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QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[X] Quarterly Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
or
[ ] Transition Report Pursuant To Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period From
___ to ___
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Commission file number 1-5581
I.R.S. Employer Identification Number 59-0778222
WATSCO, INC.
(a Florida Corporation)
2665 South Bayshore Drive, Suite 901
Coconut Grove, Florida 33133
Telephone: (305) 858-0828
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 last practicable date: 7,579,375 shares of the Company's
Common Stock ($.50 par value) and 1,418,652 shares of the Company's Class B
Common Stock ($.50 par value) were outstanding as of May 10, 1996.
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PART I. FINANCIAL INFORMATION
WATSCO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1996 and December 31, 1995
(In thousands of dollars)
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 37,281 $ 3,751
Marketable securities -- 267
Accounts receivable, net 45,653 43,564
Inventories 70,619 59,724
Other current assets 5,501 5,073
-------- --------
Total current assets 159,054 112,379
Property, plant and equipment, net 11,762 11,286
Intangible assets, net 22,208 16,995
Other assets 4,247 4,224
-------- --------
$197,271 $144,884
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 2,529 $ 2,455
Short-term promissory notes 2,750 4,250
Borrowings under revolving credit agreements 54,089 40,185
Accounts payable 18,821 17,229
Accrued liabilities 5,530 7,091
-------- --------
Total current liabilities 83,719 71,210
Long-term obligations:
Bank and other debt 3,711 3,818
Subordinated note 2,500 2,500
-------- --------
6,211 6,318
Deferred income taxes 978 978
Minority interests -- 10,622
Preferred stock of subsidiary 2,000 2,000
Shareholders' equity:
Common Stock, $.50 par value 3,775 2,401
Class B Common Stock, $.50 par value 720 740
Paid-in capital 67,773 19,479
Retained earnings 32,095 31,136
-------- --------
Total shareholders' equity 104,363 53,756
-------- --------
$197,271 $144,884
======== ========
See accompanying notes to condensed consolidated financial statements.
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WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Three Months Ended March 31, 1996 and 1995
(In thousands of dollars, except per share amounts)
(Unaudited)
1996 1995
-------- --------
Revenues:
Net sales $70,675 $53,194
Royalty and service fees 7,114 7,127
------- -------
Total revenues 77,789 60,321
------- -------
Costs and expenses:
Cost of sales 54,671 40,103
Direct service expenses 5,483 5,483
Selling, general and administrative 14,366 12,097
------- -------
Total costs and expenses 74,520 57,683
------- -------
Operating income 3,269 2,638
Other income (expense):
Investment income, net 69 63
Interest expense (1,045) (911)
------- -------
(976) (848)
------- -------
Income before income taxes and minority interests 2,293 1,790
Income taxes (871) (692)
Minority interests (116) (197)
------- -------
Net income 1,306 901
Retained earnings at beginning of period 31,136 25,829
Common stock cash dividends (315) (267)
Dividends on preferred stock of subsidiary (32) (32)
------- -------
Retained earnings at end of period $32,095 $26,431
======= =======
Earnings per share:
Primary $ .17 $ .14
======= =======
Fully diluted $ .17 $ .13
======= =======
Weighted average shares and
equivalent shares used to calculate:
Primary earnings per share 7,401 6,412
======= =======
Fully diluted earnings per share 7,702 6,720
======= =======
See accompanying notes to condensed consolidated financial statements.
