<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14(a)-12
Cooper Industries, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[COOPER INDUSTRIES, INC. LOGO]
March 11, 1998
Dear Shareholder:
On behalf of the Board of Directors, I cordially invite you to attend the Annual
Shareholders' Meeting in Houston, Texas on Tuesday, April 28, 1998, at 11:00
a.m. The meeting will be held in the Chase Center Auditorium (formerly Texas
Commerce Auditorium), 601 Travis Street, Houston, Texas, which is the same
location as last year.
The notice of meeting and proxy statement following this letter describe the
business to be conducted at the meeting, including the election of four
directors.
The Board of Directors appreciates and encourages shareholder participation.
Please take a moment now to sign, date and return your proxy in the envelope
provided even if you plan on attending the meeting. Your vote is important.
Thank you for your continued support.
Sincerely,
/s/ H. JOHN RILEY, JR.
H. JOHN RILEY, JR.
Chairman, President and
Chief Executive Officer
<PAGE> 3
COOPER INDUSTRIES, INC.
P.O. BOX 4446
HOUSTON, TEXAS 77210
---------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TIME..........................11:00 a.m. on Tuesday, April 28, 1998.
PLACE.........................Chase Center Auditorium, 601 Travis Street,
Houston, Texas. Validated parking will be
available.
ITEMS OF BUSINESS.............1. Election of four directors for the term
expiring at the annual meeting of shareholders
in 2001.
2. Approval of the Cooper Industries, Inc.
Directors' Retainer Fee Stock Plan.
3. Approval of an amendment to the Cooper
Industries, Inc. Management Annual Incentive
Plan.
4. Consideration of any other matters properly
coming before the meeting or any adjournment
thereof.
RECORD DATE...................Holders of Common Stock of record at the close of
business on March 2, 1998, are entitled to vote at
the meeting.
FINANCIAL STATEMENTS..........The audited financial statements of the Company
for the year ended December 31, 1997, and the
related Management's Discussion and Analysis of
Financial Condition and Results of Operations, are
included as Appendix A to the Proxy Statement. A
separate summary annual report of the Company for
the year 1997 also accompanies this mailing.
IMPORTANT.....................In order to avoid additional soliciting expense to
the Company, please SIGN, DATE and MAIL your proxy
PROMPTLY in the return envelope provided, even if
you plan to attend the meeting. If you attend the
meeting and wish to vote your shares in person,
arrangements will be made for you to do so.
By order of the Board of Directors:
/s/ DIANE K. SCHUMACHER
DIANE K. SCHUMACHER
Senior Vice President, General Counsel
and Secretary
Houston, Texas
March 11, 1998
<PAGE> 4
COOPER INDUSTRIES, INC.
MARCH 11, 1998
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
APRIL 28, 1998
VOTING SECURITIES, PRINCIPAL HOLDERS AND PROXIES
This proxy statement is furnished in connection with the solicitation of
proxies on behalf of the Board of Directors of Cooper Industries, Inc. ("Cooper"
or the "Company") for the annual meeting of shareholders to be held on April 28,
1998, and at any adjournment thereof. This proxy statement and the accompanying
form of proxy are being mailed to shareholders on or about March 11, 1998.
The Board of Directors ("Board") set the close of business on March 2, 1998
as the record date ("Record Date") for determining shareholders entitled to vote
at the meeting. As of the Record Date, the Company had issued and outstanding
120,485,314 shares of Common Stock, which constituted the only outstanding
securities entitled to vote.
Each share of Common Stock has one vote. A majority of the issued and
outstanding shares constitutes a quorum at the meeting. Abstentions will be
counted for purposes of determining whether a quorum is present and will be
counted as voting. Broker nonvotes are not counted for purposes of voting.
Provided a quorum is present, the election of a director requires the
affirmative vote of a majority of the shares properly voting on the election of
directors.
Shares may be voted at the meeting in person or by proxy. All valid proxies
received prior to the meeting will be voted. Unless marked to the contrary, such
proxies will be voted as recommended by the Board. If any other business is
brought before the meeting, the proxies will be voted in accordance with the
judgment of the persons voting the proxies. A shareholder who has given a proxy
may revoke it at any time prior to such proxy being voted at the meeting by
filing with the Secretary of the Company an instrument revoking it or a duly
executed proxy bearing a later date, or by attending the meeting and giving
notice of such revocation. Attendance at the meeting does not by itself
constitute revocation of a proxy.
Cooper has adopted a confidential voting policy which provides that
shareholder votes at Company shareholder meetings are kept confidential by an
independent inspector of election, who may be the transfer agent, except as may
be necessary to meet applicable legal requirements or to respond to written
comments on proxy cards. Each proxy solicited by the Board that identifies the
vote of a specific shareholder will be treated in accordance with this policy
unless the shareholder elects not to have such vote kept confidential. In the
event of a contested solicitation, the Company will attempt to agree with the
opposing party on mutually acceptable confidentiality procedures that would
apply to each party's solicitation. The Company's confidential voting policy
shall not operate to impair free and voluntary communication between Cooper and
its shareholders, including disclosure by shareholders of the nature of their
votes.
In addition to the use of the mails, proxies may be solicited by the
directors, officers and employees of the Company without additional
compensation, by personal interview, telephone, telegram or otherwise.
Arrangements also may be made with brokerage firms and other custodians,
nominees and fiduciaries who hold the voting securities of record for the
forwarding of solicitation material to the beneficial owners thereof. The
Company will reimburse such brokers, custodians, nominees and fiduciaries for
the reasonable out-of-pocket expenses incurred by them in providing such
services. In addition, Georgeson & Company Inc. has been engaged to solicit
proxies at a fee of $16,000 plus out-of-pocket costs and expenses. Expenses of
solicitation will be borne by the Company.
If you are a participant in the Cooper Dividend Reinvestment and Stock
Purchase Plan ("DRP"), shares of Cooper stock held in your DRP account are
included on and may be voted through the proxy card accompanying this proxy
statement. The DRP administrator, as the shareholder of record, may only vote
the DRP shares for which it has received directions to vote from the DRP
participants.
For Cooper Employees: If you hold shares acquired through Cooper's Employee
Stock Purchase Plan that are being held in a book-entry account at First Chicago
Trust Company of New York, Cooper's transfer agent, those shares are included on
and may be voted through the proxy card accompanying this proxy statement.
<PAGE> 5
If you are a participant in the Cooper Savings Plans and/or Stock Ownership
Plan ("CO-SAV"), the accompanying proxy card will include the number of
equivalent shares credited to your account by The Chase Manhattan Bank, as
Trustee for CO-SAV ("Trustee"). When your proxy card is returned properly
signed, it will serve as direction to the Trustee to vote the shares held in
CO-SAV for your account in accordance with your directions. If you return a
proxy card properly signed, but do not indicate your voting preference, the
shares represented by your proxy card will be voted as recommended by the Board.
The shares of Common Stock credited to participants' accounts for which no
directions are received ("Uninstructed Shares") and shares of Common Stock not
yet allocated to participants' accounts ("Unallocated Shares"), will be voted by
the Trustee in the same proportion (for/against) as the shares of Common Stock
for which instructions are received from CO-SAV participants. Properly signed
proxy cards from CO-SAV participants will serve as a direction to the Trustee to
vote all of the Uninstructed Shares and the Unallocated Shares in the same
manner as indicated by CO-SAV participants. If you fail to return a proxy card
properly signed, the equivalent shares of Common Stock credited to your account
will then be voted by the Trustee in the same proportion as the shares for which
instructions were received from other CO-SAV participants.
The Company knows of no person who was the beneficial owner as of the
Record Date of more than five percent of the outstanding shares of any class of
voting securities, other than the following, which have filed statements of
ownership on Schedule 13G with the Securities and Exchange Commission as shown
below:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP OF CLASS
-------------- ------------------- ------------ --------
<S> <C> <C> <C>
Common Stock............................ J.P. Morgan & Co. Incorporated 8,888,100(1) 7.4%
60 Wall Street
New York, New York 10260
Common Stock............................ Marsh & McLennan Companies, 6,771,488(2) 5.6%
Inc.
1166 Avenue of the Americas
New York, New York 10036
</TABLE>
- ---------------
(1) Shares are held by J.P. Morgan & Co. Incorporated directly or through its
affiliates, Morgan Guaranty Trust Company of New York, J.P. Morgan
Investment Management, Inc. and J.P. Morgan Florida Federal Savings Bank.
The beneficial owners reported sole power to vote 6,058,223 shares, shared
power to vote 33,160 shares, sole power to dispose of 8,757,073 shares and
shared power to dispose of 130,420 shares.
(2) Shares are held by Marsh & McLennan Companies, Inc. through its affiliates,
Putnam Investments, Inc., Putnam Investment Management, Inc. and the Putnam
Advisory Company, Inc. The beneficial owners reported shared power to vote
91,230 shares and shared power to dispose of all of the shares.
In addition, The Chase Manhattan Bank, as Trustee of CO-SAV, holds of
record 5,647,863 shares of Cooper Common Stock, which is 4.7% of the outstanding
shares of Common Stock. The CO-SAV participants have voting rights with respect
to all such shares, as discussed above.
2
<PAGE> 6
PROPOSAL 1
ELECTION OF DIRECTORS
The authorized number of directors is 12, divided into three classes, one
having three members, one having four members and one having five members. Each
class is elected for a term of three years, so that the term of one class of
directors expires at every meeting.
The Board of Directors has nominated four persons for election as directors
in the class whose term will expire in April 2001, or when their successors are
elected and qualified. The nominees are: Alain J.P. Belda, Harold S. Hook, Frank
A. Olson and John D. Ong. Messrs. Belda, Hook, Olson and Ong are directors and
members of the class whose term expires at the meeting.
If any nominee should be unable to serve as a director, an event not now
anticipated, it is intended that the shares represented by proxies will be voted
for the election of such substitute as the Board of Directors may nominate.
Certain information with respect to the persons nominated as directors and the
current directors who will continue as directors after the Annual Meeting is set
forth below.
NOMINEES FOR TERMS EXPIRING IN 2001
- ------------------------------
ALAIN J.P. BELDA
President and Chief
Operating Officer, Aluminum Company [Photo of Alain J.P. Belda]
of America
Director since August 5,
1997
Age 54
Received a B.A. degree from MacKenzie
University, Sao Paulo, Brazil. Joined Alcoa
Aluminio S.A., Aluminum Company of
America's ("Alcoa") majority owned
Brazilian affiliate, in 1969 and held
various financial and planning positions.
In 1979, named President of Alcoa Aluminio
S.A., which position he held until March
1994. Elected a Vice President of Alcoa
(aluminum producer) in 1982 and in 1989
took on additional responsibility as Vice
President of Latin America. Named
President -- Latin America in 1991,
Executive Vice President in 1994 and Vice Chairman in
1995. Became President and Chief Operating Officer in
1997.
Director, Citicorp.
- ------------------------------
HAROLD S. HOOK
Retired Chairman and
Chief Executive Officer,
American General Corporation
Chairman -- Audit Committee [Photo of Harold S. Hook]
Member -- Executive
Committee, Management Development
and Compensation Committee
and Committee on Nominations
and Corporate Governance
Director since 1986
Age 66
Received a B.S. degree in business
administration, an M.A. in accounting and a
Doctor of Laws from University of Missouri,
and a Doctor of Laws from Westminster
College. Also a graduate of Southern
Methodist University, Institute of
Insurance Marketing. Joined American
General Corporation (insurance) in 1970 as
President and Chief Executive Officer of
California-Western States Life Insurance
Co. Elected a director of American General
Corporation in 1972. Served as President of
American General Corporation from 1975 to
1981 and Chief Executive Officer from 1978 to 1996.
Elected Chairman in 1978. Retired as Chairman and a
director of American General Corporation in April 1997.
Director: Chase Manhattan Corporation; Chase Manhattan
Bank; Duke Energy Corporation; and Sprint Corporation.
Member, Council of Overseers, Rice University (Jones
Graduate School of Administration). Advisory Board, Sam
Houston Council Boy Scouts of America. Director Emeritus,
The Greater Houston Partnership. Board of Trustees,
Baylor College of Medicine.
3
<PAGE> 7
- ------------------------------
FRANK A. OLSON
Chairman, Chief Executive
and Chief Operating Officer,
The Hertz Corporation [PHOTO OF FRANK A. OLSON]
Chairman -- Finance
Committee
Member -- Management
Development and
Compensation
Committee and Committee
on Nominations and Corporate
Governance
Director since 1989
Age 65
Received an A.A. degree from City College
of San Francisco. Joined The Hertz
Corporation (rental cars and trucks) in
1964 and held various positions until 1973
when named Executive Vice President and
1974 when elected to the Board of
Directors. Named President and Chief
Executive Officer of The Hertz Corporation
in 1977 and Chairman in 1980.
