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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the fiscal year ended May 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For the transition period from __________ to ___________
Commission File No. 1-14187
RPM, INC.
(Exact Name of Registrant as Specified in its Charter)
Ohio 34-6550857
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
P.O. Box 777, 2628 Pearl Road, Medina, Ohio 44258
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (330) 273-5090
Securities registered pursuant to Section 12(b) of the Act:
Common Shares, Without Par Value
--------------------------------
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
None
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 the
filing requirements for the past 90 days. Yes x No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of August 20, 1999, 109,485,957 Common Shares were outstanding, and
the aggregate market value of the Common Shares of the Registrant held by
non-affiliates (based upon the closing price of the Common Shares as reported on
the New York Stock Exchange on August 20, 1999) was approximately
$1,477,463,322. For purposes of this information, the 3,002,114 outstanding
Common Shares which were owned beneficially as of August 20, 1999 by executive
officers and Directors of the Registrant were deemed to be the Common Shares
held by affiliates.
Documents Incorporated by Reference
Portions of the following documents are incorporated by reference to
Parts II, III and IV of this Annual Report on Form 10-K: (i) definitive Proxy
Statement to be used in connection with the Registrant's Annual Meeting of
Shareholders to be held on October 8, 1999 (the "1999 Proxy Statement") and (ii)
the Registrant's 1999 Annual Report to Shareholders for the fiscal year ended
May 31, 1999 (the "1999 Annual Report to Shareholders").
Except as otherwise stated, the information contained in this Annual
Report on Form 10-K is as of May 31, 1999.
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PART I
ITEM 1. BUSINESS.
THE COMPANY
RPM, Inc. ("RPM" or the "Company") was organized in 1947 as an Ohio
corporation under the name Republic Powdered Metals, Inc. On November 9, 1971,
the Company's name was changed to RPM, Inc. As used herein, the terms "RPM" and
the "Company" refer to RPM, Inc. and its subsidiaries, unless the context
indicates otherwise. The Company has its principal executive offices at 2628
Pearl Road, P.O. Box 777, Medina, Ohio 44258, and its telephone number is (330)
273-5090.
RECENT DEVELOPMENTS
On April 28, 1999, the Company's Board of Directors (the "Board")
adopted a Rights Agreement (the "Rights Plan") that provided for rights to be
issued to shareholders of record on May 11, 1999. Under the Rights Plan, the
rights will initially trade together with RPM Common Shares and will not be
exercisable. In the absence of further action by the Board, the rights generally
will become exercisable and allow the holder to acquire RPM Common Shares at a
discounted price if a person or group acquires 15 percent or more of the
outstanding Common Shares of RPM. Rights held by persons who exceed the
applicable threshold will be void. Under certain circumstances, the rights will
entitle the holder to buy shares in an acquiring entity at a discounted price.
On August 9, 1999, the Company announced the implementation of a
restructuring and consolidation program. Under the program, operating companies
in the Company's Industrial and Consumer Divisions will be realigned to foster
synergies with respect to technology, manufacturing needs, channels of
distribution and customer bases, and to generate manufacturing and distribution
efficiencies. In addition, the Company expects to close a number of facilities,
reduce its workforce approximately 10%, and has implemented changes to its
corporate management team. The Company expects that the program will result in a
$45 million pre-tax charge to earnings for the August 31 first quarter of fiscal
2000.
ACQUISITIONS
Since RPM's offering of Common Shares to the public in September 1969,
the Company has made a number of significant acquisitions that have been
described in previous reports on file with the Securities and Exchange
Commission. RPM's acquisition strategy focuses on companies with high
performance and quality products which are leaders in their respective markets.
RPM expects to continue its acquisition program, although there is no assurance
that any acquisitions will be made.
As part of this acquisition program, on August 3, 1999, the Company
acquired all of the issued and outstanding shares of DAP Products Inc. and DAP
Canada Corp. DAP is a North American manufacturer and marketer of caulks and
sealants, spackling and glazing compounds, contact cements and other specialty
adhesives. Brand names acquired as a result of this transaction include DAP,
Alex Plus, Kwik Seal, Durabond and Weldwood.
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BUSINESS
RPM manufactures and markets protective coatings for use in both
industrial and consumer applications. As of August 20, 1999, RPM markets its
products in approximately 130 countries and operates manufacturing facilities in
72 locations in the United States, Argentina, Belgium, Brazil, Canada, China,
England, Germany, Malaysia, The Netherlands, Poland, Singapore, South Africa and
the United Arab Emirates.
OPERATING SEGMENT INFORMATION
The Company is organized into two operating segments according to the
primary markets served by RPM: the Industrial Division and the Consumer
Division. Reference is made to "Operating Segment Information" on pages 20
through 21 of the Annual Report to Shareholders, which is incorporated herein by
reference, for financial information relating to operating segments.
INDUSTRIAL PRODUCTS
RPM manufactures and markets coatings for various industrial
applications including waterproofing, general maintenance, flooring systems and
coatings, corrosion control, and other specialty chemical applications. RPM's
industrial products represented approximately 61% of the Company's sales for the
fiscal year ended May 31, 1999. In connection with the Company's recently
announced restructuring and consolidation program, the Company's Industrial
Division has been realigned into three product line groups: StonCor Group,
Tremco Group and RPM II Group.
The Company's Tremco Group manufactures a number of products designed
for waterproofing and general maintenance applications. These waterproofing
products include sealants, deck coatings, membranes and water-based coatings for
commercial and industrial maintenance marketed under the Company's Tremco,
Vulken, DYmeric and Monile brands. The Tremco Group also manufactures a variety
of products used for general commercial and industrial maintenance. These
products include roofing products, such as asphaltic aluminum roof deck coating
produced by RPM's original business unit, Republic Powdered Metals, Geoflex and
Hy-Shield premium single-ply roofing materials and Tremco roofing systems, as
well as the Euco line of concrete and masonry additives, coatings and repair
products manufactured by The Euclid Chemical Company.
The newly created StonCor Group combines the Company's expertise in
corrosion control coatings and industrial polymer flooring in order to
capitalize on the fact that these product lines are sold to similar specifying
customers. The group's product lines include high-performance polymer floors,
linings and wall systems produced by Stonhard and molded and pultruded
fiberglass reinforced plastic grating products manufactured by the Company's
Fibergrate Composite Structures unit under the brand names of Chemgrate and
Fibergrate. The StonCor industrial product line also includes a broad-line of
high-performance corrosion control coatings marketed primarily under the
Carboline and Plasite brands. Carboline manufactures high-performance
corrosion-resistant protective coatings, fireproofing, tank linings and floor
coatings, and markets these products to industrial, architectural and applicator
companies throughout the world.
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The Company's newly created RPM II Group consists of the remaining
industrial product lines and is also the entity that will specialize in the
evaluation and acquisition of smaller entrepreneurial industrial coatings
companies. Product lines currently contained in RPM II include Dryvit coatings
and adhesives for exterior insulating finishing systems and TCI powder coatings
for exterior and interior operations. RPM II also produces a variety of
specialty chemical products within selected niche markets. Products manufactured
for specialty chemical applications include: Day-Glo Color and Radiant Color
fluorescent colorants and pigments; Kop-Coat manufactured compounds and wood
treatment products including Wolman industrial lumber treatments; American
Emulsions dye additives for textile dyeing and finishing; and Chemspec
commercial carpet cleaning solutions.
CONSUMER PRODUCTS
For consumer applications, RPM manufactures do-it-yourself products for
the home maintenance, automotive repair, marine applications and hobby and
leisure items. RPM's consumer do-it-yourself products are marketed through
thousands of mass merchandise, home center and hardware stores throughout North
America. RPM's consumer products represented approximately 39% of the Company's
sales for the fiscal year ended May 31, 1999. The major product line groupings
comprising RPM's Consumer Division include: the Rust-Oleum Group, Zinsser Group,
Wood Finishes Group, Bondo/Petit, Woolsey/Z-Spar Group, DAP/Bondex Group and
Testor Hobby and Leisure Group.
Rust-Oleum manufactures high quality corrosion-resistant, general
purpose, decorative coatings and assorted specialty products for the household
maintenance and light industrial markets. In addition to Rust-Oleum's original
rust preventative coatings, Rust-Oleum markets a full line of small-package
general purpose coatings under the "Painter's Touch by Rust-Oleum" brand name as
well as "American Accents by Rust-Oleum" decorative coatings.
The Company's Zinsser Group manufactures a broad line of specialty
primers and sealants marketed under the B-I-N, Bulls Eye 1-2-3 and Cover Stain
brand names, as well as wallcovering removal and preparation coatings under the
principal brands of DIF, Paper Tiger and Shieldz. Zinsser is also a leader in
mildew removal and resistance, and is the nation's leading producer of shellac
items used as pharmaceutical glazes, confectioner's glazes, citrus fruit
coatings and wood coatings. The Zinsser Group also includes RPM's Wolman deck
coatings, sealants and brighteners and the Richard E. Thibaut line of
do-it-yourself wallcoverings.
The Company's DAP/Bondex Group markets a nationwide line of
do-it-yourself household patch and repair products, including latex and silicone
caulks and sealants, spackling compounds, putty, glazing compounds, textured
ceiling paints, adhesives, basement waterproofing products, wood repair products
and other specialized materials for the home improvement market. In addition to
the DAP and Bondex brands, other leading brands within the group include Alex
Plus, Kwik Seal, Durabond, Weldwood, Woodlife and Plastic Wood.
The Company's Wood Finishes Group includes Mohawk, Star, Chemical
Coatings and Westfield Coatings furniture finishes and repair and restoration
coatings, as well as Flecto interior stains and finishes, marketed under the
Varathane and Watco labels.
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The Company's newly created Bondo/Pettit, Woolsey/Z-Spar Group contains
the Company's automotive aftermarket and pleasure marine products. Bondo
manufactures a variety of auto body paints and repair products for the
automotive aftermarket, including spray paints, body fillers, vinyl colors and
bumper repair products. The Company's line of pleasure marine coatings are
marketed under the Pettit, Woolsey and Z-Spar brand names.
The Company manufactures products for the hobby and leisure markets
including Testor's model kits and accessory products, Aztek brand model kits and
airbrushes and Floquil/Polly S Color hobby, art and craft coatings. RPM's
consumer hobby and leisure products are marketed through thousands of mass
merchandise, toy and hobby stores throughout North America.
FOREIGN OPERATIONS
The Company's foreign manufacturing operations for the fiscal year
ended May 31, 1999 accounted for approximately 23% of its total sales (which
does not include exports directly from the United States), although it also
receives license fees and royalty income from numerous license agreements and
also has joint ventures accounted for under the equity method in various foreign
countries. The Company has manufacturing facilities in Argentina, Belgium,
Brazil, Canada, China, England, Germany, Malaysia, The Netherlands, Poland,
Singapore, South Africa, and the United Arab Emirates, and sales offices or
public warehouse facilities in Australia, Canada, England, Finland, France,
Germany, Hong Kong, Iberia, Mexico, the Philippines, Russia, Singapore, Sweden
and several other countries. Information concerning the Company's foreign
operations is set forth in Management's Discussion and Analysis of Results of
Operations and Financial Condition, which appears elsewhere in this Annual
Report on Form 10-K.
COMPETITION
The Company is engaged in a highly competitive industry and, with
respect to all of its major products, faces competition from local and national
firms. Several of the companies with which RPM competes have greater financial
resources and sales organizations than the Company. While no accurate figures
are available with respect to the size of or the Company's position in the
market for any particular product, management believes that the Company is a
major producer of aluminum coatings, cement-based paint, hobby paints, pleasure
marine coatings, furniture finishing repair products, automotive repair
products, industrial corrosion control products, consumer rust-preventative
coatings, polymer flooring, fluorescent coatings and pigments, exterior
insulation finish systems, molded and pultruded fiberglass reinforced plastic
grating and shellac-based coatings. However, the Company does not believe that
it has a significant share of the total protective coatings market.
INTELLECTUAL PROPERTY
The intellectual property portfolios of the subsidiaries of the Company
include numerous valuable patents, trade secrets and know-how, trademarks and
trade names. Significant research and technology development continues to be
conducted by the subsidiaries. However, no single patent, trademark, name or
license, or group of these rights, other than the marks Day-Glo(R),
Rust-Oleum(R), Carboline(R) and Tremco(R), are material to the Company's
business.
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Day-Glo Color Corp., a subsidiary of the Company, is the owner of over
50 trademark registrations of the mark and name "DAY-GLO(R)" in numerous
countries and the United States for a variety of fluorescent products. There are
also many other foreign and domestic registrations for other trademarks of the
Day-Glo Color Corp., for a total of over 100 registrations. These registrations
are valid for a variety of terms ranging from one year to 20 years, which terms
are renewable as long as the marks continue to be used. Renewal of these
registrations is done on a regular basis.
Rust-Oleum Corporation, a subsidiary of the Company, is the owner of
over 50 United States trademark registrations for the mark and name
"RUST-OLEUM(R)" and other trademarks covering a variety of rust-preventative
coatings sold by Rust-Oleum Corporation. There are also many foreign
registrations for "RUST-OLEUM(R)" and the other trademarks of Rust-Oleum
Corporation, for a total of nearly 400 registrations. These registrations are
valid for a variety of terms ranging from one year to 20 years, which terms are
renewable for as long as the marks continue to be used. Renewal of these
registrations is done on a regular basis.
Carboline Company, a subsidiary of the Company, is the owner of a
United States trademark registration for the mark and name "CARBOLINE(R)."
Carboline Company is also the owner of several other United States registrations
for other trademarks. Renewal of these registrations is done on a regular basis.
Tremco Incorporated, a subsidiary of the Company, which was acquired in
February 1997, is the owner of over 100 registrations for the mark and name
"TREMCO(R)" in numerous countries and the United States for a variety of
sealants and coating products. There are also many other foreign and domestic
registrations for other trademarks of Tremco Incorporated, for a total of over
600 registrations and applications. The registrations are valid for a variety of
terms ranging from one year to 20 years, which terms are renewable as long as
the marks continue to be used. Renewal of the registration is done on a regular
basis.
The Company's other valuable product trademarks also include: ALOX(R),
ALUMANATION(R), AVALON(R), B-I-N(R), BITUMASTIC(R), BONDO(R), BONDEX(R), BULLS
EYE(R), CHEMGRATE(R), DRYVIT(R), DYMERIC(R), DYNALITE(R), DYNATRON(R), EASY
FINISH(R), FLECTO(R), EPOXSTEEL(R), FIBERGRATE(R), FLOQUIL(R), GEOFLEX(R),
LUBRASPIN(TM), MAR-HYDE(R), MOHAWK and DESIGN(R), OUTSULATION(R), PARASEAL(R),
PERMAROOF(R), PETTIT(TM), PLASITE(R), SANITILE(R), STONCLAD(R), STONHARD(R),
STONLUX(R), TALSOL(R), TCI(TM), TESTORS(R), ULTRALITE(TM), VARATHANE(R),
VULKEM(R), WOOLSEY(R), ZINSSER(R) and Z-SPAR(R); and, in Europe, NULLIFIRE(R),
RADGLO(R) and MARTIN MATHYS(R).
RAW MATERIALS
The Company does not have any single source suppliers of raw materials
that are material to its business, and the Company believes that alternate
sources of supply of raw materials are available to the Company for most of its
raw materials. Where shortages of raw materials have occurred, the Company has
been able to reformulate products to use more readily available raw materials.
Although the Company has been able to reformulate products to use more readily
available raw materials in the past, there can be no assurance as to the
Company's ability to do so in the future.
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SEASONAL FACTORS
The Company's business is seasonal due to outside weather factors. The
Company historically experiences strong sales and income in its first, second
and fourth fiscal quarters comprised of the three month periods ending August
31, November 30 and May 31, respectively, with weaker performance in its third
fiscal quarter (December through February).
CUSTOMERS
No one customer accounted for 10% or more of the Company's total sales.
The Company's business is not dependent upon any one customer or small group of
customers and is dispersed over thousands of customers.
BACKLOG
The Company historically has not had a significant backlog of orders,
nor was there a significant backlog during the last fiscal year.
RESEARCH
The Company's research and development work is performed in various
laboratory locations throughout the United States. During fiscal years 1999,
1998 and 1997, the Company invested approximately $18.0 million, $15.8 million
and $14.6 million, respectively, on research and development activities. The
customer sponsored portion of such expenditures was not significant.
ENVIRONMENTAL MATTERS
Several of the Company's subsidiaries are involved in various
environmental claims or proceedings relating to facilities currently or
previously owned, operated or used by such subsidiaries, or their predecessors.
In addition, the Company or its subsidiaries, together with other parties, have
been designated as potentially responsible parties ("PRPs") under federal and
state environmental laws for the remediation of hazardous waste at certain
disposal sites (see ITEM 3. LEGAL PROCEEDINGS). In connection with its
evaluation of these PRP sites, the Company's management takes into consideration
the input of outside legal counsel, the number of parties involved at the site,
joint and several liability of other PRPs, and the level of volumetric
contribution which may be attributed to the Company relative to that
attributable to other parties at such sites. Based on the above analysis,
management then assesses, to the extent possible, the estimated restoration or
other clean-up costs and related claims for each site.
The Company's environmental-related accruals are established and/or
adjusted as information becomes available upon which more accurate costs can be
reasonably estimated. Actual costs may vary from these estimates due to the
inherent uncertainties involved. In management's opinion, based upon information
presently available, the outcome of these environmental matters will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
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EMPLOYEES
As of May 31, 1999, the Company employed 7,537 persons, of whom 859
were represented by unions under contracts which expire at varying times in the
future. The Company believes that its relations with its employees are good.
ITEM 2. PROPERTIES.
The Company's corporate headquarters and a plant and offices for one
subsidiary are located on an 119-acre site in Medina, Ohio, which is owned by
the Company. As of August 3, 1999, the Company's operations occupy a total of
approximately 7.1 million square feet, with the majority, approximately 5.8
million square feet, devoted to manufacturing, assembly and storage. Of the
approximately 7.1 million square feet occupied, 6.0 million square feet are
owned and 1.1 million square feet are occupied under operating leases. The
Company's facilities of 200,000 square feet or larger, as of August 3, 1999, are
as set forth below.
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE FEET
TYPE OF OF LEASED OR
LOCATION FACILITY FLOOR SPACE OWNED
-------- -------- ----------- -----
<S> <C> <C> <C>
Pleasant Prairie, Wisconsin Manufacturing and 240,000 Owned
Warehouse (Rust-Oleum
Corporation)
Toronto, Canada Manufacturing 207,000 Owned
and Office (Tremco
Incorporated)
</TABLE>
For information concerning the Company's rental obligations, see Note E
(Leases) of Notes to Consolidated Financial Statements, which appear elsewhere
in this Annual Report on Form 10-K. Under all of its leases, the Company is
obligated to pay certain varying insurance costs, utilities, real property taxes
and other costs and expenses.
The Company believes that its manufacturing plants and office
facilities are well maintained and suitable for the operations of the Company.
ITEM 3. LEGAL PROCEEDINGS.
Bondex.
As previously reported, Bondex International, Inc., a wholly-owned
subsidiary of the Company ("Bondex"), was one of numerous corporate defendants
in 395 then pending asbestos-related bodily injury lawsuits filed on behalf of
various individual in various jurisdictions of the United States. Subsequently,
an additional 208 such cases have been filed and 132 such cases which had been
filed were dismissed with prejudice without payment pursuant to summary judgment
or stipulation of the parties, leaving a total of 471 such cases pending. Bondex
continues to deny liability in all asbestos-related lawsuits and continues to
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vigorously defend them. Under a cost-sharing agreement among Bondex and its
insurers, the insurers are responsible for payment of a substantial portion of
defense costs and indemnity payments, if any, with Bondex responsible for the
balance. The Company believes that the ultimate resolution of the matters will
not have a material adverse effect on the Company's financial position or
results of operations.
Carboline.
As previously reported, Carboline Company, a wholly-owned subsidiary of
the Company ("Carboline") has been named as one of 30 corporate defendants in
Rufino O. Cavazos, et al., vs. Ceilcote Company, et al.("ROC"), Cause No.
89-CI-12651, in the 73rd Judicial District Court of Bexar County, Texas, filed
in March 1990, and in similar suits subsequently filed on behalf of individuals
(and, where applicable, their spouses and children) employed at the Comanche
Peak Nuclear Plant and the South Texas Nuclear Plant. The workers contend they
were exposed to various solvents during their employment at the facilities,
allegedly resulting in respiratory and neurological ailments. ROC has been
reduced through voluntary dismissals and summary judgments to approximately 700
worker-Plaintiffs. A similar suit, Bernice O. Pierce, et al. v. Southern
Imperial Coatings Corp. et al. ("Pierce"), Case no. 96-CI-12756, in the Judicial
District Court of Bexar County, Texas, involves approximately 200
worker-Plaintiffs. Another case, Mary M. Gunn, et al. v. Carboline Company, et
al. ("Gunn"), Case No. 93-470, in the 4th Judicial District Court of Rusk
County, Texas, involves approximately 200 Plaintiffs. All three (3) cases are in
the discovery phase. ROC and Pierce have been the subject of several recent
motions for summary judgment which have decreased significantly the number of
Plaintiffs involved. None of the cases are set for trial at this time. Carboline
has denied all liability in these cases and is conducting a vigorous defense.
Several of Carboline's insurance carriers, and Carboline, are defending the
lawsuits under a cost-sharing agreement. The Company believes that the ultimate
resolution of ROC, Gunn and Pierce will not have a material adverse effect on
the Company's financial position or results of operations.
