Exhibit 13
GenRad, Inc. and Subsidiaries
Financial Review
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND OPERATING RESULTS 14-19
REPORTS 20
CONSOLIDATED STATEMENTS OF OPERATIONS 21
CONSOLIDATED BALANCE SHEET 22
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) 23
CONSOLIDATED STATEMENT OF CASH FLOWS 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25-37
SUPPLEMENTARY INFORMATION 38
INVESTORS' REFERENCE GUIDE 39
CORPORATE DATA 40
13
GenRad, Inc. and Subsidiaries
Selected Financial Data Five Year Summary
- --------------------------------------------------------------------------------
(Dollar amounts in thousands, except
per share amounts and number of employees):
- -----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
Operations:
Net product and service sales $236,761 $183,545 $158,753 $147,903 $161,868
Gross margin 126,764 96,408 76,822 69,407 69,153
Operating income (loss) 38,486 25,856 16,369 8,657 (39,623)
Net income (loss) $ 41,295 $ 27,335 $ 12,271 $ 4,512 $(43,957)
Net income (loss) per common
and common equivalent share:
Basic $ 1.54 $ 1.22 $ 0.59 $ 0.23 $ (2.39)
Diluted $ 1.43 $ 1.11 $ 0.56 $ 0.22 $ (2.39)
Balance sheet:
Current ratio 3.6 2.7 1.7 1.3 1.2
Total assets $178,957 $115,765 $ 87,406 $ 81,816 $ 78,997
Long-term debt, including current portion 10,953 146 49,073 48,955 48,990
Stockholders' equity (deficit) $115,013 $ 63,680 $(23,238) $(37,788) $(44,829)
Other data:
Number of employees 1,388 1,239 1,138 1,137 1,216
Weighted average common and
common equivalent shares used in
computing per share amounts
Basic 26,814 22,488 20,869 19,775 18,382
Diluted 28,788 27,484 21,866 20,493 18,382
1
GenRad, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Operating
Results
OVERVIEW
GenRad, Inc. (the "Company" or "GenRad") commenced operations as a corporation
in June 1915. The Company provides manufacturers and OEMs with hardware,
software and services to optimize manufacturing and after-market service
productivity through increased yields and lower life cycle costs. GenRad employs
approximately 1,400 employees worldwide, of whom 35 percent are applications,
software and hardware engineers.
The Company offers products and services in two core business areas: electronic
manufacturing systems ("EMS") and advanced diagnostic solutions ("ADS"). EMS,
headquartered in Westford, Massachusetts, is a leading supplier of integrated
test and inspection solutions that provide electronic manufacturers the ability
to manage and control their manufacturing processes. ADS, headquartered in
Manchester, England, is a leading supplier of diagnostic information solutions,
specializing in complex electrical and electronic systems for automotive,
aerospace, agriculture and related industries.
The fiscal year ended January 3, 1998 includes 53 weeks. The two prior fiscal
years, which ended on December 28, 1996 and December 30, 1995, respectively,
each include 52 weeks.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of net
sales represented by certain items in the Company's Consolidated Statement of
Operations.
1997 1996 1995
NET PRODUCT AND SERVICE SALES 100.0% 100.0% 100.0%
COST OF PRODUCTS AND SERVICES SOLD 46.5 47.5 51.6
----------------------------------------
GROSS MARGIN 53.5 52.5 48.4
SELLING, GENERAL AND ADMINISTRATIVE 28.9 29.4 28.8
RESEARCH AND DEVELOPMENT 8.4 9.0 9.9
RESTRUCTURING CREDIT -- -- (0.6)
---------------------------------------
OPERATING INCOME 16.2 14.1 10.3
OTHER EXPENSE (0.3) (0.1) (2.3)
INCOME TAX BENEFIT (PROVISION) 1.5 0.9 (0.3)
---------------------------------------
NET INCOME 17.4% 14.9% 7.7%
=======================================
OPERATING RESULTS - 1997 VS. 1996
Orders for the Company's products and services increased to $237.0 million for
the twelve months ended January 3, 1998, from $181.0 million for the prior
fiscal year. The increase in orders resulted from the strong demand in all
aspects of the Company's business, particularly from customers in the following
industries: contract manufacturing, computer manufacturing, telecommunications,
data communications and transportation. Demand was strong in all of the
Company's major markets: North America, Europe and Asia. Backlog at the end of
1997 was $24.9 million compared to $24.7 million at the end of 1996. The Company
believes that a substantial portion of the 1997 backlog will be recognized as
revenue during the first quarter of 1998.
Net product and service sales were $236.8 million for the twelve months ended
January 3, 1998, as compared to $183.5 million for the prior fiscal year. The
increase was due to increased sales in both EMS and ADS. The EMS increase was
due primarily to an increase in product volume as well as the continuing shift
towards the Company's higher priced, higher pin count machines required by
computer and contract manufacturing customers and the strong demand for the
Company's functional test equipment in the data communication and
telecommunication marketplaces. The ADS increase was due primarily to hardware
sales to new customers and the initial application software revenue from a Ford
Motor Company contract which was entered into in 1997.
14
GenRad, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Operating
Results
OPERATING RESULTS - 1997 VS. 1996 (CONTINUED)
Sales to international markets accounted for 52.3% of total sales for the twelve
months ended January 3, 1998, as compared to 55.1% for the prior fiscal year.
Less than 10% of the sales to international markets for the twelve months ended
January 3, 1998 and the prior fiscal year were sales to the Asian market.
Product and service sales from international markets are subject to the risks of
currency fluctuations and other customary risks associated with international
markets.
Product gross margins as a percent of sales increased to 56.2% for the twelve
months ended January 3, 1998, as compared to 55.3% for the prior fiscal year.
Product margins improved due to the continued shift towards higher pin count
machines, increased sales from the introduction of new product offerings and the
continued efforts to minimize product costs.
Service gross margins as a percent of sales increased to 42.5% for the twelve
months ended January 3, 1998, as compared to 42.3% for the prior fiscal year.
Service margins improved due to a shift in the service mix towards value-added
services such as training, software support and applications programming, which
historically have had higher gross margins than maintenance services.
Selling, general and administrative expenses increased for the twelve months
ended January 3, 1998, to $68.4 million from $54.1 million in the prior fiscal
year. As a percent of sales, selling, general and administrative expenses were
28.9% as compared to 29.4% for the comparable period in 1996. Selling expenses
increased due to the expansion of the sales force in its existing and new
regions and incremental commission expense associated with the 31% increase in
orders in 1997, as compared to 1996. Facility expenses increased as a result of
the relocation of the corporate headquarters to Westford, Massachusetts in June
of 1997, as well as the relocation of the European headquarters in Manchester,
England in October of 1996. These increased costs were partially offset by a
$0.9 million gain in the fourth quarter of 1997 for the settlement of a portion
of the Company's U.S. defined benefit pension plan through the purchase of
non-participating group annuity contracts for approximately one third of the
plan's participants.
Research and development expenses increased for the twelve months ended January
3, 1998 to $19.9 million from $16.5 million in the prior fiscal year. As a
percent of sales, research and development expenses were 8.4%, as compared to
9.0% for the prior fiscal year. In 1997, the three primary research and
development projects were for the design of a GR Vision product, enhancements to
a Mitron software suite of products and a redesign of the in-circuit test
equipment operating systems. The Company capitalized $0.2 million and $1.2
million of software development costs for the fiscal years ended January 3, 1998
and December 28, 1996, respectively.
Operating income increased to $38.5 million for the twelve months ended January
3, 1998 from $25.9 million in the prior fiscal year. For the fiscal year ended
January 3, 1998, operating profit was 21.6% in North America and 7.2% in Europe
as compared to 24.4% and 3.9%, respectively, in the prior fiscal year. Operating
margins are lower in the European sector as compared to North America primarily
due to the combination of heavy price competition, lower margin machines being
sold and additional European infrastructure costs required to support multiple
languages and sites. The Company continues to support the European markets to
maintain its status as a worldwide solution provider and is working to minimize
costs through engineered cost reductions.
Interest expense was $0.8 million for the fiscal year ended January 3, 1998 as
compared to $4.6 million for the prior fiscal year. Interest expense in 1997
related to a $12 million term loan entered into on June 26, 1997 for the
purchase of furniture and fixtures for the Company's new corporate headquarters
and manufacturing facilities in Westford, Massachusetts. During the prior fiscal
year, interest expense of $3.1 million related to the Company's 7-1/4%
convertible subordinated debentures and $0.5 million related to a credit
facility. Additionally, the Company recorded $1.0 million of interest expense in
the fourth quarter of 1996 to obtain a short-term financing facility, which was
not utilized, for the redemption of all of its 7-1/4% convertible subordinated
debentures and to replace its $15 million secured credit facilities with a $25
million unsecured credit facility.
Other net expense of $0.5 million for the fiscal year ended January 3, 1998 was
primarily from foreign currency exchange losses. Other net income of $4.3
million for the fiscal year ended December 28, 1996 was primarily the result of
a $4.0 million gain from the sale of property, plant and equipment, primarily
generated from the sale of the Company's corporate headquarters and
manufacturing facility in Concord, Massachusetts.
15
GenRad, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Operating
Results
OPERATING RESULTS - 1997 VS. 1996 (CONTINUED)
A net income tax benefit of $5.4 million was recorded in the first quarter of
fiscal 1997 as compared to $2.5 million for the comparable period in 1996. The
benefits represent reductions in the Company's valuation allowance for deferred
taxes, which were recorded due to management's improved expectations of future
income and expected utilization of the Company's domestic net operating loss
carryforwards. Excluding the previously noted deferred income tax benefits, the
income tax provision was $1.9 million for the twelve months ended January 3,
1998, as compared to $0.8 million for the prior fiscal year. In the fourth
quarter of 1997, the Company recorded a $0.7 million net tax benefit due to a
reduction in the 1997 estimated annualized effective tax rate, resulting from
higher annualized profits in the U.S., as compared to Europe. At January
3, 1998, the Company had a net deferred tax asset of $61.0 million with a
valuation allowance of $53.2 million. Management will continue to assess the
realizability of the deferred tax asset based on actual and forecasted results.
