-----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, GM7KvLN+EsDAYDYQ5tXCUG5LyIaFYGpPjyRKtmOWruNAF2+T8sVZIX5twVav69R5 7X1WbYv1OMD2+GvVnQ5kOg== 0000804312-98-000001.txt : 19980204 0000804312-98-000001.hdr.sgml : 19980204 ACCESSION NUMBER: 0000804312-98-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980129 DATE AS OF CHANGE: 19980203 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPTEK TECHNOLOGY INC CENTRAL INDEX KEY: 0000804312 STANDARD INDUSTRIAL CLASSIFICATION: 3674 IRS NUMBER: 751962405 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-16304 FILM NUMBER: 98517204 BUSINESS ADDRESS: STREET 1: 1215 W CROSBY RD STREET 2: MS 400 CITY: CARROLLTON STATE: TX ZIP: 75006 BUSINESS PHONE: 2143232200 MAIL ADDRESS: STREET 1: 1215 W CROSBY RD CITY: CARROLLTON STATE: TX ZIP: 75006 10-K 1 CONFORMED COPY SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended October 31, 1997 Commission File Number 0-16304 Optek Technology, Inc. (Exact name of registrant as specified in its charter) Delaware 75-1962405 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1215 West Crosby Road, Carrollton, Texas 75006 (Address of principal executive offices) (Zip Code) Registrant s telephone number, including area code: (972) 323-2200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share 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 of this Form 10-K. ( ) The aggregate market value of the registrant s voting stock held by non-affiliates as of October 31, 1997 was: $67,909,282 (* see note on index page). The number of shares outstanding of each class of registrant s common stock as of October 31, 1997 was: Common Stock, par value $0.01 per share, 4,259,534 shares. ___________________ Documents Incorporated by Reference Portions of the registrant s definitive proxy statement to be furnished to stockholders in connection with its Annual Meeting of Stockholders to be held on March 17, 1998 are incorporated by reference in Part III of this Form 10-K. PAGE OPTEK TECHNOLOGY, INC. ANNUAL REPORT ON FORM 10-K INDEX Securities and Exchange Commission Item Number and Description Page PART I ITEM 1. Business ................................... 1 ITEM 2. Properties.................................. 6 ITEM 3. Legal Proceedings ......................... 7 ITEM 4. Submission of Matters to a Vote of Security Holders 7 PART II ITEM 5. Market for Registrant s Common Equity and Related Stockholder Matters ........................ 7 ITEM 6. Selected Financial Data .................... 8 ITEM 7. Management s Discussion and Analysis of Financial Condition and Results of Operations ............ 9 ITEM 8. Financial Statements and Supplemental Data ..... 11 ITEM 9. Changes in and Disagreements on Accounting and Financial Disclosure .......................... 11 PART III ITEM 10. Directors and Executive Officers of the Registrant 11 ITEM 11. Executive Compensation ........................ 12 ITEM 12. Security Ownership of Certain Beneficial Owners and Management .................................. 12 ITEM 13. Certain Relationships and Related Transactions .. 12 PART IV AND SIGNATURES ITEM 14. Exhibits, Financial Statements and Financial Statement Schedules and Reports on Form 8-K ............ INDEPENDENT AUDITORS REPORT ............................. F-1 SIGNATURES * The figure indicated on the cover page as to the aggregate market value of shares of the registrant s voting stock held by nonaffiliates represents the registrant s best good faith estimate for purposes of this annual report on Form 10-K. The aggregate market value indicated is based upon the closing price of the registrant s common stock as reported by the Nasdaq National Market System as of October 31, 1997. Shares held by non-affiliates were calculated by reducing total outstanding shares by outstanding shares beneficially owned by executive officers and Directors of the registrant or by any stockholder beneficially owning more than 10% of registrants common stock, as incorporated herein under the heading Security Ownership of Certain Beneficial Owners and Management, who were considered for purposes of this disclosure to be affiliates. PAGE PART I ITEM 1. Business. Cautionary Statement Regarding Forward-Looking Information Certain statements contained in this report, such as those concerning the Company's business strategy, the expected future demand for sensor products, capital requirements and other statements regarding matters that are not historical facts are forward looking-statements. Because such forward-looking statements include risks and uncertainties, actual results may differ materially from those expressed in or implied by such statements. Factors that could cause actual results to differ materially include, but are not limited to, those discussed herein under "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Company undertakes no obligation to release publicly the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Introduction Optek Technology, Inc. ("Optek" or the "Company") is a leading designer and manufacturer of electronic sensor components and assemblies that detect motion and position for a broad range of applications. Because optoelectronic and magnetic sensors operate without physical contact, they are generally capable of more accurate, reliable and sensitive measurement than standard mechanical or electromechanical devices. These characteristics, combined with increased speed, durability and compactness, have prompted the substitution of optoelectronic and magnetic sensors for mechanical and electromechanical switches in many instances. The Company utilizes optoelectronic and magnetic field sensing technologies to target customized, non-standard applications that require specialized engineering and manufacturing expertise. The Company applies its engineering and manufacturing expertise to the design and manufacture of components and assemblies which meet the physical and technical requirements demanded for the intended use by the customer. This application-based design requires the integration of mechanical, electrical and optical or magnetic sensing technologies. The Company sells its products for end use by original equipment manufacturers (OEMs) in the office equipment, automotive, industrial, aerospace/defense, medical and communications markets. The Company believes that in many cases it is the sole source supplier for specific components and assemblies necessary for its customers' applications. Prior to fiscal 1992, the Company's sales to the automotive market were not significant (less than 2% of net sales in fiscal 1991). In fiscal 1992, the Company began production and sale of magnetic field sensors for automotive applications and continued efforts to identify additional applications. As a result of this strategic pursuit of the automotive market, by fiscal 1997 automotive sales represented approximately 25% of net sales. Because of the Company's engineering and manufacturing expertise and customer relationships, the Company has been awarded several additional long-term automotive programs. The Company's manufacturing operations are vertically integrated with facilities located in Carrollton, Texas and Juarez, Mexico. A substantial majority of the Company's products are assembled in facilities operated by the Company in Juarez, Mexico. The Company markets its products through its own technical sales staff, independent sales representatives and independent stocking distributors. PAGE Products and Technology Optoelectronic Products. The largest portion of the Companys current business is the design, manufacture and sale of custom devices which use optoelectronic technology to satisfy customers sensing application requirements in all of its major markets. Optoelectronic technology uses light to measure or sense position or motion. A familiar example of the use of this technology is its application in certain security systems which emit a beam of light which is received by a sensor. The interruption of this beam causes an electrical response in the sensor which activates the alarm. These principles may be applied using either visible or nonvisible (e.g., infrared) light as a means of sensing motion, speed or position. The optoelectronic products made by Optek primarily use infrared light. Optek's optoelectronic products consist of: (i) infrared light emitting and light sensing semiconductor chips; (ii) discrete components, which are plastic or metal packages housing the light emitting or light sensing chips described above; (iii) assemblies, which combine the light emitting and light sensing discrete components in a single package to meet various electrical and/or mechanical specifications; generally, it is assemblies which are sold by Optek to its customers for use in their products; and (iv) fiber optic products, which use light emitting and light sensing technologies to transmit and receive light signals for data transmission through fiber. The following paragraphs describe these optoelectronic devices and their basic principles of operation. Semiconductor Chips. Light emitting and light sensing semiconductor chips are the basic elements in Optek s optoelectronic product range. A light emitting diode (LED) chip emits light as the result of the application of direct current at a low voltage. Such chips can be made to produce light in a wide range of wavelengths extending from the near ultraviolet to the far infrared. Optek manufactures its own light emitting chips from gallium arsenide and gallium aluminum arsenide wafers using standard semiconductor manufacturing techniques. Light sensors are semiconductor chips which are capable of converting light into electrical signals; thus, they can be used to sense and relay the signal produced from a light emitting chip. Optek produces light sensitive chips from polished silicon slices using standard silicon semiconductor manufacturing processes. Optek s light sensing chips have varying speed and sensitivity. Some chips incorporate transistors as an integral part of the chip, thus providing in a single unit the ability to detect the light and amplify the signal received. The Company uses a substantial portion of the semiconductor chips it manufactures in its discrete components. On occasion, however, the Company does design and manufacture custom semiconductor chips for specific customer applications. Most of the light sensing chips manufactured by Optek produce an analog output which must be processed before it can be communicated to a digital device. The Company has also developed a family of light sensing integrated circuits which produce a digital output. The versatility of the chip s output geometry allows it to drive multiple outputs, resulting in savings to the customer in system processing circuitry. A chip has also been developed with increased sensitivity, low level input detection and on-chip voltage regulation which enables the chip to function under fluctuating power conditions. The former characteristic is particularly useful in fiber optics where the signal transmitted may be a very low-level signal. The latter characteristic finds a wide range of applications, for example, with battery powered devices or under conditions of heavy electrical interference. Discrete Components. Discrete components incorporate the Company's LED or sensor chips in either plastic or metal packages which protect the chip and allow light to pass to or from the chip. These components form an integral part of the assemblies manufactured by Optek. In manufacturing discrete components, LED or sensor chips are mounted on lead frames or headers, a wire is bonded from the chip to the lead, and the device is housed in a plastic or metal package. While most of Optek s discrete components are used in its own assembly manufacturing operations, the Company also manufactures and sells discrete components to OEMs which integrate them into their own products and through independent distributors, especially in foreign markets. Assemblies. Most of Optek s business is directed to the production of complete assemblies which are ready to plug into the customer s equipment. Generally, discrete LED and sensor components are used in combination with one another in interruptive or reflective assemblies. Each of these assemblies includes a discrete emitter, a light transmission path and a discrete sensor. The sensing occurs when an object interrupts the light transmission path from emitter to sensor or reflects the emitted light back to the sensor. Optek also manufactures various types of detector assemblies and displays which are used in aerospace/defense applications. These assemblies and displays often require custom sensor or LED chips which are incorporated in physical packaging capable of withstanding rigorous environmental conditions of temperature, acceleration, or mechanical shock. Optoelectronic LED s and sensors can also be used to isolate electrical noise or high voltage from an electrical circuit. These devices are used to protect computers and other sensitive circuits from potentially damaging electrical surges or electrical noise. Fiber Optic Products. As a complement to its other optoelectronic devices, Optek manufactures fiber optic LED s and sensors. Optek uses its LED and sensor technology to provide the light signal and receiver products for data transmission through fiber. These products allow electronic equipment, such as energy management systems, computers and even telephones, to communicate over thin lightweight cables of glass or plastic fiber. Magnetic Sensors. During fiscal 1992, Optek began production of Hall Effect (magnetic field sensing) devices which sense physical events by reacting to changes in magnetic fields. Since magnetic fields are relatively unaffected by the cleanliness of the environment, Hall Effect devices can be used in environments in which a clear optical path is inhibited. For example, Hall Effect devices sense rotation of gears in automobiles for various applications where the presence of dirt and oil would make the application of optoelectronic technology impractical. The first practical application of this technology by Optek has been the production of crankshaft and camshaft sensors used in conjunction with ignition systems on automobiles. The Company continues to explore additional opportunities in which Hall Effect devices can efficiently address customers requirements. For example, the Company produces a Hall Effect sensor used in an automotive theft deterrent system. Because of the presence of oil and dirt characteristic of automotive applications, magnetic sensing devices are particularly useful, and the Company has sought to expand upon the expertise and familiarity gained through its initial automotive programs to identify and participate in additional sensor programs. Prior to fiscal 1992, the Company's sales to the automotive market were not significant (less than 2% of net sales in fiscal 1991). In fiscal 1992, the Company began production and sale of magnetic field sensors for automotive applications and continued efforts to identify additional applications. As a result of this strategic pursuit of the automotive market, by fiscal 1997 automotive sales represented approximately 25% of net sales. Because of the Company's engineering and manufacturing expertise and customer relationships, the Company has been awarded several additional long-term automotive programs. Sensor components and assemblies are being used increasingly by the automotive industry to improve emission control, fuel economy, safety and performance, while reducing warranty costs. As a result of this demand and the Company's strategy to capitalize on trends in the automotive industry, including single sourcing, the Company believes that the automotive market represents its most significant opportunity for growth. As with optoelectronic products, the Company is vertically integrated and capable of producing each of the elements incorporated into its magnetic sensing devices. The basic building block of each device is a semiconductor chip which reacts to fluctuations in a magnetic field. Optek produces its own magnetic sensor chips through processes and techniques similar to those used for manufacturing light sensing chips. As the position of a magnet is changed, the sensor produces a signal which is relayed to a control device. Each of these elements is combined into an assembly integrating mechanical, electronic and magnetic technologies. PAGE Marketing and Sales Optek sells its products through its own technical sales staff, independent sales representatives, and independent stocking distributors. At October 31, 1997, Optek employed eight technical sales people who operate out of the Company s offices in Carrollton, Texas and three technical sales people operating out of offices in Western Europe. Optek also uses 20 independent sales representatives and 42 stocking distributors, both domestically and internationally. An initial customer contact is usually made by either a member of Optek s technical sales staff, a sales representative or a distributor for the geographic area. During this contact, the representative determines if custom optoelectronic or magnetic components or assemblies could perform the specific functions desired by the customer. Typically, the customer either provides a detailed specification of its requirements or is assisted by Optek s engineering and technical sales staff in the development of specifications. Optek then develops a technical proposal, incorporating preliminary design concepts, and submits the technical proposal to the customer. The technical proposal typically includes pricing terms, which usually include a one-time tooling charge and a unit price for the product over a specified period based on an estimated production volume. Frequently, especially in automotive applications, the Company's products continue through development, testing and qualification phases which involve all aspects of the Company's engineering and manufacturing expertise. The marketing and development process can range from four months to three years or more from initial customer contact to purchase order, depending on the complexity of the customer s requirements. Automotive applications tend to have a longer development cycle, typically exceeding three years. Once a product is qualified, subsequent production releases typically require lead times of six or more weeks. Many products sold by the Company are application specific and, therefore, have life cycles generally ranging from three to fifteen years. For example, many products sold to the automotive industry are model, engine or system specific. As described above, lengthy product development cycles requiring substantial design and qualification are customary in the sourcing decisions of OEMs. Therefore, the primary focus of the Company's sales effort is to develop applications designed into the products of OEMs during development. Engineering and Development A significant portion of the Company's design and application expertise is devoted to developing products to perform specific applications identified with OEMs. Therefore, the Companys efforts have been primarily directed toward enhancing the functions of its existing product base to permit a wider range of applications and to identification of new applications. Based upon the Company s expertise and knowledge of the optoelectronics industry, the Company does not believe any patents currently govern the basic optoelectronics technology used by the Company. As a result, development of new applications for this technology has proceeded without the impediment of obtaining licenses for the underlying technology. Further, the Company believes that companies desiring to enter the optoelectronics industry may do so without obtaining licenses or permits relating to the use of such technology and that competition is not impeded by such constraints. However, Optek has sought to protect confidential information which is used in the Company s operations by restricting its employees from using, disseminating or disclosing confidential information not generally known in the industry. The Company s engineering expertise in sensor technologies has likewise facilitated its identification of potential applications for magnetic sensors. Because of the relative newness of some of these applications, the Company has sought and, in some cases, obtained patent protection for these applications. However, Optek cannot currently predict whether additional new applications will qualify for patent registration. In order to expand the range of applications which can be addressed with magnetic sensor devices, the Company has identified magnetoresistive technology as one alternative for new magnetic sensor designs. Magnetoresistive technology has the advantage of demonstrating a good signal to noise ratio, and is able to detect very slow motion which is required in certain applications. Motion and position sensors for electronic ignition systems in automobiles are applications for magnetoresistive sensors for which the Company has been awarded additional programs by an automotive OEM. In addition, in order to address certain fiber optic applications requiring higher data transmission speeds, the Company has applied a portion of its research activities in recent years to the development of higher speed fiber optic LEDs, sensors, and transceivers. During the past three fiscal years, the Company s product development and engineering expenses have ranged between 6% and 7% of net sales, not including a portion of which has been funded by customers. Future developments may require the Company to allocate increased resources to advances in optoelectronic and magnetic sensor technologies. However, no assurance can be given that the Company will be successful in further expanding these technologies. Manufacturing The Company utilizes a vertically integrated manufacturing structure to develop new products and to more effectively compete. Integrated capabilities enable the Company to exercise better control through all manufacturng cycles and to effectively respond to customer requests for development of new products and design changes to existing products. The Company's manufacturing capabilities allow the Company to produce sensor and LED semiconductor chips, tools and plastic molds, plastic assemblies, discrete, assembly, hybrid and high reliability components, printed circuit boards and wire and cable assemblies. The principal raw materials used by the Company in the manufacture of its semiconductor chips, components and assemblies are silicon wafers, gallium wafers, certain chemicals and gases used in processing wafers, gold wire, copper lead frames, metal and plastic for packages that house the chip and the various custom assemblies, and magnets used in certain magnetic sensor applications. All of these raw materials can be obtained from several suppliers. From time to time, particularly during periods of increased industry-wide demand, silicon wafers and other materials have been in short supply. As is typical in the industry, the Company allows for a significant lead-time between order and delivery of raw materials. Presently, the Company uses sole sources for its requirements of some of the materials used in its manufacturing operations, which could adversely affect the Company if any such source failed to deliver for any reason. The Company is currently identifying and qualifying additional sources for these materials. Over eighty percent of the Company s components and assemblies are produced in facilities operated by the Company in Juarez, Mexico. Mexico has enacted legislation to promote the use of such manufacturing operations by foreign companies and continuation of these operations depends upon: compliance with applicable laws and regulations of the United States and Mexico; the availability of less expensive labor; and the continuation of favorable exchange rates. These operations are authorized to operate as Maquiladoras by the Ministry of Commerce and Industrial Development of Mexico. Maquiladora status allows the Company to wholly own its Mexican subsidiaries and to import items into Mexico duty free, provided that such items, after processing, are re-exported from Mexico within six months. Maquiladora status, which must be renewed every two years, is subject to various restrictions and requirements, including: compliance with the terms of the Maquiladora program; proper utilization of imported materials; hiring and training of Mexican personnel; compliance with tax, labor, exchange control and notice provisions and regulations; and compliance with locational constraints. Although assembly operations in Mexico continue to be less expensive than comparable operations in the United States, in recent years many companies have established Maquiladora operations in the Juarez area to take advantage of lower labor costs. Increasing demand for labor, particularly skilled labor and professionals, from new and existing Maquiladora operations could result in increased labor costs. The Company may be required to make additional investments in automated equipment to partially offset increased labor costs. The loss of Maquiladora status, the inability to recruit, hire and retain qualified employees, a significant increase in labor costs, unfavorable exchange rates or interruptions in the trade relations between the United States and Mexico could have a material adverse effect on the Company. Customers In fiscal 1997, Optek s ten largest customers accounted for approximately 63% of net sales. Three customers, Strattec Security Corporation, General Motors Corporation and Pitney Bowes, Inc., made purchases which accounted for 13%, 13% and 10%, respectively, of the Company s net sales during fiscal 1997. The automotive industry, which accounted for approximately 25% of the Company s net sales during fiscal 1997, represents the fastest area of growth for the Company. The automotive industry is cyclical due to general economic conditions, the level of interest rates, consumer confidence, patterns of consumer spending and the automobile replacement cycle, all of which are beyond the control of the Company. In addition, the Company s customers in the automotive industry are highly unionized and have in the past experienced labor disruptions. Accordingly, automotive production may not increase or may decline in the future. A significant reduction or prolonged interruption in automotive production could have a material adverse effect on the Company. Optek s customers normally purchase the Company s products and incorporate them in products that they in turn sell into their own markets on an ongoing basis. As a result, Optek s sales are dependent upon the success of its customers products, and its future performance is dependent upon its success in finding new customers and receiving new orders from existing customers. During fiscal 1997, foreign sales accounted for approximately $17.4 million, or approximately 23% of net sales, as compared to $18.9 million, or approximately 28% of net sales for fiscal 1996, and $16.9 million, or approximately 27% of net sales during fiscal 1995. Backlog Opteks order backlog was approximately $23.9 million at October 31, 1997 compared with a backlog of approximately $18.4 million at October 25, 1996 and approximately $23.2 million at October 27, 1995. The Company s backlog is comprised of orders which customers have released and scheduled for delivery within one year. Sales orders are typically made on the Company s standard form, which permits the customer to cancel the order in whole or in part. By industry practice, orders may be canceled or modified at any time, with the customer being responsible for all finished goods, all costs, direct and indirect, incurred by the Company and a reasonable allowance for anticipated profits. No assurance can be given that such amounts will be received by the Company after cancellation. Competition The Company competes with a range of companies for the custom optoelectronic and magnetic sensor requirements of OEMs producing office equipment, automotive products, industrial products, specialized aerospace/defense and medical applications and communications equipment. Certain of its competitors are companies which are larger, more diversified and have greater financial resources than the Company. The Company believes that its principal competitor for sales of custom sensor components and assemblies is Honeywell, Inc. Competition in the sensor markets served by the Company is primarily based upon custom design capabilities, quality, technology, responsiveness and timely delivery. While the Company believes that its custom design capabilities, quality, responsiveness, engineering and operating efficiencies are competitive advantages, no assurance can be given that the Company will be able to successfully compete with its competitors. Employees As of October 31, 1997, the Company employed 1,971 persons, including 1,821 in manufacturing and assembly (1,633 in Mexico and 188 in Carrollton), 104 in sales and engineering and 46 in management and administration. Some of the Company s employees are highly skilled and the Company s continued success will depend in part on its ability to attract and retain such employees, who are generally in demand. At times, the Company has had difficulty hiring engineering personnel with previous experience in its industry due to the limited number of engineers available with such experience. To date, this difficulty has not materially affected the Company s operations. The Company has never had a work stoppage, no employees are represented by any labor organization and the Company considers its employee relations to be good. Certain Factors Numerous factors may affect the Company's future performance, including the following: Dependence on Automotive Industry. The automotive industry, which accounted for approximately 25% of the Company's net sales during fiscal 1997, represents the fastest area of growth for the Company. The automotive industry is cyclical due to general economic conditions, the level of interest rates, consumer confidence, patterns of consumer spending and the automobile replacement cycle, all of which are beyond the control of the Company. In addition, the Company's customers in the automotive industry are highly unionized and have in the past experienced labor disruptions. Accordingly, automotive production may not increase or may decline in the future. A significant reduction or prolonged interruption in automotive production could have a material adverse effect on the Company. Product Life Cycles. Many products sold by the Company are application specific and have life cycles generally ranging from three to fifteen years. Product development cycles from four months to three years or more requiring substantial design and qualification requirements are customary in the sourcing decisions of OEMs. If the Company is unable to develop new products to replace products whose life cycles come to an end, the Company's business could be adversely affected. Pricing Pressure. There is continuing pressure from OEMs to reduce costs, including costs associated with outside suppliers such as the Company. In some cases, the Company sells products under agreements which contain provisions that require the Company to reduce its per unit price over time. The Company's other products, subject to periodic re-quotation, may also experience declining average selling prices over their life cycles with a similar potential impact on gross margins if the Company is unable to reduce corresponding costs or introduce new products with higher gross margins. If the Company is unable to make corresponding product cost reductions, the resulting decline in the average selling prices of the products sold may reduce the Company's product gross margin. Customer Concentration. In fiscal 1997, Optek s ten largest customers accounted for approximately 63% of net sales. Three customers, Strattec Security Corporation, General Motors Corporation and Pitney Bowes, Inc., made purchases which accounted for 13%, 13% and 10%, respectively, of the Company s net sales during that year. Loss of, or the failure to replace, any significant portion of sales to any significant customer could have a material adverse effect on the Company. Foreign Manufacturing Operations. Over eighty percent of the Company's components and assemblies are produced in facilities operated by the Company in Juarez, Mexico. Mexico has enacted legislation to promote the use of such manufacturing operations by foreign companies and continuation of these operations depends upon: compliance with applicable laws and regulations of the United States and Mexico; the availability of less expensive labor; and the continuation of favorable exchange rates. These operations are authorized to operate as Maquiladoras by the Ministry of Commerce and Industrial Development of Mexico. Maquiladora status allows the Company to wholly own its Mexican subsidiaries and to import items into Mexico duty free, provided that such items, after processing, are re-exported from Mexico within six months. Maquiladora status, which must be renewed every two years, is subject to various restrictions and requirements, including: compliance with the terms of the Maquiladora program; proper utilization of imported materials; hiring and training of Mexican personnel; compliance with tax, labor, exchange control and notice provisions and regulations; and compliance with locational constraints. Although assembly operations in Mexico continue to be less expensive than comparable operations in the United States, in recent years many companies have established Maquiladora operations in the Juarez area to take advantage of lower labor costs. Increasing demand for labor, particularly skilled labor and professionals, from new and existing Maquiladora operations could result in increased labor costs. The Company may be required to make additional investments in automating equipment to partially offset increased labor costs. The loss of Maquiladora status, the inability to recruit, hire and retain qualified employees, a significant increase in labor costs, unfavorable exchange rates or interruptions in the trade relations between the United States and Mexico could have a material adverse effect on the Company. Competition. The Company competes with a range of companies for the custom optoelectronic and magnetic sensor requirements of OEMs producing office equipment, automotive products, industrial products, specialized aerospace/defense and medical applications and communications equipment. Certain of its competitors are companies which are larger, more diversified and have greater financial resources than the Company. The Company believes that its principal competitor for sales of custom sensor components and assemblies is Honeywell, Inc. Competition in the sensor markets served by the Company is primarily based upon custom design capabilities, quality, technology, responsiveness and timely delivery. Although the Company believes that its custom design capabilities, quality, responsiveness, engineering and operating efficiencies are competitive advantages, no assurance can be given that the Company will be able to successfully compete with its competitors. Technological Change. There can be no assurance that the Company will be able, for financial or other reasons, to anticipate and respond to technological changes which may be necessary to satisfy customer needs. While the Company is currently unaware of any technology that would have an adverse effect on its business, there can be no assurance that products or technologies developed by others will not render the Company's products obsolete or non-competitive. Anti-Takeover Provisions of Delaware Law. The Company is subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a publicly held Delaware corporation from engaging in a business combination (which includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder) with an "interested stockholder" (defined generally as any person who beneficially owns 15% or more of the outstanding voting stock of the Company or any person affiliated with such person) for a period of three years following the date of the transaction in which the person became an interested stockholder, unless (i) prior to such date the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, or (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (x) by persons who are directors and also officers and (y) by employee stock plans in which the employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer, or (iii) on or subsequent to such date the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. ITEM 2. Properties. The Company s administrative offices, engineering facilities, silicon and gallium arsenide chip manufacturing and hybrid assembly manufacturing, as well as tooling, plastic molding and printed circuit board operations, are located in a Company-owned building containing 205,000 square feet on a 15.5 acre site in Carrollton, Texas. The Company also leases approximately 6,250 square feet of warehouse space in El Paso, Texas. This lease expires in January of 1999. Over eighty percent of the Companys discrete components and assemblies are assembled at the facilities of the Company s subsidiaries located in Juarez, Mexico. The Mexican subsidiaries beneficially own a 24,000 square foot building and a 45,000 square foot building in Juarez, Mexico through trust agreements with Banca Serfin, Sociedad Nacional de Credito. The operations formerly conducted at the smaller of those buildings have been consolidated into the larger plant and adjacent leased premises, and the Company is currently seeking to sell such plant. The Company s Mexican subsidiaries also lease a 58,000 square foot building in Juarez, Mexico under a lease expiring in December 1998 with aggregate annual lease payments of $306,000. The lease provides for three one-year renewals exercisable on at least 180 days notice. This plant is adjacent to the 45,000 square foot building owned by the Company s subsidiary. The Company believes that its existing facilities and equipment are well maintained and are in good operating condition. The Company anticipates that its current facilities will be suitable and adequate for its operations through 1998. The Company anticipates a need for increased capital spending during 1998 to support potential increases in demand during 1999 and 2000. PAGE ITEM 3. Legal Proceedings. The Company is not involved in any material current or pending legal proceedings, other than ordinary routine litigation incidental to its business. ITEM 4. Submission of Matters to a Vote of Security Holders. No matters were submitted by the Company during the fourth quarter of the fiscal year ended October 31, 1997 to a vote of the Company s security holders through the solicitation of proxies or otherwise. PAGE PART II ITEM 5. Market for Registrant s Common Equity and Related Stockholder Matters. The Company s common stock is traded on the Nasdaq National Market under the trading symbol OPTT . The following table sets forth the quarterly high and low sales prices (to the nearest 1/8) of a share of Common Stock for each quarterly period subsequent to relisting on the Nasdaq stock market on April 22, 1996, and the high and low bid prices during the first and second quarters of fiscal 1996 as reported by various market makers. Bid prices represent quotations between dealers in securities, without adjustment for retail mark-ups, mark-downs or commissions, and may not necessarily represent actual transactions. 1997 Quarter Ended High Low October 31, 1997 $19 3/4 $15 3/4 August 1, 1997 16 11 May 2, 1997 14 1/8 10 1/2 January 31, 1997 13 7/8 9 1996 Quarter Ended High Low October 25, 1996 $11 1/4 $9 July 26, 1996 15 3/4 9 5/8 April 26, 1996 14 9 January 26, 1996 8 1/4 7 At October 31, 1997, the Company had approximately 164 stockholders of record. The Company believes that a significant number of shares of the Company s Common Stock are held in street name and, consequently, the Company is unable to determine the actual number of beneficial owners thereof. The Company has never paid a cash dividend on its Common Stock, currently intends to retain any earnings for use in its business and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. The Company s loan agreement contains covenants restricting the Company from paying dividends on its Common Stock exceeding 50% of its net profit during any fiscal year. PAGE ITEM 6. Selected Financial Data. The following table summarizes certain selected consolidated financial data for the periods indicated. This information is derived from the Company s consolidated financial statements and is qualified in its entirety by, and should be read in conjunction with, Management s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K.
