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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-6050
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POWELL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
NEVADA 88-0106100
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8550 MOSLEY DRIVE, HOUSTON, TEXAS 77075-1180
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(713)944-6900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by "X" whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by "X" if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein and will not be contained, to the best of
the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by "X" whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $180,967,000 as of December 31, 2002. The
number of shares of our Common Stock outstanding on that date was 10,595,878
shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2003 annual meeting of stockholders
to be filed not later than 120 days after October 31, 2002 are incorporated by
reference into Part III.
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POWELL INDUSTRIES, INC.
TABLE OF CONTENTS
PAGE
----
Cautionary Statement Regarding Forward-Looking Statements... 2
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 5
Item 3. Legal Proceedings........................................... 5
Item 4. Submission of Matters to a Vote of Security Holders......... 5
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................... 6
Item 6. Selected Financial Data..................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations....................................... 7
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 11
Item 8. Financial Statements and Supplementary Data................. 12
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 34
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 34
Item 11. Executive Compensation...................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 34
Item 13. Certain Relationships and Related Transactions.............. 34
Item 14. Controls and Procedures..................................... 34
Item 15. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 34
Signatures............................................................ 36
1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes various forward-looking statements
regarding the Company which are subject to risks and uncertainties.
Forward-looking statements include information concerning future results of
operations and financial conditions. Statements that contain words such as
"believes," "expects," "anticipates," "intends," "estimates," "continue,"
"should," "could," "may," "plan," "project," "predict," "will" or similar
expressions are forward-looking statements. These forward-looking statements are
subject to risks and uncertainties, and many factors could affect the future
financial results of the Company. Accordingly, actual results may differ
materially from those expressed or implied by the forward-looking statements
contained in this Report. Any forward-looking statements made by or on our
behalf are made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
There are many factors that could cause actual results to differ materially
from those in forward-looking statements, some of which are beyond the control
of the Company. These factors include, but are not limited to:
Competition and Pricing Pressures. We operate in an intensely
competitive environment, and many of our competitors are significantly
larger and have substantially greater resources than we do. Some of our
competitors seek to employ competitive and management strategies similar to
those of Powell. As a result, our competitive standing may be expected to
vary from time to time and among different markets.
Sensitivity to General Economic and Industry Conditions. Our markets
are cyclical in nature and subject to general trends in the economy. Our
profitability and cash flow availability could be adversely affected by any
prolonged economic downturn.
International Sales. International sales accounted for approximately
9% of our net sales in fiscal 2002. As a result of our international sales
and operations, we are subject to the risk of fluctuation in currency
exchange rates. International instability from war or terrorism, and
unforeseen political or economic problems in countries that we export
product to could adversely affect our business.
Raw Materials. Our raw material costs represented approximately 48%
of our net sales in fiscal 2002. We purchase a wide variety of raw
materials to manufacture our products including steel, aluminum, copper,
and various electrical components. Unanticipated increases in raw material
requirements or price increases could increase production costs and
adversely affect profitability.
Acquisitions. Our business strategy calls for growth and
diversification. Pursuing acquisition opportunities and attempting to
integrate and manage acquired businesses could require significant
resources, including management time and skill, and these efforts may
detract from the management or operation of other businesses. Acquired
businesses may not perform as expected, thereby causing our actual
operating results to suffer.
2
PART I
ITEM 1. BUSINESS
OVERVIEW
We develop, design, manufacture, and service equipment and systems for the
management and control of electrical energy and other critical processes.
Headquartered in Houston, TX, we serve the transportation, environmental,
industrial, and utility industries.
Powell Industries, Inc. ("we," "us," "our," "Powell," or the "Company") was
incorporated in the state of Nevada in 1968 and is the successor to a
corporation founded by William E. Powell in 1947, which merged into the Company
in 1977. Our major subsidiaries, all of which are wholly-owned, include: Powell
Electrical Manufacturing Company; Powell Power Electronics Company, Inc.;
Powell-ESCO Company; Unibus, Inc.; Delta-Unibus Corporation; and Transdyn
Controls, Inc.
PRODUCTS AND SEGMENTS
We manage our business through operating subsidiaries, which are combined
into three reportable business segments: Switchgear and related equipment
("Switchgear"), Bus Duct, and Process Control Systems. Financial information
related to these business segments is included in Note L of the Notes to
Consolidated Financial Statements.
A brief description of our products and business segments follows:
Switchgear and related equipment. Switchgear is an electrical power
management system comprised of electrical components housed in metal
cubicles designed to monitor and control the flow of electricity and to
provide protection to motors, transformers, and other electrically powered
equipment. Our switchgear is designed to be free standing for indoor
installations, housed in outdoor enclosures or integrated into customized
transportable buildings. We design and manufacture systems ranging from 480
volts to in excess of 36,000 volts to serve the transportation, industrial,
and utility industries.
Bus Duct. Bus duct is a series of metal conductors protected by a
metal enclosure. Our bus duct is designed to distribute large amounts of
electrical energy between a generator, transformer, switching device, or
other electrical apparatus, typically requiring custom configurations. We
design and manufacture isolated phase, segregated phase, and non-segregated
phase bus duct in numerous amperage and voltage ratings for power
generation and industrial applications.
Process Control Systems. Process control systems are customized
management systems designed to monitor and control a complex sequence of
critical events. Our systems are an integration of instrumentation,
computer controls, communications equipment, and data management systems.
We design and build systems to serve the transportation, environmental,
industrial, utility, and governmental sectors.
CUSTOMERS AND MARKETS
Our products and services are principally sold directly or through agents
to the end-user or to an EPC (engineering, procurement, and construction) firm
on behalf of the end-user. We market our products and services to a wide variety
of customers, markets and geographic regions; as a result, we are not dependent
on any one customer or market for sales.
During the past three fiscal years, we did not have any one customer or
export country that accounted for more than 10% of our consolidated revenues.
The loss of any specific customer would not have a material adverse effect on
our business; however, a significant reduction in business volume from a market
segment could.
Our principal products are designed for use by and marketed to
sophisticated users of large amounts of electrical energy or complex processes.
Our markets include: oil and gas producers, oil and gas pipelines,
3
refineries, petrochemical plants, electrical power generators, public and
private utilities, mining, pulp and paper mills, transportation systems,
governmental agencies, and other large industrial customers.
Our export revenues were $28.0 million, $21.4 million, and $44.4 million in
fiscal years 2002, 2001 and 2000, respectively. The geographic areas in which
these revenues were recorded are included in Note H of the Notes to Consolidated
Financial Statements.
COMPETITION
We operate in an intensely competitive environment. Many of our competitors
are significantly larger and have substantially greater resources than we do.
However, we believe that we are a significant competitor in each of our
principal markets.
Our products and systems are custom designed to meet the specifications of
our customers. Each order is designed and manufactured to the unique
requirements of the installation. We consider our engineering and manufacturing
capabilities vital to the success of our business, and believe our technical and
project management strengths, together with our responsiveness and flexibility
to the needs of our customers, give us a competitive advantage in our markets.
Ultimately, our competitive position is dependent on the ability to provide
quality products and systems, on a timely basis, at a competitive price.
BACKLOG
Orders in our backlog at October 31, 2002, totaled $189.4 million, of which
we anticipate that approximately $165.0 million will be fulfilled during our
fiscal year 2003. A year ago, our backlog of orders totaled $208.9 million.
Orders included in our backlog are represented by customer purchase orders
and contracts, which we believe to be firm. Under certain circumstances,
penalties are included as a term of order acceptance to minimize our risk of
cancellation. In the past, we have not experienced a material amount of
cancelled orders.
RAW MATERIALS AND SUPPLIERS
The principal raw materials used in our operations are generally readily
available. We did not experience significant or unusual problems in the purchase
of key raw materials and commodities in fiscal year 2002. While we are not
dependent on any one supplier for a material amount of our raw materials, we are
highly dependent on our suppliers and subcontractors in order to meet
commitments to our customers.
We maintain a qualification and performance surveillance process to control
risk associated with our components and electrical items that are procured on a
sole-source basis. We believe that sources of supply for raw materials and
components are generally sufficient and have no reason to believe a shortage of
raw materials will cause any material adverse impact during fiscal year 2003.
EMPLOYEES
We had approximately 1,495 full-time employees at October 31, 2002, located
throughout the United States. Of the total number of employees, approximately 4%
are represented by trade unions. We believe that our relationship with our
employees and trade unions is good.
RESEARCH AND DEVELOPMENT
Our research activities are directed toward the discovery and development
of new products and processes as well as improvements in existing products and
processes. Research and development expenditures were $3.4 million, $3.1
million, and $2.9 million in our fiscal years 2002, 2001, and 2000,
respectively.
4
ITEM 2. PROPERTIES
We have over 10 locations consisting of manufacturing facilities, sales
offices, and repair centers. Our facilities are generally located in areas that
are readily accessible to raw materials and labor pools and are maintained in
good condition. These facilities, together with recent and planned expansions,
are expected to meet our needs for the foreseeable future.
Our principal manufacturing locations by segment as of October 31, 2002,
are as follows:
APPROXIMATE
SQUARE FOOTAGE
NUMBER ----------------
LOCATION OF FACILITIES ACRES OWNED LEASED
- -------- ------------- ----- ------- ------
SWITCHGEAR:
Houston, TX................................. 2 68.2 430,600 --
Greenville, TX.............................. 1 19.0 109,000 --
North Canton, OH............................ 1 8.0 72,000 --
Watsonville, CA............................. 1 -- 9,600
BUS DUCT:
Elyria, OH.................................. 1 8.6 64,000 --
Northlake, IL............................... 1 10.0 103,500 --
PROCESS CONTROL SYSTEMS:
Pleasanton, CA.............................. 1 -- 39,100
Duluth, GA.................................. 1 -- 29,700
We own one idle facility located in Franklin Park, Illinois which consists
of manufacturing and office space. We anticipate that we will sell this property
during the coming year. As this property is held for sale, the $1.5 million book
value is included in other current assets at October 31, 2002. Prior to the
construction of our new facility in Northlake, Franklin Park was used to
manufacture our isolated phase bus duct product line.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal proceedings, claims, and other disputes
arising in the ordinary course of business which, in general, are subject to
uncertainties and the outcomes are not predictable. However, we do not believe
that the ultimate conclusion of these disputes will materially affect our
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matter to a vote of our stockholders during the
fourth quarter of fiscal year 2002.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Our common stock trades on the NASDAQ National Market under the symbol
"POWL". The following table sets forth, for the periods indicated, the high and
low sales prices per share as reported on the NASDAQ National Market of our
common stock.
HIGH LOW
----- -----
FISCAL YEAR 2001:
First Quarter.......................................... 14.13 9.50
Second Quarter......................................... 17.85 13.31
Third Quarter.......................................... 32.66 17.85
Fourth Quarter......................................... 28.50 17.06
FISCAL YEAR 2002:
First Quarter.......................................... 26.09 16.61
Second Quarter......................................... 24.49 18.84
Third Quarter.......................................... 25.80 17.00
Fourth Quarter......................................... 19.49 14.75
As of October 31, 2002, the last reported sales price of our common stock
on the NASDAQ National Market was $15.71 per share. As of October 31, 2002,
there were 709 stockholders of record of our common stock.
See Part III, Item 12 for information regarding securities authorized for
issuance under our equity compensation plan.
DIVIDEND POLICY
We currently intend to retain earnings for use in our business; therefore,
we do not anticipate paying cash dividends in the foreseeable future. We have
never declared or paid cash dividends on our capital stock. In the future, the
decision to pay cash dividends will depend upon our results of operations,
financial condition and capital expenditure plans, as well as other factors in
which our Board of Directors, in its sole discretion, may consider relevant.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data shown below for the past five years was derived
from our audited financial statements. The historical results are not
necessarily indicative of the operating results to be expected in the future.
The selected financial data should be read in conjunction with "Business Risks",
"Management's
6
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and related notes included elsewhere in
this Annual Report on Form 10-K.
YEAR ENDED OCTOBER 31,
----------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
Statements of Operations:
Revenues............................................. $306,403 $271,243 $223,019 $212,531 $212,733
Cost of goods sold................................... 238,745 214,446 182,340 172,353 164,944
-------- -------- -------- -------- --------
Gross profit....................................... 67,658 56,797 40,679 40,178 47,789
Selling, general and administrative expenses......... 38,997 35,007 29,841 29,354 30,805
-------- -------- -------- -------- --------
Earnings before interest and income taxes............ 28,661 21,790 10,838 10,824 16,984
Earnings from continuing operations.................. 17,905 13,542 7,061 7,127 11,465
Loss from discontinued operations (net of income
taxes)............................................. -- -- -- -- (4,800)
-------- -------- -------- -------- --------
Net earnings....................................... $ 17,905 $ 13,542 $ 7,061 $ 7,127 $ 6,665
======== ======== ======== ======== ========
Diluted earnings per share......................... 1.67 1.28 .67 .66 .62
AS OF OCTOBER 31,
----------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA
Balance Sheet Data:
Cash and cash equivalents........................... $ 14,362 $ 6,520 $ 2,114 $ 10,646 $ 601
Property, plant and equipment, net.................. 45,020 37,409 31,383 33,286 32,311
Total assets........................................ 189,643 186,361 137,926 127,531 127,131
Long-term debt and capital lease obligations,
including current maturities...................... 12,010 22,714 7,143 9,572 13,000
Total stockholders' equity.......................... 128,207 109,369 94,087 90,772 83,336
Total liabilities and stockholders' equity.......... 189,643 186,361 137,926 127,531 127,131
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We are pleased to report to you our financial condition and results of
operations. During our fiscal year 2002, Powell Industries achieved record
revenues of $306.4 million, a 13% increase from fiscal 2001, and net earnings
grew 32% to $17.9 million. The following discussion should be read in
conjunction with the accompanying consolidated financial statements and related
notes.
In the course of operations, we are subject to certain risk factors,
including but not limited to competition and competitive pressures, sensitivity
to general economic and industry conditions, international political and
economic risks, availability and price of raw materials and execution of
business strategy, as more fully described above in our "Cautionary Statement
Regarding Forward Looking Statements." Any forward-looking statements made by or
on our behalf are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Readers are cautioned that such
forward-looking statements involve risks and uncertainties in that the actual
results may differ materially from those projected in the forward-looking
statements.
RESULTS OF OPERATIONS
REVENUE AND GROSS PROFIT
Revenues increased 13% to a record $306.4 million in fiscal 2002 as
compared to fiscal year 2001. Revenues in fiscal 2001 were $271.2 million, an
increase of 22% over fiscal 2000 revenues of $223.0 million. Our electrical
power products, which consist of the Switchgear and Bus Duct segments, recorded
revenues in fiscal 2002 of $283.6 million compared to $244.8 million in fiscal
2001 and $193.7 million in fiscal 2000.
7
During fiscal 2002, one aspect of our revenue growth was due to new worldwide
investments in oil & gas production facilities. Furthermore, demand for
additional electrical power generation capacities in the United States
strengthened over the expansion realized in fiscal 2001. Revenues in our Process
Control Systems segment were $22.8 million compared to $26.4 million in fiscal
2001 and $29.3 million in fiscal 2000. For additional information related to our
business segments, see Note L of the Notes to Consolidated Financial Statements.
International revenues increased in fiscal 2002 following a decline in the
previous two years. Revenues outside of the United States accounted for 9% of
consolidated revenues in fiscal 2002 compared to 8% and 20% in fiscal 2001 and
2000, respectively.
Gross profit, as a percentage of revenues, improved to 22.1% in fiscal
2002, compared to 21.0% and 18.2% in fiscal years 2001 and 2000, respectively.
Higher production volumes, improved operating efficiencies, along with the
quality of our backlog have all contributed to the improvement in gross profit.
We continue to implement lean manufacturing initiatives to reduce costs and
respond to the competitive markets that we serve.
OPERATING EXPENSES
Selling, general and administrative expenses, including research and
development expenditures, were $39.0 million (12.7% of revenues) in fiscal 2002
compared to $35.0 million (12.9% of revenues) and $29.8 million (13.4% of
revenues) in fiscal years 2001 and 2000, respectively. Increases in operating
expenses are largely due to the growth in business volumes during the same
periods.
We have continued to invest in research activities. Research and
development expenditures were $3.4 million in fiscal 2002 compared to $3.1
million and $2.9 million in fiscal years 2001 and 2000, respectively. Our
research efforts are directed toward the discovery and development of new
products and processes as well as improvements in existing products and
processes.
INTEREST INCOME AND EXPENSE
Net interest expense decreased to $210 thousand in fiscal 2002 from $359
thousand in fiscal 2001 due to lower levels of debt. Interest expense is related
to our revolving credit facility and long-term debt which is partially offset by
interest income from short-term investments. Fiscal 2000 resulted in net
interest income of $44 thousand.
PROVISION FOR INCOME TAXES
Our provision for income taxes reflects an effective income tax rate on
earnings before income taxes of 37.1% in fiscal 2002 compared to 36.8% in fiscal
2001. The increase in our effective tax rate is primarily a result of higher
state taxes and is also partly attributable to increases in non-deductible
expenses.
NET EARNINGS
Net earnings were $17.9 million, or $1.67 per diluted share, in fiscal year
2002 compared to $13.5 million, or $1.28 per diluted share, and $7.1 million, or
$0.67 per diluted share, in fiscal years 2001 and 2000, respectively. Growth in
business volume and increased gross profits resulted in earnings improvement in
fiscal 2002 and fiscal 2001. In fiscal 2000 we incurred additional costs on a
major project in our Process Control Systems segment which decreased earnings in
the period.
LIQUIDITY AND CAPITAL RESOURCES
We have maintained a strong liquidity position. Working capital was $86.5
million at October 31, 2002 compared to $89.0 million at October 31, 2001. As of
October 31, 2002, current assets exceeded current liabilities by nearly 2.7
times and our debt to capitalization ratio was less than 0.1 to 1.
8
Cash and cash equivalents were $14.4 million at October 31, 2002, an
increase of 120% over year end 2001. Long-term debt, including current
maturities, totaled $12.0 million at October 31, 2002 compared to $22.7 million
at October 31, 2001. In addition to our long-term debt, we have a $25.0 million
revolving credit agreement expiring February 2005. As of October 31, 2002, there
were no borrowings under this line of credit. For further information regarding
our debt, see Note F of the Notes to Consolidated Financial Statements.
OPERATING ACTIVITIES
Net cash provided by operating activities was $31.7 million in fiscal 2002.
A net reduction in operating assets and liabilities provided $8.7 million with
the remainder of the increase related to net earnings adjusted for non-cash
costs such as depreciation and amortization. During fiscal 2001, operating
activities used $2.1 million primarily due to growth in working capital
associated with higher production volumes.
INVESTING ACTIVITIES
Cash used for the purchase of property, plant and equipment during fiscal
2002 increased to $13.9 million, as compared to $10.3 million in fiscal 2001.
During 2002, we completed a new facility in Northlake, IL for the manufacture of
our isolated phase bus duct product line. The expansion of our North Canton, OH
facility, which is used in the manufacture of our Switchgear product lines, was
also completed. Capital expenditures also supported process improvements
throughout our manufacturing operations.
FINANCING ACTIVITIES
Financing activities used $10.0 million in fiscal 2002. Approximately $10.7
million was used for net repayments on our revolving line of credit and our
long-term debt. Other financing activities were limited to the exercise of stock
options. During fiscal 2001, net cash provided by financing activities was $16.8
million, primarily from increases in long-term debt.
OUTLOOK FOR FISCAL 2003
Due to the current economic environment and the outlook for the markets we
serve, we anticipate consolidated revenues to decrease in 2003 by 5% to 10%. Our
revenue growth in 2001 and 2002 was due to worldwide investments in oil and gas
production facilities and electrical power generation capacities. We anticipate
new investments in oil and gas facilities to strengthen our export sales during
the coming year. However, additional investments in power generation facilities
are expected to soften during 2003.
For the fiscal year 2003, we expect full year earnings from continuing
operations to range between $1.50 and $1.60 per diluted share. Based on initial
tests, we expect to record a pre-tax goodwill impairment charge of approximately
$800 thousand. The impairment charge will be recorded as a cumulative effect of
a change in accounting principle as of November 1, 2002.
We will continue to invest in our manufacturing capabilities and expect
capital expenditures during fiscal year 2003 to range between $8.0 million and
$12.0 million. Of this amount, approximately $4.0 million will be needed to
complete a project to increase our manufacturing capacity available for the
manufacture of electrical power control modules. These modules are provided to
the oil and gas industry for use on offshore platforms. This project was
initiated during 2002 and will be completed by the middle of 2003.