As previously reported, Carboline is a defendant in La Gloria Oil & Gas
Company vs. Carboline Company, et al., Cause No. 95-959-C, in the 241st Judicial
District Court of Smith County, Texas. The suit involves allegations by LaGloria
Oil and Gas Company ("LaGloria"), the owner/operator of a refinery in Tyler,
Texas, that Carboline's Pyrocrete 102 as applied to LaGloria's structural steel
and vessel skirts is defective. LaGloria contends the Pyrocrete is excessively
corrosive to steel, and has resulted in millions of dollars of damage to the
steel at the refinery. The court previously granted Carboline a summary
judgment, based upon the applicable statutes of limitation, on several causes of
action. On August 21, 1999, a jury returned a defense verdict in favor of
Carboline dismissing LaGloria's remaining claims for fraud and violation of the
Texas Deceptive Trade Practices Act, Texas Business & Commerce Code Section
17.46, et seq., based on statute of limitations. La Gloria is expected to appeal
the jury verdict and Carboline will continue to vigorously defend the case.
Although there has been diminishment of insurance policy limits available to
Carboline as a result of a prior settlement, the Company believes that the
ultimate resolution of the LaGloria case will not have a material adverse effect
on the Company's financial position or results of operations.
Mac-O-Lac.
As previously reported, the Company has been identified as a
Potentially Responsible Party ("PRP") under CERCLA in connection with the Rose
Township Dump Site,
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Rose Township, Michigan (the "Rose Township Site") and the Springfield Township
Dump Site, Springfield Township, Michigan (the "Springfield Site") as a
consequence of the disposal of waste originating at Mac-O-Lac Paints, Inc., a
former subsidiary of the Company whose assets were sold in February 1982. With
respect to the Rose Township Site, the Company and eleven other PRPs signed a
Consent Decree on July 18, 1989, pursuant to which the PRPs established a $9
million fund to cover costs of remediation. The Company's share, $300,000, has
been paid. With respect to the Springfield Site, the Company and other PRPs
executed in 1992 with the EPA and the Michigan Department of Natural Resources
Administrative Orders on Consent Regarding Selected Response Activities and for
Cost Recovery Settlement, In the Matter of: Springfield Township Site, No.
V-W-92-L-160 + V-W-92-C-146. Based on favorable changes in case law, the Company
withdrew from participation in the Springfield Township PRP Group in 1995. In
January 1999, the remaining members of the Springfield Township PRP Group
demanded that the Company reconsider its decision to withdraw from the PRP Group
and requested $158,000 in past remediation expenses from the Company. The
Company is not participating with the remaining Springfield Township PRPs at
this time. The Company will evaluate its potential liability after receipt of
further documentation from the remaining PRPs. The Company does not believe
either of these sites will have a material adverse effect on the Company's
financial position or results of operations.
Dryvit.
As previously reported, Dryvit Systems, Inc., a wholly-owned subsidiary
of the Company ("Dryvit"), is a defendant or co-defendant in numerous separate
but related lawsuits, some of which have sought to certify classes comprised of
owners of structures clad with exterior insulated finish systems ("EIFS")
products manufactured by Dryvit and other EIFS manufacturers. On September 18,
1996, the North Carolina Court presiding over one of the state court cases, Ruff
et al. v. Parex, Inc., et al., entered an order certifying a class of North
Carolina owners of single family or multi-family residential dwellings which had
EIFS installed during the period of 1969 to the present. Subsequent to that
ruling, Dryvit and other manufacturers filed a motion to bring a third-party
complaint against the builders of those dwellings to establish that any alleged
damage was the result of poor construction. The trial court denied that motion
but acknowledged that the manufacturers were being denied significant rights
since claims against builders for indemnity and/or contribution were possibly
being extinguished by the running of the statutes of repose and/or statute of
limitations. Dryvit and several other manufacturers appealed the trial court's
decision. On December 1, 1998, the Appellate Court reversed the Ruff trial
court's denial of the EIFS manufacturer's motion to bring a third-party
complaint against builders and others and remanded the case to the trial court
for further proceedings urging it to exercise its discretion and decide whether
or not to grant the manufacturer's motion to add third parties.
On remand, the Ruff trial court ruled on numerous motions filed by both
plaintiffs and defendants. In its June 1999 Order and Opinion, the trial court
denied defendants' motion to decertify the class and denied defendants' motion
to add third-party defendants to the class action. The trial court further
ordered that each defendant EIFS manufacturer will be afforded a separate trial
on liability and damages; that liability and damage issues will be bifurcated
for trial; and scheduled the first liability trial for October 4, 1999 against
Dryvit. The trial court held that plaintiffs should be permitted to proceed with
their class action with respect to only two liability issues: (a) whether
Dryvit's product was defectively designed; and (b) whether Dryvit
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had and subsequently breached a duty to warn homeowners of the hazards inherent
in use of its product.
Similar attempted class actions have been filed in Alabama, Georgia,
New Jersey, Illinois and Texas. Dryvit has also been recently named in an
attempted class action in North Carolina comprised of owners of structures clad
with an EIFS type product manufactured by Dryvit known as Fast Track 4000.
Dryvit intends to vigorously contest class certification and liability in all
cases. In addition, Dryvit and other parties (contractors, architects,
distributors, EIFS applicators, roofers, sealant suppliers, sealant contractors
and window manufacturers) have been named in approximately 350 pending homeowner
and commercial building lawsuits, most of which involve single family
residential structures. The majority of these suits have been filed in North
Carolina, Alabama and South Carolina by individual homeowners who either have
opted out of the Ruff class action or have filed complaints against their
builder, which then brings a third-party action against Dryvit. The Company
believes that the ultimate resolution of these cases will not have a material
adverse effect on the Company's financial position or results of operations.
Certain of Dryvit's insurers have paid or are currently paying a
portion of Dryvit's defense costs in the class actions, and individual
commercial building and homeowner lawsuits involving structures that were built
during or prior to their insurance coverage periods. In addition, these
insurance carriers have regularly funded settlement of the individual homeowner
and commercial building cases when appropriate. Two of Dryvit's primary
insurance carriers have reported that they have exhausted their policy limits
through the payment of settlements. In addition, Dryvit has settled with and
released two of its other primary insurers. As a result, Dryvit has sought
participation in the EIFS litigation from First Colonial Insurance Company, the
Company's wholly-owned captive insurance company ("First Colonial") and certain
umbrella insurance companies. Dryvit, First Colonial and one of Dryvit's
umbrella carriers have recently entered into two defense cost sharing agreements
to cover both the individual and class action cases. Dryvit's insurance carriers
have raised a number of coverage issues in reservation of rights letters, and
coverage litigation could resume in the event of a breach of the cost-sharing
agreements. Dryvit believes that the damages being sought by the plaintiffs in
the EIFS litigation are covered under existing insurance policies and that it
has adequate insurance coverage.
Mohawk and Westfield.
As previously reported, Mohawk Finishing Products, Inc. ("Mohawk") and
Westfield Coatings Corporation ("Westfield"), both wholly-owned subsidiaries of
the Company, were notified by the EPA of their status as PRPs under CERCLA with
respect to environmental contamination at the Solvents Recovery of New England
Site (the "SRS Site") located in Southington, Connecticut. To date, the EPA and
the State of Connecticut have expended in excess of $5 million in connection
with the SRS Site but the EPA has not yet selected final administrative orders
to perform non-time critical removal actions to contain contaminated water in
the aquifer at the SRS Site and to perform both the Remedial Investigation and
Feasibility Study. In January 1994, the EPA notified Westfield of its status as
a PRP at the Old Southington Landfill Superfund Site (the "Landfill") on the
basis that process wastes from the SRS Site were sent to the Landfill prior to
October 1967. In September 1994, the EPA issued a Record of Decision which
selected a source control remedy that consisted of installation of a cap on the
Landfill together with a gas collection system at an estimated cost of $16.1
million. The EPA
12
<PAGE> 13
has deferred to a second operable unit the issue of whether to actively
remediate groundwater at the Landfill, but is insisting that certain groundwater
studies be performed which will likely cost several million dollars. Westfield
recently entered into a consent decree with the United States and the State of
Connecticut which resolves Westfield's liability for the first operable unit.
Upon entry of the consent decree by the federal district court in Connecticut,
Westfield will be obligated to contribute $26,476.21 to settle its liability for
the first operable unit. It is expected that additional settlement discussions
between the PRPs and the United States and the State of Connecticut will
commence later in the summer in an effort to try to settle the remaining issues
at the Landfill. The Company believes that the ultimate resolution of the SRS
Site and the Landfill matters will not have a material adverse effect on the
Company's financial position or results of operations.
Rust-Oleum.
As previously reported in November 1979, the EPA commenced an action
captioned United States of America v. Midwest Solvent Recovery, Inc., et al.;
United States District Court for the Northern District of Indiana, Eastern
Division; Civil No. H-79-556, pertaining to pollution allegedly occurring at and
around real property located at 7400 West Fifteenth Street, Gary, Indiana
("MIDCO I") and 5900 Industrial Highway, Gary, Indiana ("MIDCO II")
(collectively, the "MIDCO Sites"). The Complaint was subsequently amended in
January 1984 to join Rust-Oleum Corporation, a wholly-owned subsidiary of the
Company ("Rust-Oleum"), and other entities as additional defendants. Rust-Oleum
is alleged to be associated with the MIDCO Sites as a consequence of disposal
waste originating at its former Evanston, Illinois plant in the mid-1970s. The
Court approved a Consent Decree in June 1992 under which Rust-Oleum entered into
a Settlement Agreement with the other settling PRPs for the voluntary cleanup of
the MIDCO Sites consistent with the EPA Record of Decision. All surface
hazardous wastes have been removed from the MIDCO Sites and cleanup is now in
the groundwater remediation stage. Remediation should be completed by the year
2002, with monitoring continuing for an undetermined period. Total remediation
and monitoring costs are currently estimated to be $35 million. Included in the
Consent Decree is an Agreement between the settling PRPs, including Rust-Oleum,
and third parties of their fair share of the MIDCO Sites remedial and response
costs. Third party funds have been placed into the MIDCO Trust Fund, which has
been created to fund the MIDCO Site remedial actions. Rust-Oleum, as a settling
PRP, has provided financial assurance for its share of the cleanup costs in the
form of a Letter of Credit. Based upon prior settlement agreements with
insurance carriers for potential costs and remediation liabilities in connection
with the MIDOC Sites, Rust-Oleum has established appropriate reserves to cover
such costs and liabilities. Accordingly, the Company believes that ultimate
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
13
<PAGE> 14
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT*.
The name, age and positions of each executive officer of the Company as
of August 20, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position and Offices with the Company
- ---- --- -------------------------------------
<S> <C> <C>
Thomas C. Sullivan 62 Chairman of the Board and Chief Executive Officer
James A. Karman 62 Vice Chairman
Frank C. Sullivan 38 President
John H. Morris, Jr. 57 Executive Vice President
David P. Reif III 46 Vice President and Chief Financial Officer
P. Kelly Tompkins 42 Vice President, General Counsel and Secretary
Charles P. Brush 63 Vice President - Environmental Affairs
Glenn R. Hasman 45 Vice President - Controller
Gordon M. Hyde 45 Vice President - Operations
Stephen J. Knoop 34 Vice President - Corporate Development
Ronald A. Rice 36 Vice President - Risk Management and Benefits
Keith R. Smiley 37 Vice President - Treasurer
</TABLE>
- -----------------------
* Included pursuant to Instruction 3 to Item 401(b) of Regulation S-K.
Thomas C. Sullivan has been Chairman of the Board and Chief Executive
Officer of the Company since October 1971. From June 1971 through September
1978, Mr. Sullivan served as President and, prior thereto, as Executive Vice
President of the Company. Mr. Sullivan's employment with the Company commenced
in 1961, and he has been a Director since 1963. Mr. Sullivan is employed as
Chairman and Chief Executive Officer under an employment agreement for a
three-year period ending May 31, 2002. Mr. Sullivan is the father of Frank C.
Sullivan, President of the Company.
James A. Karman was elected Vice Chairman on August 5, 1999. From
September 1978 to August 1999, he served as President and Chief Operating
Officer. From October 1982 to October 1993, Mr. Karman also was the Chief
Financial Officer of the Company. From October 1973 through September 1978, Mr.
Karman served as Executive Vice President, Secretary and Treasurer, and, prior
thereto, as Vice President-Finance and Treasurer of the Company. Mr. Karman's
employment with the Company commenced in 1963, and he has been a Director since
1963. Mr. Karman is employed as Vice Chairman under an employment agreement for
a three-year period ending May 31, 2002.
Frank C. Sullivan was elected President on August 5, 1999. From October
1995 to August 1999 he served as Executive Vice President, and was Chief
Financial Officer from October 1993 to August 1999. Mr. Sullivan served as a
Vice President from October 1991 to October 1995. Prior thereto, he served as
Director of Corporate Development of the Company from February 1989 to October
1991. Mr. Sullivan served as Regional Sales Manager, from February 1988 to
February 1989, and as a Technical Service Representative, from February 1987 to
February 1988, of AGR
14
<PAGE> 15
Company, an Ohio General Partnership formerly owned by the Company which was
merged into Tremco. Prior thereto, Mr. Sullivan was employed by First Union
National Bank from 1985 to 1986 and Harris Bank from 1983 to 1985. Mr. Sullivan
is employed as President under an employment agreement for a period ending July
31, 2000. Mr. Sullivan is the son of Thomas C. Sullivan, Chairman of the Board
and Chief Executive Officer of the Company.
John H. Morris has been Executive Vice President since January 1981.
Prior to that time, he was Corporate Vice President of the Company, having been
elected to that position in September 1977. Mr. Morris was elected a Director of
the Company in 1981. Mr. Morris has announced that he will take early retirement
from the Company on November 30, 1999.
David P. Reif III was elected Vice President and Chief Financial
Officer on August 5, 1999. He served as Vice President-Corporate Finance from
February 1998 to August 1999. From 1986 to February 1998, Mr. Reif served as
Chief Financial Officer of Stonhard, Inc., a wholly owned subsidiary of the
Company. From 1991 to February 1998, Mr. Reif also served as an Executive Vice
President of Stonhard. From 1978 to 1985, Mr. Reif was controller of Penn
Virginia Inc., and from 1975 to 1978, Mr. Reif was employed by KPMG Peat
Marwick. Mr. Reif is employed as Vice President and Chief Financial Officer
under an employment agreement for a period ending July 31, 2000.
P. Kelly Tompkins has served as Vice President, General Counsel and
Secretary since June 1998. From June 1996 to June 1998, Mr. Tompkins served as
Assistant General Counsel. From 1987 to 1995, Mr. Tompkins was employed by
Reliance Electric Company in various positions including Director of Corporate
Development, Director of Investor Relations and Senior Corporate Counsel. From
1985 to 1987, Mr. Tompkins was employed by Exxon Corporation. Mr. Tompkins is
employed as Vice President, General Counsel and Secretary under an employment
agreement for a period ending July 31, 2000.
Charles P. Brush has served as Vice President-Environmental Affairs of
the Company since October 1993. From June 1991 to October 1993, he served as the
Company's Director of Environmental & Regulatory Affairs. Prior thereto, from
1988 to June 1991, he served as Vice President-Environmental & Risk Management
of Kop-Coat, Inc., a wholly-owned subsidiary of the Company. Prior thereto, he
served as Vice President and Manager of Koppers Company, Inc.'s international
environmental consulting business. Mr. Brush is employed as Vice
President-Environmental Affairs under an employment agreement for a period
ending July 31, 2000.
Glenn R. Hasman was elected Vice President-Controller on August 5,
1999. He served as Vice President-Financial Operations from October 1993 to
August 1999. From July 1990 to October 1993, Mr. Hasman served as Controller.
From September 1982 through July 1990, Mr. Hasman served in a variety of
management capacities, most recently Vice President-Operations and Finance,
Chief Financial Officer and Treasurer, of Proko Industries, Inc., a former
wholly-owned subsidiary of the Company. From 1979 to 1982, Mr. Hasman served as
RPM's Director of Internal Audit and from 1976 to 1979 he was associated with
Ciulla, Smith & Dale, LLP, independent accountants. Mr. Hasman is employed as
Vice President-Controller under an employment agreement for a period ending July
31, 2000.
Gordon M. Hyde has served as Vice President-Operations of the Company
since April 1999. From August 1998 to April 1999, he served as Vice President -
Operations of the
15
<PAGE> 16
Company's Consumer Group. From October 1997 to August 1998, Mr. Hyde was a
self-employed management consultant. From July 1996 to October 1997, Mr. Hyde
was Vice President of Operations for Armor All Products, Inc. From October 1990
to July 1997, Mr. Hyde served as Vice President of Operations of Hi-Port, Inc.
Mr. Hyde also served as Plant Manager of Hi-Port, Inc. from January 1989 to
October 1996. Prior thereto, Mr. Hyde served in various capacities with Airco,
Kinark Corporation and Ford Motor Company. Mr. Hyde is employed as Vice
President-Operations under an employment agreement for a period ending July 31,
2000.
Stephen J. Knoop was elected Vice President-Corporate Development on
August 5, 1999. From June 1996 to August 1999, Mr. Knoop served as Director of
Corporate Development of the Company. From 1990 to May 1996, Mr. Knoop was an
associate at Calfee, Halter & Griswold LLP. Mr. Knoop is employed as Vice
President-Corporate Development under an employment agreement for a period
ending July 31, 2000.
Ronald A. Rice was elected Vice President-Risk Management and Benefits
and Assistant Secretary on August 5, 1999. From 1997 to August 1999, he served
as Director of Risk Management and Employee Benefits, and from 1995 to 1997 he
served as Director of Benefits. From 1985 to 1995, Mr. Rice served in various
capacities with the Wyatt Company, most recently he served as Senior Account
Manager from 1992 to 1995. Mr. Rice is employed as Vice President-Risk
Management and Benefits under an employment agreement for a period ending July
31, 2000.
Keith R. Smiley was elected Vice President on August 5, 1999, and has
served as Treasurer of the Company since February 1997. From October 1993 to
February 1997, he served as Controller of the Company. From January 1992 until
February 1997, Mr. Smiley also served as the Company's Internal Auditor. Prior
thereto, he was associated with Ciulla, Smith & Dale, LLP. Mr. Smiley is
employed as Vice President-Treasurer under an employment agreement for a period
ending July 31, 2000.
16
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
RPM Common Shares, without par value, began trading on the New York
Stock Exchange under the symbol RPM on June 9, 1998. Prior to June 9, 1998, RPM
Common Shares were traded on the Nasdaq National Market. The high and low sales
prices for the Common Shares, and the cash and stock dividends paid on the
Common Shares, for each quarter of the two most recent fiscal years is set forth
in the table below.
RANGE OF SALES PRICES AND DIVIDENDS PAID
Dividends Paid
Fiscal 1999 High Low Per Share
----------- ---- --- --------------
1st Quarter $17-5/8 $12-3/4 $0.1120
2nd Quarter 17 12-7/8 0.1175
3rd Quarter 16-1/2 12-7/8 0.1175
4th Quarter 14-15/16 12-5/8 0.1175
Dividends Paid
Fiscal 1998 High Low Per Share
----------- ---- --- --------------
1st Quarter $16-51/64 $14-3/32 $0.104
2nd Quarter 16-51/64 14-29/32 0.112
3rd Quarter 17-1/4 15 0.112
4th Quarter 18 15-11/16 0.112
- --------------------
Source: The Wall Street Journal
Cash dividends are payable quarterly, upon authorization of the Board
of Directors. Regular payment dates are approximately the 30th day of July,
October, January and April. RPM maintains a Dividend Reinvestment Plan whereby
cash dividends, and a maximum of an additional $5,000 per month, may be invested
in RPM Common Shares purchased in the open market at no commission cost to the
participant.
The number of holders of record of RPM Common Shares as of August 20,
1999 was approximately 47,517.
RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial data of
the Company for each of the five years during the period ended May 31, 1999. The
data was derived from the annual Consolidated Financial Statements of the
Company which have been audited by Ciulla, Smith & Dale, LLP, independent
accountants.
17
<PAGE> 18
FISCAL YEARS ENDED MAY 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(Amounts in thousands, except per share
and percentage data)
Net sales $1,712,154 $1,615,274 $1,350,537 $1,136,396 $1,030,736
Income before income taxes 159,597 149,556 135,728 119,886 108,492
Net income 94,546 87,837 78,315 68,929 62,616
Return on sales % 5.5% 5.4 5.8 6.1 6.1
Basic earnings per share 0.87 0.89 0.81 0.72 0.68
Diluted earnings per share 0.86 0.84 0.76 0.69 0.65
Shareholders' equity 742,876 567,337 493,398 445,915 350,469
Shareholders' equity per share 6.83 5.75 5.07 4.68 3.83
Return on shareholders' equity % 14.4% 16.6 16.7 17.3 18.8
Average shares outstanding 108,731 98,527 97,285 95,208 91,571
Cash dividends paid 50,446 43,474 39,746 35,597 31,259
Cash dividends per share 0.465 0.440 0.408 0.378 0.352
Retained earnings 359,011 314,911 270,465 231,896 199,527
Working capital 402,870 387,284 478,535 275,722 271,635
Total assets 1,737,236 1,685,917 1,633,228 1,155,076 965,523
Long-term debt 582,109 716,989 784,439 447,654 407,041
Depreciation and amortization 62,135 57,009 51,145 42,562 37,123
</TABLE>
- ---------------
Note: Acquisitions made by the Company during the periods presented may impact
comparability from year to year. See Note A(2) of Notes to Consolidated
Financial Statements, which appear elsewhere in this Annual Report on Form 10-K,
for information concerning acquisitions for fiscal years 1999, 1998 and 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by this item is set forth at pages 22 through
26 of the 1999 Annual Report to Shareholders, which information is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk from changes in interest rates
and foreign currency exchange rates since it funds its operations through
long-and short-term borrowings and denominates its business transactions in a
variety of foreign currencies. A summary of the Company's primary market risk
exposures is presented below.