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WATSCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1996 and 1995
(In thousands of dollars)
(Unaudited)
1996 1995
-------- --------
Cash flows from operating activities:
Net income $ 1,306 $ 901
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 799 623
Minority interests, net of dividends paid 116 197
Change in operating assets and liabilities,
net of effects from acquisitions in 1995
Accounts receivable (2,089) (23)
Inventories (10,895) (10,734)
Accounts payable and accrued liabilities (359) 2,492
Other, net (435) 4
-------- --------
Net cash used in operating activities (11,557) (6,540)
-------- --------
Cash flows from investing activities:
Cash used in acquisitions, net of cash acquired -- (7,914)
Capital expenditures, net (1,142) (1,009)
Net proceeds from marketable securities transactions 267 2,260
-------- --------
Net cash used in investing activities (875) (6,663)
-------- --------
Cash flows from financing activities:
Net borrowings under revolving credit agreements 13,904 14,216
Repayments of long-term obligations (1,533) (638)
Net proceeds from issuance of Common Stock 32,609 --
Exercise of stock options 1,329 9
Cash dividends (315) (267)
Other, net (32) (32)
-------- --------
Net cash provided by financing activities 45,962 13,288
-------- --------
Net increase in cash and cash equivalents 33,530 85
Cash and cash equivalents at beginning of period 3,751 1,744
-------- --------
Cash and cash equivalents at end of period $ 37,281 $ 1,829
======== ========
Supplemental cash flow information:
Interest paid $ 980 $ 791
======== ========
Income taxes paid $ 58 $ 120
======== ========
See accompanying notes to condensed consolidated financial statements
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WATSCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
1. The condensed consolidated balance sheet as of December 31, 1995, which
has been derived from audited financial statements, and the unaudited interim
condensed consolidated financial statements, have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in the annual financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules and
regulations, although the Company believes the disclosures made are adequate
to make the information presented not misleading. In the opinion of
management, all adjustments necessary to a fair presentation have been
included in the condensed consolidated financial statements for the periods
presented herein.
2. The results of operations for the quarter ended March 31, 1996 are not
necessarily indicative of the results for the year ending December 31, 1996.
The sale of the Company's products and services is seasonal with revenues
generally increasing during the months of May through August.
3. At March 31, 1996 and December 31, 1995, inventories consist of (in
thousands):
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
Raw materials $ 4,294 $ 3,637
Work in process 1,418 1,359
Finished goods 64,907 54,728
------- -------
$70,619 $59,724
======= =======
4. On March 6, 1996, the Company completed a public offering in which it sold
1,570,000 shares of Common Stock resulting in net proceeds of approximately
$32.6 million. In April 1996, the Company used approximately $14.0 million of
the proceeds to fund the acquisition of Three States Supply Co., Inc. ("Three
States Supply") discussed below. In April 1996, the Company also used $2.5
million of the net proceeds to repay a 12% subordinated note payable to Rheem
Manufacturing Company ("Rheem"). The Company intends to use the remaining net
proceeds for other potential acquisitions, to reduce debt and for general
corporate purposes.
5. Effective March 19, 1996, the Company and Rheem completed a transaction
pursuant to a Stock Exchange Agreement and Plan of Reorganization (the
"Exchange Agreement") whereby the Company acquired Rheem's minority ownership
interests in Gemaire Distributors, Inc. ("Gemaire"), Comfort Supply, Inc.
("Comfort Supply") and Heating & Cooling Supply, Inc. ("Heating & Cooling")
in exchange for 964,361 unregistered shares of the Company's Common Stock
having an estimated fair value of $16.1 million. The acquisition of Rheem's
minority ownership interests was accounted for under the purchase method of
accounting and, accordingly, the effects of the transaction are included in
the Company's results of operations as of the transaction date. Goodwill
related to the transaction, totaling approximately $5.4 million, represents
the excess of the fair value of the Common Stock exchanged over the minority
interests acquired and is being amortized on a straight-line basis over 40
years. Following this transaction, Gemaire, Comfort Supply and Heating &
Cooling became wholly-owned subsidiaries of the Company.
Previous agreements between the Company and Rheem provided Rheem with the
right to "call" from the Company and the Company with the right to "put" to
Rheem the Company's ownership interests in Gemaire, Comfort Supply and
Heating & Cooling. Under the terms of the Exchange Agreement, the put/call
provisions included in the previous agreements are effectively eliminated
because the rights to "put" or "call" become exercisable primarily upon the
occurrence of certain events of insolvency.
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6. On April 12, 1996, the Company purchased certain accounts receivable,
inventory and other operating assets and assumed certain liabilities of Three
States Supply, a Memphis, Tennessee-based distributor of supplies used
primarily in air conditioning and heating systems. The cash consideration
paid by the Company totaled approximately $14.0 million, which approximated
net book value, and is subject to adjustment upon the completion of an audit
of the assets purchased and liabilities assumed. The acquisition was
accounted for under the purchase method of accounting.
