-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GEAetu73g3rMJpo+LbyP+EWzi0Ri+fGENn/Zvvg2wJZsvtmXFiSoZolQNb5OyHnk ygKQu1OJr4sDkJ0WSyFNLg== 0000950152-97-002077.txt : 19970324 0000950152-97-002077.hdr.sgml : 19970324 ACCESSION NUMBER: 0000950152-97-002077 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970321 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LINCOLN ELECTRIC CO CENTRAL INDEX KEY: 0000059527 STANDARD INDUSTRIAL CLASSIFICATION: METALWORKING MACHINERY & EQUIPMENT [3540] IRS NUMBER: 340359955 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-01402 FILM NUMBER: 97560545 BUSINESS ADDRESS: STREET 1: 22801 ST CLAIR AVE CITY: CLEVELAND STATE: OH ZIP: 44117 BUSINESS PHONE: 2164818100 10-K405 1 LINCOLN ELECTRIC ANNUAL REPORT 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 Commission File No. 0-1402 THE LINCOLN ELECTRIC COMPANY (Exact name of registrant as specified in its charter) Ohio 34-0359955 (State of incorporation) (I.R.S. Employer Identification No.) 22801 St. Clair Avenue, Cleveland, Ohio 44117 (Address of principal executive offices) (Zip Code) (216) 481-8100 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Shares, without par value Class A Common Shares, without par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark 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 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] The aggregate market value of the voting common stock held by non-affiliates as of February 28, 1997 was $274,220,260 (affiliates, for this purpose, have been deemed to be Directors of the Company, and certain significant shareholders). The number of shares outstanding of the registrant's classes of common stock as of February 28, 1997 were as follows: Common Shares..............................10,488,212 Class A Common Shares......................13,837,697 Class B Common Shares...................... 486,772 ---------- Total outstanding shares...........24,812,681 ========== DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's proxy statement for the annual meeting of shareholders to be held on May 27, 1997 are hereby incorporated by reference into Part III. 1 2 PART I Item 1. Business -------- As used in Item 1 of this report, the term "Company", except as otherwise indicated by the context, means The Lincoln Electric Company and its subsidiaries. The Lincoln Electric Company began operations in 1895 and was incorporated under the laws of the State of Ohio in 1906. The Company is a full-line manufacturer of welding and cutting products and integral horsepower industrial electric motors. Welding products include arc welding power sources, wire feeding systems, robotic welding packages, fume extraction equipment, consumable electrodes and fluxes. The Company's welding product offering also includes regulators and torches used in oxy-fuel welding and cutting. Sales of welding products accounted for 93% of the Company's net sales in 1996. The arc welding power sources and wire feeding systems manufactured by the Company range in technology from basic units used for light manufacturing and maintenance to highly sophisticated machines for robotic applications, high production welding and fabrication. Three primary types of arc welding electrodes are produced: (1) coated manual or stick electrodes, (2) solid electrodes produced in coil form for continuous feeding in mechanized welding, and (3) cored electrodes produced in coil form for continuous feeding in mechanized welding. The integral horsepower electric motors manufactured by the Company range in size from 1/3 to 1,250 horsepower. The Company's products are sold in both domestic and international markets. In the domestic market, they are sold directly by the Company's own sales organization as well as by distributors. In the international markets, the Company's products are sold principally by foreign subsidiary companies. The Company also has an international sales organization comprised of Company employees and agents who sell products from the Company's various manufacturing sites to distributors, agents, dealers and product users that operate in more than eighty-six countries. The Company has manufacturing facilities located in the United States, Australia, Canada, Mexico, England, France, Ireland, Italy, the Netherlands, Norway and Spain. In addition, the Company is adding manufacturing capacity in the Asia Pacific region. See Note G to the consolidated financial statements with respect to geographic area information. The Company is not dependent on a single customer or a few customers. The loss of any one customer would not have a material adverse effect on its business. The Company's business is not seasonal. Conditions in the arc welding industry are highly competitive. The Company believes that it is one of the largest manufacturers of consumables and equipment in a field of three or four major domestic competitors and numerous smaller competitors. The Company continues to pursue strategies to heighten its competitiveness in international markets. Competition in the electric arc welding industry is on the basis of price, brand preference, product quality and performance, warranty, delivery, service and technical support. All of these factors have contributed to the Company's position as one of the leaders in the industry. Virtually all of the Company's products may be classified as standard commercial articles and are manufactured for stock. The Company believes its products are unique because of its highly trained technical sales force and the support of its welding research and development staff which allow it to uniquely assist the consumers of its products in optimizing their welding applications. The Company utilizes this technical expertise to present its Guaranteed Cost Reduction Program to end users in which the Company guarantees that the user will save money in its manufacturing process when it utilizes the Company's products. This allows the Company to 2 3 introduce its products to new users and to establish and maintain very close relationships with its consumers. This close relationship between the technical sales force and the direct consumers, together with its supportive relationship with its distributors, who are particularly interested in handling the broad range of the Company's products, is an important element of the Company's market success and a valuable asset of the Company. The principal raw materials essential to the Company's business are various chemicals, steel, copper and aluminum, all of which are normally available for purchase in the open market. The Company's operations are not materially dependent upon patents, licenses, franchises or concessions. The Company's facilities are subject to environmental control regulations. To date, compliance with these environmental regulations has not had a material effect on the Company's earnings. The Company conducts a significant amount of its business and has a number of operating facilities in countries outside the United States. As a result, the Company is subject to business risks inherent in non-U.S. activities, including political uncertainty, import and export limitations, exchange controls and currency fluctuations. The Company believes risks related to its foreign operations are mitigated due to the political and economic stability of the countries in which its largest foreign operations are located. Research activities relating to the development of new products and the improvement of existing products in 1996 were all Company-sponsored. These activities were primarily related to the development of new products. The number of professional employees engaged full-time in these research activities was 263. Refer to Note A to the consolidated financial statements with respect to total costs of research and development. The number of persons employed by the Company worldwide at December 31, 1996 was 5,971. The table below sets forth consolidated net sales by product line for the most recent three years:
(IN THOUSANDS OF DOLLARS) 1996 1995 1994 ---------- ---------- -------- Arc Welding and Other Welding Products $1,031,271 $ 956,642 $843,643 93% 93% 93% All Other 77,873 75,756 62,961 7% 7% 7% ---------- ---------- -------- $1,109,144 $1,032,398 $906,604 ========== ========== ========
Item 2. Properties ---------- The Company's corporate headquarters and principal United States manufacturing facilities are located in the Cleveland, Ohio area. Total Cleveland area property consists of 223 acres, of which present manufacturing facilities comprise an area of approximately 2,587,000 square feet. Current utilization of existing facilities is high and the Company is adding capacity as necessary. In addition to the principal facilities in Ohio, the Company operates two other manufacturing locations in the United States and 14 manufacturing locations in 10 foreign countries, the locations of which are as follows: 3 4 Unites States: Gainesville, Georgia; Monterey Park, California. Australia: Sydney. Canada: Toronto. England: Sheffield. (2) France: Grand-Quevilly. Ireland: Rathnew. Italy: Pianoro; Milano; Celle Ligure. Mexico: Mexico City. Netherlands: Nijmegen. Norway: Andebu; Stavern. Spain: Barcelona. In addition, a plant is under construction in Cikarang, Indonesia. Manufacturing facilities located in Germany, Venezuela, Japan and Brazil were closed in early 1994 under the Company's restructuring program. All property relating to the Company's Cleveland, Ohio headquarters and manufacturing facilities is owned outright by the Company. In addition, the Company maintains operating leases for its distribution centers and many sales offices throughout the world. See Note J to the consolidated financial statements with respect to leases. Most of the Company's foreign subsidiaries own manufacturing facilities in the foreign country where they are located. At December 31, 1996, $5.5 million of indebtedness was secured by property, plant and equipment. Item 3. Legal Proceedings ----------------- The Company is subject, from time to time, to a variety of civil and administrative proceedings arising out of its normal operations, including, without limitation, product liability claims, health, safety and environmental claims and employment-related actions. Among such proceedings are the cases described below. The Company has been named a defendant, along with a large number of unidentified "John Doe" defendants, in a class action complaint filed on January 16, 1997 in Superior Court, Los Angeles County, California, captioned PACIFIC DESIGN CENTER AND AUTOMOBILE CLUB OF CALIFORNIA V. THE LINCOLN ELECTRIC COMPANY. Two building owners, purportedly on behalf of themselves and other building owners in Los Angeles County, allege that the E70T-4 category of welding electrodes manufactured by the Company and other defendants was defective for use in "moment resisting" steel frame buildings constructed in seismically sensitive areas. According to the amended complaint, which was filed on January 22, 1997, there may be 1,500 such buildings in Los Angeles County, and damages claimed to have been discovered after the Northridge earthquake of January 1994, including the cost of inspection, retrofitting and repair, loss of income and diminution in value of the buildings, exceed $1 billion. The plaintiffs also seek punitive damages in an unspecified amount. The Company has removed the case to the Federal District Court of California, Central District. In addition to the PACIFIC DESIGN CENTER class action lawsuit, the Company has been named, in filings made on or after May 1996 in the Superior Court of California, as a defendant or co-defendant in eight additional lawsuits filed by building owners in Los Angeles County arising from alleged property damage claimed to have been discovered after the Northridge earthquake of January 1994. These cases, all of which are in very preliminary stages and two of which have been removed to the Federal District Court of California, Central District, include claims for compensatory damages and in some instances punitive damages, in some instances without specification of amount, relating to the sale and use of the E70T-4 category of welding electrode. 4 5 The Company intends to contest the litigation vigorously. The Company is co-defendant in fifteen cases involving twenty-eight plaintiffs alleging that exposure to manganese contained in arc welding electrode products caused the plaintiffs to develop a neurological condition known as manganism. The plaintiffs seek compensatory and, in most instances, punitive damages, usually for unspecified sums. Four similar cases have been tried, all resulting in defense verdicts. The Company is also one of several co-defendants in a case alleging that exposure to welding fumes generally impaired the respiratory system of seven plaintiffs. The plaintiffs seek compensatory and punitive damages for unspecified sums. Since 1990, fifty-two similar cases have resulted in twenty-two voluntary dismissals, eight defense verdicts or summary judgments and twenty-two settlements for immaterial amounts. Claims pending against the Company alleging asbestos induced illness total approximately 18,500; in each instance, the Company is one of a large number of defendants. The asbestos claimants seek compensatory and punitive damages, in most cases for unspecified sums. Twenty-three cases have been tried to defense verdicts. Voluntary dismissals on such claims total approximately 15,000; summary judgments for the defense total 81. Included within the foregoing asbestos claims are approximately 930 claims pending in the Circuit Court of Kanawha County, West Virginia. In September 1995, a jury returned a special interrogatory finding that products manufactured and/or sold by the Company and three other welding companies were defective in certain respects at the time of manufacture and/or sale. Issues relating to whether or not the claimants were exposed to Company products and, if so, whether Company products caused any injury, have not been addressed. Nor has there been any discovery relating to the claimants and their potential compensatory damage claims. The Court has dismissed punitive damage claims. The Company, together with hundreds of other co-defendants, is a defendant in state court in Morris County, Texas, in litigation on behalf of 3,025 claimants, all prior employees of a local pipe fabricator, alleging that occupational exposures caused a wide variety of illnesses. The plaintiffs seek compensatory and punitive damages of unspecified sums. The Company bears the cost of defending its product liability cases arising under current policies and filed after 1990, with some contribution by its lead insurance carrier if an aggregate threshold is reached. In many welding fume cases where there are multiple defendants, cost sharing efficiencies are arranged. Defense and indemnity costs of the Company in product liability cases involving injuries allegedly resulting from exposure to fumes and gases in the welding environment may be affected by the outcome of pending litigation with the St. Paul Fire and Marine Insurance Company, in which St. Paul Fire and Marine Insurance Company and the Company disagree about the allocation among various liability insurance policies of defense and indemnity costs of welding fume cases. The dispute, LINCOLN ELECTRIC V. ST. PAUL FIRE AND MARINE INSURANCE COMPANY, ET. AL., is proceeding in U.S. District Court for the Northern District of Ohio. Whether the Company or its insurer bears certain defense costs relating to the Los Angeles steel frame building litigation, referenced above, may also be subject to judicial determination. On March 13, 1997, the Company filed complaints for declaratory relief against St. Paul Fire and Marine Insurance Company in the United States District Court for the Central District, and in Superior Court, Los Angeles County, seeking among other things a declaration that, where complaints allege at least the potential of property damage occurring at least in part before August 1, 1985, St. Paul has a duty to pay the Company's defense costs. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- No matters were submitted to a vote of security holders during the quarter ended December 31, 1996. 5 6 PART II Item 5. Market for the Registrant's Common Stock and Related Shareholder ---------------------------------------------------------------- Matters ------- The Company's Common Shares (LECO) and Class A Common Shares (LECOA) are traded on the NASDAQ market. The number of record holders of Common Shares and Class A Common Shares at December 31, 1996 was 2,448 and 2,497, respectively. There is no public trading market for Class B Common Shares, which are only issued to the Company's Employee Stock Ownership Plan. Quarterly high and low stock prices and dividends declared for the last two years were:
1996 1995** ---------------------------------------------------- ---------------------------------------------------- LECO* LECOA* Dividends LECO* LECOA* Dividends High Low High Low Declared High Low High Low Declared ---- --- ---- --- -------- ---- --- ---- --- -------- March 31 $27.00 $23.25 $27.50 $22.25 $0.12 $25.00 $17.00 $0.10 June 30 35.75 26.00 30.50 26.75 0.12 38.00 24.25 $37.25 $29.50 0.10 September 30 35.25 29.25 31.25 24.50 0.12 34.00 26.50 31.00 27.38 0.10 December 31 33.50 27.50 31.25 26.25 0.12 27.50 21.00 28.25 21.50 0.12 - ------------- *Source: NASDAQ; Ohio Dealers' Data Service prior to NASDAQ registration in June 1995. **On June 12, 1995, holders of record of the Company's outstanding voting common shares as of June 5, 1995, received a dividend of one Class A Common Share for each outstanding share of the Company's voting common shares. Retroactive effect has been given to the stock dividend in the above per share data.
6 7 Item 6. Selected Financial Data -----------------------
Year Ended December 31 --------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (In thousands of dollars, except per share data) Net sales $1,109,144 $1,032,398 $ 906,604 $ 845,999 $ 853,007 Income (loss) before cumulative effect of accounting change 74,253 61,475 48,008 (40,536) (45,800) Cumulative effect of change in accounting for income taxes 2,468 ---------- ---------- ---------- ---------- ---------- Net income (loss) $ 74,253 $ 61,475 $ 48,008 $ (38,068) $ (45,800) ========== ========== ========== ========== ========== Per share: Income (loss) before cumulative effect of accounting change $ 2.99 $ 2.63 $ 2.19 $ (1.87) $ (2.12) Cumulative effect of change in accounting for income taxes .12 ---------- ---------- ---------- ---------- ---------- Net income (loss) $ 2.99 $ 2.63 $ 2.19 $ (1.75) $ (2.12) ========== ========== ========== ========== ========== Cash dividends declared $ 0.48 $ 0.42 $ 0.38 $ 0.36 $ 0.36 ========== ========== ========== ========== ========== Total assets $ 647,199 $ 617,760 $ 556,857 $ 559,543 $ 603,347 ========== ========== ========== ========== ========== Long-term debt $ 64,148 $ 93,582 $ 194,831 $ 216,915 $ 221,470 ========== ========== ========== ========== ==========
Net income for the years ended December 31, 1994, 1993 and 1992 included after-tax restructuring (income) expenses of $(2.7) million, $40.9 million and $23.9 million, respectively. Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- GENERAL The Company is one of the world's largest designers and manufacturers of arc welding and cutting products, manufacturing a full line of arc welding equipment, consumable welding products and other welding products which represented 93% of the Company's 1996 net sales. The Company also manufactures a broad line of integral horsepower industrial electric motors. For the third consecutive year, in 1996, the Company reported its highest net sales and net income in its history. Consolidated net sales increased to $1.1 billion or 7.4% from 1995. Net income increased 20.8% to $74.3 million or $2.99 per share. The increase in net sales was attributable to strong performance from both the U.S. and non-U.S. operations. The increased net income was attributable to increased sales combined with cost-control programs, lower interest expense and the increased utilization of tax loss carryforwards in certain non-U.S. subsidiaries generating income in 1996. In the U.S., the increase in sales was largely due to the introduction of the SourceOne distributor program in 1996. U.S. exports to the Russia, Africa and Middle East, Asia Pacific and Latin American regions and increased subsidiary sales in Canada, Europe and Australia contributed to an overall improvement in international sales. The Company expects to increase its investments in developing markets by adding manufacturing capacity in the Asia Pacific and Latin American regions. The Company believes that the high quality of its products, 7 8 advanced engineering expertise and strong distributor network, coupled with its large technically trained sales force, has enabled the Company to continue to be a key participant in the global market place. The Company is one of only a few worldwide broad line manufacturers of both arc welding equipment and consumable products. With highly competitive conditions in the welding industry, the Company will continue to emphasize its status as a single source supplier, which it believes is most capable of meeting the broadest range of its customer's welding needs. Research and development expenditures were $19.8 million in 1996 compared with $19.7 million in 1995. Included in 1996 expense is a $2.0 million charge for in-process research and development acquired in the Company's purchase of the Italian-based Electronic Welding Systems. The remaining expenditures were primarily related to the development of new products. The Company believes that over the past three years, expenditures for research and development activities have been adequate to maintain the Company's leadership position in its product lines and to introduce new products at an appropriate rate to sustain future growth. RESULTS OF OPERATIONS The following table shows the Company's results of operations for the years ended December 31, 1996, 1995 and 1994:
Year ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- Amount % of Sales Amount % of Sales Amount % of Sales ------ ---------- ------ ---------- ------ ---------- Net Sales $1,109.1 100.0% $1,032.4 100.0% $ 906.6 100.0% Cost of Goods Sold 686.5 61.9% 634.6 61.5% 556.2 61.3% -------- -------- -------- -------- -------- -------- Gross Profit 422.6 38.1% 397.8 38.5% 350.4 38.7% Distribution Cost/Selling General & Adm. Exp 310.3 28.0% 289.8 28.0% 261.7 28.9% Restructuring (Income) (2.7) (0.3%) -------- -------- -------- -------- -------- -------- Operating Income 112.3 10.1% 108.0 10.5% 91.4 10.1% Other Income 10.4 0.9% 2.2 0.2% 3.1 0.3% Interest Expense, Net 4.8 0.4% 10.6 1.0% 14.3 1.6% -------- -------- -------- -------- -------- -------- Income Before Income Taxes 117.9 10.6% 99.6 9.7% 80.2 8.8% Income Taxes 43.6 3.9% 38.1 3.7% 32.2 3.5% -------- -------- -------- -------- -------- -------- Net Income $ 74.3 6.7% $ 61.5 6.0% $ 48.0 5.3% ======== ======== ======== ======== ======== ========
1996 COMPARED TO 1995 Net Sales. Net sales for 1996 increased 7.4% to $1,109.1 million from $1,032.4 million in 1995. Third party sales from U.S. operations increased by 5.8% to $753.0 million from $711.9 million in 1995. Included in U.S. sales were international export sales of $90.7 million for 1996, which increased $8.9 million or 10.9% from 8 9 $81.8 million in 1995. Non-U.S. third party sales increased 11.1% to $356.1 million from $320.5 million in 1995. Net sales increases in all international regions were principally volume driven. Changes in foreign currencies against the U.S. dollar did not have a significant effect on non-U.S. sales for 1996. U. S. third party sales benefited from a strong SourceOne distributor program and growth in export sales principally to the Russia, Africa and Middle East, Asia Pacific and Latin American regions. Non-U.S. third party sales increased in the Canadian, European, and Australian markets. Both the non-U.S. and export sales have been improved through an increased regional sales focus and for 1996 amounted to 40.3% of the Company's sales. Gross Profit. Gross profit improved to $422.6 million in 1996 from $397.8 million in 1995. Gross profit as a percentage of sales was 38.1% in 1996. U.S. gross profit as a percentage of sales has shown a slight improvement as start-up costs associated with the new motor facility have tapered off. In addition, cost-control programs and manufacturing efficiencies have offset increased labor and product liability defense costs. Non-U.S. gross profit as a percentage of sales has been negatively affected by market penetration strategies in developing markets, as well as competitive pressures in the European and Australian markets. Distribution Cost/Selling, General and Administrative (SG&A) Expenses. Distribution cost/selling, general and administrative expenses were $310.3 million in 1996, or 28.0% of sales, as compared to $289.8 million, or 28.0% of sales in 1995. SG&A expenses for 1996 include non-recurring charges of $3.4 million ($2.1 million after-tax, or $0.08 per share) for the costs of settling a class action lawsuit over performance awards under the Company's 1988 Incentive Equity Plan, a $2.0 million charge ($1.2 million after-tax, or $0.05 per share) for acquired in-process research and development relating to the acquisition of Electronic Welding Systems; and a $5.5 million charge ($3.3 million after-tax, or $0.13 per share) for executive retirement and severance costs. SG&A expenses for 1995 were affected by the devaluation of the Mexican peso resulting in a charge to operations without tax benefit of approximately $2.3 million ($0.10 per share) and a charge for $4.0 million ($2.5 million after-tax, or $0.11 per share) for severance costs for retiring executives. Excluding the one-time charges described above, SG&A expenses were 27.0% of sales in 1996 compared with 27.5% in 1995. The decrease in SG&A as a percentage of sales is principally a result of cost-control programs to maintain costs in certain areas while increasing sales volume. The increase in SG&A expenses is attributable to higher freight costs on higher sales volume, incremental promotional costs associated with the SourceOne distributor program and higher wage and salary costs. Included in SG&A expenses are the costs related to the Company's discretionary employee bonus program, net of hospitalization costs. Other Income. Other income includes a gain of $8.4 million ($5.1 million after-tax, or $0.20 per share) relating to the sale of the Company's gas distribution businesses. The impact of this sale on future operations is not significant. Interest Expense, Net. Interest expense, net, was $4.8 million in 1996, a decrease of 54.1% from $10.6 million in 1995. This decrease reflects the lower debt levels as a result of the 1995 recapitalization and cash flow from operations. Income Taxes. Income taxes in 1996 were $43.6 million on income before income taxes of $117.9 million, an effective rate of 37.0%, as compared with income taxes of $38.1 million in 1995 on income before income taxes of $99.6 million or an effective tax rate of 38.3%. The decrease in the effective tax rate was principally due to an increase in the utilization of net operating loss carryforwards by the Company's non-U.S. subsidiaries. 9 10 Net Income. Net income for 1996 was $74.3 million as compared with net income of $61.5 million in 1995, or an increase of 20.8%. The net effect of the non-recurring items as described above reduced 1996 net income by $1.5 million or $0.06 per share. See Note A for supplemental earnings per share information regarding the pro forma impact of the 1995 recapitalization. 1995 COMPARED TO 1994 Net Sales. Net sales for 1995 were $1,032.4 million, an increase of $125.8 million or 13.9% from $906.6 million for 1994. Third party sales from the Company's U.S. operations were $711.9 million in 1995 or 11.0% higher than 1994 sales of $641.6 million, attributable to volume and price increases in both the domestic and export markets. Non-U.S. third party sales in 1995 were $320.5 million compared with $265.0 million in 1994, an increase of 20.9%. This increase was the result of improvement in the Company's international operations as well as improved economic conditions in the markets served, and the strengthening of certain foreign currencies against the U.S. dollar. Strengthening foreign currencies against the U.S. dollar increased non-U.S. sales by approximately $15.3 million or 5.8% during the year. European sales benefited from the previously reported restructuring of the Company's operations, increased customer focus and a general improvement in local economies which appeared to soften during the latter months in 1995. U.S. third party export sales were $81.8 million in 1995, an increase of $17.4 million or 27.0% from $64.4 million in 1994. This increase in export sales largely reflects improved worldwide economic conditions and an increased sales focus by the Company in the non-U.S. market. Gross Profit. Gross profit increased to $397.8 million in 1995 as compared with $350.4 million in 1994. Gross profit as a percentage of sales was flat in 1995 compared to 1994. Increased raw material and manufacturing overhead costs plus start-up costs associated with the opening of a new motor plant were offset by greater absorption of manufacturing expenses as a result of higher production volumes in both the U.S. and Europe, selected price increases and cost decreases by volume purchases. Distribution Cost/Selling, General and Administrative (SG&A) Expenses. Distribution cost/selling, general and administrative expenses were $289.8 million in 1995, or 28.0% of sales, as compared with $261.7 million, or 28.9% of sales in 1994. The decrease in SG&A expenses as a percentage of sales is due to improved economies of scale achieved by higher worldwide sales volume. SG&A for 1995 was affected by the devaluation of the Mexican peso resulting in a charge to operations without tax benefit of approximately $2.3 million ($3.1 million in 1994). In addition, 1995 expenses included $4.0 million of severance costs for retiring executives. Included in SG&A expenses are the costs related to the Company's discretionary employee bonus program, net of hospitalization costs deducted therefrom ($66.4 million in 1995 and $59.6 million in 1994, or an increase of 11.4%). Interest Expense, Net. Interest expense, net, was $10.6 million in 1995 as compared with $14.3 million in 1994, a decrease which reflects the effect of lower debt levels as a result of the recapitalization and lower interest rates. The overall effective interest rate is higher than the prior year because a greater proportion of the remaining debt is comprised of higher-rate senior debt. Income Taxes. Income taxes in 1995 were $38.1 million on income before income taxes of $99.6 million, an effective rate of 38.3%, as compared with income taxes of $32.2 million in 1994 on income before income taxes of $80.2 million or an effective tax rate of 40.1%. The decrease in the effective tax rate from the prior year is principally the result of lower non-U.S. losses without tax benefit and a lower effective tax rate on non-U.S. income. 10 11 Net Income. Net income for 1995 was $61.5 million as compared with net income of $48.0 million in 1994, or an increase of 28.1%. 1994 net income benefited from a net reversal of $2.7 million of restructuring charges recorded previously. LIQUIDITY AND CAPITAL RESOURCES Increased cash flow from operations improved the Company's financial position in 1996. During 1996, the Company reduced its outstanding borrowings by 37.4% from $123.4 million at December 31, 1995 to $77.3 million at December 31, 1996. Total debt to total capitalization improved to 16.5% at December 31, 1996 from 27.2% at December 31, 1995. Management anticipates that the Company will be able to satisfy cash requirements for its ongoing businesses for the foreseeable future primarily with cash generated by operations and, if necessary, borrowings under its existing credit facilities. Initial start-up capital for anticipated expansion in the Asia Pacific region will be funded by available cash provided from operations. Cash provided from operations was $107.8 million in 1996, an increase of $42.3 million or 64.6% from $65.5 million in 1995. The Company's inventory management programs resulted in a decrease of $9.6 million in inventory levels during 1996 despite the increased sales volume. Accounts receivable increased largely due to the higher sales volume in 1996; however, on average, there was an improvement in receivable collection periods at December 31, 1996 over the prior year. Capital expenditures during 1996 were $39.8 million, a 17.7% reduction from $48.4 million in 1995. In 1995, there were large investments in the new electric motor plant in Cleveland, Ohio, and other areas, which did not recur in 1996. Capital expenditures for 1996 included the acquisition of the Italian-based Electronic Welding Systems, a designer of state-of-the-art welding power supplies and plasma cutting equipment. The Company expects to add capacity and modernize facilities selectively in both the domestic and international markets. Cash flows from investing activities include the net cash proceeds of $17.4 million from the sale of the Company's Louisiana and Alaska gas distribution businesses during the third quarter 1996 . A total of $11.9 million in dividends was paid during 1996. In January 1997, the Board of Directors declared a cash dividend of $0.15 per share, payable on April 15, 1997, to shareholders of record on March 31, 1997. RECAPITALIZATION The Company completed its recapitalization in 1995 which included the authorization of Class A Common Shares, a new class of non-voting common shares. The recapitalization included a distribution payable on June 12, 1995, to holders of record of the Company's outstanding voting common shares as of June 5, 1995, of a dividend of one Class A Common Share for each outstanding share of the Company's voting common shares. Prior to the adoption of the recapitalization, the Company had two authorized and outstanding classes of voting common shares. As a result, the Company's authorized capital consists of two voting classes, the Common Shares, without par value (formerly the "Common Stock"), and the Class B Common Shares, without par value (formerly the "Class A Common Stock"), and one non-voting class, the Class A Common Shares (the new "Class A Common Shares"). In addition, the recapitalization included an increase in the total number of authorized common shares of all classes from 17 million to 62 million shares consisting of 30 million Common Shares, 30 million Class A Common Shares and 2 million Class B Common Shares. 11 12 In 1995, the Company successfully completed a public offering by selling 2,863,507 Class A Common Shares and realized $81.2 million in proceeds, net of the underwriters' discount. The proceeds from the offering were used to reduce debt which has improved the Company's leverage and enhanced its financial position. In December 1995, the Company entered into a new $200 million unsecured, multi-currency Credit Agreement ("Credit Agreement"). The Credit Agreement provides more favorable pricing levels and the financial covenants which require interest coverage and funded debt-to-capital ratios are less restrictive, a result of the Company's improved liquidity and financial position. See Note D to the consolidated financial statements for additional information regarding the terms and financial covenants of the Company's borrowing arrangements. At December 31, 1996, no amounts were outstanding under the Credit Agreement. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS From time to time, information provided by the Company, statements by its employees or information included in its filings with the Securities and Exchange Commission (including those portions of this Management's Discussion and Analysis that refer to the future) may contain forward-looking statements that are not historical facts. Those statements are "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, and the Company's future performance, operating results, financial position and liquidity, are subject to a variety of factors that could materially affect results, including: - - Competition. The Company operates in a highly competitive global environment and is subject to a variety of competitive factors such as pricing, the actions and strength of its competitors, and the Company's ability to maintain its position as a recognized leader in welding technology. The intensity of foreign competition is substantially affected by fluctuations in the value of the United States dollar against other currencies. The Company's competitive position could also be adversely affected should new or emerging entrants become more active in the arc welding business. - - International Markets. The Company's long-term strategy is to increase its share in growing international markets, particularly Asia, Latin America, Central Europe and other developing markets. However, there can be no certainty that the Company will be successful in its expansion efforts. The Company is subject to the currency risks of doing business abroad, and expansion poses challenging demands within the Company's infrastructure. Further, many developing economies have a significant degree of political and economic instability, which may adversely affect the Company's international operations. - - Cyclicality and Maturity of the Welding Industry. The United States arc welding industry is both mature and cyclical. The growth of the domestic arc welding industry has been and continues to be constrained by numerous factors, including the substitution of plastics and other materials in place of fabricated metal parts in many products and structures. Increased offshore production of fabricated steel structures has also cut into the domestic demand for arc welding products. - - Litigation. The Company, like other manufacturers, is subject to a variety of lawsuits and potential lawsuits that arise in the ordinary course of business. See "Item 3. Legal Proceedings" within this report. Also see Note K on Contingencies. While the impact of litigation historically has not been material to the Company, there can be no assurance that this will remain the case, or that insurance coverage will be adequate. - - Operating Factors. The Company is highly dependent on its skilled workforce and efficient production facilities, which could be adversely affected by its labor relations, business interruptions at its domestic 12 13 facilities and short-term or long-term interruptions in the availability of supplies or raw materials or in transportation of finished goods. - - Research and Development. The Company's continued success depends, in part, on its ability to continue to meet customer welding needs through the introduction of new products and the enhancement of existing product design and performance characteristics. There can be no assurances that new products or product improvements, once developed, will meet with customer acceptance and contribute positively to the operating results of the Company, or that product development will continue at a pace to sustain future growth. - - Motor Division. The Company has made substantial capital investments to modernize and expand its production of electric motors. While management believes that the profitability of this investment will improve, success is largely dependent on increased market penetration. The Company is in the process of enhancing its sales and marketing programs. Item 8. Financial Statements and Supplementary Data ------------------------------------------- The response to this item is submitted in a separate section of this report following the signature page. Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure -------------------- None. PART III A definitive proxy statement will be filed pursuant to Regulation 14A of the Securities Exchange Act prior to April 30, 1997. Therefore, information required under this part, unless set forth below, is incorporated herein by reference from such definitive proxy statement.