Director: The Hertz Corporation; Amerada
Hess Corporation; Becton Dickinson and
Company; and Fund American Enterprises
Holdings, Inc.
Director, The Swedish-American Chamber of Commerce, Inc.
- ------------------------------
JOHN D. ONG
Chairman Emeritus, The
BFGoodrich Company
Chairman -- Committee on [PHOTO OF JOHN D. ONG]
Nominations and Corporate
Governance
Member -- Audit Committee
and Finance Committee
Director since 1975
Age 64
Received B.A. and M.A. degrees in history
from Ohio State University. Received an
LL.B. degree from Harvard Law School.
Joined The BFGoodrich Company (chemicals
and aerospace products) in 1961 and held
various positions in the international
division. Elected a Group Vice President in
1972 and then Executive Vice President and
a director in 1973. Elected Vice Chairman
of the Board in 1974, President in 1975 and
Chairman in 1979. Served as Chief Executive
Officer from 1979 to 1996, when he retired.
Director: Ameritech Corporation; ASARCO Incorporated;
Defiance, Inc.; The Geon Company; The Kroger Company; and
TRW Inc.
Chairman, Musical Arts Association (Cleveland Orchestra).
Trustee: University of Chicago and John S. & James L.
Knight Foundation. Member: Business Committee for the
Arts; The Business Council; and Senior Member of The
Conference Board.
PRESENT DIRECTORS WHOSE TERMS EXPIRE IN 1999
- ------------------------------
WARREN L. BATTS
Former Chairman and Chief
Executive Officer, [PHOTO OF WARREN L. BATTS]
Premark International, Inc.
Member -- Finance
Committee and Management
Development and Compensation
Committee
Director since 1986
Age 65
Received a B.S. degree in electrical
engineering from Georgia Institute of
Technology and an M.B.A. from Harvard
University Graduate School of Business
Administration. Joined Dart Industries in
1980 and became President of Dart & Kraft,
Inc. in 1981 and Chief Operating Officer in
1983. In October 1986, when Premark
International, Inc. (food containers,
commercial food equipment, housewares and
decorative laminates) was created by Dart &
Kraft, Inc., elected Chairman and Chief
Executive Officer. Elected a director of
Premark in 1986. After a spin-off of Tupperware (food
containers) by Premark in 1996, became Chairman and Chief
Executive Officer of Tupperware Corporation and continued
as Chairman and a director of Premark International, Inc.
Retired as Chairman and a director of Premark
International, Inc. and Chairman and Chief Executive
Officer of Tupperware Corporation in September 1997.
Director: Allstate Corporation; Sears, Roebuck and Co.;
and Sprint Corporation.
Chairman and Director: Children's Memorial Hospital and
Children's Memorial Medical Center (Chicago). Director,
National Association of Manufacturers. Trustee:
Northwestern University and Art Institute of Chicago.
4
<PAGE> 8
- ------------------------------
ROBERT M. DEVLIN
Chairman and Chief
Executive Officer, American General [PHOTO OF ROBERT M. DEVLIN]
Corporation
Director since August 5,
1997
Age 57
Received a B.A. degree from Tulane
University. Joined American General
Corporation (insurance) in 1977 as Vice
President and Assistant to the President of
California-Western States Life Insurance
Company. Served as Executive Vice President
of American General Corporation in 1986,
and as Executive Vice President and Chief
Marketing Officer for American General Life
and Accident from 1980 to 1986. Served as
President and Chief Executive Officer of
American General Life Insurance Company
from 1986 to 1993. Elected Vice Chairman and a director
of American General Corporation in 1993. Named President
in 1995 and Chief Executive Officer in 1996, and elected
Chairman in 1997.
Director: American General Corporation.
Director, The Greater Houston Partnership. Advisory
Board, Tulane University. Board of Governors, The Houston
Forum. Trustee: The American College and The Museum of
Fine Arts, Houston. Member, Governor's Business Council,
State of Texas.
- ------------------------------
LINDA A. HILL
Professor, Harvard
Business School [PHOTO OF LINDA A. HILL]
Member -- Audit Committee
and Finance Committee
Director since 1994
Age 41 Received an A.B., summa cum laude in
psychology, from Bryn Mawr College and an
M.A. in educational psychology from the
University of Chicago. Earned a Ph.D in
behavioral sciences at the University of
Chicago. Prior to 1984, was a postdoctoral
research fellow at the Harvard Business
School, an advisor to the Federal
Commissioner of Education and a member of
the "Blueprint 2000" Employment Committee
for the Commonwealth of Massachusetts.
Joined the faculty of Harvard Business
School in 1984 as an Assistant Professor in
organizational behavior and human resource management.
Named Associate Professor in 1991, Professor in 1995, and
the Wallace Brett Donham Professor of Business
Administration in 1997.
Director, Independent Means. Member: American Repertory
Theater Advisory Board and An Income of Her Own Advisory
Board. Board of Trustees: Bryn Mawr College; Rockefeller
Foundation; and The Children's Museum, Boston. Board of
Overseers, Beth Israel Deaconess Medical Center, Boston.
- ------------------------------
CONSTANTINE S. NICANDROS
Chairman, CSN and Company
Former Chairman, President and
Chief Executive Officer, [PHOTO OF CONSTANTINE S. NICANDROS]
Conoco Inc.
Former Vice Chairman,
E.I. du Pont de Nemours and
Company
Chairman -- Management
Development and
Compensation Committee
Member -- Audit Committee,
Executive Committee and
Committee on Nominations
and Corporate Governance
Director since 1990
Age 64
Graduate of Ecole Des Hautes Etudes
Commerciales in Paris, France. Received a
Juris Doctor degree and a doctorate diploma
in economics from the University of Paris
Law School and an M.B.A. from Harvard
Graduate School of Business Administration.
Joined Conoco (petroleum products) in 1957.
Named Executive Vice President for
Worldwide Supply and Transportation in 1975
and Group Executive Vice President,
Petroleum Products in 1978. Named
President, Petroleum Operations in 1983 and
elected President and Chief Executive Officer in March
1987, which positions he held through December 1995.
Named Vice Chairman of E.I. du Pont de Nemours and
Company (chemical, specialty products and energy) in
1991. Retired as Chairman of Conoco Inc. and Vice
Chairman of E.I. du Pont de Nemours and Company in
February 1996. Currently, Chairman of CSN and Company, a
private consulting and investment firm.
Director: Chase Bank of Texas and Mitchell Energy and
Development Corp.
Trustee: Baylor College of Medicine; Rice University;
Houston Ballet Foundation; Houston Grand Opera; Houston
Symphony; and The Museum of Fine Arts, Houston. Board of
Governors, The Houston Forum.
5
<PAGE> 9
- ------------------------------
H. JOHN RILEY, JR.
Chairman, President and [Photo of H. John Riley, Jr.]
Chief Executive Officer
Chairman -- Executive
Committee
Director since 1992
Age 57 Received a B.S. degree in industrial
engineering from Syracuse University. Also
a graduate of the Harvard Advanced
Management Program. Joined Crouse-Hinds
Company in 1962 and held various
manufacturing positions before appointment
as Corporate Vice President in 1979. In
1982, after Cooper acquired Crouse-Hinds
Company, became Executive Vice President,
Operations for Cooper. Named President and
Chief Operating Officer in 1992, Chief
Executive Officer in 1995 and Chairman in
April 1996.
Director: Baker Hughes Incorporated and Wyman-Gordon
Company.
Director and Chairman, Central Houston, Inc. Director:
The Business Committee for the Arts; The Greater Houston
Partnership; The Houston Forum; The Houston Symphony;
Junior Achievement, Inc.; and Junior Achievement of
Southeast Texas. Trustee: Manufacturers Alliance and The
Museum of Fine Arts, Houston. Member: The Business
Roundtable and The Electrical Manufacturers Club.
PRESENT DIRECTORS WHOSE TERMS EXPIRE IN 2000
- ------------------------------
CLIFFORD J. GRUM
Chairman and Chief
Executive Officer,
Temple-Inland Inc. [Photo of Clifford J. Grum]
Member -- Executive Committee,
Finance Committee and
Management Development and
Compensation Committee
Director since 1982
Age 63
Received a B.A. degree from Austin College
and an M.B.A. from University of
Pennsylvania, Wharton School of Finance.
Joined Temple Industries, Inc. in 1968 as
Vice President, Finance. After a merger
with Time Inc. in 1973, held various
positions with Time Inc., including
Treasurer, publisher of Fortune magazine
and Executive Vice President. Elected a
director of Time Inc. in 1980 and, after a
spin-off of Temple-Inland (container and
containerboard, pulp and paperboard,
building products and financial services)
by Time Inc. in 1983, became President and Chief
Executive Officer and a director of Temple-Inland. In
1991, became Chairman of the Board and Chief Executive
Officer of Temple-Inland.
Director: Temple-Inland Inc.; Trinity Industries Inc.;
and Tupperware Corporation.
State Chairman, Texas Association of Business and
Chambers of Commerce. Trustee: Austin College, Sherman,
Texas; Lufkin Industrial Foundation; and Memorial Medical
Center of East Texas.
- ------------------------------
SIR RALPH H. ROBINS
Chairman, Rolls-Royce plc
Member -- Audit Committee
and Management Development [Photo of Sir Ralph H. Robins]
and Compensation Committee
Director since 1991
Age 65
Received a B.S. degree from Imperial
College, London and is a Chartered
Engineer. Joined Rolls-Royce (aerospace
engines and industrial power equipment) in
1955 as a Graduate Apprentice and held
various positions with the Aero Engine
Division before being named Executive Vice
President of Rolls-Royce Aero Engines Inc.
in 1972 and then Managing Director of the
Rolls-Royce Industrial and Marine Division
in 1973. Elected to the Board of
Rolls-Royce plc in 1982 as Commercial
Director, then appointed Managing Director
in 1984. Became Deputy Chairman in 1989, Chief Executive
in 1991 and Chairman in 1992.
Director: Rolls-Royce plc; Cable & Wireless plc; Marks &
Spencer plc; Schroders plc; and Standard Chartered plc.
Chairman, Defence Industries Council. Honorary Fellow of
The Institution of
Mechanical Engineers. Fellow: Royal Aeronautical Society;
The Royal Academy of Engineering; and Imperial College.
6
<PAGE> 10
- ------------------------------
JAMES R. WILSON
Chairman, President and
Chief Executive Officer, [Photo of James R. Wilson]
Thiokol Corporation
Member -- Audit Committee
and Finance Committee
Director since April 29,
1997
Age 57
Received a B.A. degree from College of
Wooster and an M.B.A. from Harvard Graduate
School of Business Administration. Joined
Thiokol Corporation (solid rocket motors
and precision fastening systems for
aerospace and industrial applications) in
1989 as Vice President and Chief Financial
Officer and was named Executive Vice
President in 1992. Became President and
Chief Executive Officer and a director in
1993 and Chairman in October 1995. Prior to
joining Thiokol in 1989, served as Chief
Financial Officer for Circuit City Stores (1987-1988) and
as Executive Vice President and Chief Financial Officer
for Fairchild Industries, Inc. (1982-1987).
Director: Thiokol Corporation; The BFGoodrich Company;
First Security Corporation; and Howmet International Inc.
Board of Governors, Aerospace Industries Association.
Board of Trustees: College of Wooster and Manufacturers
Alliance.
INFORMATION ABOUT MANAGEMENT AND ORGANIZATION
OF THE BOARD OF DIRECTORS
EXECUTIVE OFFICERS
Set forth below is certain information as of the Record Date with respect
to Cooper's present executive officers. All executive officers are elected to
terms that expire at the organizational meeting of the Board of Directors, which
follows the Annual Meeting of Shareholders.