Fiscal Year Ended Oct 31, Oct. 25, Oct 27, Oct. 28, Oct. 29, 1997 1996 1995 1994 1993 (In thousands, except per share amounts) Operating statement data: Net sales $75,572 $67,395 $62,542 $55,625 $55,878 Cost of sales 43,423 39,010 38,513 38,269 46,499 Gross profit 32,149 28,385 24,029 17,356 9,379 Product development and engineering expenses 5,246 4,933 3,841 3,591 3,968 Selling, general and administrative expenses 9,145 8,266 7,090 6,536 7,498 Provision for restructuring costs - - - - 2,292 Reduction in value of deferred costs - - - - 893 Operating income (loss) 17,758 15,186 13,098 7,229 (5,272) Other (income) expense: Interest (income) expense (65) 1,292 2,960 3,685 3,952 Other (income) expense 59 (145) 142 365 835 Total other, net (6) 1,147 3,102 4,050 4,787 Income (loss) before income taxes and extraordinary item 17,764 14,039 9,996 3,179 (10,059) Income tax expense 5,259 1,144 158 - - Net income before extraordinary item 12,505 12,895 9,838 3,179 (10,059) Extraordinary item, net of income taxes 1,003 - - - - Net income (loss)$11,502 $12,895 $9,838 $3,179 $(10,059) Earnings (loss) per share before extraordinary item $1.63 $1.69 $1.40 $0.47 $(3.12) Extraordinary item (0.13) - - - - Net earnings (loss) per share $1.50 $1.69 $1.40 $0.47 $(3.12) Weighted average common and common share equivalents outstanding 7,677 7,627 7,027 7,108 3,224 Balance sheet data: Working capital $15,068 $ 6,658 $ 4,028 $4,830 $ 6,865 Total assets 38,936 25,886 26,065 27,827 32,146 Total current liabilities 12,656 7,982 9,175 8,159 7,920 Long-term debt - 3,428 15,996 28,692 36,472 Stockholders' equity (deficit) 26,163 14,067 810 (9,148)(12,340)
PAGE ITEM 7. Management s Discussion and Analysis of Financial Condition and Results of Operations. General The following table sets forth the Company s net sales by product group for the last three fiscal years: Fiscal Year Ended Oct. 31, Oct. 25, Oct. 27, 1997 1996 1995 (in millions) Office equipment $25.4 $24.7 $24.8 Automotive 19.2 12.9 9.5 Industrial 18.7 17.7 16.0 Aerospace/defense 5.9 5.9 6.4 Medical 4.4 4.0 4.1 Communications 2.0 2.2 1.7 Total $75.6 $67.4 $62.5 The Company views automotive products as its prime opportunity for growth over the next several years due to the proliferation of sensors in automobiles resulting from the expanded use of microprocessors. The Company expects sales of office equipment, industrial and medical products to experience growth related to growth in the economy in general. Sales in the communications market consist primarily of fiber optic transmitters and receivers and offer opportunities for additional growth. Sales to the aerospace/defense market are expected to remain relatively flat or decline slightly, but opportunities for growth in certain applications may arise as high volume producers of aerospace/defense components exit this relatively low volume market. Gross margins have increased from 31.2% in fiscal 1994 to 42.5% in fiscal 1997. In addition to developing new products and increasing sales levels, the Company's ability to maintain margins at current levels will depend on its ability to work with its customers to reduce costs on existing products and to continue to control its own operating expenses. The combined effect of higher sales volumes and improved gross margins enabled the Company to generate sufficient cash flows to pay down its long term debt from a high of $39.0 million at the end of fiscal 1992 to $0 by the end of the second fiscal quarter of 1997. As a result, interest expense was reduced from $4.0 million during fiscal 1993 to $110,000 in fiscal 1997. Results for fiscal 1995 and 1996 include tax benefits resulting from utilization of net operating loss carryforwards for book and tax purposes during those years of $3.8 million and $3.2 million, respectively. All such carryforwards were fully utilized during fiscal 1996. Results of Operations Net sales for fiscal 1997 were $75.6 million compared to $67.4 million in fiscal 1996 and $62.5 million in fiscal 1995. The increase from fiscal 1996 to fiscal 1997 of $8.2 million, or 12.1%, was primarily the result of higher automotive net sales of $6.2 million and higher commercial (office equipment, industrial, medical and communications) net sales of $2.0 million. The increase in automotive net sales was primarily attributable to the implementation of a new theft deterrent system on trucks and sport utility vehicles for the first time on model year 1998. The increase from fiscal 1995 to fiscal 1996 of $4.9 million, or 7.8%, was the result of increases in automotive net sales of $3.4 million and commercial net sales of $1.9 million, partially offset by a decrease in aerospace/defense optoelectronic product net sales of $400,000. Gross profit in fiscal 1997 was $32.1 million, or 42.5% of net sales, compared to $28.4 million, or 42.1% of net sales, in fiscal 1996 and $24.0 million, or 38.4% of net sales, in fiscal 1995. The increase from fiscal 1996 to fiscal 1997 is primarily attributable to the higher net sales volume in automotive and commercial products as discussed above. The increase from fiscal 1995 to fiscal 1996 was the result of higher net sales volumes, as discussed above, higher production volumes resulting in lower unabsorbed fixed costs, continued efforts to reduce manufacturing cycle times, favorable peso exchange rates as well as cost reduction and yield improvement programs. Product development and engineering expenses in fiscal 1997 were $5.2 million, or 6.9% of net sales, compared with $4.9 million, or 7.3% of net sales, in fiscal 1996 and $3.8 million, or 6.1% of net sales, in fiscal 1995. These expenses were primarily related to the development of new applications and processes. Although expenses were up slightly from 1996 to 1997, the percentage of net sales is lower due to the increase in net sales. The increase in fiscal 1996 compared to fiscal 1995 relates to additional development expenses for fiber optic connector products, used in telecommunications, and magnetoresistive technologies, used primarily in automotive applications. In addition, certain expenses were incurred to refurbish the Company's engineering and product development labs. The Company anticipates expenditures to increase in absolute dollars in fiscal 1998 primarily to support the development of new products. Selling, general and administrative expenses in fiscal 1997 were $9.1 million, or 12.1% of net sales. This compares to $8.3 million, or 12.3% of net sales, in fiscal 1996 and $7.1 million, or 11.3% of net sales, in fiscal 1995. The increase in expenses from fiscal 1996 to fiscal 1997 was primarily related to additional commissions earned on increased net sales volume. The increase from fiscal 1995 to fiscal 1996 was primarily attributable to additional sales commissions earned on higher net sales volume and expenses related to refurbishment of the sales and customer service areas. Operating income for fiscal 1997 was $17.8 million, or 23.5% of net sales, compared to $15.2 million, or 22.5% of net sales in fiscal 1996 and $13.1 million, or 20.9% of net sales, in fiscal 1995. The improvements in fiscal 1997 and fiscal 1996 were the result of the aforementioned increases in net sales volume and overall improvements in manufacturing costs and operating expenses, relative to the increase in net sales, as discussed above. Other (income) expense consists primarily of interest income net of interest expense in fiscal 1997 and interest expense in fiscal 1996 and fiscal 1995. Interest expense decreased in fiscal 1997 and fiscal 1996 due to the continued reduction and eventual retirement, in fiscal 1997, of long-term debt. Net interest in fiscal 1997 consisted of $110,000 of interest expense and $175,000 of interest income. Income tax expense was $5.3 million, or 7.0% of net sales, in fiscal 1997 compared to $1.1 million, or 1.7% of net sales, in fiscal 1996 and $158,000, or 0.3% of net sales, in fiscal 1995. Income tax expense increased in fiscal 1997 and fiscal 1996 as a result of the Company fully utilizing its remaining net operating loss carryforwards during the fourth quarter of fiscal 1996. As a result, fiscal 1997 was on a fully taxed basis net of, primarily, experimentation tax credits. In the fourth quarter of fiscal 1997, the Company agreed to pay its former lender, First Source Financial, LLP, $1,545,000 to release all debt obligations, including contingent additional interest, under the credit facility and other restrictive covenants. The provision for payment, net of related income tax benefits of $542,000, was classified as an extraordinary item. As a result of the factors discussed above, net income for fiscal 1997 was $11.5 million compared to $12.9 million in fiscal 1996 and $9.8 million in fiscal 1995. Liquidity and Capital Resources As reflected in the Company s consolidated statements of cash flows, the Company generated approximately $14.3 million in cash from operations during fiscal 1997. The largest uses of cash flow were the retirement of long-term debt during the first and second quarters of the fiscal year in the amount of $3.4 million, and the purchase of manufacturing equipment throughout the year in the amount of $2.0 million. At fiscal year end, the Company s working capital was $15.1 million including $9.8 million of cash and cash equivalents. The Company anticipates that additional manufacturing capacity, primarily in Mexico, will be required to support growth over the next several years. Therefore, capital expenditures are planned to increase to a total of approximately $10 to $15 million to be expended over the next two to three fiscal years to support future growth in demand for the Company s products. The timing and amount of such expenditures is subject to adjustment based upon continued evaluation of the necessity therefor by management. In January 1998, the Company obtained a three year $10.0 million unsecured line of credit from NationsBank N.A. subject to customary terms and conditions. The Company anticipates that it will generate sufficient cash flow from operations to meet its obligations, including capital requirements, for the next twelve months. However, an unanticipated expansion or contraction of its business or future acquisitions may require the Company to draw upon its existing credit line or obtain other financing. Impact of the Year 2000 Issue The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company s computer programs that have date-sensitive software may recognize a date using 00 as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company is committed to a successful and timely Year 2000 conversion and funds are dedicated and available for this project. The Company anticipates maintaining its hardware platform but replacing or upgrading most of the software. In addition, all PC s, HVAC, test equipment and external providers will be reviewed and acted on accordingly. It is anticipated that the Company will be fully Year 2000 compliant by April 30, 1999. The cost of the Year 2000 project is not expected to have a material adverse effect on the Company s results of operations. New Accounting Standards In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ( SFAS 128 ), Earnings per Share, which establishes new standards for computing and presenting earnings per share. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997 and requires restatement of all prior-period earnings per share data. Early application of SFAS 128 is not permitted. The Company s adoption of the provisions of SFAS 128 will result in the dual presentation of basic and diluted earnings per share on the Company s consolidated statements of income. Diluted earnings per share as calculated under SFAS 128 is not expected to materially differ from primary earnings per share amounts previously presented. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 ( SFAS 130 ), Reporting Comprehensive Income, and Statement of Financial Accounting Standards No. 131 ( SFAS 131 ), Disclosures About Segments of an Enterprise and Related Information. SFAS 130 and SFAS 131 are effective for financial statements issued for periods beginning after December 15, 1997. The Company does not expect these standards to have a significant impact on the consolidated financial statements. ITEM 8. Financial Statements and Supplemental Data. Included on pages F-1 through F-12 hereof. ITEM 9. Changes in and Disagreements on Accounting and Financial Disclosure. None. PAGE PART III ITEM 10. Directors and Executive Officers of the Registrant. Information relating to the Company s Directors and executive officers is set forth under the heading Election of Directors and Information as to Directors, Nominees and Executive Officers in the Company s definitive proxy statement relating to the Company s Annual Meeting of Stockholders to be held March 17, 1998, which will be filed with the Securities and Exchange Commission on or about February 9, 1998, and such information is incorporated herein by reference. ITEM 11. Executive Compensation. Information relating to executive compensation is set forth under the heading Executive Compensation in the Company s definitive proxy statement relating to the Company s Annual Meeting of Stockholders to be held March 17, 1998, which will be filed with the Securities and Exchange Commission on or about February 9, 1998, and such information is incorporated herein by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. Information relating to the ownership of certain beneficial owners and management of the Company s Common Stock is set forth under the heading Securities Ownership of Certain Beneficial Owners and Management in the Company s definitive proxy statement relating to the Company s Annual Meeting of Stockholders to be held March 17, 1998, which will be filed with the Securities and Exchange Commission on or about February 9, 1998, and such information is incorporated herein by reference. ITEM 13. Certain Relationships and Related Transactions. Information relating to the business relationships and related transactions with respect to the Company and certain Directors and nominees for election as Directors is set forth under the heading Certain Transactions in the Company s definitive proxy statement relating to the Company s Annual Meeting of Stockholders to be held March 17, 1998, which will be filed with the Securities and Exchange Commission on or about February 9, 1998, and such information is incorporated herein by reference. PART IV ITEM 14. Exhibits, Financial Statements and Financial Statement Schedules and Reports on Form 8-K. (a) Financial Statements included in Part II (Item 8) of this report: Independent Auditors Report; Consolidated Balance Sheets as of October 31, 1997 and October 25, 1996; Consolidated Statements of Income for the three years ended October 31, 1997; Consolidated Statements of Stockholders Equity for the three years ended October 31, 1997; Consolidated Statements of Cash Flows for the three years ended October 31, 1997; Notes to Consolidated Financial Statements. Financial Statement Schedules included in Part IV (Item 14) of this report for the three fiscal years ended October 31, 1997: Independent Auditors Report; Schedule II - Valuation and Qualifying Accounts; All other schedules are omitted, as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. No. Exhibits 3.7 Bylaws of Optek Technology, Inc. (1). 3.8 Restated Certificate of Incorporation of Optek Technology, Inc. dated August 27, 1987 (2). 10.1 Restated and Amended 1983 Incentive Stock Option Plan (1). 10.2 Form of Incentive Stock Option Agreement (1). 10.47 Long-Term Stock Investment Plan (3). 10.48 Directors Formula Award Plan (3). 10.52 Warrant to Purchase Common Stock of Optek Technology, Inc. dated May 20, 1993 (4). 10.53 Warrant to Purchase Common Stock of Optek Technology, Inc. dated November 22, 1993 (4). 10.54 Warrant to Purchase Common Stock of Optek Technology, Inc. dated November 22, 1993 (4). 10.61 Employment Agreement between Optek Technology, Inc. and Thomas R. Filesi (5). 10.62 Consulting Agreement between Optek Technology, Inc. and Grant A. Dove (5). 10.63 Employment Agreement between Optek Technology, Inc. and William J. Collinsworth (5). 10.64 Employment Agreement between Optek Technology, Inc. and Richard Dahlberg (5). 10.65 Employment Agreement between Optek Technology, Inc. and Thomas Garrett (5). 10.66 Employment Agreement between Optek Technology, Inc. and Robert Kosobucki (5). 10.67 Amended and Restated Optek Technology, Inc. 401(k) Plan (5). 10.68 Directors Formula Compensation Plan (6). 10.69 Termination Agreement dated as of October 31, 1997 between Optek Technology, Inc. and First Source Financial, L.P. 10.70 Second Amended and Restated Warrant to Purchase Common Stock of Optek Technology, Inc. dated October 31, 1997. 10.71 Loan Agreement dated January 29, 1998 between NationsBank of Texas, N.A. and Optek Technology, Inc. 10.72 Lease Agreement between Equipos Climatec, S.A. de C.V. and Optron de Mexico, S.A. de C.V. 11.1 Statement Regarding Computation of Per Share Earnings. 22 Subsidiaries of the Registrant. 23 Independent Auditors Consent. (1) Previously filed as Exhibits 3.7, 10.1 and 10.2, to registrant s Registration Statement on Form S-1, No. 33-14885, and incorporated herein by reference. (2) Previously filed as Exhibit 3.8 to registrant s Registration Statement on Form 8-A filed on October 15, 1987, and incorporated herein by reference. (3) Previously filed as Exhibits 10.47 and 10.48 to registrant s Annual Report on Form 10-K for the fiscal year ended October 25, 1991 and incorporated herein by reference. (4) Previously filed as Exhibits 10.52, 10.53 and 10.54 to registrant s Annual Report on Form 10-K for the fiscal year ended October 28, 1994 and incorporated herein by reference. (5) Previously filed as Exhibits 10.61, 10.62, 10.63, 10.64, 10.65, 10.66, and 10.67 to registrant s Annual Report on Form 10-K for the fiscal year ended October 25, 1996 and incorporated herein by reference. (6) Previously filed as Exhibit 10.68 to registrant s Quarterly Report on Form 10-Q for the fiscal quarter ended May 2, 1997 and incorporated herein by reference. (b) Reports on Form 8-K. The Company filed no reports on Form 8-K during the quarter ended October 31, 1997. PAGE KPMG Peat Marwick LLP Certified Public Accountants INDEPENDENT AUDITORS REPORT The Board of Directors and Stockholders Optek Technology, Inc.: We have audited the accompanying consolidated balance sheets of Optek Technology, Inc. and subsidiaries as of October 31, 1997 and October 25, 1996, and the related consolidated statements of income, stockholders equity and cash flows for each of the years in the three-year period ended October 31, 1997. These consolidated financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with 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 financial position of Optek Technology, Inc. and subsidiaries as of October 31, 1997 and October 25, 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended October 31, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Dallas, Texas December 16, 1997 F-1 PAGE OPTEK TECHNOLOGY, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) October 31, 1997 October 25, 1996 ASSETS
Current assets: Cash and cash equivalents $9,815 $ 121 Accounts receivable, net of allowance for doubtful accounts and customer returns of $1,653 in 1997 and $1,095 in 1996 9,196 7,288 Inventories (note 2) 6,491 6,007 Deferred income taxes (note 7) 2,113 1,142 Prepaid expenses 109 82 Total current assets 27,724 14,640 Property, plant and equipment, net (note 3) 11,135 11,150 Other assets 77 96 $38,936 $25,886 LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Accounts payable $ 3,109 $ 2,637 Accrued expenses (note 4) 9,547 5,345 Total current liabilities 12,656 7,982 Long-term debt (note 5) - 3,428 Other liabilities 117 100 Deferred income taxes (note 7) - 309 Stockholders equity (note 6): Preferred stock, $.01 par value. Authorized 1,000,000 shares; none issued - - Common stock, $.01 par value. Authorized 12,000,000 shares; issued and outstanding 4,259,534 shares in 1997 and 3,912,915 shares in 1996 43 39 Additional paid-in-capital 13,963 13,373 Retained earnings 12,157 655 Total stockholders equity 26,163 14,067 $38,936 $25,886 See accompanying notes to consolidated financial statements. F-2
PAGE OPTEK TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share and per share data) Year ended Oct. 31, Oct. 25, Oct. 27, 1997 1996 1995 Net Sales $75,572 $67,395 $62,542 Cost and expenses: Cost of sales 43,423 39,010 38,513 Product development expenses 1,233 1,348 650 Engineering expenses 4,013 3,585 3,191 Selling expenses 5,289 5,087 4,245 General and administrative expenses 3,856 3,179 2,845 Total costs and expenses 57,814 52,209 49,444 Operating income 17,758 15,186 13,098 Other (income) expense: Interest (income) expense (65) 1,292 2,960 Other (income) expense 59 (145) 142 Total other, net (6) 1,147 3,102 Income before income taxes and extraordinary item 17,764 14,039 9,996 Income tax expense (note 7) 5,259 1,144 158 Net income before extraordinary item 12,505 12,895 9,838 Extraordinary item (net of income tax benefit of $542 - note 5) 1,003 - - Net income $11,502 $12,895 $9,838 Earnings per common and common share equivalents: Earnings before extraordinary item $1.63 $1.69 $1.40 Extraordinary item (0.13) - - Net earnings per share $1.50 $1.69 $1.40 Weighted average common and common share equivalents 7,677,242 7,626,914 7,027,181 See accompanying notes to consolidated financial statements. F-3
PAGE OPTEK TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (in thousands, except share data) Retained Total Addi- earnings stock tional (accumu- holders' Common Stock paid-in ulated equity Shares Amount capital deficit) (deficit) Balance at October 28, 1994 3,232,861 $32 $12,898 $(22,078) $(9,148) Exercise of stock options and warrants 211,763 2 118 - 120 Net income - - - 9,838 9,838 Balance at October 27, 1995 3,444,624 34 13,016 (12,240) 810 Exercise of stock options and warrants 468,291 5 357 - 362 Net income - - - 12,895 12,895 Balance at October 25, 1996 3,912,915 39 13,373 655 14,067 Exercise of stock options and warrants 346,619 4 590 - 594 Net income - - - 11,502 11,502 Balance at October 31, 1997 4,259,534 $43 $13,963 $12,157 $26,163 See accompanying notes to consolidated financial statements. F-4
PAGE OPTEK TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year ended Oct. 31. Oct. 25, Oct. 27, 1997 1996 1995 Cash flows from operating activities: Net income $11,502 $12,895 $ 9,838 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,038 2,944 2,722 Gain on sale of property, plant and equipment (204) - (25) Provision for deferred taxes (1,280) (833) - Changes in assets and liabilities: Accounts receivable (1,908) (357) (242) Inventories, prepaid expenses and other assets (492) (643) 607 Accounts payable, accrued expenses and other liabilities 4,691 (310) 733 Net cash provided by operating activities 14,347 13,696 13,633 Cash flows from investing activities: Purchase of property, plant and equipment (2,034) (1,432) (1,121) Proceeds from sale of property, plant and equipment 215 2 25 Net cash used in investing activities (1,819) (1,430) (1,096) Cash flows from financing activities: Net repayment under long-term bank debt (3,428) (12,568) (12,696) Net proceeds from exercise of stock options and warrants 594 362 120 Net cash used in financing activities (2,834) (12,206) (12,576) Net increase (decrease) in cash and cash equivalents 9,694 60 (39) Cash and cash equivalents at beginning of year 121 61 100 Cash and cash equivalents at end of year $ 9,815 $121 $61 Interest payments $171 $1,346 $3,075 Income tax payments $4,258 $2,089 $123 See accompanying notes to consolidated financial statements. F-5
OPTEK TECHNOLOGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended October 31, 1997, October 25, 1996 and October 27, 1995 (dollars in thousands, except share and per share data) (1) Summary of Significant Accounting Policies (a) General Information Optek Technology, Inc. and subsidiaries (The Company) design, manufacture and market custom infrared optoelectronic devices, magnetic field sensing devices and fiber optic transmitters and receivers. A substantial portion of the Company s products are manufactured by a wholly-owned subsidiary located in Mexico. Net assets located at that subsidiary were $5,773 at October 31, 1997, and $6,334 at October 25, 1996. The Company uses a fiscal year ending on the last Friday in October. Fiscal 1997 comprised 53 weeks and fiscal 1996 and fiscal 1995 comprised 52 weeks. (b) Principles of Consolidation The accompanying consolidated financial statements include the accounts of Optek Technology, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. (c) Revenue Recognition Revenues from product sales are recognized at the time of shipment to the customer. Certain shipments to distributors are subject to limited right-of-return provisions. The Company provides for estimated returns when material. (d) Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of net sales and expenses during the reporting period. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. (e) Inventories Inventories are stated at the lower of cost or market on a first-in, first-out basis. The Company continually assesses the appropriateness of the inventory valuations giving consideration to obsolete and excess inventory. (f) Property, Plant and Equipment Depreciation of property, plant and equipment is provided using the straight-line method over the estimated useful life of the asset. Useful lives range from 20 years for buildings to 3 to 5 years for equipment. Leasehold improvements are depreciated over the shorter of the life of the asset or the lease. F-6 The Company adopted the provisions of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of, on October 26, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on the Company s financial position, results of operations, or liquidity. (g) Earnings per Common Share Earnings per common share is based on the weighted average number of shares and, when dilutive, equivalent shares outstanding during each of the periods presented. Primary earnings per share and fully diluted earnings per share were substantially the same in fiscal 1997, 1996, and 1995. The calculation of net earnings per share in 1997, 1996, and 1995 uses the modified treasury stock method. (h) Cash and Cash Equivalents The Company considers all cash and short-term investments with original maturities of three months or less to be cash equivalents. (i) Stock Based Compensation Plans The Company accounts for its stock option plans and warrants in accordance with the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees, and related interpretations. Compensation expense is recorded on the date of grant only if the market price of the underlying stock exceeds the exercise price. On October 26, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). Under SFAS 123, the Company may elect to recognize expense for stock-based compensation based on the fair value of the awards, or continue to account for stock-based compensation under APB 25 and disclose in the financial statements the effects of SFAS 123 as if the recognition provisions were adopted. The Company has elected to continue to account for stock-based compensation under APB 25 and provide the disclosure required by SFAS 123. (j) Financial Instruments All financial instruments held by the Company have been stated at values which approximate fair value as of October 31, 1997 and October 25, 1996 due to the instruments bearing interest at market rates or due to their short duration. (k) Foreign Currency Translation The United States dollar has been determined to be the functional currency for all foreign operations. Exchange gains and losses related to such operations are immaterial for all years presented. (l) Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-7 (m) Reclassifications Certain amounts in the 1996 and 1995 consolidated financial statements have been reclassified to conform with the current year s presentation. (2) Inventories A summary of inventories at October 31, 1997 and October 25, 1996 follows: 1997 1996 Finished goods $1,503 $1,109 Work in process 4,003 3,323 Raw materials 3,140 3,381 Reserve for excess and obsolete inventory (2,155) (1,806) $6,491 $6,007 (3) Property, Plant and Equipment A summary of property, plant and equipment at October 31, 1997 and October 25, 1996 follows: 1997 1996 Land $ 3,137 $ 3,137 Buildings and improvements 8,873 8,821 Equipment 20,106 18,238 32,116 30,196 Accumulated depreciation (20,981) (19,046) $11,135 $11,150 (4) Accrued Expenses A summary of accrued expenses at October 31, 1997 and October 25, 1996 follows: 1997 1996 Employee related accruals $3,413 $2,778 Federal income tax 1,625 - Debt extinguishment charge 1,544 - Other 2,965 2,567 $9,547 $5,345 (5) Long-term Debt At October 25, 1996, the Company had borrowings outstanding of $3,428 under a credit facility with First Source Financial, LLP ( First Source ). The facility provided for a $10,500 working capital line of credit and an $8,000 revolving term loan. Substantially all of the amount outstanding at October 25, 1996, was borrowed against the revolving term loan bearing interest at the corporate base rate at the First National Bank of Chicago (corporate base rate) plus 4.0%. On November 1, 1996, the revolving term loan was retired using the available working capital line of credit bearing interest at the corporate base rate plus 0.5%. During the second quarter of fiscal 1997, the Company repaid all amounts outstanding under the credit facility with First Source. The credit facility continued to provide a $10.5 million working capital line through the end of fiscal 1997 at which time the Company chose to let the facility expire. F-8 In the fourth quarter of fiscal 1997, the Company agreed to pay First Source $1,545 to release all obligations, including contingent additional interest, under the credit facility and other restrictive covenants. The provision for payment, net of related income tax benefits of $542, has been classified as an extraordinary item. In January 1998, the Company obtained a three year $10.0 million unsecured line of credit from NationsBank N.A. subject to customary terms and conditions. (6) Stockholders Equity During fiscal 1992, the Company implemented a long-term stock investment plan (Investment Plan) which allows the granting of options to key employees and non-employee advisors to the Company to purchase up to 1,000,000 shares of the Company s authorized but unissued common stock at an exercise price equal to the fair market value on the date of grant. Options vest over a period of 3 years and are exercisable for up to 10 years after the date of grant. During fiscal 1995, the Company increased the authorized common stock available for this plan to 1,500,000 shares. The Investment Plan allows the granting of rights to receive cash in the even of a change of control in the Company or to acquire shares of common stock equal in value to the difference between the exercise price and the current market price of stock issuable pursuant to exercisable options. No rights to receive cash in lieu of common stock have been granted as of October 31, 1997. A summary of option activity under the Investment Plan follows: Weighted Average Number of Exercise Shares Price Balance at October 28, 1994 867,820 $ .40 Granted 200,650 5.58 Exercised (177,280) .26 Canceled (72,365) .19 Balance at October 26, 1995 818,825 1.72 Granted 156,000 11.88 Exercised (370,202) .41 Canceled (17,665) 3.68 Balance at October 25, 1996 586,958 5.19 Granted 200,500 10.16 Exercised (272,247) 1.49 Canceled (6,917) 8.77 Balance at October 31, 1997 508,294 $ 9.08 At October 31, 1997, the range of exercise prices and weighted average remaining contractual life of outstanding options were $.19 to $11.97 and 9 years, respectively. At October 31, 1997 and October 25, 1996, the number of options exercisable was 171,711 and 275,826, respectively, and the weighted average exercise price of those options was $7.33 and $1.37, respectively. F-9 During fiscal 1983, the Company implemented an incentive stock option plan (Incentive Plan) which allowed the granting of options, vesting over 3 years and exercisable for up to ten years after the date of grant, to key employees to purchase the Company s authorized but unissued common stock at an exercise price equal to the fair market value on the date of grant. The Incentive Plan expired during fiscal 1993. During fiscal 1995, options to purchase 18,483 shares of common stock were exercised. During fiscal 1996, options to purchase 84,089 shares of common stock were exercised. During fiscal 1997, options to purchase 21,166 shares of common stock were exercised at a weighted average price of $1.31. Under the Incentive Plan, options outstanding and exercisable totaled 42,700 at a weighted average exercise price of $2.15 and a range of $1.19 to $2.31 per share at October 31, 1997. During fiscal 1992, the Company adopted a directors formula award plan (Directors Award Plan) which provides for the granting of options to directors of the Company to purchase up to 200,000 shares of the Company s authorized but unissued common stock at an exercise price equal to the fair market value on the date of grant. Each individual elected or reelected to serve as a director of the Company who is not a full-time employee of the Company will automatically be awarded options to purchase up to 3,500 shares of common stock. Options granted under the Directors Award Plan vest if such individual continues to serve as a Director of the Company until the next annual meeting of the Company s stockholders and are exercisable for a period of ten years from the date of grant. During each of the fiscal years 1995, 1996, and 1997, options to purchase 14,000 shares of the Company s common stock were granted. During fiscal 1996, options to purchase 14,000 shares of common stock were exercised. At October 31, 1997 there are 73,500 director options outstanding of which 59,500 are currently exercisable at a weighted average exercise price of $3.90 and a range of $.44 to $13.38 per share. During fiscal 1997, the Company adopted a directors formula compensation plan (Directors Compensation Plan) which provides for the reservation and issuance of up to 100,000 shares of the Company s common stock. Under the plan, non-employee directors may elect, in lieu of all or part of the annual retainer of $12, to: a) receive the number of shares of Optek s common stock equal to the amount of the retainer divided by the fair market value per share on the date such amount would otherwise be paid; b) receive ten year options to purchase shares of the Company s common stock at an exercise price equal to 50% of the fair market value for the number of shares equal to the retainer divided by the difference between the market price and the exercise price, or; c) defer payment of the retainer until such time as they cease to be a director. For purposes of the Director s Compensation Plan, fair market value per share is defined as the average of the closing prices for the Company s common stock for the twenty trading days preceding an event. No elections to receive the benefits afforded have been made by any director under the Director s Compensation Plan. The per share weighted average fair value of stock options granted during fiscal 1997 and fiscal 1996 was $3.77 and $4.13, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: 1997 1996 Expected dividend yield 0% 0% Expected volatility 44.2% 41.5% Risk-free interest rate 6% 6% Expected life 3 years 3 years The Company applies APB opinion No. 25 in accounting for its plans and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for stock options granted in fiscal 1996 and fiscal 1997 under SFAS No. 123, the Company s net income would have been reduced to the proforma amounts indicated below: Net income: 1997 1996 As reported $11,502 $12,895 Proforma 11,259 12,810 F-10 Net earnings per share: As reported $1.50 $1.69 Proforma 1.47 1.68 Proforma net income reflects only options granted in fiscal 1997 and fiscal 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the proforma net income and net earnings per share amounts presented above because compensation cost is reflected over the options vesting period of 3 years and compensation cost for options granted prior to October 28, 1995 is not considered. Prior to fiscal 1995, warrants were granted in the amount of 261,301 shares to certain non-employee directors and advisors. During fiscal 1995, warrants to purchase 16,000 shares of common stock were exercised at a weighted average exercise price of $3.25. During fiscal 1996, 11,500 warrants expired with an exercise price of $6.13 per share. During fiscal 1997, warrants to purchase 53,333 shares of common stock were exercised at a weighted average exercise price of $3.03. Excluding warrants granted to financial institutions, the Company, at October 31, 1997, had 180,468 warrants outstanding at a weighted average exercise price of $.39 and a range of $.19 to $6.00 per share expiring July 1998 through November 1998. Prior to fiscal 1997, the Company granted First Source a warrant, as amended on October 31, 1997, to purchase 3,150,000 shares of the Company s common stock at an exercise price of $.50 per share which expires on October 31, 1998. The warrant contains certain antidilutive provisions, certain registration rights upon the occurrence of a public offering and certain demand rights for such a registration. (7) Income Taxes Income taxes consist of the following: Current: 1997 1996 1995 U.S. Federal $6,379 $1,887 $158 Foreign 160 90 - Deferred (1,280) (833) - Income tax expense before extraordinary item 5,259 1,144 158 Extraordinary item (542) - - $4,717 $1,144 $158 Income tax expense attributable to income before extraordinary item differs from the expected tax expense computed by applying the U.S. corporate income tax rate of 35% for fiscal 1997 and 1996, and 34% for fiscal 1995 to income before income taxes and extraordinary item as follows: 1997 1996 1995 Expected tax expense $6,217 $4,914 $3,399 Realization of benefits of tax - (3,238) (3,853) Change in valuation allowance (358) (209) 410 Tax credit for research and experimentation activities (600) - - Other, net - (323) 202 Income tax expense $5,259 $1,144 $ 158 F-11 The fiscal 1997 change in valuation allowance and tax credit for research and experimentation activities occurred in the fourth quarter. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at October 31, 1997 and October 25, 1996 are presented below: Deferred tax assets: 1997 1996 Accounts receivable allowances $ 578 $ 372 Inventory allowances 506 525 Accrued expenses and other 524 603 Property, plant and equipment 505 - Less valuation allowance - (358) Deferred tax assets 2,113 1,142 Deferred tax liabilities: Property, plant and equipment - 309 Net deferred tax assets $2,113 $ 833 The net change in the valuation allowance for the year ended October 31, 1997 and October 25, 1996 was a decrease of $358 and $3,447, respectively. Based on the Company s historical and current earnings, management believes it is more likely than not that the Company will realize the benefits of its net deferred tax assets existing at October 31, 1997. (8) Operating Leases The Company leases certain manufacturing facilities and equipment under noncancellable operating leases. Future minimum lease payments as of October 31, 1997 under all such operating leases are as follows: 1998, $668; 1999, $305; 2000, $233; 2001, $211; and 2002, $208. Rental expense in 1997 was $469; 1996, $399; and 1995, $412. (9) Credit Risk and Major Customer Information Substantially all of the Company s sales are made on credit on an unsecured basis. The Company evaluates credit risks on an individual basis before extending credit to its customers and believes the allowance for doubtful accounts adequately provides for losses on uncollectible accounts. During fiscal 1997, the Company s ten largest customers accounted for approximately 63% of net sales versus 62% in fiscal 1996 and 57% in fiscal 1995. Such customers are involved primarily in the automotive and office equipment industries. During fiscal 1997, net sales to one customer in the automotive industry were 13% of total net sales, versus 11% in fiscal 1996 and 13% in fiscal 1995, and net sales to another automotive customer were 13% of total net sales versus 8% in fiscal 1996 and 3% in fiscal 1995. Sales to one customer in the office equipment industry were 10% of total net sales versus 11% in fiscal 1996 and 13% in fiscal 1995. Aggregate export sales to unaffiliated customers were $17,361 in fiscal 1997, $18,865 in fiscal 1996, and $16,856 in fiscal 1995. Export sales were primarily to customers in Western Europe. F-12 (10) Employee Benefit Plan All U.S. paid employees of the Company are entitled to participate in the Optek Technology, Inc. Profit-Sharing Plan and Trust (Profit-Sharing Plan). Pursuant to the Profit-Sharing Plan, employees may request the Company to deduct and contribute up to 15% of their salary up to the appropriate statutory dollar limits. The Company has the option to contribute up to 2% of the employee s salary. Employer contributions vest ratably over a period of five years. Vesting occurs after each year in which employees accumulate at least 1,000 hours of service. An employee s vested account balance is distributable either upon termination of employment or after attaining a certain age. During fiscal 1997, the Company provided for contributions to the Profit-Sharing Plan totaling $165 to be paid the first quarter of fiscal 1998. For fiscal 1996 and fiscal 1995 the Company contributed $143 and $139, respectively. (11) Contingencies The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material affect on the Company s financial position or results of operations. F-11 PAGE 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, thereunder duly authorized. OPTEK TECHNOLOGY, INC. By /s/ Thomas R. Filesi. Thomas R. Filesi, President and Chief Executive Officer Dated: January 29, 1997 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 and on the dates indicated. Signature Title Date /s/ Thomas R. Filesi President, Chief Executive Officer and Director Thomas R. Filesi (Principal Executive Officer) /s/ William J. Collinsworth Vice President - Finance, Treasurer and William J. Collinsworth Assistant Secretary (Principal Financial and Accounting Officer /s/ Grant A. Dove Chairman of the Board and Director Grant A. Dove /s/ Rodes Ennis Director January 29,1998 Rodes Ennis /s/ Michael E. Cahr Director Michael E. Cahr /s/ William H. Daughtrey Director William H. Daughtrey /s/ Wayne Stevenson Director Wayne Stevenson EX-10 2 TERMINATION AGREEMENT This Termination Agreement (this "Agreement") dated as of October 31, 1997 by and between First Source Financial LLP, an Illinois limited liability partnership ("First Source"), and Optek Technology, Inc., a Delaware corporation ("Optek"); WITNESSETH: WHEREAS, Optek and its then subsidiary Optron, Inc. entered into a Secured Credit Agreement dated as of July 1, 1988 with Household Commercial Financial Services, Inc., a Delaware corporation ("Household"), pursuant to which Household loaned amounts to Optek to acquire the business of the Optoelectronics Division of TRW, Inc., which indebtedness was secured by substantially all of the assets of Optek; and WHEREAS, to evidence the security granted the parties entered into the Collateral Documents (as defined in the Secured Credit Agreement); WHEREAS, after several amendments, the Secured Credit Agreement was amended and restated by Amended and Restated Secured Credit Agreement dated as of January 20, 1994 between Optek and Household; and WHEREAS, Household subsequently assigned its rights and obligations under the Amended and Restated Secured Credit Agreement, as amended, and the Collateral Documents to First Source by instruments dated March 28, 1995; and WHEREAS, Optek has paid in full all amounts borrowed under the above described loan documents (the "Loan Documents") and desires to obtain a release of all remaining obligations under the Loan Documents, except as set forth herein; NOW, THEREFORE, in consideration of the release by First Source of its rights under the Loan Documents, including the release of all claims it may have or could now or in the future assert under Section 4.7 of the Amended and Restated Secured Credit Agreement, the mutual agreements herein contained, and other good and valuable consideration among the parties, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Additional Payment. Optek agrees to pay to First Source in cash the sum of $1,545,000.00 to be paid as follows: (i) $750,000 to be paid to First Source no later than March 31, 1998; and (ii) the balance to be paid not later than June 30, 1998. 2. Termination of Loan Documents. The Loan Documents are hereby terminated and of no further force and effect, except the obligations of Optek arising under Section 14.4 and Section 14.5 of the Amended and Restated Secured Credit Agreement, which expressly survive termination of the Amended and Restated Secured Loan Agreement. 3. Release. First Source for itself and its successors and assigns, hereby fully, finally and forever releases, discharges, quitclaims and covenants not to sue Optek, its officers, directors, agents, employees, attorneys, stockholders, predecessors-in- interest, successors-in-interest, subsidiaries, and indemnitees of, from or with respect to any and all claims, counterclaims, debts, covenants, contracts, promises, agreements, liabilities, actions, demands or causes of action of any kind or character, whether now known or unknown, suspected or unsuspected, arising out of the Loan Documents, except the obligations of Optek arising under Section 14.4 and Section 14.5 of the Amended and Restated Secured Credit Agreement. First Source warrants and represents that it has not sold, assigned, granted or transferred to any other person, firm or corporation any claim, counterclaim, demand or cause of action covered by the terms of this Agreement. 4. Further Assurances. From time to time, as and when requested by Optek or by its successors and assigns, First Source shall execute and deliver such releases and other documents and instruments and shall take or cause to be taken all such further and other actions as shall be appropriate or necessary in order to terminate and release all liens, pledges, security interests or claims granted, held or asserted by First Source against the assets of Optek and otherwise to carry out the purposes of this Agreement. 5. Parties in Interest. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the successors and assigns of First Source and Optek. 6. Law to Govern. THIS AGREEMENT IS BEING MADE IN ILLINOIS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THAT STATE WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES. 7. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be considered an original for all purposes, and each of which shall be binding upon each executing party regardless of whether each party named herein shall sign the same counterpart. Executed signature pages may be detached from one or more counterparts and affixed to a single document, which shall constitute the original counterpart instrument. 8. Entire Agreement. This Agreement contains the entire understanding of the parties hereto and supersedes all prior agreements of the parties with respect to the subject matter contained herein. Nothing in this Agreement, express or implied, is intended to confer upon any other person other than First Source or Optek rights or remedies under or by reason of this Agreement. 9. Amendment; Waiver. Any amendment or waiver to this Agreement may be made by, and shall require, the written agreement of each party whose rights are adversely affected thereby. FIRST SOURCE FINANCIAL LLP BY FIRST SOURCE FINANCIAL, INC., ITS AGENT/ MANAGER By: Name: Title: OPTEK TECHNOLOGY, INC. By: Name: Title: EX-10 3 NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE TRANSFERRED EXCEPT IN ACCORDANCE WITH SUCH REGISTRATION REQUIREMENTS OR AN AVAILABLE EXEMPTION THEREFROM AND EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF THIS WARRANT. SECOND AMENDED AND RESTATED WARRANT To Purchase Common Stock of OPTEK TECHNOLOGY, INC. This SECOND AMENDED AND RESTATED WARRANT (the "Warrant"), entered into as of the 31st day of October, 1997, between Optek Technology, Inc., a Delaware corporation (the "Company") and First Source Financial LLP, an Illinois limited liability partnership ("First Source"); WITNESSETH THAT: WHEREAS, First Source is currently the holder of an Amended and Restated Warrant to Purchase Common Stock of the Company dated as of December 12, 1995 which was an amendment and restatement of a warrant dated as of January 20, 1994 (the "Original Warrant"); WHEREAS, the Company issued the Original Warrant to First Source, as successor-in- interest to Household Commercial Financial Services, Inc. pursuant to that certain Amended and Restated Secured Credit Agreement dated as of January 20, 1994 among the Company and First Source, as successor-in-interest to Household Commercial Financial Services, Inc. in consideration of the loans by Household Commercial Financial Services, Inc.; WHEREAS, the Original Warrant was an amendment and restatement of, and was issued in replacement of, a warrant dated as of November 27, 1991, which, in turn, was an amendment and restatement of, and was issued in replacement of, the warrant dated as of January 31, 1991, which in turn replaced rights granted under a Conversion Agreement dated July 1, 1988, all of which were issued to Household Commercial Financial Services, Inc.; and WHEREAS the parties desire to amend and restate the Amended and Restated Warrant as set forth herein; NOW, THEREFORE, in consideration of the foregoing provisions, the mutual covenants and agreements set forth below, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and First Source hereby amend and restate the Amended and Restated Warrant in its entirety as follows: PAGE THIS IS TO CERTIFY that First Source, as successor-in-interest to Household Commercial Financial Services, Inc., or registered assigns, is entitled upon the due exercise hereof at any time during the Exercise Period (as hereinafter defined) to purchase, in whole or in part, from Optek Technology, Inc., a Delaware corporation (the "Company'), the number of shares of Common Stock, $0.01 par value, of the Company as provided in Section 2.1 (subject to adjustment) at the price for each share of such Common Stock so purchased as provided in Section 2.1 (subject to adjustment) and to exercise the other rights, powers and privileges hereinafter provided, all on the terms and conditions and pursuant to the provisions hereinafter set forth. Dated as of October 31, 1997. PAGE TABLE OF CONTENTS Page ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II EXERCISE OF WARRANT . . . . . . . . . . . . . . . . . . . . . 5 2.1 Right to Exercise, Number of Shares and Exercise Price. . . . 5 2.2 Notice of Exercise; Issuance of Common Stock. . . . . . . . . 5 2.3 Fractional Shares . . . . . . . . . . . . . . . . . . . . . . 5 2.4 Continued Validity. . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE III REGISTRATION, TRANSFER AND EXCHANGE . . . . . . . . . . . 6 ARTICLE IV ANTIDILUTION PROVISIONS AND RIGHTS UPON EXTRAORDINARY TRANSACTIONS. . . . . . . . . . . . . . . . . . 7 4.1 Adjustment of Number of Shares Purchasable and Exercise Price 7 (a) Adjustment to Number of Shares Issuable Pursuant to this Warrant . . . . . . . . . . . . . . . . . . . . . . . . . 7 (b) Minimum Adjustment. . . . . . . . . . . . . . . . . . . . 7 4.2 Diluting Events and Related Matters . . . . . . . . . . . . . 8 (a) Issuance of Stock . . . . . . . . . . . . . . . . . . . . 8 (b) Issuance of Warrants, Options or Other Rights . . . . . . 8 (c) Issuance of Convertible Securities. . . . . . . . . . . . 9 (d) Reorganization, Reclassification, Recapitalization, Merger or Sale of Company . . . . . . . . . . . . . . . . . . . . . 10 (e) Readjustments . . . . . . . . . . . . . . . . . . . . . . 10 (f) Determination of Consideration for Rights or Options. . . 11 (g) Determination of Consideration upon Payment of Cash, Property or Merger . . . . . . . . . . . . . . . . . . . . . . . . 11 (h) Date of Determination . . . . . . . . . . . . . . . . . . 11 4.3 Rights of the Holder upon Rights Offering, Mergers, Reorganizations and Certain Other Transactions. . . . . . . . . . . . . . . . 11 (a) Participation in Rights Offerings . . . . . . . . . . . . 11 (b) Participation in Stock Dispositions . . . . . . . . . . . 12 (c) Dividends . . . . . . . . . . . . . . . . . . . . . . . . 12 (d) Other Distribution. . . . . . . . . . . . . . . . . . . . 13 (e) Dividends in Securities; Splits and Combinations. . . . . 13 (f) Record Date . . . . . . . . . . . . . . . . . . . . . . . 13 (g) Shares Outstanding. . . . . . . . . . . . . . . . . . . . 14 4.4 Certificates, Notices and Consents. . . . . . . . . . . . . . 14 4.5 No Adjustment After Exercise. . . . . . . . . . . . . . . . . 15 PAGE ARTICLE V COVENANTS OF THE COMPANY. . . . . . . . . . . . . . . . . . . 15 5.1 No Impairment . . . . . . . . . . . . . . . . . . . . . . . . 15 5.2 Affirmative Covenants . . . . . . . . . . . . . . . . . . . . 15 5.2.1 Delivery of Financial and Business Information . . . . . . . . . . . . . . . . .15 5.2.2 Disputed Financial Statements . . . . . . . . . . . . . . . . 17 5.2.3 Budget. . . . . . . . . . . . . . . . . . . . . . . . . . 17 5.2.4 Auditors' Reports . . . . . . . . . . . . . . . . . . . . 17 5.2.5 Lender Information. . . . . . . . . . . . . . . . . . . . 17 5.2.6 Litigation. . . . . . . . . . . . . . . . . . . . . . . . 17 5.2.7 Default . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.2.8 Material Adverse Developments . . . . . . . . . . . . . . 18 5.2.9 Other Information . . . . . . . . . . . . . . . . . . . . 18 5.2.10 Auditors. . . . . . . . . . . . . . . . . . . . . . . . . 18 5.2.11 Inspection and Meeting Rights; Budget Review. . . . . . . 18 5.2.12 Accounting. . . . . . . . . . . . . . . . . . . . . . . . 18 5.2.13 Insurance . . . . . . . . . . . . . . . . . . . . . . . . 18 5.2.14 Payment of Taxes. . . . . . . . . . . . . . . . . . . . . 18 5.2.15 Compliance With Laws. . . . . . . . . . . . . . . . . . . 19 5.2.16 Preservation of Corporate Existence and Property; Operations 19 5.2.17 Holder as Observer. . . . . . . . . . . . . . . . . . . . 19 5.2.18 Confidential Information. . . . . . . . . . . . . . . . . 19 ARTICLE VI RESERVATION OF STOCK ISSUABLE ON EXERCISE OF WARRANT; PREEMPTIVE RIGHTS. . . . . . . . . . . . . . . . . . 20 ARTICLE VII LISTING ON SECURITIES EXCHANGE. . . . . . . . . . . . . . 20 ARTICLE VIII RESTRICTIONS ON TRANSFER. . . . . . . . . . . . . . . . . 20 8.1 Notice of Proposed Transfer; Transfers Without Registration . 20 8.2 Registration and Qualification. . . . . . . . . . . . . . . . 21 (a) Piggyback Registration. . . . . . . . . . . . . . . . . . 21 (b) Demand Registration . . . . . . . . . . . . . . . . . . . 23 8.3 Registration and Qualification Procedures . . . . . . . . . . 24 8.4 Allocation of Expenses. . . . . . . . . . . . . . . . . . . . 25 8.5 Indemnification . . . . . . . . . . . . . . . . . . . . . . . 26 8.6 Legend on Certificates. . . . . . . . . . . . . . . . . . . . 28 8.7 Supplying Information . . . . . . . . . . . . . . . . . . . . 28 8.8 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 8.9 Holdback Agreements . . . . . . . . . . . . . . . . . . . . . 29 8.10 Rule 144 Reporting. . . . . . . . . . . . . . . . . . . . . . 29 8.11 Consent for Additional Registration Rights. . . . . . . . . . 30 PAGE ARTICLE IX MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 30 9.1 Nonwaiver and Expenses. . . . . . . . . . . . . . . . . . . . 30 9.2 Holder Not a Stockholder. . . . . . . . . . . . . . . . . . . 30 9.3 Notice Generally. . . . . . . . . . . . . . . . . . . . . . . 30 9.4 Payment of Certain Expenses . . . . . . . . . . . . . . . . . 30 9.5 Successors and Assigns. . . . . . . . . . . . . . . . . . . . 31 9.6 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.7 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.8 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . 31 9.9 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . 31 9.10 No Section 338 Election or Step-Up in Asset Value on Books of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.11 Replacement . . . . . . . . . . . . . . . . . . . . . . . . . 31 9.12 Termination Agreement . . . . . . . . . . . . . . . . . . . . 31 NOTICE OF EXERCISE FORM ASSIGNMENT FORM PAGE ARTICLE I DEFINITIONS The terms defined in this ARTICLE I, whenever used in this Warrant, shall have the respective meanings hereinafter specified. Whenever used in this Warrant, any noun or pronoun shall be deemed to include both the singular and plural and to cover all genders. "Adjusted Operating Profits" means an amount equal to the Net Income of the Company and its Subsidiaries for the period specified before deduction of any amount which, in conformity with generally accepted accounting principles, would be set forth opposite the caption "income tax expense" (including deferred income taxes) (or any like caption) on a consolidated income statement of the Company, and excluding any amounts which, in conformity with generally accepted accounting principles, would be set forth opposite the captions, "extraordinary pre-tax gain" and "extraordinary pre-tax loss" (or any like captions) on such consolidated income statement, plus the amount which, in accordance with generally accepted accounting principles, would be set forth opposite the caption "interest expense" (or any like caption) on such consolidated income statement, plus an amount which, in conformity with generally accepted accounting principles, is equal to any amortization or depreciation for such fiscal period, to the extent the same are deducted from net revenues, in conformity with generally accepted accounting principles, in determining Net Income for such fiscal period. "Affiliate" of any person means any other person which, directly or indirectly, controls or is controlled by or is under common control with, such person. A person shall be deemed to be "controlled by" any other person if such other person possesses, directly or-indirectly, power (a) to vote 10% or more of the securities having ordinary voting power, or if not having ordinary voting power, having at the time voting power, for the election of directors of such person; or (b) to direct or cause the direction of the management and policies of such person whether by contract or otherwise. "Assignment" means the form of Assignment appearing at the end of this Warrant. "Commission" means the Securities and Exchange Commission. "Common Stock" means the Company's authorized Common Stock, $0.01 par value, and any class of capital stock of the Company now or hereafter authorized having the right to share in distributions either of earnings or assets of the Company without limit as to amount or percentage. "Common Stock on a Fully Diluted Basis" means, at any date as at which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held by or for the account of the Company, and shall include all shares issuable in respect of outstanding scrip or any certificates representing fractional interests in shares of Common Stock (which issued and outstanding shares shall be approximately 4,259,534 shares on the date this Warrant is issued), and all shares issuable pursuant to the Company's incentive stock option plan, long-term stock investment plan, director's formula award plan or directors formula compensation plan, all as in effect on the date hereof, or pursuant to an employee or director stock option plan, restricted stock bonus or ownership plan, stock appreciation plan or similar equity appreciation plan which the Company may implement after receiving written approval of a majority of the Holders in their sole discretion (which approval must include First Source if First Source is a Holder) (whether or not options or awards with respect to such shares have been granted) or issuable upon exercise of any warrant (including this Warrant and warrants previously issued to Directors of the Company), rights to subscribe for or options (whether or not vested) to purchase Common Stock or Convertible Securities or upon the conversion of any Convertible Securities. On the date hereof, the number of shares of Common Stock on a Fully Diluted Basis shall be 8,214,496 shares, including 3,150,000 shares of Common Stock initially issuable pursuant to this Warrant. "Common Stock Valuation Price" in effect as of any date shall mean a per share value equal to the result obtained by dividing (a) an amount equal to (i) the product of the Company's Adjusted Operating Profits for the four most recent Quarterly Fiscal Periods of the Company (at the end of the Quarterly Fiscal Period of the Company immediately preceding such date) and seven (7) less (ii) the amount of Funded Indebtedness (at the end of the Quarterly Fiscal Period of the Company immediately preceding such date), plus (iii) the proceeds that would be received by the Company upon exercise of all warrants, rights to subscribe for or options to purchase Common Stock or Convertible Securities or upon conversion of any Convertible Securities, plus (iv) the fair market value of proceeds received by the Company (other than proceeds in the form of services of employees of the Company and cash proceeds, which are reflected in the amount of Funded Indebtedness in clause (ii) above) upon any issuances or sales by it of Common Stock, Convertible Securities or warrants, rights to subscribe for or options to purchase Common Stock or Convertible Securities, multiplied by a fraction the numerator of which (which shall never be less than zero) is four minus the number of full Quarterly Fiscal Periods since such issuance or sale and the denominator of which is four, by (b) the number of shares of Common Stock on a Fully Diluted Basis on such date, all as determined by a firm of independent public accountants of recognized standing selected by the Company and reasonably acceptable to the Holder. "Company" means Optek Technology, Inc., a Delaware corporation. "Convertible Securities" means evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for, with or without payment of additional consideration in cash or property, shares of Common Stock, either immediately or upon the arrival of a specified date or the happening of a specified event. "Default Rate" means at any time 4.50% plus the rate per annum then most recently announced by The First National Bank of Chicago, a national banking association ("FNBC"), as its corporate base rate at Chicago, Illinois (or if such rate is not being quoted by FNBC, the rate which is the successor to such rate, and if FNBC is not quoting any such rate, the rate conceptually equivalent to such rate which the domestic commercial bank having the highest combined capital and surplus of any bank having its principal office in Chicago, Illinois is quoting). "Diluting Event" means any transaction or event which is identified as a Diluting Event in Section 4.2(a) - (d). "Exercise Period" means the period commencing on the date hereof and terminating at 5:00 p.m., Chicago time, on October 31, 1998. "Exercise Price" means the price per share of Common Stock as set forth in Section 2.1 as such price may be adjusted from time to time pursuant to Article IV. "First Source" means First Source Financial LLP, an Illinois registered limited liability partnership. "Funded Indebtedness" means all indebtedness of the Company and its Subsidiaries, on a consolidated basis, if appropriate, solely for money borrowed and owing, less the aggregate amount of all cash and cash equivalents of the Company and its Subsidiaries but not including the amount of any indebtedness of the Company represented by Convertible Securities. "Holder" means the person in whose name this Warrant is registered on the books of the Company maintained for such purpose. "Independent Counsel" means counsel to the Company, unless counsel to the Holder disagrees in writing with the opinion or advice of such counsel with respect to the issue in question within 15 days after receipt of such opinion or advice, in which case the Company and Holder shall select another counsel, not the regular counsel of the Company or the Holder and experienced in Securities Act matters, who shall render an opinion with respect to the issue in question. The opinion or advice of such other counsel so given shall be conclusive and binding on the Company and the Holder. The legal fees and expenses of such other counsel incurred in connection with the rendering of such opinion shall be borne equally by the Holder and the Company. "Market Value" per share of Common Stock on any date shall mean average of the daily market prices for the 10 consecutive trading days preceding such date. The market price for each such trading day shall be the last sales price on such day on such stock exchange on which such stock is listed or admitted to trading, or, if no sale takes place on such day on any such exchange, the average of the closing bid and asked prices on such day and officially quoted on any such exchange, or, if the Common Stock is not then listed or admitted to trading on any stock exchange, the market price for each such business day shall be the last sale price on such day if reported by the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or, if not so reported, the average of the reported closing bid and asked price quotations for such day, as reported by NASDAQ. Notwithstanding the foregoing, if Market Value cannot be determined as set forth above because the Common Stock is not then listed or admitted to trading on a stock exchange, nor reported by NASDAQ, then "Market Value" as used in this Warrant shall have the same meaning as "Common Stock Valuation Price." "Net Income" for any fiscal period of the Company shall mean consolidated net income or loss of the Company and its Subsidiaries, if any, as it would appear on the consolidated statement of income of the Company for such fiscal period prepared in accordance with generally accepted accounting principles and as it may be adjusted pursuant to Section 5.2. "Notice of Exercise" means the form of Notice of Exercise appearing at the end of this Warrant. "Organic Change" shall have the meaning provided in Section 4.3(b). "Quarterly Fiscal Period" means a period comprised of thirteen or fourteen weeks, as applicable, representing a fiscal quarter of the Company, the first of which in any fiscal year shall begin on the first day of the Company's fiscal year and the remainder of which in such year shall begin on the day following the termination of the preceding Quarterly Fiscal Period. "Registration Agreement" shall have the meaning provided in Section 8.2. "Securities Act" means the Securities Act of 1933, as amended, or any similar Federal statute, and the rules and regulations of the Commission promulgated thereunder, all as the same shall be in effect from time to time. "Shares" shall have the meaning provided in Section 2.1. "Subsidiary" means a corporation, partnership or other entity of which a person and/or such person's other Subsidiaries, individually or in the aggregate, own, directly or indirectly, such number of outstanding shares or other interests as have more than 50% of the ordinary voting power (or, at the time extraordinary powers are available to holders of shares or other interests, such number of outstanding shares or other interests as have more than 50% of voting power) for the election of directors or the members of any similar governing body. "Warrant" and "Warrants," including "this Warrant," mean (a) the warrant dated as of October 31, 1997 issued to First Source and (b) all warrants issued upon the partial exercise, transfer or division of or in substitution for such warrant. "Warrant Valuation Price" in effect as of any date shall mean a per share value equal to the difference between the Market Value and the Exercise Price then in effect. PAGE ARTICLE II EXERCISE OF WARRANT 2.1 Right to Exercise, Number of Shares and Exercise Price. Subject to and upon compliance with the conditions of this ARTICLE II, the Holder shall have the right, at its option, at any time and from time to time during the Exercise Period, to exercise this Warrant in whole or in part. The aggregate number of shares of Common Stock which may be purchased from time to time during the Exercise Period by the Holder upon exercise of this Warrant shall be 3,150,000 subject to adjustment as provided in ARTICLE IV hereof (the "Shares"), and the initial Exercise Price shall be fifty cents ($0.50) (subject to adjustment as provided in Section 4.3(e)). Notwithstanding the foregoing, the aggregate exercise price for the shares issuable under this Warrant shall not exceed One Million Five Hundred Seventy Five Thousand Dollars ($1,575,000.00). 