NAME AGE POSITION - --------------------------- --- --------------------------------------------------------------------- Donald F. Hastings 68 Chairman of the Board since 1992; Chief Executive Officer of the Company 1992-1996; President of the Company 1987-1992. Anthony A. Massaro 53 Chief Executive Officer of the Company since November 1996; President and Chief Operating Officer since April 1996; Corporate Vice President and President Lincoln Europe 1994-1995; Director of International Operations 1993-1994; prior thereto, a corporate officer with Westinghouse Electric Corporation, served as Vice President and then as President and a Member of the Management Committee with responsibilities worldwide.
13 14
NAME AGE POSITION - --------------------------- --- --------------------------------------------------------------------- John M. Stropki 46 Executive Vice President, President North America since October 1995; Senior Vice President, Sales 1994-1995; General Sales Manager 1992-1994; District Manager 1986-1992. H. Jay Elliott 55 Senior Vice President, Chief Financial Officer and Treasurer since April 1996; Vice President, Chief Financial Officer, and Treasurer 1994-1996; International Chief Financial Officer 1993-1994; prior thereto, Assistant Comptroller of The Goodyear Tire & Rubber Company responsible at various times for Corporate Strategic Planning, Finance Director of North American Tires and International Vice President-Finance. Frederick G. Stueber 43 Senior Vice President, General Counsel and Secretary since April 1996; Vice President, General Counsel and Secretary 1995-1996; prior thereto, partner in the law firm of Jones, Day, Reavis & Pogue. William J. Twyble 64 Senior Vice President, Engineering and Marketing since January 1997; Vice President of the Company since April 1996; CEO, Managing Director LEC (Australia) Pty. Ltd. 1988-1996. Richard C. Ulstad 57 Senior Vice President, Manufacturing since May 1996; Senior Vice President, Consumable Division 1994-1996; Vice President-Manufacturing Electrode Division 1992-1994; Superintendent-Electrode Division 1984-1992. Frederick W. Anderson 44 Vice President, Information Technology, Systems Re-engineering since May 1996; Vice President, Manufacturing - Machine Division 1994-1996; Plant Manager Machine and Motor Division 1993-1994; Plant Superintendent 1989-1993. Paul J. Beddia 63 Vice President, Government and Community Affairs since May 1996; Vice President, Human Resources 1989-1996. Dennis D. Crockett 54 Vice President, Consumable Research and Development since 1993; Chief Engineer, Consumables Research and Development 1987-1993. Joseph G. Doria 47 Vice President of the Company since October 1995; President and Chief Executive Officer, Lincoln Electric Co. of Canada 1992 - present; Executive Vice President and Chief Operating Officer, Lincoln Electric Co. of Canada 1990-1992.
14 15
NAME AGE POSITION - --------------------------- --- --------------------------------------------------------------------- Paul F. Fantelli 52 Vice President, Business Development since 1994; Assistant to the Chief Executive Officer 1992-1994; President and Chief Executive Officer of Harris Calorific Division of The Lincoln Electric Co. 1990-1992. Ralph C. Fernandez 50 Vice President of the Company since January 1997, President, Lincoln Electric Latin America since April 1996; Manager, International Support and Assistant to the Chief Operating Officer 1995-1996; Operations Manager 1995; prior thereto, President of WRS, a subsidiary of Westinghouse Electric Corporation 1991-1994. Michael J. F. Gillespie 55 Vice President of the Company since January 1997, President, Lincoln Electric Asia since January 1996; prior thereto, Regional Director, Asia Pacific Region of Esab AB, a manufacturer and distributor of welding products. Charles H. Murray 45 Vice President of the Company since January 1997, President, Lincoln Electric Europe since January 1996; Vice President - Sales, Lincoln Electric Europe 1994-1995; Sales Manager, Lincoln Electric Co. of Canada 1992-1994. Ronald A. Nelson 47 Vice President, Materials and Service since January 1997; Vice President, Machine Research and Development 1994-1996; Chief Engineer-Machine and Motor Division 1993-1994; Service Manager 1989-1993. Gary M. Schuster 42 Vice President, Motor Division since October 1995; General Manager, Motor Division 1993-1995; Manager, Motor Transition Team 1993; Manager, Factory of the Future 1991-1993; Assistant Manager, Quality Assurance 1989-1991. Richard J. Seif 49 Vice President, Marketing since 1994; Director of Marketing 1991-1994. S. Peter Ullman 47 Vice President of the Company since October 1995; President and Chief Executive Officer, Harris Calorific Division of The Lincoln Electric Co. 1993-present; President and Chief Operating Officer, Harris Calorific Division of The Lincoln Electric Co. 1992-1993; District Manager 1988-1992.
15 16
NAME AGE POSITION - --------------------------- --- --------------------------------------------------------------------- Raymond S. Vogt 55 Vice President, Human Resources since May 1996; prior thereto, Vice President, Human Resources, AM International 1995-1996; FMC Corporation, Director of Human Resources, FMC Europe 1995; Director, Human Resources, Food Machinery Group 1991-1995. John H. Weaver 58 Vice President, President, Lincoln Russia, Africa and Middle East since April 1996; Vice President, Export Sales 1994-1996: International Sales Manager 1987-1994.
PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K --------------------------------------------------------------- (a)(1) Financial Statements -------------------- The following consolidated financial statements of the Company are included in a separate section of this report following the signature page: Consolidated Balance Sheets -- December 31, 1996 and 1995 Consolidated Statements of Income -- Years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity -- Years ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows -- Years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements -- December 31, 1996 Report of Independent Auditors (a)(2) Financial Statement Schedules ----------------------------- The following consolidated financial statement schedule of the Company is included in a separate section of this report following the signature page: Schedule II -- Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted. 16 17 (a)(3) Exhibits -------- Exhibit No. Description ----------- ---------------------------------------------------- 3(a) Restated Articles of Incorporation of The Lincoln Electric Company (filed as exhibit 4.1 to the Registration Statement on Form S-3 of The Lincoln Electric Company, as filed and amended on June 26, 1995, SEC Registration No. 33-58881 and incorporated herein by reference and made a part hereof). 3(b) Restated Code of Regulations of The Lincoln Electric Company (filed as Exhibit 2 to the Registration Statement on Form 8-A for the Class A Common Shares of The Lincoln Electric Company filed on June 5, 1995 and incorporated herein by reference and made a part hereof). 4(a) Note Agreement dated November 20, 1991 between The Prudential Insurance Company of America and the Company (filed as Exhibit 4 to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1991, SEC File No. 0-1402 and incorporated by reference and made a part hereof), as amended by letter dated March 18, 1993; 8.98% Senior Note Due November 26, 2003 (filed as Exhibit 4(a) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1992, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof); as further amended by letter dated as of November 19, 1993; 8.98% Senior Note Due November 26, 2003 (filed as Exhibit 4(a) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1993, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof); as further amended by letter dated October 31, 1994 (filed as Exhibit 4(a) to Form 10-Q of The Lincoln Electric Company for the period ended September 30, 1994, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof); and as further amended by letter dated December 20, 1995 (filed as Exhibit 4(a) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 4(b) Credit Agreement dated December 20, 1995 among the Company, the Banks listed on the signature page thereof, and Society National Bank, as Agent (filed as Exhibit 4(b) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(a) The Lincoln Electric Company 1988 Incentive Equity Plan (filed as Exhibit 28 to the Form S-8 Registration Statement of The Lincoln Electric Company, SEC File No. 33-25209 and incorporated herein by reference and made a part hereof). 10(b) Form of Indemnification Agreement (filed as Exhibit 10(b) to Form 10-K of the Lincoln Electric Company for the year ended December 31, 1994, SEC File No. 0-1402 and incorporated herein by reference). 17 18 Exhibit No. Description ----------- ----------------------------------------------------- 10(c) The Lincoln Electric Company Supplemental Executive Retirement Plan, as amended (filed as Exhibit 10(c) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(d) The Lincoln Electric Company Deferred Compensation Plan, as amended (filed as Exhibit 10(d) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(e) Description of Management Incentive Plan (filed as Exhibit 10(e) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(f) Description of Non-Employee Directors' Restricted Stock Plan (filed as Exhibit 10(f) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995 SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(g) The Lincoln Electric Company Non-Employee Directors' Deferred Compensation Plan (filed as Exhibit 10(g) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(h) Retirement Agreement between the Company and Frederick W. Mackenbach dated November 8, 1995 (filed as Exhibit 10(h) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(i) Employment Retirement and Consulting Agreement between the Company and Donald F. Hastings, dated February 14, 1997, filed herewith. 10(j) Employment and Retirement Agreement between the Company and David Fullen, dated December 12, 1996, filed herewith. 10(k) Employment Agreement between the Company and Anthony A. Massaro dated July 14, 1993, as amended on January 1, 1994 (filed as Exhibit 10(e) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1994, SEC File No. 0-1402, and incorporated herein by reference). 10(l) Employment Agreement between the Company and H. Jay Elliott dated June 22, 1993 (filed as Exhibit 10(f) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1994, SEC File No. 0-1402, and incorporated herein by reference). 10(m) Employment Agreement between the Company and Frederick G. Stueber dated February 22, 1995 (filed as Exhibit 10(g) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1994, SEC File No. 0-1402, and incorporated herein by reference). 18 19 Exhibit No. Description ----------- ----------------------------------------------------- 10(n) The Lincoln Electric Company Employee Savings Plan (filed on Form S-8 Registration Statement of The Lincoln Electric Company, SEC file No. 33-64187 and incorporated herein by reference and made a part hereof). 10(o) 1995 Lincoln Stock Purchase Plan (filed on Form S-8 Registration Statement of The Lincoln Electric Company, SEC File No. 33-64189 and incorporated herein by reference and made a part hereof). 11 Computation of earnings per share. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 27 Financial Data Schedule. (b) The Company did not file any reports on Form 8-K during the fourth quarter of 1996. (c) The exhibits which are listed under Item 14 (a) (3) are filed or incorporated by reference herein. (d) The financial statement schedule which is listed under item 14 (a) (2) is filed hereunder. Upon request, The Lincoln Electric Company will furnish to security holders copies of any exhibit to the Form 10-K report upon payment of a reasonable fee. Any requests should be made in writing to: Mr. H. Jay Elliott, Senior Vice President, Chief Financial Officer and Treasurer, The Lincoln Electric Company, 22801 St. Clair Avenue, Cleveland, Ohio 44117, Phone: (216) 481-8100. 19 20 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, thereunto duly authorized. The Lincoln Electric Company ------------------------------ (Registrant) By: /s/ H. JAY ELLIOTT -------------------- H. Jay Elliott Senior Vice President, Chief Financial Officer and Treasurer (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 and in the capacities indicated on March 15, 1997.