<TABLE>
<CAPTION>
YEARS OF OFFICER
NAME POSITION AGE SERVICE SINCE
---- -------- --- -------- -------
<S> <C> <C> <C> <C>
H. John Riley, Jr........... Chairman, President and Chief Executive Officer 57 35 1982
Ralph E. Jackson, Jr........ Executive Vice President, Operations 56 21 1992
Gordon A. Ulsh.............. Executive Vice President, Operations 52 13 1997
D. Bradley McWilliams....... Senior Vice President and Chief Financial Officer 56 26 1982
Carl J. Plesnicher, Jr...... Senior Vice President, Human Resources 60 30 1979
Diane K. Schumacher......... Senior Vice President, General Counsel and Secretary 44 18 1988
David A. White, Jr.......... Senior Vice President, Strategic Planning 56 26 1988
Alan J. Hill................ Vice President and Treasurer 53 20 1979
Terry A. Klebe.............. Vice President and Controller 43 3 1995
E. Daniel Leightman......... Vice President, Taxes 57 10 1994
Phyllis J. Piano............ Vice President, Public Affairs 41 2 1995
David R. Sheil.............. Vice President, Personnel 41 12 1996
Terrance M. Smith........... Vice President, Information Systems 48 12 1996
Robert W. Teets............. Vice President, Environmental Affairs and Risk 47 20 1993
Management
</TABLE>
All of the executive officers have been employed by Cooper in management
positions for more than five years, except Terry A. Klebe, Phyllis J. Piano and
Terrance M. Smith. Terry A. Klebe was a Senior Manager with the accounting firm
of Ernst & Young LLP from 1985 until October 1990, after which he was a Partner
until April 1995. Phyllis J. Piano was Manager, Communication and Community
Relations for General Electric Medical Systems from 1986 until 1993, after which
she served until December 1995 as Manager, Public Relations Programs at General
Electric Company. Terrance M. Smith was Vice President, Management Information
Services of Moog Automotive, Inc. from 1986 until July 1996. Moog Automotive was
acquired by Cooper in 1992.
7
<PAGE> 11
SECURITY OWNERSHIP OF MANAGEMENT
As of the Record Date, each director and each executive officer named in
the Summary Compensation Table beneficially owned the number of shares of Common
Stock of the Company set forth in the following Table. Each of the named
individuals and all directors and executive officers as a group beneficially
owned less than one percent of the Company's outstanding Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1)
------------------------ ---------------------
<S> <C>
H. John Riley, Jr........................................... 176,252(2)(3)(4)
Warren L. Batts............................................. 16,800(2)(5)
Alain J.P. Belda............................................ 0
Robert M. Devlin............................................ 2,000
Clifford J. Grum............................................ 18,800(2)
Linda A. Hill............................................... 800
Harold S. Hook.............................................. 8,800
Constantine S. Nicandros.................................... 2,519
Frank A. Olson.............................................. 9,800
John D. Ong................................................. 4,500(6)
Sir Ralph H. Robins......................................... 1,056
James R. Wilson............................................. 900
Ralph E. Jackson, Jr........................................ 57,300(2)(4)
Gordon A. Ulsh ............................................. 26,000(2)
D. Bradley McWilliams....................................... 33,096(2)(4)
Carl J. Plesnicher, Jr...................................... 29,389(2)
All Directors and Executive Officers as a Group............. 586,395(2)(4)
</TABLE>
- ---------------
(1) Includes shares held by executive officers in the Cooper Savings and Stock
Ownership Plan.
(2) Includes shares of Common Stock issuable upon the exercise of options
granted under either the Company's 1986 Stock Option Plan, the Stock
Incentive Plan or the 1989 Director Stock Option Plan that are exercisable
within a period of 60 days from March 2, 1998, as follows: Mr.
Riley -- 82,666 shares; Mr. Batts -- 6,000 shares; Mr. Grum -- 6,000 shares;
Mr. Jackson -- 40,333 shares; Mr. Ulsh -- 22,059 shares; Mr.
McWilliams -- 10,465 shares; Mr. Plesnicher -- 19,065 shares; and all
directors and executive officers as a group -- 314,613 shares.
(3) Includes 7,600 shares the receipt of which has been deferred by Mr. Riley
pursuant to the Executive Restricted Stock Incentive Plan.
(4) Includes shares of Common Stock receipt of which has been deferred by the
named executive officer pursuant to the Management Annual Incentive Plan,
subject to shareholder approval of the Amendment to that Plan described in
Proposal 2, as follows: Mr. Riley -- 10,374 shares; Mr. Jackson -- 639
shares; Mr. McWilliams -- 1,827 shares; and all executive officers as a
group -- 13,362 shares.
(5) Includes 10,800 shares held in a trust for which Mr. Batts is the settlor
and trustee and for which a member of his family is the beneficiary. Mr.
Batts has sole voting and investment power with respect to these shares.
(6) Includes 400 shares owned by members of Mr. Ong's family.
MEETINGS OF THE COOPER BOARD AND ITS COMMITTEES
The Board of Directors of Cooper met on four occasions during 1997. All of
the directors attended seventy-five percent or more of the meetings of the Board
and of the committees of the Board on which they served, except Mr. Olson.
Cooper has five committees composed of directors:
Audit Committee
The Audit Committee consists of six nonemployee directors: Harold S. Hook,
Chairman, Linda A. Hill, Constantine S. Nicandros, John D. Ong, Sir Ralph H.
Robins and James R. Wilson. Three Committee meetings were held during the year.
Activities of the Committee included conferring with management and the
independent auditors regarding the 1996 financial statements and the annual
report on Form 10-K; reviewing the results of the 1996
8
<PAGE> 12
independent audit and management's response thereto; reviewing fees paid to the
independent auditors; reviewing the scope of the 1997 audit by the independent
auditors; and making a recommendation acted on by the Board of Directors to
appoint Ernst & Young LLP as the Company's independent auditors for 1997. During
1997, the Committee also reviewed the following matters: the 1997 internal audit
program and the proposed scope of the 1998 internal audit program; officers'
travel and entertainment expenses; compliance with the Company's conflicts of
interest and ethical conduct policies; the status of tax audits and litigation,
environmental compliance and remediation, and the Company's risk management
program. The Committee also reviewed modifications of the Company's internal
control program that resulted from a review of the Treadway Commission
recommendations and the model evaluation guidelines issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
Executive Committee
The Executive Committee consists of one employee director, H. John Riley,
Jr., Chairman, and three nonemployee directors, Clifford J. Grum, Harold S. Hook
and Constantine S. Nicandros. Under the Code of Regulations of the Company, the
Executive Committee has, during the intervals between the meetings of the
directors, all of the powers of the directors in the management and control of
the business and property of the Company. The Executive Committee did not meet
in 1997.
Finance Committee
The Finance Committee consists of six nonemployee directors: Frank A.
Olson, Chairman, Warren L. Batts, Clifford J. Grum, Linda A. Hill, John D. Ong
and James R. Wilson. Two Committee meetings were held during the year. The
activities of the Committee included reviewing pension plan asset management and
the Company's financial objectives and capital structure, debt ratings and debt
composition; and making recommendations acted on by the Board regarding
dividends and the redemption of the Company's debentures.
Management Development and Compensation Committee
The Management Development and Compensation Committee consists of six
nonemployee directors: Constantine S. Nicandros, Chairman, Warren L. Batts,
Clifford J. Grum, Harold S. Hook, Frank A. Olson and Sir Ralph H. Robins. Three
meetings of the Committee were held in 1997. The activities of the Committee
included determination of the attainment of performance targets and cash bonus
awards for executive officers and other key managers; establishment of
performance targets and grants of performance-based shares under the Stock
Incentive Plan; grants of stock options to 638 employees; salary reviews and
actions for officers; establishment of the 1998 Salary Policy and of the 1998
targets for the annual incentive plan; review of compliance with stock ownership
guidelines for executive officers and key executives; review and approval of
modifications to the management development and planning program; and review and
recommendation to the Board of the amendment to the Management Annual Incentive
Plan.
Committee on Nominations and Corporate Governance
The Committee on Nominations and Corporate Governance consists of four
nonemployee directors: John D. Ong, Chairman, Harold S. Hook, Constantine S.
Nicandros and Frank A. Olson. Four meetings of the Committee were held in 1997.
The activities of the Committee included determination of nominees for election
to the Board and of Board committee assignments; approval of stock ownership
guidelines for directors and the Directors' Retainer Fee Stock Plan; and a
review of the Company's corporate governance principles.
9
<PAGE> 13
EXECUTIVE MANAGEMENT COMPENSATION
The following table presents information concerning compensation paid to,
or accrued for services by the Chief Executive Officer and the four most highly
compensated executive officers of Cooper (the "Named Executives") for fiscal
years 1995, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION(3)
ANNUAL -------------------------
COMPENSATION(1)(2) AWARDS
------------------- -------------------------
(A) (B) (C) (D) (F) (G) (I)
RESTRICTED SECURITIES ALL
STOCK UNDERLYING OTHER
NAME AND SALARY BONUS AWARD(S) OPTIONS/SARS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($)(4) # ($)(5)
------------------ ---- -------- -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Riley, Jr., H. J. -- Chairman,
President and Chief Executive Officer 1997 $768,750 $825,000 $ 0 41,000 $70,594
1996 693,750 800,000 0 43,500 42,469
1995 541,250 250,000 177,125 0 24,356
Jackson, Jr., R. E. -- Executive Vice 1997 395,312 385,000 0 15,000 34,664
President, Operations 1996 360,417 375,000 0 15,500 21,079
1995 322,917 120,000 88,875 0 14,531
Ulsh, G. A. -- Executive Vice
President, Operations (6) 1997 311,538 250,000 0 15,000 21,021
McWilliams, D. Bradley -- Senior Vice 1997 313,125 230,000 0 10,000 24,891
President and Chief Financial Officer 1996 288,125 240,000 0 10,700 17,803
1995 254,375 85,000 61,225 0 13,472
Plesnicher, Jr., C. J. -- Senior Vice 1997 297,292 210,000 0 8,000 23,503
President, Human Resources 1996 281,667 225,000 0 8,000 16,050
1995 263,750 75,000 61,225 0 11,869
</TABLE>
- ---------------
(1) See the Long-Term Incentive Plan Table on page 12 disclosing long-term
incentive awards granted in 1997 to the Named Executives pursuant to the
Company's Stock Incentive Plan.
(2) Column (e) "Other Annual Compensation" has been omitted since there are no
amounts to report. The aggregate amount of perquisites and other personal
benefits for any Named Executive does not exceed $50,000 or 10% of the total
of annual salary and bonus for any such Named Executive.
(3) Column (h) "LTIP Payouts" has been omitted since there are no amounts to
report.
(4) The figures for 1995 in column (f) reflect the fair market value on the date
of grant of awards of restricted stock that are subject to forfeiture in the
event that the Named Executive does not remain employed by the Company until
December 31, 1998. Dividends are paid on the shares of restricted stock at
the dividend rate payable on all outstanding shares of Company Common Stock.
All awards, except 500 shares to Mr. Riley, were granted on February 13,
1995 and are valued at $39.50 a share. The additional award of 500 shares to
Mr. Riley was made on September 1, 1995 when he became Chief Executive
Officer, and is valued at $38.25 a share.
The following chart shows the number of shares of restricted stock held as
of December 31, 1997 and the value of such shares as of the end of 1997:
<TABLE>
<CAPTION>
NUMBER OF SHARES MARKET VALUE
---------------- ------------
<S> <C> <C>
Riley................................................... 4,500 $220,500
Jackson................................................. 2,250 110,250
McWilliams.............................................. 1,550 75,950
Plesnicher.............................................. 1,550 75,950
</TABLE>
Mr. Ulsh did not hold any shares of restricted stock as of December 31,
1997.
(5) The figures in column (i) for 1997 include the Company's contributions to
the Cooper Industries, Inc. Employees' Savings and Stock Ownership Plan and
to the Cooper Industries, Inc. Supplemental Excess Defined Contribution
Plan, respectively, as follows: H. J. Riley, Jr. $7,125 and $63,469; R. E.
Jackson, Jr. $7,125 and $27,539; G. A. Ulsh $7,125 and $13,896; D. B.
McWilliams $7,125 and $17,766; and C. J. Plesnicher, Jr. $7,125 and $16,379.
(6) Compensation information for Mr. Ulsh is not provided for years prior to
1997, since he was not an executive officer of the Company during that
period.
10
<PAGE> 14
The following table presents information concerning stock option grants to
the Named Executives in the last fiscal year.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
---------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF TOTAL STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR ($/SH)(1) DATE(2) 5%($) 10%($)
(A) (B) (C) (D) (E) (F) (G)
---- ------------ ---------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Riley, Jr., H. J. ...................... 41,000 4.21 $45.06 2/11/2007 $1,161,940 $2,944,210
Jackson, Jr., R. E...................... 15,000 1.54 45.06 2/11/2007 425,100 1,077,150
Ulsh, G. A.............................. 15,000 1.54 45.06 2/11/2007 425,100 1,077,150
McWilliams, D. B........................ 10,000 1.03 45.06 2/11/2007 283,400 718,100
Plesnicher, Jr., C. J................... 8,000 .82 45.06 2/11/2007 226,720 574,480
</TABLE>
- ---------------
(1) The exercise price of each option is equal to the fair market value of the
Company's shares on the date of grant of the option.
(2) Options become one-third exercisable one year after the date of grant,
two-thirds exercisable two years after the date of grant, and fully
exercisable three years after the date of grant.