Interest Rate Risk
The Company's primary interest rate risk exposure results from floating
rate debt including various revolving credit and other lines of credit. At May
31, 1999, approximately 72% of the Company's total long-term debt consisted of
floating rate debt. If interest rates were to increase 100 basis points (1%)
from May 31, 1999 rates, and assuming no changes in long-term debt from the May
31, 1999 levels, the additional annual expense would be approximately $4.2
million on a pre-tax basis. The Company currently does not hedge its exposure to
this floating rate interest rate risk.
18
<PAGE> 19
Foreign Currency Risk
The Company's foreign sales and results of operations are subject to
the impact of foreign currency fluctuations. As most of the Company's foreign
operations are in countries with fairly stable currencies, such as the United
Kingdom, Belgium and Canada, this effect has not been material. In addition,
foreign debt is denominated in the respective foreign currency, thereby
eliminating any related translation impact on earnings. If the dollar continues
to strengthen, the Company's foreign results of operations will be negatively
impacted, but the effect is not expected to be material. A 10% adverse change in
foreign currency exchange rates would not have resulted in a material impact on
the Company's net income for the fiscal year ended May 31, 1999. The Company
does not currently hedge against the risk of exchange rate fluctuations.
Euro Currency Conversion
On January 1, 1999, eleven of the fifteen members of the European Union
adopted a new European currency unit (the "Euro") as their common legal
currency. The participating countries' national currencies will remain legal
tender as denominations of the Euro from January 1, 1999 through January 1,
2002, and the exchange rates between the Euro and such national currency units
will be fixed. The Company has assessed the potential impact of the Euro
currency conversion on its operating results and financial condition. The impact
of pricing differences on country-to-country indebtedness is not expected to be
material. The Company converted its European operations to the Euro currency
basis effective June 1, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is set forth at pages 27 through
42 of the 1999 Annual Report to Shareholders, which information is incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item as to the Directors of the Company
appearing under the caption "Election of Directors" in the Company's 1999 Proxy
Statement is incorporated herein by reference. Information required by this item
as to the Executive Officers of the Company is included as Item 4A of Part I of
this Annual Report on Form 10-K as permitted by Instruction 3 to Item 401(b) of
Regulation S-K. Information required by Item 405 of Regulation S-K is set forth
in the 1999 Proxy Statement under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance," which information is incorporated herein by
reference.
19
<PAGE> 20
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is set forth in the 1999 Proxy
Statement under the heading "Executive Compensation," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is set forth in the 1999 Proxy
Statement under the heading "Share Ownership of Principal Holders and
Management," which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is set forth in the 1999 Proxy
Statement under the heading "Election of Directors," which information is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this 1999 Annual Report on
Form 10-K:
1. Financial Statements. The following consolidated financial
statements of the Company and its subsidiaries and the report of independent
auditors thereon, included in the 1999 Annual Report to Shareholders on pages 27
through 42, are incorporated by reference in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets -
May 31, 1999 and 1998
Consolidated Statements of Income -
years ended May 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders'
Equity - years ended May 31, 1999, 1998
and 1997
Consolidated Statements of Cash Flows -
years ended May 31, 1999, 1998 and 1997
Notes to Consolidated Financial
Statements (including Unaudited Quarterly
Financial Information)
2. Financial Statement Schedules. The following consolidated financial
statement schedule of the Company and its subsidiaries and the report of
independent auditors thereon are filed as part of this Annual Report on Form
10-K and should be read in conjunction with the
20
<PAGE> 21
consolidated financial statements of the Company and its subsidiaries included
in the 1999 Annual Report to Shareholders:
Schedule Page No.
-------- --------
Independent Auditors' Report S-1
Schedule II - Valuation and Qualifying S-2
Accounts and Reserves
All other schedules have been omitted because they are not applicable
or not required, or because the required information is included in the
consolidated financial statements or notes thereto.
3. Exhibits.
See the Index to Exhibits at page E-1 of this Annual Report on
Form 10-K.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K, dated April
28, 1999, during the fourth fiscal quarter, to report that its Board of
Directors had adopted a Shareholder Rights Plan.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RPM, INC.
Date: August 27, 1999 By: /s/ Thomas C. Sullivan
--------------------------
Thomas C. Sullivan
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature and Title
- -------------------
/s/ Thomas C. Sullivan Chairman of the Board of
- -------------------------- Directors and Chief Executive
Thomas C. Sullivan Officer (Principal Executive Officer)
/s/ James A. Karman Vice Chairman and a Director
- --------------------------
James A. Karman
/s/ Frank C. Sullivan President and a Director
- --------------------------
Frank C. Sullivan
/s/ David P. Reif III Vice President and Chief Financial Officer
- -------------------------- (Principal Financial Officer)
David P. Reif III
/s/ Glenn R. Hasman Vice President-Controller
- -------------------------- (Principal Accounting Officer)
Glenn R. Hasman
22
<PAGE> 23
/s/ Max D. Amstutz Director
- --------------------------
Max D. Amstutz
/s/ Edward B. Brandon Director
- --------------------------
Edward B. Brandon
/s/ Lorrie Gustin Director
- --------------------------
Lorrie Gustin
/s/ E. Bradley Jones Director
- --------------------------
E. Bradley Jones
/s/ Donald K. Miller Director
- --------------------------
Donald K. Miller
/s/ John H. Morris, Jr. Executive Vice President
- -------------------------- and a Director
John H. Morris, Jr.
/s/ Kevin O'Donnell Director
- --------------------------
Kevin O'Donnell
/s/ William A. Papenbrock Director
- --------------------------
William A. Papenbrock
/s/ Albert B. Ratner Director
- --------------------------
Albert B. Ratner
Date: August 27, 1999
23
<PAGE> 24
RPM, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Amended Articles of Incorporation, as amended, which is
incorporated herein by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended May 31,
1996.
3.2 Amended Code of Regulations, which is incorporated herein by
reference to Exhibit 3.2 to the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1996.
4.1 Specimen Certificate of Common Shares, without par value, of RPM,
Inc., which is incorporated herein by reference to Exhibit 4.1 to
the Company's Annual Report on Form 10-K for the fiscal year
ended May 31, 1998.
4.2 Specimen Note Certificate for 7.0% Senior Notes Due 2005, which
is incorporated herein by reference to Exhibit 4.3 to the
Company's Registration Statement on Form S-4 as filed with the
Commission on August 3, 1995.
4.3 Specimen Note Certificate of Liquid Asset Notes With Coupon
Exchange ("LANCEs(SM)") Due 2008, which is incorporated herein by
reference to Exhibit 4.3 to the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1998.
4.4 Rights Agreement by and between RPM, Inc. and Harris Trust and
Savings Bank dated as of April 28, 1999, which is incorporated
herein by reference to Exhibit 4.1 to the Company's Registration
Statement on Form 8-A as filed with the Commission on May 11,
1999.
4.5 Indenture, dated as of June 1, 1995, between RPM, Inc. and The
First National Bank of Chicago, as trustee, with respect to the
7.0% Senior Notes Due 2005, which is incorporated herein by
reference to Exhibit 4.5 to the Company's Registration Statement
on Form S-4 as filed with the Commission on August 3, 1995.
4.6 First Supplemental Indenture, dated as of March 5, 1998 to the
Indenture dated as of June 1, 1995, between RPM, Inc. and The
First National Bank of Chicago, as trustee, with respect to the
Liquid Asset Notes with Coupon Exchange ("LANCEs(SM)") due 2008,
which is incorporated herein by reference to Exhibit 4.6 to the
Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1998.
*10.1 Amended Employment Agreement, dated as of July 22, 1981, by and
between RPM, Inc. and Thomas C. Sullivan, Chairman of the Board
and Chief Executive Officer, which is incorporated herein by
reference to Exhibit 10.1 to the Company's Annual Report on Form
10-K for the fiscal year ended May 31, 1996.
E-1
<PAGE> 25
EXHIBIT NO. DESCRIPTION
----------- -----------
*10.1.1 Amendment to Amended Employment Agreement, dated as of August
5, 1999, by and between RPM, Inc. and Thomas C. Sullivan,
Chairman of the Board and Chief Executive Officer.
*10.2 Amended Employment Agreement, dated as of July 22, 1981, by and
between RPM, Inc. and James A. Karman, Vice Chairman, which is
incorporated herein by reference to Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended May 31,
1996.
*10.2.1 Amendment to Amended Employment Agreement, dated as of August
5, 1999, by and between RPM, Inc. and James A. Karman, Vice
Chairman.
*10.3 Employment Agreement, dated as of July 15, 1992, by and between
RPM, Inc. and Frank C. Sullivan, President, which is incorporated
herein by reference to Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended May 31, 1997.
*10.4 Form of Employment Agreement entered into by and between RPM,
Inc. and each of John H. Morris, Jr., Executive Vice President,
Kenneth M. Evans, Executive Vice President, P. Kelly Tompkins,
Vice President, General Counsel and Secretary, David P. Reif III,
Vice President and Chief Financial Officer, Charles P. Brush,
Vice President - Environmental Affairs, Gordon M. Hyde, Vice
President - Operations, Glenn R. Hasman, Vice President -
Controller, Stephen J. Knoop, Vice President - Corporate
Development, Ronald A. Rice, Vice President - Risk Management and
Benefits and Keith Smiley - Vice President - Treasurer, which is
incorporated herein by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the fiscal year ended May 31,
1996.
*10.4.1 Form of Amendments to Employment Agreements, dated as of
August 5, 1999, by and between RPM, Inc. and each of Frank C.
Sullivan, President, P. Kelly Tompkins, Vice President, General
Counsel and Secretary, David P. Reif III, Vice President and
Chief Financial Officer and Glenn R. Hasman, Vice President -
Controller.
*10.5 RPM, Inc. 1979 Stock Option Plan, as amended, and form of Stock
Option Agreements used in connection therewith, which is
incorporated herein by reference to Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the fiscal year ended May 31,
1996.
*10.6 RPM, Inc. 1989 Stock Option Plan, as amended, and form of Stock
Option Agreements to be used in connection therewith, which is
incorporated herein by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended May 31,
1996.
*10.7 RPM, Inc. 1996 Stock Option Plan, and form of Stock Option
Agreement to be used in connection therewith, which is
incorporated herein by reference to Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the fiscal year ended May 31,
1997.
E-2
<PAGE> 26
EXHIBIT NO. DESCRIPTION
----------- -----------
*10.7.1 Amendment No. 1 to RPM, Inc. 1996 Stock Option Plan, which is
incorporated herein by reference to Exhibit 10.7.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1998.
*10.8 RPM, Inc. Retirement Savings Trust and Plan, as amended, which
is incorporated herein by reference to Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1996.
*10.9 RPM, Inc. Benefit Restoration Plan, which is incorporated herein
by reference to Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1996.
*10.10 RPM, Inc. Board of Directors' Deferred Compensation Agreement,
as amended and restated.
*10.11 RPM, Inc. Deferred Compensation Plan for Key Employees.
*10.12 RPM, Inc. Incentive Compensation Plan, which is incorporated
herein by reference to Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the fiscal year ended May 31, 1996.
*10.13 RPM, Inc. 1997 Restricted Stock Plan, and Form of Acceptance
and Escrow Agreement to be used in connection therewith, which is
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
November 30, 1997.
*10.14 Form of Indemnification Agreement entered into by and between
the Company and each of its Directors and Executive Officers,
which is incorporated herein by reference to Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1996.
10.15 Credit Agreement, dated as of February 3, 1997, between the
Company, the Banks identified on the Signature Pages thereto,
National City Bank as Documentation Agent, and the Chase
Manhattan Bank as Administrative Agent, which is incorporated
herein by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended February 28,
1997.
11.1 Computation of Net Income per Common Share.
13.1 Financial Statements contained in 1999 Annual Report to
Shareholders.
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Certified Public Accountants.
27.1 Financial Data Schedule.
- ------------------------------
*Management contract or compensatory plan or arrangement identified
pursuant to Item 14(c) of this Form 10-K.
E-3
<PAGE> 27
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To The Board of Directors and
Shareholders
RPM, Inc. and Subsidiaries
Medina, Ohio
The audits referred to in our report to the Board of Directors and Shareholders
of RPM, Inc. and Subsidiaries dated July 6, 1999, relating to the consolidated
financial statements of RPM, Inc. and Subsidiaries included the audit of the
schedule listed under Item 14 of Form 10-K for each of the three years in the
period ended May 31, 1999. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based upon our audits.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ Ciulla Smith & Dale LLP
Ciulla, Smith & Dale, LLP
JULY 6, 1999
S-1
<PAGE> 28
RPM, INC. AND SUBSIDIARIES
--------------------------
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Schedule II
----------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
Additions
Charged To
Balance at Selling and Balance at
Beginning General and End
Of Period Administrative Acquisitions Deductions Of Period
Year Ended May 31, 1999 --------- -------------- ------------ ---------- ---------
- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 12,718 $ 6,205 $ 584 $ 5,259 (1) $ 14,248
======== ======== ======== ======== ========
Accrued loss reserves - Current $ 43,332 $ 10,248 $ 363 $ 4,647 (2) $ 49,296
======== ======== ======== ======== ========
Accrued warranty reserves -
Long-term $ 23,496 $ (1,204) $ $ 3,476 (2) $ 18,816
======== ======== ======== ======== ========
Accrued restructuring reserves $ 5,719 $ $ $ 4,081 (3) $ 1,638
======== ======== ======== ======== ========
Year Ended May 31, 1998
- -----------------------
Allowance for doubtful accounts $ 12,006 $ 5,930 $ 642 $ 5,860 (1) $ 12,718
======== ======== ======== ======== ========
Accrued loss reserves - Current $ 37,699 $ 14,545 $ $ 8,912 (2) $ 43,332
======== ======== ======== ======== ========
Accrued warranty reserves -
Long-term $ 14,885 $ 2,741 $ 8,654 $ 2,784 (2) $ 23,496
======== ======== ======== ======== ========
Accrued restructuring reserves $ 648 $ $ 6,841 $ 1,770 (3) $ 5,719
======== ======== ======== ======== ========
Year Ended May 31, 1997
- -----------------------
Allowance for doubtful accounts $ 9,993 $ 4,701 $ 1,620 $ 4,308 (1) $ 12,006
======== ======== ======== ======== ========
Accrued loss reserves - Current $ 33,731 $ 14,353 $ 4,908 $ 15,293 (2) $ 37,699
======== ======== ======== ======== ========
Accrued warranty reserves -
Long-term $ $ $ 15,356 $ 471 (2) $ 14,885
======== ======== ======== ======== ========
Accrued restructuring reserves $ $ $ 1,659 $ 1,011 (3) $ 648
======== ======== ======== ======== ========
</TABLE>
(1) Uncollectible accounts written off, net of recoveries
(2) Primarily claims paid during the year
(3) Restructuring initiatives completed during the year
S-2
<PAGE> 1
EXHIBIT 10.1.1
AMENDMENT TO AMENDED EMPLOYMENT AGREEMENT
-----------------------------------------
THIS AMENDMENT is made and entered into on this 5th day of
August, 1999 at Medina, Ohio, by and between RPM, INC. (hereinafter referred to
as the "Company") and THOMAS C. SULLIVAN (hereinafter referred to as
"Sullivan"):
W I T N E S S E T H
-------------------
WHEREAS, Sullivan is Chairman of the Board and Chief Executive
Officer of the Company; and
WHEREAS, Sullivan and the Company entered into a certain
Amended Employment Agreement, dated as of July 22, 1981 and last amended as of
July 15, 1998 (the "Employment Agreement"), to insure Sullivan's continued
employment with the Company; and
WHEREAS, it is the desire of the Company and Sullivan to
further amend the Employment Agreement in accordance with the terms hereof; and
WHEREAS, Paragraph 12 of the Employment Agreement requires
that any such Amendment be in writing and properly executed;
NOW, THEREFORE, in consideration of the premises and the
mutual understandings of the parties, IT IS AGREED, as follows:
1. COMPENSATION. Paragraph 4(a) of the Employment
Agreement shall be deleted in its entirety and amended and restated to provide
in its entirety as follows:
BASE SALARY. Sullivan shall receive a base salary at
the rate of not less than Eight Hundred Seventy Thousand
Dollars ($870,000) per annum ("Base Salary"), payable in
substantially equal monthly installments at the end of each
month during the period of Sullivan's employment hereunder. It
is contemplated that annually in July of each year the
Compensation Committee of the Board of Directors will review
Sullivan's Base Salary and other compensation during the
period of his
<PAGE> 2
employment hereunder and, at the discretion of the
Compensation Committee, it may increase his Base Salary and
other compensation based upon his performance, then
generally prevailing industry salary scales, the Company's
results of operation, and other relevant factors. Any
increase in Base Salary or other compensation shall in no
way limit or reduce any other obligation of the Company
hereunder and, once established at an increased specified
rate, Sullivan's Base Salary hereunder shall not be reduced
without his written consent.
2. EFFECTIVE DATE. The effective date of this Amendment
shall be August 5, 1999, except that the increase in compensation set forth
in Paragraph 1 shall be retroactively applied to June 1, 1999.
IN WITNESS WHEREOF, the parties have executed this Amendment
to the Employment Agreement on the date and at the place first above written.
IN THE PRESENCE OF: RPM, INC.
By: /s/ James A. Karman
- ------------------------------ -------------------------------
James A. Karman, Vice Chairman
And: /s/ P. Kelly Tompkins
-------------------------------
P. Kelly Tompkins, Secretary
/s/ Thomas C. Sullivan
- ------------------------------ --------------------------------
Thomas C. Sullivan
"Sullivan"
<PAGE> 1
EXHIBIT 10.2.1
AMENDMENT TO AMENDED EMPLOYMENT AGREEMENT
-----------------------------------------
THIS AMENDMENT is made and entered into on this 5th day of
August, 1999 at Medina, Ohio, by and between RPM, INC. (hereinafter referred to
as the "Company") and JAMES A. KARMAN (hereinafter referred to as "Karman"):
W I T N E S S E T H:
--------------------
WHEREAS, Karman was elected Vice Chairman of the Company on
August 5, 1999; and
WHEREAS, Karman and the Company entered into a certain
Amended Employment Agreement, dated as of July 22, 1981 and last amended as of
July 15, 1998 (the "Employment Agreement"), to insure Karman's continued
employment with the Company; and
WHEREAS, it is the desire of the Company and Karman to amend
the Employment Agreement in accordance with the terms hereof; and
WHEREAS, Paragraph 12 of the Employment Agreement requires
that any such Amendment be in writing and properly executed;
NOW, THEREFORE, in consideration of the premises and the
mutual understandings of the parties, IT IS AGREED, as follows:
1. COMPENSATION. Paragraph 4(a) of the Employment
Agreement shall be deleted in its entirety and amended and restated to provide
in its entirety as follows:
BASE SALARY. Karman shall receive a base salary at
the rate of not less than Six Hundred and Eighty-Five Thousand
Dollars ($685,000) per annum ("Base Salary"), payable in
substantially equal monthly installments at the end of each
month during the period of Karman's employment hereunder. It
is contemplated that annually in July of each year the
Compensation Committee of the Board of Directors will review
Karman's Base Salary and other compensation during the period
of his
<PAGE> 2
employment hereunder and, at the discretion of the
Compensation Committee, it may increase his Base Salary and
other compensation based upon his performance, then generally
prevailing industry salary scales, the Company's results of
operations, and other relevant factors. Any increase in Base
Salary or other compensation shall in no way limit or reduce
any other obligation of the Company hereunder and, once
established at an increased specified rate, Karman's Base
Salary hereunder shall not be reduced without his written
consent.
2. EFFECTIVE DATE. The effective date of this Amendment
shall be August 5, 1999, except that the increase in compensation set forth in
Paragraph 1 shall be retroactively applied to June 1, 1999.
IN WITNESS WHEREOF, the parties have executed this Amendment to the Employment
Agreement on the date and at the place first above written.
IN THE PRESENCE OF: RPM, INC.
By: /s/ Thomas C. Sullivan
- ---------------------------- -----------------------------
Thomas C. Sullivan, Chairman
and Chief Executive Officer
And: /s/ P. Kelly Tompkins
-----------------------------
P. Kelly Tompkins, Secretary
/s/ James A. Karman
- ---------------------------- -----------------------------
James A. Karman
"Karman"
-2-
<PAGE> 1
Exhibit 10.4.1
AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------
THIS AMENDMENT is made and entered into on this 5th day of
August, 1999 at Medina, Ohio, by and between RPM, INC. (hereinafter referred to
as the "Company") and __________ (hereinafter referred to as "_____"):
W I T N E S S E T H:
--------------------
WHEREAS, _____ is ______________________ of the Company; and
WHEREAS, _____ and the Company entered into a certain
Employment Agreement, originally dated as of ____________ and last amended as of
July 15, 1998 (the "Employment Agreement"), to insure _____'s continued
employment with the Company; and
WHEREAS, it is the desire of the Company and _____ to amend
the Employment Agreement in accordance with the terms hereof; and
WHEREAS, Paragraph 11 of the Employment Agreement requires
that any such Amendment be in writing and properly executed;
NOW, THEREFORE, in consideration of the premises and the
mutual understandings of the parties, IT IS AGREED, as follows:
1. EMPLOYMENT TERM. Paragraph 1 of the Employment
Agreement shall be deleted in its entirety and amended and restated to provide
in its entirety as follows:
TERM OF EMPLOYMENT. The Company hereby agrees to
continue to employ _____, and _____ hereby agrees to continue
to serve the Company, on the terms and conditions set forth
herein for the period commencing as of the date hereof (the
"Effective Date"), and expiring on July 31, 2000 (unless
sooner terminated as hereinafter set forth).