/s/ Donald F. Hastings /s/ H. Jay Elliott - ------------------------------------ ------------------------------------ Donald F. Hastings, Chairman of H. Jay Elliott, Senior Vice President, the Board Chief Financial Officer and Treasurer (principal financial and accounting officer) /s/ Anthony A. Massaro - ------------------------------------ Anthony A. Massaro, President and Chief Executive Officer (principal executive officer) /s/ Harry Carlson /s/ Kathryn Jo Lincoln - ------------------------------------ ------------------------------------ Harry Carlson, Director Kathryn Jo Lincoln, director /s/ David H. Gunning /s/ Frederick W. Mackenbach - ------------------------------------ ------------------------------------ David H. Gunning, Director Frederick W. Mackenbach, Director /s/ Edward E. Hood /s/ Henry L. Meyer III - ---------------------------------- ------------------------------------- Edward E. Hood, Jr., Director Henry L. Meyer III, Director /s/ Paul E. Lego /s/ Lawrence O. Selhorst - ------------------------------------ ------------------------------------ Paul E. Lego, Director Lawrence O. Selhorst, Director /s/ Hugh L. Libby /s/ Craig R. Smith - ---------------------------------- ------------------------------------ Hugh L. Libby, Director Craig R. Smith, Director /s/ David C. Lincoln /s/ Frank L. Steingass - ------------------------------------ ------------------------------------ David C. Lincoln, Director Frank L. Steingass, Director /s/ G. Russell Lincoln - ------------------------------------ G. Russell Lincoln, Director
20 21 ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14(a)(1) AND (2) AND ITEM 14(d) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1996 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES 21 22 REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors The Lincoln Electric Company We have audited the consolidated financial statements of The Lincoln Electric Company and subsidiaries listed in the accompanying Index to Financial Statements at Item 14 (a)(1). Our audits also included the financial statement schedule listed in the Index at Item 14 (a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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 The Lincoln Electric Company and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein. ERNST & YOUNG LLP Cleveland, Ohio February 10, 1997 22 23 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 1996 1995 ------- -------- (In thousands of dollars) ASSETS CURRENT ASSETS Cash and cash equivalents $ 40,491 $ 10,087 Accounts receivable (less allowances of $2,878 in 1996; $3,916 in 1995) 151,287 140,833 Inventories Raw materials and in-process 79,100 86,335 Finished goods 91,555 96,530 -------- -------- 170,655 182,865 Deferred income taxes 10,579 9,738 Other current assets 10,197 13,560 -------- -------- TOTAL CURRENT ASSETS 383,209 357,083 OTHER ASSETS Goodwill 37,440 39,154 Other 25,311 15,929 -------- -------- 62,751 55,083 PROPERTY, PLANT AND EQUIPMENT Land 11,710 12,396 Buildings 114,640 123,360 Machinery, tools and equipment 335,738 354,855 -------- -------- 462,088 490,611 Less: accumulated depreciation 260,849 285,017 -------- -------- 201,239 205,594 -------- -------- TOTAL ASSETS $647,199 $617,760 ======== ========
23 24 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31 1996 1995 --------- --------- (In thousands of dollars, except share data) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable to banks $ 2,607 $ 28,541 Trade accounts payable 58,157 53,882 Salaries, wages and amounts withheld 18,983 17,080 Taxes, including income taxes 36,297 33,160 Dividend payable 2,977 2,988 Other current liabilities 39,976 31,729 Current portion of long-term debt 10,528 1,269 --------- --------- TOTAL CURRENT LIABILITIES 169,525 168,649 Long-term debt, less current portion 64,148 93,582 Deferred income taxes 3,643 7,063 Other long-term liabilities 18,107 13,021 Minority interest in subsidiary -- 5,499 SHAREHOLDERS' EQUITY Common Shares, without par value -- at stated capital amount: Authorized -- 30,000,000 shares; Outstanding -- 10,484,247 shares in 1996 and 10,520,987 shares in 1995 2,097 2,104 Class A Common Shares (non-voting), without par value -- at stated capital amount: Authorized -- 30,000,000 shares; Outstanding -- 13,837,697 shares in 1996 and 13,880,171 shares in 1995 2,768 2,776 Class B Common Shares, without par value -- at stated capital amount: Authorized -- 2,000,000 shares; Outstanding -- 486,772 shares in 1996 and 487,117 shares in 1995 97 97 Additional paid-in capital 103,720 102,652 Retained earnings 290,252 228,555 Cumulative translation adjustment (7,158) (6,238) --------- --------- 391,776 329,946 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 647,199 $ 617,760 ========= =========
See notes to these consolidated financial statements. 24 25 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 1996 1995 1994 ---------- ----------- ----------- (In thousands of dollars, except per share data) Net sales $ 1,109,144 $ 1,032,398 $ 906,604 Cost of goods sold 686,545 634,551 556,259 ----------- ----------- ----------- Gross profit 422,599 397,847 350,345 Distribution cost/selling, general & administrative expenses 310,258 289,812 261,681 Restructuring (income) (2,735) ----------- ----------- ----------- Operating income 112,341 108,035 91,399 Other income (expense): Interest income 2,832 1,664 1,442 Other income 10,421 2,231 3,067 Interest expense (7,731) (12,346) (15,740) ----------- ----------- ----------- 5,522 (8,451) (11,231) ----------- ----------- ----------- Income before income taxes 117,863 99,584 80,168 Income taxes 43,610 38,109 32,160 ----------- ----------- ----------- Net income $ 74,253 $ 61,475 $ 48,008 =========== =========== =========== Per share: Net income $ 2.99 $ 2.63 $ 2.19 =========== =========== ===========
See notes to these consolidated financial statements. 25 26 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1996, 1995, 1994
Common Shares Class A Common Shares Class B Common Shares ------------------- --------------------- -------------------- (In thousands of dollars, except share data) Shares Amount Shares Amount Shares Amount - ------------------------------------------------------------------------------------------------------------------------ BALANCE, JANUARY 1, 1994 10,381,450 $2,076 - - 499,840 $100 Net Income Cash Dividends Declared - $.38 per share Shares Sold to Employees 107,520 22 Shares Issued Under Incentive Equity Plan 25,354 5 Adjustment for the Year - ------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1994 10,514,324 2,103 - - 499,840 100 Net Income Cash Dividends Declared - $.42 per share Shares Issued Under Incentive Equity Plan 2,500 Stock Dividend 11,016,664 $2,203 Shares Sold in Public Offering, net of expenses 2,863,507 573 Repurchase of Class B Shares (12,723) (3) Shares Issued to Non-Employee Directors 4,163 1 Adjustment for the Year - ------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1995 10,520,987 2,104 13,880,171 2,776 487,117 97 Net Income Cash Dividends Declared - $.48 per share Repurchase of Class B Shares (345) - Shares Issued to Non-Employee Directors 5,734 1 Shares Repurchased Under Incentive Equity Plan (42,474) (8) (42,474) (8) Options Issued in Settlement of Litigation Adjustment for the Year - ------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1996 10,484,247 $2,097 13,837,697 $2,768 486,772 $ 97 - ------------------------------------------------------------------------------------------------------------------------ Cumulative Additional Retained Translation (In thousands of dollars, except share data) Paid-in Capital Earnings Adjustment Total - --------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1994 $ 22,926 $ 137,307 $ (18,914) $ 143,495 Net Income 48,008 48,008 Cash Dividends Declared - $.38 per share (8,350) (8,350) Shares Sold to Employees 2,063 2,085 Shares Issued Under Incentive Equity Plan 458 463 Adjustment for the Year 8,432 8,432 - --------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1994 25,447 176,965 (10,482) 194,133 Net Income 61,475 61,475 Cash Dividends Declared - $.42 per share (9,885) (9,885) Shares Issued Under Incentive Equity Plan 99 99 Stock Dividend (2,203) Shares Sold in Public Offering, net of expenses 79,296 79,869 Repurchase of Class B Shares (111) (114) Shares Issued to Non-Employee Directors 124 125 Adjustment for the Year 4,244 4,244 - --------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 102,652 228,555 (6,238) 329,946 Net Income 74,253 74,253 Cash Dividends Declared - $.48 per share (11,931) (11,931) Repurchase of Class B Shares (4) (4) Shares Issued to Non-Employee Directors 136 137 Shares Repurchased Under Incentive Equity Plan (629) (625) (1,270) Options Issued in Settlement of Litigation 1,565 1,565 Adjustment for the Year (920) (920) - --------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 $103,720 $ 290,252 $ (7,158) $ 391,776 - ---------------------------------------------------------------------------------------------------------------
See notes to these consolidated financial statements. 26 27 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 1996 1995 1994 --------- -------- --------- (In thousands of dollars) OPERATING ACTIVITIES Net income $ 74,253 $ 61,475 $ 48,008 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 29,488 29,742 27,960 Deferred income taxes (3,083) 2,810 31,862 (Gain) on sale of fixed assets and businesses (8,892) (607) (1,148) Foreign exchange (gain) loss (82) 1,558 4,047 Provision for restructuring (2,735) Changes in operating assets and liabilities net of effects from acquisitions: (Increase) in accounts receivable (11,167) (13,082) (14,003) Decrease (increase) in inventories 9,591 (25,648) (6,476) Decrease (increase) in other current assets 4,287 (2,879) (1,447) Increase (decrease) in accounts payable 2,834 (1,375) 9,929 Increase (decrease) in other current liabilities 10,511 11,045 (31,026) Gross change in other noncurrent assets and liabilities (2,095) 1,991 2,458 Other--net 2,188 426 1,237 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 107,833 65,456 68,666 INVESTING ACTIVITIES Capital expenditures (39,777) (48,351) (37,366) Proceeds from sale of property, plant and equipment and businesses 22,375 2,909 5,099 --------- --------- --------- NET CASH (USED) BY INVESTING ACTIVITIES (17,402) (45,442) (32,267) FINANCING ACTIVITIES Proceeds from the sale of Common Shares and Class A Common Shares 81,180 2,085 Short-term borrowings - net (27,366) 11,749 (8,010) Proceeds from long-term borrowings 5,461 204,476 317,669 Repayments on long-term borrowings (25,799) (309,111) (351,793) Cash dividends paid (11,942) (9,100) (8,106) Other (1,138) 562 838 --------- --------- --------- NET CASH (USED) BY FINANCING ACTIVITIES (60,784) (20,244) (47,317) Effect of exchange rate changes on cash and cash equivalents 757 (107) 961 --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 30,404 (337) (9,957) Cash and cash equivalents at beginning of year 10,087 10,424 20,381 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 40,491 $ 10,087 $ 10,424 ========= ========= =========
See notes to these consolidated financial statements. 27 28 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of dollars except per share data) December 31, 1996 NOTE A -- SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of The Lincoln Electric Company and its subsidiaries (the "Company") after elimination of all significant intercompany accounts, transactions and profits. CASH EQUIVALENTS: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. INVENTORIES: Inventories are valued at the lower of cost or market. For domestic inventories, cost is determined principally by the last-in, first-out (LIFO) method, and for non-U.S. inventories cost is determined by the first-in, first-out (FIFO) method. At December 31, 1996 and 1995, approximately 64% and 63%, respectively, of total inventories were valued using the LIFO method. The excess of current cost over LIFO cost amounted to $53,660 at December 31, 1996 and $55,300 at December 31, 1995. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost and include improvements which significantly extend the useful lives of existing plant and equipment. Depreciation and amortization are computed by both accelerated and straight-line methods over useful lives ranging from 3 to 20 years for machinery, tools and equipment, and up to 50 years for buildings. Net gains or losses related to asset dispositions are recognized in earnings in the period in which dispositions occur. The carrying value of property, plant and equipment is reviewed if facts and circumstances indicate a potential impairment of carrying value utilizing relevant cash flow and profitability information. RESEARCH AND DEVELOPMENT: Research and development costs, which are expensed as incurred, were $19,800 in 1996, $19,736 in 1995 and $18,473 in 1994. Included in research and development costs for 1996 is $2,040 related to in-process research and development acquired with the purchase of Electronic Welding Systems. GOODWILL: The excess of the purchase price over the fair value of net assets acquired is amortized on a straight-line basis over periods not exceeding 40 years. Amounts are stated net of accumulated amortization of $7,960 and $6,750 in 1996 and 1995, respectively. The carrying value of goodwill is reviewed if facts and circumstances indicate a potential impairment of carrying value may have occurred. TRANSLATION OF FOREIGN CURRENCIES: Asset and liability accounts are translated into U.S. dollars using exchange rates in effect at the date of the consolidated balance sheet; revenue and expense accounts are translated at monthly exchange rates. Translation adjustments are reflected as a component of shareholders' equity. 28 29 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE A -- SIGNIFICANT ACCOUNTING POLICIES - (Continued) Transaction gains and losses are included in the consolidated statements of income in distribution cost/selling, general and administrative expenses. The Company recorded transaction losses of $302 in 1996, $1,930 in 1995 and $3,746 in 1994. FINANCIAL INSTRUMENTS: The Company, on a limited basis, has used forward exchange contracts to hedge exposure to exchange rate fluctuations on certain intercompany loans, purchase and sales transactions and other intercompany commitments. Contracts are written on a short-term basis and are not held for trading or speculation purposes. Gains and losses on all forward exchange contracts are recognized in the consolidated statements of income in the periods the exchange rates change. At December 31, 1996, the Company had $38,103 of outstanding forward exchange contracts. ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions in certain circumstances that affect the amounts reported in the accompanying consolidated financial statements and notes. Actual results could differ from these estimates. NET INCOME PER SHARE: Net income per share is based on the average number of all shares outstanding during the year (24,861,656 in 1996; 23,350,254 in 1995 and 21,939,982 in 1994). SUPPLEMENTAL EARNINGS PER SHARE: In 1995, the Company sold Class A Common Shares in an underwritten public offering (see Note B). The proceeds of the offering were used to reduce the Company's outstanding indebtedness. Had the proceeds been received and applied to reduce indebtedness as of January 1, 1995 and 1994, net income per share would have been $2.54 for 1995 and $2.06 for 1994. OTHER: Included in distribution cost/selling, general & administrative expenses are the costs related to the Company's discretionary employee bonus, net of hospitalization costs ($66,681 in 1996; $66,357 in 1995; and $59,559 in 1994). Certain reclassifications have been made to prior year financial statements to conform to current year classifications. NOTE B -- RECAPITALIZATION The Company completed a recapitalization in 1995 that included the authorization of Class A Common Shares, which became a new class of non-voting common shares. The recapitalization included a distribution payable on June 12, 1995, to holders of record of the Company's outstanding voting common shares as of June 5, 1995, of a dividend of one Class A Common Share for each outstanding share of the Company's voting common shares. Retroactive effect has been given to the stock dividend in the computation of all historical per share data prior to June 1995 in these financial statements. Prior to the recapitalization, the Company had two authorized and outstanding classes of voting common shares. As a result of the recapitalization, the Company's authorized capital consists of two voting classes, the Common Shares, without par value (formerly the "Common Stock"), and the Class B Common Shares, without par value (formerly the "Class A Common Stock"), and one non-voting class, the Class A Common Shares (the new "Class A Common Shares"). The recapitalization included an increase in the total number of authorized 29 30 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE B -- RECAPITALIZATION - (Continued) common shares of all classes from 17 million to 62 million shares consisting of 30 million Common Shares, 30 million Class A Common Shares and 2 million Class B Common Shares. On June 29, 1995, the Company sold in an underwritten public offering 2,796,914 Class A Common Shares for $28.35 per share, net of the underwriting discount. The closing date for the transaction was July 6, 1995, at which time the Company received the net proceeds of $79,292 which were used to reduce debt of the Company. On August 2, 1995, the Company sold an additional 66,593 Class A Common Shares for $28.35 per share under an over-allotment provision of the Underwriting Agreement and received additional net proceeds of $1,888 which were also used to reduce debt of the Company. NOTE C -- STOCK PLANS The Board of Directors terminated The Lincoln Electric Company Employees' Stock Purchase Plan effective March 30, 1995, and in May 1995, the shareholders approved the 1995 Lincoln Stock Purchase Plan ("Purchase Plan"), which provides employees the ability to purchase open market shares on a commission-free basis up to a limit of ten thousand dollars annually. In 1996, there were 2,799 Common Shares and 1,443 Class A Common Shares purchased under this plan. There were no purchases during 1995. The Lincoln Electric Company 1988 Incentive Equity Plan ("Incentive Equity Plan") provides for the award or sale of Common Shares and Class A Common Shares to officers and other key employees of the Company and its subsidiaries. In 1994, 10,354 common shares were issued under the Incentive Equity Plan and a corresponding number of Class A Common Shares were distributed at the time of the 1995 stock dividend. Additionally in 1994, 15,000 shares of restricted stock (after the stock dividend, 30,000 shares) were issued to two officers of the Company, with scheduled vesting over time which was completed in January 1997. In 1995, 5,000 shares of restricted stock were issued to another officer with vesting over a six-year period. The Company's Incentive Equity Plan provides for the awarding of stock options at the discretion of the Board of Directors. On October 1, 1996, the Company granted non-qualified options for 139,000 Common Shares and 139,000 Class A Common Shares to key employees. The options are outstanding for a term of ten years from the date of grant and vest ratably over a period of three years from the grant date. All such options remained outstanding at December 31, 1996. The exercise prices of the options were equal to the fair market value of the Common and Class A Shares at the date of grant, $30.00 and $27.25, respectively. As permitted under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), the Company has chosen to continue to record stock-based compensation in accordance with the intrinsic value method established by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, which measures compensation expense as the excess, if any, of the market price at the date of grant over the exercise price of the options. Accordingly, no compensation expense was recognized upon the award of these stock options. SFAS 123 requires pro forma disclosure of the before- and after-tax cost of stock-based compensation when the instruments are measured at fair value. The pro forma effect on 1996 net income in applying the fair value method was not material. 30 31 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE C -- STOCK PLANS - (Continued) In 1996, the Company settled a lawsuit over performance awards under the Incentive Equity Plan which resulted in a pre-tax charge of $3,400. The portion of the settlement paid to current employees was made in the form of stock options which were recorded at their estimated fair value. The options granted are exercisable over five- and ten-year periods and are fully vested, non-qualified and non-transferable. Options for 79,766 Class A Common Shares were granted at an exercise price of $30.00 per share, and options for 87,824 Class A Common Shares were granted at an exercise price of $34.00 per share. As of December 31, 1996, no options granted under this settlement had been exercised. At December 31, 1996, there were 810,976 Common Shares and 643,386 Class A Common Shares reserved for future issuance under the Incentive Equity Plan. The Lincoln Electric Company Employee Stock Ownership Plan (the "ESOP") is a non-contributory profit-sharing plan established to provide deferred compensation benefits for all eligible employees. The cost of the plan is borne by the Company through contributions to an employee stock ownership trust. In May 1989, shareholders authorized 2,000,000 shares of Class B Common Shares (formerly the "Class A Common Stock"), without par value. The Company's Common Shares and Class B Common Shares are identical in all respects, except that holders of Class B Common Shares are subject to certain transfer restrictions and the Class B Common Shares are only issued to the ESOP. In 1996 and 1995, no shares were issued to the ESOP. At December 31, 1996, 1,513,228 authorized but unissued shares are available for future issuance to the ESOP. The Lincoln Non-Employee Directors' Restricted Stock Plan ("Non-Employee Directors' Plan") was adopted in May 1995. The Non-Employee Directors' Plan provides for distributions of ten thousand dollars worth of Common Shares to each non-employee Director as part of an annual retainer. During 1996 and 1995, 5,734 and 4,163 shares were issued to 14 and 13 non-employee Directors, respectively, under this plan. 31 32 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE D -- SHORT-TERM AND LONG-TERM DEBT
December 31, 1996 1995 ------- ------- Short-term debt: Notes payable to banks at interest rates from 3.64% to 10.25% (5.36% to 12.50% in 1995) $ 2,607 $28,541 ======= ======= Long-term debt: Multi-currency Credit Agreement, due December 20, 2000 (5.975%) $ -- $10,000 8.73% Senior Note due 2003 (seven equal annual principal payments remaining) 65,625 75,000 Other borrowings due through 2023, interest at 2.00% to 12.00% (2.00% to 6.20% in 1995) 9,051 9,850 ------- ------- 74,676 94,850 Less current portion 10,528 1,268 ------- ------- Total $64,148 $93,582 ======= =======
In December 1995, the Company entered into a $200 million unsecured, multi-currency Credit Agreement. The terms of the Credit Agreement, which expires December 20, 2000, provide for annual extensions. The interest rate on outstanding borrowings is determined based upon defined leverage rates for the pricing options selected. The interest rate can range from LIBOR plus .20% to LIBOR plus .30% depending upon the defined leverage rate. The agreement also provides for a facility fee ranging from .10% to .15% per annum based upon the daily aggregate amount of the commitment. The Credit Agreement and the 8.73% Senior Note due in 2003 contain financial covenants which require the same interest coverage and funded debt-to-capital ratios. Maturities of long-term debt for the five years succeeding December 31, 1996 are $10,528 in 1997, $10,183 in 1998, $9,846 in 1999, $9,691 in 2000, $11,247 in 2001 and $23,181 thereafter. Total interest paid was $7,800 in 1996, $12,606 in 1995 and $17,400 in 1994. Weighted-average interest rates on notes payable to banks at December 31, 1996 and 1995 were 6.1% and 6.4%, respectively. 32 33 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE E -- INCOME TAXES The components of income before income taxes were as follows:
1996 1995 1994 -------- -------- -------- U.S. $ 94,951 $ 80,351 $ 70,703 Non-U.S 22,912 19,233 9,465 -------- -------- -------- Total $117,863 $ 99,584 $ 80,168 ======== ======== ========
Components of income tax expense (benefit) were as follows:
1996 1995 1994 --------- -------- --------- Current: Federal $ 33,484 $ 24,605 $ (8,379) Non-U.S 6,197 5,465 4,143 State and local 7,012 5,229 4,534 -------- -------- -------- 46,693 35,299 298 Deferred: Federal (2,735) 2,576 31,223 Non-U.S (348) 234 639 -------- -------- -------- (3,083) 2,810 31,862 -------- -------- -------- Total $ 43,610 $ 38,109 $ 32,160 ======== ======== ========
The differences between total income tax expense and the amount computed by applying the statutory Federal income tax rate to income before income taxes are as follows:
1996 1995 1994 -------- --------- --------- Statutory rate of 35% applied to pre-tax income $ 41,252 $ 34,854 $ 28,059 Effect of state and local income taxes, net of Federal tax benefit 4,558 3,399 2,947 Taxes in excess of (less than) the U.S. tax rate on non- U.S. earnings, including utilization of net operating loss carryforwards (2,663) (605) 955 Foreign sales corporation (1,220) (961) (838) Other - net 1,683 1,422 1,037 -------- -------- -------- Total $ 43,610 $ 38,109 $ 32,160 ======== ======== ========
Total income tax payments, net of refunds, were $36,764 in 1996, $22,428 in 1995 and $6,115 in 1994. 33 34 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE E -- INCOME TAXES - (Continued) At December 31, 1996, the Company's non-U.S. subsidiaries had net operating loss carryforwards of approximately $49,600 which expire in various years from 1997 through 2006, except for $18,025 for which there is no expiration date. Income tax expense for the years 1996, 1995 and 1994 was reduced by $3,467, $2,525 and $1,273, respectively, due to utilization of these net operating loss carryforwards. Significant components of the Company's deferred tax assets and liabilities at December 31, 1996 and 1995, are as follows:
1996 1995 -------- -------- Deferred tax assets: Net operating loss carryforwards $ 16,106 $ 20,917 U.S. foreign tax credits 1,797 State income taxes 2,256 926 Inventory (1,407) (1,003) Other accruals 9,346 5,826 Employee benefits 5,912 1,983 Pension obligations 3,975 2,038 Other 11,965 8,017 -------- -------- 48,153 40,501 Valuation allowance (16,161) (21,955) -------- -------- 31,992 18,546 Deferred tax liabilities: Depreciation (16,526) (11,820) Pension obligations (6,838) (1,401) Other deferred tax liabilities (1,692) (2,650) -------- -------- (25,056) (15,871) -------- -------- Total $ 6,936 $ 2,675 ======== ========
The Company does not provide deferred income taxes on unremitted earnings of non-U.S. subsidiaries as such funds are deemed permanently reinvested to finance non-U.S. expansion and meet operational needs on an ongoing basis. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes subject to an adjustment for foreign tax credits and withholding taxes payable to the various non-U.S. countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its calculation; however, unrecognized non-U.S. tax credits and withholding taxes paid upon distribution would be available to reduce some portion of the U.S. liability. 34 35 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE F -- RETIREMENT ANNUITY AND GUARANTEED CONTINUOUS EMPLOYMENT PLANS The Company and its subsidiaries maintain a number of defined benefit and defined contribution plans to provide retirement benefits for employees in the United States as well as employees in non-U.S. countries. These plans are maintained and contributions are made in accordance with the Employee Retirement Income Security Act of 1974, local statutory law or as determined by the Board of Directors. The plans generally provide benefits based upon years of service and compensation. Pension plans are funded except for a supplemental employee retirement plan for certain key employees. A summary of the components of total pension expense is as follows:
1996 1995 1994 -------- -------- --------- U.S. Plans: Service cost - benefits earned during the year $ 9,417 $ 7,375 $ 7,155 Interest cost on projected benefit obligation 23,250 21,847 19,601 Actual return on plan assets (23,169) (37,696) (18,795) Net amortization and deferral 266 17,819 (528) -------- -------- -------- Net pension cost of defined benefit plans 9,764 9,345 7,433 Defined contribution plans 149 154 258 -------- -------- -------- Total U.S. plans 9,913 9,499 7,691 Non-U.S. Plans: Service cost - benefits earned during the year 1,639 1,476 1,524 Interest cost on projected benefit obligation 2,477 2,291 2,207 Actual return on plan assets (3,733) (3,186) (932) Net amortization and deferral 804 374 (1,717) -------- -------- -------- Net pension cost of defined benefit plans 1,187 955 1,082 Defined contribution plans 690 687 702 -------- -------- -------- Total Non-U.S. plans 1,877 1,642 1,784 -------- -------- -------- Total pension expense $ 11,790 $ 11,141 $ 9,475 ======== ======== ========
35 36 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE F -- RETIREMENT ANNUITY AND GUARANTEED CONTINUOUS EMPLOYMENT PLANS - (Continued) The funded status of the U.S. and non-U.S. plans at December 31, 1996 and 1995 is as follows:
U.S. Non-U.S. 1996 1995 1996 1995 --------- -------- --------- --------- Actuarial present value of accumulated benefit obligations: Vested $ 275,052 $ 261,132 $ 32,247 $ 26,659 Nonvested 4,480 9,407 1,249 1,080 --------- --------- --------- --------- $ 279,532 $ 270,539 $ 33,496 $ 27,739 ========= ========= ========= ========= Actuarial present value of projected benefit obligations $ 323,673 $ 309,359 $ 36,908 $ 31,153 Plan assets at fair value 304,017 282,843 41,530 35,270 --------- --------- --------- --------- Plan assets in excess of (less than) projected benefit obligations (19,656) (26,516) 4,622 4,117 Unrecognized net (gain) loss 14,966 16,725 (1,897) (1,759) Unrecognized prior service cost 9,590 12,651 477 505 Unrecognized transition assets, net of amortization (2,214) (2,581) (1,226) (1,359) Minimum liability (474) (1,208) -- (321) --------- --------- --------- --------- Prepaid (accrued) pension expense recognized in the balance sheet $ 2,212 $ (929) $ 1,976 $ 1,183 ========= ========= ========= =========
Assumptions used in accounting for the defined benefit plans as of December 31, 1996 and 1995 for the U.S. and non-U.S. plans were as follows:
U.S. Non-U.S. Plans Plans --------------- --------------- 1996 1995 1996 1995 ---- ---- ---- ---- Weighted-average discount rates 7.6% 7.5% 7.7% 8.1% Projected rates of increase in compensation 5.3% 5.5% 4.7% 4.8% Expected rates of return on plan assets 9.0% 9.0% 8.1% 8.4%
U.S. plan assets consist principally of deposit administration contracts, an investment contract with an insurance company and equity and fixed income securities. Non-U.S. plan assets are invested in non-U.S. insurance contracts and non-U.S. equity and fixed income securities. The Company does not have, and does not provide for, any postretirement or postemployment benefits other than pensions. 36 37 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE F -- RETIREMENT ANNUITY AND GUARANTEED CONTINUOUS EMPLOYMENT PLANS - (Continued) The Cleveland, Ohio, area operations have a Guaranteed Continuous Employment Plan covering substantially all employees, which, in general, provides that the Company will provide work for at least 75% of every standard work week (presently 40 hours). This plan does not guarantee employment when the Company's ability to continue normal operations is seriously restricted by events beyond the control of the Company. The Company has reserved the right to terminate this plan effective at the end of a calendar year by giving notice of such termination not less than six months prior to the end of such year. NOTE G -- INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION The Company's primary business is the design, manufacture and sale, in the U.S. and international markets of arc, cutting and other welding products. The Company also designs, manufactures and sells integral horsepower industrial electric motors. Financial information by geographic areas follows:
United Other States Europe Countries Eliminations Total ---------- --------- ---------- ------------ ---------- 1996: Net sales to unaffiliated customers $ 752,952 $ 219,436 $ 136,756 $ -- $1,109,144 Inter-geographic sales 55,942 10,786 9,219 (75,947) ---------- ---------- ---------- ---------- ---------- Total $ 808,894 $ 230,222 $ 145,975 $ (75,947) $1,109,144 ========== ========== ========== ========== ========== Operating income $ 90,271 $ 9,993 $ 12,431 $ (354) $ 112,341 Identifiable assets 416,911 183,938 87,808 (41,458) 647,199 1995: Net sales to unaffiliated customers $ 711,940 $ 201,672 $ 118,786 $ -- $1,032,398 Inter-geographic sales 53,347 15,662 9,092 (78,101) ---------- ---------- ---------- ---------- ---------- Total $ 765,287 $ 217,334 $ 127,878 $ (78,101) $1,032,398 ========== ========== ========== ========== ========== Operating income $ 87,044 $ 11,350 $ 10,246 $ (605) $ 108,035 Identifiable assets 404,972 188,906 80,594 (56,712) 617,760 1994: Net sales to unaffiliated customers $ 641,607 $ 156,803 $ 108,194 $ -- $ 906,604 Inter-geographic sales 40,876 10,558 7,060 (58,494) ---------- ---------- ---------- ---------- ---------- Total $ 682,483 $ 167,361 $ 115,254 $ (58,494) $ 906,604 ========== ========== ========== ========== ========== Operating income $ 81,091 $ 5,843 $ 4,410 $ 55 $ 91,399 Identifiable assets 350,012 161,691 75,880 (30,726) 556,857
37 38 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE G -- INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION - (Continued) Intercompany sales between geographic regions are accounted for at prices comparable to normal, customer sales and are eliminated in consolidation. Export sales (excluding intercompany sales) from the United States were $90,706 in 1996, $81,770 in 1995 and $64,400 in 1994. NOTE H -- ACQUISITION AND DIVESTITURES In July 1996, the Company acquired Electronic Welding Systems (EWS), a designer and supplier of welding power supplies and plasma cutting equipment, based in Italy. The acquisition was accounted for as a purchase. The results of operations of EWS, which are not material, are included in the Consolidated Statement of Income from the date of acquisition. The net cost of the acquisition, $5,520, net of cash received, is included in capital expenditures in the Consolidated Statement of Cash Flows for the year ended December 31, 1996. Also during 1996, the Company sold its Louisiana and Alaska gas distribution businesses for net cash proceeds of $17,343. The Company realized a gain on disposal of these businesses of $8,365 ($5,093 after-tax, or $0.20 per share), which is included in other income. The results of operations from these businesses were not material to the Company for the years ended December 31, 1996, 1995 and 1994. NOTE I -- FAIR VALUES OF FINANCIAL INSTRUMENTS The Company has various financial instruments, including cash, cash equivalents, short- and long-term debt and forward contracts. The Company has determined the estimated fair value of these financial instruments by using available market information and appropriate valuation methodologies which require judgment. Accordingly, the use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts. The total notional value of forward currency exchange contracts at December 31, 1996 was $38,103. The carrying amounts and estimated fair value of the Company's significant other financial instruments at December 31, 1996 and 1995 were as follows:
December 31, 1996 December 31, 1995 ------------------------ ------------------------ Carrying Fair Carrying Fair Amounts Value Amounts Value ------- ----- ------- ----- Cash and cash equivalents $ 40,491 $ 40,491 $ 10,087 $ 10,087 Notes payable to banks 2,607 2,607 28,541 28,541 Long-term debt (including current portion) 74,676 77,061 94,850 101,026 Forward contracts 214 214 (167) (167)
38 39 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE J -- OPERATING LEASES The Company leases sales offices, warehouses and distribution centers, office equipment and data processing equipment. Such leases, some of which are noncancelable and, in many cases, include renewals, expire at various dates. The Company pays most maintenance, insurance and taxes relating to leased assets. Rental expense was $8,345 in 1996, $8,852 in 1995 and $9,226 in 1994. At December 31, 1996, total minimum lease payments for noncancelable operating leases are as follows:
1997 $ 6,382 1998 5,681 1999 4,830 2000 3,678 2001 1,742 Thereafter 3,496 ------- Total $25,809 =======
NOTE K -- CONTINGENCIES The Company is subject to a variety of civil and administrative proceedings arising out of its normal operations, including those relating to product liability claims, health, safety and environmental claims and employment-related actions. Based on information known to the Company, and subject to the factors and contingencies noted below, management believes the outcome of pending litigation will not have a material adverse effect upon the consolidated financial position of the Company. The Company has been named as a co-defendant in nine lawsuits in California, all arising from alleged property damage claimed to have been discovered after the Northridge, California, earthquake of January 1994. One case, filed in 1997 as a class action complaint against the Company and at least 100 other unnamed "John Doe" defendants, alleges a certain category of welding electrode manufactured by the Company and others was defective for use in "moment resisting" steel frame buildings in seismically sensitive areas. The complaint claims there may be 1,500 such buildings, with damages (including costs of inspection, retrofitting and repairs, loss of income, and diminution in value) exceeding $1 billion; it also seeks punitive damages. The other eight cases are not pled as class actions, but involve substantially similar allegations with respect to certain similar type buildings in Los Angeles County. While the ultimate outcome of the earthquake-related litigation described above cannot be determined at this time, management believes the Company has substantial defenses and intends to contest the suits vigorously. The Company believes that it has applicable insurance and that other potential defendants and their respective insurers will be identified as the lawsuits proceed. However, if the Company is unsuccessful in defending or otherwise satisfactorily resolving these lawsuits, and if insurance coverage is unavailable or inadequate, then the litigation could have a material adverse impact on the Company's operating results, financial position and liquidity. 39 40 THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued NOTE L -- QUARTERLY FINANCIAL DATA (UNAUDITED)
1996 MAR 31 JUN 30 SEP 30 DEC 31 ---- ------ ------ ------ ------ Net sales $278,712 $284,508 $270,947 $274,977 Gross profit 106,554 109,757 104,012 102,276 Income before income taxes 26,751 32,121 31,103 27,888 Net income 16,557 20,223 19,671 17,802 Net income per share $ 0.67 $ 0.81 $ 0.79 $ 0.72
1995 MAR 31 JUN 30 SEP 30 DEC 31 ---- ------ ------ ------ ------ Net sales $263,407 $268,199 $249,525 $251,267 Gross profit 101,862 107,215 93,530 95,240 Income before income taxes 26,856 27,962 23,473 21,293 Net income 16,054 17,385 14,710 13,326 Net income per share (a) $ 0.73 $ 0.79 $ 0.59 $ 0.54 (a) - Net income per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share in 1995 does not equal the total computed for the year due to stock transactions which occurred during 1995.