The following table presents information concerning options exercised
during 1997 and the unexercised stock options held at December 31, 1997 by the
Named Executives.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES(1)
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
ON EXERCISE VALUE AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)
NAME (#)(1) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
(A) (B) (C) (D) (E)
---- ----------- ----------- ---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Riley, Jr., H. J. ....... 0 $ 0 54,500 70,000 $541,730 $449,800
Jackson, Jr., R. E....... 0 0 30,166 25,334 299,850 161,820
Ulsh, G. A. ............. 1,240 15,227 12,892 20,768 54,590 116,433
McWilliams, D. B. ....... 0 0 8,566 17,134 35,446 110,312
Plesnicher, Jr., C. J. .. 3,933 44,256 13,733 13,334 136,506 84,540
</TABLE>
- ---------------
(1) No options were exercised by Messrs. Riley, Jackson or McWilliams during
1997.
11
<PAGE> 15
The following table presents information concerning long-term incentive
awards granted in 1997 to the Named Executives pursuant to the Company's Stock
Incentive Plan, which was approved by the Company's shareholders in April 1996.
The performance-share awards may be earned based on achievement of performance
goals over a four-year period commencing January 1, 1997 and ending on December
31, 2000. The performance goals are based on compound growth in earnings per
share over the performance period, with a threshold of six percent compound
growth before any awards are earned. At least 15 percent compound growth in
earnings per share must be achieved for a payout at the maximum level shown in
the table. The awards, to the extent earned, will be distributed in shares of
Company Common Stock, or at the executive's election, up to 50 percent of the
earned award may be paid in cash.
LONG-TERM INCENTIVE PLAN -- AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK PRICE BASED PLANS
---------------------------------------------
(A) (B) (C) (D) (E) (F)
NUMBER OF PERFORMANCE OR
SHARES, UNITS, OTHER PERIOD
OR OTHER UNTIL MATURATION
NAME RIGHTS(#) OR PAYOUT THRESHOLD TARGET MAXIMUM
---- -------------- ---------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Riley, Jr., H. J. .......... 10,300 12/31/2000 10,300 shares 41,000 shares 57,400 shares
Jackson, Jr., R. E.......... 3,800 12/31/2000 3,800 shares 15,000 shares 21,000 shares
Ulsh, G. A. ................ 3,800 12/31/2000 3,800 shares 15,000 shares 21,000 shares
McWilliams, D. B. .......... 2,500 12/31/2000 2,500 shares 10,000 shares 14,000 shares
Plesnicher, Jr., C. J. ..... 2,000 12/31/2000 2,500 shares 8,000 shares 11,200 shares
</TABLE>
12
<PAGE> 16
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG COOPER INDUSTRIES, INC., S&P 500,
S&P ELECTRICAL EQUIPMENT, S&P DIVERSIFIED MACHINERY
The following graph compares the total shareholder return on the Company's
Common Stock for the five-year period December 31, 1992 through December 31,
1997 to the total returns for the same period of (a) the Standard & Poors 500
Stock Index; (b) the Standard & Poors Electrical Equipment Group; and (c) the
Standard & Poors Diversified Machinery Group. The Company chose the two industry
indices for comparison since Cooper's product offering is so diverse. Standard &
Poors assigns Cooper to its Diversified Machinery Group, while many analysts
compare Cooper to other electrical equipment manufacturers since this is a
significant part of Cooper's business. Management believes that a comparison to
two different indices is appropriate.
<TABLE>
<CAPTION>
Cooper S&P S&P
Measurement Period Industries, Diversified Electrical
(Fiscal Year Covered) Inc. S&P 500* Machinery* Equipment
<S> <C> <C> <C> <C>
1992 100.00 100.00 100.00 100.00
1993 106.77 110.08 148.07 120.65
1994 77.02 111.53 144.14 122.06
1995 86.21 153.45 177.87 171.29
1996 102.02 188.68 221.71 235.24
1997 121.90 251.63 293.27 331.52
</TABLE>
- ---------------
* Includes Cooper
13
<PAGE> 17
MANAGEMENT DEVELOPMENT AND COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
RESPONSIBILITIES OF THE COMMITTEE
The Management Development and Compensation Committee (the "Committee") is
responsible for establishing compensation programs for executive officers of the
Company so as to benefit the long-term interests of the Company and its
shareholders. The Committee also reviews annually the performance of the
executive officers and other key executives. Succession planning and executive
development are reviewed in depth by the Committee triennially.
COMPENSATION PHILOSOPHY
The Committee's policy is to compensate and reward executive officers and
other key executives based on the combination of Corporate performance, business
unit performance and individual performance, depending on the individual
responsibilities of the executive. Corporate performance and business unit
performance are evaluated by reviewing the extent to which strategic business
objectives have been accomplished (i.e.; revenue growth, profitability,
management of working capital, etc.). Individual performance is evaluated by
reviewing discreet objectives established under the Company's Management
Development and Planning Program at the beginning of the performance period.
The process of assessing individual performance is as follows:
- At the beginning of each performance period, specific objectives are
established and subsequently used as the basis for evaluating the
executive's performance.
- During the course of the performance period, periodic discussions are
held with the executive on the status of performance objectives.
- At the end of the performance period, progress made with respect to
performance objectives is reviewed with the executive so that there is a
clear understanding of what has been accomplished.
- Increases in base salary and annual cash incentive awards are then
predicated on actual accomplishments during the performance period.
- Long term stock incentive awards are predicated on the executive's
sustained performance over a four-year period.
The Committee also takes into account the compensation practices of
comparable manufacturing companies (as described below) to ensure that the
Company is able to attract, retain and reward executive officers whose
contributions are critical to the long term success of the Company.
There are three major components of the Company's executive compensation
program: a base salary, an annual cash bonus and long-term stock incentive
awards.
CASH-BASED COMPENSATION
Base Salary
A base salary range is established for each executive officer using the Hay
Group Inc. Job Evaluation System, which uses a comparative assessment of
know-how, problem-solving and accountability factors in the job rating process.
The competitiveness of the base salary is also considered since the Committee
believes it is critical to attract and retain the best qualified executives. The
Committee uses the annual Hay Survey of Compensation Practices to establish the
salary ranges for executive officers. In 1997, the Hay Survey of Compensation
Practices included 191 industrial companies with revenues in excess of $1
billion. The Committee believes that this broad group of companies provides an
appropriate basis for establishing salary levels since it minimizes the
distortion of results that occurs when using a smaller sample group.
The Committee's policy is to: (1) establish a salary range for the Chief
Executive Officer and the other named executives; (2) set the midpoint of the
range between the 50th and the 75th percentile of the Hay Survey; and (3) pay
compensation within the established range. Each executive's actual base salary
takes into account the individual's duties, responsibilities, work experience,
impact on the business and individual performance. The Committee verifies the
Hay data through use of a separate compensation study, known as Project 777,
which is compiled by Management Compensation Services. This data bank includes
329 companies, over 50 percent of which are in the Fortune 500.
14
<PAGE> 18
During 1997, the actual base salaries for the named executive officers
approximated the 50th percentile of the Hay Survey.
Salaries of senior executive officers are typically reviewed at 12 to 14
month intervals, depending on performance and position in the salary range. Base
salary adjustments are primarily weighted on individual performance with due
consideration given to immediate past performance and business decisions that
impact the future growth and economic stability of the Company.
Annual Incentive Compensation
In 1995, the Committee adopted the Management Annual Incentive Plan
("MAIP"), a cash bonus plan for senior executives that is designed to link
executive compensation to the Company's short-term business objectives. The MAIP
was approved by the Company's shareholders at its annual meeting in April 1996.
Pursuant to the MAIP, the Committee established in February 1997 the performance
criteria and maximum bonus opportunities for executives named in the Summary
Compensation Table ("Named Executives") and for other executive officers. The
performance criteria are based upon increases in earnings per share in 1997 over
1996. The maximum annual award that may be granted to a participant under the
MAIP is $1.5 million. The bonus targets for the Named Executives range from 20
to 120 percent of the salary range midpoint, depending on the executive's
position. Under the MAIP, the Committee has discretion to reduce the amount of
any award that would otherwise be payable upon achievement of the performance
criteria based on its assessment of an individual's actual performance.
In February 1998, the Committee determined and certified that the
performance criteria established at the February 1997 meeting of the Committee
were achieved and cash bonuses were awarded to the Named Executives at an
average of 86 percent of base salary. The specific bonus amounts are shown in
column (d) of the Summary Compensation Table.
The Committee also considered an amendment to the Management Annual
Incentive Plan ("Amendment") that would permit awards under the MAIP to be paid
in either cash or shares of the Company's Common Stock, or a combination of cash
and stock. Pursuant to the Amendment, the Committee could determine that an
earned award would be paid in cash or stock or both, and the participant could
elect to receive all or a portion of an earned award in stock. The Committee
approved the Amendment and recommended to the full Board of Directors that the
Amendment be adopted and submitted to the shareholders for approval. The
Committee believes that the Amendment will foster stock ownership by the
executive officers.
LONG TERM EQUITY BASED COMPENSATION
Stock Incentive Compensation
The Committee provides incentives to executive officers that are tied to
the long-term performance of the Company in order to link the executive's
interests to those of the Company's shareholders and to encourage stock
ownership by executives. Prior to 1996, the Committee granted a combination of
restricted stock and performance shares to the Named Executives pursuant to the
Executive Restricted Stock Incentive Plan ("Executive Plan") and stock options
pursuant to the 1986 Stock Option Plan. Both Plans were approved by the
shareholders and have now been terminated, except to the extent awards or
options remain outstanding.
Awards of restricted stock and performance shares under the Executive Plan
were made by the Committee in February 1995 for a four-year performance period
commencing on January 1, 1995 and ending on December 31, 1998. The number of
shares of restricted stock granted to each Named Executive are shown in column
(f) and in footnote 4 to the Summary Compensation Table. The restricted stock
awards are subject to forfeiture if the Named Executive does not remain employed
by the Company until the end of the performance period (December 31, 1998). The
performance-share awards were granted to the Named Executives in 1995 under the
Executive Plan for the four-year performance period ending December 31, 1998.
Award payouts are tied to achieving performance targets expressed as the
cumulative compound growth rate in earnings per share over the four-year
performance period using 1994 earnings per share of $2.10 as the base. No awards
will be earned unless the cumulative compound growth in earnings per share of at
least three percent is achieved. Earnings per share growth over the period of at
least 12 percent is required for target level performance and at least 15
percent is required for a payout at the maximum level.
In November 1995, the Committee adopted the Stock Incentive Plan
("Incentive Plan") which was approved by the Company's shareholders in April
1996. The Incentive Plan replaces the 1986 Stock Option Plan, which expired in
1996, and the Executive Plan. Pursuant to the Incentive Plan, the Committee in
February 1997 granted stock options
15
<PAGE> 19
and performance-based share awards to the Named Executives and other key
executives. Stock options were also granted to other middle and upper level
employees of the Company. The stock options expire 10 years after the date of
grant and become exercisable over a three-year period with one-third vesting in
each year so that the option is fully exercisable after three years. Options
were granted with an exercise price equal to the fair market value on the date
of grant, which was $45.06 a share.
The performance-based share awards were granted to the Named Executives for
a four-year performance period commencing on January 1, 1997 and ending on
December 31, 2000. The Committee established performance goals tied to the
cumulative compound growth in earnings per share during the performance period,
with a threshold of six percent cumulative compound growth before any awards are
earned. At least 15 percent cumulative compound growth in earnings per share
must be achieved for a payout at the maximum award level. The Committee
determined the number of options and performance-based share awards granted
based on actual compensation, assumptions relating to stock price and earnings
growth and recommendations from Frederic W. Cook & Co., a compensation
consulting firm, who advised the Committee on competitive practices among
comparable manufacturing companies. The Committee believes that the stock
options and performance-based share awards provide a significant link between
the compensation of the Named Executives and other key executives on the one
hand and the Company's long term goals and shareholders' interests on the other.
CHIEF EXECUTIVE OFFICER COMPENSATION
Effective May 1, 1997, the Committee approved an increase of $75,000 in Mr.
Riley's base salary. Mr. Riley's base salary adjustment was based on a review of
the compensation levels of chief executive officers of companies of comparable
size and in similar businesses, using the surveys previously discussed. In
addition, in establishing Mr. Riley's compensation, the Committee considered the
financial results of the Company and Mr. Riley's overall performance since
assuming the position of Chairman, President and Chief Executive Officer of the
Company.
In February 1998, pursuant to the MAIP, the Committee awarded a cash bonus
of $825,000 to Mr. Riley after reviewing the Company's performance and
determining that the criteria established under the MAIP in February 1997 had
been achieved. Specific accomplishments during 1997 include: significant growth
in the Company's share earnings; margin improvements across all three of the
Company's business segments; improvement in the Company's financial position,
including improved management of the Company's operating working capital; the
successful divestiture of a major marginally performing product line; and the
acquisition of several strategically important businesses and product lines.