2.2 Notice of Exercise; Issuance of Common Stock. (a) To exercise this Warrant, the Holder shall deliver to the Company at its principal office at 1215 West Crosby Road, Carrollton, Texas 75006 Attention: President (i) a Notice of Exercise duly executed by the Holder and specifying the number of shares of Common Stock to be purchased and (ii) this Warrant. (b) Payment of the Exercise Price shall be made at the option of the Holder, (A) by wire transfer to an account in a bank located in the United States designated for such purpose by the Company or (B) by certified or official bank check payable to the order of the Company and drawn on a member of the Chicago or New York Clearing House. Upon receipt of the cash payment, the Company shall, as promptly as practicable, and in any event within five days thereafter, cause to be issued and delivered to the Holder, or, subject to ARTICLE VIII, the transferee designated in the Notice of Exercise, a certificate or certificates representing the aggregate number of full shares of Common Stock issuable upon such exercise registered in the name of the Holder or the name of the transferee so designated. (c) Unless otherwise requested by the Holder, this Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and the Holder or transferee so designated in the Notice of Exercise shall be deemed to have become the holder of record of such shares for all purposes, as of the close of business on the date the Notice of Exercise, together with payment as herein provided, and this Warrant, are received by the Company. (d) If this Warrant is exercised in part, the Company shall, at the time of delivery of the certificate or certificates for Common Stock, unless the Exercise Period has then expired, issue and deliver to the Holder or the transferee so designated in the Notice of Exercise a new Warrant evidencing the rights of the Holder or such transferee to purchase the aggregate number of shares of Common Stock for which this Warrant shall not have been exercised, and this Warrant shall be cancelled. 2.3 Fractional Shares. The Company shall not issue fractional shares of Common Stock or scrip representing fractional shares of Common Stock upon exercise of this Warrant. As to any fractional share of Common Stock which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall purchase from the Holder such unissued fractional share at a price equal to an amount calculated by multiplying such fractional share (calculated to the nearest 1/100th of a share) by the Market Value. Payment of such amount shall be made in cash or by check payable to the order of the Holder at the time of delivery of any certificate or certificates arising upon such exercise. 2.4 Continued Validity. A holder of shares of Common Stock issued upon the exercise of this Warrant, in whole or in part, shall continue to be entitled to all rights provided to holders of Common Stock issuable on the exercise of this Warrant, whether or not this Warrant has been fully exercised, except where such holder acquires the shares through a public market. The Company will, at the time of the exercise of this Warrant, in whole or in part, upon the request of the holder of the shares of Common Stock issued upon the exercise thereof, acknowledge in writing, in form reasonably satisfactory to such holder, its continuing obligation to afford to such holder all rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant; provided, however, that if such holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder all such rights. ARTICLE III REGISTRA TION, TRANSFER AND EXCHANGE The Company shall keep at the Company's principal office referred to in Section 2.2 or at the offices of Hewitt & Hewitt, P.C. in Dallas, Texas or at such other address as shall be specified in a written notice to the Holder a register in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration, transfer and exchange of this Warrant. The Company will not at any time, except upon the dissolution, liquidation or winding up of the Company, close such register so as to result in preventing or delaying the exercise or transfer of this Warrant. Upon surrender for registration of transfer of this Warrant at such office, the Company shall execute and deliver, in the name of the designated transferee or transferees, one or more new Warrants representing the right to purchase a like aggregate number of shares of Common Stock. At the option of the Holder, this Warrant may be exchanged for other Warrants representing the right to purchase a like aggregate number of shares of Common Stock upon surrender of this Warrant at such office. Whenever this Warrant is so surrendered for exchange, the Company shall execute and deliver the Warrants which the Holder making the exchange is entitled to receive. Every Warrant presented or surrendered for registration of transfer or exchange shall be accompanied by an Assignment duly executed by the holder thereof or its attorney duly authorized in writing. All warrants issued upon any registration of transfer or exchange of warrants shall be the valid obligations of the Company, evidencing the same rights, and entitled to the same benefits as the warrants surrendered upon such registration of transfer or exchange. Upon receipt by the Company of evidence satisfactory to it (in the exercise of reasonable discretion) of the ownership of and the loss, theft, destruction or mutilation of this Warrant and (in case of loss, theft or destruction) the written agreement of the Holder to indemnify the Company (or, if the Holder is not First Source and if the Company reasonably requests, a bond) against any resulting loss or expense and in case of mutilation upon surrender and cancellation thereof, the Company will execute and deliver in lieu thereof a new Warrant. No service charge shall be made for any registration of transfer or exchange of Warrants, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer as provided in Section 9.4. The Company and any agent of the Company may treat the person in whose name this Warrant is registered as the owner of this Warrant for all purposes whatsoever, and neither the Company nor any agent of the Company shall be affected by notice to the contrary. This Warrant, if properly assigned, may be exercised by a new holder without first having a new Warrant issued. ARTICLE IV ANTIDILUTION PROVISIONS AND RIGHTS UPON EXTRAORDINARY TRANSACTIONS 4.1 Adjustment of Number of Shares Purchasable and Exercise Price. Subject to the provisions of this ARTICLE IV, the Exercise Price and the number of shares of Common Stock issuable upon exercise of this Warrant shall be subject to adjustment from time to time as set forth below. (a) Adjustment to Number of Shares Issuable Pursuant to this Warrant. If a Diluting Event, as identified in Section 4.2, occurs (unless otherwise specified in Section 4.2), the Holder shall thereafter be entitled upon exercise of this Warrant under Section 2.1 to receive, at the same Exercise Price per share, the number of shares of Common Stock calculated by multiplying the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such Diluting Event by a fraction (a) the numerator of which shall be the Market Value immediately prior to such Diluting Event, and (b) the denominator of which is (x) the sum of (i) the number of shares of Common Stock on a Fully Diluted Basis immediately prior to such Diluting Event (but not including shares of Common Stock issuable upon exercise of this Warrant) multiplied by the Market Value immediately prior to such Diluting Event plus (ii) the aggregate consideration, if any, deemed to be received by the Company upon such Diluting Event, divided by (y) the total number of shares of Common Stock on a Fully Diluted Basis immediately after such Diluting Event (but not including shares of Common Stock issuable upon exercise of this Warrant). (b) Minimum Adjustment. In the event any adjustment pursuant to this Section 4.l shall result in an adjustment of less than 100 shares of Common Stock, no such adjustment shall be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to 100 or more shares of Common Stock; provided, however, that upon any adjustment resulting from (i) the declaration of a dividend upon, or the making of any distribution in respect of, any stock of the Company payable in Common Stock or Convertible Securities or (ii) the reclassification, by subdivision, combination or otherwise, of the Common Stock into a greater or smaller number of shares, the foregoing figure of 100 shares (or such figure as last adjusted) shall be proportionately adjusted; and provided further, that upon exercise of this Warrant, the Company shall make all necessary adjustments not theretofore made to the number of Shares up to and including the date upon which this Warrant is exercised. 4.2 Diluting Events and Related Matters. Except as otherwise expressly provided, upon the occurrence of a Diluting Event, as identified in subsections (a)-(d) below, the number of shares subject to this Warrant shall be adjusted as set forth in Section 4.1: (a) Issuance of Stock. If the Company shall issue or sell any shares of Common Stock (including any treasury shares but excluding (i) any shares issued pursuant to warrants or options outstanding on the date hereof (at prices not less than the prices at which such warrants and options are exercisable on the date hereof), (ii) any shares issued pursuant to the Company's existing incentive stock option plan, directors formula award plan, directors formula compensation plan or long term stock investment plan, in each case as in effect and in an amount permitted on the date hereof, whether or not options or awards with respect to such shares have been granted and (iii) any shares issuable pursuant to an employee or director stock option plan, restricted stock bonus or ownership plan, stock appreciation plan or similar equity appreciation plan which the Company may implement after receiving the written approval of a majority of the Holders in their sole discretion (which approval must include First Source if First Source is a Holder) whether or not options or awards with respect to such shares have been granted) for consideration per share less than the Market Value in effect immediately prior to the time of such issue or sale, then a Diluting Event shall have occurred and the number of Shares subject to this Warrant shall be adjusted as set forth in Section 4.1. (b) Issuance of Warrants, Options or Other Rights. (i) Characterization of Transaction for Antidilution Adjustment. In case the Company shall in any manner grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of Common Stock or for the purchase of Convertible Securities (but excluding options or awards granted pursuant to the Company's existing incentive stock option plan, directors' formula award plan, directors formula compensation plan or long term stock investment plan, in each case as in effect and in an amount permitted on the date hereof, or granted pursuant to an employee or director stock option plan, restricted stock bonus or ownership plan, stock appreciation plan or similar equity appreciation plan which the Company may implement after receiving the written approval of a majority of the Holders in their sole discretion (which approval must include First Source if First Source is a Holder) in amounts permitted pursuant to the approval described above), whether or not such rights or options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which shares of Common Stock are issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities shall be less than the Market Value existing immediately prior to the time of such granting of such rights or options, then a Diluting Event shall have occurred and the maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon conversion or exchange of the maximum amount of such Convertible Securities issuable upon the exercise of such rights or options shall (as of the date for adjustment required by subsection (h) below) be deemed to be outstanding and to have been issued for such price per share. Except as otherwise specified in Section 4.2 (e), no further adjustments described in Section 4.1 shall be made upon the actual issuance of such Common Stock or of such rights or options or upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities. (ii) Determination of Price. The price per share for which shares of Common Stock are issuable upon the exercise of such rights or options or upon conversion or exchange of such Convertible Securities shall be determined by dividing (1) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of such rights or options, plus, in the case of such Convertible Securities, the minimum aggregate amount of additional consideration if any, payable upon the conversion or exchange thereof plus the net amount received or receivable upon the issuance of such Convertible Securities (in each case without double counting), by (2) the total maximum number of shares of Common Stock issuable upon the exercise of such rights or options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such rights or options. (c) Issuance of Convertible Securities. (i) Characterization of Transaction for Antidilution Adjustment. In case the Company shall in any manner issue or sell (whether directly or by assumption in a merger or otherwise) any Convertible Securities, (but excluding options or awards granted pursuant to the Company's existing incentive stock option plan, directors' formula award plan, directors formula compensation plan or long term stock investment plan, in each case as in effect and in an amount permitted on the date hereof, or granted pursuant to an employee or director stock option plan, restricted stock bonus or ownership plan, stock appreciation plan or similar equity appreciation plan which the Company may implement after receiving the written approval of a majority of the Holders in their sole discretion (which approval must include First Source if First Source is a Holder) in amounts permitted pursuant to the approval described above), whether or not the rights to convert or exchange thereunder are immediately exercisable, and the price per share for which shares of Common Stock are issuable upon such conversion or exchange shall be less than the Market Value existing immediately prior to the time of such issuance or sale, then a Diluting Event shall have occurred and the maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall (as of the date for adjustment required by subsection (h) below) be deemed to be outstanding and to have been issued for such price per share. Except as otherwise specified in Section 4.2(e), (x) no further adjustments shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities and (y) if any such issue or sale of such Convertible Securities is made upon exercise of any rights to subscribe for or to purchase or any option to purchase any such Convertible Securities for which adjustments have been or are to be made pursuant to other provisions of Sections 4.1 and 4.2, no further adjustment shall be made by reason of such issue or sale. (ii) Determination of Price. The price per share for which shares of Common Stock are issuable upon such conversion or exchange shall be determined by dividing (1) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (2) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. (d) Reorganization, Reclassification, Recapitalization, Merger or Sale of Company. In case the Company or a successor thereto issues Common Stock, options, other rights or Convertible Securities in connection with any consolidation or merger of the Company or any of its Subsidiaries with or into another corporation or in connection with the sale or other disposition of all or substantially all of the business or assets of the Company or any of its Subsidiaries and the consideration per share realized by the Company by reason of any such transaction, determined as applicable in accordance with subsection (g) of this Section 4.2, is less than the Market Value in effect immediately prior to such event, then a Diluting Event shall have occurred and the number of Shares subject to this Warrant shall be adjusted as set forth in Section 4.1. (e) Readjustments. In the event (i) the purchase price provided for in any rights or options referred to in subsection (b) above, or (ii) the additional consideration, if any, payable upon the conversion or exchange of Convertible Securities referred to in subsection (b) or (c) above or (iii) the rate at which any Convertible Securities referred to in subsection (b) or (c) above are convertible into or exchangeable for Common Stock shall change (other than under or by reason of provisions designed to protect against dilution), the number of Shares in effect at the time of such event shall forthwith be readjusted to the number of Shares which would have been in effect at such time had such rights, options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or exercise rate, as the case may be, at the time initially granted, issued or sold. On the expiration of any such option or right or the termination of any such right to convert or exchange such Convertible Securities, the number of Shares then in effect hereunder shall forthwith be readjusted to the number of Shares which would have been in effect at the time of such expiration or termination had such right, option or Convertible Security never been issued, and the Common Stock issuable thereunder shall no longer be deemed to be outstanding. (f) Determination of Consideration for Rights or Options. In case any rights or options to purchase any shares of Common Stock or Convertible Securities shall be issued in connection with the issue or sale of other securities of the Company, together comprising one integral transaction, in which no specific consideration is allocated to the rights or options, such rights or options shall be deemed to have been issued without consideration. (g) Determination of Consideration upon Payment of Cash, Property or Merger. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the net amount received by the Company therefor, after deduction of any accrued interest, dividends or any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase any such Common Stock or Convertible Securities shall be issued for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair market value of such other consideration on the date of issue of such securities, as determined by the Board of Directors of the Company in the exercise of their business judgment, less any expenses incurred by the Company in connection therewith. In case any shares of Common Stock or Convertible Securities or any rights or options to purchase such Common Stock or Convertible Securities shall be issued in connection with any merger or consolidation in which the Company and its Subsidiaries, if applicable, survive, the amount of consideration therefor shall be deemed to be the fair market value thereof on the date of issue, as determined by the Board of Directors of the Company in the exercise of their business judgment, or such portion of the assets and business of the non-surviving corporation as the Board of Directors shall attribute to such Common Stock, Convertible Securities, rights or options, as the case may be. In the event of any consolidation or merger of the Company or any of its Subsidiaries in which the Company or its Subsidiaries, if applicable, does not survive or in the event of any sale or other disposition of all or substantially all of the business or assets of the Company or any of its Subsidiaries for stock or other securities of any corporation, the Company shall be deemed to have issued a number of shares of its Common Stock for stock or securities of the other corporation computed on the basis of the actual exchange ratio on which the transaction was predicated and for a consideration equal to the fair market value on the date of such transaction of such stock or securities of the other corporation. (h) Date of Determination. For purposes of Section 4.1 and 4.2, the date as of which the number of shares shall be adjusted shall be the earlier of the date upon which the Company shall (1) enter into a firm contract for the issuance of shares of Common Stock, rights or other options or Convertible Securities, as the case may be, or (2) issue such shares of Common Stock, rights or other options or Convertible Securities, as the case may be. 4.3 Rights of the Holder upon Rights Offering, Mergers, Reorganizations and Certain Other Transactions. (a) Participation in Rights Offerings. In the event the Company shall effect an offering of Common Stock or other stock pro rata among its stockholders, the Holder shall be entitled, at the Holder's option, regardless of whether the Warrant is otherwise then exercisable, in lieu of the adjustments set forth in Sections 4.1 and 4.2 to the extent that such option is exercised by the Holder, to elect to participate in each and every such offering as though this Warrant had been exercised and the holder were, at the time of any such rights offering, then a holder of that number of shares of Common Stock to which the Holder is then entitled on the exercise hereof. (b) Participation in Stock Dispositions. In the event that the Company shall offer, approve, accept or recommend an offering, sale, transfer, redemption, cancellation or other disposition of Common Stock (including without limitation, by way of any merger, capital reorganization, or reclassification or recapitalization of the capital stock of the Company) to any person (other than in any offering described in subsection (a) above) or in the event that the Company liquidates or dissolves following a sale or transfer of all or substantially all of its assets to any entity, the Company shall arrange as part of such offering, sale or other disposition for the participation of the Holder, with respect to including this Warrant or the Shares issuable upon exercise hereof in such offering, sale or other disposition upon identical terms, without such Holder incurring any liability under Section 16(b) of the Securities Exchange Act of 1934, as amended, and after taking into account the Exercise Price. Such participation shall be at the Holder's option, regardless of whether the Warrant is otherwise then exercisable, in lieu of the adjustments set forth in Sections 4.1 and 4.2, to the extent such option is exercised by the Holder. In case of the consolidation or merger of the Company or any of its Subsidiaries with or into another corporation (each such event is herein called an "Organic Change") and in which the Holder does not participate as contemplated by the preceding paragraph, then after any required adjustment on account of such Organic Change, there shall thereafter be deliverable upon the exercise of this Warrant or any portion hereof (in lieu of or in addition to the number of shares of Common Stock theretofore deliverable) the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock represented by that portion of this Warrant so exercised would have been entitled upon such Organic Change, and at the same aggregate Exercise Price, as adjusted. Prior to and as a condition of the consolidation of any Organic Change described, the Company shall make appropriate, written adjustments in the application of the provisions herein set forth satisfactory to the holders of the Warrants entitled to not less than a majority of the shares of Common Stock issuable upon the exercise thereof with respect to the rights and interests of the holders of the Warrants so that the provisions set forth herein shall thereafter be applicable, as nearly as possible, in relation to any shares of stock or other securities or other property thereafter deliverable upon exercise of the Warrants. Any such adjustment shall be made by and set forth in a supplemental agreement between the Company and the successor entity and be approved by the holders of the Warrants entitled to not less than a majority of the shares of Common Stock issuable upon the exercise thereof. (c) Dividends. In case the Company shall declare, in any 12-month period, dividends upon the Common Stock (excluding a dividend payable in Common Stock or Convertible Securities referred to in subsection (e) below) which in the aggregate is in excess of either 50% of net income for such 12-month period or 15% of the net worth of the Company (as shown on the most recent year end consolidated balance sheet to be delivered pursuant to ARTICLE V hereof) ("Net Worth"), then the Company shall make provision to pay to Holder, upon exercise of the Warrant, an amount per share acquired upon exercise (adjusted in inverse proportion to any adjustment made thereafter in the number of shares pursuant to this ARTICLE IV) the amount equal to the aggregate amount of such dividends in excess of (x) the lesser of (a) 50% of net income for such 12-month period and (b) 15% of Net Worth divided by (y) all outstanding shares of Common Stock with respect to which such dividend is payable. Such provision shall take effect as of the date on which a record date is established for the purpose of such dividend, or, if a record date is not established, the date as of which the holders of Common Stock of record entitled to such dividend are to be determined. (d) Other Distribution. In case the Company shall distribute or grant to the holders of shares of Common Stock (whether or not on a pro rata basis) any evidence of its indebtedness or any assets (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) or rights or options to subscribe or purchase any such evidence of its indebtedness or assets (excluding rights or options to subscribe or purchase Common Stock or Convertible Securities), then the Company shall make provision to pay to Holder, upon exercise of the Warrant, an amount per share acquired upon exercise (adjusted in inverse proportion to any adjustment made thereafter in the number of shares pursuant to this ARTICLE IV) the amount equal to the aggregate amount of such distribution or grant in excess of (x) the lesser of (a) 50% of net income for such 12-month period and (b) 15% of Net Worth divided by (y) all outstanding shares of Common Stock with respect to which such distribution or grant is payable. Such provision shall take effect as of the date on which a record date is established for the purpose of such distribution or grant, or, if a record date is not established, the date as of which the holders of Common Stock of record entitled to such distribution or grant are to be determined. (e) Dividends in Securities; Splits and Combinations. In case the Company shall at any time (i) declare a dividend or make any other distribution upon any stock of the Company payable in either case in Common Stock or Convertible Securities, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares or (iii) combine its outstanding shares of Common Stock into a smaller number of shares, then the Exercise Price in effect immediately prior to such events shall be adjusted as follows: the Exercise Price in effect immediately after such event shall equal the product of (a) the Exercise Price in effect immediately prior to such event and (b)(i) the number of outstanding shares of Common Stock immediately prior to such event, divided by (ii) the number of outstanding shares of Common Stock immediately after such event. The number of shares of Common Stock issuable upon the exercise of the Warrant immediately after such event shall equal the product of (c) the number of shares of Common Stock issuable upon the exercise of the Warrant immediately prior to such event and (d) (i) the number of outstanding shares of Common Stock immediately after such event, divided by (ii) the number of shares of outstanding Common Stock immediately prior to such event. (f) Record Date. In case the Company shall establish a record date of the holders of the Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock or in Convertible Securities or (ii) to subscribe for or purchase Common Stock or Convertible Securities, then effective as of such record date such Common Stock or Convertible Securities shall be deemed to have been issued or sold. Appropriate readjustment of the Exercise Price shall be made in the event that any dividend, distribution or subscription referred to in this subsection (f) shall be lawfully abandoned. (g) Shares Outstanding. Except as provided to the contrary herein, the number of shares of Common Stock deemed to be outstanding for purposes of Section 4.3(c), (d) and (e) at any given time shall be the number of shares of Common Stock actually issued and outstanding at such time, plus any shares of Common Stock issuable in respect of scrip certificates which have been issued in lieu of fractional shares of Common Stock. 4.4 Certificates, Notices and Consents. (a) Upon the occurrence of any Diluting Event requiring adjustments of the Exercise Price pursuant to Sections 4.1, 4.2 and/or 4.3, a certificate signed (i) by the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company or (ii) by any independent firm of certified public accountants of recognized standing selected by, and at the expense of, the Company setting forth in reasonable detail the events requiring the adjustment and the method by which such adjustment was calculated, shall be mailed (by first class mail, postage prepaid) to the Holder specifying the adjusted Exercise Price after giving effect to the adjustment(s). The certificate of any independent firm of certified public accountants of recognized standing selected by the Board of Directors of the Company and reasonably acceptable to the Holder shall be conclusive evidence, absent manifest error, of the correctness of any computation made under Sections 4.1, 4.2 and/or 4.3. (b) In case the Company after the date hereof shall propose to (i) pay any dividend payable in stock to the holders of shares of Common Stock or to make any other distribution to the holders of shares of Common Stock, (ii) offer to the holders of shares of Common Stock rights to subscribe for or purchase any additional shares of any class of stock or any other rights or options or (iii) effect any reclassification involving merely the subdivision or combination of outstanding shares of Common Stock, or (iv) any capital reorganization or any consolidation or merger, or any sale or other disposition of all or substantially all of the business or assets of the Company, or the liquidation, dissolution or winding up of the Company or (v) engage in any Diluting Event not otherwise mentioned in this subsection (b), then, in each such case, the Company shall mail (by first class mail, postage prepaid) to the Holder notice of such proposed action, which shall specify the date on which the books of the Company shall close, or a record date shall be established, for determining holders of Common Stock entitled to receive such stock dividends or other distribution of such rights or options, or the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, dissolution or winding up shall take place or commence, as the case may be, and the date as of which it is expected that holders of Common Stock of record shall be entitled to receive securities or other property deliverable upon such action, if any such date is to be fixed. Such notice shall be mailed, in the case of any action covered by clause (i) or (ii) above, at least 30 days prior to the date upon which such action takes place, and, in the case of any action covered by clause (iv) above, at lease 30 days prior to the date upon which such action takes place and 30 days prior to any record date to determine holders of Common Stock entitled to receive such securities or other property. (c) Failure to file any certificate or notice or to mail any notice, or any defect in any certificate or notice, pursuant to this Section 4.4, shall not affect the legality or validity of the adjustment of the number of shares purchasable upon exercise of this Warrant, or any transaction giving rise thereto. 4.5 No Adjustment After Exercise. After this Warrant is exercised in whole or in part, the holder of any Common Stock so acquired shall not be entitled to any adjustment in the price or number of shares so acquired by reason of any subsequent occurrence which would result in an adjustment of the Exercise Price, number of shares or other adjustments by operation of this Article IV. ARTICLE V COVENANTS OF THE COMPANY 5.1 No Impairment. The Company shall not, and shall not permit its Subsidiaries to, directly or indirectly, by any action, including, without limitation, amending its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate to protect the rights of the Holder against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the amount payable therefor upon such exercise, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant and any required issuance of additional shares of Common Stock pursuant to Sections 4.1 and 4.2, (c) obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant (except that compliance with applicable securities and blue sky laws shall be governed by the provisions of Article VIII of this Warrant), (d) not undertake any reverse stock split, combination, reorganization or other reclassification of its capital stock which would have the effect of making this Warrant exercisable for less than one share of Common Stock, (e) not take or permit the taking of any action which could subject the holder of this Warrant or shares of Common Stock issuable upon exercise thereof to liability under Section 16(b) of the Securities Exchange Act of 1934, as amended, and (f) not change the Company's fiscal year from a fiscal year ended at the end of October. 