40 41 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES (In thousands of dollars)
- ------------------------------------------------------------------------------------------------------------------------ COL. A COL. B COL. C COL. D COL. E - ------------------------------------------------------------------------------------------------------------------------ Additions --------------------------- (1) Charged Balance at Charged to to other Balance beginning costs and accounts (2) at end Description of period expenses describe Deductions of period - ------------------------------------------------------------------------------------------------------------------------ Allowance for doubtful accounts: Year ended December 31, 1996 $3,916 $ 193 $ (127)(1) $1,104 (3) $2,878 Year ended December 31, 1995 $4,251 $ 944 $ 194 (1) $1,473 $3,916 Year ended December 31, 1994 $6,258 $ 995 $ 117 (1) $3,119 (4) $4,251 (1) -- Currency translation adjustment. (2) -- Uncollectible accounts written-off, net of recoveries. (3) -- Includes balance of $363 at the dates of disposition relating to the Alaska and Louisiana gas distribution businesses. (4) -- Includes $2,480 relating to accounts written off during 1994 in connection with the Company's restructuring activities.
41 42 INDEX TO EXHIBITS Exhibit Number Description of Exhibit ------ ---------------------- 3(a) Restated Articles of Incorporation of The Lincoln Electric company (filed as Exhibit 4.1 to the Registration Statement on Form S-3 of The Lincoln Electric Company, as filed and amended on June 26, 1995, SEC Registration No. 33-58881 and incorporated herein by reference and made a part hereof). 3(b) Restated Code of Regulations of The Lincoln Electric Company (filed as Exhibit 2 to the Registration Statement on Form 8-A for the Class A Common Shares of The Lincoln Electric Company filed on June 5, 1995 and incorporated herein by reference and made a part hereof). 4(a) Note Agreement dated November 20, 1991 between The Prudential Insurance Company of America and the Company (filed as Exhibit 4 to form 10-K of The Lincoln Electric Company for the year ended December 31, 1991, SEC File No. 0-1402 and incorporated by reference and made a part hereof), as amended by letter dated March 18, 1993; 8.98% Senior Note Due November 26, 2003 (filed as Exhibit 4(a) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1992, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof); as further amended by letter dated as of November 19, 1993; 8.98% Senior Note Due November 26, 2003 (filed as Exhibit 4(a) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1993, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof); as further amended by letter dated October 31, 1994 (filed as Exhibit 4(a) to Form 10-Q of The Lincoln Electric Company for the period ended September 30, 1994, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof); and as further amended by letter dated December 20, 1995 (filed as Exhibit 4(a) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 4(b) Credit Agreement dated December 20, 1995 among the Company, the Banks listed on the signature page thereof, and Society National Bank, as Agent (filed as Exhibit 4(b) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(a) The Lincoln Electric Company 1988 Incentive Equity Plan (filed as Exhibit 28 to the Form S-8 Registration Statement of The Lincoln Electric Company, SEC File No. 33-25209 and incorporated herein by reference and made a part hereof). 10(b) Form of Indemnification Agreement (filed as Exhibit 10(b) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1994, SEC File No. 0-1402 and incorporated herein by reference). 42 43 INDEX TO EXHIBITS Exhibit Number Description of Exhibit ------ ---------------------- 10(c) The Lincoln Electric Company Supplemental Executive Retirement Plan, as amended (filed as Exhibit 10(c) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(d) The Lincoln Electric Company Deferred Compensation Plan, as amended (filed as Exhibit 10(d) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(e) Description of Management Incentive Plan (filed as Exhibit 10(e) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(f) Description of Non-Employee Directors' Restricted Stock Plan (filed as Exhibit 10(f) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(g) The Lincoln Electric Company Non-Employee Directors' Deferred Compensation Plan (filed as Exhibit 10(g) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(h) Retirement Agreement between the Company and Frederick W. Mackenbach dated November 8, 1995 (filed as Exhibit 10(h) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1995, SEC File No. 0-1402 and incorporated herein by reference and made a part hereof). 10(i) Employment Retirement and Consulting Agreement between the Company and Donald F. Hastings, dated February 14, 1997, filed herewith. 10(j) Employment and Retirement Agreement between the Company and David Fullen, dated December 12, 1996, filed herewith. 10(k) Employment Agreement between the Company and Anthony A. Massaro dated July 14, 1993, as amended on January 1, 1994 (filed as Exhibit 10(e) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1994, SEC File No. 0-1402, and incorporated herein by reference). 10(l) Employment Agreement between the Company and H. Jay Elliott dated June 22, 1993 (filed as Exhibit 10(f) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1994, SEC File No. 0-1402, and incorporated herein by reference). 10(m) Employment Agreement between the Company and Frederick G. Stueber dated February 22, 1995 (filed as Exhibit 10(g) to Form 10-K of The Lincoln Electric Company for the year ended December 31, 1994, SEC File No. 0-1402, and incorporated herein by reference). 43 44 INDEX TO EXHIBITS Exhibit Number Description of Exhibit ------ ---------------------- 10(n) The Lincoln Electric Company Employee Savings Plan (filed on Form S-8 Registration Statement of The Lincoln Electric Company, SEC file No. 33-64187 and incorporated herein by reference and made a part hereof). 10(o) 1995 Lincoln Stock Purchase Plan (filed on Form S-8 Registration Statement of The Lincoln Electric Company, SEC File No. 33-64189 and incorporated herein by reference and made a part hereof). 11 Computation of Earnings Per Share. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 27 Financial Data Schedule. 44 EX-10.I 2 EXHIBIT 10(I) 1 Exhibit 10(i) EMPLOYMENT, RETIREMENT AND CONSULTING AGREEMENT ----------------------------------------------- THIS EMPLOYMENT, RETIREMENT AND CONSULTING AGREEMENT (this "Agreement") is made and entered into this 14th day of February, 1997, by and between THE LINCOLN ELECTRIC COMPANY (the "Company," a term which in this Agreement shall include its predecessors, parents, subsidiaries, divisions, related or affiliated companies, officers, directors, stockholders, members, employees, heirs, successors, assigns, representatives, agents and counsel, unless the context otherwise clearly requires), and DONALD F. HASTINGS ("Executive"), WITNESSETH: ---------- WHEREAS, Executive is an employee and director of the Company and currently serves as Chairman of the Board of Directors of the Company; WHEREAS, the Executive ceased serving as Chief Executive Officer of the Company, effective October 31, 1996, and the Company and Executive have determined that Executive shall resign and retire as a director and as an officer and employee of the Company effective May 27, 1997, and its subsidiaries and related or affiliated companies effective on the date hereof, and that Executive will become Chairman Emeritus on May 27, 1997; WHEREAS, the Company and Executive desire to provide for a consulting arrangement whereby the Company may continue to benefit from the services of Executive following his retirement from the Company; WHEREAS, the Company and Executive desire to make provision for the payments and benefits that Executive will be entitled to receive from the Company in consideration for Executive's obligations and actions under this Agreement and in connection with such resignations and retirement and the cessation of his employment with the Company; and WHEREAS, the Company and Executive wish to resolve, settle and/or compromise any and all matters, claims and issues between them arising from or relating to Executive's service and employment with the Company, including the termination thereof; NOW THEREFORE, in consideration of the promises and agreements contained herein and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, and intending to be legally bound, the Company and Executive agree as follows: 2 1. EFFECTIVE DATE OF AGREEMENT. This Agreement is effective on the date hereof and shall continue in effect as provided herein. 2. EMPLOYMENT. Commencing on the date hereof, Executive's employment shall continue through May 27, 1997 (the "Employment Term"), subject to the provisions hereof. 3. DUTIES DURING EMPLOYMENT TERM. Executive's principal duties and authority after the date hereof during the Employment Term will be to serve as Chairman of the Board of Directors of the Company and as an advisor to the Chief Executive Officer of the Company. 4. COMPENSATION DURING EMPLOYMENT TERM. In consideration of the services of the Executive during the Employment Term, and of the promises of Executive in this Agreement and subject to the conditions hereof, including without limitation Paragraph 10 of this Agreement, the Company shall: (a) During the Employment Term, and thereafter until July 2, 1997 as if Executive remained an employee, continue to pay Executive an annualized base salary of FIVE HUNDRED FIFTY THOUSAND DOLLARS ($550,000) in accordance with the Company's regular payroll practices; PROVIDED that (i) no such payment shall be made unless and until the conditions in Paragraph 10 below have been satisfied, (ii) the continuance of such payments is contingent upon Executive's compliance with each and every requirement of this Agreement applicable to him and (iii) if Executive dies before the completion of the payments described in this subparagraph 4(a), the remaining payments described in this subparagraph 4(a) following his death shall be made to his estate. (b) During the Employment Term continue Executive's eligibility for a prorated 1997 bonus calculated as if Executive continued his employment with the Company until July 2, 1997, to be determined by the Board of Directors of the Company, but in any event, said 1997 prorated bonus shall not be less than $200,000 if management goals for 1997 are achieved; provided that in each case (A) no such payment shall be made unless and until each of the conditions in Paragraph 10 below have been satisfied, (B) the payment of any bonus is contingent upon Executive's compliance with each and every requirement of this Agreement applicable to him and (C) if Executive dies before any payment described in this subparagraph 4(b) is made, such payment described in this subparagraph 4(b) following his death shall be made to his estate. (c) Continue to permit Executive to participate in the Company's medical and life insurance programs, and other plans, programs and perquisites appropriate for his position and status as a senior officer of the Company, on the same basis that Executive has participated in such plans, programs and perquisites, until the end of the Employment Term; provided, however, that effective on the date hereof, the Company shall neither have any obligation to maintain the special term life insurance policy in the amount of $3 million on the life of Executive, nor any obligation to pay any premiums thereon, including but not limited to premiums that are overdue or delinquent on the date hereof. 3 5. RESIGNATION AND RETIREMENT. (a) Executive hereby (i) confirms his resignation as Chief Executive Officer of the Company effective October 31, 1996, (ii) effective the date hereof (A) resigns from all boards and offices of any entity that is a subsidiary of or is otherwise related to or affiliated with the Company, and (B) resigns from all administrative, fiduciary or other positions he may hold or have held with respect to arrangements or plans for, of or relating to the Company, and (iii) agrees to resign from any nonprofit organizations other than those identified on Exhibit E attached hereto and agrees not to join any other industry related nonprofit organization without the prior approval of the Chief Executive Officer of the Company. The costs and expenses associated with the Executive's memberships in organizations set forth on Exhibit E are the sole responsibility of the Executive and service for such organizations by Executive is for and on behalf of Executive. The Company hereby consents to and accepts said resignations, and the Company records shall so reflect. (b) Effective May 27, 1997, Executive shall resign and retire from his employment with the Company, and resign from his position as Chairman of the Board of Directors of the Company. Effective with the Company's annual meeting of stockholders on May 27, 1997, Executive shall retire from the Board of Directors of the Company. (c) For purposes of Company recognition awards, Executive shall, notwithstanding his actual retirement date of May 27, 1997 as provided in subparagraph 5(b), be deemed to have retired on July 2, 1997, the 44th anniversary of Executive's employment with the Company. 6. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN, ETC. In consideration of the promises of the Executive in this Agreement and subject to the conditions hereof, including without limitation Paragraph 10 of this Agreement, the Company shall: (a) Pay Executive a supplemental pension (the "Pension") at Executive's option, which option shall be exercised in writing and delivered to the Company on or before May 27, 1997: either (i) in a lump sum in an amount calculated in accordance with the letter dated October 2, 1996 issued by Watson Wyatt & Company, payable on August 1, 1997, or (ii) TWO HUNDRED EIGHTY-NINE THOUSAND FOUR HUNDRED FOURTEEN DOLLARS ($289,414) per year, in equal monthly installments, payable in the form of a single life annuity, commencing with a payment on August 1, 1997 and ending with a payment on the first day of the month in which Executive dies;; PROVIDED that (x) no such payment shall be made unless each of the conditions in the Option Agreements provided for in Paragraph 8(a) and the conditions in Paragraphs 8(b) and 10 below have been satisfied, and (y) such payment is contingent upon Executive's compliance with each and every requirement of this Agreement applicable to him; and PROVIDED FURTHER that the Pension shall be paid through the Company's Supplemental Executive Retirement Plan (but no other benefit shall be payable to or with respect to Executive under such plan); and PROVIDED FURTHER that in the event Executive elects to receive the Pension pursuant to paragraph 6(a)(ii), that Executive may elect to receive the Pension in the form of an 4 actuarially equivalent joint and survivor annuity in lieu of a single life annuity (such actuarial equivalence being determined in accordance with the terms of the Company's Supplemental Executive Retirement Plan). (b) Permit Executive to participate in the Company's medical program through which retirees, at their cost (as determined by the Company), may elect to have coverage under the Company's medical program that is secondary to Medicare. 7. CONSULTING SERVICES. Commencing at the expiration of the Employment Term: (a) The Company shall retain the Executive's services, and he shall serve the Company, as a consultant for the period May 28, 1997 through May 31, 2004 ("the Consulting Period"). (b) During the Consulting Period, Executive will render to the Company such services of a consultative nature as the Company reasonably may request, so that the Company may continue to have the benefit of his experience and knowledge of the affairs of the Company and of his business reputation and contacts. Executive will be an advisor to the Chief Executive Officer and will perform such tasks as the Chief Executive shall designate. The Company understands and agrees that Executive may relocate his residence elsewhere. Executive will be available for advice and counsel to the officers and directors of the Company at all reasonable times by telephone, letter or in person for up to the equivalent of twenty (20) eight hour days per calendar quarter through May 31, 1999, and five (5) eight hour days per calendar quarter commencing June 1, 1999 through the end of the Consulting Period, in each case during normal business hours. (c) The Company shall pay Executive a consulting fee of FIVE HUNDRED THOUSAND DOLLARS ($500,000) per annum during the period commencing June 1, 1997 through May 31, 1999, and a consulting fee of ONE HUNDRED THOUSAND DOLLARS ($100,000) per annum during the period commencing June 1, 1999 through the end of the Consulting Period, in each case payable monthly in arrears. (d) During the Consulting Period the Company shall reimburse Executive monthly for travel and other expenses in connection with his services as a consultant, such reimbursement to be in accordance with the Company's standard reimbursement practices. The Company hereby agrees to indemnify Executive and hold Executive harmless from any and all claims, losses, costs and expenses (including reasonable attorneys fees) incurred, suffered or paid by Executive arising out of or in connection with Executive's performance of consulting services to the Company during the Consulting Period unless caused by the negligence or intentional misconduct of Executive and/or Executive's material breach of this Agreement. This provision is not intended to limit or eliminate any indemnification obligations the Company may have to Executive as a result of Executive's position as an officer and director of the Company. 5 (e) During the Employment Term and the period May 28, 1997 through December 31, 1999, the Company will provide Executive with up to 1,250 square feet of usable office space at a location to be selected by the Company and acceptable to Executive, including rent, utilities and escalations, but not in the Company's home office building. The office space shall be furnished with office furniture and shall be equipped with other reasonable furnishings, including computer, telephone and photocopy equipment and shall be staffed by a full-time salaried qualified executive secretary with appropriate fringe benefits. Ownership of the furnishings and equipment furnished by the Company shall be retained by the Company and at December 31, 1999 possession thereof shall be delivered to Company. Reasonable operating expenses of the office shall be paid by the Company. The Executive may at any time deliver possession of this office space and the furnishings to the Company, at which time the Company's obligations to Executive under this subparagraph 7(e) shall cease. 8. Option; Trading of Company Common Shares. (a) The Company confirms that Executive received conditional grants on September 24, 1996 of an option to purchase 50,000 Common Shares of the Company at a price of $30.00 per share (the closing price on October 1, 1996) and an option to purchase 50,000 Class A Common Shares of the Company at a price of $27.25 per share (the closing price on October 1, 1996), in accordance with the terms of the Option Agreements attached hereto as Exhibits A-1 and A-2 and made a part hereof. Such grants were conditioned on Executive's execution and delivery of this Agreement. Executive hereby delivers to the Company originals of the Option Agreements duly executed by Executive. (b) Executive agrees that, from the date hereof through May 31, 1999, the Executive shall not dispose of shares of the Company's equity securities except during a period in which the Company's general counsel confirms that the Company's then directors and officers are permitted to trade such securities; provided, however, that from the date hereof through May 31, 1997, Executive may transfer such equity securities to a private foundation, as such term is defined in Section 509(a) of the Internal Revenue Code of 1986 (as amended) (the "Code"), established solely by the Executive (the "Private Foundation"). Executive shall cause his spouse, and any donee or transferee of Executive or his spouse of such securities, including, but not limited to the Private Foundation, not to dispose of shares of the Company's equity securities except for dispositions of such equity securities by the Private Foundation in order to avoid excise taxes which may be imposed under Section 4942 or 4943 of the Code or except during a period in which the Company's general counsel confirms that the Company's then directors and officers are permitted to trade such securities; provided, however, that the restrictions of this sentence shall not apply to any transferee that acquires such securities in an open market transaction that is permitted hereunder. Nothing in this subparagraph 8(b) shall restrict Executive's right to exercise any exercisable portion of the options described in subparagraph 8(a). 9. CONSIDERATION FOR RELEASES. Executive acknowledges and agrees that the consideration provided by the Company to Executive under this Agreement, including, without limitation, the payments and benefits to be made or provided by the Company to Executive pursuant to this Agreement and the Option Agreements, is greater than and in addition to anything 6 of value to which he otherwise would be entitled from the Company and that the releases by Executive set forth in Paragraph 10 of this Agreement and the obligations of and actions taken by Executive under this Agreement are given and undertaken in consideration of, and adequately supported by, the payments and benefits to be made or provided to Executive by the Company under and pursuant to this Agreement and the Option Agreements. 10. RELEASES BY EXECUTIVE. (a) In consideration of the payments made and to be made and the benefits to be received by Executive pursuant to Paragraphs 6, 7 and 8(a) of this Agreement, Executive, for himself and his dependents, successors, assigns, heirs, executors and administrators (and his and their legal representatives of every kind), hereby releases, dismisses, remises and forever discharges the Company from any and all arbitrations, claims, including claims for attorney's fees, demands, damages, suits, proceedings, actions and/or causes of action of any kind and every description, whether known or unknown, which Executive now has or may have had for, upon, or by reason of any cause whatsoever (except that this release shall not apply to the obligations of the Company arising under this Agreement) ("claims"), against the Company, including but not limited to: (i) any and all claims arising out of or relating to Executive's employment by or service with the Company through the date hereof; (ii) any and all claims arising out of or relating to the matter of ELLIS F. SMOLIK VS. THE LINCOLN ELECTRIC COMPANY, Case No. 288514 in the Common Pleas Court of Cuyahoga County, Ohio; (iii) any and all claims of discrimination, including but not limited to claims of discrimination on the basis of sex, race, age, national origin, marital status, religion or handicap, including, specifically, but without limiting the generality of the foregoing, any claims under the Age Discrimination in Employment Act, as amended, Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act, Ohio Revised Code Section 4101.17 and Ohio Revised Code Chapter 4112, including Sections 4112.02 and 4112.99 thereof; and (iv) any and all claims of breach of any contract or promise, express or implied. (b) Executive understands and acknowledges that the Company does not admit any violation of law, liability or invasion of any of his rights and that any such violation, liability or invasion is expressly denied. The consideration provided under this Agreement is made for the purpose of settling and extinguishing all claims and rights (and every other similar or dissimilar matter) that Executive ever had or now may have against the Company to the extent provided in this Paragraph 10. Executive further agrees and acknowledges that no representations, promises or inducements have been made by the Company other than as appear in this Agreement. 7 (c) Executive further agrees and acknowledges that: (i) The release provided for in this Paragraph 10 releases claims to and including the date of this Agreement; (ii) He has been advised by the Company to consult with legal counsel prior to executing this Agreement and the release provided for in this Paragraph 10, has had an opportunity to consult with and to be advised by legal counsel of his choice, fully understands the terms of this Agreement, and enters into this Agreement freely, voluntarily and intending to be bound; (iii) He has been given a period of twenty-one (21) days to review and consider the terms of this Agreement, and the release contained herein, prior to its execution and that he may use as much of the twenty-one (21) day period as he desires; and (iv) He may, within seven (7) days after execution, revoke this Agreement. Revocation shall be made by delivering a written notice of revocation to the Vice President of Human Resources at the Company. For such revocation to be effective, written notice must be actually received by the Vice President of Human Resources at the Company no later than the close of business on the seventh (7th) day after Executive executes this Agreement. If Executive does exercise his right to revoke this Agreement, all of the terms and conditions of the Agreement shall be of no force and effect and the Company shall not have any obligation to make payments or provide benefits or option to Executive as set forth in Paragraphs 6, 7 and 8 of this Agreement, except as may be required under COBRA. (d) Executive agrees that he will never file a lawsuit or other complaint asserting any claim that is released in this Paragraph 10. (e) It is understood and agreed that Executive's resignation and retirement are by mutual agreement between the Company and Executive, and that Executive waives and releases any claim that he has or may have to reemployment after May 27, 1997. (f) As a condition of the Company's obligation to make payments or provide benefits to Executive as set forth in Paragraphs 6 and 7 of this Agreement, and as a condition to any exercise of the options granted pursuant to the Option Agreements provided for in Paragraph 8(a) of this Agreement, Executive shall, at the time of his retirement as an employee of the Company pursuant to Paragraph 5 of this Agreement, execute and deliver the Release attached hereto as Exhibit B and made a part hereof. 8 11. CONFIDENTIAL INFORMATION; STATEMENTS TO THIRD PARTIES. (a) Executive acknowledges and agrees that in the performance of his duties as an officer and employee of the Company, and as a consultant to the Company pursuant to Paragraph 7 hereof, he was and may be brought into frequent contact with, had or may have had access to, and/or became or may become informed of confidential and proprietary information of the Company and/or information which is a trade secret of the Company (collectively, "Confidential Information"), as more fully described in subparagraph (b) of this Paragraph 11. Executive acknowledges and agrees that the Confidential Information of the Company gained by Executive during his association with the Company was or will be developed by and/or for the Company through substantial expenditure of time, effort and money and constitutes valuable and unique property of the Company. (b) Executive will keep in strict confidence, and will not, directly or indirectly, at any time, disclose, furnish, disseminate, make available, use or suffer to be used in any manner any Confidential Information of the Company (except as may be necessary in connection with the discharge of Executive's obligations pursuant to Paragraphs 3, 7 and 15 of this Agreement) without limitation as to when or how Executive may have acquired such Confidential Information. Executive specifically acknowledges that Confidential Information includes any and all information, whether reduced to writing (or in a form from which information can be obtained, translated, or derived into reasonably usable form), or maintained in the mind or memory of Executive and whether compiled or created by the Company, which derives independent economic value from not being readily known to or ascertainable by proper means by others who can obtain economic value from the disclosure or use of such information, that reasonable efforts have been put forth by the Company to maintain the secrecy of Confidential Information, that such Confidential Information is and will remain the sole property of the Company, and that any retention or use by Executive of Confidential Information after the termination of Executive's employment with and services for the Company shall constitute a misappropriation of the Company's Confidential Information. (c) Executive further agrees that he shall return (to the extent he has not already returned), within ten (10) days of the effective date of his retirement as an employee of the Company, in good condition, all property of the Company, including, without limitation, (i) property, documents and/or all other materials (including copies, reproductions, summaries and/or analyses) which constitute, refer or relate to Confidential Information of the Company, (ii) keys to Company property, (iii) files and (iv) blueprints or other drawings. (d) Executive further acknowledges and agrees that his obligation of confidentiality shall survive, regardless of any other breach of this Agreement or any other agreement, by any party hereto, until and unless such Confidential Information of the Company shall have become, through no fault of Executive, generally known to the public or Executive is required by law (after providing the Company with notice and opportunity to contest such requirement) to make disclosure. Executive's obligations under this Paragraph 11 are in addition to, and not in limitation or preemption of, all other obligations of confidentiality which Executive may have to the Company under general legal or equitable principles or statutes. 