In 1997, the Committee granted stock options and performance-based awards
under the Incentive Plan to Mr. Riley. The options are shown on the table
"Options/SAR Grants in Last Fiscal Year" on page 11 and the performance-based
share awards are shown in the table "Long-Term Incentive Plan -- Awards in Last
Fiscal Year" on page 12. The Committee determined the number of shares awarded
to Mr. Riley using the same criteria as for other executive officers. The
individual award was based on actual compensation, assumptions relating to stock
price and earnings growth and the recommendations and advice of Frederic W. Cook
& Co., a compensation consulting firm. The Committee believes that the stock
options and performance share awards granted to Mr. Riley are competitive with
awards provided to chief executive officers of other, similar companies in
related businesses. Through the performance share awards, a significant portion
of Mr. Riley's compensation is tied directly to the Company's financial
performance and overall return to shareholders.
STOCK OWNERSHIP GUIDELINES
Effective January 1, 1996, the Committee established stock ownership
guidelines for executive officers and certain other key executives as a way to
align more closely the interests of the key executives with those of the
shareholders. These key executives are required to make continuing progress
toward compliance with the guidelines during the five-year period beginning
January 1, 1996 and to fully comply with the guidelines by the end of such
five-year period. The guidelines are as follows:
- Chief Executive Officer -- 4.5 times base salary
- Other Senior Officers, including those other officers named in the
Summary Compensation Table -- 3 times base salary
- Other officers and division presidents -- 1.5 times base salary
16
<PAGE> 20
At its November 1997 meeting, the Committee reviewed the progress of
covered executives relative to compliance with the Stock Ownership Guidelines
and determined that acceptable progress has been achieved. Mr. Riley is
currently in compliance with the guidelines.
OMNIBUS BUDGET RECONCILIATION ACT IMPLICATIONS
The Committee has reviewed the provisions of the Omnibus Budget
Reconciliation Act of 1993 ("OBRA") and the regulations issued under the Act
that impose a limit, with certain exceptions, on the amount that a publicly held
corporation may deduct in any year for the compensation paid to its five most
highly compensated officers. The regulations provide certain transition rules
that will preserve the deductibility for the Company of the performance-based
awards granted in 1995. The Committee believes that the cash bonuses paid
pursuant to the MAIP and the awards and options granted in 1997 pursuant to the
Incentive Plan will qualify as "performance-based" compensation and will meet
the requirements of the current tax law and Internal Revenue Service regulations
so as to preserve the tax deductibility of all executive compensation.
<TABLE>
<S> <C>
Constantine S. Nicandros, Chairman Harold S. Hook
Warren L. Batts Frank A. Olson
Clifford J. Grum Sir Ralph H. Robins
</TABLE>
OTHER COMPENSATION MATTERS
PENSION BENEFITS
Upon retirement, the Named Executives may be entitled to retirement
benefits from the Salaried Employees' Retirement Plan of Cooper Industries, Inc.
("Cooper Retirement Plan"), the Cooper Industries, Inc. Supplemental Excess
Defined Benefit Plan ("Supplemental Plan") and the Crouse-Hinds Officers'
Disability and Supplemental Pension Plan ("Crouse-Hinds Officers' Plan").
Pursuant to the Cooper Retirement Plan, the Company credits to the
individual's plan account four percent of each year's total compensation up to
the Social Security wage base for the year, plus eight percent of each year's
total compensation that exceeds the Social Security wage base. For this purpose,
total compensation is cash remuneration paid by the Company to or for the
benefit of a member of the Cooper Retirement Plan for services rendered while an
employee. For the Named Executives, the total compensation is shown in columns
(c) and (d) of the Summary Compensation Table. However, if an executive elects
to defer any compensation, his total compensation under the Cooper Retirement
Plan is reduced by the amount deferred. The Restricted Stock awards shown in
column (f) of the Summary Compensation Table and the performance-based share
awards shown on the Long-Term Incentive Plan -- Awards in Last Fiscal Year Table
are not included for purposes of determining the credits under the Cooper
Retirement Plan. This formula for determining benefit credits became effective
on July 1, 1986.
Benefits for service through June 30, 1986 were determined based on the
retirement plan formula then in effect and converted to initial balances under
the Cooper Retirement Plan. Both initial balances and credits for benefits after
July 1, 1986 receive interest credits until the participant commences benefit
payments. The Plan's interest credit rate for 1997 was 5.0% and will be 5.0% for
1998. Benefits at retirement are payable, as the participant elects, in the form
of an escalating annuity, a level annuity with or without survivorship or a
lump-sum payment.
The Supplemental Plan is an unfunded, nonqualified plan that provides to
certain employees, including the Named Executives, Cooper Retirement Plan
benefits that cannot be paid from a qualified, defined benefit plan due to
Internal Revenue Code provisions. The Plan also provides benefits equal to what
would have been paid under the Cooper Retirement Plan on amounts of deferred
compensation had those amounts not been deferred. The Crouse-Hinds Officers'
Plan, an unfunded, nonqualified plan assumed by the Company following the
acquisition of Crouse-Hinds Company, may provide to Mr. Riley benefits in
addition to amounts payable under other retirement plans of the Company.
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<PAGE> 21
PENSION BENEFITS
<TABLE>
<CAPTION>
CREDITED YEAR ANNUAL
SERVICE AS OF INDIVIDUAL ESTIMATED
JANUARY 1, REACHES AGE BENEFIT AT AGE
1998 65 65
------------- ----------- --------------
<S> <C> <C> <C>
H. John Riley, Jr. ......................................... 35.2 2005 $498,000
Ralph E. Jackson, Jr. ...................................... 22.0 2006 164,000
Gordon A. Ulsh.............................................. 13.5 2011 132,000
D. Bradley McWilliams....................................... 26.1 2006 154,000
Carl J. Plesnicher, Jr. .................................... 29.9 2002 122,000
</TABLE>
For each Named Executive, the table above shows current credited years of
service, the year each attains age 65, and the projected annual pension benefit
at age 65. The projected annual pension benefit is based on the following
assumptions: benefits paid on a straight-life annuity basis; continued
compensation at the 1997 levels; and an interest credit rate of 5.0%. Amounts
payable under the Supplemental Plan and the Crouse-Hinds Officers' Plan are
included in the Annual Estimated Benefit.
CHANGE IN CONTROL ARRANGEMENTS
The Named Executives participate in the Company's Management Annual
Incentive Plan, which was approved by the shareholders on April 30, 1996. The
Plan provides an annual cash bonus opportunity and is designed to tie annual
incentive compensation to overall corporate and individual performance. Under
the Plan, which is administered by the Management Development and Compensation
Committee of the Board (the "Committee"), the awarding of a bonus is based upon
performance goals established by the Committee in February of the bonus year.
The Plan provides that upon a change in control of the Company, all outstanding
awards will be deemed earned and will be paid in cash to each eligible
executive.
The Named Executives have been granted stock options and performance-share
awards under the Company's Stock Incentive Plan, which was approved by
shareholders on April 30, 1996. The Plan is administered by the Committee.
Options granted under the Plan vest over a period of three years and have a
10-year term. Performance-share awards granted under the Plan may be earned
based on achievement over a specified period of performance goals established by
the Committee. At the end of the performance period, performance shares earned,
if any, are issued (and cash equal to the dividends on the performance shares is
paid). The Stock Incentive Plan provides that upon a change in control of the
Company, all options will be canceled and the Company will make a cash payment
to the Named Executives equal to the difference in the fair market value of the
Company's Common Stock (or the highest price actually paid for the stock in
connection with the change in control, if higher) and the option price. In
addition, all outstanding performance shares will be deemed earned at the
maximum level and will be issued.
Prior to 1996, the Named Executives were awarded restricted stock under the
Company's Executive Restricted Stock Incentive Plan. Under the Plan, which is
administered by the Committee, initial share awards were granted, subject to
forfeiture if the executive does not remain in the employ of Cooper until the
end of the four-year performance cycle. Additional performance shares may be
earned during the four-year period upon the achievement of performance criteria
established by the Committee. At the conclusion of the four-year period, the
initial share awards plus the performance shares earned, if any, will be issued
(plus cash equal to the dividends on the performance shares earned). The Plan
provides that upon a change in control of the Company, the Named Executives may
receive cash in lieu of shares under the Plan in amounts equal to the fair
market value of all outstanding share awards.
Prior to 1996, the Named Executives were granted stock options under the
Company's 1986 Stock Option Plan. This Plan expired in 1996, except to the
extent options were outstanding. The 1986 Stock Option Plan provides that upon a
change in control of the Company, the Committee may accelerate the vesting of
any outstanding options, or cancel outstanding options and make a cash payment
to the Named Executives equal to the difference between the fair market value of
the Company's Common Stock and the option exercise price.
There are no circumstances presently foreseeable under which the aggregate
dollar amount payable upon a change of control reasonably can be estimated to
have a material, adverse effect on the operating or financial condition of the
Company. The Company has established a trust that will be used to fund its
obligations under the Management Annual Incentive Plan, the Stock Incentive
Plan, the Executive Restricted Stock Incentive Plan, the 1986 Stock Option Plan
and certain otherwise unfunded benefit plans in the event of a change in control
or a potential change in control. In 1988, the Company also established a trust
that will be used to fund its obligations under otherwise
18
<PAGE> 22
unfunded benefit plans providing deferred compensation and retirement benefits
to nonemployee directors of the Company. Presently these trusts have been
nominally funded.
DIRECTOR COMPENSATION
The Annual Basic Retainer of nonemployee directors is $45,000 per annum. In
addition, nonemployee directors are paid meeting attendance fees of $1,000 for
regular committee meetings and $2,000 for special Board or committee meetings.
An additional annual retainer of $6,000 is paid to each nonemployee chairman of
a standing committee.
In lieu of receiving the Annual Basic Retainer and meeting fees in cash,
each nonemployee director may elect, pursuant to the Directors Deferred
Compensation Plan, to defer receipt of such amounts until a date determined by a
director or until retirement from the Board. Alternatively, for years prior to
1996, each nonemployee director could have elected to receive, in lieu of the
Annual Basic Retainer fee, a nonqualified stock option covering 2,000 shares of
the Company's Common Stock (subject to adjustment in the event of stock splits
or other changes in the Company's Common Stock or capital structure) pursuant to
the Company's 1989 Director Stock Option Plan (the "Director Plan"). In February
1996, the Board of Directors decided to terminate the Director Plan, except to
the extent options were outstanding. Historically, such options were granted on
the date following commencement of the annual meeting of shareholders, became
fully exercisable on the first anniversary of the date of grant and expired five
years from the date of grant. During 1997, 6,000 shares of the Company's Common
Stock were issued pursuant to the exercise of previously granted options under
the Director Plan. As of December 31, 1997, options for 12,000 shares of the
Company's Common Stock were outstanding under the Director Plan.
Prior to February 1996, pursuant to the Cooper Industries, Inc. Directors
Retirement Plan, any director with at least 10 years of service as a director
(counting a fractional year as a full year), or any director who retired in
accordance with the Board's director tenure policy was entitled to receive a
benefit amount equal to the annual basic retainer for nonemployee directors in
effect at the time of retirement, exclusive of any special compensation for
services as a committee chairman or attendance at meetings. The benefit amount
was payable annually on January 2 for the preceding year, or quarterly if
elected, for the number of years in which the director served on the Board
(counting a fractional year as a full year), with payment to cease with the
death of the retired director. In February 1996, the Board decided to terminate
the Plan and no additional benefits will accrue after such date. Any vested
benefits under the Plan were grandfathered.
The Directors' Stock Plan, which was approved by the shareholders on April
30, 1996, replaces the Director Plan and the Directors Retirement Plan and
provides for a grant to each nonemployee director of 400 shares of Common Stock
of the Company on each annual meeting date with a maximum of 1,200 shares to be
issued to any individual director. The Plan further provides for an annual grant
to each nonemployee director of a stock option for 1,000 shares at fair market
value. The option vests on the third anniversary of the date of grant and has a
10-year term. As of December 31, 1997, options for 18,000 shares were
outstanding under the Directors' Stock Plan.
PROPOSAL 2
APPROVAL OF COOPER INDUSTRIES, INC.
DIRECTORS' RETAINER FEE STOCK PLAN
During 1997, the Board of Directors established stock ownership guidelines
for the Company's nonemployee directors ("Nonemployee Directors") as a way to
align more closely the interests of such persons with those of the shareholders.
Under the guidelines, each Nonemployee Director is required to achieve over a
five-year period stock ownership in the Company in an amount equal to three
times his or her annual cash retainer fee for services on the Board.