<PAGE> 2
2. COMPENSATION. Paragraph 4(a) of the Employment
Agreement shall be deleted in its entirety and amended and restated to provide
in its entirety as follows:
BASE SALARY. _____ shall receive a base salary at the
rate of not less than _________________Dollars ($________) per
annum ("Base Salary"), payable in substantially equal monthly
installments at the end of each month during the period of
_____'s employment hereunder. It is contemplated that annually
in July or August of each year the Compensation Committee of
the Board of Directors will review _____'s Base Salary and
other compensation during the period of his employment
hereunder and, at the discretion of the Compensation
Committee, it may increase his Base Salary and other
compensation based upon his performance, then generally
prevailing industry salary scales, the Company's results of
operations, and other relevant factors. Any increase in Base
Salary or other compensation shall in no way limit or reduce
any other obligation of the Company hereunder and, once
established at an increased specified rate, _____'s Base
Salary hereunder shall not be reduced without his written
consent.
3. EFFECTIVE DATE. The Effective Date of this Amendment
shall be August 5, 1999, except that the increase in compensation set forth in
Paragraph 2 shall be retroactively applied to June 1.
IN WITNESS WHEREOF, the parties have executed this Amendment
to the Employment Agreement on the date and at the place first above written.
IN THE PRESENCE OF: RPM, INC.
____________________________ By: ____________________________
And:____________________________
The "Company"
____________________________ ____________________________
________
<PAGE> 1
EXHIBIT 10.10
DEFERRED COMPENSATION AGREEMENT
-------------------------------
As of ______________, 19__, RPM, INC., an Ohio corporation
(the "Company") and ____________________, a Director of the Company (the
"Director"), hereby agree as follows:
I. PURPOSE - The purpose of this Agreement is to
establish a Deferred Compensation Plan (the "Plan") for the
Director, pursuant to which the Director's cash compensation
for services to the Company shall be credited to the
Director, either as a cash allotment or a stock allotment,
as provided in Section VI hereof, and payment thereof shall
be deferred until distribution as provided in Section IX
hereof.
II. PARTICIPATION - The Director may elect to participate
in the Plan effective only as of the beginning of the
Company's fiscal year next following the date of notice of
such election. Such notice shall be in writing and delivered
to the Secretary of the Company not later than fifteen (15)
days prior to the first day of such fiscal year. Such notice
shall include the Director's election to establish either a
cash allotment or a stock allotment, which election shall be
irrevocable with respect to any given fiscal year. The
Director shall have the right during the term of this
Agreement to change such election from a cash allotment to a
stock allotment, or from a stock allotment to a cash
allotment, as the case may be, effective, however, only with
respect to the Director's cash compensation for services to
the Company for the fiscal year next following the date of
notice of such change. Such notice shall be in writing and
delivered to the Secretary of the Company not later than six
(6) months prior to the first day of such fiscal year.
III. DUTIES AND TERMINATION DATE - The Director will serve
as a member of the Company's Board of Directors, and perform
faithfully the duties of a member of the Board, including
service on Committees of the Board and service in an
advisory and consultative capacity to the Chairman and
Officers of the Company at such times as may be reasonably
requested. This Agreement will terminate upon the date of
occurrence of any of the following events (the "Termination
Date"):
A. The date the Director ceases to hold
office as a member of the Company's Board of
Directors, or
B. The date of death of the Director,
or
<PAGE> 2
C. The date the Director elects in writing
to terminate this Agreement.
IV. COMPENSATION - The Director shall be compensated for
serving as a member of the Board, for attendance at special
meetings of the Board, and meetings of Committees of the
Board, and, where applicable, for serving as Chairman of a
Committee of the Board, pursuant to fees established from
time to time by the Board of Directors for such services;
provided, however, that such compensation shall not be paid,
set aside or distributed until at least six (6) months after
the Termination Date, in accordance with Section IX hereof.
V. EXPENSE REIMBURSEMENT - The Director shall be
reimbursed in cash, on a current basis, for all travel and
incidental expenses incurred for the benefit of the Company,
whether in connection with attendance at meetings of the
Company's Board of Directors or otherwise.
VI. DEFERRED COMPENSATION ACCOUNT - The Company shall
establish a Deferred Compensation Account (the "Account")
for the Director. As of the last day of the Company's fiscal
quarter during which this Agreement is effective, and as of
the last day of each applicable succeeding fiscal quarter
during the term of this Agreement, the Company shall credit
to the Account the amount, in cash or stock equivalents, as
hereinafter described, of the Director's compensation
payable for services during such fiscal quarter.
VII. CASH OR STOCK ELECTION
A. The entire amount credited to the Account
for each fiscal quarter shall be credited either as a
cash allotment or as a stock allotment in accordance
with the Director's written election.
B. If a cash allotment is elected, the
Account shall be credited with the dollar amount of
the allotment, and the Account shall be credited, at
the end of each fiscal quarter during the term of
this Agreement, with interest at the rate equal to
the prime interest rate of National City Bank
(Cleveland) in effect on the last day of the quarter.
C. If a stock allotment is elected, the
Account shall be credited with a stock equivalent
which shall be equal to the number of shares
(computed to the nearest one-hundredth of a share) of
the Company's Common Shares (the "Common Shares")
that could be purchased with the dollar amount of the
allotment at the last sales price of the Common
Shares on the NASDAQ National Market System, or the
closing price of such shares on the principal
exchange on which such shares are listed, as the case
may be, on the last trading day of the applicable
quarter of the Company.
D. On the last day of each fiscal quarter
during the term of this Agreement, the Account shall
be credited with an additional stock
<PAGE> 3
equivalent which shall be equal to the number of
Common Shares (computed to the nearest one-hundredth
of a share) that could be purchased with the dollar
amount determined by multiplying the dividends paid
per Common Share to shareholders of record during
such fiscal quarter, by the number of shares,
including fractional shares, in the Account at the
beginning of such fiscal quarter, with appropriate
adjustment to reflect any increase or decrease
during the period in the number of shares in the
Account as a result of the application of paragraph
E of this Section VII.
E. In the event of any change in the Common
Shares upon which the stock equivalency hereunder is
based, by reason of a merger, consolidation,
reorganization, recapitalization, stock dividend,
stock split, combination or exchange of shares, or
other change in the corporate structure, the number
of shares credited to the Director shall be
appropriately adjusted.
F. THIS IS A CASH DEFERRED COMPENSATION
PLAN, AND UNDER NO CIRCUMSTANCES SHALL THE DIRECTOR'S
DEFERRED COMPENSATION BE PAID IN ACTUAL COMMON SHARES
OF THE COMPANY.
VIII. FINAL ACCOUNT BALANCE - The balance in the Account on the
Termination Date (the "Final Account Balance") shall be (i) in
the case of cash allotment, the cash balance on the
Termination Date, and (ii) in the case of stock allotment, the
amount of cash equal to the aggregate stock equivalents in the
Account on the Termination Date multiplied by the last sales
price of the Common Shares on the NASDAQ National Market
System or the closing price of such shares on the principal
exchange on which such shares are listed, as the case may be,
on the nearest trading day preceding the Termination Date. No
further interest (in the case of cash allotment) or dividend
equivalent (in the case of stock allotment) shall accrue or be
credited to the Account after the Termination Date.
IX. DISTRIBUTION
A. Distribution of the Final Account Balance
shall be made in cash in five (5) approximately equal
annual installments, without interest, commencing six
(6) months after the Termination Date.
Notwithstanding the foregoing, at any time after the
Termination Date, the Director may, by written notice
to the Company, elect to receive distribution of the
Final Account Balance in a single lump sum payment,
at any time six (6) months after the Termination
Date.
B. In the event the Final Account Balance or
any portion thereof shall be distributable after the
Director's death, the same shall be distributed, as
provided in paragraph A of this Section IX, to such
person or persons, or the survivors thereof,
including corporations,
<PAGE> 4
unincorporated associations or trusts, as the
Director may have designated in writing and delivered
to the Secretary of the Company. The Director may
from time to time revoke or change any such
designation by written notice delivered to the
Secretary of the Company. If there is no unrevoked
designation on file with the Company at any time of
the Director's death, such distribution shall be made
to the Director's estate in one lump sum payment to
be made at the later of (i) six (6) months after date
of death or (ii) thirty (30) days of the appointment
of the Executor of the estate.
X. MISCELLANEOUS
A. Neither the Director nor any other person
shall have any interest in any fund or in any
specific asset or assets of the Company by reason of
any cash or stock equivalents credited to the Account
of a Director hereunder, nor the right to exercise
any of the rights or privileges of a shareholder with
respect to any stock equivalents credited to his
Account, nor any right to receive any distribution
under this Agreement except as and to the extent
expressly provided in this Agreement. Any allotment
or credit to the Account shall be reflected as a
general asset on the books of the Company, subject to
the claims and obligations of creditors and others
and any liability created hereunder to the Director
shall be in the nature of a general claim without any
priority or right being created in the Director.
B. The Director shall not have the right to
assign, pledge or otherwise dispose of (except as
provided in Section IX hereof) any cash or stock
equivalents in the Account, nor shall his interest
therein be subject to garnishment, attachment,
transfer by operation of law, or any legal process.
If the Director should attempt to assign, pledge or
otherwise dispose of (except as provided in Section
IX thereof) any cash and/or stock equivalents in the
Account or if any attempt shall be made to garnish,
attach, transfer by operation of law or by any legal
process his interest in the Account, all cash and
stock equivalents in the Account and all interests of
the Director therein, shall, at the discretion of the
Company, cease and determine, and in such event the
Company may hold or apply same or any part thereof
for the benefit of the Director, the Director's
spouse, children or other dependents, or any of them,
in such manner and in such proportion as the Company
may deem proper.
C. This Agreement shall not be assignable by
the Company without the written consent of the
Director, except that, if the Company shall merge or
consolidate with or into, or transfer substantially
all of its assets including good will to, another
organization or other form of business organization,
this Agreement shall bind and run to the benefit of
the successor of the Company resulting from such
merger, consolidation or transfer.
<PAGE> 5
D. This Agreement comprises the entire
agreement between the parties hereto and supersedes,
cancels and annuls any and all prior agreements
between the parties hereto with respect to payments
to the Director for services to the Company. This
Agreement may not be modified or amended more than
once every six (6) months, other than to compart with
changes in the Internal Revenue Code, ERISA, or the
rules thereunder, which shall be in a writing duly
executed and delivered by the parties hereto.
E. This Agreement may be executed in
duplicate and each counterpart shall be deemed to be
an original, and both of which together shall
constitute one and the same instrument.
F. This Agreement shall be governed by and
construed in accordance with the laws of the State
of Ohio.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date hereof.
RPM, INC.
By: ____________________________
Thomas C. Sullivan, Chairman
DIRECTOR
______________________________
<PAGE> 1
EXHIBIT 10.11
RPM, INC.
DEFERRED COMPENSATION PLAN
Effective Date: February 3, 1994
<PAGE> 2
THE RPM, INC.
DEFERRED COMPENSATION PLAN
1. STATEMENT OF PURPOSE
The purpose of The RPM, Inc. Deferred Compensation Plan (the "Plan") is to aid
RPM, Inc. (the "Company") in attracting and retaining key employees by providing
a non-qualified compensation deferral vehicle.
2. DEFINITIONS
2.1 BENEFICIARY - "Beneficiary" means the person or persons
designated as such in accordance with Section 8.
2.2 CLOSING PRICE - "Closing Price" means the last sales price per
share of the Company's Common Stock on the NASDAQ exchange as
reported in THE WALL STREET JOURNAL, for the day at issue or the
nearest previous trading day if notrade is reported for the day
at issue.
2.3 COMMITTEE - "Committee" means the Compensation Committee of the
Board of Directors of the Company which will administer the Plan
pursuant to the provisions of Section 3 of the Plan.
2.4 COMMON STOCK - "Common Stock" means the authorized Common Shares
(without par value) of the Company.
2.5 COMPENSATION - "Compensation" means the Participant's base salary
and annual cash bonus.
2.6 CYCLE - "Cycle" means the twelve month pay-in period for each
deferral. The initial Cycle shall commence on June 1, 1994 and
end on May 31, 1995. A new Cycle shall commence each June 1
thereafter.
Page 1
<PAGE> 3
2.7 DEFERRAL AMOUNT - "Deferral Amount" means the amount of Elective
Deferred Compensation actually deferred by the Participant.
2.8 DEFERRED COMPENSATION ACCOUNT - "Deferred Compensation Account"
means the account maintained on the books of account of the
Company for each Participant pursuant to Section 6.
2.9 DISABILITY - "Disability" means the Participant is eligible to
receive benefits under a long term disability plan maintained by
the Company.
2.10 DISTRIBUTION DATE - "Distribution Date" means the date on which
the Company makes distributions from the Participant's Deferred
Compensation Account.
2.11 DIVIDEND EQUIVALENT CREDIT - "Dividend Equivalent Credit" means a
credit that is equivalent in value to what a Participant would
have received had the Participant owned an equal number of shares
of Company Common Stock as of the date any cash or stock dividend
is payable to holders of Common Stock.
2.12 ELECTION FORM - "Election Form" means the form or forms attached
to this Plan and filed with the Committee by the Participant in
order to participate in the Plan. The terms and conditions
specified in the Election Form(s) are incorporated by reference
herein and form a part of the Plan.
2.13 ELECTIVE DEFERRED COMPENSATION - "Elective Deferred Compensation"
means the amount elected to be deferred by an Eligible Employee
in his Election Form, subject to approval by the Committee.
Page 2
<PAGE> 4
2.14 ELIGIBLE EMPLOYEE - "Eligible Employee" means those employees of
the Company who have been selected by the Committee.
2.15 INSIDER - "Insider" means those employees of the Company who have
been determined by the Board of Directors of the Company to be an
"officer" of the Company within the meaning of Rule 16a-1(f)
under Section 16 of the Securities and Exchange Act of 1934 or
any successor to such rule.
2.16 PARTICIPANT - "Participant" means an Eligible Employee
participating in the Plan in accordance with the provisions of
Section 4.
2.17 PLAN YEAR - "Plan Year" means the twelve month period beginning
on the first day of the first Cycle in which the Eligible
Employee elects to participate in the Plan. The initial Plan Year
shall commence on June 1, 1994 and end on May 31, 1995.
2.18 PRIME RATE - "Prime Rate" means the Prime Rate as quoted and
published by the National City Corporation, or its successors,
or, if such corporation ceases to exist or does not publish a
prime rate, then the average Prime Rate as quoted and published
by the Wall Street Journal.
2.19 RELATED EMPLOYMENT - "Related Employment" means the employment of
a Participant by an employer which is not the Company provided
(i) such employment is undertaken by the Participant at the
request of the Company; (ii) immediately prior to undertaking
such employment the Participant was an officer or employee of the
Company, or was engaged in Related Employment as herein defined;
and (iii) such employment is recognized by the Committee, in its
sole discretion, as Related Employment.
2.20 STOCK CREDIT - "Stock Credit" means a credit that is equivalent
to one share of Company Common Stock.
Page 3
<PAGE> 5
2.21 SUBSTANTIALLY EQUAL INSTALLMENTS - "Substantially Equal
Installments" means a series of annual payments, such that equal
payments over the remaining payment period would exactly amortize
the Deferred Compensation Account balance as of the Distribution
Date if the credited interest rate remained constant at the level
credited as of the Valuation Date immediately preceding the
Distribution Date for the remainder of the payment period.
2.22 TERMINATED FOR CAUSE - "Terminated for Cause" means, with respect
to a Participant, the definition give to that term in any written
employment agreement existing between the Company and the
Participant; absent any such agreement, or absent a definition of
the term in the agreement, the term shall mean the termination of
the Participant's employment with the Company due to: (i) fraud,
misappropriation or intentional material damage to the property
or business of the Company; (ii) commission of a felony; or (iii)
continuance of either willful and repeated failure or grossly
negligent and repeated failure by the Participant to perform his
duties.
2.23 TERMINATION OF EMPLOYMENT - "Termination of Employment" means the
termination of a Participant's employment with the Company for
any reason other than Related Employment, or the termination of a
Participant's Related Employment.
2.24 VALUATION DATE - "Valuation Date" means the date on which the
value of a Participant's Deferred Compensation Account for each
Cycle is determined as provided in Section 6 hereof. Unless and
until changed by the Committee, the Valuation Date for each Cycle
shall be the last day of the Cycle.
Page 4
<PAGE> 6
3. ADMINISTRATION OF THE PLAN
The Committee shall be the sole administrator of the Plan and will
administer the Plan. The Committee shall have full power to formulate
additional details and regulations for carrying out this Plan. The
Committee shall also be empowered to make any and all of the
determinations not herein specifically authorized which may be
necessary or desirable for the effective administration of the Plan.
Any decision or interpretation of any provision of this Plan adopted by
the Committee shall be final and conclusive.
4. PARTICIPATION
4.1 ELECTIVE PARTICIPATION
a. Any Eligible Employee may elect to participate in the Plan
for a given Cycle by filing a completed Election Form for
the Cycle with the Committee. With regard to an election to
participate:
i. The Election Form must be filed with the Committee
prior to the commencement of the Cycle to which the
Election Form pertains. Notwithstanding the foregoing,
an employee who first becomes an Eligible Employee
during any Cycle may elect to participate in the Plan
for such Cycle by filing an Election Form within thirty
(30) days of becoming an Eligible employee; and
ii. The minimum deferral for a Cycle shall be $1,000.
iii. The maximum deferral for a Cycle shall be the amount
specified by the Committee.
b. A Participant's election to defer future Compensation is
irrevocable upon the filing of his Election Form with the
Committee, provided, however, that the election may be
terminated with respect to Compensation not yet earned by
mutual agreement in writing between the Participant and the
Committee. Such termination if approved shall be effective
immediately.
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<PAGE> 7
5. VESTING OF DEFERRED COMPENSATION ACCOUNT
A Participant's interest in his Deferred Compensation Account shall be
fully vested and non-forfeitable at all times.
6. ACCOUNTS AND VALUATIONS
6.1 DEFERRED COMPENSATION ACCOUNTS. The Committee shall establish and
maintain a separate Deferred Compensation Account for each
Participant for each Cycle. Any Elective Deferred Compensation
shall be credited to the Participant's Deferred Compensation
Account when deferred.
6.2 RATE OF RETURN CREDITED.
a. Except as provided in Sections 6.3 and 6.4, each
Participant's Deferred Compensation Account shall be
credited with interest annually under the Interest Rate
Option or the RPM Stock Account Option, as elected by the
Participant on his completed Election Form for each cycle.
b. Compensation deferred hereunder and allocated to the
Interest Rate Option shall be credited with interest at a
rate fixed from time to time by the Committee; provided that
such rate shall not be less than the Prime Rate as of
December 1 of the year prior to when deferrals will occur.
c. Notwithstanding Section 6.2(b), if a reallocation into an
Interest Rate Option Account is made by a Participant
pursuant to Section 6.3, the crediting rate shall not be
less than the Prime Rate for the December 1 of the year
prior to the reallocation election.
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<PAGE> 8
d. Compensation deferred hereunder and allocated to the RPM
Stock account Option shall be periodically adjusted (upward
or downward, as the case may be) by the Committee to reflect
the value that such compensation would have if it were
invested in RPM, Inc. Common Stock and if any dividends
payable with respect to the Common Stock were reinvested in
Common Stock.
As of the date any dividend is paid to holders of Common
Stock, the Participant's RPM Stock Account shall also be
credited with a Dividend Equivalent Credit equal to the
number of shares of Common Stock (including fractions of a
share to the nearest ten thousandth) that could have been
purchased at the Closing Price of Common Stock on such date
with the dividend paid on the number of shares of Common
Stock to which the Participant's RPM Stock Account is then
credited. In case of dividends paid in property, the
dividend shall be deemed to be the fair market value of the
property at the date of distribution of the dividend, as
determined by the Committee. The amount of RPM Stock Credits
credited to each Participant's RPM Stock Account shall be
appropriately adjusted upon the occurrence of any stock
split or reverse stock split.
6.3 ALLOCATION OF ACCOUNTS. Each participant shall specify in writing, on
his Election Form, how the amounts the Participant has deferred
hereunder shall be allocated between the Interest Rate Option and the
RPM Stock Account Option.
The Committee may, in its discretion and from time to time, but not
more frequently than once in any twelve (12) month period, permit a
Participant to elect to reallocate amounts from the Interest Rate
Option to the RPM Stock Account Option or from the RPM Stock Account
Option to the Interest Rate Option, subject to such conditions and
such limitations as the Committee may prescribe. Any such reallocation
election shall be in writing and in a form acceptable to the
Committee. Subject to the foregoing, the Committee may permit a
Participant who is an Insider to elect to reallocate into or out of
the RPM Stock Account pursuant to this Section 6.3 within a quarterly
ten (10) day window period which begins on the third business day
after the release of the Company's quarterly financial information.
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<PAGE> 9
The Committee may require that any reallocation election under this
Section 6.3 apply to the entire amount credited to a Participant's
Interest Rate Option Account or RPM Stock Account or to such
percentage or percentages of that amount as the Committee may specify
(e.g., increments of 25%).
If a Participant fails to specify a rate of return option with respect
to the Participant's Elective Deferred Compensation, the Participant
shall be presumed to have specified the Interest Rate Option.
6.4 TIMING OF CREDITING OF INTEREST. Each Deferred Compensation Account of
each Participant shall be revalued and credited with interest and
dividend equivalents, as applicable, as of each Valuation Date. As of
each Valuation Date, the value of each Deferred Compensation Account
shall consist of the balance of such Deferred Compensation Account as
of the immediately preceding Valuation Date, plus the amount of any
Elective Deferred Compensation credited to the Participant's Deferred
Compensation Account since the preceding Valuation Date, minus the
amount of all distributions, if any, made from such Deferred
Compensation Account since the preceding Valuation Date. As of each
Valuation Date, interest shall be credited on the average daily
balance of the Participant's Deferred Compensation Account since the
immediately preceding Valuation Date after adjustment for any
additions thereto (including interest and dividend equivalents) or
distributions therefrom. Benefit distributions (under Section 7) made
on or before February 15 of the year of payment will be considered to
have been made from the account and deducted from the account balance
as of January 1 of such year for the purpose of crediting interest
under this Section 6.4.