5.2 Affirmative Covenants. So long as the Holder is the owner of or is entitled upon the due exercise hereof during the Exercise Period to purchase at least 1,039,500 shares of the Company's Common Stock, the Company shall comply with the requirements of this Section 5.2: 5.2.1 Delivery of Financial and Business Information. The Company will deliver to the Holder: (a) As soon as practicable after the end of each of the first three Quarterly Fiscal Periods in each fiscal year of the Company, and in any event within 45 days thereafter, two copies of: (i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and (ii) consolidated statements of income, retained earnings and cash flow of the Company and its Subsidiaries for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year. Such statements shall be (1) prepared in accordance with generally accepted accounting principles consistently applied, (2) in reasonable detail and (3) certified as complete and correct by the principal financial or accounting officer of the Company; (b) As soon as practicable after the end of each fiscal year of the Company, and in any event within 90 days thereafter, two copies of: (i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such year, and (ii) consolidated statements of income, retained earnings and cash flow of the Company and its Subsidiaries for such year; setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and accompanied by a report thereon by a firm of independent certified public accountants of recognized standing selected by the Company, which report shall state that such financial statements fairly present the financial position of the company being reported upon at the end of such year and the results of its operations and changes in its financial position for such year in conformity with generally accepted accounting principles applied consistently (except for changes in accounting principles with which such accountants concur) and that their examination of such financial statements has been made in accordance with generally accepted auditing standards and accordingly included such tests of the accounting records and other auditing procedures as they considered necessary in the circumstances; (c) Promptly upon their becoming available one copy of each report, notice or proxy statement sent by the Company to its stockholders generally, and of each regular or periodic report (pursuant to the Securities Exchange Act of 1934, as amended) and any registration statement, prospectus or written communication (other than transmittal letters) (pursuant to the Securities Act), filed by the Company with (i) the Commission or (ii) any securities exchange on which shares of the Common Stock are listed; (d) With reasonable promptness, such other data and information as from time to time may be reasonably requested by the Holder; and (e) Promptly upon, and in any event within 10 days after, the adoption, initiation or undertaking of any plan, arrangement, negotiations, intention or commitment to enter into any of the transactions described in Sections 4.1, 4.2, or 4.3, notice of any such transactions, including information in reasonable detail pertaining to the terms, conditions and consummation of any such transactions. 5.2.2 Disputed Financial Statements. If the Common Stock of the Company is not then listed or admitted to trading on a stock exchange nor reported by NASDAQ, the Holder shall have the right at any time after receipt thereof to object to any financial statements delivered to the Holder pursuant to subsections (a) or (b) of Section 5.2.1 by specifying in writing to the Company the nature of its objection, and, unless such objection is resolved by agreement of the Company and the Holder, the Company and the Holder shall each have the right to submit the disputed financial statements to separate firms of independent accountants of recognized standing for a joint resolution (based upon written submissions) of the objection of the Holder (which firms of independent accountants may, in either case, be the firm of accountants regularly retained by the Company or the Holder). If such firms cannot jointly resolve the objection of the Holder, then, unless otherwise directed by agreement of the Company and the Holder, such firms shall in their sole discretion choose another firm of independent certified public accountants of recognized standing not the regular auditor of the Holder or of the Company, which firm shall resolve such objection. In either case, the determination so made shall be conclusive and binding on the Company solely for purposes of this Warrant, the Holder and all persons claiming under or through either of them, and any adjustment in the disputed financial statements and the Common Stock Valuation Price resulting from such determination shall be made. The cost of any such determination shall be borne by the Company if it results in an increase in the applicable Common Stock Valuation Price or by the Holder if it results in no adjustment or a decrease in the Common Stock Valuation Price; 5.2.3 Budget. The Company will deliver to the Holder not less than thirty (30) days prior to the commencement of each fiscal year, an annual business plan, including a budget and detailed financial projections for the Company and its Subsidiaries (the "Budget"), all in reasonable detail, together with underlying assumptions and approved by a majority of the entire Board; 5.2.4 Auditors' Reports. The Company will deliver to the Holder promptly upon receipt thereof, copies of all other material reports, if any, submitted to the Company by independent public accountants in connection with any annual or interim audit of the books of the Company and its Subsidiaries made by such accountants; 5.2.5 Lender Information. The Company will deliver to the Holder a copy of each material financial statement, report, notice or communication that the Company or any Subsidiary delivers to any of their lenders or creditors; 5.2.6 Litigation. The Company will deliver to the Holder promptly upon the Company's learning thereof, notice of any litigation, suit or administrative proceeding that could reasonably be expected to have a material adverse affect on the Company's or any Subsidiary's business, affairs, assets, prospects, operations, employee relations or condition, financial or otherwise, whether or not the claim is considered by the Company to be covered by insurance; 5.2.7 Default. The Company will deliver to the Holder notice of any default under any senior or subordinated loan agreements promptly upon the occurrence thereof; 5.2.8 Material Adverse Developments. The Company will deliver to the Holder promptly upon the occurrence thereof, notice of any event which has had, or could reasonably be expected to have, a material adverse impact on the business, affairs, assets, prospects, operations, employee relations or condition, financial or otherwise, of the Company or any Subsidiary, including, without limitation, the institution or threat of any material litigation or investigation with respect to the Company or any Subsidiary; 5.2.9 Other Information. The Company will deliver to the Holder with reasonable promptness, all press releases issued by the Company or any Subsidiary, any filings made with the Commission by the Company or any Subsidiary and such other data and information as from time to time may be reasonably requested by the Holder or such other data as the Company may from time to time furnish to any of the holders of its securities; 5.2.10 Auditors. The Company will deliver to the Holder promptly after the occurrence thereof, notice of the engagement or termination of any individual or firm that provides accounting advice to the Company; 5.2.11 Inspection and Meeting Rights; Budget Review. The Company will permit First Source to visit and inspect the properties of the Company and its Subsidiaries, including, without limitation, its and their books and records (and to make extracts therefrom) and to discuss its and their affairs, finances and accounts with its and their officers and personnel, all at such reasonable times and as often as such party may reasonably request. First Source also shall have the right to meet with the Company's key management, including, without limitation, the Company's Chief Executive Officer and Chief Financial Officer, on a quarterly basis, to discuss the state of the Company's finances, business operations and prospects, and any other matters relating to the affairs of the Company and its Subsidiaries; 5.2.12 Accounting. The Company will maintain and will cause each of its Subsidiaries to maintain a system of accounting established and administered in accordance with GAAP and all financial statements or information delivered under Section 5.2.1(a) and (b) (in the case of 5.2.1(b) exclusive of footnote disclosures) will be prepared in accordance with GAAP; 5.2.13 Insurance. The Company agrees to maintain or cause to be maintained, with financially sound and reputable insurers, insurance with respect to its assets and business and the assets and business of its Subsidiaries against loss or damage of the kinds customarily insured against by similarly situated corporations of established reputation engaged in the same or similar businesses, in adequate amounts, and at the request of the Holder shall furnish the Holder with evidence of the same; 5.2.14 Payment of Taxes. The Company agrees to pay or cause to be paid all taxes, assessments and other governmental charges levied upon any of its assets or those of its Subsidiaries or in respect of its or their respective franchises, businesses, income or profits, which if unpaid might become a lien upon any asset of the Company or any Subsidiary, before the same become delinquent, except that (unless and until foreclosure, distraint, sale or other similar proceedings shall have been commenced) no such charge need be paid if being contested in good faith and by appropriate measures promptly initiated and diligently conducted if (a) a reserve or other appropriate provision, if any, as shall be required by sound accounting practice shall have been made therefor, and (b) such contest does not have a material adverse effect on the financial condition of the Company and no material assets are in imminent danger of forfeiture; 5.2.15 Compliance With Laws. The Company agrees to use its best efforts to comply, and shall use its best efforts to cause each Subsidiary to comply, with all laws, rules, regulations, judgments, orders and decrees of any governmental or regulatory authority applicable to it and its respective assets, and with all contracts, and agreements to which it is a party or shall become a party, and to perform all obligations which it has or shall incur, the violation of which would reasonably be anticipated to have a material adverse effect on the business, affairs, assets, prospects, operations or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole; 5.2.16 Preservation of Corporate Existence and Property; Operations. The Company agrees to preserve, protect, and maintain, and cause each Subsidiary to preserve, protect, and maintain, (a) its corporate existence, and (b) all rights, franchises, accreditations, privileges, and properties the failure of which to preserve, protect, and maintain would reasonably be anticipated to have a material adverse effect on the business, affairs, assets, prospects, operations, or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole; 5.2.17 Holder as Observer. The Company agrees at all times to permit a representative of Holder to attend and observe all meetings of Company's Board of Directors and each committee thereof, and cause Holder to receive reasonably adequate notice of all such meetings; provided, however, that Holder shall not be entitled to attend or observe any portion of a meeting relating solely and exclusively to action proposed to be taken by Company with respect to Company's relationship with Holder. The Company acknowledges and agrees that attendance by a designee of Holder at any meeting of Company's Board of Directors or any committee thereof shall not constitute approval by Holder of or consent by Holder to any action authorized at such meeting, or constitute a waiver or modification of any provision of this Warrant or any right hereunder. The Company agrees to reimburse Holder for all reasonable travel, lodging, and meal expenses incurred in connection with the foregoing; and 5.2.18 Confidential Information. Holder acknowledges that pursuant to the provisions of this Section 5.2, Holder may receive insider information concerning the Company which Holder may be precluded from acting upon by applicable securities and other laws. Except as otherwise required by law or judicial order or decree or by any governmental agency or authority, each Person entitled to receive information regarding the Company and its Subsidiaries under this Section 5.2 shall use its best efforts to maintain the confidentiality of all nonpublic information obtained by it hereunder; provided that each such Person may disclose such information in connection with the sale or transfer or proposed sale or transfer of this Warrant or of any Common Stock, provided such Person's transferee or proposed transferee agrees in writing to be bound by the provisions of this Warrant and such disclosure would not materially and adversely affect the Company. ARTICLE VI RESERVATION OF S TOCK ISSUABLE ON EXERCISE OF WARRANT; PREEMPT IVE RIGHTS The Company will at all times reserve and keep available, solely for issuance, sale and delivery upon the exercise of this Warrant, a number of shares of Common Stock equal to the number of full shares of Common Stock issuable upon the exercise of this Warrant. All shares of Common Stock issuable upon the exercise of this Warrant shall, when issued upon such exercise, (a) be duly and validly authorized and issued, fully paid and nonassessable, and (b) be free from all taxes, liens and charges with respect to the issue thereof other than any stock transfer taxes in respect of any transfer occurring contemporaneously with such issue. No stockholder of the Company has or shall have any preemptive rights to subscribe for such shares of Common Stock. ARTICLE VII LISTING ON SECURITIES EXCHANGE If the Company shall list any shares of Common Stock on any securities exchange, it will during the Exercise Period, at its expense, list thereon, maintain and, when necessary, increase such listing of, all shares of Common Stock issued or, to the extent permissible under the rules of the applicable securities exchange or automated quotation system, issuable upon the exercise of this Warrant so long as any shares of Common Stock shall be so listed. ARTICLE VIII RESTRICTIONS ON TRANSFER The conditions contained in the following sections of this ARTICLE VIII are intended to insure compliance with the Securities Act in respect of the transfer of Warrants or Common Stock issuable upon the exercise of Warrants. Reference in this ARTICLE VIII to shares of Common Stock issuable upon the exercise of Warrants includes shares of Common Stock theretofore issued upon the exercise of any Warrants which are then evidenced by certificates required to bear the legend set forth in Section 8.6. 8.1 Notice of Proposed Transfer; Transfers Without Registration. The Holder or the holder of any shares of Common Stock issuable upon the exercise of this Warrant, by acceptance hereof or thereof, agrees to give written notice to the Company, prior to any transfer of this Warrant, such shares of Common Stock or any portion thereof which bear the legend described in Section 8.6, of its intention to make such transfer, which notice shall include a brief description of such proposed transfer. A copy of such notice shall be sent to Independent Counsel. If in the opinion of Independent Counsel the proposed transfer may be effected without registration or qualification under any Federal or State law, such counsel shall, as promptly as practicable, notify the Company and the Holder of such opinion and of the terms and conditions, if any, to be observed in such transfer, whereupon the Holder shall be entitled to transfer such shares of Common Stock in accordance with the terms of the notice delivered to the Company and the opinion of Independent Counsel. In the event this Warrant shall be exercised as an incident to such transfer, such exercise shall relate back and for all purposes of this Warrant be deemed to have occurred as of the date of such notice regardless of delays incurred by reason of the provisions of this ARTICLE VIII which may result in the actual exercise on any later date. 8.2 Registration and Qualification. The provisions of Section 8.2 (a), 8.2 (b), and 8.9 below are subject to the terms of the First Amended and Restated Registration Rights Agreement, dated as of July 1, 1988 (the "Original Registration Agreement"), among the Company, First Source and the stockholders listed therein, as the same may be amended, modified or supplemented from time to time with the consent required by Section 8.11 (the "Registration Agreement"), and if, prior to an amendment of the Original Registration Agreement as amended by any effective amendment thereof, any conflict exists between the provisions of the Original Registration Agreement as amended by any effective amendment thereof, and Section 8.2 (a), 8.2 (b) and 8.9, the applicable conflicting provisions of the Original Registration Agreement as amended by any effective amendment thereof shall control, but only to the extent of the conflict, and the holder of any Warrant and the shares of Common Stock issuable upon exercise thereof shall have the applicable conflicting rights contained in the Original Registration Agreement as amended by any effective amendment thereof but only to the extent of the conflict, until such time as the Original Registration Agreement as amended by any effective amendment thereof is so amended. (a) Piggyback Registration. If the Company proposes (whether on its own behalf or at the request of any other person or entity) to register any security under the Securities Act on any registration form (otherwise than for the registration of securities to be offered and sold pursuant to (a) an employee benefit plan, (b) a dividend or interest reinvestment plan, (c) other similar plans or (d) reclassifications of securities, mergers, consolidations and acquisitions of assets on Form S-4 or any successor thereto) prescribed by the Commission permitting a secondary offering or distribution, not less than 60 days prior to each such registration, the Company shall give to the holders of the Warrants or shares of Common Stock issuable upon the exercise thereof written notice of such proposal which shall describe in detail the proposed registration and distribution (including those jurisdictions where registration or qualification under the securities or blue sky laws is intended) and, upon the written request of any holder of a Warrant or shares of Common Stock issuable upon the exercise thereof given within 30 days after the date of any such notice, proceed to include in such registration such shares of Common Stock as have been requested by any such holder to be included in such registration; provided, however, that the Company shall not be required to include fewer than 50,000 shares (subject to adjustment upon any combination or split of shares or similar event) of Common Stock in any such registration pursuant to this Section 8.2(a). Any holder of a Warrant or shares of Common Stock issuable upon the exercise thereof shall in its request describe briefly the proposed disposition of such shares of Common Stock. The Company will in each instance use its best efforts to cause any shares of Common Stock issuable upon the exercise of the Warrants (the holders of which shall have so requested registration thereof) to be registered under the Securities Act and qualified under the securities or blue sky laws of any jurisdiction requested by a prospective seller, all to the extent necessary to permit the sale or other disposition thereof (in the manner stated in such request) by a prospective seller of the securities so registered. If the managing underwriter, who shall be selected by the Company (subject to the approval, not unreasonably withheld, of a majority of the holders that have requested registration (which must include First Source if First Source is then a holder and requesting registration)) to manage the distribution of the shares of Common Stock being registered, advises the Company in writing that, in its opinion, the inclusion of the shares of Common Stock requested to be included in such registration by a holder of a Warrant or shares of Common Stock issuable upon the exercise thereof with the securities being registered by the Company and other prospective sellers would materially adversely affect the distribution of all such securities, then: (a) (i) if such registration has been initially proposed by the Company, the Company shall include in such registration the number of shares proposed to be registered by the Company and by the holders of the Warrants or shares of Common Stock issuable upon the exercise thereof before including any other securities in the registration, and, if an additional reduction in the number of securities being registered is necessary, the Company shall include in such registration such shares of the Company and the holders of the Warrants or shares of Common Stock issuable upon the exercise thereof pro rata based on the number of shares originally proposed to be registered by the Company and by the holders of the Warrants or shares of Common Stock issuable upon the exercise thereof or (ii) if such registration has been initially proposed by a holder of securities other than the Company or the holders of Warrants or shares of Common Stock issuable upon exercise thereof, the Company shall include in such registration the number of shares proposed to be registered by such other holder and the holders of Warrants or shares of Common Stock issuable upon exercise thereof before including any other securities in the registration and, if an additional reduction in the number of securities being registered is necessary, the Company shall include in such registration such shares of such other holder and the holders of Warrants or shares of Common Stock issuable upon exercise thereof pro rata based on the number of shares originally proposed to be registered by such other holder and by each holder of Warrants or shares of Common Stock issuable upon exercise thereof; or (b) any holder of a Warrant or shares of Common Stock issuable upon the exercise thereof may, at its sole option, delay its offering and sale for a period not to exceed 120 days after the effective date of such registration as such managing underwriter shall reasonably request. In the event of such delay, the Company: (i) shall use its best efforts to effect any registration or qualification under the Securities Act and the securities or blue sky laws of any jurisdiction as may be necessary to permit such prospective seller to make its proposed offering and sale following the end of such period of delay; and (ii) during such period of delay and for at least 90 days thereafter, shall not file or cause to be effected any other registration of its capital stock or securities convertible into or exchangeable or exercisable for any such capital stock, whether on its own behalf or at the request of any other person or entity, and shall not sell any shares of its capital stock or securities convertible into or exchangeable or exercisable for any such capital stock. The holder of a Warrant or shares of Common Stock issuable upon the exercise thereof who has requested shares of Common Stock to be included in a registration pursuant to this Section 8.2(a) by acceptance hereof or thereof, agrees to execute an underwriting agreement with such underwriter that is (i) reasonably satisfactory to such holder and (ii) in customary form. Nothing in this Section 8.2(a) shall be deemed to require the Company to proceed with any registration of its securities after giving the notice herein provided. (b) Demand Registration. The holders of the Warrants and of any shares of Common Stock issuable upon the exercise thereof may, on up to four separate occasions (unless such request is withdrawn in accordance with the terms hereof) (the "Demands"), require the Company to effect the registration of the Shares pursuant to the provisions of this Section 8.2(b). Such Demands shall consist of two demands for which the Company shall pay all the fees and expenses as set forth in Section 8.4 (the "Free Demands") and two demands for which the holders shall pay their proportionate share of the fees and expenses set forth in Section 8.4 (the "Charged Demands"). If the holders of the Warrants and of any shares of Common Stock issuable upon the exercise thereof representing a total of more than 50% of the shares of Common Stock then issued and issuable upon the exercise of the Warrants (which must include First Source if First Source is then a holder) shall give notice to the Company to the effect that such holders intend to (i) transfer all or any part of the Shares or (ii) exercise all or any part of the Warrants and transfer all or any part of the Shares under such circumstances that a public distribution (within the meaning of the Securities Act) of the Shares will be involved, then the Company shall (A) within 10 days after receipt of such notice, give written notice of the proposed registration to the other holders of Warrants and shares of Common Stock issuable upon exercise thereof, and (B) within 30 days after receipt of such notice, file a registration statement pursuant to the Securities Act to the effect that such shares may be sold under the Securities Act as promptly as is practicable thereafter and the Company will use its best efforts to cause any such registration to become effective and to keep the prospectus included therein current for at least six months after the effective date thereof or until the distribution shall have been completed, whichever first occurs; provided, however, that such holders shall furnish the Company with such appropriate information (relating to the intention of such holders) in connection therewith as the Company may reasonably request in writing; and provided, further, that the Company shall not be required to register fewer than 200,000 (subject to adjustment upon any combination or split of shares or similar event) shares of Common Stock in any registration pursuant to this Section 8.2(b). As long as the Company is not in default on its obligations under Section 5.2.1(a) and (b), the Company's obligation to file a registration statement, at any time when it is impossible or impracticable to include the Company's fiscal year-end financial statements as the most recent certified financial statements required to be included therein, shall be suspended until the Company's next fiscal year-end financial statements are due in accordance with Section 5.2.1(b), unless the request for registration pursuant to this Section 8.2(b) has been withdrawn. The managing underwriter for offerings made pursuant to this Section 8.2(b) shall be selected by the parties requiring registration hereunder (which must include First Source if First Source is then a holder and requesting registration), subject to the consent, not unreasonably withheld, of the Company. If the managing underwriter for any offering made pursuant to this Section 8.2(b) advises the Company in writing that, in its opinion, the inclusion of all of the shares of Common Stock requested to be included in such registration by the holders of Warrants and shares of Common Stock issuable upon the exercise thereof would materially adversely affect the distribution of all such securities, then (a) there shall be included in such registration shares of the holders of Warrants or shares of Common Stock issuable upon the exercise thereof pro rata based on the number of shares originally proposed to be registered by each holder of Warrants or shares of Common Stock issuable upon the exercise thereof or (b) any holder of a Warrant or shares of Common Stock issuable upon the exercise thereof may, at its sole option, delay its offering and sale for a period not to exceed 120 days after the effective date of such registration as such managing underwriter shall reasonably request. In the event of such delay, the Company (i) shall use its best efforts to effect any registration or qualification under the Securities Act and the securities or blue sky laws of any jurisdiction as may be necessary to permit such prospective seller to make its proposed offering and sale following the end of such period of delay; and (ii) during such period of delay and for at least 90 days thereafter, shall not file or cause to be effected any other registration of its capital stock or securities convertible into or exchangeable or exercisable for any such capital stock, whether on its own behalf or at the request of any other person or entity, and shall not otherwise sell any of its capital stock or securities convertible into or exchangeable or exercisable for any such capital stock. A registration shall not reduce the number of Demands available to the holders under this Section 8.2(b) until such registration has become effective and the holders of the Warrants or shares of Common Stock issuable upon the exercise thereof participating in the demand registration are able to register and sell at least 80% of the shares of Common Stock originally requested to be included in such registration; provided, however, that if in connection with a proposed Demand made pursuant to Section 8.2(b) the holders of the Warrants or shares of Common Stock issuable upon the exercise thereof participating in the demand registration are able to register and sell more than 50% but less than 80% of the shares of Common Stock originally requested to be included in such registration, the number of Free Demands shall be reduced by one, and the number of Charged Demands shall be increased by one. 8.3 Registration and Qualification Procedures. Whenever the Company is required by the provisions of Section 8.2 to use its best efforts to effect the registration of any of its securities under the Securities Act, the Company will, as expeditiously as is possible: (a) prepare and file with the Commission a registration statement with respect to such securities; (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and the prospectus current and to comply with the provisions of the Securities Act with respect to the sale of all securities covered by such registration statement whenever the seller of such securities shall desire to sell the same, including the offering or sale of such securities on a continuous or delayed basis pursuant to Rule 415 under the Securities Act as the same shall be in effect from time to time; (c) furnish to each seller such number of copies of preliminary prospectuses and prospectuses and each supplement or amendment thereto and such other documents as each seller may reasonably request in order to facilitate the sale or other disposition of the securities owned by such seller in conformity with (i) the requirements of the Securities Act and (ii) the seller's proposed method of distribution; (d) register or qualify the securities covered by such registration statement under the securities or blue sky laws of such jurisdictions within the United States as each seller shall reasonably request, and do such other reasonable acts and things as may be required of it to enable each seller to consummate the sale or other disposition in such jurisdictions of the securities owned by such seller; provided, however, that the Company shall not be required to (i) qualify as a foreign corporation or consent to a general and unlimited service of process in any such jurisdictions, (ii) qualify as a dealer in securities or (iii) register or qualify at its own expense securities of such seller in any jurisdiction not described in the notice of the Company referred to in the first paragraph of Section 8.2(a), in any case in order to accomplish any of the foregoing; (e) furnish, at the request of any seller on the date such securities are delivered to the underwriters for sale pursuant to such registration or, if such securities are not being sold through underwriters, on the date the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, addressed to the underwriters, if any, and to the seller making such request, covering such legal matters with respect to the registration in respect of which such opinion is being given as the seller of such securities may reasonably request and are customarily included in such opinion and (ii) letters, dated, respectively, (1) the effective date of the registration statement and (2) the date such securities are delivered to the underwriters, if any, for sale pursuant to such registration, from a firm of independent certified public accountants of recognized standing selected by the Company, addressed to the underwriters, if any, and to the seller making such request, covering such financial, statistical and accounting matters with respect to the registration in respect of which such letters are being given as the seller of such securities may reasonably request and are customarily included in such letters; (f) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders as soon as reasonably practicable, but not later than 16 months after the effective date of the registration statement, an earnings statement covering a period of at least 12 months beginning after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act; (g) enter into and perform an underwriting agreement with the managing underwriter, if any, selected as provided in Section 8.2, as the case may be, containing customary terms of offer and sale of the securities, payment provisions, underwriting discounts and commissions, representations, warranties, covenants, indemnities, terms and conditions; and (h) keep each seller advised in writing as to the initiation and progress of any registration under Section 8.2, as the case may be. 8.4 Allocation of Expenses. If the Company is required by the provisions of Section 8.2 to use its best efforts to effect the registration or qualification under the Securities Act or any state securities or blue sky laws of any of the shares of Common Stock issuable upon the exercise of the Warrants, the Company will pay all expenses in connection therewith, including, without limitation, (a) all expenses incident to filing with the National Association of Securities Dealers, Inc., (b) registration fees, (c) printing expenses, (d) the Company's accounting and legal fees and expenses, (e) expenses of any special audits incident to or required by any such registration or qualification, (f) premiums for insurance in such amount, if any, deemed appropriate by the managing underwriter and (g) expenses of complying with the securities or blue sky laws of any jurisdictions in connection with such registration or qualification; provided, however, that the holders of any Warrant or shares of Common Stock issuable upon exercise thereof participating in a Charged Demand shall be liable for the amount of such expenses in connection with such Charged Demand made pursuant to Section 8.2(b) equal to the product of (a) all such expenses and (b) the proportion which the number of shares of Common Stock issuable upon exercise of the Warrants for which registration has become effective and which are sold pursuant to Section 8.2(b) bears to the total number of all shares included in such registration; and provided, further, that the Company shall not be liable for (1) any discounts or commissions to any underwriter or (2) any stock transfer taxes incurred in respect of the shares of Common Stock issuable upon the exercise of the Warrants sold by the sellers. 