As a result of our internal operating efficiencies, cost containment, and
low levels of debt, we anticipate that our cash position will continue to grow
during 2003. We believe that working capital, borrowing capabilities, and funds
generated from operations should be sufficient to finance anticipated
operational activities, capital improvements, debt repayment and possible future
acquisitions for the foreseeable future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and judgments with respect to the selection and
application of accounting policies that affect the reported amounts of assets,
liabilities, revenues
9
and expenses, and the disclosures of contingent assets and liabilities. We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates.
We believe the following critical accounting policy has the greatest impact
on the preparation of our consolidated financial statements.
REVENUE RECOGNITION
We recognize revenues from product sales upon transfer of title at the time
of shipment or delivery according to terms of the contract, when all significant
contractual obligations have been satisfied, the price is fixed or determinable,
and collectibility is reasonably assured. Contract revenues are recognized on a
percentage-of-completion basis primarily using the ratio of labor dollars or
hours incurred to date to total estimated labor dollars or hours to measure the
stage of completion. Contract costs include direct material and labor, and
certain indirect costs. Revenues are not recognized on change orders until
customer approval is obtained. Provisions for total estimated losses on
uncompleted contracts are recorded in the period in which such losses are
estimable. Conditions such as changes in job performance, job conditions,
estimated contract costs and profitability may result in revisions to original
assumptions in the period in which the change becomes evident. Thus, actual
results could differ from original assumptions, resulting in a different outcome
for profits or losses than anticipated.
NEW ACCOUNTING STANDARDS
In June 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 -- "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB issued
SFAS No. 137, which amended the effective adoption date of SFAS No. 133. This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. We adopted SFAS No. 133, as amended, on November 1,
2000. As of October 31, 2002, we have recorded a liability of $136 thousand
representing the fair value of our interest rate swap agreement which is used as
a cash flow hedge in the management of interest rate exposure. We also realized
this amount, net of income taxes, as a component of comprehensive income.
In June 2001, the FASB issued SFAS Nos. 141 "Business Combinations" and 142
"Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business
combinations completed after June 30, 2001 be accounted for using the purchase
method. The adoption of SFAS No. 141 did not have a material impact on our
financial statements. SFAS No. 142 requires that goodwill no longer be amortized
but be subject to an annual assessment for impairment based on a fair value
test. In addition, acquired intangible assets are required to be separately
recognized if the benefit to the asset is based on contractual or legal rights.
SFAS No. 142 requires an initial impairment test of the carrying value of
goodwill in the year of adoption. We adopted SFAS No. 142 on November 1, 2002
and have completed this initial impairment test. Based on this initial test, we
expect to record a pre-tax goodwill impairment charge of approximately $800
thousand in the first quarter of 2003. The impairment charge will be recorded as
a cumulative effect of a change in accounting principle as of November 1, 2002.
At October 31, 2002, net goodwill was $918 thousand and the annual amortization
of such goodwill was $143 thousand, which had an impact on earnings per diluted
share of $0.01.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 144 establishes a single accounting model
for long-lived assets to be disposed of by sale and requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. We do not believe that the adoption of SFAS No. 144 will have a
material impact on our financial statements.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement rescinds SFAS No. 4,
10
"Reporting Gains and Losses from Extinguishment of Debt," and an amendment of
that statement, SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers," and SFAS No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements." This statement amends SFAS No. 13, "Accounting for
Leases," to eliminate inconsistencies between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects which are similar to sale-leaseback
transactions. Also, this statement amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. Provisions of SFAS No.
145 related to the rescission of SFAS No. 4 were effective for the Company on
November 1, 2002 and provisions affecting SFAS No. 13 were effective for
transactions occurring after May 15, 2002. We do not believe that the adoption
of SFAS No. 145 will have a material impact on our financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement covers
restructuring type activities beginning with plans initiated after December 31,
2002. Activities covered by this standard that are entered into after that date
will be recorded in accordance with the provisions of SFAS No. 146. Management
does not believe there will be a significant impact on our consolidated
financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks arising from transactions we have
entered into in the normal course of business. These risks primarily relate to
fluctuations in interest rates, foreign exchange rates, and commodity prices.
We manage our exposure to changes in interest rates by optimizing the use
of variable and fixed rate debt and an interest rate hedge. A 1.0% increase in
interest rates would result in an annual increase in interest expense of less
than $100 thousand. We believe that changes in interest rates will not have a
material near-term impact on our future earnings or cash flows. For additional
information regarding our long-term debt agreements, interest rates and
maturities, see Note F of the Notes to Consolidated Financial Statements.
We manage our exposure to changes in foreign exchange rates primarily
through arranging compensation in U.S. dollars. Risks associated with changes in
commodity prices are primarily managed through utilizing contracts with
suppliers. Risks related to foreign exchange rates and commodity prices are
monitored and actions could be taken to hedge these risks in the future. We
believe that fluctuations in foreign exchange rates and commodity prices will
not have a material near-term effect on our future earnings and cash flows.
11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Financial Statements:
Independent Auditors' Report.............................. 13
Copy of Report of Independent Public Accountants.......... 14
Consolidated Balance Sheets as of October 31, 2002 and
2001................................................... 15
Consolidated Statements of Operations for the years ended
October 31, 2002, 2001 and 2000........................ 16
Consolidated Statements of Stockholders' Equity for the
years ended October 31, 2002, 2001 and 2000............ 17
Consolidated Statements of Cash Flows for the years ended
October 31, 2002, 2001 and 2000........................ 18
Notes to Consolidated Financial Statements................ 19
12
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Powell Industries, Inc.:
We have audited the accompanying consolidated balance sheet of Powell
Industries, Inc. and subsidiaries (the "Company") as of October 31, 2002, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated balance sheet of the Company as of October 31, 2001 and the
consolidated statements of operations, stockholders' equity and cash flows for
the two years in the period ended October 31, 2001 were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those financial statements in their report dated November 29, 2001.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated 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. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, such 2002 consolidated financial statements present fairly,
in all material respects, the consolidated financial position of the Company as
of October 31, 2002, and the consolidated results of its operations and its cash
flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Houston, Texas
December 6, 2002
13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Powell Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Powell
Industries, Inc. (a Nevada corporation) and subsidiaries as of October 31, 2001
and 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for the three years in the period ended October 31, 2001.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
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. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Powell Industries, Inc. and subsidiaries as of October 31, 2001 and 2000, and
the consolidated results of operations and their cash flows for each of the
three years in the period ended October 31, 2001, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
November 29, 2001
This is a copy of the audit report previously issued by Arthur Andersen LLP in
connection with our filing on Form 10-K for the year ended October 31, 2001.
This audit report has not been reissued by Arthur Andersen LLP in connection
with this filing on Form 10-K.
14
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
OCTOBER 31,
-------------------
2002 2001
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ 14,362 $ 6,520
Accounts receivable, less allowance for doubtful
accounts of $1,209 and $551, respectively............. 69,521 76,592
Costs and estimated earnings in excess of billings..... 32,828 36,164
Inventories............................................ 19,558 21,425
Deferred income taxes and income taxes receivable...... -- 1,043
Prepaid expenses and other current assets.............. 2,230 835
-------- --------
Total Current Assets.............................. 138,499 142,579
Property, plant and equipment, net.......................... 45,020 37,409
Deferred income taxes....................................... 589 1,064
Other assets................................................ 5,535 5,309
-------- --------
Total Assets...................................... $189,643 $186,361
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt and capital lease
obligations........................................... $ 4,746 $ 1,429
Accounts and income taxes payable...................... 15,030 18,857
Accrued salaries, bonuses and commissions.............. 9,774 9,670
Billings in excess of costs and estimated earnings..... 13,478 14,858
Accrued product warranty............................... 2,123 1,860
Other accrued expenses................................. 6,882 6,924
-------- --------
Total Current Liabilities......................... 52,033 53,598
Long-term debt and capital lease obligations, net of current
maturities................................................ 7,264 21,285
Deferred compensation expense............................... 1,522 1,404
Other liabilities........................................... 617 705
-------- --------
Total Liabilities................................. 61,436 76,992
Commitments and contingencies
Stockholders' Equity:
Preferred stock, par value $.01; 5,000,000 shares
authorized; none issued
Common stock, par value $.01; 30,000,000 shares
authorized; 10,979,000 and 10,964,000 shares issued,
respectively; 10,595,000 and 10,434,000 shares
outstanding, respectively............................. 110 109
Additional paid-in capital............................. 8,345 8,680
Retained earnings...................................... 125,872 107,967
Treasury stock, 383,920 shares and 530,100 shares\
respectively, at cost................................. (3,925) (4,887)
Accumulated other comprehensive (loss): fair value of
interest rate swap.................................... (87) (140)
Deferred compensation-ESOP............................. (2,108) (2,360)
-------- --------
Total Stockholders' Equity........................ 128,207 109,369
-------- --------
Total Liabilities and Stockholders' Equity........ $189,643 $186,361
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
15
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED OCTOBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Revenues.................................................... $306,403 $271,243 $223,019
Cost of goods sold.......................................... 238,745 214,446 182,340
-------- -------- --------
Gross profit................................................ 67,658 56,797 40,679
Selling, general & administrative expenses.................. 38,997 35,007 29,841
-------- -------- --------
Earnings before interest and income taxes................... 28,661 21,790 10,838
Interest expense (income), net.............................. 210 359 (44)
-------- -------- --------
Earnings before income taxes................................ 28,451 21,431 10,882
Income tax provision........................................ 10,546 7,889 3,821
-------- -------- --------
Net earnings................................................ $ 17,905 $ 13,542 $ 7,061
======== ======== ========
Earnings per common share:
Basic.................................................. $ 1.70 $ 1.30 $ .68
Diluted................................................ 1.67 1.28 .67
Weighted average number of common shares outstanding........ 10,511 10,381 10,451
======== ======== ========
Weighted average number of common and common equivalent
shares outstanding........................................ 10,698 10,600 10,530
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
16
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
OTHER
COMPREHENSIVE COMMON STOCK ADDITIONAL
INCOME --------------- PAID-IN RETAINED
(LOSS) SHARES AMOUNT CAPITAL EARNINGS
------------- ------ ------ ---------- --------
Balance, November 1, 1999.................... 10,675 $107 $6,043 $ 87,364
Net earnings............................. 7,061 7,061
Amortization of deferred
compensation-ESOP......................
Exercise of stock options................ 146 1 692
Income tax benefit from stock options
exercised.............................. 95
Purchases of Treasury Stock..............
------- ------ ---- ------ --------
Comprehensive Income......................... $ 7,061
=======
Balance, October 31, 2000.................... 10,821 108 6,830 94,425
Net earnings............................. 13,542 13,542
Amortization of deferred
compensation-ESOP......................
Change in value of interest rate swap,
net of $82 income taxes................ (140)
Exercise of stock options................ 143 1 1,400
Income tax benefit from stock options
exercised.............................. 450
Purchases of Treasury Stock..............
------- ------ ---- ------ --------
Comprehensive Income......................... $13,402
=======
Balance, October 31, 2001.................... 10,964 109 8,680 107,967
Net earnings............................. 17,905 17,905
Amortization of deferred
compensation-ESOP......................
Change in value of interest rate swap,
net of $33 income taxes................ 53
Exercise of stock options................ 15 1 (211)
Income tax benefit from stock options
exercised.............................. (124)
------- ------ ---- ------ --------
Comprehensive Income......................... $17,958
=======
Balance, October 31, 2002.................... 10,979 $110 $8,345 $125,872
====== ==== ====== ========
ACCUMULATED
OTHER
COMPREHENSIVE DEFERRED
TREASURY INCOME COMPENSATION
STOCK (LOSS) ESOP TOTAL
-------- ------------- ------------ --------
Balance, November 1, 1999.................... $ -- $ -- $(2,742) $ 90,772
Net earnings............................. 7,061
Amortization of deferred
compensation-ESOP...................... 135 135
Exercise of stock options................ 693
Income tax benefit from stock options
exercised.............................. 95
Purchases of Treasury Stock.............. (4,669) (4,669)
------- ----- ------- --------
Comprehensive Income.........................
Balance, October 31, 2000.................... (4,669) -- (2,607) 94,087
Net earnings............................. 13,542
Amortization of deferred
compensation-ESOP...................... 247 247
Change in value of interest rate swap,
net of $82 income taxes................ (140) (140)
Exercise of stock options................ 1,401
Income tax benefit from stock options
exercised.............................. 450
Purchases of Treasury Stock.............. (218) (218)
------- ----- ------- --------
Comprehensive Income.........................
Balance, October 31, 2001.................... (4,887) (140) (2,360) 109,369
Net earnings............................. 17,905
Amortization of deferred
compensation-ESOP...................... 252 252
Change in value of interest rate swap,
net of $33 income taxes................ 53 53
Exercise of stock options................ 962 752
Income tax benefit from stock options
exercised.............................. (124)
------- ----- ------- --------
Comprehensive Income.........................
Balance, October 31, 2002.................... $(3,925) $ (87) $(2,108) $128,207
======= ===== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
17
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED OCTOBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Operating Activities:
Net earnings........................................... $ 17,905 $ 13,542 $ 7,061
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization........................ 4,898 4,381 4,669
Loss on disposition of assets........................ 68 85 --
Deferred income tax provision........................ 140 1,029 1,166
Changes in operating assets and liabilities:
Accounts receivable, net.......................... 7,071 (22,387) (11,202)
Costs and estimated earnings in excess of
billings........................................ 3,336 (11,872) (8,101)
Inventories....................................... 1,867 (3,902) (2,350)
Prepaid expenses and other current assets......... 110 (8) 968
Other assets...................................... (436) (359) (177)
Accounts payable and income taxes payable or
receivable...................................... (2,907) 2,903 5,546
Accrued liabilities............................... 659 4,514 1,598
Billings in excess of costs and estimated
earnings........................................ (1,380) 9,543 1,110
Deferred compensation expense..................... 370 410 250
Other liabilities................................. (35) 64 (16)
-------- -------- --------
Net cash provided by (used in) operating
activities................................... 31,666 (2,057) 522
-------- -------- --------
Investing Activities:
Purchases of property, plant and equipment............. (13,872) (10,291) (2,648)
-------- -------- --------
Net cash used in investing activities........... (13,872) (10,291) (2,648)
-------- -------- --------
Financing Activities:
Borrowings on revolving line of credit................. 14,450 31,950 --
Repayments on revolving line of credit................. (23,450) (31,950) --
Borrowing on long-term debt............................ -- 17,000 --
Repayments of long-term debt and capital lease
obligations.......................................... (1,704) (1,429) (2,430)
Payments to reacquire common stock..................... -- (218) (4,669)
Proceeds from exercise of stock options................ 752 1,401 693
-------- -------- --------
Net cash provided by (used in) financing
activities................................... (9,952) 16,754 (6,406)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 7,842 4,406 (8,532)
Cash and cash equivalents at beginning of year.............. 6,520 2,114 10,646
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 14,362 $ 6,520 $ 2,114
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest............................................... $ 566 $ 673 $ 638
======== ======== ========
Taxes.................................................. $ 8,200 $ 6,225 $ 3,200
======== ======== ========
Non-cash investing and financing activities:
Change in fair value of interest rate swap, net of $33,
$82, and $0 income taxes, respectively............... $ 53 $ (140) $ --
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
18
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. BUSINESS AND ORGANIZATION
We develop, design, manufacture, and service equipment and systems for the
management and control of electrical energy and other critical processes.
Headquartered in Houston, TX, we serve the transportation, environmental,
industrial, and utility industries.
Powell Industries, Inc. ("we," "us," "our," "Powell," or the "Company") was
incorporated in the state of Nevada in 1968 and is the successor to a
corporation founded by William E. Powell in 1947, which merged into the Company
in 1977. Our major subsidiaries, all of which are wholly-owned, include: Powell
Electrical Manufacturing Company; Powell Power Electronics Company, Inc.;
Powell-ESCO Company; Unibus, Inc.; Delta-Unibus Corporation; and Transdyn
Controls, Inc.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Powell Industries, Inc. and its wholly-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
We consider all deposits with banks and highly liquid investments purchased
with an original maturity of less than three months to be cash equivalents.
ACCOUNTS RECEIVABLE AND MARKET RISK
Our receivables are generally not collateralized. We perform ongoing credit
analyses of the accounts of our customers and provide allowances as deemed
necessary. Accounts receivable includes retention amounts of $7.8 million and
$7.9 million at October 31, 2002 and 2001, respectively. Retention amounts are
in accordance with applicable provisions of engineering and construction
contracts and become due upon completion of contractual requirements.
Approximately $540 thousand of the retained amount at October 31, 2002 is
expected to be collected subsequent to October 31, 2003.
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS
Costs and estimated earnings in excess of billings arise when revenues are
recorded on a percentage of completion basis but cannot be invoiced under the
terms of the contract. Such amounts are invoiced upon completion of contractual
milestones.
Costs and estimated earnings in excess of billings also include certain
costs associated with unapproved change orders. These costs are included when
change order approval is probable. Amounts are carried at the lower of cost or
net realizable value. No profit is recognized on costs incurred until change
order approval is obtained. The amounts recorded involve the use of judgments
and estimates; thus, actual recoverable amounts could differ from original
assumptions.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out or
weighted average method) or market and include the cost of material, labor and
manufacturing overhead.
19
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and improvements which extend the useful lives
of existing equipment are capitalized and depreciated. Upon retirement or
disposition of property, plant and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statement of operations.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," we evaluate the recoverability of property, plant and
equipment and other assets, if facts and circumstances indicate that any of
those assets might be impaired. An evaluation compares the estimated future
undiscounted cash flows associated with the asset to the asset's book value to
determine if the asset is impaired. Any impairment would be recognized as an
expense. No impairment charges were recorded in fiscal years 2002, 2001 or 2000.
As of November 1, 2002, we adopted SFAS No. 144 as discussed in this Note under
"New Accounting Standards."
INTANGIBLE ASSETS
Included in other assets are net intangible assets totaling $1.5 million
and $1.5 million at October 31, 2002 and 2001, respectively. Intangible assets
primarily include goodwill and patents which are amortized using the
straight-line method over periods ranging from five to twenty years. The
accumulated amortization of intangible assets totaled $1.7 million and $1.5
million at October 31, 2002 and 2001, respectively.
We adopted SFAS No. 142 on November 1, 2002. This statement requires that
goodwill no longer be amortized but be subject to an annual assessment for
impairment based on a fair value test. Goodwill amortization expense was $143
thousand, $145 thousand, and $146 thousand for fiscal years 2002, 2001, and
2000, respectively. Amortization expense for all other intangibles was $67
thousand, $83 thousand, and $74 thousand for 2002, 2001, and 2000, respectively.
INCOME TAXES
We account for income taxes using SFAS No. 109 "Accounting for Income
Taxes." Under SFAS No. 109, deferred income tax assets and liabilities are
computed based on the difference between the financial statement and income tax
bases of assets and liabilities using enacted tax rates. Under this standard,
the effect on deferred income taxes of a change in tax rates is recognized in
income in the period that the tax rate changes.
REVENUE RECOGNITION
Revenues from product sales are recognized upon transfer of title at the
time of shipment or delivery according to terms of the contract, when all
significant contractual obligations have been satisfied, the price is fixed or
determinable, and collectibility is reasonably assured. Contract revenues are
recognized on a percentage-of-completion basis primarily using the ratio of
labor dollars or hours incurred to date to total estimated labor dollars or
hours to measure the stage of completion. Contract costs include direct material
and labor, and certain indirect costs. Provisions for total estimated losses on
uncompleted contracts are recorded in the period in which such losses are
estimable.
WARRANTIES
We provide for estimated warranty costs at the time of sale based upon
historical rates applicable to individual product lines. In addition, specific
provisions are made when the costs of such warranties are expected to exceed
accruals.
20
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs are charged to expense as incurred. These
costs are included as a component of selling, general and administrative
expenses on the consolidated statements of operations. Such amounts were $3.4
million, $3.1 million, and $2.9 million in fiscal years 2002, 2001 and 2000,
respectively.
NEW ACCOUNTING STANDARDS
In June 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 -- "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB issued
SFAS No. 137, which amended the effective adoption date of SFAS No. 133. This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. We adopted SFAS No. 133, as amended, on November 1,
2000. As of October 31, 2002, we have recorded a liability of $136 thousand
representing the fair value of our interest rate swap agreement which is used as
a cash flow hedge in the management of interest rate exposure. We also realized
this amount, net of income taxes, as a component of comprehensive income.
In June 2001, the FASB issued SFAS Nos. 141 "Business Combinations" and 142
"Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business
combinations completed after June 30, 2001 be accounted for using the purchase
method. The adoption of SFAS No. 141 did not have a material impact on our
financial statements. SFAS No. 142 requires that goodwill no longer be amortized
but be subject to an annual assessment for impairment based on a fair value
test. In addition, acquired intangible assets are required to be separately
recognized if the benefit to the asset is based on contractual or legal rights.