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<PAGE> 10
7. BENEFITS
7.1 NORMAL BENEFIT
a. A Participant's Deferred Compensation Account shall be
paid to the Participant in accordance with the terms of
the Participant's Election Form, subject to the terms
and conditions specified in the Election Form. If a
Participant elects to receive payment of his Deferred
Compensation Account in installments, payments shall be
made in Substantially Equal Installments. Unless the
Committee determines otherwise, and subject to the
provisions of Section 7.6 as to when payments shall
commence, installments shall be paid on the first day
of February of each year.
b. Distribution of a Participant's RPM Stock Account
balance shall be made in cash with the amount of the
distribution determined by multiplying the number of
Stock Credits attributable to the installment by the
Closing Price of Common Stock on the last business day
in December immediately prior to the Plan Year in which
the installment is to be paid; provided, however, that
if an alternative distribution date is determined by
the Committee pursuant to Section 7.6 or if
distribution is payable pursuant to Section 7.1(c) or
Section 7.1(d), the Closing Price to be used shall be
the Closing Price of Common Stock on the last business
day immediately prior to the date of Participant's
termination of employment.
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<PAGE> 11
c. Notwithstanding the provisions of Section 7.1a, and
notwithstanding any contrary election made by the
Participant on his Election Form, if a Participant
terminates his employment for any reason other than
death or Disability, the Participant's Deferred
Compensation Account balance will be paid to the
Participant in a lump sum within ninety (90) days
following the Participant's Termination of Employment.
However, upon the written request of the Participant,
the Committee, in its sole discretion, may allow
payments to be made to the Participant in up to five
(5) annual installments.
d. If a Participant dies before receiving his or her total
account balance for a Cycle, his Beneficiary shall be
entitled to the remaining account balance. The
Participant may specify that any amounts payable to any
Beneficiary under this provision shall be paid either
in a lump sum within ninety (90) days after the
Participant's death, or in up to ten equal annual
installments beginning in the February after the
Participant's death. If the Participant has not
designated a Beneficiary, or if the Participant fails
to specify the manner of payment to his Beneficiary,
the Participant's Deferred Compensation Account value
will be paid to the Participant's estate, in a lump
sum, within ninety (90) days after the Participant's
death.
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<PAGE> 12
7.2 HARDSHIP BENEFIT. In the event that the Committee, upon
written petition of the Participant, determines in its sole
discretion, that the Participant has suffered an
unforeseeable financial emergency, the Company may pay to
the Participant, as soon as practicable following such
determination, an amount necessary to meet the emergency,
not in excess of the Deferred Compensation Account credited
to the Participant. The Deferred Compensation Account of the
Participant shall thereafter be reduced to reflect the
payment of a Hardship Benefit.
7.3 TERMINATED FOR CAUSE. Notwithstanding any contrary
provisions of this Section 7, if a Participant's employment
with the Company is Terminated for Cause, the Participant's
Deferred Compensation Account balance will be paid to the
Participant in a lump sum within ninety (90) days following
the Participant's Termination of Employment.
7.4 REQUEST TO COMMITTEE FOR DELAY IN PAYMENT. A Participant
shall have no right to modify in any way the schedule for
the distribution of amounts from his Deferred Compensation
Account which he has specified in his Election Form.
However, upon a written request submitted by the Participant
to the Committee, the Committee may, in its sole discretion:
a. Postpone one time the date on which payment shall
commence; and
b. Increase one time the number of installments to a
number not to exceed ten (10).
Any such request(s) must be made at least ninety (90)
days prior to the earlier of (1) the beginning of the
year which the Participant has elected for
distributions to commence, or (2) the Participant's
Termination of Employment.
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7.5 TAXES; WITHHOLDING. To the extent required by law, the
Company shall withhold from payments made hereunder an
amount equal to at least the minimum taxes required to be
withheld by the federal or any state or local government.
7.6 DATE OF PAYMENTS. Except as otherwise provided in this Plan,
payments under this Plan shall begin on or before the
fifteenth (l5th) day of July of the calendar year following
receipt of notice by the Committee of an event which
entitles a Participant (or Beneficiary) to payments under
the Plan, or at such earlier date as may be determined by
the Committee.
8. BENEFICIARY DESIGNATION
A Participant shall have the right at any time, and from
time to time, to designate and/or change or cancel any
person, persons, or entity as his Beneficiary or
Beneficiaries (both principal and contingent) to whom
payment under this Plan shall be paid in the event of his
death prior to complete distribution to Participant of the
benefits due him under the Plan. Each beneficiary
designation shall become effective only when filed in
writing with the Committee during the Participant's lifetime
on a form provided by the Committee. The filing of a new
beneficiary designation form will cancel all beneficiary
designations previously filed.
Any finalized divorce of a Participant subsequent to the
date of filing of a beneficiary designation form in favor of
the Participant's spouse shall revoke such designation. The
spouse of a married Participant domiciled in a community
property jurisdiction shall join in any designation of
Beneficiary or Beneficiaries other than the spouse.
If a Participant fails to designate a Beneficiary as
provided above, or if his beneficiary designation is revoked
by divorce, or otherwise, without execution of a new
designation, or if all designated Beneficiaries predecease
the Participant or die prior to complete distribution of the
Participant's benefits, then the distribution of such
benefits shall be made to the Participant's estate.
If any distribution to a Beneficiary is to be made in
installments, and the primary Beneficiary dies before
receiving all installments, the remaining installments, if
any, shall be paid to the estate of the primary Beneficiary.
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9. AMENDMENT AND TERMINATION OF PLAN
9.1 AMENDMENT. The Board of Directors may at any time amend the Plan
in whole or in part, provided, however, that except as provided
in 9.2, no amendment shall be effective to decrease the benefits
under the Plan payable to any Participant or Beneficiary with
respect to any Elective Deferred Compensation deferred prior to
the date of the amendment. Written notice of any amendments shall
be given to each individual then participating in the Plan.
9.2 TERMINATION OF PLAN
a. COMPANY'S RIGHT TO TERMINATE. The Board of Directors of the
Company may at any time terminate the Plan, in its sole
discretion for any reason whatsoever.
b. PAYMENTS UPON TERMINATION. Upon any termination of the Plan
under this section, Compensation shall prospectively cease
to be deferred and, with respect to Compensation previously
deferred, the Company will pay to the Participant, in a lump
sum, the value of his Deferred Compensation Account.
10. MISCELLANEOUS
10.1 UNSECURED GENERAL CREDITOR. Participants and their beneficiaries,
heirs, successors and assignees shall have no legal or equitable
rights, interests, or other claims in any property or assets of
the Company, nor shall they be beneficiaries of, or have any
rights, claims, or interests in any life insurance policies,
annuity contracts, or the policies therefrom owned or which may
be acquired by Company ("policies"). Such policies or other
assets of the Company shall not be held under any trust for the
benefit of Participants, their beneficiaries, heirs, successors,
or assigns, or held in any way as collateral security for the
fulfilling of the obligations of the Company under this Plan. Any
and all of the Company's assets and policies shall be and remain
general, unpledged, unrestricted assets of the Company. The
Company's obligation under the Plan shall be that of an unfunded
and unsecured promise of the Company to pay money in the future.
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10.2 SUCCESSORS AND MERGERS, CONSOLIDATIONS OR CHANGE IN CONTROL. The
terms and conditions of this Plan shall inure to the benefit of
and bind the Company, the Participants, their successors,
assignees, and personal representatives. If substantially all of
the stock or assets of the Company are acquired by another
corporation or entity or if the Company is merged into, or
consolidated with, another corporation or entity, then the
obligations created hereunder shall be obligations of the
acquiror or successor corporation or entity.
10.3 NON-ASSIGNABILITY. Neither a Participant nor any other person
shall have any right to commute, sell, assign, transfer, pledge,
anticipate, mortgage, or otherwise encumber, transfer,
hypothecate, or convey in advance of actual receipt the amounts,
if any, payable hereunder, or any part thereof, which are, and
all rights to which are, expressly declared to be unassignable
and nontransferable. No part of the amounts payable shall, prior
to actual payment, be subject to seizure or sequestration for the
payment of any debts, judgments, alimony or separate maintenance
owed by a Participant or any other person, nor be transferable by
operation of law in the event of a Participant's or any other
person's bankruptcy or insolvency.
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10.4 EMPLOYMENT OR FUTURE ELIGIBILITY TO PARTICIPATE NOT GUARANTEED.
Nothing contained in this Plan nor any action taken hereunder
shall be construed as a contract of employment or as giving any
Eligible Employee any right to be retained in the employ of the
Company. Designation as an Eligible Employee may be revoked at
anytime by the Committee with respect to any Compensation not yet
deferred.
10.5 GENDER, SINGULAR AND PLURAL. All pronouns and any variations
thereof shall be deemed to refer to the masculine, feminine, or
neuter, as the identity of the person or persons may require. As
the context may require, the singular may be read as the plural
and the plural as the singular.
10.6 CAPTIONS. The captions to the articles, sections, and paragraphs
of this Plan are for convenience only and shall not control or
affect the meaning or construction of any of its provisions.
10.7 APPLICABLE LAW. This Plan shall be governed and construed in
accordance with the laws of the State of Ohio.
10.8 VALIDITY. In the event any provision of this Plan is held
invalid, void, or unenforceable, the same shall not affect, in
any respect whatsoever, the validity of any other provision of
this Plan.
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<PAGE> 17
10.9 NOTICE. Any notice or filing required or permitted to be
given to the Committee shall be sufficient if in writing and
hand delivered, or sent by registered or certified mail, to
the principal office of the Company at 2628 Pearl Road,
Medina, OH 44258, directed to the attention of the Chief
Executive Officer. Such notice shall be deemed given as of
the date of delivery or, if delivery is made by mail, as of
the date shown on the postmark on the receipt for
registration or certification. Any notice to the Participant
shall be addressed to the Participant at the Participant's
residence address as maintained in the Company's records.
Any party may change the address for such party here set
forth by giving notice of such change to the other parties
pursuant to this Section.
11. CLAIMS PROCEDURE
11.1 NAMED FIDUCIARY. The Committee is hereby designated as the
named fiduciary under this Plan. The named fiduciary shall
have authority to control and manage the operation and
administration of the Plan.
11.2 CLAIMS PROCEDURE. Any controversy or claim arising out of or
relating to this Plan shall be filed with the Committee
which shall make all determinations concerning such claim.
Any decision by the Committee denying such claim shall be in
writing and shall be delivered to all parties in interest in
accordance with the notice provisions of Section 10.9
hereof. Such decision shall set forth the reasons for denial
in plain language. Pertinent provisions of the Plan shall be
cited and, where appropriate, an explanation as to how the
Participant can perfect the claim will be provided. This
notice of denial of benefits will be provided within 90 days
of the Committee's receipt of the Participant's claim for
benefits. If the Committee fails to notify the Participant
of its decision regarding the claim, the claim shall be
considered denied, and the Participant shall then be
permitted to proceed with the appeal as provided in this
Section.
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A Participant who has been completely or partially denied a
benefit shall be entitled to appeal this denial of his claim
by filing a written statement of his position with the
Committee no later than sixty (60) days after receipt of the
written notification of such claim denial. The Committee
shall schedule an opportunity for a full and fair review of
the issue within thirty (30) days of receipt of the appeal.
The decision on review shall set forth specific reasons for
the decision, and shall cite specific references to the
pertinent Plan provisions on which the decision is based.
Following the review of any additional information submitted
by the Participant, either through the hearing process or
otherwise, the Committee shall render a decisions on the
review of the denied claim in the following manner:
a. The Committee shall make its decision regarding the
merits of the denied claim within 60 days following
receipt of the request for review (or within 120 days
after such receipt, in a case where there are special
circumstances requiring extension of time for reviewing
the appealed claim). The Committee shall deliver the
decision to the claimant in writing. If an extension of
time for reviewing the appealed claim is required
because of special circumstances, written notice of the
extension shall be furnished to the Participant prior
to the commencement of the extension. If the decision
on review is not furnished within the prescribed time,
the claim shall be deemed denied on review.
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b. The decision on review shall set forth specific reasons
for the decision, and shall cite specific references to
the pertinent Plan provisions on which the decision is
based.
IN WITNESS WHEREOF, RPM, INC., by its Chairman of the Board duly authorized, has
caused this Plan to be signed this 3rd day of February, 1994.
RPM, INC.
By: /S/ Thomas C. Sullivan
----------------------------
Thomas C. Sullivan, Chairman
Page 18
<PAGE> 1
Exhibit 11.1
RPM, INC. AND SUBSIDIARIES
--------------------------
CONSOLIDATED STATEMENTS OF COMPUTATIONS OF EARNINGS
---------------------------------------------------
PER COMMON SHARE AND COMMON SHARE EQUIVALENTS
---------------------------------------------
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Year Ended May 31
------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Income
- ----------
Net income applicable to common shares
for basic earnings per share $ 94,546 $ 87,837 $ 78,315
Add back interest net of tax on
convertible securities assumed
to be converted 1,005 5,638 5,266
-------- -------- --------
Net income applicable to common
shares for diluted earnings $ 95,551 $ 93,475 $ 83,581
======== ======== ========
Shares Outstanding
- ------------------
Weighted average shares for basic
earnings per share 108,731 98,527 97,285
Net issuable common share equivalents 567 944 609
Additional shares issuable assuming
conversion of convertible securities 2,078 12,192 12,208
-------- -------- --------
Total shares for diluted earnings
per share 111,376 111,663 110,102
======== ======== ========
Basic Earnings Per Common Share $.87 $.89 $.81
==== ==== ====
Diluted Earnings Per Common Share $.86 $.84 $.76
==== ==== ====
</TABLE>
<PAGE> 1
Exhibit 13.1
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
REPORTABLE SEGMENT INFORMATION
- ------------------------------
Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an
Enterprise and Related Information, was adopted by the Company effective May 31,
1999. This Standard requires disclosure of segment information using the
management approach, or the basis used internally to evaluate operating
performance and to decide resource allocations.
The Company has determined that it has two such operating segments - Industrial
and Consumer - based on the nature of business activities, products and
services; the structure of management and the structure of information as
presented to the Board of Directors. Within each Division, individual operating
companies or groups of companies generally address common markets, utilize
similar technologies, and can share manufacturing or distribution capabilities.
The Company evaluates the profit performance of the two Divisions based on
earnings before interest and taxes (EBIT), since interest expense is essentially
related to corporate acquisitions, as opposed to segment operations.
The Industrial Division includes the following main product lines:
- - Stonhard commercial and industrial flooring systems
- - Tremco roofing systems
- - Carboline high-performance corrosion control coatings
- - Vulkem, DYmeric and Monile sealants
- - Dryvit Exterior Insulation Finishing Systems (EIFS)
- - Day-Glo fluorescent pigments
- - Plasite specialty coatings
- - Fibergrate floor grating
- - TCI powder coatings
- - Alumanation roof coatings
- - American Emulsions textile specialties
- - Kop-Coat wood treatments for lumber mills
- - Euco concrete and masonry specialty products
The Industrial Division has operations throughout North America and accounts for
most of RPM's sales in Europe, South America, Asia, South Africa, Australia and
the Middle East. The industrial product line is primarily sold to distributors,
contractors and to end users, such as industrial manufacturing facilities,
educational and governmental institutions and commercial establishments.
Industrial Division products reach their markets through a combination of direct
sales, sales representative organizations, distributor sales and sales by
licensees and joint ventures.
The Consumer Division consists of the following main product lines:
- - Rust-Oleum rust-preventative, decorative and general purpose coatings
- - Zinsser primer-sealers, wallcovering removal and preparation products and
mildew-resistant coatings
- - Bondo auto and home repair materials
- - Flecto interior wood stains and finishes
- - Wolman deck care products
- - Bondex patch and repair products
- - Testors hobby and leisure products
- - Mohawk and Star furniture refinishing products
- - Westfield Coatings and Chemical Coatings furniture finishes
As of August 3, 1999, DAP sealants, caulks and other products are included in
the Consumer Division.
The Consumer Division's products are sold throughout North America by home
centers, hardware stores, paint stores, automotive supply stores and craft
shops. Major customers include The Home Depot, Lowe's Home Centers, Wal-Mart,
Kmart, Sherwin-Williams, Ace Hardware Stores and Cotter & Company. Consumer
Division products are sold to retailers through a combination of direct sales,
sales representative organizations and distributor sales.
In addition to the two operating segments, there are certain business
activities, referred to as Corporate/Other, that do not constitute an operating
segment, including corporate headquarters and related administrative expenses,
results of the Company's captive insurance company, gains or losses on the sales
of certain assets and other expenses not directly associated with either
operating segment. Related assets consist primarily of investments, prepaid
expenses, deferred pension assets, and headquarters property and equipment.
20
<PAGE> 2
These corporate and other assets and expenses reconcile operating segment data
to total consolidated net external sales, EBIT, identifiable assets, capital
expenditures, and depreciation and amortization, as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
May 31
---------------------------------------------------
(In thousands) 1999 1998 1997
====================================================================================================
<S> <C> <C> <C>
Net External Sales
Industrial Division $ 1,052,825 $ 998,069 $ 768,159
Consumer Division 659,329 616,836 582,028
Corporate/Other 369 350
- ----------------------------------------------------------------------------------------------------
Total $ 1,712,154 $ 1,615,274 $ 1,350,537
====================================================================================================
Earnings Before Interest and Taxes (EBIT)
Industrial Division $ 135,632 $ 125,537 $ 93,670
Consumer Division 71,294 74,435 80,204
Corporate/Other (14,548) (13,716) (5,566)
- ----------------------------------------------------------------------------------------------------
Total $ 192,378 $ 186,256 $ 168,308
====================================================================================================
Identifiable Assets
Industrial Division $ 1,102,531 $ 1,035,419 $ 978,645
Consumer Division 586,846 586,864 581,273
Corporate/Other 47,859 63,634 73,310
- ----------------------------------------------------------------------------------------------------
Total $ 1,737,236 $ 1,685,917 $ 1,633,228
====================================================================================================
Capital Expenditures
Industrial Division $ 35,779 $ 32,813 $ 13,315
Consumer Division 26,648 26,490 21,190
Corporate/Other 979 1,040 1,320
- ----------------------------------------------------------------------------------------------------
Total $ 63,406 $ 60,343 $ 35,825
====================================================================================================
Depreciation and Amortization
Industrial Division $ 32,668 $ 29,607 $ 24,974
Consumer Division 28,387 27,225 25,473
Corporate/Other 1,080 177 698
- ----------------------------------------------------------------------------------------------------
Total $ 62,135 $ 57,009 $ 51,145
====================================================================================================
</TABLE>
As the Company is segmented based on differences in products and services, the
following illustrates enterprise-wide geographic information, based on shipping
location:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
May 31
---------------------------------------------------
(In thousands) 1999 1998 1997
====================================================================================================
<S> <C> <C> <C>
Net External Sales
United States $ 1,320,410 $ 1,303,032 $ 1,149,348
- ----------------------------------------------------------------------------------------------------
Foreign
Canada 145,123 102,317 50,983
Europe 175,741 151,376 115,299
Other Foreign 70,880 58,549 34,907
- ----------------------------------------------------------------------------------------------------
Total Foreign 391,744 312,242 201,189
- ----------------------------------------------------------------------------------------------------
Total $ 1,712,154 $ 1,615,274 $ 1,350,537
====================================================================================================
Assets Employed
United States $ 1,445,599 $ 1,436,557 $ 1,412,157
- ----------------------------------------------------------------------------------------------------
Foreign
Canada 88,965 82,040 74,652
Europe 144,636 127,552 114,350
Other Foreign 58,036 39,768 32,069
- ----------------------------------------------------------------------------------------------------
Total Foreign 291,637 249,360 221,071
- ----------------------------------------------------------------------------------------------------
Total $ 1,737,236 $ 1,685,917 $ 1,633,228
====================================================================================================
</TABLE>
The above sales do not include unconsolidated sales of Company products by
licensees or minority-owned joint ventures of approximately $72 million, $88
million, and $105 million for the years ended in 1999, 1998, and 1997,
respectively. Export sales amounted to less than 10% of total consolidated
revenue for each of the three years presented.
21
<PAGE> 3
RESULTS OF OPERATIONS
- ---------------------
FISCAL 1999 COMPARED TO FISCAL 1998
The Company achieved its 52nd consecutive record year of sales and earnings in
the 1999 fiscal year. Sales grew 6%, to $1.7 billion, while earnings grew 8%, to
$94.5 million.
Effective February 1, 1999, the Company acquired the remaining 50% of The Euclid
Chemical Company ("Euclid") from the Company's former partner, Holderbank
Financiere Glaris Ltd. As part of the Tremco Group within the Industrial
Division, Euclid offers a full line of concrete and masonry repair and
maintenance products marketed under the Euco name and is pursuing its strategy
of global expansion in the concrete and masonry industry.
Approximately 60% of the 1999 sales increase was attributable to net
acquisitions, most notably that of Euclid and of The Flecto Company, Inc.
("Flecto") [refer to Note A(2)] on March 31, 1998. The Company's existing
operations and several product line additions generated the balance of the sales
increase, growing at the rate of approximately 2% for the year, almost entirely
from higher unit volume as pricing adjustments have been flat to somewhat soft,
particularly in the Consumer Division. Exchange rate differences had a slight
negative effect of less than 1% on year-to-year sales. Sales may continue to be
negatively affected if the dollar continues to strengthen.
Internal sales grew much more slowly than anticipated this year. Growth slowed
to approximately 2.5% in the Industrial Division from a softening North American
market and continued depressed overseas markets, particularly in the financially
troubled Asian and South American economies. A stronger dollar against most
foreign currencies further reduced demand for the Company's products outside
North America. Growth slowed in the Consumer Division to approximately 1% from
continuing consolidation in the do-it-yourself (D-I-Y) retailing industry,
inventory reductions at a number of major D-I-Y accounts, despite solid
sell-through rates, and continued weakness in the automobile aftermarket. The
Company sees many of the foreign markets for its industrial products beginning
to revive, and many of the retailers' inventory and related adjustments now
completed.