7. Certain amounts for 1995 have been reclassified to conform with the 1996
presentation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1996 VS. QUARTER ENDED MARCH 31, 1995
RESULTS OF OPERATIONS
The following table presents certain items of the Company's consolidated
financial statements for the three months ended March 31, 1996 and 1995,
expressed as a percentage of total revenues:
1996 1995
---- ----
Total revenues 100.0% 100.0%
Cost of sales and direct service expenses (77.3) (75.6)
------- -------
Gross profit 22.7 24.4
Selling, general and administrative expenses (18.5) (20.1)
------- -------
Operating income 4.2 4.3
Investment income, net - .1
Interest expense (1.3) (1.5)
Income taxes (1.1) (1.1)
Minority interests (.1) (.3)
------- -------
Net income 1.7% 1.5%
======= =======
The above table and following narrative includes the results of operations
of the following wholesale distributors of air conditioners and related parts
and supplies: Airite, Inc., a Louisiana-based distributor acquired in February
1995; H.B. Adams, Inc., a central Florida distributor purchased in March 1995;
Environmental Equipment & Supplies, Inc. a North Little Rock, Arkansas-based
distributor purchased in June 1995; and Central Air Conditioning Distributors,
Inc., a Winston-Salem, North Carolina-based distributor purchased in October
1995 (collectively, the "acquisitions"). These acquisitions were accounted for
under the purchase method of accounting and, accordingly, the results of their
operations have been included in the consolidated results of the Company
beginning on their respective dates of acquisition.
Revenues for the three months ended March 31, 1996 increased $17.5 million,
or 29%, compared to the same period in 1995. In the climate control segment,
revenues increased $17.5 million, or 33%. Excluding the effect of acquisitions,
revenues for the climate control segment increased $7.8 million, or 15%. Such
increase was driven by strong replacement sales, increased homebuilding activity
and favorable weather patterns.
Gross profit for the three months ended March 31, 1996 increased $2.9
million, or 20%, as compared to the same period in 1995. Excluding the effect of
acquisitions, gross profit increased $459,000, or 3%, primarily as a result of
the aforementioned revenue increases. Gross profit margin in the first quarter
decreased to 22.7% in 1996 from 24.4% in 1995. Excluding the effect of
acquisitions, gross profit margin decreased to 22.3% in 1996 from 24.4% in 1995.
These decreases were primarily due to certain vendor price increases which the
Company did not begin passing on to customers until late in the quarter.
Selling, general and administrative expenses for the three months ended March
31, 1996 increased $2.3 million, or 19%, compared to the same period in 1995,
primarily due to selling and delivery costs related to increased sales.
Excluding the effect of acquisitions, selling, general and administrative
expenses increased $405,000, or 3%, primarily due to revenue increases. Selling,
general and administrative costs as a percent of revenues decreased from 20.1%
in 1995 to 18.5% in 1996 and excluding the effect of acquisitions decreased from
20.1% in 1995 to 18.4% in 1996. These decreases were the result of a larger
revenue base over which to spread fixed costs.
7 of 10
Interest expense for the first quarter in 1996 increased $134,000, or 15%,
compared to the same period in 1995, due to higher borrowings used to finance
acquisitions and increased inventory levels required by sales growth.
The effective tax rate for the three months ended March 31, 1996 was 38.0%
compared to 38.6% for the same period in 1995. The decrease is primarily a
result of a proportionately larger share of taxable income expected to be
generated in states with lower tax rates during 1996 as compared to 1995.
ACQUISITION OF MINORITY INTERESTS
In March 1996, pursuant to a Stock Exchange Agreement and Plan of
Reorganization (the "Exchange Agreement") with Rheem Manufacturing Company
("Rheem"), the Company acquired Rheem's minority ownership interests in three of
the Company's distribution subsidiaries in exchange for 964,361 shares of
unregistered Common Stock of the Company having an estimated fair value of $16.1
million. Following this transaction, all of the Company's distribution companies
are wholly-owned subsidiaries of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has adequate availability of capital from operations and
revolving credit facilities to fund current operations and anticipated growth,
including expansion in the Company's current and targeted market areas, through
1996. At March 31, 1996, the Company had aggregate borrowing commitments from
lenders under existing revolving credit agreements of $75 million, of which $18
million was unused and $11 million available. In February 1996, the Company
received and is considering a proposal from one of its lenders to syndicate a
master $125 million unsecured revolving credit facility. This facility, if
completed, would replace all of the Company's existing revolving credit
facilities and provide the Company with up to $50 million of additional
availability to fund future growth.