SFAS No. 142 requires an initial impairment test of the carrying value of
goodwill in the year of adoption. We adopted SFAS No. 142 on November 1, 2002
and have completed this initial impairment test. Based on this initial test, we
expect to record a pre-tax goodwill impairment charge of approximately $800
thousand in the first quarter of 2003. The impairment charge will be recorded as
a cumulative effect of a change in accounting principle as of November 1, 2002.
At October 31, 2002, net goodwill was $918 thousand and the annual amortization
of such goodwill was $143 thousand, which had an impact on earnings per diluted
share of $0.01.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 144 establishes a single accounting model
for long-lived assets to be disposed of by sale and requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. We do not believe that the adoption of SFAS No. 144 will have a
material impact on our financial statements.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and an amendment of that statement, SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers," and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
statement amends SFAS No. 13, "Accounting for Leases," to eliminate
inconsistencies between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. Also, this statement
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Provisions of SFAS No. 145 related to the rescission of SFAS No. 4
were effective for the Company on November 1, 2002 and provisions affecting SFAS
No. 13 were effective for transactions occurring after May 15, 2002. We do not
believe that the adoption of SFAS No. 145 will have a material impact on our
financial statements.
21
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement covers
restructuring type activities beginning with plans initiated after December 31,
2002. Activities covered by this standard that are entered into after that date
will be recorded in accordance with the provisions of SFAS No. 146. Management
does not believe there will be a significant impact on our consolidated
financial position or results of operations.
C. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
YEARS ENDED OCTOBER 31,
---------------------------
2002 2001 2000
------- ------- -------
Numerator:
Numerator for basic and diluted earnings per share --
earnings from continuing operations available to
common stockholders.............................. $17,905 $13,542 $ 7,061
======= ======= =======
Denominator:
Denominator for basic earnings per share --
weighted-average shares............................ 10,511 10,381 10,451
Effect of dilutive securities --
employee stock options and deferred directors'
fees............................................. 187 219 79
------- ------- -------
Denominator for diluted earnings per share --
adjusted weighted-average shares with assumed
conversions...................................... 10,698 10,600 10,530
======= ======= =======
Basic earnings per share.............................. $ 1.70 $ 1.30 $ .68
======= ======= =======
Diluted earnings per share............................ $ 1.67 $ 1.28 $ .67
======= ======= =======
For the years ended October 31, 2002, 2001 and 2000 exercisable stock
options of 26 thousand, none and 207 thousand, respectively, were excluded from
the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of our common stock.
D. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Activity in our allowance for doubtful accounts receivable consists of the
following (in thousands):
OCTOBER 31,
-------------
2002 2001
------ ----
Balance at beginning of period.............................. $ 551 $505
Additions to costs and expenses............................. 690 62
Deductions for uncollectible accounts written off, net of
recoveries................................................ (32) (16)
------ ----
Balance at end of period.................................... $1,209 $551
====== ====
The components of inventories are summarized below (in thousands):
OCTOBER 31,
-----------------
2002 2001
------- -------
Raw materials, parts and subassemblies...................... $14,111 $15,186
Work-in-process............................................. 5,447 6,239
------- -------
Total inventories...................................... $19,558 $21,425
======= =======
22
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of costs and estimated earnings in excess of billings (in
thousands):
OCTOBER 31,
---------------------
2002 2001
--------- ---------
Costs and estimated earnings................................ $ 190,106 $ 156,822
Progress billings........................................... (157,278) (120,658)
--------- ---------
Total costs and estimated earnings in excess of
billings............................................. $ 32,828 $ 36,164
========= =========
The components of billings in excess of costs and estimated earnings (in
thousands):
OCTOBER 31,
---------------------
2002 2001
--------- ---------
Progress billings........................................... $ 131,840 $ 111,963
Costs and estimated earnings................................ (118,362) (97,105)
--------- ---------
Total billings in excess of costs and estimated
earnings............................................. $ 13,478 $ 14,858
========= =========
Property, plant and equipment is summarized below (in thousands):
OCTOBER 31,
------------------- RANGE OF
2002 2001 ASSET LIVES
-------- -------- -----------
Land............................................... $ 5,093 $ 5,232 --
Buildings and improvements......................... 35,791 30,952 3-39 Years
Machinery and equipment............................ 37,191 31,559 3-15 Years
Furniture and fixtures............................. 3,012 3,829 3-10 Years
Construction in progress........................... 6,463 4,985 --
-------- --------
87,550 76,557
Less-accumulated depreciation...................... (42,530) (39,148)
-------- --------
Total property, plant and equipment, net...... $ 45,020 $ 37,409
======== ========
Depreciation expense was $4.7 million, $4.2 million and $4.4 million for
fiscal years 2002, 2001 and 2000, respectively.
E. EMPLOYEE BENEFIT PLANS
We have a defined employee contribution 401(k) plan for substantially all
of our employees. We match 50% of employee contributions up to an employee
contribution of six percent of each employee's salary. We recognized expenses of
$1.4 million, $1.2 million, and $1.1 million in fiscal years 2002, 2001 and
2000, respectively, under this plan.
In October 1985 and February 1987, we entered into Executive Benefit
Agreements with several key officers and employees. Three participants remain in
this deferred compensation plan, which provides for payments in accordance with
a predetermined plan upon retirement or death. We recognize the cost of this
plan over the projected years of service of the participant. We have insured the
lives of these key employees to assist in the funding of the deferred
compensation liability.
We have established an employee stock ownership plan ("ESOP") for the
benefit of substantially all full-time employees other than employees covered by
a collective bargaining agreement to which the ESOP has not been extended by any
agreement or action of ours. The ESOP initially purchased 793,525 shares of the
Company's common stock from a major stockholder. At October 31, 2002 and 2001
there were 651,755 and 674,569 shares in the trust with 330,975 and 308,926
shares allocated to participants, respectively. The funding for this plan was
provided through a loan from the Company of $4.5 million. This loan will be
repaid by the
23
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ESOP over a twenty-year period with equal payments of $424 thousand per year
including interest at 7 percent. We recorded deferred compensation as a
contra-equity account for the amount loaned to the ESOP in the accompanying
consolidated balance sheets. We are required to make annual contributions to the
ESOP to enable it to repay its loan to us. The deferred compensation account is
amortized as compensation expense over twenty years as employees earn their
shares for services rendered. The loan agreement also provides for prepayment of
the loan if we elect to make any additional contributions. The compensation
expense for fiscal years 2002, 2001 and 2000 was $252 thousand, $247 thousand,
and $135 thousand, respectively. The receivable from the ESOP is recorded as a
reduction from stockholders' equity and the allocated and unallocated shares of
the ESOP are treated as outstanding common stock in the computation of earnings
per share.
In November 1992, we established a plan to extend to retirees health
benefits which are available to active employees under our existing health
plans. Participants became eligible for retiree health care benefits when they
retired from active service at age 55 with ten years of service. Generally, the
health plans paid a stated percentage of medical and dental expenses reduced for
any deductible and co-payment. These plans are unfunded. Medical coverage may be
continued by the retired employee up to age 65 at the average cost to the
Company of active employees. At the age of 65, when the employee became eligible
for Medicare, the benefits provided by the Company were to be reduced by the
amount provided by Medicare and the cost to the retired employee would be
reduced to 50 percent of the average cost to the Company of active employees.
In 1994, we modified our postretirement benefits to provide retiree
healthcare benefits to only current retirees and active employees who were
eligible to retire by December 31, 1999. Participants eligible for such benefits
were required to pay between 20 percent and 100 percent of our average cost of
benefits based on years of service. In addition, benefits would end upon the
employee's attainment of age 65. The effect of these modifications significantly
reduced our postretirement benefits cost and accumulated benefits obligation.
In 2000, we again modified our postretirement benefits to provide retiree
healthcare benefits to current retirees and active employees who were eligible
to retire after December 31, 1999. The retired employees' cost of the optional
retiree coverage under the plan is based on the full COBRA cost of that
coverage, reduced by a fixed dollar amount for each additional service year in
excess of ten (10) service years.
The following table illustrates the components of net periodic benefits
expense, funded status, the change in funded status, and the change in
accumulated benefit obligation of the postretirement benefit plans (in
thousands):
OCTOBER 31,
--------------------
2002 2001 2000
---- ----- -----
Components of net periodic postretirement benefits expense
(income):
Service cost........................................... $ 20 $ 17 $ 16
Interest cost.......................................... 39 34 27
Prior service cost (benefit)........................... 13 16 (40)
Net (gain)/loss recognized............................. 2 (5) (14)
---- ----- -----
Net periodic postretirement benefits expense
(income)............................................. $ 74 $ 62 $ (11)
==== ===== =====
24
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31,
--------------------
2002 2001 2000
---- ----- -----
Funded Status:
Retirees............................................... $120 $ 73 $ 51
Fully eligible active participants..................... 182 167 163
Other actual participants.............................. 300 254 257
---- ----- -----
Accumulated postretirement benefits obligation......... 602 494 471
Less unrecognized balances:
Prior service cost..................................... 129 145 161
Net actuarial (gain)/loss.............................. (57) (134) (109)
---- ----- -----
Net amount recognized.................................. $530 $ 483 $ 419
==== ===== =====
Changes in accumulated postretirement benefits obligation:
Balance at beginning of year........................... $494 $ 471 $ 400
Service cost........................................... 20 17 16
Interest cost.......................................... 39 34 27
Loss due to plan change................................ -- -- 174
Actuarial (gain)/loss.................................. 74 (30) (141)
Benefits paid.......................................... (25) 2 (5)
---- ----- -----
Balance at end of year................................. $602 $ 494 $ 471
==== ===== =====
Fair value of plan assets.............................. $ -- $ -- $ --
==== ===== =====
Weighted average assumptions:
Discount rate.......................................... 6.5% 7% 7%
Expected return on plan assets......................... N/A N/A N/A
Rate of compensation increase.......................... N/A N/A N/A
The assumed health care cost trend measuring the accumulated postretirement
benefits obligation was 6% in both fiscal years 2002 and 2001. The trend is
expected to remain at 6% for fiscal year 2003 and later. If the health care
trend rate assumptions were increased by 1% as of October 31, 2002, there would
be no significant effect of this change on the accumulated postretirement
benefits obligation or net postretirement benefit cost for 2002.
F. DEBT
We entered into a $10 million term loan with a domestic bank in September
1998. This loan has a maturity of five years with nineteen equal quarterly
payments of $357 thousand. As of October 31, 2002, this loan had a remaining
balance of $4.3 million, with final payment of the remaining principal balance
due on September 30, 2003. Per the agreement, the rate is the London Interbank
Offered Rate ("LIBOR") plus .5%. The effective interest rate, after including
the results of an interest rate swap negotiated with the trust company of the
same domestic bank is 5.2% per annum plus a .75% to 1.25% fee based on financial
covenants.
We entered into an interest rate swap agreement to manage our interest rate
exposure. This agreement is accounted for on the accrual basis. Income and
expense resulting from this agreement are recorded in the same category as
interest expense accruals on the related term loan. Amounts to be paid or
received under the interest rate swap agreement are recognized as an adjustment
to interest expense in the periods in which they occurred. The original $10
million notional amount of the swap agreement follows the same reduction
schedule as the term loan. The agreement requires that we pay the counterparty
at the above fixed swap rate
25
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and requires the counterparty to pay us interest at the 90 day LIBOR rate. The
closing 90 day LIBOR rate on October 31, 2002, was 1.7%. We consider the risk of
non-performance by our swap partner to be minimal.
We borrowed $8 million in October 2001, through a loan agreement funded
with proceeds from tax-exempt industrial development revenue bonds("Bonds").
These Bonds were issued by the Illinois Development Finance Authority and were
used for the completion of our North Lake, IL facility. A reimbursement
agreement between the Company and a major domestic bank required an issuance by
the bank of an irrevocable direct-pay letter of credit to the Bonds' trustee to
guarantee payment of the Bonds' principal and interest when due. The letter of
credit terminates on October 25, 2004, and is subject to both early termination
and extension provisions customary to such agreements. The Bonds mature in 2021
but the reimbursement agreement requires the Company to provide for redemption
of one twentieth of the par value of the Bonds beginning on October 25, 2002,
and each subsequent anniversary. A sinking fund is used for the redemption of
the Bonds. As of October 31, 2002, the remaining balance was $7.6 million. The
Bonds bear interest at a floating rate determined weekly by the Bonds'
remarketing agent, which was the underwriter for the Bonds and is an affiliate
of the bank. This interest rate was 2% per annum on October 31, 2002.
We have a $25 million revolving line of credit agreement with a major
domestic bank which was amended in September 2002 to extend the maturity date to
February 2005. The revolving line of credit allows us to elect an interest rate
on amounts borrowed of (1) the bank's prime rate, which was 4.75% at October 31,
2002, less .5% (on the first $5 million) and the bank's prime rate on additional
borrowings, or (2) the bank's LIBOR rate, which was 1.7% at October 31, 2002,
plus an additional percentage of .75% to 1.25% based on our performance. A fee
of .20% to .25% is charged on the unused balance of the line. The agreement
contains customary affirmative and negative covenants and requirements to
maintain a minimum level of tangible net worth and profitability. As of October
31, 2002, we were in compliance with all debt covenants. The amount available
under this agreement is reduced by $3.3 million for our outstanding letters of
credit. (The direct pay letter of credit discussed above does not affect our
available credit under this agreement.) There were no borrowings under this line
of credit as of year-end.
Some machinery and equipment used in our manufacturing facilities were
financed through capital lease agreements. These capital lease agreements are
collateralized by the leased property. The capital lease obligation is at a
fixed interest rate of 3%.
Long-term debt is summarized below (in thousands):
OCTOBER 31,
-----------------
2002 2001
------- -------
Five year term note......................................... $ 4,286 $ 5,714
Revolving line of credit.................................... 0 9,000
Capital lease............................................... 124 0
Industrial Development Revenue Bonds........................ 7,600 8,000
------- -------
Sub-total long-term debt and capital lease obligations...... 12,010 22,714
Less-current maturities..................................... (4,746) (1,429)
------- -------
Total long-term debt and capital lease obligations.......... $ 7,264 $21,285
======= =======
26
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The interest expense recorded during the year was $508 thousand, $673
thousand, and $639 thousand in 2002, 2001 and 2000, respectively. The annual
maturities of long-term debt for the years 2003 through 2007 are as follows (in
thousands):
YEAR ENDING LONG-TERM DEBT CAPITAL
OCTOBER 31 MATURITIES LEASE TOTAL
- ----------- --------------- ------- -------
2003................................................. 4,686 60 4,746
2004................................................. 400 64 464
2005................................................. 400 -- 400
2006................................................. 400 -- 400
2007................................................. 400 -- 400
Thereafter........................................... 5,600 -- 5,600
------- ---- -------
Total long-term debt maturities...................... $11,886 $124 $12,010
======= ==== =======
See footnote L for discussion of the fair market value of the debt
instruments.
G. INCOME TAXES
The net deferred income tax asset is comprised of the following (in
thousands):
OCTOBER 31,
-----------------
2002 2001
------- -------
Current deferred income taxes:
Gross assets........................................... $ 3,109 $ 2,177
Gross liabilities...................................... (3,607) (3,010)
------- -------
Net current deferred income tax liability.............. (498) (833)
------- -------
Noncurrent deferred income taxes:
Gross assets........................................... 1,378 1,231
Gross liabilities...................................... (789) (167)
------- -------
Net noncurrent deferred income tax asset............... 589 1,064
------- -------
Net deferred income tax asset.......................... $ 91 $ 231
======= =======
The tax effect of temporary differences between GAAP accounting and federal
income tax accounting creating deferred income tax assets and liabilities are as
follows (in thousands):
OCTOBER 31,
-----------------
2002 2001
------- -------
Allowance for doubtful accounts............................. $ 461 $ 192
Reserve for accrued employee benefits....................... 596 789
Warranty reserves........................................... 780 567
Uncompleted long-term contracts............................. (3,515) (3,010)
Depreciation and amortization............................... (374) 165
Deferred compensation....................................... 559 495
Postretirement benefits liability........................... 172 294
Accrued legal expenses...................................... 217 338
Uniform capitalization and inventory........................ 1,064 315
Other....................................................... 131 86
------- -------
Net deferred income tax asset.......................... $ 91 $ 231
======= =======
27
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the income tax provision consist of the following (in
thousands):
YEARS ENDED OCTOBER 31,
-------------------------
2002 2001 2000
------- ------ ------
Current:
Federal.............................................. $ 9,865 $6,478 $2,445
State................................................ 541 382 209
Deferred:
Federal.............................................. 140 1,029 1,167
------- ------ ------
Total income tax provision...................... $10,546 $7,889 $3,821
======= ====== ======
A reconciliation of the statutory U.S. income tax rate and the effective
income tax rate, as computed on earnings before income tax provision in each of
the three years presented in the Consolidated Statements of Operations is as
follows:
YEARS ENDED
OCTOBER 31,
------------------
2002 2001 2000
---- ---- ----
Statutory rate.............................................. 35% 35% 34%
Foreign sales corporation credits........................... -- -- (1)
State income taxes, net of federal benefit.................. 1 1 2
Other....................................................... 1 1 --
-- -- --
Effective rate.............................................. 37% 37% 35%
== == ==
H. SIGNIFICANT SALES DATA
No single customer or export country accounted for more than 10 percent of
consolidated revenues in fiscal years 2002, 2001 and 2000.
Export sales are as follows (in thousands):
YEARS ENDED OCTOBER 31,
---------------------------
2002 2001 2000
------- ------- -------
Europe (including former Soviet Union).................. $ 386 $ 411 $ 734
Far East................................................ 8,717 4,437 17,200
Middle East and Africa.................................. 9,205 6,152 7,832
North, Central and South America (excluding U.S.)....... 9,706 10,431 18,655
------- ------- -------
Total export sales...................................... $28,014 $21,431 $44,421
======= ======= =======
28
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
I. COMMITMENTS AND CONTINGENCIES
LEASES
We lease certain offices, facilities and equipment under operating leases
expiring at various dates through 2008. At October 31, 2002, the minimum annual
rental commitments under leases having terms in excess of one year are as
follows (in thousands):
YEAR ENDING OPERATING
OCTOBER 31 LEASES
- ----------- ---------
2003........................................................ $1,238
2004........................................................ 1,348
2005........................................................ 1,132
2006........................................................ 947
2007........................................................ 931
Thereafter.................................................. 1,177
------
Total lease commitments..................................... $6,773
======
Lease expense for all operating leases, excluding leases with terms of less
than one year, was $1.5 million, $1.6 million and $1.3 million for fiscal years
2002, 2001 and 2000, respectively.
LETTERS OF CREDIT AND BONDS
We are contingently liable for secured and unsecured letters of credit of
$11.0 million as of October 31, 2002. We also had performance bonds totaling
approximately $156.5 million that were outstanding at October 31, 2002.
Performance bonds are used to guarantee contract performance to our customers.
INSURANCE
We partially retain the risk for the employee group health claims,
resulting from uninsured deductibles per occurrence. Losses up to the deductible
amounts are accrued based upon known claims incurred and an estimate of claims
incurred but not reported. The accruals are based upon known facts and
historical trends and we believe such accruals to be adequate.
LITIGATION
We are a party to disputes arising in the ordinary course of business. We
do not believe that the ultimate outcome of these disputes will materially
affect the financial position or future results of our operations.
OTHER CONTINGENCIES
The Company is a partner in a joint venture (the "Joint Venture"), which
provided process control systems to the Central Artery/Tunnel Project (the
"Project") in Boston, Massachusetts, under a contract with the Massachusetts
Turnpike Authority (the "MTA"). The Joint Venture has submitted claims against
the MTA seeking additional reimbursement for work done by the Joint Venture on
the project. In a separate matter, the Joint Venture received notice dated May
9, 2002 (the "Notice") from the MTA that a follow-on contractor has asserted a
claim against the MTA in connection with work done or to be done by the
follow-on contractor on the project. One component of the Project involved the
Joint Venture performing specific work that the MTA then bid for the follow-on
contractor to complete. The follow-on contractor's claim, in part, includes
unsubstantiated allegations that work performed by the Joint Venture was
insufficient and defective, thus possibly contributing to the follow-on
contractor's claims for damages against the MTA. In the Notice of the potential
claim, the MTA advised the Joint Venture that if it is required to pay the
follow-on contractor additional amounts and such payment is the result of
defective work by the Joint Venture, the MTA will seek indemnification from the
Joint Venture for such additional amounts.