8.5 Indemnification. In connection with any registration or qualification of securities under Section 8.2 or 8.3, the Company hereby indemnifies the Holder and the holders of any shares of Common Stock issuable upon the exercise of the Warrants and each underwriter thereof, including each person, if any, who controls the Holder or such stockholder or underwriter within the meaning of Section 15 of the Securities Act, against all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) caused by any untrue, or alleged untrue, statement of a material fact contained in any registration statement, preliminary prospectus, prospectus or notification or offering circular (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or caused by any omission, or alleged omission, to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses are caused by any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information furnished in writing to the Company by the Holder or any such stockholder or underwriter expressly for use therein. The Holder and the holders of any shares of Common Stock issuable upon the exercise of the Warrants hereby indemnify the Company and each officer, director and controlling person of the Company or underwriter within the meaning of Section 15 of the Securities Act against all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) caused by any untrue, or alleged untrue, statement of a material fact contained in any registration statement, preliminary prospectus or notification or offering circular (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or caused by any omission, or alleged omission, to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with information furnished in writing to the Company by the Holder or any such stockholder expressly for use therein. Promptly upon receipt by a party indemnified under this Section 8.5 of notice of the commencement of any action against such indemnified party in respect of which indemnity or reimbursement may be sought against any indemnifying party under this Section 8.5, such indemnified party shall notify the indemnifying party in writing of the commencement of such action, but the failure so to notify the indemnifying party shall not relieve it of any liability which it may have to any indemnified party, unless such failure shall materially adversely affect the defense of such action. In case notice of commencement of any such action shall be given to the indemnifying party as above provided, the indemnifying party shall be entitled to participate in and, to the extent it may wish, jointly with any other indemnifying party similarly notified, to assume the defense of such action at its own expense, with counsel chosen by it and satisfactory to such indemnified party. The indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel (other than reasonable costs of investigation) shall be paid by the indemnified party unless (a) the indemnifying party agrees to pay the same, (b) the indemnifying party fails to assume the defense of such action with counsel reasonably satisfactory to the indemnified party or (c) the named parties to any such action (including any impleaded parties) have been advised by such counsel that representation of such indemnified party and the indemnifying party by the same counsel would be inappropriate under applicable standards of professional conduct (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party); provided that the indemnifying party shall not be required to pay the fees and expenses of more than one counsel to indemnified parties claiming indemnification pursuant to this Section 8.5. No indemnifying party shall be liable for any settlement entered into without its consent. If the indemnification provided for in this Section 8.5 shall for any reason be unenforceable by an indemnified party, although otherwise available in accordance with its terms, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages, liabilities or expenses with respect to which such indemnified party has claimed indemnification, in such proportion as is appropriate to reflect the relative fault of the indemnified party on the one hand and the indemnifying party on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The Company, each holder of the Warrants and each holder of Shares of Common Stock issued upon the exercise thereof agree that it would not be just and equitable if contribution pursuant hereto were to be determined by pro rata allocation or by any other method of allocation which does not take into account such equitable considerations. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or expenses referred to herein shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending against any action or claim which is the subject hereof. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. Each Holder of the Warrants and each holder of shares of Common Stock issued upon the exercise thereof and bearing the legend required by Section 8.6, by acceptance thereof, agrees to the indemnification provisions of this Section 8.5. 8.6 Legend on Certificates. In case any shares of Common Stock are issued upon the exercise in whole or in part of the Warrants or are thereafter transferred, in either case under such circumstances that no registration under the Securities Act is required, each certificate representing such shares shall bear on the face thereof the following legend: The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and any transfer thereof is subject to the conditions specified in the Warrant, dated as of October 31, 1997, which is an amendment and restatement of the Warrant originally issued by Optek Technology, Inc. (the "Company") to First Source Financial LLP, dated as of January 31, 1991. A copy of the form of such Warrant is on file with the Secretary of the Company at 1215 West Crosby Road, Carrollton, Texas 75006 and will be furnished without charge by the Company to the holder of this certificate upon written request to the Secretary of the Company at such address. In case (a) a registration statement covering shares of Common Stock represented by a certificate bearing the legend specified above becomes effective under the Securities Act or (b) the Company receives an opinion of Independent Counsel that such legend is no longer necessary on such certificate to protect the Company from a violation of the Securities Act, the Company shall, or shall instruct its transfer agent and registrar to, issue in lieu thereof a new certificate or certificates for such shares in the name of the holder of such shares without such legend on the face thereof. 8.7 Supplying Information. The Company, the Holder and each holder of shares of Common Stock issuable upon the exercise of the Warrant shall cooperate with each other in supplying such information as may be necessary for any of such parties to complete and file any information reporting forms presently or hereafter required by the Commission or any commissioner or other authority administering the blue sky or securities laws of any jurisdiction where shares of Common Stock are proposed to be sold pursuant to Section 8.2 or 8.3. 8.8 Damages. In the event the Company fails to comply with any provision of Section 8.2 or 8.3, upon written request of the Holder of the Warrant or any holder of shares of Common Stock issuable upon the exercise thereof, the Company shall promptly obtain from an independent investment banking firm acceptable to such person an opinion estimating the net proceeds which such person would have received (after deducting underwriting commissions and discounts and any other expenses that would have been for the account of such Holder or holder of shares of Common Stock in connection with the registration or qualification of such shares of Common Stock) upon the sale of shares of Common Stock proposed to be sold pursuant to such registration or qualification. Such opinion of the independent investment banking firm shall be (a) delivered in writing to the Company, with a copy to such person, within 15 days after the date of the request of such person to the Company and (b) conclusive and binding on the Company and such person. Within 21 days of receipt by the Company of such estimate, if such person so elects, the Company shall pay to such person an amount, equal to such estimated net proceeds related to the Warrants or shares of Common Stock, as the case may be. Payment of such amount shall be made at the option of such person, by (i) wire transfer to an account in a bank located in the United States designated by such person for such purpose or (ii) a certified or official bank check drawn on a member of the Chicago or New York Clearing House payable to the order of such person. Upon payment to such person of such amount, such person shall assign to the Company this Warrant and, if issued, the shares of Common Stock issued upon the exercise of this Warrant proposed to be sold pursuant to the registration or qualification in question without any representation or warranty (other than that such Holder has good and valid title thereto free and clear of liens, claims, encumbrances and restrictions of any kind arising by or through such Holder). If less than all of the shares of Common Stock issuable upon exercise of this Warrant were proposed to be sold pursuant to the registration or qualification in question, the Company shall cancel the Warrant and issue in the name of, and deliver to, the Holder, pursuant to Section 2, a new Warrant for the shares of Common Stock issuable upon the exercise thereof not required to be assigned to the Company pursuant to the provisions of the preceding sentence. The Company agrees that the amount of actual damages that would be sustained by the Holder as a result of the failure of the Company to comply with any provisions of Section 8.2 or 8.3 is not capable of ascertainment on any other basis. 8.9 Holdback Agreements. The Company agrees: (i) not to effect any public sale or distribution of or otherwise dispose of any of its capital stock or securities convertible into or exchangeable or exercisable for any such capital stock during the seven days prior to or 135 days after the date any registration pursuant to Section 8.2(a) or 8.2(b) has become effective, except as part of such registration and except pursuant to any registration of securities to be offered and sold pursuant to (A) an employee benefit plan, (B) a dividend or interest reinvestment plan, (C) other similar plans or (D) reclassifications of securities, mergers, consolidations and acquisitions of assets on Form S-4 or any successor thereto; and (ii) to cause each person or entity which owns any capital stock of the Company as of the date of this Warrant (other than persons or entities holding nonrestricted stock that can be freely traded pursuant to Section 4(1) of the Securities Act and persons or entities who obtained stock pursuant to a registration described in Section 8.9(i)(A), (B), (C) or (D)) and each person or entity which purchases the Company's capital stock or securities convertible into or exchangeable or exercisable for any such capital stock at any time after the date of this Warrant (other than in a public offering and other than persons or entities holding nonrestricted stock that can be freely traded pursuant to Section 4(1) of the Securities Act and persons or entities who obtained stock pursuant to a registration described in Section 8.9(i)(A), (B), (C) or (D)) to agree not to effect any such public sale or distribution during such period. 8.10 Rule 144 Reporting. With a view to making available to the holders of Warrants and of shares of Common Stock issuable upon exercise thereof the benefits of certain rules and regulations of the Commission which may permit the sale of Warrants or shares of Common Stock issuable upon exercise thereof to the public without registration, the Company agrees to: (a) make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act or any successor rule or regulation from time to time in effect; (b) file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) furnish to the Holder or a holder of Common Stock issuable upon exercise of Warrants forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 and the Exchange Act, a copy of the most recent annual or quarterly report of the Company filed with the Commission and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as the Holder or such holders may reasonably request in availing themselves of any rule or regulation of the Commission allowing them to sell securities without registration under the Securities Act. 8.11 Consent for Additional Registration Rights. The Company shall not grant rights to register any of its securities under the Securities Act to any person or entity, and shall not permit the amendment, supplement or modification of any such rights existing as of the Closing Date, without the consent of the holders of Warrants and shares of Common Stock issuable upon exercise thereof representing more than 50% of the shares of Common Stock issued or issuable upon exercise of the Warrants (which must include First Source if First Source is then a Holder), except for the rights described by the Registration Agreement. ARTICLE IX MISCELLAN EOUS 9.1 Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of the Holder shall operate as a waiver of such right or otherwise prejudice the Holder's rights, power or remedies. If the Company fails to make, when due, any payments provided for herein or fails to comply with any other provision of this Warrant, the Company shall pay to the Holder (a) interest at the Default Rate on any amounts due and owing to the Holder and (b) such further amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys fees, incurred by the Holder in collecting any amounts due pursuant to this Warrant or in otherwise enforcing any of its rights, powers or remedies hereunder. 9.2 Holder Not a Stockholder. Except as otherwise provided herein, prior to the exercise of this Warrant as hereinbefore provided, the Holder shall not be entitled to any of the rights of a stockholder of the Company, including, without limitation, the right as a stockholder to (a) vote or consent, or (b) receive dividends or any other distributions made to stockholders. 9.3 Notice Generally. Any notice, demand or delivery to be made pursuant to the provisions of this Warrant shall be sufficiently given or made if sent by first class mail, postage prepaid, addressed to (a) the Holder at its last known address appearing on the books of the Company maintained for such purpose or (b) the Company at its principal office referred to in Section 2.2. The Holder and the Company may each designate a different address by notice to the other pursuant to this Section 9.3. 9.4 Payment of Certain Expenses. The Company shall pay all expenses in connection with, and all taxes (other than stock transfer taxes and income taxes) and other governmental charges that may be imposed in respect of, the issue, sale and delivery of (a) the shares of Common Stock issuable upon the exercise of this Warrant or (b) this Warrant. The Company shall reimburse First Source for all reasonable expenses incurred by First Source in monitoring the Company's compliance with the covenants of this Warrant. 9.5 Successors and Assigns. This Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant, and shall be enforceable by any such Holder. 9.6 Amendment. This Warrant may not be modified or amended except by an instrument in writing signed by the party against which enforcement is sought. 9.7 Headings. The headings of the Articles and Sections of this Warrant are for convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant. 9.8 GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS FOR CONTRACTS ENTERED INTO AND TO BE PERFORMED IN SUCH STATE. 9.9 Subsidiaries. The provisions of this Warrant referring to "Subsidiaries" of the Company or to "consolidated" financial statements shall only apply during such times as the Company has one or more Subsidiaries. 9.10 No Section 338 Election or Step-Up in Asset Value on Books of the Company. The Company acknowledges that the definition of Adjusted Operating Profits is based upon the assumption that neither the Company nor any of its Subsidiaries will (or will be deemed to) make a Section 336 election under the Internal Revenue Code of 1986, as amended, or otherwise write-up the value of any of its assets on its books used for computing Adjusted Operating Profits. The Company hereby agrees and covenants that neither it nor any of its Subsidiaries will (or will be deemed to) make any such election or write-up. 9.11 Replacement. This Warrant is an amendment and restatement of, and is issued in replacement of, the warrant dated as of December 12, 1995 which was issued to First Source Financial, Inc., and that warrant and its predecessors and all rights thereunder are hereby cancelled and terminated. 9.12 Termination Agreement. Nothing in that certain Termination Agreement dated as of October 31, 1997 between the parties hereto is intended to or shall release any obligations of the Company to First Source under this Warrant. PAGE Dated as of October 31, 1997. OPTEK TECHNOLOGY, INC. By: Its: Attest: Secretary (AFFIX CORPORATE SEAL) AGREED AND ACCEPTED TO: FIRST SOURCE FINANCIAL LLP By: Its: PAGE NOTICE OF EXERCISE FORM (To be executed only upon partial or full exercise of the within Warrant) The undersigned registered Holder of the within Warrant irrevocably exercises the within Warrant for and purchases _____________ shares of Common Stock of Optek Technology, Inc. and agrees to make payment therefor in the amount of $__________, all at the price and on the terms and conditions specified in the within Warrant and requests that a certificate (or ______________ certificates in denominations of __________ shares) for the shares of Common Stock of Optek Technology, Inc. hereby purchased be issued in the name of and delivered to (choose one) (a) the undersigned or (b) ___________________, whose address is ____________________, and if such shares of Common Stock shall not include all the shares of Common Stock issuable as provided in the within Warrant, that a new Warrant of like tenor for the number of shares of Common Stock of Optek Technology, Inc. not being purchased hereunder be issued in the name of and delivered to [choose one] (a) the undersigned or (b) _________________ whose address is _____________________. Dated:_______________________, 19___ By (Signature of Registered Holder) Signature Guaranteed: By [Title] NOTICE: The signature of this Notice of Exercise must correspond exactly with the name of the Holder as specified on the face of the within Warrant. The signature to this Notice of Exercise must be guaranteed by a commercial bank or trust company in the United States or a member firm of the New York Stock Exchange of business). EX-10 4 1/29/98 Loan Agreement January 29, 1998 Between BORROWER OPTEK TECHNOLOGY, INC. 1215 West Crosby Road Carrollton, Texas 75006 BANK NATIONSBANK OF TEXAS, N.A. 901 Main Street, 7th Floor Dallas, Texas 75202 In consideration of the creation of the revolving facility described below and the mutual covenants and agreements contained herein, and intending to be legally bound hereby, Bank and Borrower agree as follows: 1.0 Certain Definitions. The terms "Floating Base Rate", "LIBO Rate", "LIBO Business Day" and "LIBO Interest Period" are defined in the Note referred to below. In addition, the following terms shall have the meaning set forth with respect thereto: "Adjusted Current Liabilities": see Section 5.2. "Agreement" means this Loan Agreement and all subsequent modifications and amendments hereto. "Commitment" means the obligation of Bank, subject to the terms and conditions of this Agreement, to make Loans which shall not exceed at any one time outstanding $10,000,000. "Contested in Good Faith" means, as to any payment, tax, assessment, charge, levy, lien, encumbrance or claim, contesting the amount, applicability or validity thereof in good faith by appropriate proceedings or other appropriate actions promptly initiated and diligently conducted in a manner satisfactory to Bank, provided (a) adequate reserves satisfactory to Bank have been established, and (b) the enforcement of the contested payment, tax, assessment, charge, levy, lien, encumbrance or claim is stayed in a manner satisfactory to Bank pending the resolution of such contest. "EBITDA": see Section 5.1. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder, as in effect as of the date hereof and any subsequent provisions which are amendatory thereof, supplemental thereto or substituted therefor. In addition, the terms "Commonly Controlled Entity," "Multiemployer Plan," "PBGC," "Plan," "Prohibited Transaction," and "Reportable Event" have the same means as provided therefor in ERISA. "GAAP" means generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes approved by Borrower s independent public accountant) with the most recent financial statements of Borrower delivered to Bank. "Guarantor" means each subsidiary executing a Guaranty Agreement. "Guaranty Agreement": see Section 2.4. "Hazardous Materials" include all materials defined as hazardous materials or substances under any local, state or federal environmental laws, rules or regulations, and petroleum, petroleum products, oil and asbestos. "Loan Documents" means this Agreement, the Note, the Negative Pledge Agreement, the Guaranty Agreements, the Officer's Certificates, the Section 26.02 Notice, and all other documents, instruments, guarantees, security agreements, deeds of trust, pledge agreements, certificates and agreements executed and/or delivered by Borrower, or any guarantor or third party in connection with any Loan. "Loans": see Section 2.0. "Material Adverse Effect" means a set of circumstances or events any one of which (i) has or could have a material and adverse effect upon the validity or enforceability of or would result in a Potential Default under any of the Loan Documents, (ii) is material and adverse to the business, operations, affairs, financial condition, assets or properties of Borrower or any Guarantor, (iii) could materially and adversely impair the ability of Borrower or any Guarantor to fulfill its obligations under the Loan Documents, or (iv) could materially and adversely impair the value of any collateral or the ability of the secured party to realize thereon. "Maturity Date" means January 15, 2001. "Mexican Subsidiaries" mean Optron De Mexico, S.A. de C.V., and Semicondores Opticos, S.A. de C.V. "Negative Pledge Agreement": see Section 2.3 "Net Depreciation": see Section 5.1. "Net Income": see Section 5.1. "No Cure Period Covenants" mean any term, covenant or agreement set forth in Sections 5.1 through 5.4, Sections 6.1 and 6.2, Sections 7.1 through 7.12, Section 9.1, Section 9.2, Section 12.0 and Section 13.9 hereof. "Note" means that certain promissory note made by Borrower payable to the order of Bank in the original principal sum of $10,000,000 dated January 29, 1998, and all renewals, extensions, modifications and amendments thereto, and substitutions therefor. "Obligations" means the obligations of Borrower: (a) to pay all indebtedness arising out of this Agreement, any future advances under this Agreement, and all renewals, extensions or amendments of such indebtedness or any part thereof or any such future advances; (b) to pay the principal of and interest on the Note in accordance with the terms thereof, and all renewals, extensions, modifications and amendments of such Note or any part thereof, and any future advances made pursuant thereto; (c) to repay to Bank all amounts advanced by Bank hereunder or under the other Loan Documents on behalf of Borrower, including, without limitation, advances for principal or interest payments to prior secured parties, mortgagees, or lienors, or for taxes, levies, insurance, rent, repairs to or maintenance or storage of any of the collateral; (d) to pay any and all other indebtedness of Borrower to Bank of every kind, nature and description, direct or indirect, primary or secondary, secured or unsecured (including overdrafts), joint or several, absolute or contingent, due or to become due, now existing or hereafter arising, regardless of how it may be evidenced, including without limitation all future advances, whether or not presently contemplated by the parties hereto; (e) to perform fully all of the terms and provisions of each of the instruments constituting the Loan Documents; and (f) to reimburse Bank, on demand, for all of Bank's expenses and costs, which Borrower and Guarantors are obligated to pay pursuant to the terms of the Loan Documents. "Permitted Liens" mean (i) liens for current taxes not delinquent or for taxes being Contested in Good Faith, (ii) liens arising in the ordinary course of business for sums being Contested in Good Faith, or for sums not due, and in either case not involving any deposits or advances for borrowed money or the deferred purchase of property or services, (iii) liens incurred in the ordinary course of business for amounts not yet due and payable in connection with worker s compensation, unemployment insurance or other forms of governmental insurance or benefits, (iv) mechanic s, worker s, materialmen s and other like liens arising in the ordinary course of business in respect of obligations which are not delinquent or which are being Contested in Good Faith, (v) liens and security interests, if any, in favor of Bank, (vi) purchase-money liens and security interests on any property acquired after the date of this Agreement securing Purchase Money Debt up to $500,000 in the aggregate at any time outstanding, (vii) liens securing lease expenditures permitted by Section 7.2 hereof, and (viii) minor defects and irregularities which neither (1) are liens or security interests which secure other indebtedness or obligations, nor (2) materially impair the value of such asset or the use thereof for the purposes for which such asset is held. "Plan" means, at any time, any employee benefit plan which is covered by ERISA and in respect of which Borrower or any Commonly Controlled Entity is (or, if such plan were terminated at such time, would under ERISA be deemed to be) an "employer" as defined in ERISA. "Potential Default" means any condition, event or act, which with the giving of notice of the lapse of time, or both, will constitute an Event of Default hereunder. "Principal Debt": see Section 2.2. "Quick Assets": see Section 5.2. "Section 26.02 Notice": see Section 4.6. "subsidiary" means, with respect to Borrower, any corporation, limited liability company, partnership, limited partnership, association or other entity the accounts of which would be consolidated with those of Borrower if such financial statements were prepared with accordance with GAAP, including without limitation, the Mexican Subsidiaries. "Tangible Net Worth": see Section 5.3. "Total Funded Debt": see Section 5.1. 2.0 Loans. Bank agrees, subject to the terms and conditions hereof, to lend Borrower at any time and from time to time on or before the Maturity Date sums (each year-end called a "Loan" and collectively the "Loans") which may be repaid and reborrowed pursuant to the terms hereof and which shall not exceed at any one time outstanding the amount of the Commitment. Whenever Borrower desires a Loan hereunder, Borrower shall give Bank notice in the form of Exhibit "A" attached hereto (a "Borrowing and Interest Notice Request") specifying (a) the date (which shall be a Business Day in the case of a Loan based upon the Floating Base Rate or a LIBO Business Day in the case of a Loan based upon the LIBO Rate) of the proposed borrowing, (b) the amount to be borrowed, (c) the portion of the borrowing constituting a Loan based upon the Floating Base Rate and/or a Loan based upon the LIBO Rate (which LIBO Rate based Loan may only be in integral multiples of $500,000), and (d) if any portion of the proposed borrowing constitutes a LIBO Rate based Loan, the initial LIBO Interest Period selected by Borrower (thirty days, sixty days or ninety days). Such notice shall be given by 10 a.m. (Dallas, Texas time) on the date of the proposed borrowing in the case of a Floating Base Rate Loan, and by 10 a.m. (Dallas, Texas time) two (2) Business Days prior to the date of the proposed borrowing in the case of a LIBO Rate based Loan. The notice required may be given telephonically by Borrower to Bank, but upon giving such telephonic notice Borrower shall immediately thereafter provide Bank with the written notice attached hereto as Exhibit A. All notices given under this Section shall be irrevocable. Not later than 12 noon (Dallas, Texas time) on the date of the proposed borrowing and upon fulfillment of all other conditions required by this Agreement, Bank will make such Loan available to Borrower by crediting the amount thereof to Borrower's account with Bank or otherwise disbursing it as Borrower shall request in writing. No Loans may be obtained after the Maturity Date. 2.1 Use of Proceeds. The proceeds of Loans may be used solely for general corporate purposes. 2.2 Promissory Note. The obligation of Borrower to repay the aggregate principal balance of all Loans hereunder outstanding at any one time (the "Principal Debt") shall be evidenced by the Note which (a) shall be payable as to principal on or before the Maturity Date for the amount of $10,000,000, or the Principal Debt then outstanding, whichever is less, (b) shall bear interest and be payable as to interest in the manner therein provided, (c) be entitled to the benefits of this Agreement in the security provided for herein, and (d) be in such form as is acceptable to Bank. 2.3 Negative, Negative Pledge. The Obligations shall be unsecured. However, except for liens expressly permitted by Section 7.5 hereof, until full payment and performance of all Obligations of Borrower under the Loan Documents, all assets of Borrower shall be maintained by Borrower free and clear of all liens, encumbrances, pledges or commitments to pledge or not to pledge Borrower s assets to another creditor. This obligation shall be further evidenced by an agreement (the "Negative Pledge Agreement"), which shall be in form and substance satisfactory to Bank. 2.4 Guaranties. If the combined Tangible Net Worth of all subsidiaries exceeds 25% of the Tangible Net Worth of Borrower, then the payment and performance of the Note and all of the other Obligations hereunder and under the Loan Documents shall be unconditionally guaranteed by all subsidiaries then in existence and thereafter formed or acquired pursuant to the terms of one or more guaranty agreements (each a "Guaranty Agreement"), which shall be in form and substance satisfactory to Bank. Borrower shall pay the reasonable fees and expenses of counsel for Bank incurred in connection with the preparation of the Guaranty Agreements. 