Certain of the subsidiaries' revolving credit agreements contain provisions
limiting the payment of dividends to their shareholders. The Company does not
anticipate that these limitations on dividends will have a material effect on
the Company's ability to meet its cash obligations.
Working capital increased to $75.3 million at March 31, 1996 from $41.2
million at December 31, 1995. This increase is primarily due to the receipt of
net proceeds of $32.6 million from the sale of 1,570,000 shares of the Company's
Common Stock in March 1996. In April 1996, the Company used approximately $14.0
million of the net proceeds to fund the acquisition of Three States Supply Co.,
Inc., a Memphis, Tennessee-based distributor of supplies used primarily in air
conditioning and heating systems, and $2.5 million to repay a 12% subordinated
note payable to Rheem. The Company anticipates using the remainder of the net
proceeds to fund other potential acquisitions, to reduce debt and for general
corporate purposes.
Cash and cash equivalents increased $33.5 million during the first quarter of
1996. Principal sources of cash were net proceeds from the issuance of Common
Stock, increased borrowings under revolving credit agreements and profitable
operations. The principal uses of cash were to purchase inventories, repay
long-term obligations and finance capital expenditures. Inventory purchases are
substantially funded by borrowings under revolving credit agreements.
The Company continually evaluates potential acquisitions and has held
discussions with a number of acquisition candidates; however, the Company has no
agreement with respect to any acquisition candidates. Should suitable
acquisition opportunities or working capital needs arise that would require
additional financing, the Company believes that its financial position and
earnings history provide a solid base for obtaining additional financing
resources at competitive rates and terms.
NEW ACCOUNTING STANDARDS
On January 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for Long-Lived Assets and
Long-Lived Assets to be Disposed of" ("SFAS No. 121"). The adoption of SFAS No.
121 did not have a material effect on the Company's results of operations.
8 of 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no significant changes from the information
reported in the Annual Report on Form 10-K for the period ended
December 31, 1995, filed on March 29, 1996.
Item 2. Changes in the Rights of the Company's Security Holders
None
Item 3. Defaults by the Company on its Senior Securities
None
Item 4. Results of Votes of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.20 Employment Agreement and Incentive Plan dated January 31,
1996 by and between Watsco, Inc. and Albert H. Nahmad.
11. Computation of Earnings Per Share for the Quarters Ended
March 31, 1996 and 1995.
27. Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
None
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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.
WATSCO, INC.
---------------------------------
(Registrant)
By: /s/ RONALD P. NEWMAN
---------------------------------
Ronald P. Newman
Vice President and Secretary
(Chief Financial Officer)
May 14, 1996
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, made and entered into as of the 31st day of
January, 1996 by and between WATSCO, INC., a Florida corporation (hereinafter
called the "Company") and ALBERT H. NAHMAD (hereinafter called "Employee").
W I T N E S S E T H:
WHEREAS, the parties desire to execute an Employment Agreement to
contain the terms of the employment of the Employee by the Company,
NOW, THEREFORE, for good and valuable consideration the parties agree
as follows:
1. EMPLOYMENT TERM
The Company agrees to continue the employment of the Employee as
President and Chairman of the Board of the Company for the period commencing
February 1, 1996 and ending January 31, 1999. This contract shall, each January
31, automatically extend one year from its then expiration date unless the
Compensation Committee shall have notified the Employee to the contrary in
writing prior to that date.
2. DUTIES
The Company hereby employs Employee as President and Chairman of
the Board of the Company and Employee hereby accepts the employment and agrees
to devote substantially all of his business time and attention and best efforts
to the performance of his duties hereunder which shall include such duties,
authority and responsibility on behalf of the Company as are customary for such
positions and as may from time to time be assigned to him by the Board of
Directors of the Company. The Employee may serve as a Director or in other
capacities with other companies as long as it does not affect his ability to
devote substantially all of his business time and attention to the Company.
3. EXTENT OF SERVICE
Employee shall assume and perform such reasonable
responsibilities and duties as may be assigned to him from time to time by the
Company. Employee, while employed by the Company shall not, at any time during
the term of this Agreement become interested directly or indirectly in any
manner with any business competitive with or similar to the business of the
Company.