9 (e) Because the purpose of this Agreement is to settle amicably any and all potential disputes or claims among the parties, neither Executive nor the Company shall, directly or indirectly, make or cause to be made any statements to any third parties criticizing or disparaging the other or commenting on the character or business reputation of the other. Executive further hereby agrees that, without the prior written consent of the Chief Executive Officer of the Company, unless otherwise required by law, he will not (1) comment to others concerning the status, plans or prospects of the business of the Company, (2) comment to others concerning the status, plans or prospects of any existing, threatened or potential claims or litigation involving the Company, or (3) engage in any act or omission that would be detrimental, financially or otherwise, to the Company, or that would subject the Company to public disrespect, scandal or ridicule. 12. NON-COMPETITION; CERTAIN ACTIONS. (a) Executive agrees that for a period commencing on the date of this Agreement through the end of the Consulting Period, within the Territory (as described in subparagraph (b)(i) of this Paragraph 12) (and, as to subparagraph (a)(iii) of this Paragraph 12, any place), he shall not, directly or indirectly, do or suffer any of the following: (i) Own, manage, control or participate in the ownership, management, or control of, or be employed or engaged by or otherwise affiliated or associated as a consultant, independent contractor or otherwise with, any other corporation, partnership, proprietorship, firm, association, or other business entity, or otherwise engage in any business, which is in competition with the Company's business (as described in subparagraph (b)(ii) of this Paragraph 12); provided, however, that the ownership of not more than five percent (5%) of any class of publicly-traded securities of any entity shall not be deemed a violation of this Agreement. (ii) Employ, assist in employing, or otherwise associate in business with any person who presently or at the end of the Employment Term is an employee, officer or agent of the Company, or any of its affiliated, related or subsidiary entities. (iii) Induce any person who is an employee, officer or agent of the Company, or any of its affiliated, related, or subsidiary entities to terminate such relationship. (b) For purposes of this Agreement: (i) "Territory" shall mean the countries identified in Exhibit C hereto. (ii) The Company's business shall mean the design, manufacture, distribution and sale of the products identified in Exhibit D hereto. 10 (c) Executive agrees that for a period commencing on the date of this Agreement through the end of the Consulting Period, except within the terms of a specific request from the Company, Executive shall not as a principal, or agent of another person, propose or publicly announce or otherwise disclose an intent to propose, or enter into or agree to enter into, singly or with any other person or directly or indirectly, (i) any form of business combination, acquisition, or other transaction relating to the Company or any majority-owned affiliate thereof, (ii) any form of restructuring, recapitalization or similar transaction with respect to the Company or any such affiliate, or (iii) any demand, request or proposal to amend, waive or terminate any provision of this subparagraph 12(c) of this Agreement, nor except as aforesaid during such period will Executive, except with respect to the exercise of options granted pursuant to the Option Agreements provided for in Paragraph 8 of this Agreement, as a principal, or agent of another person, (1) acquire, or offer, propose or agree to acquire, by purchase or otherwise, any securities entitled to vote generally in the election of directors of the Company or any direct or indirect options or other rights to acquire any such securities ("Voting Securities"), (2) make, or in any way participate in, any solicitation of proxies with respect to any Voting Securities (including by the execution of action by written consent), become a participant in any election contest with respect to the Company, seek to influence any person with respect to any Voting Securities or demand a copy of the Company's list of its stockholders or other books and records, (3) participate in or encourage the formation of any partnership, syndicate, or other group which owns or seeks or offers to acquire beneficial ownership of any Voting Securities or which seeks to affect control of the Company or for the purpose of circumventing any provision of this Agreement, or (4) except in connection with Executive's duties as Chairman of the Board of the Company, otherwise act, alone or in concert with others (including by providing financing for another person), to seek or to offer to control or influence, in any manner, the management, Board of Directors, or policies of the Company. (d) In the event Executive shall violate any provision of this Paragraph 12 as to which there is a specific time period during which he is prohibited from taking certain actions or from engaging in certain activities, as set forth in such provision, then, in such event, such violation shall toll the running of such time period from the date of such violation until such violation shall cease. (e) Executive has carefully considered the nature and extent of the restrictions upon him and the rights and remedies conferred upon the Company under this Paragraph 12 and this Agreement, and hereby acknowledges and agrees that the same are reasonable in time and territory, are designed to eliminate competition which otherwise would be unfair to the Company, do not stifle the inherent skill and experience of Executive, would not operate as a bar to Executive's sole means of support, are fully required to protect the legitimate interests of the Company and do not confer a benefit upon the Company disproportionate to the detriment to Executive. 13. DISCLOSURE. Executive, for a period commencing on the date of this Agreement through the end of the Consulting Period, agrees to communicate the contents of Paragraphs 11, 12, 14(b), 15 and 17 of this Agreement to any person, firm, association, or corporation which he intends to be employed by, associated in business with, or represent. 11 14. BREACH. (a) If Executive breaches in any material way any of the provisions of this Agreement, then the Company may, at its sole option, (1) immediately terminate all remaining payments and benefits described in Paragraphs 4 and 7 of this Agreement, and Paragraph 6 of this Agreement to the extent not vested in Executive on the date hereof, (2) cancel the outstanding options granted pursuant to the Option Agreements provided for in Paragraph 8(a) of this Agreement, and (3) obtain reimbursement from Executive of all payments and benefits, options and related Common Shares and Class A Common Shares of the Company already provided pursuant to Paragraphs 4, 7 and 8(a) of this Agreement, and Paragraph 6 of this Agreement to the extent not vested in Executive on the date hereof, plus any expenses and damages incurred as a result of the breach, with the remainder of this Agreement, and all promises and covenants herein, remaining in full force and effect. (b) Executive acknowledges and agrees that the remedy at law available to the Company for breach by Executive of any of his obligations under Paragraphs 11 and 12 of this Agreement would be inadequate and that damages flowing from such a breach would not readily be susceptible to being measured in monetary terms. Accordingly, Executive acknowledges, consents and agrees that, in addition to any other rights or remedies which the Company may have at law, in equity or under this Agreement, upon adequate proof of Executive's violation of any provision of Paragraph 11 or 12 of this Agreement, the Company shall be entitled to immediate injunctive relief and may obtain a temporary order restraining any threatened or further breach, without the necessity of proof of actual damage. (c) The Company acknowledges and agrees that the remedy at law available to the Executive for breach by the Company of its obligations under Paragraph 11(e) of this Agreement would be inadequate and that damages flowing from such a breach would not be readily susceptible to being measured in monetary terms. Accordingly, the Company acknowledges, consents and agrees that, in addition to any other rights or remedies which Executive may have at law, in equity or under this Agreement, upon adequate proof of the Company's violation of Paragraph 11(e) of this Agreement, Executive shall be entitled to immediate injunctive relief and may obtain a temporary order restraining any threatened or further breach, without the necessity of proof of actual damages. (d) In the event of the nonpayment by Company after receipt of thirty (30) days written notice of non-payment from Executive of all or any part of the compensation or consideration required to be paid to Executive pursuant to the terms of this Agreement (other than by reason of Executive's breach of the terms of this Agreement) or in the event this Agreement is not ratified by any receiver, trustee or similar officer appointed in connection with a bankruptcy proceeding involving the Company, then in either event, the restrictions on Executive set forth in paragraph 12 of this Agreement shall immediately terminate and be of no further force and effect without further action by Executive. 12 15. CONTINUED AVAILABILITY AND COOPERATION. (a) Executive shall cooperate fully with the Company and with the Company's counsel in connection with any present and future actual or threatened litigation or administrative proceeding involving the Company that relates to events, occurrences or conduct occurring (or claimed to have occurred) during the period of Executive's employment by the Company. This cooperation by Executive shall include, but not be limited to: (i) making himself reasonably available for interviews and discussions with the Company's counsel as well as for depositions and trial testimony; (ii) if depositions or trial testimony are to occur, making himself reasonably available and cooperating in the preparation therefor as and to the extent that the Company or the Company's counsel reasonably requests; (iii) refraining from impeding in any way the Company's prosecution or defense of such litigation or administrative proceeding; and (iv) cooperating fully in the development and presentation of the Company's prosecution or defense of such litigation or administrative proceeding. (b) After the end of the Consulting Period, Executive shall be reimbursed by the Company for reasonable travel, lodging, telephone and similar expenses incurred in connection with such cooperation, which the Company shall reasonably endeavor to schedule at times not conflicting with the reasonable requirements of any future employer of Executive, or with the requirements of any third party with whom Executive has a business relationship that provides remuneration to Executive. Executive shall not unreasonably withhold his availability for such cooperation. The Company will give appropriate consideration to reimbursement of Executive at a per diem rate if significant involvement and/or cooperation in excess of five (5) days in any given year is required of Executive by Company. 16. SUCCESSORS AND BINDING AGREEMENT. (a) This Agreement shall be binding upon and inure to the benefit of the Company and any successor of or to the Company, including, without limitation, any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed included in the definition of "the Company" for purposes of this Agreement), but shall not otherwise be assignable or delegable by the Company. (b) This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and/or legatees. 13 (c) This Agreement is personal in nature and none of the parties hereto shall, without the consent of the other parties, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in subparagraphs (a) and (b) of this Paragraph 16. (d) This Agreement is intended to be for the exclusive benefit of the parties hereto, and except as provided in subparagraphs (a) and (b) of this Paragraph 16, no third party shall have any rights hereunder. (e) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, operation of law or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform this Agreement. 17. NON-DISCLOSURE. Except to the extent that this Agreement or the terms hereof become publicly known or available because of legally mandated disclosure and filing requirements of the Securities and Exchange Commission, or because of any other legal requirement that this Agreement or the terms hereof be disclosed or filed with a governmental instrumentality or agency, all provisions of this Agreement and the circumstances giving rise hereto are and shall remain confidential and shall not be disclosed to any person not a party hereto (other than (i) Executive's spouse and children, (ii) each party's attorney, financial advisor and/or tax advisor to the extent necessary for such advisor to render appropriate legal, financial and tax advice, and (iii) persons or entities that fall within the scope of Paragraph 13 of this Agreement, but only to the extent required thereby), except as necessary to carry out the provisions of this Agreement, and except as may be required by law; PROVIDED, HOWEVER, that Executive may disclose to prospective employers the circumstances of his retirement from the Company so long as all such disclosures are made in a manner not injurious to the reputation or business of the Company. 18. NOTICES. For all purposes of this Agreement, all communications provided for herein shall be in writing and shall be deemed to have been duly given when delivered, addressed to the Company (to the attention of the Vice President of Human Resources) at its principal executive offices and to Executive at his principal residence, _________________, or to such other address as any party may have furnished to the other in writing and in accordance herewith. Notices of change of address shall be effective only upon receipt. 19. PROFESSIONAL FEES. The Company and Executive acknowledge and agree that each shall be responsible for the payment of their respective professional fees and costs (and related disbursements) incurred in connection with Executive's termination and resignation and all matters relating to the negotiation and execution of this Agreement; provided that the Company shall reimburse Executive his reasonable professional fees and costs (and related disbursements) in connection herewith in an amount not to exceed SIXTY THOUSAND DOLLARS ($60,000). 14 20. TAXES, PAYMENTS, ETC. (a) Executive acknowledges and agrees that he shall be responsible for his share of any and all Federal, State and/or local taxes applicable to the payments made, and benefits provided or made available, to Executive pursuant to this Agreement and further agrees to indemnify the Company against any liability as a result of those taxes. (b) The payments to Executive pursuant to Paragraphs 4, 6 and 7 of this Agreement shall be made by check or direct deposit to an account designated by Executive, and shall be reduced by any applicable Federal, State and local tax or other required withholding. The payments to Executive pursuant to subparagraph 4(b) of this Agreement shall be reduced by any applicable deductions resulting from Executive's election to participate in the Company's medical and/or life insurance programs as described in subparagraph 4(c) of this Agreement. 21. MISCELLANEOUS. The death or disability of Executive following the execution of this Agreement shall not affect or revoke this Agreement or any of the obligations of the parties hereto. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by any of the parties that are not set forth expressly in this Agreement and every one of them (if, in fact, there have been any) is hereby terminated without liability or any other legal effect whatsoever. 22. ENTIRE AGREEMENT. This Agreement shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof and shall supersede all prior verbal or written agreements, covenants, communications, understandings, commitments, representations or warranties, whether oral or written, by any party hereto or any of its representatives pertaining to such subject matter. 23. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the substantive laws of the State of Ohio, without giving effect to the principles of conflict of laws of such state. 24. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement which shall nevertheless remain in full force and effect. 25. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same Agreement. 15 26. CAPTIONS AND PARAGRAPH HEADINGS. Captions and paragraph headings used herein are for convenience and are not part of this Agreement and shall not be used in construing it. 27. FURTHER ASSURANCES. Each party hereto shall execute such additional documents, and do such additional things, as may reasonably be requested by the other party to effectuate the purposes and provisions of this Agreement. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement on the date set forth above. THE LINCOLN ELECTRIC COMPANY By: /s/ RAYMOND S. VOGT --------------------------------- Its: Vice President, Human Resources --------------------------------- Witness: /s/ L.O. SELHORST /s/ DONALD F. HASTINGS ---------------------- -------------------------------------- Lawrence O. Selhorst Donald F. Hastings Date: February 14, 1997 16 [Common Shares] EXHIBIT A-1 THE LINCOLN ELECTRIC COMPANY Non-Qualified Stock Option Agreement ------------------------------------ WHEREAS, Donald F. Hastings (the "Optionee") is an employee of The Lincoln Electric Company (the "Company"); WHEREAS, the execution of a stock option agreement in the form hereof has been authorized by a resolution of the Compensation Committee (the "Committee") of the Board of Directors (the "Board") of the Company that was duly adopted on September 24, 1996, with an effective date of October 1, 1996 (the "Date of Grant"), and is incorporated herein by this reference; and WHEREAS, the option granted hereby is intended to be a non-qualified stock option and shall not be treated as an "incentive stock option" within the meaning of that term under Section 422 of the Internal Revenue Code of 1986; NOW, THEREFORE, pursuant to the Company's 1988 Incentive Equity Plan (the "Plan") and subject to the terms and conditions thereof and the terms and conditions hereinafter set forth, the Company hereby grants to the Optionee a non-qualified stock option (the "Option") to purchase 50,000 Common Shares, without par value, of the Company (the "Common Shares"), at the exercise price of thirty dollars ($30.00) per Common Share (the "Exercise Price"). 1. VESTING OF OPTION. (a) Unless terminated as hereinafter provided, the Option shall be exercisable after the Optionee shall have been in the continuous employ of the Company or a Subsidiary (as defined in the Plan) from the Date of Grant to May 27, 1997. (b) Notwithstanding the provisions of Section 1(a) hereof, the Option shall become immediately exercisable in full upon any change in control of the Company that shall 17 occur while the Optionee is an employee of the Company or a Subsidiary. For the purposes of this agreement, the term "change in control" shall mean the occurrence of any of the following events: (i) all or substantially all of the assets of the Company are sold or transferred to another corporation or entity, or the Company is merged, consolidated or reorganized into or with another corporation or entity, with the result that upon conclusion of the transaction less than 51 percent of the outstanding securities entitled to vote generally in the election of directors or other capital interests of the acquiring corporation or entity is owned, directly or indirectly, by the shareholders of the Company generally prior to the transaction; or (ii) there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report thereto), as promulgated pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation thereto under the Exchange Act) of securities representing 30 percent or more of the combined voting power of the then-outstanding voting securities of the Company, excluding (A) any person or group of persons who are officers, directors or employees of the Company or any Subsidiary as of the date hereof or are related by blood or marriage to the descendants of James F. or John C. Lincoln, including any trusts or similar arrangements for any of the foregoing and any foundations established by any of the foregoing and (B) any underwriter or syndicate of underwriters acting on behalf of the Company in a public offering of the Company's securities and any of their transferees; or (iii) the Company shall file a report or proxy statement with the Securities and Exchange Commission (the "SEC") pursuant to the Exchange Act disclosing in response to Item 1 of Form 8-K thereunder or Item 5(f) of Schedule 14A thereunder (or any successor schedule, form, report or item thereto) that a change in control of the 18 Company has or may have occurred, or will or may occur in the future, pursuant to any then-existing contract or transaction; or (iv) the individuals who constituted the Board at the beginning of any period of two consecutive calendar years cease for any reason to constitute at least a majority thereof unless the nomination for election by the Company's shareholders of each new member of the Board was approved by a vote of at least two-thirds of the members of the Board still in office who were members of the Board at the beginning of any such period. In the event that any person described in Section 1(b)(ii) hereof files an amendment to any report referred to in Section 1(b)(ii) hereof that shows the beneficial ownership described in Section 1(b)(ii) hereof to have decreased to less than 30 percent, or in the event that any anticipated change in control referred to in Section 1(b)(iii) hereof does not occur following the filing with the SEC of any report or proxy statement described in Section 1(b)(iii) hereof because any contract or transaction referred to in Section 1(b)(iii) hereof is cancelled or abandoned, the Committee may nullify the effect of Section 1(b)(ii) or 1(b)(iii) hereof, as the case may be, and reinstate the provisions of Section 1(a) hereof by giving notice thereof to the Optionee; PROVIDED, HOWEVER, that any such action by the Committee shall not prejudice any exercise of the Option that may have occurred prior to the nullification and reinstatement. The provisions of Section 1(b)(ii) hereof shall again become automatically effective following any such nullification of the provisions thereof and reinstatement of the provisions of Section 1(a) hereof in the event that any person described in Section 1(b)(ii) hereof files a further amendment to any report referred to in Section 1(b)(ii) hereof that shows the beneficial ownership described in Section 1(b)(ii) hereof to have again increased to 30 percent or more. (c) Notwithstanding the provisions of Section 1(a) hereof, the Option shall become immediately exercisable in full upon the death or disability (as defined in the Plan) of the Optionee while in the employment of the Company or any Subsidiary, or the Retirement (as defined in the Plan) of the Optionee with the consent of the Board of Directors. 19 (d) To the extent that the Option shall have become exercisable in accordance with the terms of this agreement, it may be exercised in whole or in part from time to time thereafter. 2. TERMINATION OF OPTION. The Option shall terminate automatically and without further notice on the earliest of the following dates: (a) Three months after the date upon which the Optionee ceases to be an employee of the Company or a Subsidiary, unless the cessation of his employment (i) is a result of his or her death, Disability (as defined in the Plan) or Retirement or (ii) occurs in a manner described in (d) or (e) below; (b) Three years after the date of the death or Disability of the Optionee while an employee of the Company or a Subsidiary or three years after the date of Retirement of the Optionee; (c) One year after the date of the death of the Optionee, if the Optionee dies after the termination of his employment with the Company or a Subsidiary and prior to the termination of the Option; (d) Automatically and without further notice upon the termination of Optionee's employment for Cause; (e) If the Optionee, either during employment by the Company or after termination of such employment, does not comply with each and every provision of the Employment, Retirement and Consulting Agreement dated February 14, 1997 between the Optionee and the Company (the "ERC Agreement") applicable to the Optionee, including, without limitation Paragraphs 10, 11, 12, 13 and 15 of the ERC Agreement and the Board of Directors or the Compensation Committee shall so find, the Optionee shall, forthwith upon notice of such finding, (i) return to the Company, in exchange for payment by the Company of the option price paid therefor, all the Common Shares that the Optionee has not disposed of that were purchased pursuant to this Agreement prior to the date of such noncompliance or the commencement of such noncompliance with the ERC Agreement, and (ii) with respect to any shares so purchased that the 20 Optionee has disposed of, pay to the Company in cash the difference between (A) the option price paid therefor by the Optionee pursuant to this Agreement, and (B) the closing price of the Common Shares on the NASDAQ National Market on the date of such purchase (or on the last trading day prior to such purchase, if there was no trading on the purchase date). To the extent that such amounts are not paid to the Company, the Company may set off the amounts so payable to it against any amounts that may be owing from time to time by the Company or a Subsidiary to the Optionee, whether as wages, deferred compensation or vacation pay or in the form of any other benefit under the ERC Agreement or for any other reason. (f) ten years after the Date of Grant. For purposes of this agreement, the following term shall be defined as set forth below: (i) "Cause" means a felony conviction of the Optionee or the failure of the Optionee to contest prosecution for a felony, or Optionee's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company or any Subsidiary. 3. PAYMENT OF EXERCISE PRICE. The Exercise Price shall be payable upon exercise (a) in cash in the form of certified or bank check or other cash equivalent acceptable to the Company, (b) by transfer to the Company of nonforfeitable, unrestricted Common Shares or Class A Common Shares, without par value, of the Company ("Class A Shares") that have been owned by the Optionee for at least six months prior to the date of exercise, or (c) by any combination of the methods of payment described in Sections 3(a) and 3(b) hereof. Nonforfeitable, unrestricted Common Shares or Class A Shares that are transferred by the Optionee in payment of all or any part of the Exercise Price shall be valued on the basis of their fair market value as determined by the Committee from time to time. 4. COMPLIANCE WITH LAW. Notwithstanding any other provision of this agreement, the Option shall not be exercisable if the exercise or issuance thereof would result in a violation of any law. To the extent that the Ohio Securities Act shall be applicable to the Option, the Option 21 shall not be exercisable unless the Common Shares or other securities covered by the Option are (a) exempt from registration thereunder, (b) the subject of a transaction that is exempt from compliance therewith, (c) registered by description or qualification thereunder, or (d) the subject of a transaction that shall have been registered by description thereunder. 5. TRANSFERABILITY AND EXERCISABILITY. The Option, including any interest therein, shall not be transferable by the Optionee except by will or the laws of descent and distribution, and the Option shall be exercisable during the lifetime of the Optionee only by him or, in the event of his legal incapacity to do so, by his guardian or legal representative acting on behalf of the Optionee in a fiduciary capacity under state law and court supervision. 6. ADJUSTMENTS. The Committee shall make any adjustments in the Exercise Price and the number or kind of shares of stock or other securities covered by the Option that the Committee may determine to be equitably required to prevent any dilution or expansion of the Optionee's rights under this agreement that otherwise would result from any (a) stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, (b) merger, consolidation, separation, reorganization or partial or complete liquidation involving the Company, or (c) other transaction or event having an effect similar to any of those referred to in Section 6(a) or 6(b) hereof. Furthermore, in the event that any transaction or event described or referred to in the immediately preceding sentence shall occur, the Committee may provide in substitution of any or all of the Optionee's rights under this agreement such alternative consideration as the Committee may determine in good faith to be equitable under the circumstances. 7. WITHHOLDING TAXES. If the Company shall be required to withhold any federal, state, local or foreign tax in connection with any exercise of the Option, the Optionee shall pay the tax or make provisions that are satisfactory to the Company for the payment thereof. 8. CONTINUOUS EMPLOYMENT. For purposes of this Agreement, the continuous employ of the Optionee with the Company or a Subsidiary shall not be deemed interrupted, and 22 the Optionee shall not be deemed to have ceased to be an employee of the Company or any Subsidiary, by reason of the transfer of his employment among the Company and its Subsidiaries. 9. RIGHT TO TERMINATE EMPLOYMENT. No provision of this agreement shall limit in any way whatsoever any right that the Company or a subsidiary may otherwise have to terminate the employment of the Optionee at any time. 10. RELATION TO OTHER BENEFITS. Any economic or other benefit to the Optionee under this agreement or the Plan shall not be taken into account in determining any benefits to which the Optionee may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by the Company or a subsidiary and shall not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Company or a subsidiary. 11. AMENDMENTS. Any amendment to the Plan shall be deemed to be an amendment to this agreement to the extent that the amendment is applicable hereto; PROVIDED, HOWEVER, that no amendment shall adversely affect the rights of the Optionee with respect to the Option without the Optionee's consent. 12. SEVERABILITY. In the event that one or more of the provisions of this agreement shall be invalidated for any reason by a court of competent jurisdiction, any provision so invalidated shall be deemed to be separable from the other provisions hereof, and the remaining provisions hereof shall continue to be valid and fully enforceable. 