As a result of the above, the Company reported net income of $41.3 million for
the twelve months ended January 3, 1998, as compared to net income of $27.3
million for the comparable period in 1996.
OPERATING RESULTS - 1996 VS. 1995
Orders for the Company's products and services increased to $181.0 million for
the twelve months ended December 28, 1996, compared to $153.4 million for the
comparable period in 1995. The increase in orders between the periods resulted
from the strong demand in all aspects of the Company's business, including
strong demand from contract manufacturing, computer manufacturers, diagnostic
customers, and transportation customers in the North American and Asian markets,
as well as from the acquisition of Test Technology Associates, Inc. ("TTA") and
Testware, Inc. ("Testware"). Backlog at the end of 1996 was $24.7 million
compared to $26.3 million at year-end 1995.
Net product and service sales were $183.5 million for the twelve months ended
December 28, 1996, as compared to $158.8 million for the comparable period in
1995. The increase is due to increased sales in EMS and ADS; new product
introductions; and incremental sales associated with the acquisition of TTA and
Testware. Partially offsetting these increases were decreasing sales from the
MCATES contract for the U.S. Marine Corps, a $29.3 million contract. Sales for
the MCATES contract were $1.1 million for the twelve months ended December 28,
1996 as compared to $9.3 million for the comparable period in 1995, as the
contract was completed in fiscal 1996.
Sales to international markets accounted for 55.1% of sales for the twelve
months ended December 28, 1996, as compared to 58.0% for the comparable period
in 1995. Product and service sales from international markets are subject to the
risks of currency fluctuations.
Product gross margin as a percent of sales increased to 55.3% for the twelve
months ended December 28, 1996, as compared to 49.0% for the comparable period
in 1995. Product margin improvements resulted from a combination of new product
offerings which yielded higher gross margins, continued improvements in
controlling manufacturing costs that commenced in 1993, and a reduction of
warranty costs.
Service gross margins as a percent of sales decreased to 42.3% for the twelve
months ended December 28, 1996, as compared to 46.4% for the comparable period
in 1995. Service margins were impacted by customer funded development at a lower
margin and continuing competitive pricing pressures in the maintenance business.
Selling, general and administrative expenses increased for the twelve months
ended December 28, 1996 to $54.1 million from $45.7 million in the comparable
period of 1995. The increase in expenses is due primarily to increased selling
expenses associated with increased orders, additional expenses from the newly
acquired TTA and Testware subsidiaries and start-up expenses incurred to support
new product offerings. Additionally, in 1995 the Company resolved all legal
issues and settled patent infringement litigation with a competitor. The
settlement resulted in the elimination of previously established reserves and
reduced selling, general and administrative expenses by $1.3 million in 1995.
Furthermore, on January 31, 1995 the Company ceased all benefit accruals under
the Company's domestic noncontributory defined benefit pension plan as part of
its redesigning of the Company's domestic employee benefit plans. This change
resulted in the Company recognizing a curtailment gain of $1.9 million in 1995,
which reduced selling, general and administrative expenses.
16
GenRad, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Operating
Results
OPERATING RESULTS - 1996 VS. 1995 (CONTINUED)
Research and development expenses increased for the twelve month period ended
December 28, 1996 to $16.5 million from $15.7 million in the comparable period
in 1995. In the fourth quarter of 1996, the Company capitalized $1.2 million of
software development costs. As a percentage of net product and service sales,
research and development expenses prior to capitalization of software
development costs decreased to 9.6% for the twelve months ended December 28,
1996 from 10.0% for the comparable period in 1995. The Company continues to
invest in new product development and enhancements to existing products.
As part of a 1993 restructuring, the Company established a reserve for
discontinued product lines. As a result of the sale of one such product line in
March 1995, $1.0 million of the reserve was reversed in 1995.
During 1996, interest expense was $4.6 million as compared to $4.0 million for
the comparable period in 1995. The Company recorded $1.0 million of expense in
the fourth quarter of 1996 to obtain short-term financing for the redemption of
all of its 7-1/4% convertible subordinated debentures, which was not utilized,
and to replace its $15 million secured credit facilities with a $25 million
unsecured credit facility. This was offset by interest savings of $0.4 million
in the fourth quarter of 1996 due to the redemption of these debentures.
Other net income increased to $4.3 million in 1996 from $0.1 million in 1995.
The Company realized a $4.0 million gain from the sale of property, plant and
equipment. Other net income also includes foreign currency exchange gains and
other miscellaneous income of $0.3 million.
A net income tax benefit of $2.5 million was recorded in the first quarter of
1996. The benefit represents a reduction in the valuation allowance for deferred
taxes and was recorded due to management's improved expectations of future
income and expected utilization of the Company's domestic net operating loss
carryforwards in 1997. Excluding the $2.5 million income tax benefit, the income
tax provision of $0.8 million for the twelve months ended December 28, 1996
increased by $0.3 million from the comparable period in 1995. Although pretax
profitability increased substantially for the twelve months ended December 28,
1996, GenRad's annualized effective tax rate, excluding the $2.5 million income
tax benefit, decreased due to higher profits in the U.S. as compared to Europe.
The 1996 income tax expense represents U.S. and foreign income taxes.
As a result of the above, the Company reported net income of $27.3 million for
the twelve months ended December 28, 1996, as compared to net income of $12.3
million for the comparable period in 1995.
LIQUIDITY AND SOURCES OF CAPITAL
Cash and cash equivalents at January 3, 1998 totaled $21.9 million, compared to
$10.6 million at December 28, 1996. The Company's current ratio at January 3,
1998 increased to 3.6 from 2.7 at December 28, 1996. Cash generated from
operating activities was $12.2 million for the fiscal year ended January 3,
1998, compared to $4.8 million and $1.2 million, respectively, for the two prior
fiscal years.
The increase in cash provided by operating activities in the fiscal year ended
January 3, 1998 is primarily attributable to an increase in overall net income.
Accounts receivable and inventory increased by $35.1 million in the fiscal year
ended January 3, 1998 due to the increase in sales and the maintenance of higher
inventory levels to meet increasing customer demands for shorter delivery
periods. An increase in current liabilities provided cash of $2.3 million in the
fiscal year ended January 3, 1998 and was attributable to the general timing of
vendor and employee payments.
During the fiscal year ended January 3, 1998, net cash used in investing
activities was $22.7 million, compared to $7.2 million and $3.4 million,
respectively, for the two prior fiscal years. Capital expenditures were $24.9
million in 1997, $8.9 million in 1996 and $6.6 million in 1995. The increase in
capital expenditures during the fiscal year ended January 3, 1998 is due
primarily to the relocation of the Company's corporate headquarters and
manufacturing facilities to Westford, Massachusetts. Fiscal 1998 capital
expenditures are expected to be approximately $15 million, which includes the
implementation of a new business system.
Net cash provided by financing activities was $20.9 million for the fiscal year
ended January 3, 1998, compared to cash provided of $4.7 million for the fiscal
year ended December 28, 1996, and cash provided of $3.4 million for the fiscal
year ended December 30, 1995. The increase in cash provided by financing
activities in fiscal 1997, as compared to previous years, is attributable to the
increase in the proceeds from issuance
17
GenRad, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Operating
Results
LIQUIDITY AND SOURCES OF CAPITAL (CONTINUED)
of stock under the Company's employee stock plans as well as from the issuance
of debt. Proceeds from the issuance of stock were $9.4 million, $6.1 million
and $2.6 million in 1997, 1996 and 1995, respectively. Proceeds from the
issuance of debt were $12.0 million, $0 and $0.1 million in 1997, 1996 and 1995,
respectively.
In the fourth quarter of 1996, the Company replaced its $12.8 million U.S.
secured credit facility and its $2.2 million U.K. secured credit facility with
an unsecured U.S. credit facility. The new line provides borrowings up to $25
million. There were no borrowings outstanding at January 3, 1998. The new credit
facility will expire on December 31, 1998. Borrowings under the credit facility
are subject to compliance with specified financial and operating covenants.
In June 1997, the Company entered into an unsecured term loan which provided
approximately $12 million. The proceeds of the loan were used for the purchase
of furniture and fixtures for the new corporate headquarters and manufacturing
facilities in Westford, Massachusetts. The term of the loan is five years and
will expire on June 26, 2002. Twenty equal quarterly principal payments of $0.6
million are due, commencing in September 1997. Interest is payable quarterly in
arrears at LIBOR plus 1.25%.
The Company's primary source of liquidity is internally generated funds. In
1998, the Company anticipates it will fund its working capital and capital
expenditure requirements, make interest payments on its borrowings and meet its
cash obligations from internally generated funds and from the available credit
facility. As the Company continues to invest in new product developments and
enhancements to existing products, it expects research and development net
expenditures to continue at approximately the same percentage of sales as prior
fiscal years.
EFFECTS OF INFLATION AND FOREIGN EXCHANGE
Although the Company cannot accurately determine the precise effect of inflation
on its operations, it does not believe inflation has had a material effect on
sales or results of operations. The Company attempts to mitigate inflationary
cost increases by continuously improving manufacturing methods and technologies.
Management does not expect inflation to have a significant impact on operations
in the foreseeable future.
The Company conducts a significant amount of its business and has a number of
operating facilities in countries outside the United States (e.g., England,
France, Italy, Germany, Switzerland, Singapore, Malaysia, Canada and Mexico). As
a result, the Company may experience transaction and translation gains and
losses because of currency fluctuations. In order to minimize foreign exchange
transaction risk, the Company selectively hedges certain of its foreign exchange
exposures through forward exchange contracts. The strategy of selective hedging
can partially reduce the Company's vulnerability to certain of its foreign
exchange exposures and the Company expects to continue this practice in the
future to the extent appropriate.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results of operations and future
financial conditions may differ materially from those expressed in any such
forward-looking statements as a result of many factors that may be beyond the
Company's control. Factors that might cause such differences include, but are
not limited to, those discussed below.
The Company has experienced and expects to continue to experience fluctuations
in its results of operations, particularly on a quarterly basis. The Company's
expense levels are based, in part, on expectations of future revenues. If
revenue levels in a particular period do not meet expectations, due to the
timing of the receipt of orders from customers, customer cancellations or delays
of shipments, then operating results could be adversely impacted.