29
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Joint Venture has no reason to believe the systems it delivered under
contract to the MTA were defective and accordingly it intends to vigorously
defend any such allegations. The ultimate disposition of the Joint Venture's
claim against the MTA and the MTA's potential claim for indemnification based on
the follow-on contractor's claims are not presently determinable. Although an
unfavorable outcome to the follow-on contractor's claim could have a material
adverse effect on the Company's financial condition and results of operations,
the Company believes that an unfavorable outcome with respect to these matters,
under the circumstances and on the basis of the information now available, is
unlikely.
J. STOCK OPTIONS AND GRANTS
We provide an employee stock option plan in which 2.1 million shares of our
common stock would be made available through an incentive program for certain
employees. The awards available under the plan include both stock options and
stock grants, and are subject to certain conditions and restrictions as
determined by the Compensation Committee of the Board of Directors. There were
no stock grants during fiscal years 2002, 2001 and 2000. Stock options granted
to the employees are non-qualified and are granted at an exercise price equal to
the fair market value of the common stock at the date of grant. Generally,
options granted have terms of seven years from the date of grant and will vest
in increments of 20 percent per year over a five year period. The plan provides
for additional stock to be awarded equal to 20 percent of all options which are
exercised and then held for a period of five years. There were 480,086 shares
available to be granted under this plan as of October 31, 2002.
The Shareholders voted at the March 16, 2002 meeting to approve the
Non-Employer Director Stock Option Plan for the benefit of members of the Board
of Directors of the Company who, at the time of their service, are not employees
of the Company or any of its affiliates. Annually each eligible Director who is
continuing to serve as a Director, shall receive a grant of an option to
purchase 2,000 shares of our Common Stock. The total number of shares of our
common stock available under this plan is 59,117 as of October 31, 2002. Stock
options granted to the Directors are non-qualified and are granted at an
exercise price equal to the fair market value of the common stock at the date of
grant. Generally, options granted have expiration terms of seven years from the
date of grant and will vest in full one year from the grant date.
30
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity (number of shares) for the Company during fiscal
years 2002, 2001 and 2000 was as follows:
2002 2001 2000
------- ------- -------
Outstanding, beginning of year.......................... 834,300 654,730 778,635
Granted:
Stock options $8.44 per share................. -- -- 12,000
Stock options $17.85 per share................ -- 358,900 --
Stock options ranging from $13.06 to $27.10
per share................................... 26,883 -- --
Exercised:
Stock options $6.25 per share................. (82,900) (66,730) (19,960)
Stock options $6.75 per share................. -- -- (95,295)
Stock options $15.81 per share................ (19,830) (49,740) --
Stock options $8.50 per share................. (16,140) (26,090) (1,280)
Stock options $8.44 per share................. -- (2,000) --
Stock options $17.85 per share................ (100) -- --
Forfeited:
Stock options $6.25 per share................. (800) -- --
Stock options $15.81 per share................ (4,720) (13,300) (10,000)
Stock options $8.50 per share................. (12,920) (21,470) (9,370)
Stock options $17.85 per share................ (3,600) -- --
------- ------- -------
Outstanding, ranging from $6.25 to $27.10 per
share, at the end of year................... 720,173 834,300 654,730
======= ======= =======
The following table summarizes information about stock options outstanding
as of October 31, 2002:
OUTSTANDING EXERCISABLE
- -------------------------------------------------------- ----------------------
WEIGHTED NUMBER WEIGHTED
RANGE OF NUMBER WEIGHTED AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE AT EXERCISE
PRICES AT 10/31/02 CONTRACTUAL LIFE PRICE 10/31/02 PRICE
- ------------ ----------- ---------------- -------- ----------- --------
$15.81 113,510 1.6 $15.81 113,510 $15.81
8.50 214,580 3.8 8.50 115,140 8.50
8.44 10,000 4.6 8.44 10,000 8.44
17.85 355,200 5.5 17.85 81,280 17.85
13.06-27.10 26,883 6.3 23.52 4,883 23.21
------- -------
$8.44-27.10 720,173 4.4 14.82 324,813 13.61
======= =======
The weighted average fair value of options granted was $10.83, $9.13, and
$4.26 per option for the fiscal years ended October 31, 2002, 2001, and 2000,
respectively.
We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," in accounting for employee stock options whereby no
compensation expense is recorded related to the options granted equal to the
market value of the stock on the date of grant. If compensation expense had been
determined based on the Black-Scholes option pricing model value at the grant
date for stock option awards
31
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consistent with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," our net income and earnings per share would have been as follows:
2002 2001 2000
------- ------- ------
Net income:
As reported......................................... $17,905 $13,542 $7,061
Pro forma........................................... 17,071 13,066 6,585
Basic earnings per share:
As reported......................................... $ 1.70 $ 1.30 $ .68
Pro forma........................................... 1.62 1.26 .63
Diluted earnings per share:
As reported......................................... $ 1.67 $ 1.28 $ .67
Pro forma........................................... 1.60 1.23 .63
The effects of applying SFAS No. 123 in the pro forma disclosure above may
not be indicative of future amounts as additional awards in future years are
anticipated.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
2002 2001 2000
------- ------- -------
Expected life of options.................................. 7 years 7 years 7 years
Risk-free interest rate................................... 3.45% 5.30% 6.38%
Expected dividend yield................................... 0.00% 0.00% 0.00%
Expected stock price volatility........................... 38.15% 39.53% 36.23%
K. FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial instruments include short-term investments, debt obligations
and interest rate hedges. The book value of short-term investments is considered
to be representative of fair value because of the short maturity of these
instruments. The carrying value of our debt approximates fair value as interest
rates are indexed to LIBOR or the bank's prime rate.
At October 31, 2002, we had $4.3 million in borrowings subject to the
interest rate swap at a rate of 5.20% through September 30, 2003. This rate is
approximately 3.5% above market and represents approximately $150 thousand of
increased interest expense for fiscal year 2003 assuming the current market
interest rates do not change. The fair value of the swap agreement at October
31, 2002 was a liability of $136 thousand. The fair value is the amount we would
pay to terminate the contract. This agreement requires that we pay the
counterparty at the above fixed swap rate and requires the counterparty to pay
us interest at the 90 day LIBOR rate. The closing 90 day LIBOR rate on October
31, 2002 was 1.7%.
L. BUSINESS SEGMENTS
We have three reportable segments: Switchgear and related equipment
(Switchgear) for the distribution and control of electrical energy, Bus duct
products (Bus Duct) for the distribution of electrical energy, and Process
Control Systems which consists principally of instrumentation, computer control,
communications and data management systems.
The tables below reflect certain information relating to our operations by
segment. Substantially all revenues represent sales from unaffiliated customers.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. For purposes of this presentation,
all general corporate expenses have been allocated among operating segments
based primarily on revenues. In addition, the corporate assets are mainly cash
and cash equivalents transferred to the corporate office from the segments.
32
POWELL INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The required disclosures for the business segments are set forth below (in
thousands):
YEARS ENDED OCTOBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
Revenues:
Switchgear...................................... $242,740 $202,219 $161,494
Bus Duct........................................ 40,852 42,613 32,213
Process Control Systems......................... 22,811 26,411 29,312
-------- -------- --------
Total........................................... $306,403 $271,243 $223,019
======== ======== ========
Earnings from Operations before Income Tax Provision:
Switchgear...................................... $ 21,652 $ 14,518 $ 6,039
Bus Duct........................................ 5,759 6,208 6,056
Process Control Systems......................... 1,040 705 (1,213)
-------- -------- --------
Total........................................... $ 28,451 $ 21,431 $ 10,882
======== ======== ========
Assets:
Switchgear...................................... $132,428 $134,872 $100,071
Bus Duct........................................ 24,156 21,576 15,608
Process Control Systems......................... 14,937 17,579 14,331
Corporate....................................... 18,122 12,334 7,916
-------- -------- --------
Total........................................... $189,643 $186,361 $137,926
======== ======== ========
M. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The table below sets forth the unaudited consolidated operating results by
fiscal quarter for the years ended October 31, 2002 and 2001 (in thousands,
except per share data):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
2002--
Revenues.................................. 76,487 80,286 74,287 75,343
Gross profit.............................. 15,591 17,267 16,430 18,370
Net earnings.............................. 3,734 4,514 4,523 5,134
Net earnings per common and common
equivalent share:
Basic................................ .36 .43 .43 .48
Diluted.............................. .35 .42 .42 .48
2001--
Revenues.................................. $55,151 $68,719 $70,780 $76,593
Gross profit.............................. 11,214 14,226 15,752 15,605
Net earnings.............................. 1,884 3,121 4,226 4,311
Net earnings per common and common
equivalent share:
Basic................................ .18 .30 .41 .41
Diluted.............................. .18 .30 .40 .40
The sum of the individual earnings per share amounts may not agree with
year-to-date earnings per share as each period's computation is based on the
weighted average number of shares outstanding during the period.
33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by these items is incorporated in this Annual
Report by reference to our definitive proxy statement pursuant to Regulation
14A, to be filed with the Securities and Exchange Commission not later than 120
days after the close of our fiscal year ended October 31, 2002, under the
headings set forth above.
ITEM 14. CONTROLS AND PROCEDURES
Our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO")
have evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-4(c) and 15d-14(c) of the Securities Exchange Act of 1934,
as amended) as of a date ("Evaluation Date") within 90 days prior to the filing
date of this annual report. Based on such evaluation, our CEO and CFO have each
concluded that as of the Evaluation Date, our disclosure controls and procedures
were effective to ensure that information required to be disclosed by us in
reports that we file or submit under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms. There
were no significant changes in our internal controls or in other factors that
could significantly affect the internal controls subsequent to the Evaluation
Date.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this Annual Report on Form
10-K, or are incorporated herein by reference. Where an exhibit is incorporated
herein, an asterisk (*) precedes the exhibit number.
1. Financial Statements. Reference is made to the Index to Consolidated
Financial Statements at Item 8 of this report.
2. All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the
notes to the financial statements.
3. Exhibits
3.1 -- Articles of Incorporation and Certificates of Amendment of
Powell Industries, Inc. dated July 20, 1987 and March 13,
1992 (filed as Exhibit 3 to our Form 10-K for the fiscal
year ended October 31, 1982, Form 10-Q for the quarter ended
July 31, 1987, and Form 10-Q for the quarter ended April 30,
1992, respectively, and incorporated herein by reference).
3.2 -- By-laws of Powell Industries, Inc. (filed as Exhibit 3.2 to
our Form 10-Q for the quarter ended April 30, 1995 and
incorporated herein by reference).
*10.1 -- Powell Industries, Inc., Incentive Compensation Plan for
2002.
10.2 -- Description of Supplemental Executive Benefit Plan (filed as
Exhibit 10 to our Form 10-K for the fiscal year ended
October 31, 1984, and incorporated herein by reference).
10.3 -- 1992 Powell Industries, Inc. Stock Option Plan (filed as
Exhibit 4.2 to our registration statement on Form S-8 dated
July 26, 1994 (File No. 33-81998) and incorporated herein by
reference).
10.4 -- Amendment to 1992 Powell Industries, Inc. Stock Option Plan
(filed as Exhibit 10.8 to our Form 10-Q for the quarter
ended April 30, 1996 and incorporated herein by reference).
34
10.5 -- Amendment to 1992 Powell Industries, Inc. Stock Option Plan
(the cover of the 1992 Powell Industries, Inc. Stock Option
Plan has been noted to reflect the increase in the number of
shares authorized for issuance under the Plan from 1,500,000
to 2,100,000, which increase was approved by the
stockholders of the Company at the 2001 Annual Meeting of
Stockholders).
10.6 -- Powell Industries, Inc. Directors' Fees Program (filed as
Exhibit 10.7 to our Form 10-K for the fiscal year ended
October 31, 1992, and incorporated herein by reference).
*10.7 -- Powell Industries, Inc. Executive Severance Protection Plan.
*10.8 -- Powell Industries, Inc. Non-Employee Directors Stock Option
Plan.
*10.9 -- Powell Industries, Inc. Deferred Compensation Plan.
*10.10 -- Amended Loan Agreement dated September 30, 2002, between
Powell Industries, Inc. and Bank of America Texas N.A.
*21.1 -- Subsidiaries of Powell Industries, Inc.
*99.1 -- Certification Pursuant to Section 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
*99.2 -- Certification Pursuant to Section 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K.
None
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, there unto duly authorized.
POWELL INDUSTRIES, INC.
By /s/ THOMAS W. POWELL
------------------------------------
Thomas W. Powell
President and Chief Executive
Officer
(Principal Executive)
By /s/ DON R. MADISON
------------------------------------
Don R. Madison
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated:
SIGNATURE TITLE
--------- -----
/s/ THOMAS W. POWELL Chairman of the Board
------------------------------------------------
Thomas W. Powell
/s/ JOSEPH L. BECHERER Director
------------------------------------------------
Joseph L. Becherer
/s/ EUGENE L. BUTLER Director
------------------------------------------------
Eugene L. Butler
/s/ JAMES F. CLARK Director
------------------------------------------------
James F. Clark
/s/ STEPHEN W. SEALE, JR. Director
------------------------------------------------
Stephen W. Seale, Jr.
/s/ LAWRENCE R. TANNER Director
------------------------------------------------
Lawrence R. Tanner
/s/ ROBERT C. TRANCHON Director
------------------------------------------------
Robert C. Tranchon
/s/ RONALD J. WOLNY Director
------------------------------------------------
Ronald J. Wolny
Date: December 31, 2002
36
CERTIFICATION
I, Thomas W. Powell, certify that:
1. I have reviewed this annual report on Form 10-K of Powell Industries,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: December 31, 2002 /s/ THOMAS W. POWELL
------------------------------------
Thomas W. Powell,
President and Chief Executive
Officer
(Principal Executive Officer)
CERTIFICATION
I, Don R. Madison, certify that:
7. I have reviewed this annual report on Form 10-K of Powell Industries,
Inc.;
8. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
9. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
10. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
11. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
12. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: December 31, 2002 /s/ DON R. MADISON
------------------------------------
Don R. Madison
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
EXHIBIT INDEX
NUMBER EXHIBIT TITLE
- ------ -------------
3.1 -- Articles of Incorporation and Certificates of Amendment of
Powell Industries, Inc. dated July 20, 1987 and March 13,
1992 (filed as Exhibit 3 to our Form 10-K for the fiscal
year ended October 31, 1982, Form 10-Q for the quarter ended
July 31, 1987, and Form 10-Q for quarter ended April 30,
1992, respectively, and incorporated herein by reference).
3.2 -- By-laws of Powell Industries, Inc. (filed as Exhibit 3.2 to
our Form 10-Q for the quarter ended April 30, 1995 and
incorporated herein by reference).
10.1 -- Powell Industries, Inc., Incentive Compensation Plan for
2002.
10.2 -- Description of Supplemental Executive Benefit Plan (filed as
Exhibit 10 to our Form 10-K for the fiscal year ended
October 31, 1984, and incorporated herein by reference).
10.3 -- 1992 Powell Industries, Inc. Stock Option Plan (filed as
Exhibit 4.2 to our registration statement on Form S-8 dated
July 26, 1994 (File No. 33-81998) and incorporated herein by
reference).
10.4 -- Amendment to 1992 Powell Industries, Inc. Stock Option Plan
(filed as Exhibit 10.8 to our Form 10-Q for the quarter
ended April 30, 1996 and incorporated herein by reference).
10.5 -- Amendment to 1992 Powell Industries, Inc. Stock Option Plan
(the cover of the 1992 Powell Industries, Inc. Stock Option
Plan has been noted to reflect the increase in the number of
shares authorized for issuance under the Plan from 1,500,000
to 2,100,000, which increase was approved by the
stockholders of the Company at the 2001 Annual Meeting of
Stockholders).
10.6 -- Powell Industries, Inc. Directors' Fees Program (filed as
Exhibit 10.7 to our Form 10-K for the fiscal year ended
October 31, 1992, and incorporated herein by reference).
10.7 -- Powell Industries, Inc. Executive Severance Protection Plan.
10.8 -- Powell Industries, Inc. Non-Employee Directors Stock Option
Plan.
10.9 -- Powell Industries, Inc. Deferred Compensation Plan.
10.10 -- Amended Loan Agreement dated September 30, 2002, between
Powell Industries, Inc. and Bank of America Texas N.A.
21.1 -- Subsidiaries of Powell Industries, Inc.
99.1 -- Certification Pursuant to Section 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 -- Certification Pursuant to Section 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
EXHIBIT 10.1
POWELL INDUSTRIES, INC.
INCENTIVE COMPENSATION PLAN GUIDELINES
2002
PURPOSE
An incentive compensations plan ("Plan") is intended to promote business growth
and profitability and to attract, retain, motivate and reward key members of the
management team by linking incentive awards to the achievement of strategically
directed financial and non-financial goals on an annual basis. These guidelines
are intended also to provide overall guidance while providing flexibility to
tailor certain elements of an incentive compensation plan to meet specific
business needs.
ELIGIBILITY AND PARTICIPATION
Key corporate and subsidiary executives and managers will be designated annually
to be Participants in the Plan. Participation is determined principally by the
degree to which an employee can have a definitive influence on performance and
profitability. Participation in one year does not guarantee participation in the
following year.
Participants must be active employees on first day of the plan year to be
eligible for a full annual award. Those hired or promoted into eligible
positions after the first day of a plan year will be eligible for an annual
award on a pro-rata basis assuming all other plan conditions are fulfilled.
Subsidiary presidents may also recommend an incentive "pool" for employees of
the subsidiary who are not Plan participants.
The CEO will recommend corporate and subsidiary participants and their maximum
incentive compensation amount for approval by the Compensation Committee of the
Company's Board of Directors, and the CEO may authorize use of the an incentive
"pool" for employees of Powell Industries, Inc. who are not Plan participants.
Participants in a plan are not eligible for participation in any other annual
incentive plan.
MAXIMUM AWARDS
Each Participant is assigned a maximum incentive compensation award annually
based on the Participant's potential contribution to the performance of the
Company or subsidiary. This maximum award is a percentage of participant's base
salary on the first day of the plan year. The Plan year is the fiscal year of
the Company.
Each Participant may earn between zero and one hundred percent of this maximum
Incentive compensation award depending on how the Company or subsidiary that
employs the participant performs during the Plan year against pre-established
performance targets.
ELEMENTS AND WEIGHTING OF THE PLAN
o Financial
Each year as part of the budgeting process for each operation, specific
goals are established for the following elements: Return of Net Assets
(RONA) (earnings before interest and taxes divided by 13 months average of
net total assets less current liabilities) and EBIT (earnings before
Page 1 of 3
interest and taxes). The CFO will recommend the threshold and maximum
performance measures for RONA and EBIT for corporate and subsidiary's
incentive targets.
o Special Factors
Components are significant measures typically focused on major process
improvements related to business objectives. While referred to as special
factors, they may actually be measurable in financial terms (e.g. accounts
receivables, etc.). All special factors measures shall be as specific as
possible and have clear goals established for the threshold and maximum
performance levels. A maximum of two special factors are recommended.
The weighting percentage reflects the relative weight given to each performance
measure. The following measures will be used to measure the performance of each
subsidiary and the Company overall:
PERFORMANCE MEASURES FOR SUBSIDIARY PARTICIPANTS
o 60% Weighting: RONA
o 25% Weighting: EBIT
o 15% Weighting: Special Factors
PERFORMANCE MEASURES FOR CORPORATE PARTICIPANTS
o 50% Weighting: Return on Equity
o 50% Weighting: Earnings Per Share
Each subsidiary will have unique targets. The CEO may authorize the use by a
subsidiary of separate performance measures and targets for that subsidiary or
for certain of its Participants provided their use is, in the best business
judgment of the CEO, compatible and consistent with the purpose and provisions
of this Plan.
The CEO will approve measures and targets for each subsidiary. The Compensation
Committee will review performance measures and targets for the Company.
PAYMENT OF AWARDS
Annual incentive awards will be determined after the audited financial
statements of the Company for the Plan year are complete, and paid in cash as
soon as practical thereafter. (Computation of each entity's performance must be
net of (after) provision for the total of Incentive Compensation amounts earned
for that entity.) The awards will be made in a lump sum subject to the usual
payroll taxes and employee benefit plan deductions.
Incentive goals are based upon a full plan year effort and are measured on a
full plan year basis. Incentive compensation is not deemed to be earned by a
participant until all conditions of a plan have been fulfilled including
participant's completion of the full plan year for which annual measures and
goals are established. However, at the Company's discretion, a prorated award
may be grated for those who were actively employed during a plan year but ceased
active employment with the Company under any of the following circumstances:
death, retirement, disability (in the first year of disability only),
involuntary layoff and transfer.