4. BASE COMPENSATION
The Company agrees to pay to Employee and Employee agrees to
accept from the Company a salary at the annual rate of not less than Four
Hundred and Eighty Thousand ($480,000) Dollars, payable in bi-weekly or monthly
installments.
5. ADDITIONAL COMPENSATION
For his leadership of the Company to its recent outstanding
growth in value, on January 2, 1997 the Employee shall be awarded $450,000 of
additional compensation provided he does not voluntarily leave employment of the
Company before that date.
For the year ended December 31, 1996 and for all subsequent years
during which this agreement is in effect for the entire year, the Employee shall
be entitled to the incentive compensation described in Exhibit A.
6. EXPENSE REIMBURSEMENT
Upon submission of proper proof of payment by Employee, the
Company will reimburse him for all reasonable expenditures for business travel
or entertainment made by him in the course of and pursuant to the business of
the Company, and Company shall supply to Employee the use of one (1) automobile
and shall pay all fuel, maintenance and insurance costs incident thereto.
7. TERMINATION OF EMPLOYMENT
During the term of this Agreement the Company may at any time
terminate the employment of Employee for cause. For the purpose of this
Agreement, "cause" shall be defined as any actions of Employee which are in the
nature of fraud or willful malfeasance or
misfeasance in the performance of the employment duties provided for by this
Agreement. Cause shall not include any act or failure to act, whether due to
error of judgment or otherwise, where Employee exercised good faith in the
exercise of his duties.
8. RESTRICTIVE COVENANT
The parties understand and contemplate that Employee is receiving
substantial benefits under this Agreement and that the Company is giving
Employee access to information concerning its business operations and that it
is, therefore, reposing a high degree of confidence and trust in Employee. In
consideration of the foregoing, Employee agrees that during the term of this
Agreement and upon termination of his employment with the Company for any
reason, he shall not engage in any business, enterprise or employment, whether
as owner, operator, stockholder, director, financial backer, creditor,
consultant, partner, agent, employee or otherwise, competitive with any business
engaged in by the Company or any subsidiary of the Company at the time of
termination for a period of two (2) years after termination of employment in the
areas in which the Company or any subsidiary are so engaged in such business.
This provision, and the provisions of paragraph 3 hereof, shall not prevent the
Employee from owning less than 2% of the outstanding stock of a public company
which may be in the same or a similar business too that engaged in by the
Company, as long as the stock owned by the Employee is publicly traded stock and
the interest of the Employee in the public company is solely that of an inactive
stockholder. The restrictive covenant contained herein applies even after this
Agreement is fully performed and has ended by its own terms.
Employee agrees that a violation by him of the covenant contained
herein will cause irreparable damage to the Company, the amount of which will be
almost impossible to ascertain, and for that reason Employee agrees that the
Company shall be entitled to an injunction out of any court of competent
jurisdiction restraining any violation of such covenant by Employee and such
right to injunction shall be cumulative to and in addition to any other remedies
of the Company.
9. SEVERABILITY
This Agreement shall be governed by the laws of the State of
Florida, and the invalidity of any one or more of the portions contained in this
Agreement shall not affect the enforceability of the remaining portions of this
Agreement or any part thereof, all of which are inserted conditionally on their
being valid in law, and in the event that one or more portions contained herein
shall be invalid, this instrument shall be construed as if such invalid portions
had not been inserted, and if such invalidity shall be caused by the length of
time or the size of any area set forth in any part hereof, such period of time
or such area, or both, shall be considered to be reduced to a period or area
which would cure such invalidity.
10. WAIVER
Failure to insist upon strict compliance with any of the terms,
covenants or conditions hereof shall not be deemed a waiver of such terms,
covenants or conditions, nor shall any waiver or relinquishment of such right or
power hereunder, at any time or times, be deemed a waiver or relinquishment of
such right or power at any other time or times.
11. BENEFIT
Except as otherwise herein expressly provided, this Agreement
shall inure to the benefit of and be binding upon the Company, its successors
and assigns, including, but not limited to, any corporation which may acquire
all or substantially all of the Company's assets and business, or with which the
Company may be consolidated or merged, and Employee, his heirs, executors,
administrators and legal representatives.