The market for the Company's products is characterized by rapid technological
change, an increased demand for specific feature requests by customers, evolving
industry standards, and frequent new product introductions. The introduction of
products embodying new technology or the emergence of new industry standards or
practices could render the Company's existing products obsolete or otherwise
unmarketable. Future operating results are dependent upon the Company's ability
to develop, design, manufacture and market technologically innovative products
that meet customer needs.
18
GenRad, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Operating
Results
FACTORS THAT MAY AFFECT FUTURE RESULTS (CONTINUED)
Competition in the markets where the Company operates is intense. The Company
continues to invest in manufacturing productivity to try to minimize the impact
of competitive pricing pressures, fluctuations within the Company's product mix,
potential inventory obsolescence exposure and start-up manufacturing costs for
new product introductions.
The Company is dependent upon a number of suppliers for several key components
of its products. The loss of certain of the Company's suppliers, supply
shortages or increases in the costs of key raw materials could have a material
adverse effect on the Company.
The Year 2000 issue is the result of a computer program being written using two
digits rather than four to define the applicable year. Any programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations. The Company is in the process of rectifying the Year 2000 issue
in its core business systems, and it is projected to be complete by the third
quarter of 1998. Both internal and external resources will be utilized, and the
projected costs, which are expected to be minimal, will be expensed as incurred.
The Company has established a task force to ensure that the software utilized
within its wide suite of products is Year 2000 compliant and any vendor or
customer related issues are addressed. At this point, the Company cannot project
when it will be completed nor the estimated total costs associated with the
remediation plan.
Other factors which could impact future results are past and future
acquisitions, strategic alliances, patent or product liability claims in excess
of available insurance coverage, changes in the Company's effective tax rates,
new regulatory requirements, political and economic changes, tariffs, trade
restrictions, transportation delays, foreign currency fluctuations and
inflation.
The Company disclaims any intent or obligation to update any forward-looking
statements that may be included in this report. Additionally, there can be no
assurance that other factors, not included above, could impact future results.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 130, "Reporting
Comprehensive Income". This Statement establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. This Statement is required to be adopted
in the Company's fiscal year-end 1998. The Financial Accounting Standards Board
issued Statement No. 131, "Disclosure about Segments of an Enterprise and
Related Information". This Statement requires an enterprise to report financial
and descriptive information about its reportable operating income. Operating
segments are components that are evaluated regularly by chief operating decision
makers in deciding how to allocate resources and in assessing performance. This
Statement requires a business enterprise to report a measure of segment profit
or loss, certain specific revenue and expense items (including interest,
depreciation, and income taxes), and segment assets. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. This Statement is required to be adopted in the Company's
fiscal year-end 1998. These Statements will not affect the Company's
consolidated financial position or results of operations because they impact
disclosure only.
19
GenRad, Inc. and Subsidiaries
Reports
MANAGEMENT REPORT
Management is responsible for the preparation and integrity of the consolidated
financial statements appearing in this Annual Report. The financial statements
were prepared in conformity with generally accepted accounting principles.
Management has included in the Company's financial statements, amounts that are
based on estimates and judgement, which they believe are reasonable under the
existing circumstances.
Management believes that its established accounting procedures and related
systems of internal control provide reasonable assurance, at an appropriate
cost/benefit relationship, that assets are safeguarded, that the books and
records properly reflect all transactions, and the policies and procedures are
implemented by qualified personnel.
Our independent auditors, Price Waterhouse LLP, have audited the consolidated
financial statements. Their audit was conducted in accordance with generally
accepted auditing standards and provides an independent opinion about the fair
presentation of the consolidated financial statements. When performing their
audit, Price Waterhouse LLP considers the Company's internal control structure
to the extent they deem necessary to issue their opinion on the financial
statements. The Board of Directors appoints the independent auditors;
ratification of the appointment is solicited annually from the stockholders.
The Board of Directors, through its Audit Committee, consisting solely of
outside directors of the Company, is responsible for reviewing and monitoring
the Company's financial reporting and accounting practices. Price Waterhouse LLP
has full and free access to the Audit Committee, and meets with the Committee,
with and without the presence of management.
/s/ Paul Pronsky, Jr.
- ---------------------
Paul Pronsky, Jr.
Vice President,
Chief Financial Officer and Secretary
January 26, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of GenRad, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
GenRad, Inc. and its subsidiaries at January 3, 1998 and December 28, 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended January 3, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Boston, Massachusetts
January 26, 1998
20
GenRad, Inc. and Subsidiaries
Consolidated Statement of Operations
YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995 (IN
THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------
1997 1996 1995
SALES:
SALES OF PRODUCTS $191,120 $144,325 $122,105
SALES OF SERVICES 45,641 39,220 36,648
--------------------------------------------
TOTAL SALES 236,761 183,545 158,753
--------------------------------------------
COST OF SALES:
COST OF PRODUCTS SOLD 83,738 64,500 62,277
COST OF SERVICES SOLD 26,259 22,637 19,654
--------------------------------------------
TOTAL COST OF SALES 109,997 87,137 81,931
--------------------------------------------
GROSS MARGIN 126,764 96,408 76,822
--------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE 68,376 54,061 45,736
RESEARCH AND DEVELOPMENT 19,902 16,491 15,717
RESTRUCTURING CREDIT -- -- (1,000)
--------------------------------------------
TOTAL OPERATING EXPENSES 88,278 70,552 60,453
--------------------------------------------
OPERATING INCOME 38,486 25,856 16,369
--------------------------------------------
OTHER INCOME (EXPENSE):
INTEREST INCOME 530 106 238
INTEREST EXPENSE (793) (4,575) (4,009)
OTHER, NET (477) 4,292 136
--------------------------------------------
TOTAL OTHER EXPENSES (740) (177) (3,635)
--------------------------------------------
INCOME BEFORE INCOME TAXES 37,746 25,679 12,734
INCOME TAX (BENEFIT) PROVISION (3,549) (1,656) 463
--------------------------------------------
NET INCOME $ 41,295 $ 27,335 $ 12,271
============================================
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE:
BASIC $ 1.54 $ 1.22 $ 0.59
============================================
DILUTED $ 1.43 $ 1.11 $ 0.56
============================================
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
USED IN COMPUTING PER SHARE AMOUNTS:
BASIC 26,814 22,488 20,869
============================================
DILUTED 28,788 27,484 21,866
============================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
21
GenRad, Inc. and Subsidiaries
Consolidated Balance Sheet
JANUARY 3, 1998 AND DECEMBER 28, 1996 (IN THOUSANDS)
- ----------------------------------------------------
1997 1996
ASSETS
CURRENT ASSETS:
CASH AND EQUIVALENTS $ 21,883 $ 10,557
ACCOUNTS RECEIVABLE, LESS ALLOWANCES OF $1,127 AND $1,431 73,006 49,142
INVENTORIES 29,896 20,250
OTHER CURRENT ASSETS 4,194 4,501
---------------------------
TOTAL CURRENT ASSETS 128,979 84,450
---------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 33,479 19,168
DEFERRED TAX ASSET 7,868 2,480
INTANGIBLE ASSETS 7,107 8,486
OTHER ASSETS 1,524 1,181
---------------------------
$178,957 $115,765
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
TRADE ACCOUNTS PAYABLE $ 12,730 $ 7,171
ACCRUED LIABILITIES 12,445 15,007
ACCRUED COMPENSATION AND EMPLOYEE BENEFITS 6,884 7,096
ACCRUED INCOME TAXES 1,029 1,537
CURRENT PORTION OF LONG-TERM DEBT 2,434 -
---------------------------
TOTAL CURRENT LIABILITIES 35,522 30,811
---------------------------
LONG-TERM LIABILITIES:
LONG-TERM DEBT 8,519 146
ACCRUED PENSIONS AND BENEFITS 11,239 12,177
FUTURE LEASE COSTS OF UNUSED FACILITIES 4,106 4,949
OTHER LONG-TERM LIABILITIES 4,558 4,002
---------------------------
TOTAL LONG-TERM LIABILITIES 28,422 21,274
---------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
COMMON STOCK, $1 PAR VALUE, 60,000,000 SHARES AUTHORIZED;
27,349,000 AND 26,048,000 ISSUED AND OUTSTANDING 27,349 26,048
ADDITIONAL PAID-IN CAPITAL 172,026 163,099
ACCUMULATED DEFICIT (82,492) (123,787)
CUMULATIVE TRANSLATION ADJUSTMENT (1,870) (1,680)
---------------------------
TOTAL STOCKHOLDERS' EQUITY 115,013 63,680
---------------------------
$178,957 $115,765
===========================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
22
GenRad, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995
(IN THOUSANDS)
- --------------------------------------------------------------------
TOTAL
COMMON STOCK-
STOCK, ADDITIONAL CUMULATIVE HOLDERS'
$1 PAR PAID-IN ACCUMULATED TRANSLATION EQUITY
VALUE CAPITAL DEFICIT ADJUSTMENT (DEFICIT)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 $19,738 $108,304 $(163,393) $(2,437) $ (37,788)
NET INCOME -- -- 12,271 -- 12,271
TRANSLATION ADJUSTMENT -- -- -- (347) (347)
STOCK ISSUED UNDER EMPLOYEE STOCK PLANS 1,494 1,132 -- -- 2,626
---------------------------------------------------------------------------
BALANCE AT DECEMBER 30, 1995 21,232 109,436 (151,122) (2,784) (23,238)
NET INCOME -- -- 27,335 -- 27,335
TRANSLATION ADJUSTMENT -- -- -- 1,104 1,104
STOCK ISSUED UNDER EMPLOYEE STOCK PLANS 1,256 4,835 -- -- 6,091
STOCK ISSUED IN CONNECTION WITH
COMPANY ACQUISITIONS 108 1,972 -- -- 2,080
CONVERSION OF 7-1/4% CONVERTIBLE DEBENTURES 3,452 46,856 -- -- 50,308
---------------------------------------------------------------------------
BALANCE AT DECEMBER 28, 1996 26,048 163,099 (123,787) (1,680) 63,680
NET INCOME -- -- 41,295 -- 41,295
TRANSLATION ADJUSTMENT -- -- -- (190) (190)