2.5 Unused Commitment Fee. Borrower agrees to pay Bank an unused commitment fee for the period commencing with the date of this Agreement to the Maturity Date, computed at the rate of 3/8's of one percent (0.375%) per annum on the average daily unused portion of the Commitment. The phrase "unused portion of the Commitment" as used in the preceding sentence means the difference between (a) $10,000,000, and (b) the Principal Debt. The unused commitment fee shall be payable quarterly in arrears commencing with the calendar quarter ending March 31, 1998. Borrower authorizes Bank to effect payment of the unused commitment fee by debiting Borrower s account specified in Section 5 of the Note for automatic payment. This authorization shall not affect the obligation of Borrower to pay such sum when due, without notice, if there are insufficient funds in such account to make such payment in full on the due date thereof, or if Bank fails to debit the account. 3.0 Conditions Precedent to Closing. The obligations of Bank as set forth herein are subject to the satisfaction, unless waived in writing by Bank, of each of the following conditions: 3.1 Loan Origination Fee. Borrower shall have paid Bank a loan origination fee of $30,000. 3.2 Effectiveness of Loan Documents. Each of the Loan Documents shall be in full force and effect. 3.3 Termination of First Source Financial Credit Facility. Borrower shall provide documentation satisfactory to Bank evidencing the termination of lending relationships with First Source Financial, Inc., and all other lenders in existence immediately prior to the date hereof, excluding lease arrangements by Borrower and its subsidiaries previously disclosed to Bank in writing. 3.4 Credit Opinion. There shall have been delivered a favorable credit opinion of counsel for Borrower covering organization, authority, enforceability and such other matters incident to the Loan as Bank may reasonably request. 3.5 Insurance Certificate. Bank shall have received evidence that Borrower has obtained the policies of insurance specified and required by Section 6.6 hereof. 3.6 Documentation and Proceedings. Borrower shall have delivered resolutions of its boards of directors authorizing its execution, delivery and performance of the Loan Documents to which they are parties. 3.7 Section 26.02 Notice. Borrower shall have executed a notice in compliance with the provisions of Section 26.02 of the Texas Business and Commerce Code (the "Section 26.02 Notice"). 3.8 Representations and Warranties. All representations and warranties contained herein or in the documents referred to herein or otherwise made in writing in connection herewith or therewith shall be true and correct with the same force and effect as though such representations and warranties have been made on and as of this date. 4.0 Conditions Precedent to All Loans. The obligation of Bank to make all Loans to Borrower is subject, at the time of the funding of each such Loan (the "Funding Date"), to the satisfaction, unless waived in writing by Bank, of each of the following conditions: 4.1 Borrowing and Interest Notice Request. Borrower shall have delivered to Bank, within the time frame specified in Section 2.0 hereof, a Borrowing and Interest Notice Request appropriately completed in compliance herewith. 4.2 Availability of Commitment. The then Principal Debt plus the amount of the requested Loan shall be equal to or less than the Commitment. 4.3 Expenses. Borrower shall have paid all reasonable expenses of Bank in connection with the making of the Loan (other than those specified in the first sentence of Section 12.0 hereof). 4.4 Representations and Warranties. All representations and warranties contained herein shall be true and correct in all material respects as though such representations and warranties have been made on and as of the Funding Date (except to the extent that such representations and warranties relate solely to an earlier date). 4.5 No Default. There shall exist no Event of Default or Potential Default hereunder. 4.6 Change in Condition. No change in the condition (financial or otherwise) of Borrower or Guarantors or any other event shall have occurred which has had or is likely to have a Material Adverse Effect. 4.7 (a)0 Financial Covenants. 4.8 Leverage Ratio. Borrower will not permit its ratio of Total Funded Debt as of the last day of each fiscal quarter to EBITDA for the period of four consecutive fiscal quarters ending on such day, to be greater than 2.0 to 1.0. "Total Funded Debt" means, as of any date of determination, without duplication, the aggregate principal amount of all indebtedness of Borrower and its subsidiaries outstanding as of such date determined on a consolidated basis in accordance with GAAP. "EBITDA" means, for any period, Net Income for such period, plus, without duplication and to the extent deducted from revenues in determining Net Income, the sum of (a) the aggregate amount of Consolidated Interest Expense for such period, (b) the aggregate amount of letter of credit fees paid during such period, (c) the aggregate amount of income tax expense for such period, (d) all amounts attributable to Net Depreciation and amortization for such period, and (e) all other non-cash charges, minus, all cash dividends paid during such period, all determined on a consolidated basis with respect to Borrower and its subsidiaries in accordance with GAAP. "Net Income" means, for any period, net income or loss (after income taxes) of Borrower and its subsidiaries for such period determined on a consolidated basis in accordance with GAAP, provided, there shall be excluded (a) extraordinary gains, (b) gains due to sales or write-up of assets, (c) earnings of any entity newly acquired, if earned prior to acquisition, and (d) gains due to acquisitions of any securities of any entity. "Interest Expense" means, for any period, the interest expense, both expensed and capitalized (including the interest component in respect of capital lease obligations), accrued or paid by Borrower and its subsidiaries during such period, determined on a consolidated basis in accordance with GAAP. Net Depreciation means depreciation expense during such period determined on a consolidated basis in accordance with GAAP, less $500,000 for capital expenditures. 4.9 Quick Asset Ratio. Borrower shall maintain at all times a ratio of Quick Assets to Adjusted Current Liabilities of not less than .75 to 1.0. "Quick Assets" means the sum of (a) cash on hand or on deposit in banks, (b) readily marketable securities issued by the United States, (c) readily marketable commercial paper rated "A-1" by Standard & Poors Corporation (or a similar rating by any similar organization which rates commercial paper), (d) certificates of deposit or banker s acceptances issued by commercial banks of recognized standing operating in the United States, and (e) receivables not more than 90 days overdue. "Adjusted Current Liabilities" means current liabilities determined in accordance with GAAP excluding the Principal Debt outstanding at any time. 4.10 Minimum Tangible Net Worth. Borrower shall maintain at all times a Tangible Net Worth of not less than the sum of the following: (a) $20,000,000; plus (b) 50% of Net Income for which purpose Net Income is a positive number measured cumulatively for each fiscal year beginning with the fiscal year ending October 30, 1998; plus (c) 100% of the net proceeds of any offering of any equity securities sold for the account of Borrower and otherwise permitted by the terms hereof and consummated after the date hereof; plus (d) 100% of any capital contributions made to Borrower after the date hereof. Tangible Net Worth means the amount by which total assets exceed total liabilities, total assets and total liabilities each being determined on a consolidated basis in accordance with GAAP consistent with those applied in the preparation of the financial statements previously furnished to Bank referred to in Section 8.2, excluding however, from the determination of total assets all assets which would be classified as intangible assets under GAAP, including without limitation, good will, licenses, patents, trademarks, trade names, copyrights, and franchises. 4.11 Consecutive Losses. Borrower will not realize any negative Net Income in any two consecutive fiscal quarters. 5.0 Affirmative Covenants. Until full payment and performance of all Obligations of Borrower under the Loan Documents, Borrower will, unless Bank consents otherwise in writing (and without limiting any requirement of any other Loan Document): 5.1 Financial Statements and Other Information. Deliver or cause to be delivered to Bank (a) quarterly consolidated and consolidating financial statements of Borrower within forty-five (45) days after the end of the first three fiscal quarters of each fiscal year, and annual audited consolidated financial statements of Borrower within one hundred twenty (120) days after the end of each fiscal year, in each instance to include a balance sheet, an income statement, a statement of cash flows and such other financial statements and supporting schedules or documentation reasonably requested by Bank, prepared in accordance with generally accepted accounting principles consistently applied and presented in a format reasonably acceptable to Bank, and (b) such additional information, reports and statements with respect to the business operations and financial condition of Borrower as Bank may reasonably request from time to time, and (c) within one hundred twenty (120) days after the end of each fiscal year, and within forty-five (45) days after the end of the first three fiscal quarters of each fiscal year, a compliance certificate in the form of Exhibit B attached hereto, and (d) immediately after the filing thereof, copies of any report, proxy statement, financial statement, or other filing made by Borrower with the Securities and Exchange Commission, any state securities agency, or any national stock exchange or quotation service, and promptly upon receipt thereof, copies of any notices received from the Securities and Exchange Commission or any state securities agency relating to any order, rule, statute, or other laws or information that could have a Material Adverse Effect. 5.2 Adverse Conditions or Events. Promptly advise Bank in writing of (i) any condition, event or act which comes to its attention that could or can reasonably be expected to have a Material Adverse Effect, (ii) any litigation filed by or against Borrower or any Guarantor involving an amount in excess of $500,000, (iii) the occurrence of any Event of Default, or of any Potential Default, or the failure of Borrower or any Guarantor to observe any of its undertakings hereunder or under any of the other Loan Documents, (iv) any uninsured or partially uninsured loss through fire, theft, liability or property damage in excess of an aggregate of $500,000, (v) any and all enforcement, cleanup, remedial, removal or other governmental or regulatory actions instituted, completed or threatened pursuant to any applicable federal, state or local laws, ordinances or regulations relating to any Hazardous Materials affecting the business operations of Borrower or any Guarantor, (vi) all claims made or threatened by any third party against Borrower or any Guarantor relating to damages, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials, (vii) any circumstances that constitute grounds entitling the PBGC to institute proceedings to terminate a Plan subject to ERISA, and the receipt of any notice to Borrower or any Commonly Controlled Entity that the PBGC intends to terminate a Plan, and the receipt of notice concerning the imposition of withdrawal liability in excess of $25,000 with respect to Borrower or any Commonly Controlled Entity; and (viii) the formation or acquisition of any subsidiary and the occurrence of any event which will require the execution of Guaranty Agreements pursuant to Section 2.4 hereof. 5.3 Taxes and Other Obligations. Pay all of its taxes, assessments and other obligations, including, but not limited to taxes, costs or other expenses arising out of this transaction, as the same become due and payable, except to the extent the same are being contested in good faith by appropriate proceedings in a diligent manner. 5.4 Insurance. Maintain insurance with responsible insurance companies on such of its properties, in such amounts and against such risks as is customarily maintained by similar businesses operating in the same vicinity, specifically to include fire and extended coverage insurance covering all assets, business interruption insurance, workers compensation insurance and liability insurance, all providing for at least 30 days prior notice to Bank of any cancellation thereof. Satisfactory evidence of such insurance will be supplied to Bank at closing, thereafter as and when requested by Bank, and 30 days prior to each policy renewal. 5.5 Existence and Compliance. (a) Maintain its existence, good standing and qualification to do business, in each jurisdiction in which, under then applicable law, the nature of its business and the ownership of its properties require such qualification and the failure to so qualify would have a Material Adverse Effect; and (b) comply with all laws, regulations and governmental requirements including, without limitation, environmental laws applicable to it or to any of its property, business operations and transactions, a breach of which (when considered alone or when aggregated with the effect of other breaches) could have a Material Adverse Effect. 5.6 Maintenance. Maintain all of its tangible property in good condition and repair and make all necessary replacements thereof, and preserve and maintain all licenses, trademarks, privileges, permits, franchises, certificates and the like necessary for the operation of its business. 5.7 Inspection of Books and Records. Allow any representative of Bank to examine its books of record and account and to discuss its affairs, finances and accounts with any of its officers, directors, employees and agents, all at such reasonable times and as often as Bank may reasonably request. 5.8 Audits. Submit to, and bear the expense of (except that Borrower shall not be required to pay more than $10,000 of such expenses in any period of 12 consecutive months), such audits and inspections as Bank may from time to time reasonably request. 5.9 Further Assurances. Make, execute or endorse, acknowledge and deliver or file or cause the same to be done, all such vouchers, invoices, notices, certifications and additional agreements, undertakings, conveyances, deeds of trust, mortgages, assignments, financing statements or other assurances, and take any and all such other action as Bank may from time to time reasonably request in connection with this Agreement or any of the other Loan Documents (a) to cure any defects in the creation of the Loan Documents, or (ii) to correct any omissions in the Loan Documents. 6.0 Negative Covenants. Until full payment and performance of all Obligations of Borrower under the Loan Documents, Borrower will not, without the prior written consent of Bank (and without limiting any requirement of any other Loan Documents): 6.1 Capital Expenditures. Make capital expenditures during each fiscal year (including capitalized leases) in excess of $7,500,000. 6.2 Lease Expenditures. Incur new obligations for the lease or hire of real or personal property in any fiscal year in excess of an aggregate of $1,000,000. 6.3 Transfer of Assets. Convey, assign, transfer, sell, lease or otherwise dispose of in one transaction or a series of transactions (or agree to do any of the foregoing at any future time) all or substantially all or a substantial part of its properties or assets (whether now owned or hereafter acquired) or any part of such properties or assets which are essential to the conduct of its business substantially as now conducted. 6.4 Merger, Etc. Enter into any merger or consolidation, except that Borrower may merge into or consolidate with any of its subsidiaries so long as Borrower is the survivor. 6.5 Liens. Grant, suffer or permit any contractual or noncontractual lien on or security interest in its assets, except Permitted Liens. 6.6 Extensions of Credit. Make, or permit any Guarantor to make, any loan or advance to any person or entity, or purchase or otherwise acquire, or permit any Guarantor to purchase or otherwise acquire, any capital stock, assets, obligations or other securities of, or make any capital contribution to, or otherwise invest in or acquire any interest in any entity; provided that Borrower may acquire or invest in entities where the cumulative aggregate cash and/or stock consideration does not exceed $10,000,000 over the term of this Agreement. 6.7 Borrowings. Create, incur, assume or become liable in any manner for any indebtedness (whether direct or contingent, for borrowed money, deferred payment for the purchase of assets, lease payments, as surety or guarantor for the debt for another, or otherwise) other than to Bank, except for (i) normal trade debts incurred in the ordinary course of Borrower's business, (ii) purchase-money debt up to $500,000 in the aggregate at any time outstanding, (iii) lease expenditures permitted by Section 7.2 hereof, and (iv) existing indebtedness disclosed to Bank in writing and acknowledged by Bank prior to the date of this Agreement. 6.8 Dividends and Distributions. Make any distribution (other than dividends payable in capital stock of Borrower) on any shares of any class of its capital stock, or apply any of its property or assets to the purchase, redemption or other retirement of any shares of any class of capital stock of Borrower exceeding in the aggregate 50% of net profit per fiscal year. 6.9 Change of Character of Business or Location. Change the general character of business as conducted at the date hereof, or engage in any type of business not reasonably related to its business as presently conducted, or fail to maintain in Texas its principal place of business, its primary administrative office, and its billing and collection operations. . 6.10 Principal Debt not to Exceed Commitment. Permit at any time the Principal Debt to exceed the Commitment. 6.11 Change of Control. Permit the change of control of Borrower. "Change of control" as used in the preceding sentence means the acquisition by a third party of more than fifty percent (50%) of the outstanding voting stock of Borrower. 6.12 Arm's Length Transactions. Enter into a transaction with any affiliate (other than services rendered by an officer, employee or director), except a transaction upon terms that are not less favorable to it than would be obtained in a transaction negotiated at arm's length with an unrelated third party. 7.0 Representations and Warranties. Borrower hereby represents and warrants to Bank as follows: 7.1 No Liens. Borrower and each Guarantor have good and defensible title to all of their assets, and none of such assets are subject to any security interest, mortgage, deed of trust, pledge, lien, title retention document or encumbrance of any character, except for Permitted Liens. 7.2 Financial Statements. The financial statements of Borrower dated as of July 31, 1997, have been prepared in accordance with generally accepted accounting principles on a consistent basis throughout the period involved and fairly present Borrower s financial condition as of the date or dates thereof, and there have been no material adverse changes in Borrower s financial condition or operation since the date or dates thereof. 7.3 Good Standing. Borrower is a corporation, duly organized, validly existing and in good standing under the laws of Delaware and has the power and authority to own its property and to carry on its business in Texas and in every other state in which, under presently applicable law, the nature of its property or business requires such qualification and in which the failure to be so qualified would (when considered alone or when aggregated with the effect of failure to qualify in all other jurisdictions) have a Material Adverse Effect. 7.4 Binding Agreements. This Agreement and the other Loan Documents executed by Borrower constitute valid and legally binding obligations of Borrower, enforceable in accordance with their terms. Each of the Loan Documents executed by each Guarantor constitutes the valid and binding obligation of such Guarantor, enforceable in accordance with its terms. 7.5 Litigation. There is no proceeding involving Borrower or any Guarantor pending or, to the knowledge of Borrower, threatened before any court or governmental authority, agency or arbitration authority, except as disclosed to Bank in writing and acknowledged by Bank prior to the date of this Agreement. 7.6 No Conflicting Agreements. There is no charter, bylaw, stock provision, partnership agreement or other document pertaining to the power or authority of Borrower or any Guarantor and no provision of any existing agreement, mortgage, indenture or contract binding on Borrower or any Guarantor or affecting any property of Borrower or any Guarantor, which would conflict with or in any way prevent the execution, delivery or carrying out of the terms of this Agreement and the other Loan Documents. 7.7 Taxes. All taxes and assessments due and payable by Borrower and any Guarantor have been paid or are being contested in good faith by appropriate proceedings in a diligent manner, and the Borrower and Guarantors have filed all tax returns which they are required to file. 7.8 Accuracy of Information. To the best of Borrower's knowledge, all factual information furnished to Bank in connection with this Agreement and the other Loan Documents is and will be accurate and complete in all material respects on the date as of which such information is delivered to Bank and is not and will not be incomplete by the omission of any material fact necessary to make such information not misleading. 7.9 ERISA. Borrower is in compliance in all material respects with all applicable provisions of ERISA. Neither a Reportable Event nor a Prohibited Transaction has occurred and is continuing with respect to any Plan; no notice of intent to terminate a Plan has been filed, nor has any Plan been terminated; neither Borrower nor any Commonly Controlled Entity has completely or partially withdrawn from a Multiemployer Plan; and Borrower and each Commonly Controlled Entity have met their minimum funding requirements under ERISA with respect to all of their Plans. 7.10 Environmental. The conduct of Borrower s business operations and the condition of Borrower s property does not and will not violate any federal laws, rules or ordinances for environmental protection, or regulations of the Environmental Protection Agency, or any applicable local or state law, rule, regulation or rule of common law, or any judicial interpretation thereof relating primarily to the environment or Hazardous Materials. 7.11 Subsidiaries. Borrower has no subsidiaries other than the Mexican Subsidiaries, Optek Holdings, Inc. and OTX Corporation. 7.12 Continuation of Representations and Warranties. All representations and warranties made under this Agreement shall be deemed to be made at and as of the date hereof and at and as of the date of any future Loan and in all instances shall be true and correct (except to the extent that such representations and warranties relate solely to an earlier date). 8.0 Default. Any of the following shall constitute events of default (each an Event of Default ): 8.1 Nonpayment. (a) Borrower shall default in the due and punctual payment of any principal or interest of the Note when due and payable, whether at maturity or otherwise, or (b) Borrower or any Guarantor shall default in the due and punctual payment of any of the other Obligations when due and payable. 8.2 Representations and Warranties. Any representation, warranty or statement made by Borrower or any Guarantor herein or otherwise in writing in connection herewith or in connection with any of the other Loan Documents and the agreements referred to herein or therein or in any financial statement, certificate or statement signed by any officer or employee of Borrower and furnished pursuant to any provision of the Loan Documents shall be breached, or shall be materially false, incorrect or incomplete when made. 8.3 Default in Covenants Under Agreement. (a) Borrower shall default in the due performance or observance by it of any term, covenant or agreement set forth in the No Cure Period Covenants; or (b) Borrower shall default in the due performance or observance of any term, covenant or agreement contained in this Agreement other than the No Cure Period Covenants, and such default continues unremedied for a period of thirty (30) days after notice thereof from Bank or Bank is notified of such default or should have been so notified pursuant to the provisions of Section 6.2 hereof, whichever is earlier. 8.4 Default in Other Loan Documents. Borrower or any Guarantor shall default in the due performance of or observance by it of any term, covenant or agreement on its part to be performed pursuant to the terms of any of the other Loan Documents and the default shall continue unremedied beyond any grace or cure period therein provided. 8.5 Default in Other Debt. An event of default shall occur under the provisions of any instrument (other than the Loan Documents) evidencing indebtedness of Borrower for the payment of borrowed money or of any agreement relating thereto, the effect of which is to permit the holder or holders of such instrument to cause the indebtedness evidenced by such instrument to become due and payable prior to its stated maturity (whether or not the holder actually exercises such option). 8.6 Validity of Loan Documents. Any of the Loan Documents shall cease to be a legal, valid and binding agreement enforceable against any party executing the same in accordance with the respective terms thereof, or shall in any way be terminated, or become or be declared ineffective or inoperative by operation of law, or shall in any way whatsoever cease to give or provide the respective rights, remedies, powers and privileges intended to be created thereby. 8.7 Bankruptcy. Borrower or any Guarantor shall suspend or discontinue its business operations, or shall generally fail to pay its debts as they mature, or shall file a petition commencing a voluntary case concerning Borrower under any chapter of the United States Bankruptcy Code; or a court of competent jurisdiction enters an order or decree under any bankruptcy law that remains unstayed and in effect for forty-five (45) days that is for relief against Borrower or any Guarantor in an involuntary case or appoints a custodian of Borrower or any Guarantor for all or substantially all of its property; or Borrower or any Guarantor shall become insolvent (howsoever such insolvency may be evidenced). 8.8 Judgments and Decrees. Borrower or any Guarantor shall suffer a final judgment for the payment of money in excess of $500,000 and shall not discharge the same within a period of thirty (30) days unless, pending further proceedings, execution has not been commenced, or, if commenced, has been effectively stayed. Any order, judgment or decree shall be entered in any proceeding against Borrower or any Guarantor decreeing the dissolution or split up of such entity and such order shall remain undischarged or unstayed for a period in excess of thirty (30) days. 8.9 ERISA. Any of the following events shall occur or exist with respect to Borrower and any Commonly Controlled Entity under ERISA and the regulations promulgated thereunder: (a) any Reportable Event shall occur; (b) complete or partial withdrawal from any Multiemployer Plan shall take place; (c) any Prohibited Transaction shall occur; (d) a notice of intent to terminate a Plan shall be filed, or a Plan shall be terminated; or (e) circumstances shall exist which constitute grounds entitling the PBGC to institute proceedings to terminate a Plan, or the PBGC shall institute such proceedings; and in each case above, such event or condition, together with all other events or conditions, if any, could subject Borrower to any tax, penalty or other liability which in the aggregate may exceed $25,000. 9.0 Remedies. Upon the occurrence of an Event of Default described in Section 9.7 hereof, the entire principal of and accrued interest on the Note shall forthwith be due and payable without demand, presentment for payment, notice of nonpayment, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notices and further actions of any kind, all of which are hereby expressly waived by Borrower. In the event that any other Event of Default occur and be continuing, Bank may, without demand or notice of its election terminate its obligation to make further Loans hereunder and/or declare the entire unpaid balance of the Note and all other indebtedness of Borrower to Bank, or any part thereof, immediately due and payable, whereupon the principal of and accrued interest on such Note and other indebtedness shall be forthwith due and payable without demand, presentment for payment, notice of nonpayment, protest, notice of protest, notice of intent to accelerate, notice of acceleration and all other notices and further actions of any kind, all of which are hereby expressly waived by Borrower. Upon the occurrence and during the continuance of any Event of Default, Bank may (a) exercise any and all rights under or pursuant to any of the Loan Documents, and (b) exercise any and all rights afforded to Bank by the laws of the State of Texas or any other applicable jurisdiction or in equity or otherwise, as Bank may deem appropriate, and (c) terminate the Commitment. 10.0 Notices. All notices, requests or demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing (including telegraphic, telex and facsimile transmission) delivered to the other party at the addresses set forth on the first page of this Agreement or to such other address as any party may designate by written notice to the other party. Each such notice, request and demand shall be deemed given or made (whether actually received or not) (a) if sent by mail, upon the earlier of the date of receipt or five (5) days after deposit in the U.S. Mail, first class postage prepaid, and (b) if sent by any other means, upon delivery. Unless otherwise changed by notice given pursuant to this Section, the facsimile transmission number for Borrower shall be (972) 323-2208, and the facsimile transmission number for Bank shall be (214) 508-3139. 11.0 Costs, Expenses and Attorneys' Fees. Each party shall bear its own attorneys fees incurred by it in connection with the negotiation and preparation of this Agreement and each of the Loan Documents executed as part of the initial closing. Borrower shall pay to Bank immediately upon demand the full amount of all costs and expenses, including reasonable attorneys' fees (including outside counsel fees but excluding any allocation of costs of Bank s in-house counsel), incurred by Bank in connection with (a) if initiated or requested by Borrower, any modifications of or consents or waivers under or amendments to this Agreement, the Note, the other Loan Documents and the agreements described therein, and (b) all other costs and attorneys fees incurred by Bank for which Borrower is obligated to pay in accordance with the terms of the Loan Documents. Borrower further agrees to pay on demand all costs and expenses of Bank incurred in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of the Loan Documents. Borrower further agrees to indemnify Bank and its employees and agents, from and hold it harmless against any and all losses, liabilities, claims, damages or expenses which any of them suffers or incurs as a result of its entering into this Agreement, or the consummation of the transactions contemplated by this Agreement and the Loan Documents, or the use or contemplated use of the proceeds of the Loan, or due to a release or alleged release of Hazardous Materials, including, without limitation, the fees and disbursements of counsel incurred in connection with any litigation, arbitration or other proceeding arising out of or by reason of any of the aforesaid. Borrower shall defend any claim for which an indemnified party is entitled to seek indemnity pursuant to the preceding sentence, and the indemnified party shall cooperate with the defense. The indemnified party may have separate counsel, and Borrower will pay the expenses and reasonable fees of such separate counsel if either counsel for Borrower or counsel for the indemnified party shall advise the indemnified party that the interests of both Borrower and the indemnified party with respect to such claim are or with reasonable certainty will become adverse. 12.0 Miscellaneous. Borrower and Bank further covenant and agree as follows, without limiting any requirement of any other Loan Document: 12.1 Cumulative Rights and No Waiver. Each and every right granted to Bank under any Loan Document, or allowed it by law or equity shall be cumulative of each other and may be exercised in addition to any and all other rights of Bank, and no delay in exercising any right shall operate as a waiver thereof, nor shall any single or partial exercise by Bank of any right preclude any other or future exercise thereof or the exercise of any other right. Borrower expressly waives any presentment, demand, protest or other notice of any kind, including but not limited to notice of intent to accelerate and notice of acceleration. No notice to or demand on Borrower in any case shall, of itself, entitle Borrower to any other or future notice or demand in similar or other circumstances. 12.2 Choice of Law and Venue. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE STATE OF TEXAS AND SHALL BE PERFORMABLE IN DALLAS COUNTY, TEXAS. 12.3 Amendment. No modification, consent, amendment or waiver of any provision of this Agreement, nor consent to any departure by a party therefrom, shall be effective unless the same shall be in writing and signed by an officer of the other party, and then shall be effective only in the specified instance and for the purpose for which given. This Agreement is binding upon the parties, their successors and assigns, and inures to the benefit of the parties, their successors and assigns; however, no assignment or other transfer of Borrower's rights or obligations hereunder shall be made or be effective without Bank's prior written consent, nor shall it relieve Borrower of any obligations hereunder. There is no third party beneficiary of this Agreement. 