Prior to payment of such amounts, the Compensation Committee will review and
certify the incentive awards for all participants. Amounts due participants
under the Plan are an unfunded, general obligation of the Company.
GENERAL
The establishment of measures and goals under the plan does not guarantee
employment or payment of an award, but rather directs and prioritizes the
participant's activities for a plan year. Neither a plan nor the establishment
of an individual's performance measures or goals is intended to create or
constitute a contract of employment or otherwise. An employee's employment may
be
Page 2 of 3
terminated with or without cause or notice at any time at the option of either
the Company or the employee.
ADMINISTRATION
The Compensation Committee of the Company's Board of Directors is the plan
administrator. The administrator shall have the full power and discretionary
authority to administer and interpret the plan. The administrator will also
establish rules for the administration of the plan, including, but not limited
to, the power and discretionary authority to determine issues concerning
eligibility, prorating or adjusting of awards and interpretation of the terms of
the plan.
The decisions of the administrator shall be final and binding.
The Company's Board of Directors shall have the right to suspend, terminate or
amend the plan, in whole or in part, at any time, without notice.
Page 3 of 3
EXHIBIT 10.7
POWELL INDUSTRIES, INC.
EXECUTIVE SEVERANCE PROTECTION PLAN
WITNESSETH:
WHEREAS, the Board of Directors (the "Board") of Powell Industries,
Inc. (the "Company") has determined that, in the event the Company becomes
subject to any proposed or threatened Change of Control (as defined in the
Plan), the Board and the Company must be able to rely on the continued advice
and support of key management personnel without concern that such personnel
might be distracted by personal financial concerns and leave the employ of the
Company;
WHEREAS, the Board has determined that a formal executive severance
protection plan should be adopted to insure stability and continuity of
employment of key management personnel in the event of a proposed or threatened
Change of Control;
WHEREAS, it is intended that this Plan set forth the terms and
conditions upon which benefits are payable to certain executives under this
Plan; and
WHEREAS, this Plan constitutes an employee welfare benefit plan, as
that term is defined in Section 3(1) of the Employee Retirement Income Security
Act of 1974 ("ERISA"); and
WHEREAS, it is intended that this Plan shall comply with the
requirements of Section 402 of ERISA that an employee benefit plan be maintained
pursuant to a written instrument;
NOW, THEREFORE, the Company has adopted this Plan which provides as
follows:
1. DEFINITIONS.
The following definitions shall apply for the purposes of this Plan:
A. "BENEFICIARY" means any person or entity entitled to receive
benefits which are payable upon or after a Participant's death pursuant to the
terms of this Plan.
B. "CHANGE OF CONTROL" of Powell Industries, Inc. means the date of
occurrence of one or more of the following:
(1) Any acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 under the
Exchange Act) of 35% or more of either (A) the then outstanding shares
of common stock of the Company (the "Outstanding Common Stock") or (B)
the combined voting power of the then outstanding voting securities of
the Company entitled to vote
generally in the election of the Board of Directors of the Company (the
"Outstanding Voting Securities");
(2) the merger or consolidation of the Company with any other
entity if any person or group of persons (as defined in Rule 13d-5),
together with his or its affiliates, is the beneficial owner, directly
or indirectly, of 35% or more of the surviving entity's then
outstanding securities entitled generally to vote for the election of
the surviving entity's directors;
(3) Continuing Directors no longer constitute a majority of
the Board; the term "Continuing Director" means any individual who is a
member of the Board on the date hereof or was nominated for election as
a director by, or whose nomination as a director was approved by, the
Board with the affirmative vote of a majority of directors who were
members of the Board on the date hereof; or
(4) The Company transfers substantially all of its assets to
another corporation which is a less than 80% owned subsidiary of the
Company.
C. "COMMITTEE" means the Compensation Committee of the Company's Board
of Directors.
D. "COVERED PERIOD" means three years from the date of occurrence of a
Change of Control.
E. "EXECUTIVE" means an executive designated by the Board as eligible
to receive benefits under this Plan, as provided for in Section 5.
F. "INVOLUNTARY TERMINATION" means, within the Covered Period,
termination of an Executive's employment following:
(1) an Executive's resignation, for any reason, which is
requested by the Company;
(2) a significant change or reduction in job duties and
responsibilities without the Executive's consent including, but not
limited to his position title, work location, responsibility, or
authority;
(3) reduction in his base salary, incentive award opportunity,
employee benefits, or perquisites; or
(4) resignation by the Executive for "good reason". "Good
reason" means the failure of the Company to provide a comparable
position and compensation.
G. "PLAN" means the Powell Industries, Inc. Executive Severance
Protection Plan as set forth in this document, and as hereafter amended.
H. "PLAN ADMINISTRATOR" means the entity provided for in Section 2.
I. "TERMINATION FOR CAUSE" means a termination of the Executive's
employment because of (1) the conviction of the Executive by a state or federal
court of competent jurisdiction of any felony, (2) the conviction of the
Executive by a state or federal court of competent jurisdiction for embezzlement
or misappropriation of funds of the Company or its
2
consolidated subsidiaries, (3) gross negligence or willful misconduct of the
Executive which causes a material monetary injury to the Company or its
consolidated subsidiaries, or (4) the Executive's continued failure to
substantially perform material stated duties of his positions with the Company
and its consolidated subsidiaries.
2. NAME OF ADMINISTRATOR AND PLAN FIDUCIARY.
For purposes of Section 3(16) of ERISA, the Company is administrator of
this Plan. Unless the Board designates a different committee, the Committee is
designated Plan Administrator and Fiduciary of this Plan and is charged with the
general administration of this Plan.
3. BENEFITS UNFUNDED.
All benefits owing under the Plan shall be paid out of the Company's
general corporate funds, which are subject to the claims of creditors.
Neither the Executives nor any Beneficiary shall have any right, title
or interest whatever in or to, or any claim, preferred or otherwise, in or to,
any particular assets of the Company as a result of participation in the Plan.
Nothing contained in the Plan, and no action taken pursuant to its provisions,
shall create or be construed to create a trust or a fiduciary relationship of
any kind between the Company and an Executive or any other person. Neither an
Executive nor a Beneficiary of an Executive shall acquire any interest greater
than that of an unsecured creditor in any assets of the Company.
4. PLAN OPERATION AND POWERS OF THE COMMITTEE AS PLAN ADMINISTRATOR AND
FIDUCIARY.
A. THE COMMITTEE. The Committee is authorized in its sole discretion to
make all rules, regulations and procedures it deems necessary or appropriate for
administering this Plan within policies established by the Board, to construe
its provisions, to correct its defects, and supply any omissions or reconcile
any inconsistencies which may appear in this Plan, to determine all questions of
eligibility and entitlement to benefits and resolve all controversies. The Board
may allocate discretionary responsibilities to the Committee as Fiduciary
provided it is in writing. The Board may in writing permit the Committee as
Fiduciary to designate other persons to carry out discretionary
responsibilities.
B. CLAIMS. If an Executive believes any benefit under this Plan has
been incorrectly calculated or denied, he or she may file a claim with the
Committee. The Committee shall follow claims procedures substantially identical
to the claims procedures in the Powell Industries, Inc. Employees Incentive
Savings Plan.
C. STANDARD OF JUDICIAL REVIEW OF COMMITTEE ACTIONS. The Committee has
full and absolute discretion in the exercise of its authority under this Plan,
including without limitation, the authority to determine any person's right to
benefits under this Plan, the correct amount and form of any benefits, the
authority to decide any appeal, the authority to review and correct the actions
of any prior administrative committee, and all of the rights, powers, and
authorities specified in this Section 4 and this Plan. Notwithstanding any
provision of law or any explicit or implicit provision of this document, any
action taken or ruling or decision made by the Committee in the exercise of any
of its powers and authorities under this Plan, shall be final and conclusive as
to all parties, regardless of whether the Committee or one or more of its
3
members may have an actual or potential conflict of interest with respect to the
subject matter of the action, ruling, or decision. Thus, no final action,
ruling, or decision of the Committee shall be subject to de novo review in any
judicial proceeding and no final action, ruling, or decision of the Committee
may be set aside unless it is held to have been arbitrary and capricious by a
final judgment of a court having jurisdiction with respect to the issue.
5. ELIGIBILITY FOR PLAN BENEFITS:
The Board shall designate the Executives eligible to receive benefits
under this Plan in the event of that Executive's termination of employment
following a Change of Control as described in this Plan, and the Board shall
designate whether each such Executive is eligible for benefits under Executive
Benefit Group 1 or Group 2. The Board may change the benefit classification of
an Executive, or add or delete names from the list, from time to time, prior to
a Change of Control.
6. PLAN BENEFITS.
The benefits payable under this Plan shall be calculated as follows:
- ----------------------------- ------------------------------------------- -------------------------
INVOLUNTARY TERMINATION FOR
BENEFITS TERMINATION CAUSE
- ----------------------------- ------------------------------------------- -------------------------
Base Salary Group 1: 3 times the current Group 1 and 2: None
annual base salary
Group 2: 2 times the current
annual base salary
Annual Incentive Group 1: 3 times the maximum Group 1 and 2: None.
under Executive incentive opportunity for the
Incentive Plan current year
Group 2: 2 times the maximum
incentive opportunity for the
current year
4
- ----------------------------- ------------------------------------------- -------------------------
INVOLUNTARY TERMINATION FOR
BENEFITS TERMINATION CAUSE
- ----------------------------- ------------------------------------------- -------------------------
Employee Benefits Group 1: Continuation of medical, Group 1 and 2:
dental, and life benefits (as existing
*These benefits cease at the on date of termination) for
earliest to occur of (i) Executive and dependents for up to
maximum number of years 3 years.* Executive would pay normal None
indicated, or (ii) the group rate employee contribution
Executive is covered under amounts for this Coverage.
another plan. None
Group 2: Continuation of medical,
dental, and life benefits (as existing
on date of termination) for Executive
and dependents for up to 2 years.*
Executive would pay normal group rate
employee contribution amounts for this
Coverage. Group 1 and 2: COBRA
coverage begins at
Group 1 and 2: COBRA coverage Period, if termination unless
applicable, begins after the benefits Executive is terminated
continuation period has ended. for gross misconduct.
- --------------------------------------------------------------------------------------------------------
BENEFITS PROVIDED BY OTHER PLANS
- --------------------------------------------------------------------------------------------------------
Qualified Retirement Group 1 and 2: All vested balances Group 1 and 2: All vested
Plan (as required by law). balances (as required by
law).
Restricted Stock and Group 1 and 2: Immediate vesting Group 1 and 2: Immediate
Stock Options at time of change of control per vesting at time of change
Option Plan. of control per Option
Plan.
Benefits are not payable under this Plan if an Executive's employment
is terminated following the sale or disposition of any subsidiary of the Company
unless that transaction is in conjunction with a Change of Control of Powell
Industries, Inc.
If an Executive dies during the Covered Period after his Involuntary
Termination, but before the payment or provision of all benefits to which that
Executive has become entitled, then (1) cash payments due under Section 7 shall
be made in accordance with the terms thereof, and (2) coverage for the
Executive's dependents shall continue for the applicable term provided in this
Section 6.
7. PLAN PAYMENTS.
Payments from this Plan will consist of the payment and provision of
severance benefits by the Company out of its general assets in accordance with
the terms of this Plan. Cash
5
payments due will be paid to the Executive or his Beneficiary within 90 days of
the event causing the benefit payment under this Plan.
8. DESIGNATION OF BENEFICIARY.
Each Executive may from time to time designate the person(s) or
entity(ies) to whom the benefits provided for in this Plan are to be paid in the
event of the Executive's death. An Executive may from time to time change such
Executive's designation of Beneficiary and, upon any such change, any previously
designated Beneficiary's right to receive any benefits under the Plan shall
terminate.
In order to be effective, any designation or change of designation of a
Beneficiary must be made on a form furnished by the Committee and signed by the
Executive and received by the Committee while the Executive is alive. If a
Beneficiary of a deceased Executive shall survive the deceased Executive but die
prior to the receipt of all benefits payable to said Beneficiary under the Plan,
then such benefits as would have been payable to said deceased Beneficiary shall
be paid to such Beneficiary's estate at the same time and in the same manner as
such benefits would have been payable to said deceased Beneficiary.
If no such designation is on file with the Committee at the time of the
death of the Executive or such designation is not effective for any reason as
determined by the Committee, then the designated Beneficiary to receive such
benefit shall be such Executive's spouse, if any, or the Executive's estate, if
the Executive was not married at the time of his death.
9. PLAN AMENDMENT AND/OR TERMINATION.
This Plan may be amended at any time at the sole discretion of the
Company by appropriate action of the Board and may be terminated at any time;
provided that within one year of a Change of Control: (i) no amendment may be
made which adversely affects the benefits which would be payable to an Executive
hereunder in the event of a termination of employment following such Change of
Control, and (ii) the Plan may not be terminated.
10. COORDINATION WITH EMPLOYMENT AND OTHER AGREEMENTS.
The severance benefits provided under this Plan to an Executive of the
Company shall be coordinated with any severance benefits provided to such
officer under any employment contract or other agreements between the Company
and its consolidated subsidiaries and such Executive, such that for each item of
severance benefit described herein, the Executive shall be entitled to the most
favorable of the benefits provided by this Plan and by the employment contract
or other agreement, but the Company shall not be required under this Plan to pay
or provide twice any item of severance benefit that is covered both by this Plan
and by such employment contract or other agreement. Split dollar agreements, if
any, between the Company and an Executive shall operate according to their terms
and shall not be affected by, or affect, payments due under this Plan.
11. GENERAL PROVISIONS.
A. NO ASSIGNMENT OF PROPERTY RIGHTS. Unless it is specifically required
by applicable law, no interest or property rights of any Executive in this Plan
or in any severance benefit to be paid pursuant to its terms, shall be subject
in any manner to sale, transfer,
6
assignment, pledge, attachment, garnishment, or other alienation or encumbrance
of any kind, nor may such interest or right to receive a payment or distribution
be taken, voluntarily or involuntarily, for the satisfaction of the obligations
or debts of, or other claims against, the Executive or his Beneficiary,
including claims for alimony, support, separate maintenance, and claims in
bankruptcy proceedings. Any act in violation of this section shall be null and
void.
B. NO EMPLOYMENT CONTRACT. This Plan is not an employment contract and
nothing contained in it shall prohibit the adjustment from time to time of the
terms of employment of any Executive, including his current compensation and
fringe benefits to which he may otherwise be entitled. No provision in this Plan
shall be construed to affect in any way the Company's right to discharge any
Executive at any time and for any reason, which right is hereby reserved,
subject to any separate contract with such Executive.
C. INTERPRETATION. The interpretation, performance and enforcement of
this Plan shall be governed by ERISA and, to the extent not preempted, by the
laws of the State of Texas, without regard to Texas rules concerning conflicts
of laws. Except when otherwise indicated by the context, the use of masculine
terminology in this Plan shall include the feminine.
D. NO OFFSET REQUIRED. No payments or benefits payable to or with
respect to an Executive pursuant to this Plan shall be reduced by any amount the
Executive may owe to the Company, or any amount the Executive may earn or
receive from employment with another employer or from any other source.
E. TAX WITHHOLDING. If any Federal or state tax withholding is required
with respect to an Executive's severance benefit under this Plan, the Committee
shall make appropriate arrangements to withhold the required amount from the
Executive's benefit payment under this Plan.
F. GROSS UP. Benefits paid to an Executive pursuant to this Plan shall
be "grossed-up" by the Company to cover (1) any federal excise tax due by that
Executive on account of these benefit payments and (2) any federal income and
employment taxes due on the federal excise tax described in this Section 11.F.
G. REIMBURSEMENT FOR LEGAL FEES. The Company shall reimburse an
Executive for legal fees incurred by an Executive to successfully enforce the
terms of this Plan in an amount which does not exceed the following maximums:
Executive in Group 1 $150,000
========
Executive in Group 2 $100,000
========
Reimbursement shall be made by the Company to the Executive within 30
days of receipt by the Company of a statement for such legal fees submitted by
the Executive.
H. SEVERABILITY. In the event any provision of this Plan is held
illegal or invalid, the remaining provisions of this Plan shall not be affected
thereby.
12. EXECUTION.
To record the adoption of this amended and restated Executive Severance
Protection Plan as set forth in this document, effective as of September 20,
2002, the effective date for this Plan
7
as approved by its Board, Powell Industries, Inc. has caused this Plan to be
executed by its duly authorized representative this 20th day of September, 2002.
POWELL INDUSTRIES, INC.
By: /s/ DON R. MADISON
-------------------------------
Don R. Madison
Vice President
Chief Financial Officer
8
EXHIBIT 10.8
POWELL INDUSTRIES, INC.
NON-EMPLOYER DIRECTOR STOCK OPTION PLAN
1. PURPOSE. The Powell Industries, Inc. Non-Employee Director Stock
Option Plan (the "Plan") of Powell Industries, Inc. (the "Company") is for the
benefit of members of the Board of Directors of the Company (the "Board"), who,
at the time of their service, are not employees of the Company or any of its
affiliates, by providing them an opportunity to become owners of the Common
Stock of the Company (the "Stock"), thereby advancing the best interests of the
Company by increasing their proprietary interest in the success of the Company
and encouraging them to continue in their present capacity.
2. EFFECTIVE DATE OF PLAN. The Plan, as amended and restated, is
effective January 18, 2002, having been approved by the Board and the
stockholders of the Company.
3. ADMINISTRATION. The Plan shall be administered by the Compensation
Committee of the Board (the "Committee"). Subject to the terms of the Plan, the
Committee shall have the power to grant Options to Eligible Directors, construe
the provisions of the Plan, Options, and Stock issued hereunder, to determine
all questions arising hereunder, and to adopt and amend such rules and
regulations for administering the Plan as the Committee deems desirable;
provided, however, that the actions and decisions taken by the Committee in its
capacity as administrator of the Plan shall not be effective until submitted to
and ratified by the Board.
4. DEDICATED SHARES. The total number of shares of Stock with respect
to which Initial Grants and Annual Grants (collectively, the "Options") may be
granted under this Plan shall not exceed, in the aggregate, 100,000 shares;
provided, that the class and aggregate number of shares of Stock which may be
granted hereunder shall be subject to adjustment in accordance with the
provisions of Paragraph 17. The shares of Stock may be treasury shares or
authorized but unissued shares of Stock. In the event that any outstanding
Option shall expire or is terminated or canceled for any reason, the shares of
Stock allocable to the unexercised portion of that Option may again be subject
to an Option or Options under the Plan.
5. GRANT OF OPTIONS. All Options granted under the Plan shall be
Nonqualified Options which are not intended to satisfy the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended.
6. ELIGIBILITY. The individuals who shall be eligible to receive
Options under the Plan shall be each member of the Board who is not an employee
of the Company or any affiliate of the Company ("Eligible Director").
7. OPTION GRANT SIZE AND GRANT DATES.
Annual Grants -- If shares of Stock are available for issuance under
the Plan, on a date established by the Committee, each Eligible Director who is
continuing to serve as a director after such date, shall receive a grant of an
Option to purchase the 2000 shares of Stock at the Fair Market Value of the
Stock on the date of grant (an "Annual Grant").
1
Initial Grants -- If an Eligible Director is first elected or appointed
to the Board (whichever is applicable), after the date of the immediately
preceding Annual Grant but before the date chosen for the next Annual Grant, the
Eligible Director shall be granted an Option to purchase the number of shares of
Stock (rounded to the nearest whole share) which is determined my multiplying
2,000 shares by a fraction, the numerator of which is the number of months
served actually served by the Eligible Director until the date of the next
Annual Grant and the denominator of which is 12. The exercise price of such
Stock shall be the Fair Market Value on the date of grant (an "Initial Grant").
The intent of this initial Grant is to provide the new Director with a prorated
Option for the partial year served before the Annual Grant.
If the General Counsel of the Company determines, in his sole
discretion, that the Company is in possession of material, nonpublic information
about the Company or any of its subsidiaries, he may suspend granting of the
Initial Grant and Annual Grant to each Eligible Director until the second
trading day after public dissemination of the information, and the determination
by the General Counsel that issuance of the Options is then appropriate.
8. OPTION PRICE; FAIR MARKET VALUE. The price at which shares of Stock
may be purchased by each Eligible Director (the "Optionee") pursuant to his
Initial Grant and each Annual Grant, respectively, shall be 100% of the "Fair
Market Value" of the shares of Stock on the date of grant of the Initial Grant
and each Annual Grant, as applicable.