STOCK ISSUED UNDER EMPLOYEE STOCK PLANS 1,301 8,121 -- -- 9,422
TAX BENEFIT OF STOCK OPTIONS -- 806 -- -- 806
---------------------------------------------------------------------------
BALANCE AT JANUARY 3, 1998 $27,349 $172,026 $ (82,492) $(1,870) $ 115,013
===========================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
23
GenRad, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995
(IN THOUSANDS)
- --------------------------------------------------------------------
1997 1996 1995
OPERATING ACTIVITIES:
NET INCOME $ 41,295 $27,335 $12,271
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 9,250 6,825 5,577
LOSS (GAIN) ON DISPOSITION OF PROPERTY, PLANT AND EQUIPMENT 265 (4,034) 694
PAYMENT FOR LEASE COSTS OF EXCESS FACILITIES, NET (843) (1,671) (4,775)
(DECREASE) INCREASE RESULTING FROM
CHANGES IN OPERATING ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE (24,941) (3,845) (8,321)
INVENTORIES (10,185) (4,211) 208
OTHER CURRENT ASSETS 173 (1,373) 1,102
DEFERRED TAX ASSET (5,388) (2,480) --
TRADE ACCOUNTS PAYABLE 5,689 (1,375) (736)
ACCRUED LIABILITIES (2,305) (7,692) (2,951)
ACCRUED COMPENSATION AND EMPLOYEE BENEFITS (600) (2,930) (957)
ACCRUED INCOME TAXES (474) 775 (201)
OTHER, NET 221 (485) (698)
--------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,157 4,839 1,213
--------------------------------------------
INVESTING ACTIVITIES:
PURCHASES OF PROPERTY, PLANT AND EQUIPMENT (24,879) (8,947) (6,598)
PURCHASE OF SUBSIDIARIES -- (4,989) --
PROCEEDS FROM SALE OF PROPERTY, PLANT AND EQUIPMENT 2,175 6,769 73
PROCEEDS FROM SALE OF ASSETS HELD FOR SALE -- -- 3,157
--------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (22,704) (7,167) (3,368)
--------------------------------------------
FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF DEBT 12,009 -- 76
REPAYMENT OF DEBT (1,337) (642) --
NET CHANGE IN REVOLVING LINE OF CREDIT -- (729) 729
PROCEEDS FROM EXERCISE OF STOCK OPTIONS 9,423 6,091 2,626
TAX BENEFIT FROM EXERCISE OF STOCK OPTIONS 806 -- --
--------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 20,901 4,720 3,431
--------------------------------------------
EFFECTS OF EXCHANGE RATES ON CASH 972 (899) (209)
--------------------------------------------
INCREASE IN CASH AND EQUIVALENTS 11,326 1,493 1,067
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 10,557 9,064 7,997
--------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $ 21,883 $10,557 $ 9,064
============================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY:
In conjunction with the purchase of TTA in 1996, the Company recorded a minimum
future obligation of $2.0 million which was classified as accrued liabilities
and other long-term liabilities.
Stock issued in association with the Company's acquisitions in 1996 increased
total stockholders' equity by $2.1 million.
The net carrying amount of convertible debt, including unamortized debt issue
costs and accrued interest, which converted to equity in 1996, was $50.3
million.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
24
GenRad, Inc. and Subsidiaries
Notes to Consolidated Financial Statements for the Years ended January 3, 1998,
December 28, 1996, and December 30, 1995
NOTE 1: DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description of the Business: GenRad, Inc. (the "Company" or "GenRad") commenced
operations as a corporation in June 1915. The Company is a leading worldwide
supplier of integrated test, measurement and diagnostic solutions for the
manufacture and maintenance of electronic products. The Company offers products
and services in two core business areas: electronic manufacturing systems and
advanced diagnostic solutions.
Accounting Estimates: The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires management to
make certain estimates and assumptions that affect the reported amounts of
assets, liabilities, sales and expenses at and during the reporting periods of
the financial statements. Actual results could differ from those estimates.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and all of its subsidiaries. All significant
intercompany transactions and balances have been eliminated.
Revenue Recognition and Accounts Receivable: Revenue from product sales is
generally recognized at the time the product is shipped or delivered to the
customer. Service revenue is recognized over the contractual period on a
straight-line basis for service contracts or as services are performed. Revenue
under certain contracts is recognized under the percentage-of-completion method.
Financial instruments which potentially expose the Company to concentration of
credit risks include accounts receivable. The Company maintains reserves for
potential credit issues which, in the aggregate, have not exceeded management's
expectations.
Net Income Per Common and Common Equivalent Share: In February 1997, Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128),
was issued which supercedes the old methodology for calculation of EPS, as
promulgated under APB Opinion No. 15. The new Standard simplifies the existing
computational guidelines, revises the disclosure requirements and increases the
comparability of EPS data on an international basis. SFAS No. 128 requires
presentation of "basic" earnings per share (which excludes dilution as a result
of unexercised stock options and convertible subordinated debentures) and
"diluted" earnings per share. The Statement was adopted in fiscal 1997 and all
prior periods were retroactively restated. Earnings per share was calculated in
accordance with SFAS No. 128 for the fiscal years ended January 3, 1998,
December 28, 1996 and December 30, 1995 as follows (in thousands, except per
share amounts):
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
PER PER PER
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------------------------------
BASIC:
INCOME AVAILABLE TO
COMMON STOCKHOLDERS $41,295 26,814 $1.54 $27,335 22,488 $1.22 $12,271 20,869 $0.59
------- ------ ------
EFFECT OF DILUTIVE SECURITIES:
ASSUMED CONVERSION OF 7-1/4%
CONVERTIBLE SUBORDINATED
DEBENTURES -- -- 3,131 2,981 -- --
ASSUMED EXERCISE OF STOCK OPTIONS -- 1,974 -- 2,015 -- 997
------------------ ---------------- ----------------
DILUTED EPS:
INCOME AVAILABLE TO COMMON
STOCKHOLDERS AND ASSUMED
CONVERSIONS $41,295 28,788 $1.43 $30,466 27,484 $1.11 $12,271 21,866 $0.56
--------------------------------------------------------------------------------------
25
GenRad, Inc. and Subsidiaries
Notes to Consolidated Financial Statements for the Years ended January 3, 1998,
December 28, 1996, and December 30, 1995
NOTE 1: DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Cash and Equivalents: The Company considers cash on hand, certificates of
deposit, loan participation notes and money market funds as cash and
equivalents. Such cash equivalents have maturities of less than ninety days.
Inventory Valuation: Inventories include material, labor and overhead and are
stated at the lower of cost (first-in, first-out method) or market.
Property, Plant and Equipment: These assets are stated at cost. Depreciation is
computed by the straight-line method over the estimated useful lives of the
assets (buildings and improvements, 3 to 15 years; machinery and equipment, 3 to
8 years; and service parts, 5 to 7 years).
Intangible Assets: Goodwill, representing the excess of the purchase price over
the fair value of the net assets of the acquired entities, is being amortized on
a straight-line basis over the period of expected benefit of three to ten years.
The Company capitalizes certain computer software development costs once
technological feasibility is established. Capitalized computer software costs
are amortized over the economic lives of the related products, generally two
years, beginning from when the product is available for general release to
customers. Computer software costs capitalized for the fiscal years ended
January 3, 1998 and December 28, 1996 were $0.2 million and $1.2 million,
respectively. Accumulated amortization was $0.7 million at January 3, 1998 and
$0 at December 28, 1996. Amortization expense was $0.7 million in 1997 and $0 in
both 1996 and 1995.
Purchased software of $0.8 million, which was attributable to the acquisition of
Field Oriented Engineering, AG, was recorded in the third quarter of fiscal
1996. This purchased software is being amortized on a straight-line basis over
three years.
Other intangibles also include the cost of patents and trademarks acquired,
which are amortized on a straight-line basis over their estimated useful lives.
The Company evaluates the net realizable value of its intangible assets on an
ongoing basis. Should the review indicate that an intangible asset will not be
recoverable, the Company's carrying value will be reduced by the estimated
shortfall of the undiscounted cash flows.
Foreign Currency Translation: The local currency is the functional currency
(primary currency in which business is conducted) for the Company's subsidiaries
with the exception of the Company's Mexican subsidiary whose functional currency
is the U.S. dollar. All balance sheet accounts of foreign subsidiaries are
translated at the current exchange rates and statement of operations items are
translated at the average exchange rates during the year. Resulting translation
adjustments are made directly to a separate component of stockholders' equity
(deficit). The effect of foreign currency transaction gains and losses, included
in the determination of 1997, 1996 and 1995 results of operations, was not
significant.
Fiscal Year: The Company's fiscal year ends on the Saturday nearest December 31.
Fiscal year 1997 includes 53 weeks, whereas fiscal years 1996 and 1995 include
52 weeks.
Reclassifications: Certain reclassifications were made to the 1995 consolidated
financial statements to conform to the 1997 presentation. The pension
curtailment gain of $1.9 million was reclassified from Restructuring and pension
curtailment gain to Selling, general and administrative.
26
GenRad, Inc. and Subsidiaries
Notes to Consolidated Financial Statements for the Years ended January 3, 1998,
December 28, 1996, and December 30, 1995
NOTE 2: ACQUISITIONS
Test Technology Associates, Inc. ("TTA") and Testware, Inc. ("Testware"): On
January 16, 1996 and November 8, 1996, respectively, the Company acquired TTA
and Testware. These companies provide custom test programming, test fixture
integration and other value-added services to manufacturers and users of
electronic products.
The acquisition of TTA was for cash and the acquisition of Testware was for cash
and 80,000 shares of the Company's Common Stock. Both acquisitions were
accounted for by the purchase method of accounting. Pro forma results of
operations have not been presented because the effects of the acquisitions were
not significant. The results of TTA and Testware are included in the 1996
financial statements beginning from the date of purchase. The excess purchase
price over the net assets acquired, recorded as goodwill, is being amortized on
a straight-line basis over the lesser of its useful life or 10 years.