13. GOVERNING LAW. This agreement is made under, and shall be construed in accordance with, the internal substantive laws of the State of Ohio. This agreement is executed by the Company on this 14th day of February, 1997. THE LINCOLN ELECTRIC COMPANY By /s/ RAYMOND S. VOGT --------------------------------- Raymond S. Vogt Vice President, Human Resources 23 The undersigned Optionee hereby acknowledges receipt of an executed original of this agreement and accepts the Option granted hereunder, subject to the terms and conditions of the Plan and the terms and conditions hereinabove set forth. /s/ DONALD F. HASTINGS --------------------------------- Donald F. Hastings Date: February 14, 1997 24 [Class A Shares] EXHIBIT A-2 THE LINCOLN ELECTRIC COMPANY Non-Qualified Stock Option Agreement ------------------------------------ WHEREAS, Donald F. Hastings (the "Optionee") is an employee of The Lincoln Electric Company (the "Company"); WHEREAS, the execution of a stock option agreement in the form hereof has been authorized by a resolution of the Compensation Committee (the "Committee") of the Board of Directors (the "Board") of the Company that was duly adopted on September 24, 1996, with an effective date of October 1, 1996 (the "Date of Grant"), and is incorporated herein by this reference; and WHEREAS, the option granted hereby is intended to be a non-qualified stock option and shall not be treated as an "incentive stock option" within the meaning of that term under Section 422 of the Internal Revenue Code of 1986; NOW, THEREFORE, pursuant to the Company's 1988 Incentive Equity Plan (the "Plan") and subject to the terms and conditions thereof and the terms and conditions hereinafter set forth, the Company hereby grants to the Optionee a non-qualified stock option (the "Option") to purchase 50,000 Class A Common Shares, without par value, of the Company (the "Class A Shares"), at the exercise price of twenty-seven dollars and twenty-five cents ($27.25) per Class A Share (the "Exercise Price"). 1. VESTING OF OPTION. (a) Unless terminated as hereinafter provided, the Option shall be exercisable after the Optionee shall have been in the continuous employ of the Company or a Subsidiary (as defined in the Plan) from the Date of Grant to May 27, 1997. (b) Notwithstanding the provisions of Section 1(a) hereof, the Option shall become immediately exercisable in full upon any change in control of the Company that shall 25 occur while the Optionee is an employee of the Company or a Subsidiary. For the purposes of this agreement, the term "change in control" shall mean the occurrence of any of the following events: (i) all or substantially all of the assets of the Company are sold or transferred to another corporation or entity, or the Company is merged, consolidated or reorganized into or with another corporation or entity, with the result that upon conclusion of the transaction less than 51 percent of the outstanding securities entitled to vote generally in the election of directors or other capital interests of the acquiring corporation or entity is owned, directly or indirectly, by the shareholders of the Company generally prior to the transaction; or (ii) there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report thereto), as promulgated pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation thereto under the Exchange Act) of securities representing 30 percent or more of the combined voting power of the then-outstanding voting securities of the Company, excluding (A) any person or group of persons who are officers, directors or employees of the Company or any Subsidiary as of the date hereof or are related by blood or marriage to the descendants of James F. or John C. Lincoln, including any trusts or similar arrangements for any of the foregoing and any foundations established by any of the foregoing and (B) any underwriter or syndicate of underwriters acting on behalf of the Company in a public offering of the Company's securities and any of their transferees; or (iii) the Company shall file a report or proxy statement with the Securities and Exchange Commission (the "SEC") pursuant to the Exchange Act disclosing in response to Item 1 of Form 8-K thereunder or Item 5(f) of Schedule 14A thereunder (or any successor schedule, form, report or item thereto) that a change in control of the 26 Company has or may have occurred, or will or may occur in the future, pursuant to any then-existing contract or transaction; or (iv) the individuals who constituted the Board at the beginning of any period of two consecutive calendar years cease for any reason to constitute at least a majority thereof unless the nomination for election by the Company's shareholders of each new member of the Board was approved by a vote of at least two-thirds of the members of the Board still in office who were members of the Board at the beginning of any such period. In the event that any person described in Section 1(b)(ii) hereof files an amendment to any report referred to in Section 1(b)(ii) hereof that shows the beneficial ownership described in Section 1(b)(ii) hereof to have decreased to less than 30 percent, or in the event that any anticipated change in control referred to in Section 1(b)(iii) hereof does not occur following the filing with the SEC of any report or proxy statement described in Section 1(b)(iii) hereof because any contract or transaction referred to in Section 1(b)(iii) hereof is cancelled or abandoned, the Committee may nullify the effect of Section 1(b)(ii) or 1(b)(iii) hereof, as the case may be, and reinstate the provisions of Section 1(a) hereof by giving notice thereof to the Optionee; PROVIDED, HOWEVER, that any such action by the Committee shall not prejudice any exercise of the Option that may have occurred prior to the nullification and reinstatement. The provisions of Section 1(b)(ii) hereof shall again become automatically effective following any such nullification of the provisions thereof and reinstatement of the provisions of Section 1(a) hereof in the event that any person described in Section 1(b)(ii) hereof files a further amendment to any report referred to in Section 1(b)(ii) hereof that shows the beneficial ownership described in Section 1(b)(ii) hereof to have again increased to 30 percent or more. (c) Notwithstanding the provisions of Section 1(a) hereof, the Option shall become immediately exercisable in full upon the death or disability (as defined in the Plan) of the Optionee while in the employment of the Company or any Subsidiary, or the Retirement (as defined in the Plan) of the Optionee with the consent of the Board of Directors. 27 (d) To the extent that the Option shall have become exercisable in accordance with the terms of this agreement, it may be exercised in whole or in part from time to time thereafter. 2. TERMINATION OF OPTION. The Option shall terminate automatically and without further notice on the earliest of the following dates: (a) Three months after the date upon which the Optionee ceases to be an employee of the Company or a Subsidiary, unless the cessation of his employment (i) is a result of his or her death, Disability (as defined in the Plan) or Retirement or (ii) occurs in a manner described in (d) or (e) below; (b) Three years after the date of the death or Disability of the Optionee while an employee of the Company or a Subsidiary or three years after the date of Retirement of the Optionee; (c) One year after the date of the death of the Optionee, if the Optionee dies after the termination of his employment with the Company or a Subsidiary and prior to the termination of the Option; (d) Automatically and without further notice upon the termination of Optionee's employment for Cause; (e) If the Optionee, either during employment by the Company or after termination of such employment, does not comply with each and every provision of the Employment, Retirement and Consulting Agreement dated February 14, 1997 between the Optionee and the Company (the "ERC Agreement") applicable to the Optionee, including, without limitation Paragraphs 10, 11, 12, 13 and 15 of the ERC Agreement and the Board of Directors or the Compensation Committee shall so find, the Optionee shall, forthwith upon notice of such finding, (i) return to the Company, in exchange for payment by the Company of the option price paid therefor, all the Class A Shares that the Optionee has not disposed of that were purchased pursuant to this Agreement prior to the date of such noncompliance or the commencement of such noncompliance with the ERC Agreement, and (ii) with respect to any shares so purchased that the 28 Optionee has disposed of, pay to the Company in cash the difference between (A) the option price paid therefor by the Optionee pursuant to this Agreement, and (B) the closing price of the Class A Shares on the NASDAQ National Market on the date of such purchase (or on the last trading day prior to such purchase, if there was no trading on the purchase date). To the extent that such amounts are not paid to the Company, the Company may set off the amounts so payable to it against any amounts that may be owing from time to time by the Company or a Subsidiary to the Optionee, whether as wages, deferred compensation or vacation pay or in the form of any other benefit under the ERC Agreement or for any other reason. (f) ten years after the Date of Grant. For purposes of this agreement, the following term shall be defined as set forth below: (i) "Cause" means a felony conviction of the Optionee or the failure of the Optionee to contest prosecution for a felony, or Optionee's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company or any Subsidiary. 3. PAYMENT OF EXERCISE PRICE. The Exercise Price shall be payable upon exercise (a) in cash in the form of certified or bank check or other cash equivalent acceptable to the Company, (b) by transfer to the Company of nonforfeitable, unrestricted Common Shares, without par value, of the Company ("Common Shares") or Class A Shares that have been owned by the Optionee for at least six months prior to the date of exercise, or (c) by any combination of the methods of payment described in Sections 3(a) and 3(b) hereof. Nonforfeitable, unrestricted Common Shares or Class A Shares that are transferred by the Optionee in payment of all or any part of the Exercise Price shall be valued on the basis of their fair market value as determined by the Committee from time to time. 4. COMPLIANCE WITH LAW. Notwithstanding any other provision of this agreement, the Option shall not be exercisable if the exercise or issuance thereof would result in a violation of any law. To the extent that the Ohio Securities Act shall be applicable to the Option, the Option 29 shall not be exercisable unless the Class A Shares or other securities covered by the Option are (a) exempt from registration thereunder, (b) the subject of a transaction that is exempt from compliance therewith, (c) registered by description or qualification thereunder, or (d) the subject of a transaction that shall have been registered by description thereunder. 5. TRANSFERABILITY AND EXERCISABILITY. The Option, including any interest therein, shall not be transferable by the Optionee except by will or the laws of descent and distribution, and the Option shall be exercisable during the lifetime of the Optionee only by him or, in the event of his legal incapacity to do so, by his guardian or legal representative acting on behalf of the Optionee in a fiduciary capacity under state law and court supervision. 6. ADJUSTMENTS. The Committee shall make any adjustments in the Exercise Price and the number or kind of shares of stock or other securities covered by the Option that the Committee may determine to be equitably required to prevent any dilution or expansion of the Optionee's rights under this agreement that otherwise would result from any (a) stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, (b) merger, consolidation, separation, reorganization or partial or complete liquidation involving the Company, or (c) other transaction or event having an effect similar to any of those referred to in Section 6(a) or 6(b) hereof. Furthermore, in the event that any transaction or event described or referred to in the immediately preceding sentence shall occur, the Committee may provide in substitution of any or all of the Optionee's rights under this agreement such alternative consideration as the Committee may determine in good faith to be equitable under the circumstances. 7. WITHHOLDING TAXES. If the Company shall be required to withhold any federal, state, local or foreign tax in connection with any exercise of the Option, the Optionee shall pay the tax or make provisions that are satisfactory to the Company for the payment thereof. 8. CONTINUOUS EMPLOYMENT. For purposes of this Agreement, the continuous employ of the Optionee with the Company or a Subsidiary shall not be deemed interrupted, and 30 the Optionee shall not be deemed to have ceased to be an employee of the Company or any Subsidiary, by reason of the transfer of his employment among the Company and its Subsidiaries. 9. RIGHT TO TERMINATE EMPLOYMENT. No provision of this agreement shall limit in any way whatsoever any right that the Company or a subsidiary may otherwise have to terminate the employment of the Optionee at any time. 10. RELATION TO OTHER BENEFITS. Any economic or other benefit to the Optionee under this agreement or the Plan shall not be taken into account in determining any benefits to which the Optionee may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by the Company or a subsidiary and shall not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Company or a subsidiary. 11. AMENDMENTS. Any amendment to the Plan shall be deemed to be an amendment to this agreement to the extent that the amendment is applicable hereto; provided, however, that no amendment shall adversely affect the rights of the Optionee with respect to the Option without the Optionee's consent. 12. SEVERABILITY. In the event that one or more of the provisions of this agreement shall be invalidated for any reason by a court of competent jurisdiction, any provision so invalidated shall be deemed to be separable from the other provisions hereof, and the remaining provisions hereof shall continue to be valid and fully enforceable. 13. GOVERNING LAW. This agreement is made under, and shall be construed in accordance with, the internal substantive laws of the State of Ohio. This agreement is executed by the Company on this 14th day of February, 1997. THE LINCOLN ELECTRIC COMPANY By /s/ RAYMOND S. VOGT ---------------------------------- Raymond S. Vogt Vice President, Human Resources 31 The undersigned Optionee hereby acknowledges receipt of an executed original of this agreement and accepts the Option granted hereunder, subject to the terms and conditions of the Plan and the terms and conditions hereinabove set forth. /s/ DONALD F. HASTINGS ---------------------------------- Donald F. Hastings Date: February 14, 1997 32 EXHIBIT B --------- RELEASE ------- (a) In consideration of the payments made and to be made and the benefits to be received by the undersigned (the "Executive") pursuant to Paragraphs 6, 7 and 8(a) of the Employment, Retirement and Consulting Agreement between The Lincoln Electric Company and the Executive made the 14th day of February, 1997, the Executive, for himself and his dependents, successors, assigns, heirs, executors and administrators (and his and their legal representatives of every kind), hereby releases, dismisses, remises and forever discharges The Lincoln Electric Company, its predecessors, parents, subsidiaries, divisions, related or affiliated companies, officers, directors, stockholders, members, employees, heirs, successors, assigns, representatives, agents and counsel (the "Company") from any and all arbitrations, claims, including claims for attorney's fees, demands, damages, suits, proceedings, actions and/or causes of action of any kind and every description, whether known or unknown, which Executive now has or may have had for, upon, or by reason of any cause whatsoever (except that this release shall not apply to the obligations of the Company arising under this Agreement) ("claims"), against the Company, including but not limited to: (i) any and all claims arising out of or relating to Executive's employment by or service with the Company and his termination from the Company; (ii) any and all claims of discrimination, including but not limited to claims of discrimination on the basis of sex, race, age, national origin, marital status, religion or handicap, including, specifically, but without limiting the generality of the foregoing, any claims under the Age Discrimination in Employment Act, as amended, Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act, Ohio Revised Code Section 4101.17 and Ohio Revised Code Chapter 4112, including Sections 4112.02 and 4112.99 thereof; and (iii) any and all claims of wrongful or unjust discharge or breach of any contract or promise, express or implied. (b) Executive understands and acknowledges that the Company does not admit any violation of law, liability or invasion of any of his rights and that any such violation, liability or invasion is expressly denied. The consideration provided for this Release is made for the purpose of settling and extinguishing all claims and rights (and every other similar or dissimilar matter) that Executive ever had or now may have against the Company to the extent provided in this Release. Executive further agrees and acknowledges that no representations, promises or inducements have been made by the Company other than as appear in this Agreement. (c) Executive further agrees and acknowledges that: 33 (i) The release provided for herein releases claims to and including the date of this Release; (ii) He has been advised by the Company to consult with legal counsel prior to executing this Release, has had an opportunity to consult with and to be advised by legal counsel of his choice, fully understands the terms of this Release, and enters into this Release freely, voluntarily and intending to be bound; (iii) He has been given a period of twenty-one (21) days to review and consider the terms of this Release, prior to its execution and that he may use as much of the twenty-one (21) day period as he desires; and (iv) He may, within seven (7) days after execution, revoke this Release. Revocation shall be made by delivering a written notice of revocation to the Vice President of Human Resources at the Company. For such revocation to be effective, written notice must be actually received by the Vice President of Human Resources at the Company no later than the close of business on the seventh (7th) day after Executive executes this Release. If Executive does exercise his right to revoke this Release, all of the terms and conditions of the Release shall be of no force and effect and the Company shall not have any obligation to make payments or provide benefits to Executive as set forth in Paragraphs 6 (to the extent not vested in Executive on the 14th day of February, 1997) and 7 of the Employment, Retirement and Consulting Agreement between the Company and the Executive made the 14th day of February, 1997. (d) Executive agrees that he will never file a lawsuit or other complaint asserting any claim that is released in this Release. (e) It is understood and agreed that Executive's resignation and retirement are by mutual agreement between the Company and Executive, and that Executive waives and releases any claim that he has or may have to reemployment after May 27, 1997. 34 IN WITNESS WHEREOF, the Executive has executed and delivered this Release on the date set forth below. DONALD F. HASTINGS Witness: _____________________ __________________________________ Date: ________________________ Date: ____________________________ 35 EXHIBIT C --------- Argentina Australia Austria Brazil Canada Chile China Columbia Czech Republic Denmark England Finland France Germany Greece Hungary India Indonesia Ireland Italy Japan Korea Malaysia Mexico Netherlands Northern Ireland Norway Peru Phillipines Poland Portugal Russia Scotland South Africa Spain Sweden Taiwan Thailand United States Venezuela Vietnam Wales 36 EXHIBIT D --------- I. All Arc Welding Machines ranging from light duty models for light industrial and farm use to heavy duty models for commercial and industrial use in manual, semi-automatic, automatic and robotic welding. II. All Arc Welding Consumables: Welding rods, fluxes and wires used in light to heavy manufacturing of mild steel, alloy and hard surface applications; coated manual or stick electrodes; solid electrodes produced in coil form for continuous feeding in mechanized welding; cored electrodes produced in coil form for continuous feeding in mechanized welding; submerged arc electrodes and fluxes; self-shielded cored electrodes; gas-shielded solid and cored electrodes. III. All Arc Welding Power Sources and Automated Wire Feeding Systems. IV. All Integral horsepower electric motors ranging principally from 1/3 to 250 horsepower, but including cast iron motors of up to 1,250 horsepower. 37 EXHIBIT E --------- Mr. Hastings may serve on the below-mentioned Boards and with such organizations only in his individual capacity. American Welding Society (on Foundation Board) Case Western Reserve (on Visiting Committee) Weatherhead School of Management Cleveland Council on World Affairs (Chairman) 75 Public Square Cleveland, OH 44113-2001 Ohio Law Enforcement Agency (Fund Raising Captain) Hope Lodge, American Cancer Society (on Board of Trustees - Chairman of Capital Campaign) Lake Erie College (on Board of Trustees) 50 Club (Member) Cleveland Committee on Foreign Relations (Chairman) French American Chamber of Commerce (Chairman on Advisory Committee) Greater Cleveland Growth Association (Executive Committee) World Trade Center, Chairman International Trade Alliance (Chairman) Cleveland World Trade Association (Member) EX-10.J 3 EXHIBIT 10(J) 1 Exhibit 10(j) EMPLOYMENT AND RETIREMENT AGREEMENT ----------------------------------- THIS EMPLOYMENT AND RETIREMENT AGREEMENT (this "Agreement") is made and entered into this 12th day of December, 1996, by and between THE LINCOLN ELECTRIC COMPANY (the "Company," a term which in this Agreement shall include its predecessors, parents, subsidiaries, divisions, related or affiliated companies, officers, directors, stockholders, members, employees, heirs, successors, assigns, representatives, agents and counsel, unless the context otherwise clearly requires), and DAVID FULLEN ("Executive"), WITNESSETH: ----------- WHEREAS, Executive is an employee of the Company and currently serves as Executive Vice President - Engineering/Marketing of the Company; WHEREAS, the Company and Executive have determined that Executive shall resign from the position of Executive Vice President - Engineering/Marketing of the Company, effective December 31, 1996, and that Executive shall resign and retire as an employee of the Company and its subsidiaries and related or affiliated companies, effective June 30, 1997; WHEREAS, the Company and Executive desire to make provision for the payments and benefits that Executive will be entitled to receive from the Company in consideration for Executive's obligations and actions under this Agreement and in connection with such resignations and retirement and the cessation of his employment with the Company; and WHEREAS, the Company and Executive wish to resolve, settle and/or compromise any and all matters, claims and issues between them arising from or relating to Executive's service and employment with the Company, including the termination thereof; NOW THEREFORE, in consideration of the promises and agreements contained herein and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, and intending to be legally bound, the Company and Executive agree as follows: 1. EFFECTIVE DATE OF AGREEMENT. This Agreement is effective on the date hereof and shall continue in effect as provided herein. 2. EMPLOYMENT. Commencing on the date hereof, Executive's employment shall continue through June 30, 1997 (the "Employment Term"), subject to the provisions hereof. 2 3. DUTIES DURING EMPLOYMENT TERM. Executive's principal duties and authority after December 31, 1996 during the Employment Term will be to serve as an advisor to the Company in any capacity as the Chief Executive Officer of the Company may designate. 4. COMPENSATION DURING EMPLOYMENT TERM. In consideration of the services of the Executive during the Employment Term, and of the promises of Executive in this Agreement and subject to the conditions hereof, the Company shall: (a) During the Employment Term, continue to pay Executive his base salary at its current rate in accordance with the Company's regular payroll practices; PROVIDED that (i) the continuance of such payments is contingent upon Executive's compliance with each and every requirement of this Agreement applicable to him and (ii) if Executive dies before the completion of the payments described in this subparagraph 4(a), the remaining payments described in this subparagraph 4(a) following his death shall be made to his estate. (b) During the Employment Term, continue Executive's eligibility for a 1996 bonus, to be determined by the Board of Directors of the Company; PROVIDED that (i) the payment of any bonus is contingent upon Executive's compliance with each and every requirement of this Agreement applicable to him and (ii) if Executive dies before any payment described in this subparagraph 4(b) is made, such payment described in this subparagraph 4(b) following his death shall be made to his estate. Executive shall not be eligible for a 1997 bonus. (c) Continue to permit Executive to participate in the Company's medical and life insurance programs, and other plans, programs and perquisites appropriate for his position and status as a senior officer of the Company, on the same basis that Executive has participated in such plans, programs and perquisites, until the end of the Employment Term. 5. RESIGNATION AND RETIREMENT; OTHER PAYMENTS. (a) Effective December 31, 1996, Executive hereby (i) resigns as Executive Vice President - Engineering/Marketing of the Company, (ii) resigns from all offices of the Company and any entity that is a subsidiary of or is otherwise related to or affiliated with the Company to which he has been elected by the Board of Directors of the Company (or to which he has otherwise been appointed), and (iii) resign from all administrative, fiduciary or other positions he may hold with respect to arrangements or plans for, of or relating to the Company. The Company hereby consents to and accepts said resignation, and the Company records shall so reflect. (b) Effective June 30, 1997, Executive shall resign and retire from his employment with the Company and its subsidiaries and related or affiliated companies. (c) Following Executive's retirement, the Company shall reimburse Executive's documented relocation expenses relating to (i) the sale of his house in the Greater Cleveland Area in an amount not to exceed THIRTY THOUSAND DOLLARS ($30,000), and (ii) the 3 transportation of his household goods to Florida in an amount not to exceed TEN THOUSAND SEVEN HUNDRED DOLLARS ($10,700). (d) The Company shall pay to Executive after January 19, 1997 NINETY THOUSAND ONE HUNDRED FORTY DOLLARS ($90,140) in exchange for the cancellation of the options granted to him as part of the settlement arising out of the matter of ELLIS F. SMOLIK VS. THE LINCOLN ELECTRIC COMPANY, Case No. 288514 in the Common Pleas Court of Cuyahoga County, Ohio. Upon such payment, Executive shall return the Option Agreements dated July 5, 1996, relating to 5524 Class A Common Shares at $30.00 per share and 6304 Class A Common Shares at $34.00 per share, and such options shall be cancelled. 6. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN, ETC. In consideration of the promises of the Executive in this Agreement and subject to the conditions hereof, including without limitation Paragraph 9 of this Agreement, the Company shall: (a) Pay Executive a supplemental pension of FORTY-FOUR THOUSAND FIVE HUNDRED FORTY-THREE DOLLARS ($44,543) per year, in equal monthly installments, payable in the form of a single life annuity, commencing with a payment on July 1, 1997 and ending with a payment on the first day of the month in which Executive dies (the "Pension"); PROVIDED that (i) no such payments shall be made unless each of the conditions in the Option Agreements provided for in Paragraph 7 and the conditions in Paragraph 9 below have been satisfied, and (ii) each such payment is contingent upon Executive's compliance with each and every requirement of this Agreement applicable to him; and PROVIDED FURTHER that the Pension shall be paid through the Company's Supplemental Executive Retirement Plan (but no other benefit shall be payable to or with respect to Executive under such plan); and PROVIDED FURTHER that Executive may elect to receive the Pension in the form of an actuarially equivalent joint and survivor annuity in lieu of a straight life annuity (such actuarial equivalence being determined in accordance with the terms of the Company's Supplemental Executive Retirement Plan). (b) Permit Executive to participate in the Company's medical program through which retirees, at their cost (as determined by the Company), may elect to have coverage under the Company's medical program that is secondary to Medicare. 7. OPTION. The Company shall grant Executive an option to purchase 4,000 Common Shares of the Company at a price of $30.00 per share and an option to purchase 4,000 Class A Common Shares of the Company at a price of $27.25 per share, in accordance with the terms of the Option Agreements attached hereto as Exhibits A-1 and A-2 and made a part hereof. 8. CONSIDERATION FOR RELEASES. Executive acknowledges and agrees that the consideration provided by the Company to Executive under this Agreement, including, without limitation, the payments and benefits to be made or provided by the Company to Executive pursuant to this Agreement and the Option Agreements, is greater than and in addition to anything of value to which he otherwise would be entitled from the Company and that the releases by Executive set forth in Paragraph 9 of this Agreement and the obligations of and actions taken by Executive under this Agreement are given and undertaken in consideration of, 4 and adequately supported by, the payments and benefits to be made or provided to Executive by the Company under and pursuant to this Agreement and the Option Agreements. 