For all purposes of this Plan, the "Fair Market Value" of the Stock as
of any date means (a) the average of the high and low sale prices of the Stock
on that date on the principal securities exchange on which the Stock is listed;
(b) if the Stock is not listed on a securities exchange, the average of the high
and low sale prices of the Stock on that date as reported on the NASDAQ National
Market System; (c) if the Stock is not listed on the NASDAQ National Market
System the average of the high and low bid quotations for the Stock on that date
as reported by the National Quotation Bureau Incorporated; or (d) if none of the
foregoing is applicable, the average between the closing bid and ask prices per
share of stock on the last preceding date on which those prices were reported or
that amount as determined by the Committee.
9. DURATION OF OPTIONS. The term of each Option shall be seven (7)
years from the date of grant. No Option shall be exercisable after the
expiration of seven (7) years from the date the Option is granted.
10. AMOUNT EXERCISABLE. Each Option granted hereunder shall be
exercisable in full after the first anniversary of the grant of the Option.
11. EXERCISE OF OPTIONS. Options shall be exercised by the delivery of
written notice to the Company setting forth the number of shares with respect to
which the Option is to be exercised, together with: (a) cash, certified check,
bank draft, or postal or express money order payable to the order of the Company
for an amount equal to the option price of the shares, (b) Stock (held by
Optionee for at least six months) at its Fair Market Value on the date of
exercise, and/or (c) any other form of payment which is acceptable to the
Committee, and specifying the address to which the certificates for the shares
are to be mailed. As promptly as practicable after receipt of written
notification and payment, the Company shall deliver to the Eligible Director
certificates for the number of shares with respect to which the Option has been
exercised, issued in the Eligible Director's name. If shares of Stock are used
in payment, the Fair Market Value of the shares of Stock tendered must be less
than the option price of the shares being purchased, and the difference must be
paid by check. Delivery shall be deemed effected for all purposes when a stock
transfer agent of the Company shall have deposited the certificates in the
United States mail, addressed to the Eligible Director, at the address specified
by the Eligible Director.
2
Whenever an Option is exercised by exchanging shares of Stock owned by
the Optionee, the Optionee shall deliver to the Company certificates registered
in the name of the Optionee representing a number of shares of Stock legally and
beneficially owned by the Optionee, free of all liens, claims, and encumbrances
of every kind, accompanied by stock powers duly endorsed in blank by the record
holder of the shares represented by the certificates, (with signature guaranteed
by a commercial bank or trust company or by a brokerage firm having a membership
on a registered national stock exchange). The delivery of certificates upon the
exercise of Options is subject to the condition that the person exercising the
Option provide the Company with the information the Company might reasonably
request pertaining to exercise, sale or other disposition.
12. NON-TRANSFERABILITY OF OPTIONS. Options shall not be transferable
by the Optionee other than by will or under the laws of descent and
distribution, and shall be exercisable, during the Optionee's lifetime, only by
him.
13. TERMINATION OF DIRECTORSHIP OF OPTIONEE. If, before the date of
expiration of the Option, the Optionee shall cease to be a director of the
Company, the Option shall terminate on the earlier of the date of expiration or
one (1) year after the date of ceasing to serve as a director. In this event,
the Optionee shall have the right, prior to the termination of the Option, to
exercise the Option if he was entitled to exercise the Option immediately prior
to ceasing to serve as a director, however, in the event that the Optionee has
ceased to serve as a director on or after attaining the age of seventy (70)
years, the Optionee shall be entitled to exercise all or any part of such Option
without regard to any limitations imposed pursuant to Paragraph 10, provided
that in no event shall the Option be exercisable within six months after the
date of grant.
Upon the death of the Optionee while serving as a director, his
executors, administrators, or any person or persons to whom his Option may be
transferred by will or by the laws of descent and distribution, shall have the
right, at any time prior to the earlier of the date of expiration of the Option
or one (1) year following the date of his death, to exercise the Option, in
whole or in part without regard to any limitations imposed pursuant to Paragraph
10, provided that in no event shall the Option be exercisable within six months
after the date of grant.
14. REQUIREMENTS OF LAW. The Company shall not be required to sell or
issue any Stock under any option if issuing that Stock would constitute or
result in a violation by the Optionee or the Company of any provision of any
law, statute, or regulation of any governmental authority. Specifically, in
connection with any applicable state or regulation relating to the registration
of securities, upon exercise of any Option, the Company shall not be required to
issue any Stock unless the Company has received evidence satisfactory to it to
the effect that the holder of that Option will not transfer the Stock except in
accordance with applicable law, including receipt of an opinion of counsel
satisfactory to the Company to the effect that any proposed transfer complies
with applicable law. The determination by the Company on this matter shall be
final, binding and conclusive. The Company may, but shall in no event be
obligated to, register any Stock covered by this Plan pursuant to applicable
securities laws of any country or any political subdivision. In the event the
Stock issuable on exercise of an Option is not registered, the Company may
imprint on the certificate evidencing the Stock any legend that counsel for the
Company considers necessary or advisable to comply with applicable law. The
Company shall not be obligated to take any other affirmative action in order to
cause the exercise of an Option, or the issuance of shares under it, to comply
with any law or regulation of any governmental authority.
15. NO RIGHTS AS STOCKHOLDER. No Optionee shall have any rights as a
stockholder with respect to Stock covered by any Option until the date a stock
certificate is issued for the Stock, and, except as otherwise provided in
Paragraph 17 hereof, no adjustment for dividends, or otherwise, shall be made if
the record date thereof is prior to the date of issuance of such certificate.
3
16. NO OBLIGATION TO RETAIN OPTIONEE. The granting of any Option shall
not impose upon the Company or its stockholders any obligation to retain or
continue to retain any Optionee or nominate any Optionee for election to
continue in his capacity as a director of the Company. The right of the Company,
the Board, and the stockholders to terminate the service of any Optionee as a
director shall not be diminished or affected by reason of the fact that one or
more Options have been or would be granted to him.
17. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The existence of
outstanding Options or Stock Awards shall not affect in any way the right or
power of the Company or its stockholders to make or authorize any or all
adjustments, recapitalization, reorganizations or other changes in the Company's
capital structure or its business, or any merger or consolidation of the
Company, or any issue of bonds, debentures, preferred or prior preference stock
ahead of or affecting the Stock or its rights, or the dissolution or liquidation
of the Company, or any sale or transfer of all or any part of its assets or
business, or any other corporate act or proceeding, whether of a similar
character or otherwise.
If the Company shall effect a subdivision or consolidation of shares or
other capital readjustment the payment of a stock dividend, or other increase or
reduction of the number of shares of the Stock outstanding, without receiving
compensation for it in money, services or property, then (a) the number, class,
and per share price of shares of Stock subject to outstanding Options under this
Plan shall be appropriately adjusted in such a manner as to entitle an Employee
to receive upon exercise of an Option, for the same aggregate cash
consideration, the equivalent total number and class of shares he would have
received had he exercised his Option in full immediately prior to the event
requiring the adjustment; and (b) the number and class of shares of Stock then
reserved to be issued under the Plan shall be adjusted by substituting for the
total number and class of shares of Stock then reserved, that number and class
of shares of Stock that would have been received by the owner of an equal number
of outstanding shares of each class of Stock as the result of the event
requiring the adjustment.
If while unexercised Options remain outstanding under the Plan (i) the
Company shall not be the surviving entity in any merger, consolidation or other
reorganization, (or survives only as a subsidiary of an entity other than an
entity that was wholly-owned by the Company immediately prior to such merger,
consolidation or other reorganization), (ii) the Company sells, leases or
exchanges or agrees to sell, lease or exchange all or substantially all of its
assets to any other person or entity (other than an entity wholly-owned by the
Company), (iii) the Company is to be dissolved, or (iv) the Company is a party
to any other corporate transaction (as defined under Section 424(a) of the Code
and applicable Treasury Regulations) that is not described in clauses (i), (ii)
or (iii) of this sentence (each such event is referred to herein as a "Corporate
Change"), then (x) except as otherwise provided in an Option Agreement or as a
result of the Committee's effectuation of one or more of the alternatives
described below, there shall be no acceleration of the time at which any Option
then outstanding may be exercised, and (y) no later than ten (10) days after the
approval by the stockholders of the Company of such Corporate Change, the
Committee, without the consent or approval of any Optionee, shall act to effect
one or more of the following alternatives, which may vary among individual
Optionees and which may vary among Options held by any individual Optionee:
(1) accelerate the time at which some or all of the Options then
outstanding may be exercised so that such Options may be exercised in full for a
limited period of time on or before a specified date (before or after such
Corporate Change) fixed by the Committee, after which specified date all such
Options that remain unexercised and all rights of Optionees thereunder shall
terminate,
(2) require the mandatory surrender to the Company by all or selected
Optionees of some or all of the then outstanding Options held by such Optionee
(irrespective of whether such Options are then exercisable under the provisions
of this Plan or the Option Agreements evidencing such Options) as of a
4
date, before or after such Corporate Change, specified by the Committee, in
which event the Committee shall thereupon cancel such Options and the Company
shall pay to each such Optionee an amount of cash per share equal to the excess,
if any, of the per share price offered to stockholders of the Company in
connection with such Corporate Change over the exercise price(s) under such
Options for such shares,
(3) with respect to all or selected Optionees, have some or all of
their then outstanding Options (whether vested or unvested) assumed or have a
new Option substituted for some or all of their then outstanding options
(whether vested or unvested) by an entity which is a party to the transaction
resulting in such Corporate Change and which is then, employing him, or a parent
or subsidiary of such entity, provided that (A) such assumption or substitution
is on a basis where the excess of the aggregate fair market value of the shares
subject to the Option immediately after the assumption or substitution over the
aggregate exercise price of such shares is equal to the excess of the aggregate
fair market value of all shares subject to the Option immediately before such
assumption or substitution over the aggregate exercise price of such shares, and
(B) the assumed rights under such existing option or the substituted rights
under such new Option as the case may be will have the same terms and conditions
as the rights under the existing Option assumed or substituted for, as the case
may be,
(4) provide that the number and class of shares of Stock covered by an
Option (whether vested or unvested) theretofore granted shall be adjusted so
that such Option when exercised shall thereafter cover the number and class of
shares of stock or other securities or property (including, without limitation,
cash) to which the Optionee would have been entitled pursuant to the terms of
the agreement and/or plan relating to such Corporate Change if, immediately
prior to such Corporate Change, the Optionee had been the holder of record of
the number of shares of Stock then covered by such Option, or
(5) make such adjustments to Options then outstanding as the Committee
deems appropriate to reflect such Corporate Change (provided, however, that the
Committee may determine that no such adjustment is necessary).
In effecting one or more of alternatives (3), (4) or (5) above, and
except as otherwise may be provided in an Option Agreement, the Committee, in
its sole and absolute discretion and without the consent or approval of any
Optionee, may accelerate the time at which some or all Options then outstanding
may be exercised.
In the event of changes in the outstanding Stock by reason of
recapitalizations, reorganizations, mergers, consolidations, combinations,
exchanges or other relevant changes in capitalization occurring after the date
of the grant of any Option and not otherwise provided for by this Section 17,
any outstanding Options and any agreements evidencing such Options shall be
subject to adjustment by the Committee as to the number and price of shares of
stock or other consideration subject to such Options. In the event of any such
change in the outstanding Stock, the aggregate number of shares available under
this Plan may be appropriately adjusted by the Committee.
After a merger of one or more corporations into the Company or after a
consolidation of the Company and one or more corporations in which the Company
shall be the surviving corporation, each Employee shall be entitled to have his
Restricted Stock appropriately adjusted based on the manner the Stock was
adjusted under the terms of the agreement of merger or consolidation.
The issue by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, for cash or property, or for
labor or services either upon direct sale or upon the exercise of rights or
warrants to subscribe for them, or upon conversion of shares or obligations of
the Company convertible into shares or other securities, shall not affect, and
no adjustment by reason of such issuance
5
shall be made with respect to, the number, class, or price of shares of Stock
then subject to outstanding Options or Stock Awards.
18. TERMINATION AND AMENDMENT OF PLAN. The Board may amend, terminate
or suspend the Plan at any time, in its sole and absolute discretion; provided,
however, to the extent required to qualify the Plan under Rule 16b-3 promulgated
under Section 16 of the Securities Exchange Act of 1934, as amended, no
amendment shall be made more than once every six months that would change the
amount, price or timing of the Initial and Annual Grants, other than to comport
with changes in the Internal Revenue Code of 1986, as amended, the Employee
Retirement Income Security Act or the rules and regulations promulgated
thereunder, and provided, further, to the extent required to qualify the Plan
under Rule 16b-3, no amendment that would (a) materially increase the number of
shares of the Stock that may be issued under the Plan, (b) materially modify the
requirements as to eligibility for participation in the Plan, or (c) otherwise
materially increase the benefits accruing to participants under the Plan, shall
be made without the approval of the Company's stockholders.
19. WRITTEN AGREEMENT. Each Option granted hereunder shall be embodied
in written agreement, which shall be subject to the terms and conditions of this
Plan and shall be signed by the Optionee and by the Chairman of the Board, the
Vice Chairman, the President or any Vice President of the Company for and in the
name and on behalf of the Company.
20. INDEMNIFICATION OF COMMITTEE. With respect to administration of the
Plan, the Company shall indemnify each present and future member of the
Committee against, and each member of the Committee shall be entitled without
further act on his part to indemnity from the Company for, all expenses
(including the amount of judgments and the amount of approved settlements made
with a view to the curtailment of costs of litigation, other than amounts paid
to the Company itself) reasonably incurred by him in connection with or arising
out of any action, suit, or proceeding in which he may be involved by reason of
his being or having been a member of the Committee, whether or not he continues
to be a member of the Committee at the time of incurring the expenses. However,
this indemnity shall not include any expenses incurred by any member of the
Committee (a) in respect of matters as to which he shall be finally adjudged in
any action, suit or proceeding to have been guilty of gross negligence or
willful misconduct in the performance of his duty as a member of the Committee,
or (b) in respect of any matter in which any settlement is effected, to an
amount in excess of the amount approved by the Company on the advice of its
legal counsel. In addition, no right of indemnification under this Plan shall be
available to or enforceable by any member of the Committee unless, within 60
days after institution of any action, suit or proceeding he shall have offered
the Company, in writing, the opportunity to handle and defend same at its own
expense. This right of indemnification shall inure to the benefit of the heirs,
executors or administrators of each member of the Committee and shall be in
addition to all other rights to which a member of the Committee may be entitled
as a matter of law, contract, or otherwise.
21. FORFEITURES. Notwithstanding any other provision of this Plan, if,
before or after termination of the Optionee's capacity as a director of the
Company, there is an adjudication by a court of competent jurisdiction that the
Optionee committed fraud, embezzlement, theft, commission of felony, or proves
dishonesty in the course of his advisory relationship to the Company and its
affiliates which conduct materially damaged the Company or its affiliates, or
disclosed trade secrets of the Company or its affiliates, then any outstanding
options which have not been exercised by Optionee shall be forfeited. In order
to provide the Company with an opportunity to enforce this Section, an Option
may not be exercised if a lawsuit alleging that an action described in the
preceding sentence has taken place until a final resolution of the lawsuit
favorable to the Optionee.
22. GENDER. If the context requires, words of one gender when used in
this Plan shall include the others and words used in the singular or plural
shall include the other.
6
23. HEADINGS. Headings are included for convenience of reference only
and do not constitute part of the Plan and shall not be used in construing the
terms of the Plan.
24. GOVERNING LAW. The provisions of this Plan shall be construed,
administered, and governed under the laws of the State of Texas.
7
EXHIBIT 10.9
POWELL INDUSTRIES, INC.
DEFERRED COMPENSATION PLAN
WHEREAS, Powell Industries, Inc. (the "Company") heretofore adopted a
deferred compensation plan for a select group of management and highly
compensated employees;
WHEREAS, the Company reserved the right to amend the Plan from time to
time; and
WHEREAS, the Company desires to amend and restate the Plan in its
entirety;
NOW, THEREFORE, the Company hereby adopts the Powell Industries, Inc.
Deferred Compensation Plan, effective December 5, 2002, with respect to any
bonus eligible for deferral prior to December 31, 2002 and January 1, 2003 for
Compensation and future bonuses eligible for deferral on and after January 1,
2003, the terms of which are set forth in this document as it may be amended
from time to time, effective on December 5, 2002.
ARTICLE I
DEFINITIONS
1.1 "ACCOUNT" means all ledger accounts pertaining to a Participant
which are maintained by the Committee to reflect the amount of deferred
compensation due the Participant. The Committee shall establish the following
Accounts and any additional Accounts that the Committee considers necessary.
(a) Deferral Account - The Participant's deferral, if any,
between one percent and 50 percent of his base Compensation, and the
Participant's deferral, if any, between one percent and 100 percent, minus
applicable taxes, of any incentive bonus or commissions paid to the Participant.
(b) Company Match Accrual Account - The Company's matching
contribution, if any, equal to a percentage of the Participant's Deferral.
1.2 "BENEFICIARY" means a person or entity designated by the
Participant under the terms of the Plan to receive a payment under the Plan upon
the death of the Participant.
1.3 "BOARD OF DIRECTORS" means the Board of Directors of the Company.
1.4 "CODE" means the Internal Revenue Code of 1986, as amended from
time to time.
1.5 "COMPANY" means Powell Industries, Inc.
1.6 "COMPANY MATCH ACCRUAL" means the match which the Company accrues
with respect to the amount deferred during a Plan Year by a Participant under
the Plan.
1.7 "COMPENSATION" means remuneration paid to a Participant by the
Company during the portion of the Plan Year in which he is eligible to
participate in the Plan, or that would have been paid to a Participant during
the Plan Year by the Company but for the Participant's election to make a
Deferral under the Plan or his deferrals under a cash or deferred arrangement
described in section 401(k) of the Code or a cafeteria plan described in section
125 of the Code, including and limited to regular base pay as determined by the
Committee in its sole discretion, commissions, merit and incentive bonuses
(other than bonuses paid by the Company with respect to services for a
predecessor employer that has not adopted the Plan or with respect to services
performed by the Participant prior to his employment by the Company, as
determined by the Committee in its sole discretion), excluding however, car
allowance payments.
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1.8 "COMMITTEE" means the persons who are from time to time serving as
members of the committee administering the Plan.
1.9 "DEFERRAL" means the amount of Compensation deferred under a
deferral election made by a Participant under Section 3.1.
1.10 "DEFERRED COMPENSATION LEDGER" means the ledger maintained by the
Committee for each Participant which reflects the amount of Compensation
deferred by the Participant under the Plan, Company Match Accrual and the
provided under the Plan, and the amount of earnings and losses credited on each
of these amounts.
1.11 "DISABILITY" means any medically determinable physical or mental
impairment that is deemed to be a disability by the Social Security
Administration Department for purpose of receiving a primary Social Security
disability benefit, or any such physical or mental impairment which is
determined to make the Participant eligible to receive a disability benefit in
accordance with the provisions of the Company's insured long term disability
plan, if applicable to such Participant, by the insurance carrier underwriting
such plan.
1.12 "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
1.13 "INVESTMENT FUND" means a mutual fund or other investment option
that is designated by the Committee for purposes of determining the amount of
the Company's deferred compensation obligation to a Participant under the Plan.
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1.14 "PARTICIPANT" means an employee of a Company who is eligible to
participate in the Plan.
1.15 "PLAN" means the Powell Industries, Inc. Deferred Compensation
Plan set out in this document, as amended from time to time.
1.16 "PLAN YEAR" means a one-year period which coincides with the
calendar year. Therefore, the first Plan Year of the Plan shall be a short plan
year from December 1, 2002 through December 31, 2002.
1.17 "RETIREMENT" means the voluntary termination of employment with
the Company at or after attaining age 65 (normal retirement). A Participant may
retire early at age 55 with five (5) years of active service with the Company.
1.18 "SAVINGS PLAN" means the Powell Industries, Inc. Employees
Incentive Savings Plan.
1.19 "TRUST" means the Powell Industries, Inc. Deferred Compensation
Trust.
1.20 "VALUATION DATE" means the end of each calendar quarter unless the
Committee selects another date.
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ARTICLE II
ELIGIBILITY
The employees eligible to participate in the Plan include the key
employees of the Company, who are in a select group of management or are highly
compensated employees, as determined by the Committee. The Committee shall
notify each Participant of his eligibility to participate in the Plan. Each
Participant in the Plan during a Plan Year shall continue to participate in the
Plan unless the Committee shall have notified the Participant that he will not
be eligible to participate in the Plan. A former Participant who has been
notified that he will no longer participate in the Plan, but who remains in the
employ of the Company, shall retain the balance in his Accounts under the terms
of the Plan, but he shall not make additional deferrals under Section 3.1 and no
additional amounts shall be credited to his Accounts under Sections 4.3 and 4.4
during the periods in which he is not a Participant.