In conjunction with the purchase of TTA, the Company agreed to pay to the
sellers for each of fiscal years 1996 through 1999 the greater of $0.5 million
per year, or fifty percent of TTA's profit before taxes in excess of $0.3
million for the respective years. The minimum obligation of $2.0 million was
recorded at the date of acquisition. At January 3, 1998 the total remaining
obligation was $1.5 million, with $0.5 million classified as accrued liabilities
and $1.0 million classified as other long-term liabilities.
Mitron Corporation ("Mitron"): On June 20, 1996, GenRad, Inc. acquired Mitron.
Mitron is a developer of an integrated family of software applications, tools
and services for electronics manufacturing including its CIMBridge(R) software
applications. The products enable users to generate and collect electronics
manufacturing data to achieve greater control, shorten time-to-market and lower
costs.
In connection with the acquisition, the Company issued approximately 1,196,000
shares of GenRad Common Stock in exchange for all outstanding shares of Mitron
common stock. The acquisition was accounted for as a pooling of interests, and
accordingly, the consolidated financial statements and all financial data
contained herein have been restated to include the accounts of Mitron for all
periods presented. Financial results for each of the previously separate
companies have not been presented because the effects of the acquisition were
not significant. Merger costs were insignificant and were expensed in the second
quarter of 1996.
Field Oriented Engineering, AG ("FOE AG"): On August 14, 1996, GenRad acquired
certain assets of FOE AG, consisting primarily of the software program known as
TRACS(R) III, which had been and is now sold to electronic manufacturing systems
customers. In close collaboration with GenRad, FOE AG developed TRACS(R) III
which provides manufacturers of electronic products real-time data collection,
analysis and reporting for improved manufacturing process control and paperless
repair.
The acquisition was accounted for by the purchase method of accounting. Pro
forma results of operations have not been presented because the effects of the
acquisition were not significant. The purchase price paid by GenRad in
connection with the acquisition of certain assets consisted of shares of GenRad
Common Stock and cash. The excess purchase price over the net assets acquired,
recorded as goodwill, is being amortized on a straight-line basis over three
years.
NOTE 3: EXCESS FACILITY RESERVES
The Company had excess facility reserves of $4.9 million and $6.6 million at
January 3, 1998 and December 28, 1996, respectively. The excess facilities
reserves were provided for two buildings: one in Milpitas, California with a
lease expiration of March 1998 and the other in Maidenhead, England with a lease
expiration date of 2013. The Milpitas, California building has been partially
subleased through March 1998, and the Maidenhead building has been subleased
through March 2001. As the Company continues to renegotiate leasing
arrangements, the utilization of excess facilities reserves and related cash
outflows may differ from the present estimates.
27
GenRad, Inc. and Subsidiaries
Notes to Consolidated Financial Statements for the Years ended January 3, 1998,
December 28, 1996 and December 30, 1995
NOTE 4: DETAILS OF FINANCIAL STATEMENT COMPONENTS (IN THOUSANDS)
1997 1996
CASH AND EQUIVALENTS:
CASH $ 5,118 $ 5,957
CERTIFICATE OF DEPOSIT -- 300
MONEY MARKET 11,365 --
LOAN PARTICIPATIONS 5,400 4,300
--------------------------
$ 21,883 $ 10,557
==========================
INVENTORIES:
RAW MATERIALS $ 18,378 $ 10,632
WORK IN PROCESS 8,355 4,075
FINISHED GOODS 3,163 5,543
---------------------------
$ 29,896 $ 20,250
==========================
PROPERTY, PLANT AND EQUIPMENT:
BUILDINGS AND LEASEHOLD IMPROVEMENTS $ 14,612 $ 2,908
MACHINERY AND EQUIPMENT 56,259 64,058
SERVICE PARTS 12,757 13,189
---------------------------
83,628 80,155
ACCUMULATED DEPRECIATION (50,149) (60,987)
---------------------------
$ 33,479 $ 19,168
==========================
INTANGIBLE ASSETS:
GOODWILL $ 6,029 $ 6,029
CAPITALIZED AND PURCHASED COMPUTER SOFTWARE 2,374 2,187
OTHER INTANGIBLE ASSETS 1,534 1,333
---------------------------
9,937 9,549
ACCUMULATED AMORTIZATION (2,830) (1,063)
---------------------------
$ 7,107 $ 8,486
==========================
ACCRUED LIABILITIES:
LEASE COSTS OF UNUSED FACILITIES $ 1,315 $ 1,686
CUSTOMER PREPAYMENTS 6,059 10,238
OTHER ACCRUED LIABILITIES 5,071 3,083
---------------------------
$ 12,445 $ 15,007
==========================
ACCRUED PENSION AND BENEFITS:
ACCRUED U.S. PENSION COST $ 4,258 $ 5,507
ACCRUED FOREIGN PENSION COST 4,247 4,159
ACCRUED POSTRETIREMENT BENEFIT COST 2,734 2,511
---------------------------
$ 11,239 $ 12,177
==========================
28
GenRad, Inc. and Subsidiaries
Notes to Consolidated Financial Statements for the Years ended January 3, 1998,
December 28, 1996 and December 30, 1995
NOTE 5: DEBT
Term Loan: On June 26, 1997, the Company entered into a five year term loan
which provided approximately $12 million for the purchase of furniture and
fixtures for the Company's new corporate headquarters and manufacturing
facilities in Westford, Massachusetts. The principal of the loan is repayable in
twenty equal quarterly payments of $0.6 million. Interest is payable quarterly
in arrears at LIBOR plus 1.25%. At January 3, 1998, the outstanding balance of
the term loan was $11.0 million, of which $2.4 million is classified as current.
Annual maturities of the term loan for the five years subsequent to January 3,
1998 are as follows: 1998 through 2001 - $2.4 million per year; and 2002 - $1.4
million.
Convertible Subordinated Debentures: On October 22, 1996, the Company announced
its redemption of all $50 million of its 7-1/4% convertible subordinated
debentures due in 2011 at par value plus accrued interest to the redemption
date. Prior to the November 6, 1996 redemption date, holders of the debentures
converted $49.6 million of principal into common stock at a price of $14.375 per
share. The remaining principal was redeemed in cash totaling $0.4 million,
including accrued interest and bond redemption costs. The net carrying amount of
convertible debt, including unamortized debt issue costs and accrued interest,
which was converted to equity was $50.3 million. The Company recorded $1.0
million of interest expense in the fourth quarter of 1996 to obtain short-term
financing for the redemption of all of its 7-1/4% convertible subordinated
debentures, which was not utilized, and to replace its $15 million secured
credit facilities with a $25 million unsecured credit facility.
Line of Credit: The Company has a $25 million credit facility. Borrowings under
the credit facility will expire on December 31, 1998 and are subject to
compliance with specified financial and operating covenants. Interest is payable
at the lesser of (i) the prime interest rate, or (ii) under a LIBOR option, with
borrowing spreads of LIBOR plus 1.25% to LIBOR plus 1.75%. The unused commitment
fee ranges from 0.250% to 0.625% based upon the Company's financial performance.
There were no borrowings outstanding on the line of credit at January 3, 1998.
Interest Paid: Interest paid amounted to $0.5 million in 1997, $5.1 million in
1996 and $4.0 million in 1995.
NOTE 6: FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company operates internationally and is exposed to market risks from changes
in foreign exchange rates. Derivative financial instruments are utilized by the
Company to partially mitigate those risks. The Company does not hold or issue
financial instruments for trading purposes.
The Company enters into foreign exchange contracts to hedge certain purchases
and accounts receivable denominated in foreign currencies (principally European
currencies). The term of the currency derivatives is rarely more than six
months. Market value gains and losses are recognized and the resulting gain or
loss offsets foreign exchange gains or losses on those transactions. The purpose
of the Company's foreign currency hedging activities is to protect the Company
from the risk that the eventual net cash inflows resulting from the sale of
products to foreign customers and purchases from foreign suppliers will be
adversely affected by changes in exchange rates.
At January 3, 1998, the Company had contracts comprised primarily of European
currencies maturing through June 25, 1998 to sell $17.4 million, net, of foreign
currency at various rates.
NOTE 7: STOCK PLANS
Stock Option and Restricted Stock Award Plans: The Company has four stock option
plans: a 1982 plan for 2,700,000 shares (terminated in 1991); a 1991 plan
(amended in 1993, 1994, 1996 and 1997) for 8,250,000 shares for key employees; a
1991 plan (amended in 1995) for 200,000 shares for non-employee directors, and a
1997 plan for 500,000 shares for key employees excluding directors and officers.
In general, option shares granted under these plans are exercisable in
installments based on years of service or stock price. Options under the 1991
and 1997 key employee plans generally become vested over a four-year period and
have a maximum term of ten years.
29
GenRad, Inc. and Subsidiaries
Notes to Consolidated Financial Statements for the Years ended January 3, 1998,
December 28, 1996 and December 30, 1995
NOTE 7: STOCK PLANS (CONTINUED)
Options under the 1991 non-employee directors plan generally become vested upon
issuance of options and have a maximum term of five years. Stock options issued
under the 1991 plans may be either non-qualified stock options or incentive
stock options. Stock options issued under the 1997 plan are non-qualified stock
options. Certain stock options were granted in 1997 with an exercise price below
the fair market value of the underlying stock. This resulted in deferred
compensation expense of $1.9 million, which will be recognized over the future
years of service. Compensation expense was $0.3 million in 1997 and the deferred
compensation balance was $1.6 million at January 3, 1998.
The 1991 Equity Incentive Plan contains provisions for stock options, as
described above, and restricted stock awards. All restricted stock awards are
granted subject to restrictions as to continuous employment, except in the case
of death, permanent disability or retirement. One fourth of the shares vest at
the end of one year from the date of grant and the remaining shares are vested
at a one-fourth rate per year through the fourth year. The cost of the awards,
determined as the fair market value of the shares on the date of grant, is
charged to expense ratably over the vesting period. No restricted stock awards
were issued in 1997, 1996 and 1995.