12. ENTIRE AGREEMENT
This Agreement contains the entire agreement between the parties
hereto, the same shall not be modified or altered except by another written
agreement executed by each of the parties hereto and all prior employment
agreements between the parties and all the provisions thereof are hereby
terminated and shall be of no further force and effect.
13. NOTICES
Any notice required or permitted to be given under this Agreement
shall be sufficient if in writing, and shall be deemed served if deposited in
the United States Certified Mail, Return Receipt Requested, and addressed as
follows:
TO THE COMPANY: WATSCO, INC.
2665 South Bayshore Drive
Coconut Grove, Florida 33133
TO THE EMPLOYEE: ALBERT H. NAHMAD
2665 South Bayshore Drive
Coconut Grove, Florida 33133
or to such other address as the parties may from time to time give notice of to
the other party.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
and seals this 31st day of January, 1996.
WATSCO, INC.
By: /s/ RONALD P. NEWMAN
-------------------------------
Ronald P. Newman, Secretary
/s/ ALBERT H. NAHMAD
-------------------------------
ALBERT H. NAHMAD
EXHIBIT A
TO
EMPLOYMENT AGREEMENT
INCENTIVE PLAN
I. PURPOSES. The purposes of the Incentive Plan are (i) to establish an
annual incentive compensation program for the Company's President and
Chief Executive Officer (the "Executive") that awards the Executive for
the achievement of objectives and goals established by the Board of
Directors (Compensation Committee) which contribute to the success of
the Company, thus providing a means for participation by the Executive
in such success, and (ii) to afford an incentive to the Executive to
contribute his best efforts to promote the success of the Company.
II. DEFINITIONS. The following words and phrases shall have the meaning set
forth below whenever used herein:
A. "COMMON STOCK PRICE" shall mean the reported New York Stock
Exchange closing price of the Company's Common Stock on the last
day of trading during that year.
B. "COMPENSATION COMMITTEE" shall mean the Compensation Committee of
the Company's Board of Directors. The membership of the
Compensation Committee shall in all cases be comprised solely of
two or more outside directors (within the meaning of Section
162(m)).
C. "EARNINGS PER SHARE" shall mean the fully diluted earnings per
share of the Company as reported in the Company's annual report to
shareholders.
D. "EMPLOYMENT AGREEMENT" shall mean the employment agreement, dated
as of January 31, 1996, between the Company and the Executive, as
such agreement may be amended or renewed from time to time.
E. "INCOME BEFORE TAXES" shall mean that amount as reported in the
Company's annual report to shareholders.
F. "NET INCOME" shall mean that amount as reported in the Company's
annual report to shareholders.
G. "PERFORMANCE BASED COMPENSATION" shall mean the compensation paid
or payable to the Executive pursuant to Article III of this
Incentive Plan.
H. "SECTION 162(M)" shall mean Section 162(m) (or any successor
provision) of the Internal Revenue Code of 1986, as amended, and
applicable authority thereunder.
III. OPERATION OF INCENTIVE PLAN.
A. ESTABLISHMENT OF PERFORMANCE GOALS. In each year in which the
Executive's Employment Agreement is in effect, not later than 90
days after the end of the prior year, the Compensation Committee
and the Executive shall agree upon the Performance Based
Compensation which the Executive will earn for that year if he
achieves the agreed upon incremental goals for increases in any one
of more of the following categories: Income Before Taxes, Net
Income, Earnings Per Share and Common Stock Price. Such performance
goals shall be in writing and become Exhibit A-1 to this Incentive
Plan. The performance goals will automatically be adjusted for any
increase or decrease in the number of 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.
B. PAYMENT OF PERFORMANCE BASED COMPENSATION. Performance Based
Compensation shall be paid to the Executive as soon after year end
as the amount of such compensation can be determined with
reasonable certainty and the Compensation Committee has certified
that the performance goals have been met.
IV. NON-PERFORMANCE BASED COMPENSATION. It is recognized by the Company
that, at times, there may be years in which the Compensation Committee
desires to pay the Executive special non-performance based
compensation. At such times, the Compensation Committee may award
additional non-performance based compensation to the Executive in such
amount as it shall desire.