On November 4, 1997, the Board of Directors adopted, subject to approval by
the shareholders, the Cooper Industries, Inc. Directors' Retainer Fee Stock Plan
(the "Plan"). Under the Plan, each Nonemployee Director may make an election to
receive all or a portion of his or her annual retainer fee for services on the
Board, annual retainer fee, if any, for serving as a chairperson of a committee
of the Board, and committee attendance fees (the "Annual Service Fee") in Common
Stock in lieu of cash. The Plan will not increase the amount of compensation
received by any director.
19
<PAGE> 23
The purpose of the Plan is to promote the growth and success of the Company
by attracting, motivating and retaining experienced and knowledgeable persons to
serve as directors of the Company and, along with the stock ownership
guidelines, to promote identification of such directors' interests with those of
the Company's shareholders.
A summary of the principal features of the Plan is provided below, but is
qualified in its entirety by reference to the full text of the Plan, which is
attached to this Proxy Statement as Exhibit A. Approval of the Plan requires the
affirmative vote of a majority of the shares represented in person or by proxy
at the meeting and voting on such Plan. Abstentions will be counted for purposes
of determining whether a quorum is present and will be counted as voting. Broker
nonvotes are not counted for purposes of voting.
A total of 100,000 shares of Common Stock may be issued under the Plan,
subject to adjustment for stock splits, stock dividends and certain other
changes in capitalization. Shares issued under the Plan may be authorized but
unissued shares or treasury shares. Only Nonemployee Directors of the Company
(currently 11) may participate in the Plan.
If the Plan is approved by shareholders, prior to the first day of each
Plan Year (May 1 through the following April 30), each Nonemployee Director may
make an election to receive all or a portion of his or her Annual Service Fee
for that Plan Year in Common Stock in lieu of cash. Unless a Nonemployee
Director elects to make a Deferral Election, as described below, a portion of
such shares of Common Stock shall be transferred to such director on the last
business day of each calendar month of the Plan Year (the "Issue Dates"). The
total number of shares of Common Stock to be transferred on any Issue Date shall
be determined by dividing (x) the product of (1) the percentage specified by the
Nonemployee Director and (2) the portion of the Nonemployee Director's Annual
Service Fee payable in the month of the Issue Date by (y) the fair market value
of a share of Common Stock on the Issue Date.
Under the Plan, each Nonemployee Director also may make an annual election
to defer the receipt (a "Deferral Election") of all or a portion of the shares
of Common Stock otherwise payable under the Plan to such Nonemployee Director.
At the time of the Deferral Election, the Nonemployee Director shall elect to
receive the deferred shares in either a lump sum or in no more than 10
substantially equal annual installments. The lump sum shall be paid on either
the March 1 following the Nonemployee Director's cessation of service on the
Board or a date designated by the Nonemployee Director at the time the Deferral
Election is made. Installment payments shall begin on the March 1 following the
Nonemployee Director's cessation of service on the Board and shall continue on
each March 1 until all deferred shares are distributed. Shares that are deferred
under the Plan shall be credited with an amount equal to the dividends that
would have been paid on an equal number of outstanding shares of Common Stock.
The amount so credited shall be converted into additional deferred shares and
shall be treated in the same manner as other deferred shares under the Plan.
The Plan shall be administered by the Committee on Nominations and
Corporate Governance of the Board. All costs and expenses involved in
administration of the Plan shall be borne by the Company.
The Plan provides that upon a Change in Control, as defined in the Plan,
all shares that have been deferred under the Plan prior to the Change in Control
shall be issued immediately, or if the Common Stock is no longer trading on the
New York Stock Exchange, shall be paid in cash in an amount equal to the higher
of (1) the fair market value of the Common Stock on the date of determination of
the Change in Control, or (2) the highest price per share actually paid for the
Common Stock in connection with the Change in Control.
The Board may at any time alter, amend or terminate the Plan; provided,
however, that no such action shall affect the rights of any Nonemployee Director
without his or her consent in any Common Stock issued to or deferred by such
Nonemployee Director; and provided further, that no amendment shall be effective
prior to approval by the Company's shareholders to the extent such approval is
then required by law or pursuant to Rule 16b-3 issued under the Securities
Exchange Act of 1934, as amended, to preserve the applicability of the exemption
provided by that Rule.
If approved by the shareholders, the Plan will become effective on April
30, 1998 and shall have a term of 10 years, unless terminated earlier by the
Board.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE DIRECTORS' RETAINER
FEE STOCK PLAN.
20
<PAGE> 24
PROPOSAL 3
APPROVAL OF AMENDMENT TO COOPER INDUSTRIES, INC.
MANAGEMENT ANNUAL INCENTIVE PLAN
On February 11, 1998, the Board of Directors adopted, subject to approval
by the shareholders, the Amendment to Cooper Industries, Inc. Management Annual
Incentive Plan ("Amendment"). The Cooper Industries, Inc. Management Annual
Incentive Plan (the "Annual Incentive Plan" or the "Plan") was approved by the
shareholders in 1996 and provides for the awarding of annual bonuses ("Annual
Incentive Awards" or "Awards") in cash to senior executives (currently seven)
based on the Company's performance. The Amendment permits the Management
Development and Compensation Committee (the "Committee") to pay Awards earned
under the Annual Incentive Plan in cash or the Company's Common Stock ("Shares")
or a combination of cash and Shares. The Amendment furthers the Board's policy
of more closely linking executive compensation to the Company's performance and
shareholders' interests as a whole. The Amendment will not increase the amount
of compensation payable to any participant under the Plan.
A summary of the principal features of the Amendment is provided below, but
is qualified in its entirety by reference to the full text of the Amendment,
which is attached to this Proxy Statement as Exhibit B, and by reference to the
full text of the Plan, which is attached to this Proxy Statement as Exhibit C.
Approval of the Amendment requires the affirmative vote of a majority of the
shares represented in person or by proxy at the meeting and voting on the
Amendment. Abstentions will be counted for purposes of determining whether a
quorum is present and will be counted as voting. Broker nonvotes are not counted
for purposes of voting.
The Plan is administered by the Committee. The Amendment provides that the
Committee in its sole discretion may determine to pay any Award in cash or
Shares or a combination of cash and Shares. The Amendment also provides that,
subject to the Committee's approval, a participant may request to have all or a
portion of his or her Award paid in Shares. For amounts paid in Shares, the
number of Shares to be paid shall be determined by dividing the amount of the
Award to be paid in Shares by the fair market value of a Share on the date the
Committee determines that the Award is earned. Only whole Shares will be
distributed; fractional Shares will be paid in cash.
Under the Plan, the Committee may permit participants to defer receipt of
all or a portion of an Award. The Amendment provides that if such amounts
deferred are in Shares, a deferral account will be established for the
participant, and amounts equal to the dividends or distributions that would have
been paid on those Shares shall be credited to the participant's deferral
account. The accrued dividends shall be credited with interest. In the event of
a Change in Control (as defined in the Plan), any Shares credited to a
participant's deferral account shall be issued immediately.
The Amendment provides that the total number of Shares available for
issuance under the Plan is 500,000, subject to adjustment in the event of any
change in the number of outstanding shares by reason of a stock dividend, stock
split, recapitalization or similar corporate change. Shares available for
issuance under the Plan may be authorized but unissued shares or treasury
shares.
Mr. Riley has requested that 78 percent of his 1997 Award be paid in
Shares. In addition, three other participants in the Plan have requested to take
a portion of their 1997 Award in Shares. The Committee has approved these
requests subject to shareholder approval of the Amendment.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENT TO THE
COOPER INDUSTRIES, INC. MANAGEMENT ANNUAL INCENTIVE PLAN.
RELATIONSHIP WITH INDEPENDENT AUDITORS
The Board selects the Company's independent auditors for each year. During
the year ended December 31, 1997, Ernst & Young LLP was employed principally to
perform the annual audit and to render other services.
Representatives of Ernst & Young will be present at the meeting and will be
available to answer questions and discuss matters pertaining to the Report of
Independent Auditors contained in the financial statements included in Appendix
A hereto. Representatives of Ernst & Young will have the opportunity to make a
statement, if they desire to do so.
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<PAGE> 25
SHAREHOLDERS' PROPOSALS
Shareholders' proposals intended to be presented at the 1999 Annual Meeting
should be sent by certified mail, return receipt requested, and must be received
by the Company at its principal executive offices (Attention: Corporate
Secretary) on or before November 10, 1998 for inclusion in the proxy statement
and the form of proxy for that meeting. Such proposals may be made only by
persons who are shareholders, beneficially or of record, on the date the
proposal is submitted and who continue in such capacity through the meeting
date, of at least one percent or $1,000 in market value of securities entitled
to be voted at the meeting, and have held such securities for at least one year.
OTHER BUSINESS
The Board is not aware of any other matters that will be presented for
action at the meeting. If any other matter requiring a vote of the shareholders
properly comes before the meeting, the persons authorized under management
proxies will vote and act according to their best judgment.
FORM 10-K
A copy of the 1997 Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 as filed with the Securities and Exchange Commission will be
available on Cooper's home page at www.cooperindustries.com or may be obtained
upon request and without charge, by writing:
Public Affairs Department
Cooper Industries, Inc.
P.O. Box 4446
Houston, Texas 77210
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<PAGE> 26
EXHIBIT A
COOPER INDUSTRIES, INC.
DIRECTORS' RETAINER FEE STOCK PLAN
1. Purpose. The purpose of the Directors' Retainer Fee Stock Plan (the
"Plan") is to attract, motivate and retain experienced and knowledgeable persons
to serve as directors of Cooper Industries, Inc. (the "Company") and to promote
identification of such directors' interests with those of the Company's
shareholders.
2. Definitions. As used in the Plan:
2.1. "Affiliate" shall have the meaning set forth in Rule 12b-2 under
Section 12 of the Exchange Act.
2.2. "Annual Service Fee" means the annual cash retainer fee payable
to a Nonemployee Director for his or her services on the Board; the annual
retainer fee, if any, payable to a Nonemployee Director for serving as a
chairperson of a committee of the Board; and any fees payable to a
Nonemployee Director for attendance at meetings of the Board or any of its
committees.
2.3. "Beneficial Owner" shall have the meaning set forth in Rule 13d-3
under the Exchange Act, except that a Person shall not be deemed to be the
Beneficial Owner of any securities which are properly filed on a Schedule
13G.
2.4. "Board" means the Board of Directors of the Company.
2.5. For all purposes of the Plan, a "Change in Control" shall be
deemed to have occurred if the event set forth in any one of the following
paragraphs shall have occurred:
2.5.1. any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including in the
securities beneficially owned by such Person any securities acquired
directly from the Company or its affiliates) representing 20% or more of
the combined voting power of the Company's then outstanding securities,
excluding any Person who becomes such a Beneficial Owner in connection
with a transaction described in clause (i) of paragraph 2.5.3 below; or
2.5.2. the following individuals cease for any reason to constitute
a majority of the number of directors then serving: individuals who, on
the date hereof, constitute the Board and any new director (other than a
director whose initial assumption of office is in connection with an
actual or threatened election contest, including but not limited to a
consent solicitation, relating to the election of directors of the
Company) whose appointment or election by the Board or nomination for
election by the Company's shareholders was approved or recommended by a
vote of at least two-thirds ( 2/3) of the directors then still in office
who either were directors on the date hereof or whose appointment,
election or nomination for election was previously so approved or
recommended; or
2.5.3. there is consummated a merger or consolidation of the
Company or any direct or indirect subsidiary of the Company with any
other corporation, other than (i) a merger or consolidation which would
result in the voting securities of the Company outstanding immediately
prior to such merger or consolidation continuing to represent (either by
remaining outstanding or by being converted into voting securities of
the surviving entity or any parent thereof), at least 60% of the
combined voting power of the securities of the Company or such surviving
entity or any parent thereof outstanding immediately after such merger
or consolidation, or (ii) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in
which no Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including in the
securities Beneficially Owned by such Person any securities acquired
directly from the Company or its Affiliates) representing 20% or more of
the combined voting power of the Company's then outstanding securities;
or
2.5.4. the shareholders of the Company approve a plan of complete
liquidation or dissolution of the Company or there is consummated an
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets, other than a sale or
disposition by the Company of all or substantially all of the Company's
assets to an entity, at least 60% of the combined voting power of the
voting securities of which are owned by shareholders of the Company in
substantially the same proportions as their ownership of the Company
immediately prior to such sale.
<PAGE> 27
Notwithstanding the foregoing, a "Change in Control" shall not be
deemed to have occurred by virtue of the consummation of any transaction
or series of integrated transactions immediately following which the
record holders of the Common Stock of the Company immediately prior to
such transaction or series of transactions continue to have
substantially the same proportionate ownership in an entity which owns
all or substantially all of the assets of the Company immediately
following such transaction or series of transactions.