Stock option activity is summarized below (thousands of shares):
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
TOTAL AVERAGE TOTAL AVERAGE TOTAL AVERAGE
SHARES OPTION PRICE SHARES OPTION PRICE SHARES OPTION PRICE
- ----------------------------------------------------------------------------------------------------------------------------------
OPTIONS:
OUTSTANDING AT BEGINNING OF YEAR 4,043 $ 8.88 3,514 $ 5.06 4,170 $ 4.66
GRANTED 2,593 16.19 2,021 13.44 728 5.55
EXERCISED (1,175) 6.40 (1,132) 5.16 (759) 3.08
CANCELED (418) 12.82 (360) 8.95 (625) 5.35
--------- --------- ---------
OUTSTANDING AT END OF YEAR 5,043 12.88 4,043 8.88 3,514 5.06
========= ========= =========
OPTIONS EXERCISABLE 1,896 2,644 1,466
========= ========= =========
OPTIONS AVAILABLE FOR FUTURE GRANTS 517 195 162
========= ========= =========
The following table summarizes information about the stock options outstanding
at January 3, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AT 1/03/98 CONTRACTUAL EXERCISE AT 1/03/98 EXERCISE
PRICES (IN THOUSANDS) LIFE PRICE (IN THOUSANDS) PRICE
- ----------------------------------------------------------------------------------------------------------------------------------
$ 0.54 - $ 3.50 306 5.7 $ 3.08 283 $ 3.25
$ 4.38 - $ 7.63 910 6.5 5.75 910 5.75
$ 8.13 - $11.38 452 7.8 8.55 452 8.55
$12.13 - $14.75 825 8.6 13.39 87 13.23
$15.00 - $18.38 2,268 9.2 16.57 113 17.77
$20.50 - $25.75 282 9.4 22.43 51 21.17
- ----------------------------------------------------------------------------------------------------------------------------------
5,043 1,896
==================================================================================================================================
30
GenRad, Inc. and Subsidiaries
Notes to Consolidated Financial Statements for the Years ended January 3, 1998,
December 28, 1996 and December 30, 1995
NOTE 7: STOCK PLANS (CONTINUED)
Employee Stock Purchase Plan: Under the Company's Employee Stock Purchase Plan,
eligible employees may invest up to 10% of their base salary in shares of the
Company's Common Stock. The purchase price of the shares is 85% of the fair
market value of the stock on the offering commencement date or the offering
termination date (typically three months after commencement date), whichever is
lower. In 1994, the Plan was amended, increasing the amount of shares from
1,962,000 to 2,462,000. During the fiscal years ended January 3, 1998, December
28, 1996 and December 30, 1995, the Company issued 87,000, 74,000 and 39,000
shares under the Plan, respectively. At January 3, 1998, there were 1,873,000
shares available for future issuance.
Stock Based Compensation: The Company adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting
for Stock-Based Compensation".
Had compensation cost been determined based on the fair value of the options at
the grant dates for awards in 1997, 1996 and 1995 on a basis consistent with the
provisions of SFAS No. 123, the Company's net income and earnings per share on a
fully diluted basis would have been reduced to the pro forma amounts indicated
below:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- ----------------------------------------
1997 1996 1995
NET INCOME-AS REPORTED $41,295 $27,335 $12,271
NET INCOME-PRO FORMA 33,700 22,803 10,556
BASIC EARNINGS PER SHARE-AS REPORTED 1.54 1.22 0.59
DILUTED EARNINGS PER SHARE-AS REPORTED 1.43 1.11 0.56
BASIC EARNINGS PER SHARE-PRO FORMA 1.25 1.01 0.51
DILUTED EARNINGS PER SHARE-PRO FORMA 1.21 0.96 0.48
The fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
1997 1996 1995
EXPECTED LIFE (YEARS) 6 5 4
INTEREST RATE 6.6% 6.5% 6.5%
VOLATILITY 66.2% 63.0% 57.4%
DIVIDEND YIELD 0% 0% 0%
FAIR VALUE OF OPTIONS GRANTED AT FAIR MARKET VALUE $ 11.10 $ 6.58 $ 3.27
FAIR VALUE OF OPTIONS GRANTED BELOW FAIR MARKET VALUE $ 9.55 N/A N/A
SFAS NO. 123 DOES NOT APPLY TO AWARDS PRIOR TO 1995.
Director Restricted Stock Plan: In 1994, the Company adopted the 1994 Director
Restricted Stock Plan (amended in 1996), which contains provisions for
restricted stock awards. Up to 50,000 shares of the Company's Common Stock may
be issued under the Plan. On August 31 of each year, while the Plan is in
effect, each eligible non-employee director is granted a restricted stock award
of 2,500 shares of the Company's Common Stock. The awards are subject to certain
restrictions that generally prohibit the transfer of any shares except upon the
director's death or disability, upon the director's resignation with the consent
of the Board of Directors, upon a change in control of the Company as defined
under the Plan, or prior to the third anniversary of the award with certain
restrictions remaining through the fifth anniversary. During 1997, 1996 and
1995, the Company granted restricted stock awards for 17,500, 10,500 and 10,500
shares, respectively. Compensation expense related to these awards was not
significant in 1997, 1996 and 1995. At January 3, 1998 there were 4,000 shares
available for future issuance.
Shareholder Rights Plan: GenRad has a shareholder rights program that was
adopted June 17, 1988. Under the Plan, the holder of each share of the Company's
Common Stock is entitled to purchase from the Company one share of Common Stock
at a purchase price of $50.00 subject to adjustment. The Rights expire June 17,
1998 and are exercisable only if an individual or group has acquired or obtained
the right to acquire beneficial
31
GenRad, Inc. and Subsidiaries
Notes to Consolidated Financial Statements for the Years ended January 3, 1998,
December 28, 1996, and December 30, 1995
NOTE 7: STOCK PLANS (CONTINUED)
ownership of 20% or more of the Company's Common Stock or announces a tender or
exchange offer that would result in such individual or group owning 30% or more
of the Company's Common Stock. Such percentages may, at the Board's discretion
be lowered, although in no event below 10%. When the Rights become exercisable,
they separate from the Company's Common Stock. The Company is entitled to redeem
the Rights in whole at $0.02 per Right under certain circumstances.
NOTE 8: INCOME TAXES
The components of income before income taxes consist of the following (in
thousands):
1997 1996 1995
DOMESTIC $38,942 $24,082 $11,229
FOREIGN (1,196) 1,597 1,505
------------------------------------------
$37,746 $25,679 $12,734
==========================================
The provision (benefit) for income taxes consists of the following (in
thousands):
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
- -----------------------------------------------------------------------------------------------------------------------------------
FEDERAL $1,088 $ (5,388) $ 219 $(2,480) $ -- $ --
FOREIGN 671 -- 520 -- 420 --
STATE 80 -- 85 -- 43 --
--------------------------------------------------------------------------------------------
$1,839 $ (5,388) $ 824 $(2,480) $ 463 $ --
============================================================================================
A reconciliation of tax on income at the federal statutory rate to the recorded
income tax (benefit) provision is presented below (in thousands):
1997 1996 1995
TAX PROVISION AT STATUTORY RATE $13,211 $ 8,988 $ 4,330
STATE INCOME TAXES LESS RELATED FEDERAL INCOME TAX BENEFITS 52 55 28
REALIZATION OF DEFERRED TAX ASSETS (11,374) (8,155) (3,893)
NET REVERSAL OF DEFERRED TAX ASSET VALUATION ALLOWANCE (5,388) (2,480) --
FOREIGN EARNINGS TAXED AT DIFFERENT RATES, INCLUDING WITHHOLDING TAXES (50) (64) (2)
------------------------------------------
RECORDED INCOME TAX (BENEFIT) PROVISION $(3,549) $(1,656) $ 463
==========================================
The temporary differences and carryforwards that gave rise to the significant
deferred tax assets and liabilities as of January 3, 1998 and December 28, 1996
were as follows (in thousands):
1997 1996
DEFERRED TAX ASSETS:
DOMESTIC NET OPERATING LOSSES $ 44,181 $49,193
RESEARCH AND DEVELOPMENT TAX CREDITS 8,670 9,569
ALTERNATIVE MINIMUM TAX CREDIT 633 --
FOREIGN NET OPERATING LOSSES NOT YET BENEFITED 943 --
INVENTORY VALUATION RESERVES 2,026 2,993
RETIREMENT BENEFIT ACCRUALS 2,797 3,207
RESTRUCTURING RESERVES, SEVERANCE AND LEASE COSTS OF UNUSED FACILITIES 2,848 4,136
OTHER RESERVES 939 1,978
--------------------------
TOTAL DEFERRED TAX ASSETS 63,037 71,076
VALUATION ALLOWANCE (53,162) (66,678)
--------------------------
NET DEFERRED TAX ASSETS $ 9,875 $ 4,398
--------------------------
DEFERRED TAX LIABILITIES:
DEPRECIATION $ (1,779) $(1,649)
OTHER (228) (269)
--------------------------
TOTAL DEFERRED TAX LIABILITIES (2,007) (1,918)
--------------------------
NET DEFERRED TAXES RECORDED $ 7,868 $ 2,480
==========================
32
GenRad, Inc. and Subsidiaries
Notes to Consolidated Financial Statements for the Years ended January 3, 1998,
December 28, 1996 and December 30, 1995
NOTE 8: INCOME TAXES (CONTINUED)
Deferred income taxes are provided to reflect the future tax consequences of
differences between the book and the tax basis of assets and liabilities. At
January 3, 1998 and December 28, 1996, the Company had a net deferred tax asset
of $61.0 million and $69.2 million, before valuation allowance, respectively. At
January 3, 1998, $1.7 million of the Company's deferred tax asset was applicable
to net operating losses generated by the disqualified disposition of stock
options. When realized, the related tax benefit will be credited to paid-in
capital.
The Company's net deferred tax asset consists primarily of the future tax
benefits from domestic net operating loss carryforwards and other tax credits.