The gross profit margin strengthened to 45.9% compared with last year's 44.8%,
with the Industrial Division improving to 46.0% from 44.3% and the Consumer
Division achieving 45.6% compared with 45.5% a year ago. This improvement
reflects generally lower raw material costs, including lower costs on goods
sourced outside the U.S. from the strength of the dollar. The Company remains
confident that raw material price changes will continue to be effectively
managed in the foreseeable future. Margin improvement also continued at Tremco,
within the Industrial Division, through this year, mainly from ongoing
purchasing savings and the successful restructuring of its operations, since its
acquisition in February 1997. Other margin improvement came from Flecto in the
Consumer Division and Euclid in the Industrial Division, with their
comparatively higher margins. The positive effects of Flecto and lower raw
material costs more than offset certain product mix and market share-driven
lower margins within the Consumer Division.
Selling, general and administrative expenses of 34.6% of sales compare with
33.3% a year ago. The Industrial Division expenses increased to 33.1% of sales
from 31.8% and the Consumer Division expenses increased to 34.8% from 33.5% in
1998. Both divisions continued with many of their product and market
development, promotional and other growth-related initiatives to set the stage
for stronger sales growth in the future. The Consumer Division, in particular,
incurred higher freight and handling costs to accommodate increased demands for
smaller, more frequent shipments of products. Flecto also has proportionately
much higher costs in this category, including acquisition-related expenses. The
Industrial Division incurred costs associated with certain restructurings during
1999, and there were certain timing differences on a number of expenses between
years.
The Industrial Division generated the EBIT growth in 1999, primarily from
existing operations, while slower sales growth, coupled with the higher
servicing and development costs, adversely affected the Consumer Division.
The August 10, 1998 redemption of the Company's convertible debt securities
(refer to Liquidity and Capital Resources) lowered interest expense by $6.8
million this year, more than offsetting $4.3 million of additional interest
expense from increased indebtedness to acquire Flecto, Euclid and other smaller
acquisitions. Debt repayments throughout the past year, higher interest income,
and slightly lower interest rates between years further reduced net interest
expense, comparatively [refer to Note A (12)].
The tax rate improved in 1999 to 40.8% from 41.3% in 1998 [refer to Note C],
with the largest improvement coming from proportionately lower state and local
taxes.
Approximately two-thirds of the growth in earnings and diluted earnings per
share was internal, mainly within the Industrial Division, with the balance of
growth resulting
22
<PAGE> 4
from the net effect of acquisitions and divestitures. The Company's net income
margin improved to 5.5% from 5.4% a year ago. The issuance of common shares in
connection with the August 10, 1998 redemption of the Company's convertible debt
securities negatively impacted the calculation of basic earnings per share
compared with last year. This redemption is also the principal cause of the
comparative difference between the percentage changes in net income and earnings
per share between years. This effect will be much less after the first quarter
of fiscal 2000.
Subsequent to year end, on August 3, 1999, the Company completed its acquisition
of DAP Products Inc. and DAP Canada Corp. (collectively "DAP") headquartered in
Baltimore, Maryland. DAP has annual sales of approximately $250 million and is
the premier North American manufacturer and marketer of caulks and sealants,
spackling and glazing compounds, contact cements and other specialty adhesives.
DAP's brand names, which include DAP, Kwik Seal and Durabond, are well known
throughout the U.S. and Canada. DAP is expected to be neutral to the Company's
earnings results in fiscal 2000, but a strong contributor thereafter.
Also subsequent to year-end, on August 9, 1999, the Company announced a
restructuring program to generate manufacturing, distribution and administrative
efficiencies, and to better position the Company for long-term growth. This will
require a $45 million pre-tax ($.24 per share after-tax) charge in the first
quarter of fiscal 2000, but is expected to generate annualized pre-tax savings
of $23 million, or $.13 per share after-tax, once completed. These savings will
phase in over the next two years with the full savings expected beginning in
fiscal 2002. The Company also plans to divest non-core product lines with annual
sales of approximately $100 million over the next two years, but with no net
loss anticipated from these transactions. The net cash requirement of the
restructuring program is expected to be approximately $4 million.
FISCAL 1998 COMPARED TO FISCAL 1997
On March 31, 1998, the Company acquired Flecto, a leading manufacturer of wood
finishes and equipment for the retail do-it-yourself wood and floor finishing
markets [refer to Note A (2)]. With annual sales of approximately $50 million,
Flecto has the leading market share position in Canada and substantial market
share in the United States and complements the Company's other leading consumer
name brand companies serving the D-I-Y market, such as Rust-Oleum, Zinsser,
Bondex and Bondo.
Approximately 65% of the 1998 sales increase was attributable to net
acquisitions, most notably that of Flecto and that of Tremco on February 1,
1997. The Company's existing operations generated the balance of the sales
increase, growing at the rate of 7% for the year, almost entirely from higher
unit volume as pricing adjustments were negligible. Exchange rate differences
had a slight negative effect of less than 1% of sales year-to-year.
Internal growth was nearly 8% in the Consumer Division and nearly 7% in the
Industrial Division. The UPS strike affected shipments and caused some loss of
business early in the year, and generally slower retail markets affected the
Consumer Division during the first half of the year. Substantially all operating
units experienced generally stronger growth in the second half of the year.
The Company's gross profit margin improved to 44.8% from 44.3% in 1997, with the
Industrial Division improving to 44.3% from 43.1% and the Consumer Division at
45.5% compared with 45.8% in 1997. This was the result of the stronger average
margins of recently acquired companies, Tremco and Flecto, coupled with margin
improvements at Tremco throughout the year, mainly from purchasing savings by
being part of a larger group, and the on-schedule restructuring of its
operations. Certain market share-driven lower margins within the Consumer
Division offset the positive margin effects of Flecto. Raw material price
changes were not a significant factor during 1998.
Selling, general and administrative expenses increased to 33.3% of sales from
31.8% in 1997, with the Industrial Division at 31.8% from 30.0% and the Consumer
Division at 33.5% from 32.8% the previous year. Tremco and Flecto, with their
proportionately higher costs in this category, plus acquisition-related
expenses, accounted for the majority of this increase. Existing operations
increased certain promotional and related spending to further the Company's
growth, as planned. The Consumer Division, in particular, also incurred higher
freight costs in 1998 to meet increasing demands for smaller, more frequent
shipments to their customers, while the Far East economic situation precipitated
certain bad debts and exchange losses within the Industrial Division.
The Industrial Division generated strong EBIT growth in 1998, mostly from the
acquisition of Tremco. The Consumer Division change in EBIT during 1998 reflects
the loss of earnings from several small business divestitures during 1997, the
acquisition of Flecto late in 1998, and
23
<PAGE> 5
comparative weakness in the automobile aftermarket mainly due to the mild
winter. The EBIT change in Corporate/Other mainly reflects the net gain from the
divestitures in 1997.
Interest expense increased $6.2 million in 1998 [refer to Note A(12)],
reflecting the additional indebtedness to acquire Tremco, Flecto, and other
smaller acquisitions, plus non-cash interest accretion on the convertible debt.
Debt reductions and fractionally lower interest rates between years reduced net
interest expense, comparatively.
The tax rate improved to 41.3% in 1998 from 42.3% in 1997 [refer to Note C],
with the most significant improvements coming from the foreign sales
corporation, resulting in more favorable tax treatment of the Company's exports
from the U.S., proportionately lower state and local taxes, and fewer tax
disadvantaged losses among foreign countries.
Approximately half the growth in earnings and earnings per share in 1998 was
internal, with the balance of growth from the net effect of acquisitions and
divestitures. The decline in the Company's net income margin to 5.4% from 5.8% a
year ago is the result of the Tremco acquisition and its comparatively lower
return on sales, primarily as a result of related acquisition costs. Tremco's
return on sales has since improved significantly through sales growth combined
with savings generated through its successful restructuring programs.
The Company's earnings per share were affected in 1998 by the averaging of
Company shares issued in connection with Flecto and a smaller acquisition,
causing a 12% increase in earnings to compare to an 11% increase in diluted
earnings per share.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CASH PROVIDED FROM OPERATIONS
The Company generated $118 million in cash from operations during 1999, $6.1
million more than 1998. Other than normal timing differences within the balance
sheet, certain inventories had been built up during 1998 to accommodate
increased retail business in the Consumer Division, and these have come down
significantly along with other inventory reductions, primarily also within the
Consumer Division, in order to conserve working capital. The large difference
when comparing 1998 cash flow with 1997 was mainly attributable to the
seasonality of Tremco's business between its date of acquisition on February 1,
1997, and May 31, 1997.
The Company's strong cash flow from operations continues to be its primary
source of financing internal growth, with limited use of short-term credit.
INVESTING ACTIVITIES
The Company is not capital intensive, and capital expenditures generally do not
exceed depreciation and amortization in a given year. Capital expenditures are
made primarily to accommodate the Company's continued growth through improved
production and distribution efficiencies and capacity, and to enhance
administration. Capital expenditures in 1999 of $63 million compared with
depreciation and amortization of $62 million. Approximately $20 million of these
expenditures were Information Technology (IT) related, including major new
system installations for Tremco's North American and European operations. Most
of the larger IT system changeovers have now taken place, and capital spending
in this area is expected to trend downward over the next few years.
The investment of $35 million in new businesses this year reflects the
acquisitions of Euclid and several smaller businesses and assets this year, net
of cash acquired. The Company historically has acquired complementary businesses
and this trend is expected to continue.
The Company's captive insurance company invests in marketable securities in the
ordinary course of conducting its operations, and this activity will continue.
The differences between years are primarily attributable to the timing of
investments.
During 1998, the Company collected a $23.3 million May 31, 1997 receivable
associated with the sale of a business, and completed the sales of Tremco's
insulating glass unit and Autoglass division for a net amount of $107.5 million.
FINANCING ACTIVITIES
On January 22, 1999, the Company announced the authorization of a share
repurchase program. The program allows the Company to repurchase up to 5,000,000
Common Shares of the Company from time-to-time for a period of 12 months. As of
May 31, 1999, the Company had repurchased 1,296,000 Common Shares of the Company
at an average cost of approximately $13.15 per share.
During 1999, $51 million of additional debt was incurred primarily related to
acquisitions, $17 million of debt was incurred related to the share repurchase
program and approximately $44 million of debt was repaid. The acquisitions were
financed through the Company's revolving credit agreement.
24
<PAGE> 6
The Company's redemption of its convertible notes, effective August 10, 1998,
resulted in a $159 million decrease in long-term debt and a similar increase in
shareholders' equity. The Company's revolving credit facility was used to fund
the convertible securities redeemed for cash amounting to approximately $32
million. The Company's debt-to-capital ratio has strengthened to 44% from 56% at
May 31, 1998, mainly as a result of this redemption.
The acquisition of DAP, subsequent to year end on August 3, 1999, was financed
with a bridge loan arranged through one of the Company's lead banks. This
transaction has since been refinanced through a $700 million commercial paper
program, fully backed by the Company's existing $300 million revolving credit
facility plus a new $400 million revolving credit facility.
The stronger dollar effect on the Company's foreign net assets has tended to
reduce shareholders' equity, and this trend could continue if the dollar
continues to strengthen and the growth of foreign net assets continues.
The Company maintains excellent relations with its banks and other financial
institutions to further enable the financing of future growth opportunities.
OTHER MATTERS
- -------------
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue results from date sensitive computer programs that
improperly handle dates beyond 1999. This issue will impact virtually every
business that relies on a computer, including government agencies, utilities and
other basic service providers, which are outside the Company's control.
Since 1997, the Company has been addressing its computer systems to become Year
2000 compliant and provides quarterly updates to the Board of Directors. Because
the Company is a highly decentralized organization, comprised of many autonomous
operating companies, it is not dependent on one company-wide integrated system.
If, however, a number of the individual operating company systems do not become
Year 2000 compliant, the Company's operations could be substantially disrupted.
To date, the Company has made significant progress toward becoming completely
Year 2000 compliant. Remediation efforts are now essentially completed, tested
and in production. The remaining efforts are substantially devoted to final
testing, which the Company expects to complete by September 1999. The Company
presently does not anticipate disruptions in its business as a result of the
Year 2000. In addition, the Company is continuing to assess the Year 2000
preparedness of its key third party relationships, but does not anticipate
disruptions. As a result, the Company does not foresee the need to execute
contingency plans.
The Company's most reasonably likely worst case scenario, should the Company or
its key suppliers or customers fail to resolve the Year 2000 issue, would be a
short-term slowdown or cessation of manufacturing operations at one or more of
its facilities and a short- term inability on the part of the Company to process
orders and billings in a timely manner, and to deliver product to customers.
The Company does not expect that any third party significant to its business
will be determined not to be Year 2000 compliant. However, should the Company
determine that a third party with whom the Company has a materially significant
relationship is not Year 2000 compliant, the Company will: (a) investigate
whether or not such noncompliance will affect the Company's relationship with
such third party, and (b) if such relationship is materially impaired by a lack
of Year 2000 compliance, the Company will seek a party similarly situated to the
third party to provide the relevant products, supplies or services to the
Company.
The Company continues to estimate its total Year 2000 compliance efforts will
cost $4,500,000, which is approximately $1,000,000 less than originally
anticipated. All Year 2000 costs have been and will be funded from the Company's
operating cash flow. The Company has utilized both internal and external
resources to address these issues.
The Company's estimated future costs for Year 2000 were made using various
assumptions including the continued availability of certain resources, Year 2000
modification plans, implementation success by key third-parties and other
factors. Unforeseen changes or developments may occur that could affect the
Company's estimates of the amount of time and costs necessary to modify and test
its IT and non-IT systems for Year 2000 compliance. These developments include,
but are not limited to, the availability and cost of personnel trained in this
area and the ability to locate and correct all relevant computer codes. This
Year 2000 disclosure statement is intended to be covered by and fall within the
meaning of the "Year 2000 Readiness Disclosure Act."
ENVIRONMENTAL MATTERS
Environmental obligations continue to be appropriately addressed and, based upon
the latest available information, it is not anticipated that the outcome of such
matters will materially affect the Company's results of operations or financial
condition [refer to Note H].
25
<PAGE> 7
MARKET RISK
- -----------
The Company is exposed to market risk from changes in interest rates and foreign
currency exchange rates since it funds its operations through long- and
short-term borrowings and denominates its business transactions in a variety of
foreign currencies. A summary of the Company's primary market risk exposures is
presented below.
INTEREST RATE RISK
The Company's primary interest rate risk exposure results from floating rate
debt including various revolving credit and other lines of credit. At May 31,
1999, approximately 72% of the Company's total long-term debt consisted of
floating rate debt. If interest rates were to increase 100 basis points (1%)
from May 31, 1999 rates, and assuming no changes in long-term debt from the May
31, 1999 levels, the additional annual expense would be approximately $4.2
million on a pre-tax basis. The Company currently does not hedge its exposure to
floating interest rate risk.
FOREIGN CURRENCY RISK
The Company's foreign sales and results of operations are subject to the impact
of foreign currency fluctuations. As most of the Company's foreign operations
are in countries with fairly stable currencies, such as the United Kingdom,
Belgium and Canada, this effect has not been material. In addition, foreign debt
is denominated in the respective foreign currency, thereby eliminating any
related translation impact on earnings. If the dollar continues to strengthen,
the Company's foreign results of operations will be negatively impacted, but the
effect is not expected to be material. A 10% adverse change in foreign currency
exchange rates would not have resulted in a material impact in the Company's net
income for the year ended May 31, 1999. The Company does not currently hedge
against the risk of exchange rate fluctuations.
EURO CURRENCY CONVERSION
On January 1, 1999, eleven of the fifteen members of the European Union adopted
a new European currency unit (the "Euro") as their common legal currency. The
participating countries' national currencies will remain legal tender as
denominations of the Euro from January 1, 1999 through January 1, 2002, and the
exchange rates between the Euro and such national currency units will be fixed.
The Company has assessed the potential impact of the Euro currency conversion on
its operating results and financial condition. The impact of pricing differences
on country-to-country indebtedness is not expected to be material. The Company
converted its European operations to the Euro currency basis effective June 1,
1999.
FORWARD-LOOKING STATEMENTS
- --------------------------
The foregoing discussion includes forward-looking statements relating to the
business of the Company. These forward-looking statements, or other statements
made by the Company, are made based on management's expectations and beliefs
concerning future events impacting the Company and are subject to uncertainties
and factors (including those specified below) which are difficult to predict
and, in many instances, are beyond the control of the Company. As a result,
actual results of the Company could differ materially from those expressed in or
implied by any such forward-looking statements. These uncertainties and factors
include (a) the price and supply of raw materials, particularly titanium
dioxide, certain resins, aerosols and solvents; (b) continued growth in demand
for the Company's products; (c) risks associated with environmental liability
inherent in the nature of a chemical coatings business; (d) the effect of
changes in interest rates; (e) the effect of fluctuations in currency exchange
rates upon the Company's foreign operations; (f) the effect of non-currency
risks of investing in and conducting operations in foreign countries, including
those relating to political, social, economic and regulatory factors; (g) future
acquisitions and the Company's ability to effectively integrate such
acquisitions; (h) the potential future impact of Year 2000 related software
conversion issues; the potential impact of the Company's suppliers, customers
and other third parties ability to identify and resolve their own Year 2000
obligations in such a way as to allow them to continue normal business
operations or furnish raw materials, products, services or data to the Company
and its operating companies without interruption; the potential impact of
manufacturers of the Company's computer systems and software representations as
to their Year 2000 status; and the potential impact of the Company's own Year
2000 investigation, remediation, testing and systems implementation efforts; (i)
the potential impact of the Euro currency conversion; and (j) the ability of the
Company to realize the projected pre-tax savings associated with the
restructuring and consolidation program, and to divest non-core product lines.
26
<PAGE> 8
CONSOLIDATED BALANCE SHEETS
- ---------------------------
RPM, Inc. and Subsidiaries
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
May 31 1999 1998
============================================================================================================================
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments (Note A) $ 19,729 $ 40,783
Trade accounts receivable (less allowances of $14,248 in 1999 and $12,718 in 1998) 362,611 332,944
Inventories (Note A) 242,445 243,249
Prepaid expenses and other current assets 80,634 58,136
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 705,419 675,112
- ----------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST (NOTE A)
Land 27,887 27,510
Buildings and leasehold improvements 197,567 187,405
Machinery and equipment 347,236 300,995
- ----------------------------------------------------------------------------------------------------------------------------
572,690 515,910
Less allowance for depreciation and amortization 232,993 210,013
- ----------------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 339,697 305,897
- ----------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Cost of businesses over net assets acquired, net of amortization (Note A) 425,951 418,092
Other intangible assets, net of amortization (Note A) 232,556 237,830
Equity in unconsolidated affiliates 7,771 20,536
Other 25,842 28,450
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 692,120 704,908
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,737,236 $ 1,685,917
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and accounts payable $ 131,118 $ 119,882
Current portion of long-term debt (Note B) 3,764 5,016
Accrued compensation and benefits 58,277 56,300
Accrued loss reserves (Note H) 49,296 43,332
Other accrued liabilities 50,843 51,383
Income taxes payable (Notes A and C) 9,251 11,915
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 302,549 287,828
- ----------------------------------------------------------------------------------------------------------------------------
LONG-TERM LIABILITIES
Long-term debt, less current maturities (Note B) 582,109 716,989
Other long-term liabilities 55,832 56,704
Deferred income taxes (Notes A and C) 53,870 58,059
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM LIABILITIES 691,811 831,752
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 994,360 1,119,580
- ----------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common shares, stated value $.015 per share; authorized 200,000,000 shares;
issued 109,444,000 and outstanding 109,443,000 in 1999;
issued and outstanding 100,254,000 in 1998 (Note D) 1,613 1,460
Paid-in capital 423,204 264,508
Treasury shares, at cost (Note D) (17,044)
Accumulated other comprehensive loss (Note A) (23,908) (14,542)
Retained earnings 359,011 314,911
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 742,876 566,337
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,737,236 $ 1,685,917
============================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
27
<PAGE> 9
CONSOLIDATED STATEMENTS OF INCOME
RPM, Inc. and Subsidiaries
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended May 31 1999 1998 1997
=============================================================================================================================
<S> <C> <C> <C>
NET SALES $ 1,712,154 $ 1,615,274 $ 1,350,537
Cost of sales 927,110 891,862 752,391
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 785,044 723,412 598,146
Selling, general and administrative expenses 592,666 537,156 429,838
Interest expense, net 32,781 36,700 32,580
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 159,597 149,556 135,728
Provision for income taxes (Note C) 65,051 61,719 57,413
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 94,546 $ 87,837 $ 78,315
- -----------------------------------------------------------------------------------------------------------------------------
Average shares outstanding (Note D) 108,731 98,527 97,285
- -----------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share (Note D) $ .87 $ .89 $ .81
- -----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share (Note D) $ .86 $ .84 $ .76
- -----------------------------------------------------------------------------------------------------------------------------
Cash dividends per common share $ .46 $ .44 $ .41
=============================================================================================================================
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -----------------------------------------------
RPM, Inc. and Subsidiaries
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Common Shares
----------------------- Accumulated
Number Other
of Shares Stated Paid-In Treasury Comprehensive Retained
(Note D) Value Capital Shares Loss (Note A) Earnings Total
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MAY 31, 1996 96,811 $ 1,410 $ 215,019 $ $ (2,410) $ 231,896 $ 445,915
Comprehensive income ---------
Net income 78,315 78,315
Other comprehensive loss (5,704) (5,704)
---------
Comprehensive income 72,611
Dividends paid (39,746) (39,746)
Amendment of articles (250) (250)
Business combinations 965 14 13,586 13,600
Stock option exercises, net 253 4 1,264 1,268
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1997 98,029 1,428 229,619 (8,114) 270,465 493,398
Comprehensive income -------
Net income 87,837 87,837
Other comprehensive loss (6,428) (6,428)
-------
Comprehensive income 81,409
Dividends paid (6) (83) (43,391) (43,474)
Debt conversion 32 499 499
Business combinations 1,813 26 32,259 32,285
Stock option exercises, net 276 4 2,216 2,220
Restricted share awards 110 2 (2)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1998 100,254 1,460 264,508 (14,542) 314,911 566,337
Comprehensive income -------
Net income 94,546 94,546
Reclassification adjustments (65) (65)
Other comprehensive loss (9,301) (9,301)
-------
Comprehensive income 85,180
Dividends paid (50,446) (50,446)
Debt conversion 10,135 148 156,896 157,044
Business combinations (24) (417) (417)
Repurchase of shares (1,296) (17,044) (17,044)
Stock option exercises, net 281 4 2,218 2,222
Restricted share awards 93 1 (1)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1999 109,443 $ 1,613 $ 423,204 $ (17,044) $ (23,908) $ 359,011 $ 742,876
==================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
28
<PAGE> 10
CONSOLIDATED STATEMENTS OF CASH FLOWS
RPM, Inc. and Subsidiaries
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended May 31 1999 1998 1997
==================================================================================================================================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 94,546 $ 87,837 $ 78,315
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 62,135 57,009 51,145
(Decrease) in deferred liabilities (4,189) (10,459) (7,400)
(Earnings) of unconsolidated affiliates (2,332) (2,217) (2,275)
Non-cash interest expense 1,696 9,599 9,127
Changes in assets and liabilities, net of effect
from purchases and sales of businesses:
(Increase) in accounts receivable (27,828) (26,944) (34,934)
(Increase) decrease in inventory 11,089 (19,727) (11,722)
(Increase) in prepaid and other assets (11,523) (4,163) (9,520)
Increase (decrease) in accounts payable (6,349) 6,138 3,489
Increase (decrease) in accrued liabilities 7,639 18,413 (4,568)
Other (7,163) (3,883) (2,179)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash From Operating Activities 117,721 111,603 69,478
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (63,406) (60,343) (35,825)
Acquisition of businesses, net of cash acquired (34,551) (47,709) (315,960)
Purchase of marketable securities (31,666) (27,224) (13,428)
Proceeds from marketable securities 29,895 17,355 14,992
Distributions from joint ventures 1,063 592 261
Investments in joint ventures (2,702) (200)
Proceeds from sale of assets and businesses 565 131,222 8,930
- ----------------------------------------------------------------------------------------------------------------------------------
Cash From (Used For) Investing Activities (98,100) 11,191 (341,230)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term and short-term debt 1,169,127 1,238,371 1,187,128
Reductions of long-term and short-term debt (1,144,022) (1,316,000) (858,534)
Cash dividends (50,446) (43,474) (39,746)
Exercise of stock options 2,222 2,220 1,268
Repurchase of shares (17,044)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash From (Used For) Financing Activities (40,163) (118,883) 290,116
- ----------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (512) (570) (777)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (21,054) 3,341 17,587
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AT BEGINNING OF YEAR 40,783 37,442 19,855
- ----------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 19,729 $ 40,783 $ 37,442
==================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 36,155 $ 32,375 $ 23,454
Income taxes $ 71,904 $ 70,189 $ 67,842
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Interest accreted on convertible notes $ 1,696 $ 9,599 $ 9,127
Shares issued (returned) in business combinations $ (417) $ 32,285 $ 13,600
Conversion of debt to equity $ 157,044 $ 499
Receivables (payables) from business combinations $ (1,557) $ 26,728
==================================================================================================================================
</TABLE>
Additions and reductions to long-term and short-term debt relate to periodic
rollovers of amounts borrowed under the Company's long-term credit agreement.