2.6. "Change in Control Price" means the higher of (i) the Fair Market
Value on the date of determination of the Change in Control or (ii) the
highest price per share actually paid for the Common Stock in connection
with the Change in Control of the Company.
2.7. "Committee" means the Committee on Nominations and Corporate
Governance of the Board.
2.8. "Common Stock" means the Common Stock, par value $5.00 a share,
of the Company.
2.9. "Deferral Election" shall have the meaning set forth in Section 7
hereof.
2.10. "Deferred Shares" shall have the meaning set forth in Section 7
hereof.
2.11. "Deferred Share Account" shall have the meaning set forth in
Section 7 hereof.
2.12. "Dividend Equivalents" shall have the meaning set forth in
Section 8 hereof.
2.13. "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time.
2.14. "Fair Market Value" of a share of Common Stock, as of any date,
means the average of the high and low sales prices of a share of Common
Stock as reported on the Stock Exchange composite tape on the applicable
date, provided that if no sales of Common Stock were made on the Stock
Exchange on that date, the average of the high and low prices as reported
on the composite tape for the preceding day on which sales of Common Stock
were made.
2.15. "Issue Dates" means the last business day of each calendar month
in a Plan Year.
2.16. "Nonemployee Director" means a member of the Board who is not an
employee of the Company or any of its subsidiaries.
2.17. "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof,
except that such term shall not include (i) the Company or any of its
Affiliates, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its subsidiaries, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities or (iv) a corporation owned, directly or indirectly, by the
shareholders of the Company in substantially the same proportions as their
ownership of stock of the Company.
2.18. "Plan Year" means the 12-month period commencing May 1 and
ending on the following April 30. The first Plan Year shall commence on May
1, 1998.
2.19. "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act
(or any successor rule to the same effect).
2.20. "Stock Exchange" means the New York Stock Exchange, Inc.
("NYSE") or, if the Common Stock is no longer included on the NYSE, then
such other market price reporting system on which the Common Stock is
traded or quoted.
2.21. "Voting Stock" means securities entitled to vote in an election
of directors of the Company.
3. Authorized Shares. The total number of shares of the Company's Common
Stock available for issuance under the Plan is 100,000, including Deferred
Shares (as defined below), subject to adjustment pursuant to Section 13 hereof.
Shares available for issuance under the Plan may be authorized and unissued
shares or treasury shares, as the Company may determine from time to time.
4. Administration of the Plan. The Plan shall be administered by the
Committee. The Committee shall, subject to the provisions of the Plan, adopt
such rules as it may deem appropriate in order to carry out the purpose of the
Plan. All questions of interpretation, administration, and application of the
Plan shall be determined by a majority of the members of the Committee, except
that the Committee may authorize any one or more of its members, or any officer
or employee of the Company, to execute and deliver documents on behalf of the
Committee. The determination of
2
<PAGE> 28
such majority shall be final and binding in all matters relating to the Plan. No
member of the Committee shall be liable for any act done or omitted to be done
by such member or by any other member of the Committee in connection with the
Plan, except for such member's own willful misconduct or as expressly provided
by statute. All costs and expenses involved in administration of the Plan shall
be borne by the Company.
5. Participation. Each Nonemployee Director shall be eligible to
participate in the Plan.
6. Election to Receive Common Stock in Lieu of Annual Service Fee. Prior
to the first day of each Plan Year, each Nonemployee Director may make an
election to receive all or a portion of his or her Annual Service Fee for such
Plan Year in Common Stock (a "Stock Election") in lieu of cash. Such shares of
Common Stock shall be transferred in accordance with Section 9 hereof, except to
the extent that a Deferral Election shall be in effect with respect to such
shares or to the extent that Section 12 hereof applies. Any Stock Election shall
be in writing, shall specify the percentage of the Annual Service Fee to be paid
in Common Stock, and shall be irrevocable for the Plan Year for which the Stock
Election is made. Notwithstanding the foregoing, any Nonemployee Director who is
newly elected or appointed to the Board after the first day of a Plan Year may
make the election under this Section 6 upon the date of his or her election or
appointment to the Board with respect to the percentage of the Annual Service
Fee that is payable for the remainder of that Plan Year.
7. Deferral Election. Prior to the first day of each Plan Year, each
Nonemployee Director may make an election to defer the receipt (a "Deferral
Election") of all or any percentage of the shares of Common Stock otherwise
payable to such Nonemployee Director pursuant to Section 6 hereof. In such
event, the Company shall credit to an account (a "Deferred Share Account")
maintained on behalf of such Nonemployee Director, as of the date on which the
shares would otherwise be transferred hereunder, the shares of Common Stock
("Deferred Shares") deferred. Any Deferral Election shall be in writing, shall
specify the percentage of shares to be deferred, and shall be irrevocable for
the Plan Year for which the Deferral Election is made. Notwithstanding the
foregoing, any Nonemployee Director who is newly elected or appointed to the
Board after the first day of a Plan Year may make the election under this
Section 7 upon the date of his or her election or appointment to the Board with
respect to the percentage of the Stock Election that is to be deferred for the
remainder of that Plan Year.
Deferred Shares will be distributed in whole shares of Common Stock and
cash in lieu of fractional shares. At the time of the Deferral Election, the
Nonemployee Director shall elect to receive the Deferred Shares in either a lump
sum or in no more than 10 substantially equal annual installments. The lump sum
will be paid on either (a) the March 1 following the Nonemployee Director's
cessation of service on the Board or (b) a date designated by the Nonemployee
Director on the Deferral Election. Installment payments shall commence on the
March 1 following the Nonemployee Director's cessation of service on the Board
and shall continue on each March 1 until all Deferred Shares are distributed.
All Deferral Elections are subject to Section 12 of this Plan.
In the event of the Nonemployee Director's death before distribution of all
of his or her Deferred Shares, the balance of the Deferred Shares shall be
distributed in a lump sum to the beneficiary or beneficiaries designated in
writing by the Nonemployee Director, or if no designation has been made, to the
estate of the Nonemployee Director.
8. Dividend Equivalents. Deferred Shares shall be credited with an amount
equal to the dividends that would have been paid on an equal number of
outstanding shares of Common Stock ("Dividend Equivalents"). Dividend
Equivalents shall be credited (i) as of the payment date of such dividends, and
(ii) only with respect to Deferred Shares credited to such Nonemployee Director
prior to the record date of the dividend. When credited, Dividend Equivalents
shall be converted into an additional number of Deferred Shares as of the
payment date of the dividend, based on the Fair Market Value on such payment
date. Such Deferred Shares shall thereafter be treated in the same manner as any
other Deferred Shares under the Plan.
9. Transfer of Shares. Shares of Common Stock issuable to a Nonemployee
Director under Section 6 hereof shall be transferred to such Nonemployee
Director on the Issue Dates. The total number of shares of Common Stock to be
transferred shall be determined by the following formula:
% of Stock Election x Monthly Service Fee Payable
-------------------------------------------------------------------
Fair Market Value of a Share of Common Stock on Issue Date
The Company will instruct its registrar to make an entry on the Company's
Shareholder records evidencing that the shares (including any fractional shares)
of Common Stock have been issued as of the Issue Dates.
3
<PAGE> 29
Notwithstanding anything to the contrary herein, if on any Issue Date the
number of shares of Common Stock otherwise issuable to the Nonemployee Directors
shall exceed the number of authorized shares of Common Stock remaining available
under the Plan, the available shares shall be allocated among the Nonemployee
Directors in proportion to the number of shares they would otherwise be entitled
to receive and the remainder of the Nonemployee Directors' Annual Service Fee
shall be payable in cash.
10. Rights as a Shareholder. Except as otherwise expressly provided herein
with respect to Dividend Equivalents, a Nonemployee Director shall have no
rights as a shareholder of the Company with respect to any Common Stock to be
issued under the Plan until he or she becomes the holder of record of such
shares.
11. Vesting. A Nonemployee Director shall be 100% vested in his or her
Deferred Share Account at all times.
12. Change in Control. Upon a Change in Control, all Deferred Shares, to
the extent credited prior to the Change in Control, shall be issued immediately,
or if the Common Stock is no longer trading on the Stock Exchange, shall be paid
immediately in cash. For purposes of this Section 12, the cash equivalent value
of a Deferred Share shall be the Change in Control Price.
13. Effect of Certain Changes in Capitalization. In the event of any
recapitalization, stock split, reverse stock split, stock dividend,
reorganization, merger, consolidation, spin-off, combination, repurchase, or
share exchange, or other similar corporate transaction or event affecting the
Common Stock, the maximum number or class of shares available under the Plan,
and the number or class of shares of Common Stock to be delivered hereunder
shall be adjusted by the Committee to reflect any such change in the number or
class of issued shares of Common Stock.
14. Term of Plan. The Plan shall become effective on April 30, 1998
provided that the Plan shall have been approved by the Company's shareholders at
the 1998 annual meeting of shareholders. Unless terminated earlier pursuant to
Section 15, the Plan shall have a term of 10 years. Notwithstanding the
foregoing, any Deferral Elections made prior to the termination of the Plan
shall continue in accordance with the terms hereof.
15. Amendment; Termination. The Board may at any time and from time to
time alter, amend, or terminate the Plan in whole or in part; provided, however,
that no such action shall, without the consent of a Nonemployee Director, affect
the rights of such Nonemployee Director in any Common Stock issued to or
deferred by such Nonemployee Director under the Plan, and provided, further that
no amendment shall be effective prior to approval by the Company's shareholders
to the extent such approval is then required by law, rule or regulation or
pursuant to Rule 16b-3 in order to preserve the exemption provided by Rule
16b-3.
16. Rights of Directors. Nothing contained in the Plan shall confer upon
any Nonemployee Director any right to continue in the service of the Company as
a director.
17. Government and Other Regulations. The obligations of the Company to
deliver shares under the Plan shall be subject to all applicable laws, rules and
regulations and such approvals by any government agency as may be required,
including, without limitation, compliance with the Securities Act of 1933, as
amended.
18. Nontransferability. The rights and benefits under the Plan shall not
be transferable by a Nonemployee Director other than by the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined in
the Internal Revenue Code of 1986, as amended, or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder.
19. Withholding. To the extent required by applicable federal, state,
local, or foreign law, a Nonemployee Director shall make arrangements
satisfactory to the Company for the payment of any withholding tax obligations
that arise in connection with the Plan. The Company shall not be required to
issue any Common Stock under the Plan until such obligations are satisfied. A
Nonemployee Director may satisfy any such withholding obligation by (i) having
the Company retain the number of shares of Common Stock or (ii) tendering the
number of shares of Common Stock, in either case, whose Fair Market Value equals
the amount required to be withheld.
20. Governing Law. To the extent that federal laws do not otherwise
control, the Plan and all rights hereunder shall be construed in accordance with
and governed by the laws of the State of Ohio.
21. Headings. The headings of sections herein are included solely for
convenience of reference and shall not affect the meaning of any of the
provisions of the Plan.
4
<PAGE> 30
EXHIBIT B
AMENDMENT TO
COOPER INDUSTRIES, INC.
MANAGEMENT ANNUAL INCENTIVE PLAN
WHEREAS, the Board of Directors of Cooper Industries, Inc. (the "Company")
adopted on November 7, 1995, and the shareholders of the Company approved on
April 30, 1996, the Cooper Industries, Inc. Management Annual Incentive Plan
(the "Plan"), which provides for the awarding of annual cash bonuses to senior
executives of the Company based on the Company's performance; and
WHEREAS, the Board of Directors, upon the recommendation of the Management
Development and Compensation Committee of the Board of Directors, desires to
amend the Plan to permit awards to be paid in either cash or shares of the
Company's Common Stock, par value $5.00 a share ("Shares") or a combination of
cash and Shares.
NOW THEREFORE, the Plan is hereby amended as follows:
A. The following is added to Article I of the Plan:
The total number of shares of Common Stock available for issuance
under this Plan is 500,000, subject to adjustment in the event of any
change in the number of outstanding shares by reason of a stock dividend,
stock split, recapitalization or similar corporate change. Shares available
for issuance under this Plan may be authorized and unissued shares or
treasury shares, as the Company may determine from time to time.
B. Section 2.1 of the Plan is amended to read as follows:
"Annual Incentive Award" or "Award" means the compensation payable
in cash or Shares granted under the Plan to a Participant by the
Committee pursuant to such terms, conditions, restrictions and
limitations established by the Committee and the Plan.
C. Section 2.10 of the Plan is amended to read as follows:
"Plan" means the Cooper Industries, Inc. Management Annual
Incentive Plan dated November 7, 1995, as amended effective February 11,
1998, subject to approval by the shareholders of the Company.
D. A Section 2.16 is added as follows:
"Shares" shall mean the shares of Common Stock, par value $5.00 a
share, of the Company and other such securities of the Company as the
Committee may from time to time determine.