12.4 Documents. All documents, certificates and other items required under this Agreement to be executed and/or delivered to Bank shall be in form and content satisfactory to Bank and its counsel. 12.5 Partial Invalidity. The unenforceability or invalidity of any provision of this Agreement shall not affect the enforceability or validity of any other provision herein and the invalidity or unenforceability of any provision of any Loan Document to any person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances. 12.6 Survivability. All covenants, agreements, representations and warranties made herein or in the other Loan Documents shall survive the making of the initial Loan and shall continue in full force and effect so long as the Obligations are outstanding or the Commitment has not expired. 12.7 Accounting Terms. Unless specified elsewhere herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements to be delivered hereunder shall be prepared in accordance with GAAP. 12.8 Expiration of Commitment/Renewal. The Commitment of Bank hereunder shall expire on the Maturity Date. Bank is under no express or implied duty or obligation to renew the Note or extend the Maturity Date. 12.9 Environmental. Borrower shall immediately notify Bank of any remedial action taken by Borrower under environmental laws with respect to Borrower's business operations. Borrower will not use or permit any other party to use any Hazardous Materials at any of Borrower's places of business or at any other property owned by Borrower except such materials as are incidental to Borrower's normal course of business, maintenance and repairs and which are handled in compliance with all applicable environmental laws. Borrower agrees to permit Bank, its agents, contractors and employees to enter and inspect any of Borrower's places of business or any other property of Borrower at any reasonable times upon three (3) days prior notice for the purposes of conducting an environmental investigation and audit (including taking physical samples) to insure that Borrower is complying with this covenant and Borrower shall reimburse Bank on demand for the costs of any such environmental investigation and audit not to exceed $10,000 per year. Borrower shall provide Bank, its agents, contractors, employees and representatives with access to and copies of any and all data and documents relating to or dealing with any Hazardous Materials used, generated, manufactured, stored or disposed of by Borrower's business operations within five (5) days of the request therefore. 13.0 Agreement Controlling. In the event of a conflict between the terms and provisions of this Agreement and the terms and provisions of any of the other Loan Documents, the terms and provisions of this Agreement shall control. 14.0 Arbitration. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO ARISING OUT OF OR RELATING TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW). THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF (J.A.M.S.), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. 14.1 Special Rules. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF BORROWER S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT, AGREEMENT OR DOCUMENT, AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. 14.2 Reservation of Rights. NOTHING IN THIS ARBITRATION PROVISION SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT OR DOCUMENT; OR (II) BE A WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER, OR (IV) LIMIT THE RIGHTS OF THE PARTIES HERETO UNDER THE BANKRUPTCY CODE OR SIMILAR LAWS AFFECTING THE RIGHTS OF CREDITORS GENERALLY. THE BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. OPTEK TECHNOLOGY, INC. By Title NATIONSBANK OF TEXAS, N.A. By Ronald K. Baker Senior Vice President LIST OF EXHIBITS A. . . . . . . . . Borrowing and Interest Notice Request . . . . . . 2.1 B. . . . . . . . . . . . .Compliance Certificate . . . . . . . . . . 6.1 14.3PAGE EXHIBIT A BORROWING AND INTEREST NOTICE REQUEST Reference is made to that certain Loan Agreement between OPTEK TECHNOLOGY, INC. and NATIONSBANK OF TEXAS, N.A. dated as of January 29, 1998 (the "Loan Agreement"). The terms used herein shall have the same meanings as provided therefor in the Loan Agreement unless the context hereof otherwise requires or provides. A. AVAILABILITY. 1. Enter: Amount of Commitment $10,000,000 2. Enter: Principal Debt outstanding as of this date. 3. Excess (deficit) available for Loans (subtract line A2 from line A1). 4. Description of use of proceeds of Loan: 5. The Borrower hereby certifies that all conditions precedent specified by the Loan Agreement for this Loan have been complied with in all respects. B. FLOATING BASE LOAN. 1. Amount of Floating Base Rate loan: ____________________ 2. Type of Floating Base loan New Floating Base loan Conversion of LIBO Rate loan to Floating Base loan 3. Date of funding or conversion ____________________ PAGE C. LIBO RATE LOAN. 1. Amount of LIBO Rate loan (minimum of $500,000 and in $100,000 increments thereafter) ____________________ 2. Type of LIBO Rate loan New LIBO Rate loan Renewal of existing LIBO Rate loan Conversion of Floating Base Rate loan to LIBO Rate loan 3. Date of funding or renewal or conversion ____________________ 4. LIBO Interest Period (30 days, 60 days or 90 days)____________________ The Borrower hereby certifies that on the date hereof the representations and warranties contained the Loan Agreement are true in all material respects as if made on the date hereof (except to the extent that such representations and warranties relate solely to an earlier date), and no Event of Default or Potential Default exists. Dated ____________, 199__. OPTEK TECHNOLOGY, INC. By Title 14.4PAGE EXHIBIT B COMPLIANCE CERTIFICATE TO:NATIONSBANK OF TEXAS, N.A. Reference is made to that certain Loan Agreement between OPTEK TECHNOLOGY, INC. and NATIONSBANK OF TEXAS, N.A. dated as of January 29, 1998 (the "Loan Agreement"). The terms used herein shall have the same meanings as provided therefor in the Loan Agreement, unless the context hereof otherwise requires or provides. The undersigned HEREBY CERTIFIES that he is the duly elected and qualified officer of _________________________ holding the office set forth opposite his signature below, AND DOES FURTHER CERTIFY, individually and on behalf of the Borrower, that: 1. Attached hereto are complete and detailed financial statements of the Borrower as of, and for the period ending _________________, 199__, which are complete and correct in all respects. 2. A review of the activities of the Borrower during the preceding fiscal quarter has been made under his supervision with a view to determining whether, during such fiscal quarter, Borrower has kept, observed, performed and fulfilled all of its obligations under the Loan Documents, and that to the best of his knowledge Borrower has kept, observed, performed and fulfilled all of such obligations, except as set forth in Schedule I attached hereto. (If no Schedule I is attached, then such exception does not apply and no such failures exist.) 3. Set forth below is the calculation of the financial covenants of the Loan Agreement determined as of the last day of the immediately preceding fiscal quarter of the Borrower, which calculations have been made in accordance with the requirements of the Loan Agreement and which are true and correct in all material respects. A. Leverage Ratio. Borrower will not permit its ratio of Total Funded Debt as of the last day of each fiscal quarter to EBITDA for the period of four consecutive fiscal quarters ending on such day to be greater than 2.0 to 1.0 The leverage ratio of Borrower as of the last day of the date set forth above for the period of four consecutive fiscal quarters ending on such day is: (1) Computation of EBITDA Net Income, plus $__________ Consolidated Interest Expense, plus $__________ Aggregate Letter of Credit Fees, plus $__________ Aggregate Income Tax Expense, plus $__________ Net Depreciation, plus $__________ 15. Amortization, plus $__________ All other non-cash charges, minus $__________ Cash dividends, minus $__________ Extraordinary gains $__________ EBITDA $__________ (2) Total Funded Debt $__________ (3) Leverage Ratio (Total Funded Debt divided by EBITDA) _____ to _____ B. Quick Asset Ratio. Borrower will at all times maintain a ratio of Quick Assets to Adjusted Current Liabilities of not less than .75 to 1.0. Such ratio as of the date above is: (1) Computation of Quick Assets Cash on hand or on deposit, plus $__________ Readily marketable securities issued by U.S., plus $__________ Readily marketable commercial paper rated "A-1", plus $__________ Certificates of deposit/banker s acceptances, plus $__________ Receivables not more than 90 days overdue $__________ Quick Assets $__________ (2) Computation of Adjusted Current Liabilities __________ Current liabilities, less $__________ Principal debt outstanding $__________ Adjusted current liabilities $__________ (3) Quick Asset Ratio (Quick Assets divided by Adjusted Current Liabilities) _____ to _____ C. Minimum Tangible Net Worth. Borrower must maintain at all times a Tangible Net Worth of not less than the sum of (a) $20,000,000; plus (b) 50% of Net Income for which purpose Net Income is a positive number measured cumulatively for each fiscal year beginning with the fiscal year ending October 30, 1998; plus (c) 100% of the net proceeds of any offering of any equity securities sold for the account of Borrower and otherwise permitted by the terms hereof and consummated after January 29, 1998; plus (d) 100% of any capital contributions made to Borrower after January 29, 1998. (1) $20,000,000 Threshold $20,000,000 (2) 50% of Net Income for which purpose Net Income is a positive number measured cumulatively for each fiscal year beginning with the fiscal year ending October 30, 1998 $__________ (3) 100% of the net proceeds of any offering of any equity securities sold for the account of Borrower and otherwise permitted by the terms hereof and consummated after January 29, 1998 $__________ (4) 100% of any capital contributions made to Borrower after January 29, 1998 $__________ (5) Sum of lines (1), (2), (3) and (4) $__________ (6) Tangible Net Worth as of the date above is (amount on line (6) must be greater than amount on line (5)): $__________ D. Tangible Net Worth of Mexican Subsidiaries. (1) Tangible Net Worth of Optron De Mexico, S.A. de C.V. $__________ (2) Tangible Net Worth of Semicondores Opticos, S.A. de C.V.$__________ (3) Total of lines (1) and (2) $__________ (4) Tangible Net Worth of Borrower $__________ (5) Multiply amount on line (4) by 25% $__________ (6) If amount on line (5) is less than the amount on line (3), Mexican Subsidiaries must guarantee Obligations. 4. Set forth below is the calculation of those negative covenants contained in the Loan Agreement which are determined as of the last day of the fiscal year of Borrower. These calculations have been made in accordance with the requirements of the Loan Agreement and are true and correct in all respects: A. Capital Expenditures. The total of all capital expenditures during the fiscal year ending on the date set forth above (including capitalized leases) were $___________. B. Lease Expenditures. The total of all new obligations for lease or hire of real or personal property incurred in the fiscal year ending on the date set forth above are $______________. C. Fifty percent of the net profits of Borrower during the fiscal year ending on the date set forth above is $___________. The aggregate of all distributions (other than dividends payable in capital stock of Borrower) on any shares of any class of Borrower s capital stock made during the fiscal year ended on the date set forth above and the aggregate of all property or assets of Borrower applied to the purchase or redemption or other retirement of its shares during the fiscal year ending on the date set forth above, are $___________. IN WITNESS WHEREOF, the undersigned has executed this Certificate on ________________, 199__. Office Signature Printed Name EX-10 5 LEASE AGREENENT ENTERED INTO, BY AKD BETWEEN EQUIP08 CLINATEC, 8.A. DE C.V,, RPsE82NTED BY IT8 ATTORsBY-IN-FACT XS8RS. DIETER E. GRETHER AND BOBBY M.SEORNTON 5gEREINAETER REFERBED TO AS THE "LES80R" AND BY TUE OTHER PART OPTON DE MEXICO, 8.A. DE C.V., REPRE8ENTED BY ITS ATTORNEY--IN-FACT MR. S ~f U) PPFF-1 _ (HEREINAFTER REFERRED TO AS TRE ";BS8BE"), PURSUANt TO THE FOLLOWING STAtEMENT8 AND CLAU8ES: S T A T E M E N T S I. The LESSOR states, through its legal representative: a) That it is a Mexican Commercial stock corporation incorporated in accordance to the General Law of Commercial Corporations. EQUIPoS is the owner of the entire beneficial interest in the property and the building situated thereon through two different Real Estate trust agreements which are effective for thirty-year terms and renewals for additional thirtyyear terms. b) That it is the owner and has full possession and domain of an industrial plant with an approximate surface area of 5,400 square meters (approximately 58,125 square feet), constructed on a plot with surface of 19,568.43 square meters (approximately 210,634.50 square feet), located in the Rio Bravo Industrial Park, in the City of Zargoza, Municipality of Juarez, Bravos District, State of Chihuahua, Mexico, which characteristics are illustrated in the plot plan and plan of premises which are attached to this contract as Exhibit "A". (The aforementioned will be hereinafter referred to as the "Real Estate" or the "Premises"). c) That it has the intention to lease the Real Estate, to the LBSSEE pursuant to the terms and conditions set forth in this instrument. d) That its representative has legal capacity for the execution of this instrument on behalf of the LESSOR, same which has not been limited nor revoked. e) That the LESSOR has legal capacity to enter into this lease pursuant to the permit attached hereto as Exhibit "B". II. The IzESSEE through its legal representative states: a) That is a commercial stock corporation incorporated in accordance to the General Law of Commercial Corporations. b) That its objective is to operate light and clean industry. c) That it wishes to lease the Real Estate pursuant to the terms and conditions set forth herein. d) That its legal representative has legal capacity for the execution of this contract on behalf of the LESSEE, which has not been limited nor revoked. e) That the LESSEE has legal capacity to enter into this Lease. III. Both parties state: That upon the execution of this instrument there existed no error, misrepresentation nor bad faith between them. Having stated the foregoing, the parties hereby covenant and agree to the following: 2 C L A U S E S: SECTION I LEASE 1.1. The LESSOR hereby grants to the hESSEE the temporary use and enjoyment of the Real Estate. 1.2. The LESSEE accepts and receives the Real Estate in lease, pursuant to the terms and conditions set forth herein. SECTION 2 TERM 2.1. Provided there is no uncured Event of Default and subject to the terms, covenants, agreements and conditions contained herein, this Lease Agreement shall be for a term, binding for both parties, commencing as of the date of execution hereof and ending on December 31, 1996, at il:59 p.m., Mexico city, Federal District time. 2.2. This Lease Agreement may be extended for an additional five (5) consecutive terms of one year each, which extensions shall be exercised by the LESSEE by providing to the LESSOR a previous and written notice duly delivered, at least one hundred and eighty (180) days prior to the expiration date of this Agreement, expressing its intention to extend this Lease Agreement. In the event that LESSEE does not exercise its option to extend the Term of this Lease for the next available one year term, then all rights and options of LESSEE to extend the term shall cease and LESSOR shall have the right during the remainder of the term to advertise, in any manner, the availability of the Premises for reletting. /S.g SECTION 3 USE OF THE REAL ESTATE 3.1. The LESSEE shall use the ReaI Estate only for light and clean industrial purposes, such as the assembly or manufacture of all kinds of products, excluding basic chemical production and heavy industry, being forbidden expressly to use the Real Estate for basic chemical production, heavy industry, fabrication or storage of explosive, radioactive, inflammable (except as needed in day to day operations), explosive products or any other product which may be dangerous to persons or the integrity of the Real Estate. LESSEE shall comply with the Mexican law of Ecological Balance and Environmental Protection and Health Law. LESSEE states that it has the intention of manufacturing electrical and electronic products, activity that is considered a light and clean industrial operation. Therefore, the LESSEE represents that the intended use of the Premises is according to the provisions set forth above. Notwithstanding any other provision of this Lease, LESSOR retains a right to ingress, egress, and access over and across the Premises for the benefit of other parts of the Property or other Real Estate in which LESSOR or its successor or Affiliates may have an interest. SECTION 4 B~ 4.1. The LESSEE shall pay to the LESSOR for this Lease the rental amount of $70,143.25 (Seventy Thousand One Hundred Forty-three and 25/loo Dollars), legal currency of the United States of 4 X~fMl? s~ America, or pesos if required by Hexican law, in advance for the space occupied for the period thru December 31, 1991. Beginning January l, 1992 the LESSEE shall pay $4.50 (Four and 50/100 Dollars) per square foot per year for the 58,125 square feet or the amount of space not occupied by Equipos Climatec, S.A. de C.V., payable in twelve (12) equal and monthly installments of $21,797.00 (Twenty-one Thousand Seven Hundred Ninety-seven and no/100 Dollars), legal currency of the United States of America, or Mexico if required by Mexican law. Each such payment shall be due and payable on the first day of each calendar month. 4.2. The LESSEE agrees to make payment of the rent without the need of prior demand or request of payment; the LESSEE, likewise, may not retain any part of the rentals due to repairs or any other reason whatsoever. 4.3. The installments of the Lease price referred in paragraph 4.1. above, shall be payable by the LESSEE to the LESSOR, on the first day of each month, precisely at the payment address of the LESSOR located at P.O. Box 754, Oklahoma City, Oklahoma 73101. 4.4. In case the LESSEE does not pay on time to the LESSOR at the address abovementioned, interest shall accrue at the rate of 128 per annum on the overdue amount, from the rental payment due date until the total and comp}ete to payment is effected, without prejudice of the right of the LESSOR to rescind this Agreement. 4.5. The rental amount shall be increased each year on the first day of January in proportion to the increase of the "Consumer Prices Index@~ published by the Department of Labor of the United|)swf States of America, from the prior January 1, with the understanding the rental amounts shall never be reduced. 4.6. To fix the increases of the rentals, as set forth in paragraph 4.5 above, the LESSEE agrees that the LESSOR shall determine such increases according to the provisions set forth in this Section and LESSOR shall notify LESSEE in writing of such increase. This notice shall bind the LESSEE to pay the new rental amounts, unless the LESSEE notifies LESSOR that there is a mathematical error in the calculation within thirty (30) days of such invoice. If there is a correction to the calculation of such amount, LESSEE agrees to pay such corrected amount. SECTION 5 LESSEE POSSESSION 5.1. The LESSOR hereby delivers the possession of the Real Estate to LESSEE. LESSEE receives the Real Estate in possession and states its agreement and full satisfaction with respect to its foundations, columns, walls, exteriors, roofs, structures and all other components. 5.2. The LESSEE shall permit to the person or persons designated by the LESSOR the access to Real Estate for the purpose to verify the fulfillment of the obligations of the LESSEE under the terms set forth in this Agreement, as well as for the preservation of the Real Estate or any other proper purpose, including but not limited to the access of other property owned by LESSOR or its Affiliates. $~1SECTION 6 MAINTENANCE OF LESSOR 6.1. The LESSOR shall be bound to maintain the structure and integrity of the roofs (without including the waterproofing) and structure of the Real Estate, provided that such repairs do not become necessary due to the negligence or misconduct of the LESSEE or the installation of machinery, equipment or additions or the placement of materials which due to their dangerous nature, weight, movement, vibrations and other similar conditions may produce any injury to the Real Estate, due to the characteristics of the structure or roof of the Real Estate or its actual weight resistance. For reason of the above stated purposes, the LESSEE represents to know perfectly well the technical characteristics of the Real Estate and states its full satisfaction therewith. SECTION 7 MAINTENANCE OF THE LESSEE 7.1 The LESSEE during the term hereof, binds itself to render to the Real Estate whatever maintenance is required and to make the corresponding repairs, so as to keep the Real Estate in its normal state of conservation, excluding its normal wear and tear but including the adequate waterproofing of the roofs. 7.2. For the purpose of carrying out repairs or maintenance work referred in the foregoing paragraph on the Real Estate, when the LESSEE is to carry out any important maintenance work, the LESSEE must previously notify the LESSOR in writing, informing LESSOR of W # - t the need to carry out such work and the characteristics thereof, so that LESSOR approves such work which approval shall not be unreasonably withheld. SECTION 8 IMPROVEMENTS AND INSTALLATIONS CARRY OUT BY LESSEE 8.1. The LESSEE may carry out with the previous authorization of the LESSOR given in writing, at its expense, all improvements to the Real Estate or installations thereof which LESSEE considers convenient to take full advantage of the Real Estate, in accordance with LESSEEts activitiest with the understanding that upon termination hereof, all installations, improvements or additions of a permanent character, including but not limited to heating ventilating and air conditioning systems equivalent of whatsoever nature ("HVAC") in;stalled in the Premises by LESSEE whether permanently affixed thoreto or otherwise and all fixtures shall remain for the benefit of the Real Estate; LESSEE hereby expressly waives the provisions of Sections 2423 and 2424 of the Civil Code for the Federal District and their corresponding Section of other Civil Codes applicable in the Republic of Mexico. The LESSOR, if ift is convenient to its interest, shall have the authority to demand from the LESSEE, upon termination hereof, to remove alldinstallations, improvements or additions effected by LESSEE andXsaid LESS:EE shall deliver the Real Estate to the LESSOR in the same state in which LESSEE received it, reasonable wear and tear;#xcepted. 8 :: X The LESSEE may remove the installations or improvements that it may have carried out on the Real Estate, which are not of a permanent nature, provided however, that upon removal thereof that the Real Estate is left in the same state in which it was received, with the exception of its normal wear and tear. 8.2. LESSEE's obligation to pay the rental amounts shall be in force until the LESSEE delivers to the LESSOR the Real Estate without any object that the LE9SEE may have on the Real Estate. The rental amounts shall accrue by complete months, according to the terms set forth in paragraph 13.3. hereof. SECTION 9 9.1. The LESSEE shall be authorized to install, inside or outside of the Real Estate, without inJury to the Real Estate, those signs which it considers necessary, with the understanding that they must be removed upon termination hereof and all damages caused thereby to the Real Estate must be repaired. 9.2. The LESSEE shall permit to the LESSOR the installment of signs in the Real Estate:to offer it on Lease, Sale, or any other for three months before the termination f this Agreement or its renewal. SECTION 10 fUTILITIES 10.1. The LESSEE shall on its own account enter into the corresponding utilities contracts for lighting or power, gas or water utilities and any other utility which may be required by ~t the LESSEE to carry out its activities within the Real Estate, all amounts charged thereof sh:ll be paid by the LESSEE. 10.2. Upon termination of this Agreement, the LESSEE shall cancel and pay all utilities contracts, as part of the termination obligations related to the deliver of the Real Estate, according to the terms set forth in Section 13 hereof and the rental amounts set forth in paragraph 8.2. shall accrue as long as the LESSEE does not comply with its obligations set forth herein. SECTIoN 11 LIABILITIES OF THE PARTIES 11.1 In conformance with applicable law, EQUIPOS guarantees to OPTRON the use and peacefui enjoyment of the Premises during the fll term of the contractF, and OPTRON covenants and agrees to use the Premises only for the purposes herein set forth and in accordance with the nature and intended usage of the Premises. The liabilities of EQUIPOS and of OPTRON, in each case, shall be ruled by the following provisions: ll.l.A. Each of-EQUIPOS or OPTRON, respectively, shall be liable for damages to the Premises caused by their own fault or negligence, or that of their agents, employees or visitors, except for losses commonly insurable by fire insurance with extended coverage endorsement. ll.l.B. If the Premises are damaged or destroyed by any act of God or force majeure, upon OPTRON's written request, EQUIPOS shall have the option to restore the Premises 10 - - - with the insurance proceeds referred to below and put them in proper condition within 6 (six) months for OPTRON to use for the purposes agreed on in this contract. However, if EQUIPOS elects not the rebuild, this lease shall terminate without any further responsibility to the parties. ll.l.C. If the damage is attributable to the fault or misconduct of OPTRON, or its agents, employees or visitors, OPTRON shall be liable to EQUIPOS for all damages caused to the Premises and shall indemnify EQUIPOS for all cost to leave the Premises as they were before the damage occurred. ll.l.D. The responsibilities of the parties referred to in the foregoing paragraphs of this clause shall be subject to the provisions of Clause Twelve of this contract. SECTIoN 12 INSURANCE 12.1. The LESSEE agrees to obtain and pay for, as long as this Agreement is in full force, or allow the LESSOR to obtain them and LESSEE shall pay all costs thereof, the following insurance: The required insurance during the term of this lease shall be against any loss or damage by fire and against any loss or damage by lighting, explosion, hurricane and hail, airplanes, vehicles and smoke, earthquake and/or volcanic eruption, strikes, riots and vandalism and any other risks now or hereafter embraced by so called "Extended Coverage" (including glass insurance), in 11 ~ a m o u n t s s u f f i c i e n t t o p r e v e n t E Q U I P O S o r O P T R O N f r o m b e c o m i n g a c o - i n s u r e r u n d e r t h e t e r m s o f t h e a p p l i c a b l e p o l i c i e s , b u t i n a n y e v e n t i n a n a m o u n t e q u a l t o o n e h u n d r e d p e r c e n t o f t h e t h e n " f u l l i n s u r a b l e v a l u e " ( r e p l a c e m e n t v a l u e ) , w h i c h f o r t h e p u r p o s e o f t h i s C l a u s e s h a l l b e d e e m e d t o b e t h e c o s t o f r e p l a c i n g t h e P r e m i s e s l e s s t h e c o s t o f e x c a v a t i o n s , f o u n d a t i o n s a n d f o o t i n g s a n d w i t h o u t a n y d e d u c t i o n s f o r p h y s i c a l d e p r e c i a t i o n o f t h e P r e m i s e s . S u c h " f u l l i n s u r a b l e v a l u e " s h a l l b e d e t e r m i n e d f r o m t i m e t o t i m e , b u t n o t m o r e f r e q u e n t l y t h a n o n c e i n a n y t w e l v e c a l e n d a r m o n t h s , f o l l o w i n g t h e b e l o w m e n t i o n e d p r o c e d u r e : 1 2 . 1 . A . B y m e a n s o f a n a p p r a i s a l t o e p e r f o r m e d b y a c e r t i f i e d a p p r a i s e r f o r i n s u r a n c e p u r p o s e s , d e s i g n a t e d a n d a p p r o v e d i n w r i t i n g b y E Q U I P O S ( s u c h a p p r o v a l n o t t o b e u n r e a s o n a b l y w i t h h e l d ) , w h i c h a p p r a i s a l s h a l l b e p a i d b y O P T R O N . 1 2 . 2 . A s p e r t h e p r o v i s i o n s o f t h e p r e c e d i n g p a r a g r a p h , O P T R O N s h a l l a l s o i m m e d i a t e l y c o n t r a c t f o r t h e b e n e f i t o f E Q U I P O S t h e f o l l o w i n g i n s u r a n c e c o v e r a g e : 1 2 . 2 . A . G e n e r a l p u b l i c l i a b i l i t y i n s u r a n c e , c o v e r i n g c l a i m s f o r i n j u r y , d e a t h o r p r o p e r t y d a m a g e o c c u r r i n g o n o r a b o u t t h e P r e m i s e s i n t h e a m o u n t o f n o t l e s s t h a n $ 5 0 0 , 0 0 0 . 0 0 ( F i v e H u n d r e d T h o u s a n d a n d n o / 1 0 0 D o l l a r s ) c u r r e n c y o f t h e U n i t e d S t a t e s o f A m e r i c a , f o r p e r s o n a l i n j u r y o r d e a t h a n d f o f n o t l e s s t h a n 5 5 0 0 , 0 0 0 . 0 0 ( F i v e 1 2 ~ ~ i Hundred Thousand and no/100 Doll ars) currency of the United States of America for prop erty damage. 12.2 .B.Insurance against loss or damage by boiler (or compressor), malfunction or by i nternal explosion by boiler (or compressor), for any high pressure boil er (or compressor) installed in the Premises whic h is part of the Premises, in such limits as EQUIPOS, from time to time, reas onably requires. 12.2.C.Rental interruption insurance which covers the rental payments which the LESS OR ceases to receive EX-11 6 Computation of Per Share Earnings Exhibit 11.1 October 31, October 25, October 27, 1997 1996 1995 Adjusted Shares Outstanding Weighted average common shares outstanding 4,192,530 3,767,083 3,318,649 Warrants 3,352,968 3,383,800 3,404,801 Stock Options 625,656 795,759 967,461 Total common shares and common share equivalents 8,171,154 7,946,642 7,690,911 20% common stock limitation (493,912) (319,728) (663,730) Adjusted weighted average shares outstanding 7,677,242 7,626,914 7,027,181 Adjusted Net Earnings Net earnings $11,502,000 $12,895,000 $9,838,000 Adjustment for 20% common stock limitation - - 27,000 Adjusted earnings for computation of earnings per share $11,502,000 $12,895,000 $9,865,000 Earnings Per Share Adjusted earnings for computation of earnings per share $11,502,000 $12,895,000 $9,865,000 Adjusted weighted average shares outstanding 7,677,242 7,626,914 7,027,181 Earnings per common share $1.50 $1.69 $1.40 NOTES: Primary earnings per share and fully diluted earnings per share were substantially the same in all periods presented. The modified treasury stock method is used to calculate net earnings per common share. The calculation uses the weighted average number of common shares outstanding and, when fully dilutive, common equivalent shares outstanding (warrants and stock options). Under the method, all warrants and options are assumed to be exercised and up to 20% of common shares outstanding are assumed to be repurchased. The remaining proceeds, if any, are then assumed to be used to reduce debt and the resulting reduction in interest expense is added back to net earnings for calculation of earnings per share. 1 EX-22 7 Subsidiaries of the Registrant Optek Technology, Inc. (Texas) OTX Corporation (Texas) Semiconductores Opticos, S.A. de C.V. (Mexico) Optron de Mexico, S.A. de C.V. (Mexico) EX-23 8 INDEPENDENT AUDITORS CONSENT The Board of Directors Optek Technology, Inc.: We consent to incorporation by reference in the registration statements (No. 33-60656, 33-18555 and 333-419) on Form S-8 of Optek Technology, Inc. of our reports dated December 16, 1997, relating to the consolidated balance sheets of Optek Technology, Inc. and subsidiaries as of October 31, 1997 and October 25, 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended October 31, 1997, and the related schedule which reports appear in the October 31, 1997 annual report on Form 10-K of Optek Technology, Inc. KPMG Peat Marwick LLP Dallas, Texas January 26, 1998 EX-99 9 January 26, 1998 The Board of Directors and Stockholders Optek Technology, Inc.: Under date of December 16, 1997, we reported on the consolidated balance sheets of Optek Technology, Inc. and subsidiaries as of October 31, 1997 and October 25, 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended October 31, 1997, which are included in the Annual Report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule in the Annual Report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an option on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Dallas, Texas December 16, 1997 Schedule II OPTEK TECHNOLOGY, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts (in thousands) Description Balance at Additions charged Deductions Balance at beginning to costs and end of year of year and expenses Write-off Year ended October 31, 1997 Allowance for doubtful accounts and customer returns 1,095 1,331 (774) 1,653 Reserve for excess and obsolete inventory 1,806 421 (72) 2,155 Year ended October 25, 1996 Allowance for doubtful accounts And customer returns 975 641 (521) 1,095 Reserve for excess and obsolete inventory 2,453 (151) (496) 1,806 Year ended October 25, 1995 Allowance for doubtful accounts and customer returns 738 785 (548) 975 Reserve for excess and obsolete inventory 3,030 63 (640) 2,453 -----END PRIVACY-ENHANCED MESSAGE-----