Realization of the net deferred tax asset and future reversals of the valuation
allowance depend on the Company's ability to generate taxable income during the
respective carryforward periods. Under the Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", the Company is required to
recognize all or a portion of its net deferred tax asset if it is believed that
it is more likely than not that all or a portion of the benefits of the
carryforward losses and tax credits will be realized. In establishing the
valuation reserve, management considers positive factors, including positive
earnings in recent years, and negative factors including the tax basis losses
incurred for eleven consecutive years through 1995; the scheduled expiration of
certain tax credit and net operating loss carryovers; the competitive nature of
the industry in which the Company sells its products and services; and
uncertainties relating to the tax jurisdiction in which income will be
generated. Based on all of these factors, primarily the positive taxable income
in 1996 and 1997, the Company reversed $5.4 million and $2.5 million of the
valuation allowance in the first quarter of 1997 and 1996, respectively.
Management continues to assess the realizability of the net deferred tax asset
on an ongoing basis, and believes that it is reasonably possible that an
additional portion of the valuation allowance will be reduced in the near term.
It has been the practice of the Company to reinvest unremitted earnings of
foreign subsidiaries outside the United States. Accordingly, the Company does
not provide for federal income taxes that would result from the remittance of
such earnings.
At January 3, 1998 the Company had, for tax purposes, domestic and foreign
unused net operating loss carryforwards of $125.8 million and $3.0 million,
respectively. The net operating losses are available to offset future income and
will begin expiring in 2001. The Tax Reform Act of 1986 contains provisions that
limit the net operating loss carryforwards available to be used in any given
year upon the occurrence of certain events, including significant changes in
ownership interests. For tax purposes, the Company has $8.7 million of
investment and research credit carryforwards at January 3, 1998, which will
expire starting in 1998. Net taxes paid were $1,065,000 in 1997, $154,000 in
1996 and $43,000 in 1995.
NOTE 9: RETIREMENT BENEFITS
U.S. Pension Plan: The Company maintains a noncontributory defined benefit
pension plan which covered substantially all domestic employees. On January 31,
1995, the Company ceased all benefit accruals under this plan as part of
redesigning the Company's employee benefit plans. Participants of the Plan who
met the vesting requirements earned benefits based on years of service, age and
the average of the employee's compensation during the last 10 years of his or
her employment through January 31, 1995. The change resulted in a curtailment
gain of $1.9 million, which is included in selling, general and administrative
expenses in 1995. The Company's funding policy is to contribute amounts to the
Plan sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional amounts as
the Company determined to be appropriate from time to time.
On December 12, 1997, the Company used plan assets to purchase non-participating
group annuity contracts for a group of participants which represented
approximately one third of the Plan's liability. The purchase resulted in a $0.9
million gain in the fourth quarter of 1997 utilizing a 7-1/4% discount rate,
which is included in selling, general and administrative expenses in 1997.
33
GenRad, Inc. and Subsidiaries
Notes to Consolidated Financial Statements for the Years ended January 3, 1998,
December 28, 1996 and December 30, 1995
NOTE 9: RETIREMENT BENEFITS (CONTINUED)
Net pension cost included the following components (in thousands):
1997 1996 1995
SERVICE COST $ -- $ -- $ 66
INTEREST COST ON PROJECTED BENEFIT OBLIGATION 3,102 2,779 2,781
ACTUAL RETURN ON PLAN ASSETS (6,090) (4,013) (2,565)
NET DEFERRAL AND (AMORTIZATION) 2,664 776 (368)
OTHER (BENEFIT) (925) -- (1,946)
-------------------------------------------
NET PERIODIC PENSION (BENEFIT) $(1,249) $ (458) $(2,032)
===========================================
The Plan's funded status and amounts recognized in the Company's consolidated
financial statements are as follows (in thousands):
1997 1996
ACTUARIAL PRESENT VALUE OF ACCUMULATED PLAN BENEFITS, INCLUDING
VESTED BENEFITS OF $30,737 AND $39,772 $(30,743) $(39,800)
=========================
ACTUARIAL PRESENT VALUE OF PROJECTED BENEFIT OBLIGATION FOR SERVICE RENDERED TO DATE $(30,743) $(39,800)
PLAN ASSETS AT FAIR VALUE, PRIMARILY LISTED STOCK AND U.S. BONDS 28,171 38,679
-------------------------
PROJECTED BENEFIT OBLIGATION IN EXCESS OF PLAN ASSETS (2,572) (1,121)
UNRECOGNIZED NET ASSET AT TRANSITION (1,929) (3,282)
UNRECOGNIZED NET ACTUARIAL LOSS (GAIN) 243 (1,104)
-------------------------
ACCRUED U.S. PENSION COST $ (4,258) $ (5,507)
=========================
The discount rate used in determining the actuarial present value of the
projected benefit obligation was 7% and 7.5% at January 3, 1998 and December 28,
1996, respectively. There was no rate increase in future compensation levels to
determine the actuarial present value of the projected benefit obligation at
January 3, 1998 and December 28, 1996, as the Company ceased all benefit
accruals on January 31, 1995. The rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation was 5% at December 31, 1994. The expected long-term rate of return on
plan assets was 8% in 1997, 1996 and 1995. No contributions were required from
the Company for 1997, 1996 or 1995.
The Company also sponsors a defined contribution plan. The plan covers employees
who work at least 1,000 hours per year and provides for contributions by the
employee between 1% and 15% of an employee's salary, which is capped by the
maximum amount permitted by the Internal Revenue Code. The Company matches 50%
of the first 6% of the employee's contributions. Pension expense recognized for
the defined contribution plan totaled $1.0 million in 1997, $0.8 million in 1996
and $0.7 million in 1995.
Non-U.S. Plans: The Company has a defined benefit pension plan for one of its
subsidiaries outside the U.S. For the non-U.S. defined benefit pension plan, the
net pension cost included the following components (in thousands):
1997 1996 1995
SERVICE COST $ 98 $270 $141
INTEREST COST ON PROJECTED BENEFIT OBLIGATION 232 267 257
NET (AMORTIZATION) AND DEFERRAL (242) 129 (20)
----------------------------------------
NET PERIODIC PENSION COST $ 88 $666 $378
========================================
The Plan's unfunded status and amounts recognized in the Company's financial
statements are as follows (in thousands):
1997 1996
ACTUARIAL PRESENT VALUE OF ACCUMULATED PLAN BENEFITS, INCLUDING
VESTED BENEFITS OF $3,039 AND $3,089 $(3,217) $(3,217)
=========================
ACTUARIAL PRESENT VALUE OF PROJECTED BENEFIT OBLIGATION FOR SERVICE RENDERED TO DATE $(3,688) $(3,499)
UNRECOGNIZED NET ASSET AT TRANSITION (45) (56)
UNRECOGNIZED NET ACTUARIAL GAIN (514) (604)
-------------------------
ACCRUED FOREIGN PENSION COST $(4,247) $(4,159)
=========================
34
GenRad, Inc. and Subsidiaries
Notes to Consolidated Financial Statements for the Years ended January 3, 1998,
December 28, 1996 and December 30, 1995
NOTE 9: RETIREMENT BENEFITS (CONTINUED)
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation was
6.5% at January 3, 1998 and 7.5% at December 28, 1996.
Accrued Postretirement Benefits: Effective January 3, 1993, the Company put in
place the provisions of Statement of Financial Accounting Standards No. 106
(SFAS No. 106), "Employer's Accounting for Postretirement Benefits Other Than
Pensions", for its postretirement benefit plan. The Company provides certain
health care and life insurance benefits for retired U.S. employees. Employees
become eligible for these benefits when they reach normal retirement age while
working for the Company. Prior to the adoption of this Statement, the cost was
recognized as claims were paid. The Company's postretirement benefit plans were
modified at the end of 1995 and include a limit on the cost of the Company's
contributions for all retirees. The Plan is not funded.
The following table sets forth the Plan's projected funded status (in
thousands):
1997 1996
ACCUMULATED AND UNFUNDED POSTRETIREMENT BENEFIT OBLIGATION:
RETIRED EMPLOYEES $(6,812) $(6,775)
ACTIVE EMPLOYEES (1,127) (999)
-------------------------
TOTAL ACCUMULATED AND UNFUNDED POSTRETIREMENT BENEFIT OBLIGATION (7,939) (7,774)
UNRECOGNIZED NET LOSS (GAIN) 19 (269)
UNRECOGNIZED TRANSITION OBLIGATION 5,186 5,532
-------------------------
ACCRUED POSTRETIREMENT BENEFIT COST $(2,734) $(2,511)
=========================
The Company is recognizing the actuarial present value of the accumulated
postretirement benefit obligation at transition on the delayed recognition
method over 20 years.
Net periodic postretirement benefit costs for fiscal 1997, 1996 and 1995 include
the following components (in thousands):
1997 1996 1995
SERVICE COST $ 72 $ 62 $ 95
INTEREST COST 557 505 1,028
AMORTIZATION OF UNRECOGNIZED NET ACTUARIAL LOSS - - 24
AMORTIZATION OF TRANSITION OBLIGATION 346 345 582
-----------------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT COST $ 975 $ 912 $1,729
=========================================
For measurement purposes, an 8.0%, 8.5% and 9.0% annual rate of increase in the
per capita cost of covered health care benefits was assumed for fiscal 1997,
1996 and 1995, respectively. The Company's annual per capita cost commitment for
retiree medical care is capped at 1995 levels. As a result, the health care cost
trend rate assumption does not have a significant effect on the amounts
reported. The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at January 3, 1998 and 7.5% at
December 28, 1996.
35
GenRad, Inc. and Subsidiaries
Notes to Consolidated Financial Statements for the Years ended January 3, 1998,
December 28, 1996 and December 30, 1995
NOTE 10: LEASES
The Company leases certain manufacturing facilities, sales and service offices
and equipment under operating leases. Total rental expense for these leases
amounted to $7.1 million in 1997, $4.8 million in 1996 and $4.9 million in 1995.
The future minimum commitments as of January 3, 1998 for noncancelable operating
leases are as follows (in thousands):
REAL ESTATE EQUIPMENT TOTAL
1998 $ 6,506 $1,260 $ 7,766
1999 5,456 939 6,395
2000 4,853 310 5,163
2001 4,510 36 4,546
2002 4,478 2 4,480
THEREAFTER 44,320 -- 44,320
------------------------------------------
GROSS COMMITMENT $70,123 $2,547 $72,670
LESS SUBLEASE INCOME 3,282 -- 3,282
------------------------------------------
NET COMMITMENT $66,841 $2,547 $69,388
==========================================
NOTE 11: CONTINGENCIES
On August 17, 1995, the Company settled litigation with a competitor relative to
patent infringement. The Company had previously established reserves for legal
fees and related costs with respect to the litigation. The settlement resulted
in the elimination of previously established reserves and reduced selling,
general and administrative expenses by $1.3 million in fiscal 1995.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
results of operations or the financial position of the Company.