See Notes to Consolidated Financial Statements
29
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
MAY 31, 1999, 1998 AND 1997
NOTE A -- SUMMARY OF SIGNIFICANT
ACCOUNTING PRINCIPLES
(1) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of RPM, Inc. and its
majority owned domestic and foreign subsidiaries. The Company accounts for its
investment in less than majority owned joint ventures under the equity method.
Intercompany accounts, transactions and unrealized profits and losses are
eliminated in consolidation.
Certain reclassifications have been made to prior year amounts to conform with
the current year presentation.
(2) BUSINESS COMBINATIONS
During the two year period ended May 31, 1999, the Company completed several
acquisitions. As reported last year, the Company acquired all the outstanding
shares of The Flecto Company, Inc. and affiliates. This acquisition as well as
several other smaller acquisitions have been accounted for by the purchase
method of accounting. The difference of approximately $60,000,000 between the
fair value of net assets acquired and the purchase consideration of $128,000,000
($96,000,000 in cash and 1,813,000 of the Company's shares) has been allocated
to goodwill. The assets, liabilities and operating results of these companies
are reflected in the Company's financial statements from their respective dates
of acquisition forward. Pro forma results were immaterial and consequently are
not presented.
In addition, the Company also completed several divestitures of companies and
product lines during the past two years which had an immaterial effect on the
results of operations.
(3) FOREIGN CURRENCY
The functional currency of foreign subsidiaries is their local currency.
Accordingly, for the periods presented, assets and liabilities have been
translated using exchange rates prevailing at year end while income and expense
for the periods have been translated using an average exchange rate. The
resulting translation adjustments have been recorded in other comprehensive
loss, a component of shareholders' equity, and will be included in net earnings
only upon the sale or liquidation of the underlying foreign investment, which is
not contemplated at this time. Transaction gains and losses have been immaterial
during the past three fiscal years.
(4) COMPREHENSIVE INCOME
As of June 1, 1998, the Company adopted SFAS No. 130 Reporting Comprehensive
Income. SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components, however, the adoption of this statement
had no impact on the Company's net income. SFAS No. 130 requires other
comprehensive income to include foreign currency translation adjustments,
minimum pension liability adjustments and unrealized gain or loss on securities
which prior to adoption were reported separately. The May 31, 1998 and 1997
financial statements have been reclassified to conform to the requirements of
SFAS No. 130.
Accumulated other comprehensive loss (which is shown net of taxes) consists of
the following components:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Foreign Minimum Unrealized
Currency Pension Gain (Loss)
Translation Liability On
(In thousands) Adjustments Adjustments Securities Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at May 31, 1996 $ (2,492) $ $ 82 $ (2,410)
Other comprehensive loss (5,724) 20 (5,704)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1997 (8,216) 102 (8,114)
Other comprehensive loss (5,605) (786) (37) (6,428)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1998 (13,821) (786) 65 (14,542)
Less: Reclassification adjustments
for gains included in net income (65) (65)
Other comprehensive loss (8,496) (67) (738) (9,301)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MAY 31, 1999 $ (22,317) $ (853) $ (738) $ (23,908)
===============================================================================================================================
</TABLE>
30
<PAGE> 12
(5) CASH AND SHORT-TERM INVESTMENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents. The Company does not believe it is exposed to any significant
credit risk on cash and short-term investments.
(6) MARKETABLE SECURITIES
Marketable securities, all of which are classified as available for sale, total
$23,351,000 and $21,319,000 at May 31, 1999 and 1998, respectively. The
estimated fair values of these securities are included in other current assets
and are based on quoted market prices.
(7) FINANCIAL INSTRUMENTS
The Company's financial instruments recorded on the balance sheet include cash
and short-term investments, accounts receivable, notes and accounts payable, and
debt. The carrying amount of cash and short-term investments, accounts
receivable and notes and accounts payable approximates fair value because of
their short term maturity.
The carrying amount of the Company's debt instruments approximates fair value
based on quoted market prices, variable interest rates, or borrowing rates for
similar types of debt arrangements.
(8) INVENTORIES
Inventories are stated at the lower of cost or market, cost being determined
substantially on a first-in, first-out (FIFO) basis and market being determined
on the basis of replacement cost or net realizable value. Inventory costs
include raw material, labor and manufacturing overhead. Inventories were
composed of the following major classes:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
May 31
-----------------------
(In thousands) 1999 1998
===================================================================================
<S> <C> <C>
Raw material and supplies $ 80,827 $ 77,173
Finished goods 161,618 166,076
- -----------------------------------------------------------------------------------
TOTAL INVENTORY $ 242,445 $ 243,249
===================================================================================
</TABLE>
(9) DEPRECIATION
Depreciation is computed over the estimated useful lives of the assets primarily
using the straight-line method. Depreciation expense charged to operations for
the three years ended May 31, 1999 was $34,803,000, $30,823,000 and $26,412,000,
respectively. The annual depreciation rates are based on the following ranges of
useful lives:
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------
Land improvements 10 to 40 years
- --------------------------------------------------------------------------------------
Buildings and improvements 5 to 50 years
- --------------------------------------------------------------------------------------
Machinery and equipment 3 to 20 years
======================================================================================
</TABLE>
31
<PAGE> 13
(10) INTANGIBLES
The excess of cost over the underlying value of the net assets of companies
acquired is being amortized on the straight-line basis, primarily over 40 years.
Amortization expense charged to operations for the three years ended May 31,
1999 was $13,625,000, $12,435,000 and $9,916,000, respectively. Cost of
businesses over net assets acquired is shown net of accumulated amortization of
$71,150,000 at May 31, 1999 ($56,611,000 at May 31, 1998).
Intangible assets also represent costs allocated to formulae, trademarks and
other specifically identifiable assets arising from business acquisitions. These
assets are being amortized using the straight-line method over periods of 7 to
40 years. The Company assesses the recoverability of the excess of cost over the
assigned value of net assets acquired by determining whether the amortization of
the balance over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operations. Amortization expense charged to
operations for the three years ended May 31, 1999 was $12,504,000, $11,473,000
and $10,936,000, respectively.
Other intangible assets consist of the following major classes:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
May 31
--------------------------------
(In thousands) 1999 1998
=========================================================================================
<S> <C> <C>
Formulae $ 89,358 $ 89,648
Trademarks 84,194 83,621
Distributor networks 39,000 37,500
Workforce 37,433 36,783
Patents 10,987 10,518
Licenses 10,215 9,747
Other 13,169 11,631
- -----------------------------------------------------------------------------------------
284,356 279,448
Accumulated amortization 51,800 41,618
- -----------------------------------------------------------------------------------------
OTHER INTANGIBLE ASSETS, NET $ 232,556 $ 237,830
=========================================================================================
</TABLE>
(11) RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when incurred and are
included in operating expenses. The amounts charged for the three years ended
May 31, 1999 were $18,022,000, $15,815,000 and $14,610,000, respectively. The
customer sponsored portion of such expenditures was not significant.
(12) INTEREST EXPENSE, NET
Interest expense is shown net of investment income which consists of interest,
dividends and capital gains. Investment income for the three years ended May 31,
1999 was $4,880,000, $4,154,000 and $2,059,000, respectively.
(13) INCOME TAXES
The Company and its wholly owned domestic subsidiaries file a consolidated
federal income tax return. The tax effects of transactions are recognized in the
year in which they enter into the determination of net income, regardless of
when they are recognized for tax purposes. As a result, income tax expense
differs from actual taxes payable. The accumulation of these differences at May
31, 1999 is shown as a noncurrent liability of $53,870,000 (net of a noncurrent
asset of $40,333,000). At May 31, 1998, the noncurrent liability was $58,059,000
(net of a noncurrent asset of $41,353,000). The Company does not intend to
distribute the accumulated earnings of consolidated foreign subsidiaries
amounting to $92,021,000 at May 31, 1999, and $69,691,000 at May 31, 1998, and
therefore no provision has been made for the taxes which would result if such
earnings were remitted to the Company.
32
<PAGE> 14
(14) ESTIMATES
The preparation of 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, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(15) RECENTLY ISSUED ACCOUNTING STANDARDS
The Accounting Standards Executive Committee recently issued Statements of
Position (SOP) 98-1, Accounting for Computer Software Developed or Obtained for
Internal Use and SOP 98-5, Reporting on the Costs of Start-Up Activities. Both
Statements of Position require the expensing of certain costs previously
capitalized by the Company. The impact of these SOPs is not expected to be
material.
NOTE B - BORROWINGS
A description of long-term debt follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
May 31
--------------------------
(In thousands) 1999 1998
===============================================================================================================
<S> <C> <C>
Revolving credit agreement for $300,000,000 with ten banks
through February 2, 2002. Interest, which is tied to one of
various rates, was 5.19% at May 31, 1999. The Chairman
of the Board and Chief Executive Officer of the Company is a
director of one of the banks providing this facility. $ 215,000 $ 243,000
Short-term borrowings with two banks bearing interest of 5.10%
at May 31, 1999. These obligations were reclassified as long-term
debt reflecting the Company's intent and ability, through the unused
credit facility above, to refinance these borrowings. 85,000 1,300
Convertible notes due 2012. These notes were redeemed in
August 1998 for 10,135,000 shares and $32,124,000 in cash. 189,809
7.00% unsecured senior notes due June 15, 2005. 150,000 150,000
Unsecured notes due 2008 bearing interest for one year at the six
month LIBOR rate minus five basis points (5.75% at May 31, 1999). 100,000 100,000
Multi-currency revolving credit agreement for $45,000,000 with
a bank through December 14, 2001. Interest, which is tied to
one of various rates, averaged 3.80% at May 31, 1999. 19,884 20,876
6.75% unsecured senior notes due to an insurance company
in annual installments through 2003. 8,571 10,286
Other notes and mortgages payable at various rates of interest
due in installments through 2004, substantially secured by property. 7,418 6,734
- --------------------------------------------------------------------------------------------------------------
585,873 722,005
Less current portion 3,764 5,016
- --------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT, LESS CURRENT MATURITIES $ 582,109 $ 716,989
===============================================================================================================
</TABLE>
At May 31, 1999, the Company has unused short-term lines of credit with several
banks totalling $33,424,000. An additional $6,400,000 short-term line of credit
was outstanding at May 31, 1999, and is included in Notes and Accounts Payable.
The aggregate maturities of long-term debt for the five years subsequent to May
31, 1999 are as follows: 2000 - $3,764,000; 2001 - $3,032,000; 2002 -
$325,447,000; 2003 - $1,906,000; 2004 -$1,723,000.
33
<PAGE> 15
NOTE C - TAXES
The provision for taxes on income includes the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year Ended May 31
---------------------------------------------
(In thousands) 1999 1998 1997
=========================================================================================================================
<S> <C> <C> <C>
Federal income tax rate of 35% applied to income before income taxes $ 55,859 $ 52,345 $ 47,505
Increase (decrease) in taxes resulting from:
Tax credits (660) (1,132) (291)
State and local taxes - Net of federal income tax benefit 4,841 6,033 5,994
Foreign taxes in excess of U.S. federal tax rate 1,032 433 1,161
Amortization of goodwill 3,326 3,346 2,144
All other items, none of which exceed 5% of computed tax 653 694 900
- -------------------------------------------------------------------------------------------------------------------------
ACTUAL TAX EXPENSE $ 65,051 $ 61,719 $ 57,413
=========================================================================================================================
ACTUAL TAX RATE 40.76% 41.27% 42.30%
=========================================================================================================================
The provision for income taxes consists of the following:
- -------------------------------------------------------------------------------------------------------------------------
Current
Federal $ 48,609 $ 49,802 $ 48,363
State 7,448 9,281 9,222
Foreign 13,183 13,096 7,228
69,240 72,179 64,813
- -------------------------------------------------------------------------------------------------------------------------
Deferred
Federal (6,238) (9,970) (7,681)
Foreign 2,049 (490) 281
- -------------------------------------------------------------------------------------------------------------------------
ACTUAL TAX EXPENSE $ 65,051 $ 61,719 $ 57,413
=========================================================================================================================
</TABLE>
Deferred income taxes result from timing differences in recognition of revenue
and expense for book and tax purposes, primarily from the tax timing differences
relating to business combinations.
NOTE D - COMMON SHARES
There are 200,000,000 common shares authorized with a stated value of $.015 per
share. At May 31, 1999 and 1998, there were 109,443,000 and 100,254,000 shares
outstanding respectively, each of which is entitled to one vote.
Basic earnings per share is computed by dividing income available to common
shareholders, the numerator, by the weighted average number of common shares
outstanding during each year, the denominator (108,731,000 in 1999, 98,527,000
in 1998 and 97,285,000 in 1997). In computing diluted earnings per share, the
net income was increased by the add back of interest expense, net of tax, on
convertible securities assumed to be converted. In addition, the number of
common shares was increased by common stock options with exercisable prices
lower than the average market prices of common shares during each year and
reduced by the number of shares assumed to have been purchased with proceeds
from the exercised options. The number of common shares was also increased by
additional shares issuable assuming conversion of convertible securities.
In April 1997, the Company adopted a Restricted Stock Plan. The Plan is intended
to replace, over a period of time, the Company's existing cash based Benefit
Restoration Plan. Under the terms of the Plan, up to 1,563,000 shares may be
awarded to certain employees through May 2007. For the year ended May 31, 1999,
93,000 shares were awarded under this Plan (110,000 shares in 1998). None of
these awards, which generally are subject to forfeiture until the completion of
five years of service, were vested at May 31, 1999 or May 31, 1998.
In January 1999, the Company authorized, through December 31, 1999, the
repurchase of up to 5,000,000 of its common shares. The repurchase of shares
under this program may be made in the open market or in private transactions, at
times and in amounts and prices that management deems appropriate. The Company
may
34
<PAGE> 16
terminate or limit the repurchase program at any time. Through May 31, 1999, the
Company had repurchased 1,296,000 shares at an aggregate cost of $17,044,000.
Shares repurchased under this program are held at cost and are included in
Shareholders' Equity as Treasury Shares.
In April 1999, the Company adopted a Shareholder Rights Plan and declared a
dividend distribution of one right for each outstanding common share. The Plan
provides existing shareholders the right to purchase shares of the Company at a
discount in certain circumstances as defined by the Plan. The rights are not
exercisable at May 31, 1999 and expire in May 2009.
The Company has options outstanding under three stock option plans, the 1979
Nonqualified Stock Option Plan, the 1989 Stock Option Plan and the 1996 Key
Employees Stock Option Plan which provides for the granting of options for up to
4,500,000 shares. These options are generally exercisable cumulatively in equal
annual installments commencing one year from the grant date and have expiration
dates ranging from July 1999 to October 2008. At May 31, 1999, 2,134,000 shares
(2,856,000 at May 31, 1998) were available for future grant.
Transactions during the last two years are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SHARES UNDER OPTION
(In thousands) 1999 1998
====================================================================================================================================
<S> <C> <C>
Outstanding, beginning of year (weighted average price of $12.99 ranging from $5.03 to $17.25 per share) 4,432 3,204
Granted (weighted average price of $15.37 ranging from $14.88 to $16.13 per share) 722 1,644
Cancelled (weighted average price of $14.00 ranging from $5.03 to $16.35 per share) (101) (94)
Exercised (weighted average price of $10.22 ranging from $5.03 to $13.80 per share) (345) (322)
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year (weighted average price of $13.54 ranging from $5.84 to $17.25 per share) 4,708 4,432
- ------------------------------------------------------------------------------------------------------------------------------------
Exercisable, end of year (weighted average price of $12.13 ranging from $5.84 to $17.25 per share) 2,362 1,889
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
at May 31, 1999 at May 31, 1999
------------------------------------------------- ----------------------------------------
Average
Range of Shares Remaining Average Shares Average
Exercise Prices (000's) Life Price (000's) Price
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
$ 5.00 - $ 9.99 324 2.2 $ 8.47 324 $ 8.47
$ 10.00 - $ 14.99 2,513 6.4 $ 12.64 1,640 $ 12.03
$ 15.00 - $ 17.25 1,871 8.4 $ 15.63 398 $ 15.54
-------- --------
4,708 6.9 $ 13.54 2,362 $ 12.13
====================================================================================================================================
</TABLE>
The Company is accounting for its stock option plans under the provisions of APB
Opinion No. 25 and, accordingly, no compensation cost has been recognized. If
compensation cost had been determined based on the fair value at the grant date
for awards under this plan consistent with the method prescribed by SFAS No.
123, the Company's net income and earnings per share for the years ended May 31,
1999 and 1998, would have been reduced to the pro forma amounts indicated in the
following table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
(In thousands, except per share amounts) 1999 1998
======================================================================================
<S> <C> <C>
Pro forma net income $ 92,239 $ 85,920
======================================================================================
Pro forma earnings per share:
Basic $ .85 $ .87
======================================================================================
Diluted $ .84 $ .82
======================================================================================
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions. The expected volatility rate is 28.7% for shares granted in 1999
and 27.1% for 1998. The expected life is 7.3 and 7.0 years, with dividend
yields of 3.0% and 2.9% and risk-free interest rates of 5.0% and 6.2%, for 1999
and 1998, respectively.
35
<PAGE> 17
NOTE E - LEASES
At May 31, 1999, certain property, plant and equipment were leased by the
Company under long-term leases. Certain of these leases provide for increased
rental based upon an increase in the cost-of-living index. Future minimum lease
commitments as of May 31, 1999 for all noncancellable leases are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
May 31 (In thousands)
=======================================================================================
<S> <C>
2000 $ 10,803
2001 7,843
2002 4,803
2003 2,996
2004 1,186
Thereafter 6,097
- ---------------------------------------------------------------------------------------
TOTAL MINIMUM LEASE COMMITMENTS $ 33,728
=======================================================================================
</TABLE>
Rental expenses for all operating leases totalled $9,350,000 in 1999, $9,654,000
in 1998 and $8,804,000 in 1997. Capitalized leases were insignificant for the
three years ended May 31, 1999.
NOTE F - RETIREMENT PLANS
The Company sponsors a non-contributory defined benefit pension plan (The
Retirement Plan) covering substantially all domestic non-union employees.
Pension coverage for employees of the Company's foreign subsidiaries is
provided, to the extent deemed appropriate, through separate plans, many of
which are governed by local statutory requirements. In addition, benefits for
domestic union employees are provided by separate plans.