9. RELEASES BY EXECUTIVE. (a) In consideration of the payments made and to be made and the benefits to be received by Executive pursuant to Paragraphs 5, 6 and 7 of this Agreement, Executive, for himself and his dependents, successors, assigns, heirs, executors and administrators (and his and their legal representatives of every kind), hereby releases, dismisses, remises and forever discharges the Company from any and all arbitrations, claims, including claims for attorney's fees, demands, damages, suits, proceedings, actions and/or causes of action of any kind and every description, whether known or unknown, which Executive now has or may have had for, upon, or by reason of any cause whatsoever (except that this release shall not apply to the obligations of the Company arising under this Agreement) ("claims"), against the Company, including but not limited to: (i) any and all claims arising out of or relating to Executive's employment by or service with the Company through the date hereof; (ii) any and all claims arising out of or relating to the matter of ELLIS F. SMOLIK VS. THE LINCOLN ELECTRIC COMPANY, Case No. 288514 in the Common Pleas Court of Cuyahoga County, Ohio; (iii) any and all claims of discrimination, including but not limited to claims of discrimination on the basis of sex, race, age, national origin, marital status, religion or handicap, including, specifically, but without limiting the generality of the foregoing, any claims under the Age Discrimination in Employment Act, as amended, Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act, Ohio Revised Code Section 4101.17 and Ohio Revised Code Chapter 4112, including Sections 4112.02 and 4112.99 thereof; and (iv) any and all claims of breach of any contract or promise, express or implied. (b) Executive understands and acknowledges that the Company does not admit any violation of law, liability or invasion of any of his rights and that any such violation, liability or invasion is expressly denied. The consideration provided under this Agreement is made for the purpose of settling and extinguishing all claims and rights (and every other similar or dissimilar matter) that Executive ever had or now may have against the Company to the extent provided in this Paragraph 9. Executive further agrees and acknowledges that no representations, promises or inducements have been made by the Company other than as appear in this Agreement. 5 (c) Executive further agrees and acknowledges that: (i) The release provided for in this Paragraph 9 releases claims to and including the date of this Agreement; (ii) He has been advised by the Company to consult with legal counsel prior to executing this Agreement and the release provided for in this Paragraph 9, has had an opportunity to consult with and to be advised by legal counsel of his choice, fully understands the terms of this Agreement, and enters into this Agreement freely, voluntarily and intending to be bound; (iii) He has been given a period of twenty-one (21) days to review and consider the terms of this Agreement, and the release contained herein, prior to its execution and that he may use as much of the twenty-one (21) day period as he desires; and (iv) He may, within seven (7) days after execution, revoke this Agreement. Revocation shall be made by delivering a written notice of revocation to the Vice President of Human Resources at the Company. For such revocation to be effective, written notice must be actually received by the Vice President of Human Resources at the Company no later than the close of business on the seventh (7th) day after Executive executes this Agreement. If Executive does exercise his right to revoke this Agreement, all of the terms and conditions of the Agreement shall be of no force and effect and the Company shall not have any obligation to make payments or provide benefits or option to Executive as set forth in Paragraphs 6 and 7 of this Agreement, except as may be required under COBRA. (d) Executive agrees that he will never file a lawsuit or other complaint asserting any claim that is released in this Paragraph 9. (e) It is understood and agreed that Executive's resignation and retirement are by mutual agreement between the Company and Executive, and that Executive waives and releases any claim that he has or may have to reemployment after June 30, 1997. (f) As a condition of the Company's obligation to make payments or provide benefits to Executive that are not otherwise vested as set forth in Paragraphs 5 and 6 of this Agreement, and as a condition to any exercise of the options granted pursuant to the Option Agreements provided for in Paragraph 7 of this Agreement, Executive shall, at the time of his retirement as an employee of the Company pursuant to Paragraph 5 of this Agreement (6/30/97), execute and deliver the Release attached hereto as Exhibit B and made a part hereof. 6 10. CONFIDENTIAL INFORMATION; STATEMENTS TO THIRD PARTIES. (a) Executive acknowledges and agrees that in the performance of his duties as an officer and employee of the Company, he was and may be brought into frequent contact with, had or may have had access to, and/or became or may become informed of confidential and proprietary information of the Company and/or information which is a trade secret of the Company (collectively, "Confidential Information"), as more fully described in subparagraph (b) of this Paragraph 10. Executive acknowledges and agrees that the Confidential Information of the Company gained by Executive during his association with the Company was or will be developed by and/or for the Company through substantial expenditure of time, effort and money and constitutes valuable and unique property of the Company. (b) Executive will keep in strict confidence, and will not, directly or indirectly, at any time, disclose, furnish, disseminate, make available, use or suffer to be used in any manner any Confidential Information of the Company (except as may be necessary in connection with the discharge of Executive's obligations pursuant to Paragraphs 3 and 14 of this Agreement) without limitation as to when or how Executive may have acquired such Confidential Information. Executive specifically acknowledges that Confidential Information includes any and all information, whether reduced to writing (or in a form from which information can be obtained, translated, or derived into reasonably usable form), or maintained in the mind or memory of Executive and whether compiled or created by the Company, which derives independent economic value from not being readily known to or ascertainable by proper means by others who can obtain economic value from the disclosure or use of such information, that reasonable efforts have been put forth by the Company to maintain the secrecy of Confidential Information, that such Confidential Information is and will remain the sole property of the Company, and that any retention or use by Executive of Confidential Information after the termination of Executive's employment with and services for the Company shall constitute a misappropriation of the Company's Confidential Information. (c) Executive further agrees that he shall return (to the extent he has not already returned), within ten (10) days of the effective date of his retirement as an employee of the Company, in good condition, all property of the Company, including, without limitation, (i) property, documents and/or all other materials (including copies, reproductions, summaries and/or analyses) which constitute, refer or relate to Confidential Information of the Company, (ii) keys to Company property, (iii) files and (iv) blueprints or other drawings. (d) Executive further acknowledges and agrees that his obligation of confidentiality shall survive, regardless of any other breach of this Agreement or any other agreement, by any party hereto, until and unless such Confidential Information of the Company shall have become, through no fault of Executive, generally known to the public or Executive is required by law (after providing the Company with notice and opportunity to contest such requirement) to make disclosure. Executive's obligations under this Paragraph 10 are in addition to, and not in limitation or preemption of, all other obligations of confidentiality which Executive may have to the Company under general legal or equitable principles or statutes. 7 (e) Because the purpose of this Agreement is to settle amicably any and all potential disputes or claims among the parties, neither Executive nor the Company shall, directly or indirectly, make or cause to be made any statements to any third parties criticizing or disparaging the other or commenting on the character or business reputation of the other. Executive further hereby agrees that, without the prior written consent of the Chief Executive Officer of the Company, unless otherwise required by law, he will not (1) comment to others concerning the status, plans or prospects of the business of the Company, (2) comment to others concerning the status, plans or prospects of any existing, threatened or potential claims or litigation involving the Company, or (3) engage in any act or omission that would be detrimental, financially or otherwise, to the Company, or that would subject the Company to public disrespect, scandal or ridicule. 11. NON-COMPETITION; CERTAIN ACTIONS. (a) Executive agrees that for a period commencing on the date of this Agreement through June 30, 1999 within the Territory (as described in subparagraph (b)(i) of this Paragraph 11) (and, as to subparagraph (a)(iii) of this Paragraph 11, any place), he shall not, directly or indirectly, do or suffer any of the following: (i) Own, manage, control or participate in the ownership, management, or control of, or be employed or engaged by or otherwise affiliated or associated as a consultant, independent contractor or otherwise with, any other corporation, partnership, proprietorship, firm, association, or other business entity, or otherwise engage in any business, which is in competition with the Company's business (as described in subparagraph (b)(ii) of this Paragraph 11); PROVIDED, however, that the ownership of not more than one percent (1%) of any class of publicly-traded securities of any entity shall not be deemed a violation of this Agreement. (ii) Employ, assist in employing, or otherwise associate in business with any person who presently or at the end of the Employment Term is an employee, officer or agent of the Company, or any of its affiliated, related or subsidiary entities. (iii) Induce any person who is an employee, officer or agent of the Company, or any of its affiliated, related, or subsidiary entities to terminate such relationship. (b) For purposes of this Agreement: (i) "Territory" shall mean the countries identified in Exhibit C hereto. 8 (ii) The Company's business shall mean the design, manufacture, distribution and sale of the products identified in Exhibit D hereto. (c) Executive agrees that for a period commencing on the date of this Agreement through June 30, 1999, except within the terms of a specific request from the Company, Executive shall not as a principal, or agent of another person, propose or publicly announce or otherwise disclose an intent to propose, or enter into or agree to enter into, singly or with any other person or directly or indirectly, (i) any form of business combination, acquisition, or other transaction relating to the Company or any majority-owned affiliate thereof, (ii) any form of restructuring, recapitalization or similar transaction with respect to the Company or any such affiliate, or (iii) any demand, request or proposal to amend, waive or terminate any provision of this subparagraph 11(c) of this Agreement, nor except as aforesaid during such period will Executive, except with respect to the exercise of options granted pursuant to the Option Agreements provided for in Paragraph 7 of this Agreement, as a principal, or agent of another person, (1) acquire, or offer, propose or agree to acquire, by purchase or otherwise, any securities entitled to vote generally in the election of directors of the Company or any direct or indirect options or other rights to acquire any such securities ("Voting Securities"), (2) make, or in any way participate in, any solicitation of proxies with respect to any Voting Securities (including by the execution of action by written consent), become a participant in any election contest with respect to the Company, seek to influence any person with respect to any Voting Securities or demand a copy of the Company's list of its stockholders or other books and records, (3) participate in or encourage the formation of any partnership, syndicate, or other group which owns or seeks or offers to acquire beneficial ownership of any Voting Securities or which seeks to affect control of the Company or for the purpose of circumventing any provision of this Agreement, or (4) otherwise act, alone or in concert with others (including by providing financing for another person), to seek or to offer to control or influence, in any manner, the management, Board of Directors, or policies of the Company. (d) In the event Executive shall violate any provision of this Paragraph 11 as to which there is a specific time period during which he is prohibited from taking certain actions or from engaging in certain activities, as set forth in such provision, then, in such event, such violation shall toll the running of such time period from the date of such violation until such violation shall cease. (e) Executive has carefully considered the nature and extent of the restrictions upon him and the rights and remedies conferred upon the Company under this Paragraph 11 and this Agreement, and hereby acknowledges and agrees that the same are reasonable in time and territory, are designed to eliminate competition which otherwise would be unfair to the Company, do not stifle the inherent skill and experience of Executive, would not operate as a bar to Executive's sole means of support, are fully required to protect the legitimate interests of the Company and do not confer a benefit upon the Company disproportionate to the detriment to Executive. 12. DISCLOSURE. Executive, for a period commencing on the date of this Agreement through June 30, 1999, agrees to communicate the contents of Paragraphs 10, 11, 9 13(b), 14 and 16 of this Agreement to any person, firm, association, or corporation which he intends to be employed by, associated in business with, or represent. 13. BREACH. (a) If Executive breaches any of the provisions of this Agreement, then the Company may, at its sole option, (1) immediately terminate all remaining payments and benefits described in Paragraphs 4 and 6 of this Agreement that did not prior to the date hereof constitute vested benefits, (2) cancel the outstanding options granted pursuant to the Option Agreements provided for in Paragraph 7 of this Agreement, and (3) obtain reimbursement from Executive of all non-vested payments and benefits, options and related Common Shares and Class A Common Shares of the Company already provided pursuant to Paragraphs 4, 6 and 7 of this Agreement, plus any expenses and damages incurred as a result of the breach, with the remainder of this Agreement, and all promises and covenants herein, remaining in full force and effect. (b) Executive acknowledges and agrees that the remedy at law available to the Company for breach by Executive of any of his obligations under Paragraphs 10 and 11 of this Agreement would be inadequate and that damages flowing from such a breach would not readily be susceptible to being measured in monetary terms. Accordingly, Executive acknowledges, consents and agrees that, in addition to any other rights or remedies which the Company may have at law, in equity or under this Agreement, upon adequate proof of Executive's violation of any provision of Paragraph 10 or 11 of this Agreement, the Company shall be entitled to immediate injunctive relief and may obtain a temporary order restraining any threatened or further breach, without the necessity of proof of actual damage. 14. CONTINUED AVAILABILITY AND COOPERATION. (a) Executive shall cooperate fully with the Company and with the Company's counsel in connection with any present and future actual or threatened litigation or administrative proceeding involving the Company that relates to events, occurrences or conduct occurring (or claimed to have occurred) during the period of Executive's employment by the Company. This cooperation by Executive shall include, but not be limited to: (i) making himself reasonably available for interviews and discussions with the Company's counsel as well as for depositions and trial testimony; (ii) if depositions or trial testimony are to occur, making himself reasonably available and cooperating in the preparation therefor as and to the extent that the Company or the Company's counsel reasonably requests; (iii) refraining from impeding in any way the Company's prosecution or defense of such litigation or administrative proceeding; and (iv) cooperating fully in the development and presentation of the Company's prosecution or defense of such litigation or administrative proceeding. 10 (b) From and after the end of the Employment Term, Executive shall continue to provide cooperation to the Company with respect to projects undertaken by the Company where Executive's prior knowledge with respect to, or prior involvement in, such or similar projects would be relevant to the advancement of such projects; PROVIDED that such cooperation shall not require more than twenty (20) days of Executive's time per calendar year and a reasonable per diem fee can be agreed upon. (c) After the end of the Employment Term, Executive shall be reimbursed by the Company for reasonable travel, lodging, telephone and similar expenses incurred in connection with such cooperation, which the Company shall reasonably endeavor to schedule at times not conflicting with the reasonable requirements of any future employer of Executive, or with the requirements of any third party with whom Executive has a business relationship that provides remuneration to Executive. Executive shall not unreasonably withhold his availability for such cooperation. 15. SUCCESSORS AND BINDING AGREEMENT. (a) This Agreement shall be binding upon and inure to the benefit of the Company and any successor of or to the Company, including, without limitation, any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed included in the definition of "the Company" for purposes of this Agreement), but shall not otherwise be assignable or delegable by the Company. (b) This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and/or legatees. (c) This Agreement is personal in nature and none of the parties hereto shall, without the consent of the other parties, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in subparagraphs (a) and (b) of this Paragraph 15. (d) This Agreement is intended to be for the exclusive benefit of the parties hereto, and except as provided in subparagraphs (a) and (b) of this Paragraph 15, no third party shall have any rights hereunder. 11 16. NON-DISCLOSURE. Except to the extent that this Agreement or the terms hereof become publicly known or available because of legally mandated disclosure and filing requirements of the Securities and Exchange Commission, or because of any other legal requirement that this Agreement or the terms hereof be disclosed or filed with a governmental instrumentality or agency, all provisions of this Agreement and the circumstances giving rise hereto are and shall remain confidential and shall not be disclosed to any person not a party hereto (other than (i) Executive's spouse, (ii) each party's attorney, financial advisor and/or tax advisor to the extent necessary for such advisor to render appropriate legal, financial and tax advice, and (iii) persons or entities that fall within the scope of Paragraph 12 of this Agreement, but only to the extent required thereby), except as necessary to carry out the provisions of this Agreement, and except as may be required by law; PROVIDED, HOWEVER, that Executive may disclose to prospective employers the circumstances of his retirement from the Company so long as all such disclosures are made in a manner not injurious to the reputation or business of the Company. 17. NOTICES. For all purposes of this Agreement, all communications provided for herein shall be in writing and shall be deemed to have been duly given when delivered, addressed to the Company (to the attention of the Vice President of Human Resources) at its principal executive offices and to Executive at his principal residence, 6472 Timberlakes Dr. (3-103), Ft. Myers, FL, 33908 or to such other address as any party may have furnished to the other in writing and in accordance herewith. Notices of change of address shall be effective only upon receipt. 18. PROFESSIONAL FEES. The Company and Executive acknowledge and agree that each shall be responsible for the payment of their respective professional fees and costs (and related disbursements) incurred in connection with Executive's termination and resignation and all matters relating to the negotiation and execution of this Agreement. 19. TAXES, PAYMENTS, ETC.. (a) Executive acknowledges and agrees that he shall be responsible for his share of any and all Federal, State and/or local taxes applicable to the payments made, and benefits provided or made available, to Executive pursuant to this Agreement and further agrees to indemnify the Company against any liability as a result of those taxes. (b) The payments to Executive pursuant to Paragraphs 4, 5 and 6 of this Agreement shall be made by check or direct deposit to an account designated by Executive, and shall be reduced by any applicable Federal, State and local tax or other required withholding. The payments to Executive pursuant to subparagraph 4(b) of this Agreement shall be reduced by any applicable deductions resulting from Executive's election to participate in the Company's medical and/or life insurance programs as described in subparagraph 4(c) of this Agreement. 12 20. MISCELLANEOUS. The death or disability of Executive following the execution of this Agreement shall not affect or revoke this Agreement or any of the obligations of the parties hereto. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, expressed or implied with respect to the subject matter hereof have been made by any of the parties that are not set forth expressly in this Agreement and every one of them (if, in fact, there have been any) is hereby terminated without liability or any other legal effect whatsoever. 21. ENTIRE AGREEMENT. This Agreement shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof and shall supersede all prior verbal or written agreements, covenants, communications, understandings, commitments, representations or warranties, whether oral or written, by any party hereto or any of its representatives pertaining to such subject matter. 22. GOVERNING LAW. The validity, interpretation, construction and performance of this Agreement shall be governed by the substantive laws of the State of Ohio, without giving effect to the principles of conflict of laws of such state. 23. VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement which shall nevertheless remain in full force and effect. 24. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same Agreement. 25. CAPTIONS AND PARAGRAPH HEADINGS. Captions and paragraph headings used herein are for convenience and are not part of this Agreement and shall not be used in construing it. 26. FURTHER ASSURANCES. Each party hereto shall execute such additional documents, and do such additional things, as may reasonably be requested by the other party to effectuate the purposes and provisions of this Agreement. 13 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement on the date set forth above. THE LINCOLN ELECTRIC COMPANY By: /s/ ANTHONY A. MASSARO ------------------------------- Its: President and Chief Operating ------------------------------- Officer, Chief Executive Officer --------------------------------- Witness: /s/ RAYMOND S. VOGT /s/ DAVID FULLEN ------------------------- ------------------------- Raymond S. Vogt David Fullen Date: December 12, 1996 14 [Common Shares] EXHIBIT A-1 THE LINCOLN ELECTRIC COMPANY NON-QUALIFIED STOCK OPTION AGREEMENT ------------------------------------ WHEREAS, David Fullen (the "Optionee") is an employee of The Lincoln Electric Company (the "Company"); WHEREAS, the execution of a stock option agreement in the form hereof has been authorized by a resolution of the Compensation Committee (the "Committee") of the Board of Directors (the "Board") of the Company that was duly adopted on September 24, 1996, with an effective date of October 1, 1996 (the "Date of Grant"), and is incorporated herein by this reference; and WHEREAS, the option granted hereby is intended to be a non-qualified stock option and shall not be treated as an "incentive stock option" within the meaning of that term under Section 422 of the Internal Revenue Code of 1986; NOW, THEREFORE, pursuant to the Company's 1988 Incentive Equity Plan (the "Plan") and subject to the terms and conditions thereof and the terms and conditions hereinafter set forth, the Company hereby grants to the Optionee a non-qualified stock option (the "Option") to purchase 4,000 Common Shares, without par value, of the Company (the "Common Shares"), at the exercise price of thirty dollars ($30.00) per Common Share (the "Exercise Price"). 1. VESTING OF OPTION. (a) Unless terminated as hereinafter provided, the Option shall be exercisable after the Optionee shall have been in the continuous employ of the Company or a Subsidiary (as defined in the Plan) from the Date of Grant to June 30, 1997. (b) Notwithstanding the provisions of Section 1(a) hereof, the Option shall become immediately exercisable in full upon any change in control of the Company that shall 15 occur while the Optionee is an employee of the Company or a Subsidiary. For the purposes of this agreement, the term "change in control" shall mean the occurrence of any of the following events: (i) all or substantially all of the assets of the Company are sold or transferred to another corporation or entity, or the Company is merged, consolidated or reorganized into or with another corporation or entity, with the result that upon conclusion of the transaction less than 51 percent of the outstanding securities entitled to vote generally in the election of directors or other capital interests of the acquiring corporation or entity is owned, directly or indirectly, by the shareholders of the Company generally prior to the transaction; or (ii) there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report thereto), as promulgated pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation thereto under the Exchange Act) of securities representing 30 percent or more of the combined voting power of the then-outstanding voting securities of the Company, excluding (A) any person or group of persons who are officers, directors or employees of the Company or any Subsidiary as of the date hereof or are related by blood or marriage to the descendants of James F. or John C. Lincoln, including any trusts or similar arrangements for any of the foregoing and any foundations established by any of the foregoing and (B) any underwriter or syndicate of underwriters acting on behalf of the Company in a public offering of the Company's securities and any of their transferees; or (iii) the Company shall file a report or proxy statement with the Securities and Exchange Commission (the "SEC") Pursuant to the Exchange Act disclosing in response to item 1 of Form 8-K thereunder or Item 5(f) of Schedule 14A thereunder (or any successor schedule, form, report or item thereto) that a change in control of the 16 Company has or may have occurred, or will or may occur in the future, pursuant to any then-existing contract or transaction; or (iv) the individuals who constituted the Board at the beginning of any period of two consecutive calendar years cease for any reason to constitute at least a majority thereof unless the nomination for election by the Company's shareholders of each new member of the Board was approved by a vote of at least two-thirds of the members of the Board still in office who were members of the Board at the beginning of any such period. In the event that any person described in Section 1(b)(ii) hereof files an amendment to any report referred to in Section 1(b)(ii) hereof that shows the beneficial ownership described in Section 1(b)(ii) hereof to have decreased to less than 30 percent, or in the event that any anticipated change in control referred to in Section 1(b)(iii) hereof does not occur following the filing with the SEC of any report or proxy statement described in Section 1(b)(iii) hereof because any contract or transaction referred to in Section 1(b)(iii) hereof is cancelled or abandoned, the Committee may nullify the effect of Section 1(b)(ii) or 1(b)(iii) hereof, as the case may be, and reinstate the provisions of Section 1(a) hereof by giving notice thereof to the Optionee; PROVIDED, HOWEVER, that any such action by the Committee shall not prejudice any exercise of the Option that may have occurred prior to the nullification and reinstatement. The provisions of Section 1(b)(ii) hereof shall again become automatically effective following any such nullification of the provisions thereof and reinstatement of the provisions of Section 1(a) hereof in the event that any person described in Section 1(b)(ii) hereof files a further amendment to any report referred to in Section 1(b)(ii) hereof that shows the beneficial ownership described in Section 1(b)(ii) hereof to have again increased to 30 percent or more. (c) Notwithstanding the provisions of Section 1(a) hereof, the Option shall become immediately exercisable in full upon the death or disability (as defined in the Plan) of the Optionee while in the employment of the Company or any Subsidiary, or the Retirement (as defined in the Plan) of the Optionee with the consent of the Board of Directors. 17 (d) To the extent that the Option shall have become exercisable in accordance with the terms of this agreement, it may be exercised in whole or in part from time to time thereafter. 