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ARTICLE III
DEFERRALS AND ACCRUALS
3.1 DEFERRAL ELECTION. A Participant may elect, within 30 days of
notification that he is eligible to participate in the Plan, the percentage, if
any, of his Compensation to be earned during the ensuing Plan Year, that is to
be deferred under the Plan. A Participant may elect to defer a minimum of one
percent but not more than 50 percent of his base Compensation for the Plan Year,
and may defer a minimum of one percent and a maximum of 100 percent, minus
applicable taxes, of any incentive bonus or commissions to be paid to the
Participant for the Plan Year. Prior to the election period the Committee shall
notify all eligible Participants of their right to make a deferral election.
Once an election has been made as to the percentage to be deferred, it becomes
irrevocable for the Plan Year. The election to defer a percentage of
Compensation shall be effective only upon the timely receipt by the Committee of
the Participant's percentage deferral election on such form as will be
determined by the Committee from time to time. If an election form is not
received on or prior to the beginning of the Plan Year to which the election
applies, the Participant shall be deemed to have elected not to defer any part
of his Compensation for that Plan Year.
Notwithstanding the foregoing, if a Participant takes a withdrawal from
the Savings Plan for reasons of a financial hardship, no amounts may deferred
under this Plan for a period of six months following the withdrawal and until
the Participant files a new election form under this Plan. A Participant's
election to defer amounts under this Plan following such six-month period shall
not be effective until the beginning of the next Plan Year.
3.2 COMPANY MATCH ACCRUAL. Each Plan Year the Company shall credit the
Company Match Account of each Participant who elects to defer a portion of his
Compensation under the Plan with an amount equal to the difference between A and
B where A is equal to
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amount of the employer matching contribution the Participant would have been
allocated under the Savings Plan for such Plan Year had the Participant's
compensation for under the Savings Plan included the amount the Participant
elected to defer under this Plan and B is equal to the amount of the employer
matching contribution the Participant was allocated under the Savings Plan for
such Plan Year.
III-2
ARTICLE IV
ACCOUNT
4.1 ESTABLISHING A PARTICIPANT'S ACCOUNT. The Committee shall establish
an Account for each Participant in a special Deferred Compensation Ledger which
shall be maintained by the Company. The Account shall reflect the amount of the
Company's obligation to the Participant at any given time.
4.2 DEFERRAL ACCOUNT. The amount deferred by a Participant, if any,
shall be credited to each Participant's Deferral Account as of the last day of
each month in which the Participant would have received the amount deferred but
for his election to defer.
4.3 COMPANY MATCH ACCRUAL ACCOUNT. The Company Match, if any, shall be
credited to each Participant's Company Match Account as of the last day of the
Plan Year for the accrual attributable to Compensation paid during that Plan
Year.
4.4 CREDITING OF INTEREST. As part of a Participant's total benefit
under the Plan, each Participant's Account shall be credited with earnings (or
losses) equal to the amount which is deemed to be earned on his bookkeeping
Account established to enable the Company to determine its obligations under the
Plan. Each Valuation Date the Committee or its delegate will determine the
amount of earnings (or losses) to be allocated to a Participant's Account and
will credit that amount to the Participant's Account. For the purpose of
determining the earnings (or losses) to be credited to the Participant's
Account, the Committee shall assume that the Participant's Account is invested
in units or shares of the Investment Funds in the proportions selected by the
Participant in accordance with procedures established by the Committee. This
amount accrued by the Committee as additional deferred compensation shall be a
part of the Company's obligation to the Participant and payment of it shall be a
general obligation of the Company. Earnings (or losses) will continue to be
credited to a Participant's Account each
IV-1
Valuation Date until his entire benefit due under the Plan has been paid in
full. The determination of interest based on the income and appreciation of the
Participant's Account shall in no way affect the ability of the general
creditors of the Company to reach the assets of the Company in the event of the
insolvency or bankruptcy of the Company or place the Participants in a secured
position ahead of the general creditors of the Company. Although a Participant's
investment selections made in accordance with the terms of the Plan and such
procedures as may be established by the Committee shall be relevant for purposes
of determining the Company's obligation to the Participant under the Plan, there
is no requirement that any assets of the Company shall be invested in accordance
with the Participant's investment selections.
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ARTICLE V
VESTING
A Participant shall have a 100 percent nonforfeitable interest in his
Deferrals and his Company Match Accruals under the Plan at all times. A
Participant will also have a 100 percent nonforfeitable interest in any increase
in the Deferral and Company Match Accrual as a result of the crediting of
interest in accordance with Section 4.5 after his Deferral and Company Match
Accrual has been initially credited or accrued.
V-I
ARTICLE VI
DISTRIBUTIONS
6.1 DEATH. Upon the death of a Participant, his Beneficiary or
Beneficiaries shall receive the value of the amounts credited to the
Participant's Accounts in the Deferred Compensation Ledger determined under
Section 6.9.
Each Participant, upon notification of his participation in the Plan,
shall file with the Committee a designation of a Beneficiary or Beneficiaries to
whom distributions otherwise due the Participant shall be made in the event of
his death prior to the distribution of the amount credited to his Accounts in
the Deferred Compensation Ledger. The designation will be effective upon receipt
by the Committee of a properly executed form which the Committee has approved
for that purpose. The Participant may from time to time revoke or change any
designation of Beneficiary by filing another approved Beneficiary designation
form with the Committee. If there is no valid designation of Beneficiary on file
with the Committee at the time of the Participant's death, or if all of the
Beneficiaries designated in the last Beneficiary designation have predeceased
the Participant or otherwise ceased to exist, the Beneficiary will be the
Participant's spouse, if the spouse survives the Participant, or otherwise the
Participant's estate. Any Beneficiary designation which designates any person or
entity other than the Participant's spouse must be consented to in writing by
the spouse in a form acceptable to the Committee in order to be effective.
6.2 DISABILITY. Upon the Disability of a Participant, the Participant
shall receive the value of the amounts credited to the Participant's Accounts in
the Deferred Compensation Ledger determined under Section 6.9.
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6.3 RETIREMENT. Upon the Retirement of a Participant, the Participant
shall receive the value of the amounts credited to his Accounts in the Deferred
Compensation Ledger determined under Section 6.9.
6.4 TERMINATION PRIOR TO DEATH, DISABILITY OR RETIREMENT. Upon a
Participant's termination from the employ of the Company prior to his death,
Disability or Retirement, the Participant shall receive the portion of the
amount credited to his Accounts in the Deferred Compensation Ledger determined
under Section 6.9, which is vested under Sections 5.1 and 5.2.
6.5 TIME AND FORM OF BENEFIT PAYMENTS. Distributions under the Plan
shall be made in one lump sum payment or in equal monthly installments over a
three-, five-or ten-year period. All distributions shall be made in cash. Each
Participant shall have the right to elect, to revoke or to change any election
of the form of distribution at the time and under the rules established by the
Committee. Initially, however, a Participant must elect prior to becoming a
Participant, the form of distribution. If a Participant fails to designate a
form of distribution, the Participant's benefit under the Plan shall be made in
a single lump sum payment. Except for distributions due to Disability or death,
all other elections of form of distribution and all revocations or changes of
election of form of distribution shall be effective only if the election,
revocation or change is received by the Committee in proper form one year prior
to the event which required a distribution under the Plan. During that one-year
period prior to the effective date of such election, revocation or change, the
last effective election, revocation or change made by the Participant shall
continue to remain in force. With respect to distributions due to Disability or
death, the form of distribution elected on the last election form by the
Participant shall be the form of distribution made to the Disabled Participant
or, in the case of death, the Participant's Beneficiary. If installment payments
are elected by the Participant and the
VI-2
Participant dies after he has retired and prior to receiving all installment
payments, to which he is entitled, the remaining installments shall be paid to
the Participant's Beneficiary. In addition, if installment payments are being
paid to a Participant, the Participant may elect to receive a single sum payment
of the remaining installment payments, less a penalty equal to ten percent (10%)
of the remaining balance in his total Account. The Committee has the sole
discretion as to determining the date, nature and reason of any termination of
employment by a Participant.
A distribution shall be made or commence within 30 days after the
Participant's death, Disability, Retirement or termination prior to death,
Disability or Retirement.
6.6 HARDSHIP DISTRIBUTION ELECTIONS. In addition to receiving a
distribution of his Deferral Account upon death, Disability, or Retirement, each
Participant may, in accordance with procedures established by the Committee,
request to receive a distribution of all or any portion of his Deferral Account
on account of a major, unanticipated, financial emergency.
6.7 IN-SERVICE WITHDRAWALS. In addition to the in-service distribution
election provided for under Section 6.5 of the Plan, each Participant may,
receive a withdrawal of all or any portion of the value of the Deferral Account,
less a penalty equal to ten percent (10%) of the value of the Deferral Account.
No in-service withdrawals are permitted from a Participant's Company Match
Accrual Account. The Participant's withdrawal request for Deferral Contributions
terminates the right to make any Deferrals until the next time Deferral
elections are permitted after the lapse of one (1) year following the
withdrawal.
6.8 RESPONSIBILITY FOR DISTRIBUTIONS AND WITHHOLDING OF TAXES. The
Committee shall furnish information to the Company concerning the amount and
form of distribution to any Participant entitled to a distribution so that the
Company may make or cause the Trust to make the distribution required. It will
also calculate the deductions from the amount of the benefit
VI-3
paid under the Plan for any taxes required to be withheld by federal, state or
local government and will cause them to be withheld and paid to the appropriate
authority.
6.9 ACQUISITIONS, MERGERS, OR CONSOLIDATIONS. If the Company is a party
to any merger, consolidation or other reorganization, sells, leases or exchanges
or agrees to sell, lease or exchange all or substantially all of its assets to
any other person or entity (other than an entity wholly-owned by the Company),
is to be dissolved, or is a party to any other corporate transaction (as defined
under Section 424(a) of the Code and applicable Treasury Regulations) that is
not described in this sentence, then the Committee, acting in its sole and
absolute discretion without the consent or approval of any Participant, may
immediately vest each Participant in the Plan and/or make or cause the Trust to
make a single lump sum cash distribution of the value of the amounts credited to
each of the Participants' Accounts in the Deferred Compensation Ledger
determined under Section 6.9 to each Participant or Beneficiary under the Plan.
6.10 DISTRIBUTION DETERMINATION DATE. For purposes of all distributions
described in this Article VI, the determination date for valuing the amounts
credited to a Participant's Accounts shall be the Valuation Date immediately
preceding the event which triggers the beginning of the 90-day period described
in Section 6.1, 6.2, 6.3, 6.4, or 6.8 as applicable.
VI-4
ARTICLE VII
ADMINISTRATION
7.1 COMMITTEE APPOINTMENT. The Committee which shall consist of not
less than three members shall be appointed by the Compensation Committee of the
Board of Directors. Each Committee member shall serve until his resignation or
removal. The Compensation Committee of the Board of Directors shall have the
sole discretion to remove any one or more Committee members and appoint one or
more replacement or additional Committee members from time to time.
7.2 COMMITTEE ORGANIZATION AND VOTING. The Committee shall select from
among its members a chairman who shall preside at all of its meetings and shall
elect a secretary without regard to whether that person is a member of the
Committee. The secretary shall keep all records, documents and data pertaining
to the Committee's supervision and administration of the Plan. A majority of the
members of the Committee shall constitute a quorum for the transaction of
business and the vote of a majority of the members present at any meeting shall
decide any question brought before the meeting. In addition, the Committee may
decide any question by a vote, taken without a meeting, of a majority of its
members. A member of the Committee who is also a Participant shall not vote or
act on any matter relating solely to himself.
7.3 POWERS OF THE COMMITTEE. The Committee shall have the exclusive
responsibility for the general administration of the Plan according to the terms
and provisions of the Plan and shall have all powers necessary to accomplish
those purposes, including but not by way of limitation the right, power and
authority:
(a) to make rules and regulations for the administration of the
Plan;
(b) to construe all terms, provisions, conditions and limitations
of the Plan;
VII-1
(c) to correct any defect, supply any omission or reconcile any
inconsistency that may appear in the Plan in the manner and to the extent it
deems expedient to carry the Plan into effect;
(d) to designate the persons eligible to become Participants;
(e) to determine all controversies relating to the administration
of the Plan, including but not limited to:
(1) differences of opinion arising between the Company and a
Participant; and
(2) any question it deems advisable to determine in order to
promote the uniform administration of the Plan for the benefit of all parties at
interest; and
(f) to delegate by written notice those clerical and recordation
duties of the Committee, as it deems necessary or advisable for the proper and
efficient administration of the Plan.
7.4 COMMITTEE DISCRETION. The Committee in exercising any power or
authority granted under the Plan or in making any determination under the Plan
shall perform or refrain from performing those acts using its sole discretion
and judgment. Any decision made by the Committee or any refraining to act or any
act taken by the Committee in good faith shall be final and binding on all
parties and shall not be subject to de novo review.
7.5 ANNUAL STATEMENTS. The Committee shall cause each Participant to
receive an annual statement as soon as administratively feasible after the
conclusion of each Plan Year containing a statement of the Participant's
Accounts in the Deferred Compensation Ledger through the end of that Plan Year.
The statement shall include a report of the Participant Deferral, Company Match
Accrual, if any, and , if any, and the number of units credited to each
Participant's Accounts for that Plan Year.
7.6 REIMBURSEMENT OF EXPENSES. The Committee shall serve without
compensation for its services but shall be reimbursed by the Company for all
expenses properly and actually incurred in the performance of its duties under
the Plan.
VII-2
7.7 STANDARD OF JUDICIAL REVIEW OF COMMITTEE ACTIONS. The Committee has
full and absolute discretion in the exercise of each and every aspect of the
rights, power, authority and duties retained or granted it under the Plan,
including without limitation, the authority to determine all facts, to interpret
this Plan, to apply the terms of this Plan to the facts determined, to make
decisions based upon those facts and to make any and all other decisions
required of it by this Plan, such as the right to benefits, the correct amount
and form of benefits, the determination of any appeal, the review and correction
of the actions of any prior administrative committee, and the other rights,
powers, authority and duties specified in this Article and elsewhere in this
Plan. Notwithstanding any provision of law, or any explicit or implicit
provision of this document, any action taken, or finding, interpretation, ruling
or decision made by the Committee in the exercise of any of its rights, powers,
authority or duties under this Plan shall be final and conclusive as to all
parties, including without limitation all Participants, former Participants and
Beneficiaries, regardless of whether the Committee or one or more of its members
may have an actual or potential conflict of interest with respect to the subject
matter of the action, finding, interpretation, ruling or decision. No final
action, finding, interpretation, ruling or decision of the Committee shall be
subject to de novo review in any judicial proceeding. No final action, finding,
interpretation, ruling or decision of the Committee may be set aside unless it
is held to have been arbitrary and capricious by a final judgment of a court
having jurisdiction with respect to the issue.
7.8 CLAIMS PROCEDURES. When a benefit is due, the Participant or
Beneficiary should submit a claim to the office designated by the Committee to
receive claims. Under normal circumstances, the Committee will make a final
decision as to a claim within 90 days after receipt of the claim. If the
Committee notifies the claimant in writing during the initial 90-day
VII-3
period, it may extend the period up to 180 days after the initial receipt of the
claim. The written notice must contain the circumstances necessitating the
extension and the anticipated date for the final decision. If a claim is denied
during the claims period, the Committee must notify the claimant in writing. The
denial must include the specific reasons for it, the Plan provisions upon which
the denial is based, any additional material or information necessary for the
claimant to perfect the claim and an explanation of why such material or
information is necessary, and the Plan's review procedures and time limits,
including a statement of the claimant's right to bring a civil action under
section 502(a) of ERISA.
If a Participant's or Beneficiary's claim is denied and he wants a
review, he must apply to the Committee in writing. That application can include
any arguments, written comments, documents, records, and other information
relating to the claim for benefits. In addition, the claimant is entitled to
receive on request and free of charge reasonable access to and copies of all
information relevant to the claim. For this purpose, "relevant" means
information that was relied on in making the benefit determination or that was
submitted, considered or generated in the course of making the determination,
without regard to whether it was relied on, and information that demonstrates
compliance with the Plan's administrative procedures and safeguards for assuring
and verifying that Plan provisions are applied consistently in making benefit
determinations. The Committee must take into account all comments, documents,
records, and other information submitted by the claimant relating to the claim,
without regard to whether the information was submitted or considered in the
initial benefit determination. The claimant may either represent himself or
appoint a representative, either of whom has the right to inspect all documents
pertaining to the claim and its denial. The Committee can schedule any meeting
with the claimant or his representative that it finds necessary or appropriate
to complete its review.
VII-4
The request for review must be filed within 90 days after the denial. If it is
not, the denial becomes final. If a timely request is made, the Committee must
make its decision, under normal circumstances, within 60 days of the receipt of
the request for review. However, if the Committee notifies the claimant prior to
the expiration of the initial review period, it may extend the period of review
up to 120 days following the initial receipt of the request for a review. All
decisions of the Committee must be in writing and must include the specific
reasons for its action, the Plan provisions on which its decision is based, and
a statement that the claimant is entitled to receive, upon request and free of
charge, reasonable access to, and copies of, all documents, records, and other
information relevant to the claimant's claim for benefits, and a statement of
the claimant's right to bring an action under section 502(a) of ERISA If a
decision is not given to the claimant within the review period, the claim is
treated as if it were denied on the last day of the review period.
VII-5
ARTICLE VIII
AMENDMENT AND/OR TERMINATION
8.1 AMENDMENT OR TERMINATION OF THE PLAN. The Compensation Committee of
the Board of Directors may amend or terminate the Plan at any time by an
instrument in writing without the consent of any Participant.
8.2 NO RETROACTIVE EFFECT ON AWARDED BENEFITS. No amendment shall
affect the rights of any Participant to the amounts and/or units then standing
to his credit in his Accounts in the Deferred Compensation Ledger. However,
Compensation Committee of the Board of Directors shall retain the right to
change at any time and in any manner the method of calculating all amounts
deferred by a Participant and all amounts matched by the Company to be accrued
in the future and the gauge to be used to determine future increases or
decreases in amounts accrued or deferred after the date of the amendment.
8.3 EFFECT OF TERMINATION. If the Plan is terminated, all amounts
deferred by Participants and matched or accrued by the Company and credited to a
Participant's Accounts shall immediately vest as if the Participant were
entitled to and did retire on the date the Plan terminated. Distributions would
then commence in accordance with Section 6.3.
VIII-1
ARTICLE IX
PAYMENT
9.1 PAYMENTS UNDER THIS AGREEMENT ARE THE OBLIGATION OF THE COMPANY.
The Company shall be liable for all benefits due the Participants under the
Plan.
9.2 PAYMENTS MAY BE MADE TO A RABBI TRUST. Under all circumstances, the
rights of the Participants to the assets held in any rabbi trust created with
respect to the Plan shall be no greater than the rights expressed in this
agreement. Nothing contained in the trust agreement which creates any such rabbi
trust shall constitute a guarantee by any Company that the amounts transferred
by it to the trust shall be sufficient to pay any benefits under the Plan or
would place the Participant in a secured position ahead of judgment and/or
general creditors should the Company become insolvent or bankrupt. Any trust
agreement established with respect to a Plan must specifically set out these
principles so it is clear in the trust agreement that the Participants are only
unsecured general creditors of the Company with respect to their benefits under
the Plan.
9.3 PARTICIPANTS MUST RELY ONLY ON GENERAL CREDIT OF THE COMPANY. The
Plan is only a general corporate commitment and each Participant must rely upon
the general credit of the Company for the fulfillment of its obligations under
the Plan. Under all circumstances the rights of Participants to any asset held
by the Company shall be no greater than the rights expressed in this agreement.
Nothing contained in this agreement shall constitute a guarantee by the Company
that the assets of the Company will be sufficient to pay any benefits under the
Plan or would place the Participant in a secured position ahead of general
creditors and judgment creditors of the Company. Though the Company may
establish or become a signatory to a rabbi trust to accumulate assets to help
fulfill its obligations, the Plan and any trust created, shall not create any
lien, claim, encumbrance, right, title or other interest of any kind in any
Participant in
IX-1
any asset held by the Company, contributed to any trust created, or otherwise be
designated to be used for payment of any of its obligations created in this
agreement. No specific assets of the Company have been or will be set aside, or
will be transferred to a trust or will be pledged for the performance of the
Company's obligations under the Plan which would remove those assets from being
subject to the general creditors and judgment creditors of the Company.
9.4 PLAN UNFUNDED. It is intended that the Plan shall be unfunded for
tax purposes and for purposes of Title I of ERISA.