V. TERMINATION OF EMPLOYMENT. The Executive must be employed for the
entire year to be entitled to the Performance Based Compensation for
such year, unless the Compensation Committee specifically determines
that such amounts are to be paid.
VI. ADMINISTRATION. The Incentive Plan shall be administered by the
Compensation Committee, which will have the authority and
responsibility for (i) interpreting and administering the Incentive
Plan, (ii) establishing the performance goals for each year of the
Incentive Plan, (iii) determination of Performance Based Compensation
and final approval of payments to the Executive, and (iv) payment of
prorated
A-2
awards if, in its judgment, the payment of such awards would be in the
best interest of the Company.
VII. AMENDMENT AND TERMINATION. The Compensation Committee shall have the
power to amend, modify, suspend or terminate any part of the Incentive
Plan at any time; provided, however, that notwithstanding any other
provisions of the Incentive Plan, no such amendment or modification
shall (i) be effective without the approval of the shareholders of the
Company if such shareholder approval is required to preserve the
Company's Federal income tax deduction for Performance Based
Compensation paid under the Incentive Plan pursuant to the "other
performance based compensation" exception in Section 162(m), or (ii)
without the consent of the Executive, reduce the right of the Executive
to a payment hereunder to which he is entitled with respect to a fiscal
year that has ended prior to such amendment, modification, suspension
or termination.
VIII. WITHHOLDING TAXES. The Company shall have the right to deduct from all
payments under this Incentive Plan any Federal, state or local taxes
required by law to be withheld with respect to such payments.
IX. REORGANIZATION OR DISCONTINUANCE. The obligations of the Company
under the Incentive Plan shall be binding upon any successor
corporation or organization resulting from merger, consolidation or
other reorganization succeeding to substantially all of the assets and
business of the Company. The Company will make appropriate provision
for the preservation of the Executive's rights under the Incentive Plan
in any agreement or plan which it may enter into or adopt to effect any
such merger, consolidation, reorganization or transfer of assets.
If the business conducted by the Company shall be discontinued, any
previously earned and unpaid compensation under the Incentive Plan
shall be immediately payable to the Executive.
X. GENERAL PROVISIONS. The general provisions of the Executive's
Employment Agreement shall be applicable to this Incentive Plan.
XI. EFFECTIVE DATE. The Incentive Plan is effective initially for the
fiscal year ended December 31, 1996, subject to approval by the
shareholders of the Company at the annual meeting of shareholders on
June 3, 1996, and shall remain in effect as long as the Executive is
employed by the Company.
A-3
EXHIBIT A-1
1996 PERFORMANCE GOALS AND PERFORMANCE BASED COMPENSATION
PERFORMANCE
BASED
COMPENSATION
------------
A. EARNINGS PER SHARE
For each $.01 increase . . . . . . . . . . . . . . . . . . . $29,000
B. INCREASE IN COMMON STOCK PRICE
For each $.125 increase in per share price of a share of
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . $5,500
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
Quarters Ended March 31, 1996 and 1995
(In thousands of dollars, except per share amounts)
1996 1995
------- -------
Net income $ 1,306 $ 901
Less subsidiary preferred stock dividend (32) (32)
------- -------
Income applicable to common stock
for primary earnings per share 1,274 869
Add interest expense, net of income tax effects,
attributable to convertible debentures 25 28
------- -------
Income applicable to common stock for
fully diluted earnings per share $ 1,299 $ 897
======= =======
Weighted average common shares outstanding 6,912 6,152
Additional shares assuming
exercise of stock options and warrants 489 260
------- -------
Shares used for primary earnings per share 7,401 6,412
Additional shares assuming
exercise of stock options and warrants 78 60
Conversion of 10% Convertible
Subordinated Debentures due 1996 223 248
------- -------
Shares used for fully diluted earnings per share 7,702 6,720
======= =======
Earnings per share:
Primary $ .17 $ .14
======= =======
Fully diluted $ .17 $ .13
======= =======
5
1,000
3-MOS
DEC-31-1996
MAR-31-1996
37,281
0
48,956
3,303
70,619
159,054
23,515
11,753
197,271
83,719
6,211
0
0
4,495
99,868
197,271
70,675
77,789
54,671
60,154
14,146
220
1,045
2,293
871
1,306
0
0
0
1,306
.17
.17