2. TERMINATION OF OPTION. The Option shall terminate automatically and without further notice on the earliest of the following dates: (a) Three months after the date upon which the Optionee ceases to be an employee of the Company or a Subsidiary, unless the cessation of his employment (i) is a result of his or her death, Disability (as defined in the Plan) or Retirement or (ii) occurs in a manner described in (d) or (e) below; (b) Three years after the date of the death or Disability of the Optionee while an employee of the Company or a Subsidiary or three years after the date of Retirement of the Optionee; (c) One year after the date of the death of the Optionee, if the Optionee dies after the termination of his employment with the Company or a Subsidiary and prior to the termination of the Option; (d) Automatically and without further notice upon the termination of Optionee's employment for Cause; (e) If the Optionee, either during employment by the Company or after termination of such employment, does not comply with each and every provision of the Employment and Retirement Agreement dated December 12, 1996 between the Optionee and the Company (the "ERC Agreement") applicable to the Optionee, including, without limitation Paragraphs 9, 10, 11, 12 and 14 of the ERC Agreement and the Board of Directors or the Compensation Committee shall so find, the Optionee shall, forthwith upon notice of such finding, (i) return to the Company, in exchange for payment by the Company of the option price paid therefor, all the Common Shares that the Optionee has not disposed of that were purchased pursuant to this Agreement prior to the date of such noncompliance or the commencement of such noncompliance with the ERC Agreement, and (ii) with respect to any shares so purchased that the 18 Optionee has disposed of, pay to the Company in cash the difference between (A) the option price paid therefor by the Optionee pursuant to this Agreement, and (B) the closing price of the Common Shares on the NASDAQ National Market on the date of such purchase (or on the last trading day prior to such purchase, if there was no trading on the purchase date). To the extent that such amounts are not paid to the Company, the Company may set off the amounts so payable to it against any amounts that may be owing from time to time by the Company or a Subsidiary to the Optionee, whether as wages, deferred compensation or vacation pay or in the form of any other benefit under the ERC Agreement or for any other reason. (f) ten years after the Date of Grant. For purposes of this agreement, the following term shall be defined as set forth below: (i) "Cause" means a felony conviction of the Optionee or the failure of the Optionee to contest prosecution for a felony, or Optionee's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company or any Subsidiary. 3. PAYMENT OF EXERCISE PRICE. The Exercise Price shall be payable upon exercise (a) in cash in the form of certified or bank check or other cash equivalent acceptable to the Company, (b) by transfer to the Company of nonforfeitable, unrestricted Common Shares or Class A Common Shares, without par value, of the Company ("Class A Shares") that have been owned by the Optionee for at least six months prior to the date of exercise, or (c) by any combination of the methods of payment described in Sections 3(a) and 3(b) hereof. Nonforfeitable, unrestricted Common Shares or Class A Shares that are transferred by the Optionee in payment of all or any part of the Exercise Price shall be valued on the basis of their fair market value as determined by the Committee from time to time. 19 4. COMPLIANCE WITH LAW. Notwithstanding any other provision of this agreement, the Option shall not be exercisable if the exercise or issuance thereof would result in a violation of any law. To the extent that the Ohio Securities Act shall be applicable to the Option, the Option shall not be exercisable unless the Common Shares or other securities covered by the Option are (a) exempt from registration thereunder, (b) the subject of a transaction that is exempt from compliance therewith, (c) registered by description or qualification thereunder, or (d) the subject of a transaction that shall have been registered by description thereunder. 5. TRANSFERABILITY AND EXERCISABILITY. The Option, including any interest therein, shall not be transferable by the Optionee except by will or the laws of descent and distribution, and the Option shall be exercisable during the lifetime of the Optionee only by him or, in the event of his legal incapacity to do so, by his guardian or legal representative acting on behalf of the Optionee in a fiduciary capacity under state law and court supervision. 6. ADJUSTMENTS. The Committee shall make any adjustments in the Exercise Price and the number or kind of shares of stock or other securities covered by the Option that the Committee may determine to be equitably required to prevent any dilution or expansion of the Optionee's rights under this agreement that otherwise would result from any (a) stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, (b) merger, consolidation, separation, reorganization or partial or complete liquidation involving the Company, or (c) other transaction or event having an effect similar to any of those referred to in Section 6(a) or 6(b) hereof. Furthermore, in the event that any transaction or event described or referred to in the immediately preceding sentence shall occur, the Committee may provide in substitution of any or all of the Optionee's rights under this agreement such alternative consideration as the Committee may determine in good faith to be equitable under the circumstances. 20 7. WITHHOLDING TAXES. If the Company shall be required to withhold any federal, state, local or foreign tax in connection with any exercise of the Option, the Optionee shall pay the tax or make provisions that are satisfactory to the Company for the payment thereof. 8. CONTINUOUS EMPLOYMENT. For purposes of this Agreement, the continuous employ of the Optionee with the Company or a Subsidiary shall not be deemed interrupted, and the Optionee shall not be deemed to have ceased to be an employee of the Company or any Subsidiary, by reason of the transfer of his employment among the Company and its Subsidiaries. 9. RIGHT TO TERMINATE EMPLOYMENT. No provision of this agreement shall limit in any way whatsoever any right that the Company or a subsidiary may otherwise have to terminate the employment of the Optionee at any time. 10. RELATION TO OTHER BENEFITS. Any economic or other benefit to the Optionee under this agreement or the Plan shall not be taken into account in determining any benefits to which the Optionee may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by the Company or a subsidiary and shall not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Company or a subsidiary. 11. AMENDMENTS. Any amendment to the Plan shall be deemed to be an amendment to this agreement to the extent that the amendment is applicable hereto; PROVIDED, HOWEVER, that no amendment shall adversely affect the rights of the Optionee with respect to the Option without the Optionee's consent. 12. SEVERABILITY. In the event that one or more of the provisions of this agreement shall be invalidated for any reason by a court of competent jurisdiction, any provision so invalidated shall be deemed to be separable from the other provisions hereof, and the remaining provisions hereof shall continue to be valid and fully enforceable. 21 13. GOVERNING LAW. This agreement is made under, and shall be construed in accordance with, the internal substantive laws of the State of Ohio. This agreement is executed by the Company on this 12th day of December, 1996. THE LINCOLN ELECTRIC COMPANY By /s/ ANTHONY A. MASSARO --------------------------------- Anthony A. Massaro President and Chief Operating Officer, Chief Executive Officer 22 The undersigned Optionee hereby acknowledges receipt of an executed original of this agreement and accepts the Option granted hereunder, subject to the terms and conditions of the Plan and the terms and conditions hereinabove set forth. /s/ DAVID FULLEN ---------------------- David Fullen Date: December 12, 1996 23 [Class A Shares] EXHIBIT A-2 THE LINCOLN ELECTRIC COMPANY Non-Qualified Stock Option Agreement ------------------------------------ WHEREAS, David Fullen (the "Optionee") is an employee of The Lincoln Electric Company (the "Company"); WHEREAS, the execution of a stock option agreement in the form hereof has been authorized by a resolution of the Compensation Committee (the "Committee") of the Board of Directors (the "Board") of the Company that was duly adopted on September 24, 1996, with an effective date of October 1, 1996 (the "Date of Grant"), and is incorporated herein by this reference; and WHEREAS, the option granted hereby is intended to be a non-qualified stock option and shall not be treated as an "incentive stock option" within the meaning of that term under Section 422 of the Internal Revenue Code of 1986; NOW, THEREFORE, pursuant to the Company's 1988 Incentive Equity Plan (the "Plan") and subject to the terms and conditions thereof and the terms and conditions hereinafter set forth, the Company hereby grants to the Optionee a non-qualified stock option (the "Option") to purchase 4,000 Class A Common Shares, without par value, of the Company (the "Class A Shares"), at the exercise price of twenty-seven dollars and twenty-five cents ($27.25) per Class A Share (the "Exercise Price"). 1. VESTING OF OPTION. (a) Unless terminated as hereinafter provided, the Option shall be exercisable after the Optionee shall have been in the continuous employ of the Company or a Subsidiary (as defined in the Plan) from the Date of Grant to June 30, 1997. (b) Notwithstanding the provisions of Section 1(a) hereof, the Option shall become immediately exercisable in full upon any change in control of the Company that shall 24 occur while the Optionee is an employee of the Company or a Subsidiary. For the purposes of this agreement, the term "change in control" shall mean the occurrence of any of the following events: (i) all or substantially all of the assets of the Company are sold or transferred to another corporation or entity, or the Company is merged, consolidated or reorganized into or with another corporation or entity, with the result that upon conclusion of the transaction less than 51 percent of the outstanding securities entitled to vote generally in the election of directors or other capital interests of the acquiring corporation or entity is owned, directly or indirectly, by the shareholders of the Company generally prior to the transaction; or (ii) there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report thereto), as promulgated pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation thereto under the Exchange Act) of securities representing 30 percent or more of the combined voting power of the then-outstanding voting securities of the Company, excluding (A) any person or group of persons who are officers, directors or employees of the Company or any Subsidiary as of the date hereof or are related by blood or marriage to the descendants of James F. or John C. Lincoln, including any trusts or similar arrangements for any of the foregoing and any foundations established by any of the foregoing and (B) any underwriter or syndicate of underwriters acting on behalf of the Company in a public offering of the Company's securities and any of their transferees; or (iii) the Company shall file a report or proxy statement with the Securities and Exchange Commission (the "SEC") pursuant to the Exchange Act disclosing in response to Item 1 of Form 8-K thereunder or Item 5(f) of Schedule 14A thereunder (or any successor schedule, form, report or item thereto) that a change in control of the 25 Company has or may have occurred, or will or may occur in the future, pursuant to any then-existing contract or transaction; or (iv) the individuals who constituted the Board at the beginning of any period of two consecutive calendar years cease for any reason to constitute at least a majority thereof unless the nomination for election by the Company's shareholders of each new member of the Board was approved by a vote of at least two-thirds of the members of the Board still in office who were members of the Board at the beginning of any such period. In the event that any person described in Section 1(b)(ii) hereof files an amendment to any report referred to in Section 1(b)(ii) hereof that shows the beneficial ownership described in Section 1(b)(ii) hereof to have decreased to less than 30 percent, or in the event that any anticipated change in control referred to in Section 1(b)(iii) hereof does not occur following the filing with the SEC of any report or proxy statement described in Section 1(b)(iii) hereof because any contract or transaction referred to in Section 1(b)(iii) hereof is cancelled or abandoned, the Committee may nullify the effect of Section 1(b)(ii) or 1(b)(iii) hereof, as the case may be, and reinstate the provisions of Section 1(a) hereof by giving notice thereof to the Optionee; PROVIDED, HOWEVER, that any such action by the Committee shall not prejudice any exercise of the Option that may have occurred prior to the nullification and reinstatement. The provisions of Section 1(b)(ii) hereof shall again become automatically effective following any such nullification of the provisions thereof and reinstatement of the provisions of Section 1(a) hereof in the event that any person described in Section 1(b)(ii) hereof files a further amendment to any report referred to in Section 1(b)(ii) hereof that shows the beneficial ownership described in Section 1(b)(ii) hereof to have again increased to 30 percent or more. (c) Notwithstanding the provisions of Section 1(a) hereof, the Option shall become immediately exercisable in full upon the death or disability (as defined in the Plan) of the Optionee while in the employment of the Company or any Subsidiary, or the Retirement (as defined in the Plan) of the Optionee with the consent of the Board of Directors. 26 (d) To the extent that the Option shall have become exercisable in accordance with the terms of this agreement, it may be exercised in whole or in part from time to time thereafter. 2. TERMINATION OF OPTION. The Option shall terminate automatically and without further notice on the earliest of the following dates: (a) Three months after the date upon which the Optionee ceases to be an employee of the Company or a Subsidiary, unless the cessation of his employment (i) is a result of his or her death, Disability (as defined in the Plan) or Retirement or (ii) occurs in a manner described in (d) or (e) below; (b) Three years after the date of the death or Disability of the Optionee while an employee of the Company or a Subsidiary or three years after the date of Retirement of the Optionee; (c) One year after the date of the death of the Optionee, if the Optionee dies after the termination of his employment with the Company or a Subsidiary and prior to the termination of the Option; (d) Automatically and without further notice upon the termination of Optionee's employment for Cause; (e) If the Optionee, either during employment by the Company or after termination of such employment, does not comply with each and every provision of the Employment and Retirement Agreement dated December 12, 1996 between the Optionee and the Company (the "ERC Agreement") applicable to the Optionee, including, without limitation Paragraphs 9, 10, 11, 12 and 14 of the ERC Agreement and the Board of Directors or the Compensation Committee shall so find, the Optionee shall, forthwith upon notice of such finding, (i) return to the Company, in exchange for payment by the Company of the option price paid therefor, all the Class A Shares that the Optionee has not disposed of that were purchased pursuant to this Agreement prior to the date of such noncompliance or the commencement of such noncompliance with the ERC Agreement, and (ii) with respect to any shares so purchased that the 27 Optionee has disposed of, pay to the Company in cash the difference between (A) the option price paid therefor by the Optionee pursuant to this Agreement, and (B) the closing price of the Class A Shares on the NASDAQ National Market on the date of such purchase (or on the last trading day prior to such purchase, if there was no trading on the purchase date). To the extent that such amounts are not paid to the Company, the Company may set off the amounts so payable to it against any amounts that may be owing from time to time by the Company or a Subsidiary to the Optionee, whether as wages, deferred compensation or vacation pay or in the form of any other benefit under the ERC Agreement or for any other reason. (f) ten years after the Date of Grant. For purposes of this agreement, the following term shall be defined as set forth below: (i) "Cause" means a felony conviction of the Optionee or the failure of the Optionee to contest prosecution for a felony, or Optionee's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company or any Subsidiary. 3. PAYMENT OF EXERCISE PRICE. The Exercise Price shall be payable upon exercise (a) in cash in the form of certified or bank check or other cash equivalent acceptable to the Company, (b) by transfer to the Company of nonforfeitable, unrestricted Common Shares, without par value, of the Company ("Common Shares") or Class A Shares that have been owned by the Optionee for at least six months prior to the date of exercise, or (c) by any combination of the methods of payment described in Sections 3(a) and 3(b) hereof. Nonforfeitable, unrestricted Common Shares or Class A Shares that are transferred by the Optionee in payment of all or any part of the Exercise Price shall be valued on the basis of their fair market value as determined by the Committee from time to time. 4. COMPLIANCE WITH LAW. Notwithstanding any other provision of this agreement, the Option shall not be exercisable if the exercise or issuance thereof would result in a violation of any law. To the extent that the Ohio Securities Act shall be applicable to the Option, the Option 28 shall not be exercisable unless the Class A Shares or other securities covered by the Option are (a) exempt from registration thereunder, (b) the subject of a transaction that is exempt from compliance therewith, (c) registered by description or qualification thereunder, or (d) the subject of a transaction that shall have been registered by description thereunder. 5. TRANSFERABILITY AND EXERCISABILITY. The Option, including any interest therein, shall not be transferable by the Optionee except by will or the laws of descent and distribution, and the Option shall be exercisable during the lifetime of the Optionee only by him or, in the event of his legal incapacity to do so, by his guardian or legal representative acting on behalf of the Optionee in a fiduciary capacity under state law and court supervision. 6. ADJUSTMENTS. The Committee shall make any adjustments in the Exercise Price and the number or kind of shares of stock or other securities covered by the Option that the Committee may determine to be equitably required to prevent any dilution or expansion of the Optionee's rights under this agreement that otherwise would result from any (a) stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, (b) merger, consolidation, separation, reorganization or partial or complete liquidation involving the Company, or (c) other transaction or event having an effect similar to any of those referred to in Section 6(a) or 6(b) hereof. Furthermore, in the event that any transaction or event described or referred to in the immediately preceding sentence shall occur, the Committee may provide in substitution of any or all of the Optionee's rights under this agreement such alternative consideration as the Committee may determine in good faith to be equitable under the circumstances. 7. WITHHOLDING TAXES. If the Company shall be required to withhold any federal, state, local or foreign tax in connection with any exercise of the Option, the Optionee shall pay the tax or make provisions that are satisfactory to the Company for the payment thereof. 8. CONTINUOUS EMPLOYMENT. For purposes of this Agreement, the continuous employ of the Optionee with the Company or a Subsidiary shall not be deemed interrupted, and 29 the Optionee shall not be deemed to have ceased to be an employee of the Company or any Subsidiary, by reason of the transfer of his employment among the Company and its Subsidiaries. 9. RIGHT TO TERMINATE EMPLOYMENT. No provision of this agreement shall limit in any way whatsoever any right that the Company or a subsidiary may otherwise have to terminate the employment of the Optionee at any time. 10. RELATION TO OTHER BENEFITS. Any economic or other benefit to the Optionee under this agreement or the Plan shall not be taken into account in determining any benefits to which the Optionee may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by the Company or a subsidiary and shall not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Company or a subsidiary. 11. AMENDMENTS. Any amendment to the Plan shall be deemed to be an amendment to this agreement to the extent that the amendment is applicable hereto; PROVIDED, HOWEVER, that no amendment shall adversely affect the rights of the Optionee with respect to the Option without the Optionee's consent. 12. SEVERABILITY. In the event that one or more of the provisions of this agreement shall be invalidated for any reason by a court of competent jurisdiction, any provision so invalidated shall be deemed to be separable from the other provisions hereof, and the remaining provisions hereof shall continue to be valid and fully enforceable. 30 13. GOVERNING LAW. This agreement is made under, and shall be construed in accordance with, the internal substantive laws of the State of Ohio. This agreement is executed by the Company on this 12th day of December, 1996. THE LINCOLN ELECTRIC COMPANY By /s/ ANTHONY A. MASSARO ---------------------------------- Anthony A. Massaro President and Chief Operating Officer, Chief Executive Officer 31 The undersigned Optionee hereby acknowledges receipt of an executed original of this agreement and accepts the Option granted hereunder, subject to the terms and conditions of the Plan and the terms and conditions hereinabove set forth. /s/ DAVID FULLEN ---------------------------- David Fullen Date: December 12, 1996 32 EXHIBIT B --------- RELEASE ------- (a) In consideration of the payments made and to be made and the benefits to be received by the undersigned (the "Executive") pursuant to Paragraphs 5, 6 and 7 of the Employment, Retirement and Consulting Agreement between The Lincoln Electric Company and the Executive made the 12th day of December, 1996, the Executive, for himself and his dependents, successors, assigns, heirs, executors and administrators (and his and their legal representatives of every kind), hereby releases, dismisses, remises and forever discharges The Lincoln Electric Company, its predecessors, parents, subsidiaries, divisions, related or affiliated companies, officers, directors, stockholders, members, employees, heirs, successors, assigns, representatives, agents and counsel (the "Company") from any and all arbitrations, claims, including claims for attorney's fees, demands, damages, suits, proceedings, actions and/or causes of action of any kind and every description, whether known or unknown, which Executive now has or may have had for, upon, or by reason of any cause whatsoever (except that this release shall not apply to the obligations of the Company arising under this Agreement) ("claims"), against the Company, including but not limited to: (i) any and all claims arising out of or relating to Executive's employment by or service with the Company and his termination from the Company; (ii) any and all claims of discrimination, including but not limited to claims of discrimination on the basis of sex, race, age, national origin, marital status, religion or handicap, including, specifically, but without limiting the generality of the foregoing, any claims under the Age Discrimination in Employment Act, as amended, Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act, Ohio Revised Code Section 4101.17 and Ohio Revised Code Chapter 4112, including Sections 4112.02 and 4112.99 thereof; and (iii) any and all claims of wrongful or unjust discharge or breach of any contract or promise, express or implied. (b) Executive understands and acknowledges that the Company does not admit any violation of law, liability or invasion of any of his rights and that any such violation, liability or invasion is expressly denied. The consideration provided for this Release is made for the purpose of settling and extinguishing all claims and rights (and every other similar or dissimilar matter) that Executive ever had or now may have against the Company to the extent provided in this Release. Executive further agrees and acknowledges that no representations, promises or inducements have been made by the Company other than as appear in this Agreement. (c) Executive further agrees and acknowledges that: 33 (i) The release provided for herein releases claims to and including the date of this Release; (ii) He has been advised by the Company to consult with legal counsel prior to executing this Release, has had an opportunity to consult with and to be advised by legal counsel of his choice, fully understands the terms of this Release, and enters into this Release freely, voluntarily and intending to be bound; (iii) He has been given a period of twenty-one (21) days to review and consider the terms of this Release, prior to its execution and that he may use as much of the twenty-one (21) day period as he desires; and (iv) He may, within seven (7) days after execution, revoke this Release. Revocation shall be made by delivering a written notice of revocation to the Vice President of Human Resources at the Company. For such revocation to be effective, written notice must be actually received by the Vice President of Human Resources at the Company no later than the close of business on the seventh (7th) day after Executive executes this Release. If Executive does exercise his right to revoke this Release, all of the terms and conditions of the Release shall be of no force and effect and the Company shall not have any obligation to make payments or provide benefits to Executive as set forth in Paragraph 6 of the Employment, Retirement and Consulting Agreement between the Company and the Executive made the 12 day of December, 1996. (d) Executive agrees that he will never file a lawsuit or other complaint asserting any claim that is released in this Release. (e) It is understood and agreed that Executive's resignation and retirement are by mutual agreement between the Company and Executive, and that Executive waives and releases any claim that he has or may have to reemployment after June 30, 1997. 34 IN WITNESS WHEREOF, the Executive has executed and delivered this Release on the date set forth below. DAVID FULLEN Witness: -------------------------- --------------------- Date: Date: ------------------- -------------------- 35 EXHIBIT C --------- Argentina Australia Brazil Canada Chile China Columbia Czech Republic England France Germany Greece Hungary India Indonesia Ireland Italy Japan Korea Malaysia Mexico Netherlands Norway Peru Poland Russia South Africa Spain Sweden Taiwan Thailand United States Venezuela Vietnam 36 EXHIBIT D --------- I. Arc Welding Machines ranging from light duty models for light industrial and farm use to heavy duty models for commercial and industrial use in manual, semi-automatic, automatic and robotic welding. II. Arc Welding Consumables: Welding rods, fluxes and wires used in light to heavy manufacturing of mild steel, alloy and hard surface applications; coated manual or stick electrodes; solid electrodes produced in coil form for continuous feeding in mechanized welding; cored electrodes produced in coil form for continuous feeding in mechanized welding; submerged arc electrodes and fluxes; self-shielded cored electrodes; gas-shielded solid and cored electrodes. III. Arc Welding Power Sources and Automated Wire Feeding Systems. IV. Integral horsepower electric motors ranging principally from 1/3 to 250 horsepower, but including cast iron motors of 1,250 horsepower. EX-11 4 EXHIBIT 11 1 EXHIBIT (11) THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (In thousands except per share data) Year Ended December 31 ---------------------- 1996 1995 1994 ---- ---- ---- Primary and fully diluted: Average shares outstanding 24,862 23,350 21,940 Net income $74,253 $61,475 $48,008 Per share amounts: Net income $ 2.99 $ 2.63 $ 2.19 EX-21 5 EXHIBIT 21 1 EXHIBIT (21) THE LINCOLN ELECTRIC COMPANY AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT The Company's significant subsidiaries, all of which are included in its consolidated financial statements, are listed in the following table: COUNTRY OF CONSOLIDATED NAME INCORPORATION PERCENT OWNERSHIP - ------------------------------- ------------- ----------------- Lincoln Electric (U.K.) Limited United Kingdom 100 Lincoln-Norweld A/S Norway 100 Lincoln Electric France S.A. France 100 Lincoln Smitweld B.V. The Netherlands 100 Lincoln K.D.S.A. Spain 100 Lincoln Electric Company Australia 100 (Australia) Proprietary Limited Lincoln Electric Company of Canada 100 Canada Limited Lincoln Electric Mexicana, S.A. de C.V. Mexico 100 Lincoln Electric Do Brasil Ltda. Brazil 100 The Company has omitted the names of its subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute a "significant subsidiary" within the meaning of Rule 1-02 contained in Regulation S-X. EX-23 6 EXHIBIT 23 1 EXHIBIT (23) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements of The Lincoln Electric Company pertaining to The Lincoln Electric Company 1988 Incentive Equity Plan (Form S-8 No. 33-25209), pertaining to The Lincoln Stock Purchase Plan (Form S-8 No. 33-64189) and pertaining to the Lincoln Electric Company Employee Savings Plan (Form S-8 No. 33-64187) of our report dated February 10, 1997, with respect to the consolidated financial statements and schedule of The Lincoln Electric Company and subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP Cleveland, Ohio March 21, 1997 EX-27 7 EXHIBIT 27
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 40,491 0 154,165 2,878 170,655 383,209 462,088 260,849 647,199 169,525 64,148 4,962 0 0 386,814 647,199 1,109,144 1,109,144 686,545 686,545 297,005 0 7,731 117,863 43,610 74,253 0 0 0 74,253 2.99 2.99
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