NOTE 12: FINANCIAL INFORMATION BY GEOGRAPHIC AREA
GenRad sells and services its products primarily through its own sales and
service organizations consisting of sales offices and service centers located in
the United States, the United Kingdom, Germany, France, Switzerland, Italy,
Mexico, Malaysia and Singapore. Sales or service elsewhere is provided through
independent representatives to whom GenRad provides technical and administrative
assistance.
GenRad's operations abroad consist of selling, marketing, distributing and
servicing products, providing other types of customer support services such as
software development and manufacturing of diagnostic systems. Transfer prices to
foreign subsidiaries, combined with supplemental commission arrangements, are
intended to produce profit margins commensurate with the sales and service
effort associated with the products sold.
36
GenRad, Inc. and Subsidiaries
Notes to Consolidated Financial Statements for the Years ended January 3, 1998,
December 28, 1996 and December 30, 1995
NOTE 12: FINANCIAL INFORMATION BY GEOGRAPHIC AREA (CONTINUED)
Certain information on a geographic basis (in thousands):
1997 1996 1995
NET SALES:
NORTH AMERICA $143,032 $104,268 $ 85,292
INTERCOMPANY SALES 23,938 22,982 18,963
--------------------------------------------
TOTAL NORTH AMERICA 166,970 127,250 104,255
EUROPE 93,729 79,277 73,461
INTERCOMPANY SALES 3,881 1,332 2,869
--------------------------------------------
TOTAL EUROPE 97,610 80,609 76,330
ELIMINATIONS (27,819) (24,314) (21,832)
--------------------------------------------
TOTAL $236,761 $183,545 $158,753
============================================
OPERATING PROFIT:
NORTH AMERICA $ 30,965 $ 25,454 $ 13,441
EUROPE 6,752 3,122 2,872
ELIMINATIONS 769 (2,720) 56
--------------------------------------------
TOTAL $ 38,486 $ 25,856 $ 16,369
============================================
IDENTIFIABLE ASSETS:
NORTH AMERICA $119,200 $ 70,040 $ 43,689
EUROPE 59,757 45,725 43,717
--------------------------------------------
TOTAL $178,957 $115,765 $ 87,406
============================================
North America sales include export sales of $30.0 million in 1997, $21.9 million
in 1996 and $18.6 million in 1995.
Sales to one customer amounted to 10% of consolidated sales in 1997, 15% in 1996
and 16% in 1995. No other customer accounted for 10% or more of consolidated
sales.
37
GenRad, Inc. and Subsidiaries
Supplementary Information
QUARTERLY INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS - UNAUDITED)
FIRST SECOND THIRD FOURTH YEAR
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 3, 1998:
NET SALES AND SERVICE SALES $52,500 $61,050 $58,870 $64,341 $236,761
GROSS MARGIN 29,015 29,537 32,831 35,381 126,764
NET INCOME 11,717 7,921 9,605 12,052 41,295
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE:
BASIC .45 .30 .36 .44 1.54
DILUTED .42 .28 .33 .41 1.43
----------------------------------------------------------------------------
YEAR ENDED DECEMBER 28, 1996:
NET SALES AND SERVICE SALES $43,554 $45,168 $46,152 $48,671 $183,545
GROSS MARGIN 22,835 24,222 23,898 25,453 96,408
NET INCOME 6,949 5,711 5,010 9,665 27,335
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE:
BASIC .32 .26 .23 .39 1.22
DILUTED .29 .24 .21 .36 1.11
----------------------------------------------------------------------------
COMMON STOCK
As of February 13, 1998 there were 3,188 stockholders of record holding
27,376,983 shares.
DIVIDENDS
It is the policy of the Company to retain earnings to support the growth and
expansion of the Company's business. Although the Company has paid dividends in
the past, there are no plans to resume paying dividends. Payment of dividends is
restricted by financing agreements to which the Company is a party.
STOCK PRICE INFORMATION
1997 1996
HIGH LOW HIGH LOW
- ----------------------------------------------------------------------------------------------
1ST QUARTER 23-3/4 11-7/8 13-3/8 8-1/8
2ND QUARTER 22-15/16 13-5/8 17-5/8 11-3/4
3RD QUARTER 30-1/8 20-1/16 16-3/4 11-7/8
4TH QUARTER 34 23-7/16 23 15-5/8
This Annual Report contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from
results discussed in the forward-looking statements due to a number of important
factors, including, but not limited to, those discussed in the section "Factors
That May Affect Future Results" of this Annual Report.
38
GenRad, Inc. and Subsidiaries
Investors' Reference Guide
COMMON STOCK
The Company's Common Stock is listed and traded on the New York Stock Exchange
(trading symbol "GEN").
TRANSFER AGENT AND REGISTRAR FOR COMMON STOCK
BankBoston is the Company's stock transfer agent and registrar and maintains the
stockholder accounting records. The agent will respond to questions regarding
change of ownership, lost stock certificates and consolidation of accounts.
Please direct questions of this nature to BankBoston's Consumer Service
Department at (617) 575-3120.
A change of address should be reported promptly by sending a signed and dated
letter to BankBoston. Stockholders should state the name in which the stock is
registered, account number, social security number and the new address. Please
mail correspondence to:
BankBoston
c/o Boston EquiServe
Investor Relations Department
Mail Stop: 45-02-64
P.O. Box 8040
Boston, MA 02266-8040
Stockholders can access the EquiServe home page at the following web address:
http://www.equiserve.com
INVESTOR RELATIONS
For information about the Company, please see the GenRad Home Page at
http://www.genrad.com. Inquiries from stockholders and the financial community
are welcome by telephone, fax or letter and should be directed to:
Walter A. Shephard Nancy A. Miller
Treasurer and Vice President, Investor Relations Director, Corporate Relations
GenRad, Inc. GenRad, Inc.
101 Federal Street, 22nd Floor 101 Federal Street, 22nd Floor
Boston, MA 02110-1817 Boston, MA 02110-1817
(978) 589-7440 Phone (978) 589-7144 Phone
(978) 589-2002 Fax (978) 589-2002 Fax
shephardwa@genrad.com millern@genrad.com
FORM 10-K AND OTHER DOCUMENTS
The Company's Form 10-K for the fiscal year ended January 3, 1998, filed with
the Securities and Exchange Commission, interim reports and additional
information about the Company, its products, and the market it serves, can be
obtained by request to the Corporate Relations office (above).
By using GenRad, Inc.'s Investor Relations FAX-ON-DEMAND Service, you can
receive GenRad's most current stockholder information.
Please call 1-800-469-1261.
ANNUAL MEETING
The Annual Meeting of Stockholders will be held in Boston, Massachusetts on
Thursday, May 14, 1998, 11:00 a.m. at the BankBoston auditorium. All
stockholders are cordially invited to attend.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
Boston, Massachusetts
GENERAL LEGAL COUNSEL
Nutter, McClennen & Fish, LLP
Boston, Massachusetts
GenRad, Inc. is an Equal Opportunity Employer. All employment related action(s)
are taken without regard to race, color, sex, national origin, sexual
orientation, religion, physical/mental disability, or veteran status.
Additionally, the Company is committed to maintaining an atmosphere free of
discrimination and one which fosters an environment that enables all employees
to work to their potential.
39
GenRad, Inc. and Subsidiaries
Corporate Data
DIRECTORS
William S. Antle III (1,2)
President and Chief Executive Officer
Oak Industries, Inc.
Russell A. Gullotti (1,3)
Chairman, President and Chief Executive Officer
National Computer Systems, Inc.
Lowell B. Hawkinson (2,4)
Chairman and Chief Executive Officer
Gensym Corporation
James F. Lyons
President and Chief Executive Officer
GenRad, Inc.
Richard G. Rogers (2,4)
President
Tokyo Electron Massachusetts, Inc.
William G. Scheerer (3,4)
President
Performance QUEST LLC
Adriana Stadecker (1,3)
Director, Human Resources
BTR plc.
Ed Zschau (1,2,4)
Professor of Management
Harvard Business School
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Corporate Governance Committee
(4) Member of the Technology and Quality Committee
SENIOR MANAGEMENT TEAM
James F. Lyons
President and Chief Executive Officer
Paul Geere
Vice President, Managing Director
Advanced Diagnostic Solutions
Lori B. Hannay
Vice President, Worldwide Human Resources
Sarah H. Lucas
Vice President, Chief Strategic Officer
Gary H. Mueller
Vice President, General Manager
Mitron Corporation
Paul Pronsky, Jr.
Vice President, Chief Financial Officer
and Secretary
Brian C. Quirk
Vice President, Global Manufacturing
Michael W. Schraeder
Vice President, Worldwide Sales and Service
Nan Xia
Vice President, Global Software Development
CORPORATE OFFICE
7 Technology Park Drive
Westford, Massachusetts 01886-0033 USA
MANUFACTURING AND SERVICE CENTERS
Advanced Diagnostic Solutions
Manchester, UK
Dearborn, Michigan USA
Electronic Manufacturing Systems
Westford, Massachusetts USA
Mitron Corporation
Portland, Oregon USA
Test Technology Associates, Inc.
Milpitas, California USA
Fern Park, Florida USA
Hudson, Massachusetts USA
Lewisville, Texas USA
SALES OFFICES
Irvine, California USA
San Jose, California USA
Altamonte Springs, Florida USA
Arlington Heights, Illinois USA
Frederick, Maryland USA
Westford, Massachusetts USA
Novi, Michigan USA
Portland, Oregon USA
Plano, Texas USA
Cedex, France
Ismaning, Germany
Milan, Italy
Penang, Malaysia
Guadalajara, Mexico
Science Park, Singapore
Zurich, Switzerland
Maidenhead, UK
Manchester, UK
Windsor, UK
40