IX-2
ARTICLE X
MISCELLANEOUS
10.1 LIMITATION OF RIGHTS. Nothing in the Plan will be construed:
(a) to give any employee of any Company any right to be
designated a Participant in the Plan;
(b) to give a Participant any right with respect to the
Deferral, the Company Match Accrual accrued or accrued except in accordance with
the terms of the Plan;
(c) to limit in any way the right of the Company to terminate
a Participant's employment with the Company at any time;
(d) to evidence any agreement or understanding, expressed or
implied, that the Company will employ a Participant in any particular position
or for any particular remuneration; or
(e) to give a Participant or any other person claiming through
him any interest or right under the Plan other than that of any unsecured
general creditor of the Company.
10.2 DISTRIBUTIONS TO INCOMPETENTS OR MINORS. Should a Participant
become incompetent or should a Participant designate a Beneficiary who is a
minor or incompetent, the Committee is authorized to pay the amounts due to the
parent of the minor or to the guardian of the minor or incompetent or directly
to the minor or to apply those amounts for the benefit of the minor or
incompetent in any manner the Committee determines in its sole discretion.
10.3 NONALIENATION OF BENEFITS. No right or benefit provided in the
Plan shall be transferable by the Participant except, upon his death, to a named
Beneficiary as provided in the Plan. No right or benefit under the Plan shall be
subject to anticipation, alienation, sale, assignment, pledge, encumbrance or
charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber,
or charge the same shall be void. No right or benefit under the Plan shall in
any manner be liable for or subject to any debts, contracts, liabilities or
torts of the person entitled to such benefits. If any Participant or any
Beneficiary becomes bankrupt or attempts to
X-1
anticipate, alienate, sell, assign, pledge, encumber or charge any right or
benefit under the Plan, that right or benefit shall, in the discretion of the
Committee, cease. In that event, the Committee may have the Company hold or
apply the right or benefit or any part of it to the benefit of the Participant
or Beneficiary, his or her spouse, children or other dependents or any of them
in any manner and in any proportion the Committee believes to be proper in its
sole and absolute discretion, but is not required to do so.
10.4 RELIANCE UPON INFORMATION. The Committee shall not be liable for
any decision or action taken in good faith in connection with the administration
of the Plan. Without limiting the generality of the foregoing, any decision or
action taken by the Committee when it relies upon information supplied it by any
officer of the Company, the Company's legal counsel, the Company's independent
accountants or other advisors in connection with the administration of the Plan
shall be deemed to have been taken in good faith.
10.5 SEVERABILITY. If any term, provision, covenant or condition of the
Plan is held to be invalid, void or otherwise unenforceable, the rest of the
Plan shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
10.6 NOTICE. Any notice or filing required or permitted to be given to
the Committee or a Participant shall be sufficient if in writing and hand
delivered or sent by U.S. mail to the principal office of the Company or to the
residential mailing address of the Participant. Notice shall be deemed to be
given as of the date of hand delivery or if delivery is by mail, as of the date
shown on the postmark.
10.7 GENDER AND NUMBER. If the context requires it, words of one gender
when used in the Plan will include the other genders, and words used in the
singular or plural will include the other.
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10.8 GOVERNING LAW. The Plan will be construed, administered and
governed in all respects by the laws of the State of Texas.
10.9 SUCCESSORS, ACQUISITIONS, MERGERS, CONSOLIDATIONS. The terms and
conditions of this Plan and each Deferral Election shall inure to the benefit of
and bind the Company, the Participants, their successors, assigns, and personal
representatives. The terms successors and assigns as used herein shall include
any corporate or other business entity which shall include any consolidation,
purchase or otherwise, acquire all or substantially all of the business and
assets of the Company and successors of any such corporation or other business
entity.
10.10 EFFECTIVE DATE. The Plan, as amended and restated, will be
operative and effective on the 5th day of December 2002.
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IN WITNESS WHEREOF, the Company has executed this document on this 5th
day of December 2002.
POWELL INDUSTRIES, INC.
By /s/ Don R. Madison
-----------------------------------
Title Vice President & Vice President
--------------------------------
EXHIBIT 10.10
FIRST AMENDMENT TO LOAN AGREEMENT
This First Amendment to Loan Agreement (this "First Amendment") is made
and entered into as of the 30th day of September, 2002, by and between POWELL
INDUSTRIES, INC., a Nevada corporation ("Borrower"), and BANK OF AMERICA, N.A.,
a national banking association ("Lender").
WITNESSETH:
WHEREAS, pursuant to that certain Amended and Restated Loan Agreement
(the "Loan Agreement") dated October 25, 2001, Lender agreed to make certain
loans to Borrower upon the terms and conditions therein contained; and
WHEREAS, Borrower and Lender desire to modify and amend certain terms
and provisions of the Loan Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Borrower and Lender agree as
follows:
1. Amendments to Loan Agreement. Subject to and upon the full and
complete satisfaction of the terms and conditions of numerical Section 3 below,
the Loan Agreement is amended and modified as follows:
1.1. The definition of the following term in Section 1.1 of the Loan
Agreement is deleted in its entirety and the following is substituted in place
thereof:
"TERMINATION DATE" shall mean the earlier to occur of (a) February 28,
2005, or (b) an Event of Default.
2. Reaffirmation of Representations and Warranties. To induce the
Lender to enter into this First Amendment, Borrower hereby reaffirms, as of the
date hereof, its representations and warranties in their entirety contained in
the Loan Agreement and in all other Loan Documents executed by Borrower pursuant
thereto (except to the extent such representations and warranties relate solely
to an earlier date in which case they shall have been true and accurate in all
respects as of such earlier date) and additionally represents and warrants as
follows:
2.1. The execution and delivery of this First Amendment and the
performance by Borrower of its obligations under this First Amendment and the
Loan Agreement as amended hereby are within Borrower's powers, have been duly
authorized by all necessary action, have received all necessary governmental and
other approvals (if any shall be required), and do not and will not contravene
or conflict with the governance documents of Borrower or any provision of law,
any presently existing requirement or restriction imposed by any judicial,
arbitral, regulatory or governmental instrumentality or constitute a default
under, or result in the creation or imposition of any lien other than a lien
permitted by the terms of the Loan Agreement upon any property or assets of
Borrower or any Guarantor under, any agreement, instrument or indenture by which
Borrower or any Guarantor is bound;
2.2. This First Amendment has been duly executed and delivered on
behalf of Borrower and this First Amendment and the Loan Agreement, as amended
hereby, are the legal, valid and binding obligations of Borrower, enforceable in
accordance with their terms subject as to enforcement only to bankruptcy,
insolvency, reorganization, moratorium or other similar laws and equitable
principles affecting the enforcement of creditors' rights generally; and
2.3. No Default or Event of Default has occurred and is continuing
after giving effect to this First Amendment.
3. Conditions. The effectiveness of this First Amendment is subject to
the following conditions, all in form and substance satisfactory to the Lender:
3.1. The Lender shall have received and approved:
(a) First Amendment. A counterpart of this First Amendment
executed by Borrower and Guarantors;
(b) Other Documents. Such other documents as the Lender may
reasonably request (which shall include without limitation, partnership
certificates, and other authorization documents required by Lender in
connection with the foregoing); and
(c) Expenses. Reimbursement for all of Lender's fees and
expenses (including attorneys' fees) incurred in connection with the
preparation, negotiation, and execution of this First Amendment.
3.2. All legal matters incident to the execution and delivery of this
First Amendment shall be satisfactory to the Lender.
3.3. No Default or Event of Default shall be then continuing.
4. Arbitration and Waiver of Jury Trial.
(a) THIS SECTION CONCERNS THE RESOLUTION OF ANY CONTROVERSIES
OR CLAIMS BETWEEN THE BORROWER AND THE LENDER, WHETHER ARISING IN
CONTRACT, TORT OR BY STATUTE, INCLUDING BUT NOT LIMITED TO
CONTROVERSIES OR CLAIMS THAT ARISE OUT OF OR RELATE TO: (i) THIS FIRST
AMENDMENT AND THE LOAN AGREEMENT (INCLUDING ANY RENEWALS, EXTENSIONS OR
MODIFICATIONS); OR (II) ANY DOCUMENT RELATED TO THIS FIRST AMENDMENT
AND THE LOAN AGREEMENT (COLLECTIVELY A "CLAIM").
(b) AT THE REQUEST OF THE BORROWER OR LENDER, ANY CLAIM SHALL
BE RESOLVED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL
ARBITRATION ACT (TITLE 9, U. S. CODE) (THE "ACT"). THE ACT WILL
APPLY EVEN THOUGH THIS
2
AGREEMENT PROVIDES THAT IT IS GOVERNED BY THE LAW OF A SPECIFIED
STATE.
(c) ARBITRATION PROCEEDINGS WILL BE DETERMINED IN ACCORDANCE
WITH THE ACT, THE APPLICABLE RULES AND PROCEDURES FOR THE ARBITRATION
OF DISPUTES OF JAMS OR ANY SUCCESSOR THEREOF ("JAMS"), AND THE TERMS OF
THIS SECTION. IN THE EVENT OF ANY INCONSISTENCY, THE TERMS OF THIS
PARAGRAPH SHALL CONTROL.
(d) THE ARBITRATION SHALL BE ADMINISTERED BY JAMS AND
CONDUCTED IN ANY U. S. STATE WHERE REAL OR TANGIBLE PERSONAL PROPERTY
COLLATERAL FOR THIS CREDIT IS LOCATED OR IF THERE IS NO SUCH
COLLATERAL, IN TEXAS. ALL CLAIMS SHALL BE DETERMINED BY ONE ARBITRATOR;
HOWEVER, IF CLAIMS EXCEED $5,000,000, UPON THE REQUEST OF ANY PARTY,
THE CLAIMS SHALL BE DECIDED BY THREE ARBITRATORS. ALL ARBITRATION
HEARINGS SHALL COMMENCE WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION
AND CLOSE WITHIN 90 DAYS OF COMMENCEMENT AND THE AWARD OF THE
ARBITRATOR(S) SHALL BE ISSUED WITHIN 30 DAYS OF THE CLOSE OF THE
HEARING. HOWEVER, THE ARBITRATOR(S), UPON A SHOWING OF GOOD CAUSE, MAY
EXTEND THE COMMENCEMENT OF THE HEARING FOR UP TO AN ADDITIONAL 60 DAYS.
THE ARBITRATOR(S) SHALL PROVIDE A CONCISE WRITTEN STATEMENT OF REASONS
FOR THE AWARD. THE ARBITRATION AWARD MAY BE SUBMITTED TO ANY COURT
HAVING JURISDICTION TO BE CONFIRMED AND ENFORCED.
(e) THE ARBITRATOR(S) WILL HAVE THE AUTHORITY TO DECIDE
WHETHER ANY CLAIM IS BARRED BY THE STATUTE OF LIMITATIONS AND, IF SO,
TO DISMISS THE ARBITRATION ON THAT BASIS. FOR PURPOSES OF THE
APPLICATION OF THE STATUTE OF LIMITATIONS, THE SERVICE ON JAMS UNDER
APPLICABLE JAMS RULES OF A NOTICE OF CLAIM IS THE EQUIVALENT OF THE
FILING OF A LAWSUIT. ANY DISPUTE CONCERNING THIS ARBITRATION PROVISION
OR WHETHER A CLAIM IS ARBITRABLE SHALL BE DETERMINED BY THE
ARBITRATOR(S). THE ARBITRATOR(S) SHALL HAVE THE POWER TO AWARD LEGAL
FEES PURSUANT TO THE TERMS OF THIS FIRST AMENDMENT AND THE LOAN
AGREEMENT.
(f) THIS SECTION DOES NOT LIMIT THE RIGHT OF THE BORROWER OR
THE LENDER TO: (i) EXERCISE SELF-HELP REMEDIES, SUCH AS BUT NOT LIMITED
TO, SETOFF; (ii) INITIATE JUDICIAL OR NONJUDICIAL FORECLOSURE AGAINST
ANY REAL OR PERSONAL PROPERTY COLLATERAL; (iii) EXERCISE ANY JUDICIAL
OR POWER OF SALE RIGHTS, OR (iv) ACT IN A COURT OF LAW TO OBTAIN AN
INTERIM REMEDY, SUCH AS BUT NOT LIMITED TO, INJUNCTIVE RELIEF, WRIT OF
POSSESSION OR
3
APPOINTMENT OF A RECEIVER, OR ADDITIONAL OR SUPPLEMENTARY REMEDIES.
(g) BY AGREEING TO BINDING ARBITRATION, THE PARTIES
IRREVOCABLY AND VOLUNTARILY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY CLAIM. FURTHERMORE, WITHOUT INTENDING IN ANY WAY
TO LIMIT THIS AGREEMENT TO ARBITRATE, TO THE EXTENT ANY CLAIM IS NOT
ARBITRATED, THE PARTIES IRREVOCABLY AND VOLUNTARILY WAIVE ANY RIGHT
THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF SUCH CLAIM. THIS
PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES ENTERING INTO THIS
FIRST AMENDMENT.
5. NO CONTROL BY LENDER. BORROWER AGREES AND ACKNOWLEDGES THAT ALL OF
THE COVENANTS AND AGREEMENTS PROVIDED FOR AND MADE BY BORROWER IN THIS FIRST
AMENDMENT, THE LOAN AGREEMENT, AND IN THE OTHER LOAN DOCUMENTS ARE THE RESULT OF
EXTENSIVE AND ARMS-LENGTH NEGOTIATIONS BETWEEN BORROWER AND LENDER. LENDER'S
RIGHTS AND REMEDIES PROVIDED FOR IN THE LOAN AGREEMENT AND IN THE OTHER LOAN
DOCUMENTS ARE INTENDED TO PROVIDE LENDER WITH A RIGHT TO OVERSEE BORROWER'S
ACTIVITIES AS THEY RELATE TO THE LOAN TRANSACTIONS PROVIDED FOR IN THE LOAN
AGREEMENT, WHICH RIGHT IS BASED ON LENDER'S VESTED INTEREST IN BORROWER'S
ABILITY TO PAY THE NOTES AND PERFORM THE OTHER OBLIGATIONS. NONE OF THE
COVENANTS OR OTHER PROVISIONS CONTAINED IN THE LOAN AGREEMENT SHALL, OR SHALL BE
DEEMED TO, GIVE LENDER THE RIGHT OR POWER TO EXERCISE CONTROL OVER, OR OTHERWISE
IMPAIR, THE DAY-TO-DAY AFFAIRS, OPERATIONS, AND MANAGEMENT OF BORROWER; PROVIDED
THAT IF LENDER BECOMES THE OWNER OF ANY STOCK OF ANY ENTITY, WHICH ENTITY OWNS
AN INTEREST IN BORROWER, WHETHER THROUGH FORECLOSURE OR OTHERWISE, LENDER
THEREAFTER SHALL BE ENTITLED TO EXERCISE SUCH LEGAL RIGHTS AS IT MAY HAVE BY
BEING A SHAREHOLDER OF SUCH ENTITY.
6. Release. Borrower and Guarantors on their own behalf and on behalf of their
predecessors, successors and assigns (collectively, the "RELEASING PARTIES"),
hereby acknowledge and stipulate that as of the date of the execution of this
First Amendment, none of the Releasing Parties has any claims or causes of
action of any kind whatsoever against Lender or any of its officers, directors,
employees, agents, attorneys, or representatives, or against any of their
respective predecessors, successors, or assigns. Each of the Releasing Parties
hereby forever releases, remises, discharges and holds harmless Lender and all
of its officers, directors, employees, agents, attorneys, and representatives,
and all of their respective predecessors, successors, and assigns, from any and
all claims, causes of action, demands, and liabilities of any kind whatsoever,
whether direct or indirect, fixed or contingent, liquidated or non-liquidated,
disputed or undisputed, known or unknown, which any of the Releasing Parties has
or may acquire in the future relating in any way
4
to any event, circumstance, action, or failure to act from the beginning of time
through the date of the execution of this First Amendment.
7. Lien Continuation: Miscellaneous. The liens granted in the Loan
Documents are hereby ratified and confirmed as continuing to secure the payment
of the Notes. Nothing herein shall in any manner diminish, impair or extinguish
the Notes, as may be modified and increased under the Loan Agreement or the
liens securing the Notes. The liens granted in the Loan Documents are not
waived. The Security Agreement is specifically amended to secure Term Note B and
each other Note and all Swap Contracts. Borrower ratifies and acknowledges the
Loan Documents as valid, subsisting, and enforceable and agrees that the
indebtedness evidenced by the Notes is just, due, owing and unpaid, and is
subject to no offsets, deductions, credits, charges or claims of whatsoever kind
or character, and further agrees that all offsets, credits, charges and claims
of whatsoever kind or character are fully settled and satisfied.
8. Defined Terms. Words and terms used herein which are defined in the
Loan Agreement are used herein as defined therein, except as specifically
modified by the terms of this First Amendment. Terms used in this First
Amendment which are not defined in the Loan Agreement are used therein as herein
defined.
9. Miscellaneous.
9.1. Preservation of the Loan Agreement. Except as specifically amended
and modified by the terms of this First Amendment, all of the terms, provisions,
covenants, warranties, and agreements contained in the Loan Agreement and in the
other Loan Documents shall remain in full force and effect (any irreconcilable
conflicts or inconsistencies between the terms of this First Amendment and the
Loan Agreement, or any other Loan Document, shall be governed and controlled by
this First Amendment).
9.2. Counterparts. This First Amendment may be executed in two or more
counterparts, and it shall not be necessary that any one of the counterparts be
executed by all of the parties hereto. Each fully or partially executed
counterpart shall be deemed an original, but all such counterparts taken
together shall constitute but one and the same instrument.
9.3. Joinder. Each of the Guarantors join in the execution of this
First Amendment to join in the release set forth in numerical section 6 above
and to evidence that their Guaranty remains in full force and effect and is not
limited or impaired as a result of the execution and delivery of this First
Amendment by Borrower.
9.4. NO ORAL AGREEMENTS. THIS WRITTEN AGREEMENT AND THE OTHER WRITTEN
LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NOT UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
9.5. ACKNOWLEDGMENT. BORROWER HAS BEEN ADVISED BY LENDER TO SEEK THE
ADVICE OF AN ATTORNEY AND AN ACCOUNTANT IN CONNECTION WITH THE COMMERCIAL LOANS
EVIDENCED BY THE NOTES;
5
AND BORROWER HAS HAD THE OPPORTUNITY TO SEEK THE ADVICE OF AN ATTORNEY AND
ACCOUNTANT OF BORROWER'S CHOICE IN CONNECTION WITH THE COMMERCIAL LOANS
EVIDENCED BY THE NOTES.
IN WITNESS WHEREOF, the parties have executed this First Amendment as
of the date first above written.
POWELL INDUSTRIES, INC.
By: /s/ DON R. MADISON
---------------------------------
Don R. Madison
Vice President
Chief Financial Officer
BORROWER
BANK OF AMERICA, N.A.
By: /s/ DANIEL J. LINTNER
---------------------------------
Name: Daniel J. Litner
-------------------------------
Title: Vice President
------------------------------
LENDER
6
EXHIBIT 21.1
SUBSIDIARIES OF POWELL INDUSTRIES, INC.
NAME OF DOMESTIC SUBSIDIARY STATE OF INCORPORATION
- --------------------------- ----------------------
Delta-Unibus Corp. Illinois
Powell Electrical Manufacturing Co. Delaware
Powell Power Electronics Company, Inc. Delaware
Powell-Process Systems, Inc. (Inactive) Utah
Powell-ESCO Company Texas
Unibus, Inc. Ohio
Powell Energy Systems Inc. (Inactive) Nevada
Transdyn Controls, Inc. California
Traction Power Systems, Inc. Delaware
NAME OF FOREIGN SUBSIDIARY COUNTRY OF INCORPORATION
- -------------------------- ------------------------
Powell Foreign Sales Corporation Barbados, West Indies
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report (the "Report") of Powell
Industries, Inc. (the "Company") on Form 10-K for the period ending October 31,
2002 as filed with the Securities and Exchange Commission on the date hereof, I,
Thomas W. Powell, President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly represents, in all
material respects, the financial condition and results of
operations of the Company.
Date: December 31, 2002 /s/ THOMAS W. POWELL
-------------------------------------
Thomas W. Powell
President and Chief Executive Officer
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report (the "Report") of Powell
Industries, Inc. (the "Company") on Form 10-K for the period ending October 31,
2002 as filed with the Securities and Exchange Commission on the date hereof, I,
Don R. Madison, Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly represents, in all
material respects, the financial condition and results of
operations of the Company.
Date: December 31, 2002 /s/ DON R. MADISON
------------------------------------------
Don R. Madison
Vice President and Chief Financial Officer