The Retirement Plan provides benefits that are based upon years of service and
average compensation with accrued benefits vesting after five years. Benefits
for union employees are generally based upon years of service. The Company's
funding policy is to contribute annually an amount that can be deducted for
federal income tax purposes using a different actuarial cost method and
different assumptions from those used for financial reporting.
Effective June 1, 1998, the Company adopted SFAS No. 132, Employers' Disclosure
About Pension and Other Postretirement Benefits. SFAS No. 132 does not change
the measurement or recognition of those plans, but revises the disclosure
requirements for pension and other postretirement benefit plans for all years
presented.
Net periodic pension cost (income) consisted of the following for the three
years ended May 31, 1999:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
U.S. Plans Non-U.S. Plans
------------------------------------------- --------------------------
(In thousands) 1999 1998 1997 1999 1998
<S> <C> <C> <C> <C> <C>
Service cost $ 7,247 $ 5,575 $ 4,417 $ 1,041 $ 881
Interest cost 5,253 5,353 5,038 2,263 2,122
Expected return on plan assets (6,071) (4,930) (4,263) (3,183) (2,899)
Amortization of:
Prior service cost 114 110 130
Net gain on adoption of SFAS No. 87 (100) (100) (68)
Net actuarial (gain) loss recognized 71 (6) 149 1 (60)
Curtailment/settlement (gains) losses (1,728) (808) (308)
- -----------------------------------------------------------------------------------------------------------------------
NET PENSION COST $ 4,786 $ 5,194 $ 5,403 $ (186) $ 44
========================================================================================================================
</TABLE>
36
<PAGE> 18
The changes in benefit obligations and plan assets, as well as the funded status
of the Company's pension plans at May 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
U.S. PLANS NON-U.S. PLANS
------------------------- -------------------------
(In thousands) 1999 1998 1999 1998
===========================================================================================================================
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $ 74,091 $ 64,837 $ 32,093 $ 27,700
Service cost 7,247 5,575 1,041 881
Interest cost 5,253 5,353 2,263 2,122
Benefits paid (11,000) (8,845) (1,538) (1,588)
Participant contributions 398 348
Actuarial (gain) loss 2,755 10,894 1,126 3,050
Currency exchange rate changes (1,466) (420)
Curtailment/settlement (gains) losses (2,018) (3,977) (911)
Plan amendments 254
- ---------------------------------------------------------------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR $ 76,328 $ 74,091 $ 33,006 $ 32,093
===========================================================================================================================
Fair value of plan assets at beginning of year $ 64,132 $ 56,366 $ 38,106 $ 33,771
Actual return on plan assets 607 10,578 871 5,747
Employer contributions 7,976 6,126 429 414
Participant contributions 398 348
Benefits paid (11,000) (8,845) (1,702) (1,644)
Currency exchange rate changes (1,633) (530)
Curtailment/settlement gains (losses) (93)
- ---------------------------------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 61,715 $ 64,132 $ 36,469 $ 38,106
===========================================================================================================================
Excess (deficit) of plan assets versus
benefit obligations at end of year $(14,613) $ (9,959) $ 3,463 $ 6,013
Contributions after measurement date 1,527 1,282 104
Unrecognized actuarial (gain) loss 13,161 5,237 2,989 174
Unrecognized prior service cost 824 1,003
Unrecognized net transitional asset (408) (507)
- ---------------------------------------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED $ 491 $ (2,944) $ 6,556 $ 6,187
===========================================================================================================================
</TABLE>
37
<PAGE> 19
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
U.S. Plans Non-U.S. Plans
(In thousands) 1999 1998 1999 1998
==================================================================================================================
<S> <C> <C> <C> <C>
Amounts recognized in the consolidated
balance sheets consist of:
Prepaid benefit cost $ 2,788 $ 1,224 $ 7,446 $ 7,248
Accrued benefit liability (3,146) (5,011) (1,018) (1,147)
Intangible asset (SFAS No. 87) 124 143
Accumulated other comprehensive loss (net of tax) 725 700 128 86
- ------------------------------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED $ 491 $(2,944) $ 6,556 $ 6,187
==================================================================================================================
</TABLE>
For domestic plans with accumulatedbenefit obligations in excess of plan assets,
the projected benefit obligation, accumulated benefit obligation and fair value
of assets were $4,000,000, $4,000,000 and $839,000, respectively, as of May 31,
1999 and $5,445,000, $5,445,000 and $743,000, respectively, as of May 31, 1998.
For foreign plans with accumulated benefit obligations in excess of plan assets,
the projected benefit obligation, accumulated benefit obligation and fair value
of assets were $1,018,000, $1,018,000 and $ -0- , respectively as of May 31,
1999 and $1,533,000, $911,000 and $ -0- , respectively, as of May 31, 1998.
The following weighted average assumptions were used to determine the Company's
obligations under the plans:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Plans Non-U.S. Plans
---------------------- -------------------------
(In thousands) 1999 1998 1999 1998
<S> <C> <C> <C> <C>
==============================================================================================================================
Discount rate 7.00% 7.00% 5.83% 6.50%
Expected return on plan assets 9.00% 8.50% 8.25% 8.25%
Rate of compensation increase 4.50% 4.50% 4.25% 4.50%
==============================================================================================================================
</TABLE>
The plans' assets consist primarily of stocks, bonds and fixed income
securities.
The Company also sponsors an employee savings plan under Section 401(k) of the
Internal Revenue Code which covers substantially all non-union employees in the
United States. The Plan provides for matching contributions in Company shares
based upon qualified employee contributions. Matching contributions charged to
income were $4,304,000, $4,001,000 and $2,229,000 for years ending May 31, 1999,
1998 and 1997, respectively.
38
<PAGE> 20
NOTE G - POSTRETIREMENT HEALTH CARE BENEFITS
In addition to the defined benefit pension plan, the Company also provides
health care benefits to certain of its retired employees through unfunded plans.
Employees become eligible for these benefits if they meet minimum age and
service requirements. The components of this expense for the three years ended
May 31, 1999 were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
===========================================================================================
<S> <C> <C> <C>
Service cost - Benefits earned during this period $ 99 $ 90 $ 36
Interest cost on the accumulated obligation 784 915 714
Amortization of unrecognized (gains) (40) (52)
- -------------------------------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT EXPENSE $ 843 $ 953 $ 750
===========================================================================================
</TABLE>
The changes in the benefit obligations of the plans at May 31, 1999 and 1998,
were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(In thousands) 1999 1998
=====================================================================================================
<S> <C> <C>
Accumulated postretirement benefit obligation at beginning of year $ 14,661 $ 12,070
Service cost 99 90
Interest cost 784 914
Settlement/curtailment (gains) losses (181)
Benefit payments (693) (750)
Actuarial (gains) losses (3,102) 2,668
Currency exchange rate changes (201) (150)
- -----------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation at end of year 11,548 14,661
Unrecognized actuarial gains (losses) (1,625) (1,406)
- -----------------------------------------------------------------------------------------------------
ACCRUED POSTRETIREMENT HEALTH CARE BENEFITS $ 13,173 $ 13,255
=====================================================================================================
</TABLE>
A 7% general discount rate was used in determining the accumulated
postretirement benefit obligation as of May 31, 1999 and 1998. A 9% increase in
the cost of covered health care benefits was generally assumed for fiscal 1999
(10% for fiscal 1998). This trend rate in all cases is assumed to decrease to 5%
after several years and remain at that level thereafter except for various union
plans which will cap at alternate benefit levels. A 1% increase in the health
care costs trend rate would have increased the accumulated postretirement
benefit obligation as of May 31, 1999 by $1,264,000 and the net postretirement
expense by $112,000. A 1% decrease in the health care costs trend rate would
have decreased the accumulated postretirement benefit obligation as of May 31,
1999 by $1,045,000 and the net postretirement expense by $89,000.
39
<PAGE> 21
NOTE H - CONTINGENCIES AND LOSS RESERVES
Accrued loss reserves consisted of the following classes:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
May 31
---------------------------
(In thousands) 1999 1998
==================================================================================================
<S> <C> <C>
Accrued product liability reserves $ 34,566 $ 26,799
Accrued warranty reserves - current 8,234 10,630
Accrued environmental reserves 5,214 4,891
Other 1,282 1,012
- --------------------------------------------------------------------------------------------------
Accrued loss reserves - current 49,296 43,332
Accrued warranty reserves - long-term 18,816 23,496
- --------------------------------------------------------------------------------------------------
TOTAL ACCRUED LOSS RESERVES $ 68,112 $ 66,828
==================================================================================================
</TABLE>
The Company, through its wholly owned insurance subsidiary, provides certain
insurance coverage, primarily product liability, to the Company's other domestic
subsidiaries. Excess coverage is provided by outside carriers. The Company has
provided the reserves reflected above to provide for these potential losses as
well as other uninsured claims. Provision for estimated warranty costs is
recorded at the time of sale and periodically adjusted to reflect actual
experience.
In addition, the Company, like others in similar businesses, is involved in
several proceedings relating to environmental matters. It is the Company's
policy to accrue remediation costs when it is probable that such efforts will be
required and the related costs can be reasonably estimated. These liabilities
are undiscounted and do not take into consideration any possible recoveries of
future insurance proceeds or claims against third parties.
Due to the uncertainty inherent in the loss reserve estimation process, it is at
least reasonably possible that actual costs will differ from estimates, but,
based upon information presently available, such costs are not expected to have
a material adverse effect on the Company's competitive or financial position or
its ongoing results of operations. However, such costs could be material to
results of operations in a future period.
40
<PAGE> 22
NOTE I - INTERIM FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the years ended May 31, 1999 and 1998:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Three Months Ended
-----------------------------------------------------------------------------
(In thousands, except per share amounts) August 31 November 30 February 28 May 31
-----------------------------------------------------------------------------
1999
=======================================================================================================================
<S> <C> <C> <C> <C>
Net sales $ 448,132 $ 415,725 $ 373,007 $ 475,290
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 204,402 187,883 164,626 228,133
- -----------------------------------------------------------------------------------------------------------------------
Net income 31,224 21,712 6,130 35,480
- -----------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .30 $ .20 $ .06 $ .32
=======================================================================================================================
Diluted earnings per share $ .29 $ .20 $ .06 $ .32
=======================================================================================================================
Dividends per share $ .1120 $ .1175 $ .1175 $ .1175
=======================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------
Three Months Ended
-----------------------------------------------------------------------------
(In thousands, except per share amounts) August 31 November 30 February 28 May 31
-----------------------------------------------------------------------------
1998
=======================================================================================================================
Net sales $ 415,053 $ 397,757 $ 350,456 $ 452,008
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 187,101 177,364 149,373 209,574
- -----------------------------------------------------------------------------------------------------------------------
Net income 28,186 21,445 5,526 32,680
- -----------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ .29 $ .22 $ .06 $ .33
=======================================================================================================================
Diluted earnings per share $ .27 $ .21 $ .06 $ .30
=======================================================================================================================
Dividends per share $ .1040 $ .1120 $ .1120 $ .1120
=======================================================================================================================
</TABLE>
Quarterly earnings per share do not total to the yearly earnings per share due
to the weighted average number of shares outstanding in each quarter.
41
<PAGE> 23
INDEPENDENT AUDITORS REPORT
TO THE BOARD OF DIRECTORS
AND SHAREHOLDERS
RPM, INC. AND SUBSIDIARIES
MEDINA, OHIO
We have audited the accompanying consolidated balance sheets of RPM, Inc. and
Subsidiaries as of May 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the years
in the three year period ended May 31, 1999. 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 RPM, Inc. and
Subsidiaries at May 31, 1999 and 1998, and the results of their operations and
their cash flows for each of the years in the three year period ended May 31,
1999, in conformity with generally accepted accounting principles.
/s/ Ciulla, Smith & Dale, LLP
Cleveland, Ohio
July 6, 1999
<PAGE> 1
Exhibit 21.1
The following is a list of subsidiaries of RPM, Inc. as of May 31, 1999.
Jurisdiction of
Name Incorporation
- ---- -------------
Bondex International, Inc. Ohio
Consolidated Coatings Corporation Ohio
Consolidated Inter-Continental Corporation Ohio
Consolidated Protective Coatings, Ltd. Canada
Day-Glo Color Corp. Ohio
Kop-Coat, Inc. Ohio
Alox Corporation New York
Alox International Sales Corporation New York
Republic Powdered Metals, Inc. Ohio
Tremco Incorporated (1) Ohio
Weatherproofing Technologies, Inc. Delaware
Paramount Technical Products, Inc. South Dakota
Tremco A.B. Sweden
Tremco GmbH Germany
Tremco Ltee./Ltd. Canada
Tremco Limited U.K.
OY Tremco Ltd. Finland
Tretol Group Ltd. U.K.
Tretol Ltd. U.K.
Tretobond Ltd. U.K.
Tremco Asia Pte. Ltd. Singapore
Tremco Asia Pacific Pty. Limited Australia
Tremco Pty. Limited Australia
PABCO Products Pty. Limited Australia
Tremco (NZ) Limited New Zealand
Tremco Japan Pty. Ltd. Australia
Tremco Far East Limited Hong Kong
Tremco Malaysia Sdn. Bhd. Malaysia
Tremco Far East Ltd. Korea
Tremco Far East Ltd. Singapore
Bondo/Mar-Hyde Corporation Ohio
The Euclid Chemical Company.(2) Ohio
Westgate Advertising, Inc. Ohio
Carboline Company Delaware
Carboline International Corporation(3) Delaware
Carboline Dubai Corporation Missouri
Map II, Inc. Delaware
RPM World Trade, Ltd. Virgin Islands
RPM World Trade, Inc. Delaware
Stonhard, Inc.(4) Delaware
Parklin Management Group, Inc. Ohio
<PAGE> 2
Stonhard Ltd. Canada
Stonhard S.A. Luxembourg
Stonhard S.A. de C.V. Mexico Mexico
Stonhard de Mexico S.A. de C.V. Mexico
Juarez Immobiliaria S.A. de C.V. Mexico
Plasite Protective Coatings, Inc. Delaware
Briner Paint Mfg. Co. Texas
American Emulsions Co., Inc. Georgia
Lubraspin Corporation Georgia
Select Dye & Chemical, Inc. Georgia
DesignCraft Fabric Corporation Illinois
Chemical Specialties Manufacturing Corp. Maryland
RPM of Mass, Inc. Massachusetts
Haartz-Mason, Inc. Massachusetts
Westfield Coatings Corporation Massachusetts
William Zinsser & Co. Incorporated New Jersey
Richard E. Thibaut, Inc. New York
Mantrose-Haeuser Co., Inc. Massachusetts
Mohawk Finishing Products, Inc. New York
H. Behlen & Bro., Inc. New York
Bondex International (Canada) Ltee./Ltd. Canada
Chemical Coatings, Inc. North Carolina
First Colonial Insurance Company, Inc. Vermont
Fibergrate Composite Structures Incorporated Delaware
Fibergrate Corporation(5) Texas
Chemgrate Corporation Washington
Chem-Grate Corporation Tennessee
Chemgrate (Asia), Inc.(6) Washington
Chemgrate (PRC), Inc.(6) Washington
Dryvit Holdings, Inc. Rhode Island
Dryvit Systems, Inc.(7) Rhode Island
Dryvit Systems, Canada Ltd. Canada
Tech 21 Panel Systems, Inc. Rhode Island
Ultra-Tex Surfaces, Inc. California
Metro Clean Systems, Inc. Delaware
Rust-Oleum Corporation(8) Illinois
Rust-Oleum Sales Company, Inc. Ohio
ROC Sales, Inc. Illinois
Rust-Oleum International Corporation Delaware
Star Finishing Products, Inc. Illinois
TCI, Inc. Georgia
The Testor Corporation Ohio
The Flecto Company, Inc.(9) California
Flecto International Supply, Inc. Nevada
Flecto Coatings Ltd. Canada
RPM/Europe B.V. Netherlands
Carboline Europe B.V. Netherlands
Rust-Oleum Netherlands, B.V. Netherlands
<PAGE> 3
Martin Mathys Nederland B.V. Netherlands
Radiant Color N.V. Belgium
Martin Mathys N.V. Belgium
RPOW U.K. Limited U.K.
Chemspec Europe Limited U.K.
Rust-Oleum U.K. Limited U.K.
Stonhard U.K. Limited U.K.
Carboline U.K. Limited U.K.
Mantrose U.K. Limited U.K.
Agricoat Industries Limited U.K.
Wm. Zinsser Limited U.K.
Stonhard (Ireland) Limited Ireland
RPM Holdings UK Limited U.K.
Dore Holdings Limited U.K.
Nullifire Limited U.K.
Amtred Limited U.K.
RPOW France S.A. France
Rust-Oleum France S.A. France
Stonhard S.A.S. France
Corroline France S.A. France
Bati-Traital S.A.R.L. France
Tremco B.V. Netherlands
RPM/Belgium N.V. Belgium
Monile France S.A.R.L. France
RPM/Lux Consult S.A. Luxembourg
RPM Asia Pte. Ltd. Singapore
RPM China Pte. Ltd. Singapore
Magnagro Industries Pte. Ltd.(10) Singapore
Espan Corporation Pte. Ltd. (11) Singapore
Espan Building Industries Pte. Ltd. Singapore
Alumanation (M) Sdn. Bhd. Malaysia
(1) Tremco Incorporated owns 50% of the outstanding stock of Sime Tremco
Sdn. Bhd., a Malaysian company.
(2) The Euclid Chemical Company owns 100% of the outstanding shares of two
Ohio corporations, Redwood Transport, Inc. and Euclid Chemical
International Sales Corporation, and is a 51% joint venture partner in
Euclid Admixture Canada, Inc., a Canadian corporation; a 51% joint
venture partner in Euclid Admixture LLC, a Mississippi limited
liability company; a 49% joint venture partner in Eucomex S.A., a
Mexican company; and a 49% joint venture partner in Toxement S.A., a
Columbian company.
(3) Carboline International Corporation owns 80% of Chemrite Coatings
(Pty.), Limited, a South African corporation; 49% of Carboline Korea
Ltd.; 45% of Carboline Norge A/S; 49% of Carboline Middle East LLC;
33.33% of Japan Carboline Company and 40% of CDC Carboline (India)
Private Ltd.
<PAGE> 4
(4) Stonhard, Inc. owns 79% of Stonhard Deutschland GmbH, a German
corporation, which, in turn, owns 100% of Alteco Technik GmbH, a
German corporation. Parklin Management Group, Inc. owns the remaining
21% of Stonhard Deutschland GmbH. Stonhard, Inc. also owns 75% of
Stonhard South America Ltda., a Brazilian limited liability company
and is a 50% joint venture partner in Stonhard Distribuidora de Suelos
Industriales S.A., a Spanish corporation.
(5) Fibergrate Corporation owns 50% of Fibergrate B.V., a Netherlands
corporation.
(6) Chemgrate (Asia), Inc. and Chemgrate (PRC), Inc. each own 50% of
Chemgrate Shanghai FRP Co. Ltd., a Chinese corporation.
(7) Dryvit Systems, Inc. is a 51% joint venture partner in Beijing Dryvit
Chemical Building Materials Co., Ltd., a Chinese company and a 55.41%
joint venture partner in Dryvit Systems USA (Europe) sp z.oo., a
Polish company.
(8) Rust-Oleum owns 70% of the outstanding shares of Multicor S.A.
Agentina I. y C., an Argentine corporation.
(9) The Flecto Company, Inc. owns 79% of the outstanding shares of Harry
A. Crossland Investments, Ltd., a Nevada corporation, which, in turn,
owns 100% of Crossland Distributors Ltd., a Canadian corporation. The
remaining 21% of the outstanding shares of Harry A. Crossland
Investments, Ltd. are owned by Flecto Coatings Ltd.
(10) Magnagro Industries Pte. Ltd. owns 100% of the outstanding shares of
Dryvit Pacific Coating Systems (SIP) Co. Ltd., a Chinese corporation,
and 90% of the outstanding shares of Shanghai Ban Lee Heng
Construction Co., Ltd., a Chinese corporation.
(11) Espan Corporation Pte. Ltd. owns 40% of the outstanding shares of
Pacific Goldhill Pte. Ltd., a Singapore corporation.
<PAGE> 1
Exhibit 23.1
Consent of Independent Accountants
As independent public accountants, we hereby consent to the
incorporation by reference of our report dated July 6, 1999 in the Annual Report
on Form 10-K for the year ending May 31, 1999, in RPM, Inc.'s Registration
Statements on Form S-3 (333-19305, acquisition of Marson Automotive Division,
and 333-51371 acquisition of The Flecto Company, Inc.) and Registration
Statements on Form S-8 (Reg. Nos. 2-65508, 1979 Stock Option Plan, 33-32794,
1989 Stock Option Plan and 333-35967, 1996 Stock Option Plan).
/s/ Ciulla, Smith & Dale, LLP
------------------------------
Ciulla, Smith & Dale, LLP
August 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<EXCHANGE-RATE> 1
<CASH> 19,729
<SECURITIES> 0
<RECEIVABLES> 376,859
<ALLOWANCES> 14,248
<INVENTORY> 242,445
<CURRENT-ASSETS> 705,419
<PP&E> 572,690
<DEPRECIATION> 232,993
<TOTAL-ASSETS> 1,737,236
<CURRENT-LIABILITIES> 302,549
<BONDS> 582,109
0
0
<COMMON> 1,613
<OTHER-SE> 741,263
<TOTAL-LIABILITY-AND-EQUITY> 742,876
<SALES> 1,712,154
<TOTAL-REVENUES> 1,712,154
<CGS> 927,110
<TOTAL-COSTS> 1,519,776
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,781
<INCOME-PRETAX> 159,597
<INCOME-TAX> 65,051
<INCOME-CONTINUING> 94,546
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 94,546
<EPS-BASIC> 0.87
<EPS-DILUTED> 0.86
</TABLE>