E. Section 6.1 of the Plan is amended as follows:
Awards under the Plan shall be paid in cash or Shares, or a
combination of cash and Shares, as provided in Sections 6.3 and 6.4.
F. Sections 6.3, 6.4, 6.5 and 6.6 are added as follows:
6.3 The Committee in its sole discretion may determine to pay any
earned Annual Incentive Awards in cash or Shares or a combination of
cash and Shares.
6.4 A Participant may request to have all or a portion of the
Annual Incentive Award, when earned, paid in Shares. Such request shall
be made by delivering to the Company at the office of its Secretary a
notice setting forth that portion (expressed as a percentage) of the
Award for which the Participant desires to receive Shares. The Committee
shall consider the request and have absolute discretion to determine the
extent to which the request shall be approved.
6.5 With respect to any Awards paid in Shares, the number of Shares
to be paid shall be determined by dividing the amount of the Award to be
paid in Shares by the fair market value of a Share on the date the
Committee approves the Award pursuant to Section 6.2. Only whole Shares
will be distributed; fractional Shares will be paid in cash.
6.6 Shares will be issued to the Participant as soon as practicable
after the Committee makes its determination under Section 6.2, unless
the Participant elects to defer receipt of all or a portion of the
Annual Incentive Award that is to be paid in Shares as provided in
Section 7.2.
<PAGE> 31
G. Article VII "Deferrals and Settlements" is amended as follows:
7.1 The Committee may permit Participants to elect to defer receipt
of all or a portion of the Annual Incentive Award under administrative
policies established pursuant to the Company's Management Incentive
Compensation Deferral Plan. It also may provide that amounts be credited
with interest.
7.2 If the Participant elects to defer the receipt of Shares, the
Shares shall be credited to a deferral account in the Participant's name
and shall be credited with all dividends or other distributions, as and
when paid by the Company with respect to Shares. Accrued dividends shall
be credited with interest. Until the Shares are issued to the
Participant, the Participant shall have no other rights as a shareholder
of the Company. Upon a Change in Control, any Shares credited to a
Participant's deferral account shall be issued immediately.
2
<PAGE> 32
EXHIBIT C
COOPER INDUSTRIES, INC.
MANAGEMENT ANNUAL INCENTIVE PLAN
NOVEMBER 7, 1995
I. PURPOSE OF THE PLAN
The Cooper Industries, Inc. Management Annual Incentive Plan is intended to
provide Cooper Industries, Inc. ("the Company") a means by which it can engender
and sustain a sense of personal commitment on the part of its senior executives
in the continued growth, development and financial success of the Company and
encourage them to remain with and devote their best efforts to the business of
the Company, thereby advancing the interests of the Company and its
shareholders. Accordingly, the Company may award to senior executives annual
incentive compensation on the terms and conditions established herein.
II. DEFINITIONS
2.1 "Annual Incentive Award" or "Award" means the compensation payable in
cash granted under the Plan to a Participant by the Committee pursuant to such
terms, conditions, restrictions and limitations established by the Committee and
the Plan.
2.2 "Board" means the Board of Directors of the Company.
2.3 For all purposes of the Plan, a "Change in Control" shall have occurred
if any of the following events shall occur:
(a) The Company is merged, consolidated or reorganized into or with
another corporation or other legal person, and immediately after such
merger, consolidation or reorganization less than a majority of the
combined voting power of the then-outstanding securities of such
corporation or person immediately after such transaction are held in the
aggregate by the holders of Voting Stock of the Company immediately prior
to such transaction;
(b) The Company sells all or substantially all of its assets to any
other corporation or other legal person, and less than a majority of the
combined voting power of the then-outstanding securities of such
corporation or person immediately after such sale are held in the aggregate
by the holders of Voting Stock of the Company immediately prior to such
sale;
(c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any
successor schedule, form or report), each as promulgated pursuant to the
Exchange Act, disclosing that any person (as the term "person" is used in
Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the
beneficial owner (as the term "beneficial owner" is defined under Rule
13(d)(3) or any successor rule or regulation promulgated under the Exchange
Act) of securities representing 20% or more of the Voting Stock;
(d) The Company files a report or proxy statement with the Securities
and Exchange Commission pursuant to the Exchange Act disclosing in response
to Form 8-K or Schedule 14A (or any successor schedule, form or report or
item therein) that a Change in Control of the Company has or may have
occurred or will or may occur in the future pursuant to any then-existing
contract or transaction; or
(e) If during any period of two consecutive years, individuals who at
the beginning of any such period constitute the Directors of the Company
cease for any reason to constitute at least a majority thereof, provided,
however, that for purposes of this Section 2.3(e), each Director who is
first elected, or first nominated for election by the Company's
stockholders, by a vote of at least two-thirds of the Directors of the
Company (or a committee thereof) then still in office who were Directors of
the Company at the beginning of any such period will be deemed to have been
a Director of the Company at the beginning of such period.
Notwithstanding the foregoing provisions of Section 2.3(c) or 2.3(d)
hereof, unless otherwise determined in a specific case by majority vote of the
Board, a Change in Control shall not be deemed to have occurred for purposes of
the Plan solely because (i) the Company, (ii) an entity in which the Company
directly or indirectly beneficially owns 50% or more of the Voting Stock, or
(iii) any employee stock ownership plan or any other employee benefit plan
sponsored by the Company, either files or becomes obligated to file a report or
a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K
or Schedule 14A (or any successor schedule, form or report or item
<PAGE> 33
therein) under the Exchange Act, disclosing beneficial ownership by it of shares
of Voting Stock, whether in excess of 20% or otherwise, or because the Company
reports that a change in control of the Company has or may have occurred or will
or may occur in the future by reason of such beneficial ownership.
2.4 "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
2.5 "Commission" means the Securities and Exchange Commission.
2.6 "Committee" means the Management Development and Compensation Committee
of the Board, or such other committee designated by the Board to administer the
Plan, provided that the Committee shall consist of three or more persons each of
whom is an "outside director" within the meaning of Section 162(m) and a
"disinterested person" within the meaning of Rule 16b-3 under the Exchange Act.
2.7 "Employee" means an employee of the Company or any of its subsidiaries
or affiliates.
2.8 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.9 "Participant" means a Senior Executive Officer of the Company who is
selected by the Committee to participate in the Plan.
2.10 "Plan" means the Cooper Industries, Inc. Management Annual Incentive
Plan dated November 7, 1995.
2.11 "Performance Goals" shall be defined as the performance criterion or
criteria established by the Committee, pursuant to Section V hereof, for the
purpose of determining Awards under the Plan.
2.12 "Performance Period" means the consecutive 12 month period that
constitutes the Company's fiscal year.
2.13 "Section 162(m)" means Section 162(m) of the Code and the regulations
promulgated thereunder.
2.14 "Senior Executive Officer" means the Chairman; Chief Executive
Officer; any Executive Vice President, Operations; any Senior Vice President; or
any other senior officer reporting directly to the Chief Executive Officer.
2.15 "Voting Stock" means securities entitled to vote in an election of
Directors of the Company.
III. ADMINISTRATION
3.1 The overall administration of the Plan, including the final
determination of Awards to each Participant, is vested in the Committee.
3.2 Determinations of the Committee in administering the Plan shall be
final and binding upon all Participants.
IV. ELIGIBILITY
Participation in the Plan shall be limited to Senior Executive Officers.
Participants will be selected for participation annually by the Committee not
later than 90 days after the commencement of the Performance Period. The
Committee may withdraw its approval for participation in the Plan for a
Participant at any time. In the event of such withdrawal, such Participant shall
cease to be a Participant as of the date designated by the Committee and the
employee shall be notified of such withdrawal as soon as practicable following
such action. Further, such Employee shall cease to have any right to an Award
for the Performance Period in which such withdrawal is effective; provided,
however, that the Committee may, in its sole discretion, authorize a prorated
award based on the number of full months of participation prior to the effective
date of such withdrawal and the Company's performance during such period.
V. PERFORMANCE GOALS AND MEASURES
5.1 Performance Goals shall be established by the Committee not later than
90 days after commencement of the Performance Period relating to a specific
Award. The Performance Goals may be identical for all Participants or, at the
discretion of the Committee, may be different to reflect more appropriate
measures of individual performance. The criterion or criteria used in
establishing Performance Goals may, at the discretion of the Committee, include
one or any combination of the following: (i) the Company's return on equity,
assets, capital or investment; (ii) pre-tax or after-tax profit levels expressed
in absolute dollars or earnings per share of the Company; or (iii) cash flow or
similar measure. The Performance Goals established by the Committee shall
include a threshold level of performance below which no
2
<PAGE> 34
Award will be payable and a maximum Award opportunity for each Senior Executive
Officer. The determination of attainment of the Performance Goals shall be
determined in accordance with generally accepted accounting principles and
certified in writing by the Committee.
5.2 The Committee shall be authorized to make adjustments in the method of
calculating attainment of Performance Goals in recognition of: (i) extraordinary
or non-recurring items, (ii) changes in tax laws, (iii) changes in generally
accepted accounting principles or changes in accounting policies, (iv) charges
related to restructured or discontinued operations, (v) restatement of prior
period financial results, and (vi) any other unusual, non-recurring gain or loss
that is separately identified and quantified in the Company's financial
statements. Notwithstanding the foregoing, the Committee may, at its sole
discretion, reduce the performance results upon which Awards are based under the
Plan, to offset any unintended result(s) arising from events not anticipated
when the Performance Goals were established, provided that such adjustment is
permitted by Section 162(m).
VI. AWARDS
6.1 Awards under the Plan shall be paid in cash.
6.2 At the first meeting of the Committee after the expiration of the
Performance Period, the Committee shall review the prior year's performance in
relation to the Performance Goals and determine the level of achievement of the
Performance Goals. Payment of Annual Incentive Awards to Participants under the
Plan shall occur only after the Committee has certified in writing that the
Performance Goals have been achieved for the relevant Performance Period.
Notwithstanding the attainment of Performance Goals for the Company as a whole,
Awards for individual Participants under the Plan may be denied or adjusted
downward by the Committee, in its sole judgment, based on its assessment of the
Participant's performance. The maximum Annual Incentive Award that may be
granted to a Senior Executive Officer under the Plan for any Performance Period
shall be $1.5 million.
VII. DEFERRALS AND SETTLEMENTS
The Committee may permit Participants to elect to defer receipt of all or a
portion of the Annual Incentive Award under administrative policies established
pursuant to the Company's Management Incentive Compensation Deferral Plan. It
also may provide that amounts be credited with interest.
VIII. WITHHOLDING TAXES
The Company shall have the right to deduct from any payment to be made
pursuant to the Plan the amount of any taxes required by law.
IX. NO RIGHT TO CONTINUED EMPLOYMENT OR AWARDS
No person shall have any claim or right to be granted an Award, and the
granting of an Award shall not be construed as giving a Participant the right to
be retained in the employ of the Company or any of its subsidiaries. Further,
the Company and its subsidiaries expressly reserve the right at any time to
terminate the employment of any Participant free from any liability under the
Plan; except that a Participant, who meets or exceeds the Performance Goals for
the Performance Period and was actively employed for the full term of the
Performance Period, will be eligible for an Award even though the Participant is
not an active employee of the Company at the time the Committee grants Awards
under the Plan.
X. CHANGE IN CONTROL
Immediately upon a Change in Control, all outstanding Awards shall be
deemed earned at the maximum Performance Goal level and the Company shall make a
payment in cash to each Participant within ten (10) days after the effective
date of the Change in Control in the amount of such maximum Award. The granting
of Awards under the Plan shall in no way affect the right of the Company to
adjust, reclassify, reorganize, or otherwise change its capital or business
structure, or to merge, consolidate, dissolve, liquidate, sell or transfer all
or any portion of its businesses or assets.
3
<PAGE> 35
XI. AMENDMENT, MODIFICATION, SUSPENSION OR TERMINATION
The Board may amend, modify, suspend or terminate this Plan for any purpose
except that no amendment or alteration shall be effective prior to approval by
the Company's shareholders to the extent such approval is then required pursuant
to Section 162(m) or otherwise required as a matter of law. Further, no
amendment to the Plan shall be effective that would (i) increase the maximum
amount that can be paid to a Participant under the Plan; (ii) change the
performance criterion or criteria set forth in Section V hereof for payment of
Awards; or (iii) modify the eligibility requirements for Participants in the
Plan unless first approved by the Company's shareholders.
XII. GOVERNING LAW
The validity, construction and effect of the Plan and any actions taken or
relating to the Plan shall be determined in accordance with the laws of the
State of Ohio and applicable Federal law.
XIII. OTHER BENEFIT AND COMPENSATION PROGRAMS
Unless otherwise specifically provided to the contrary in the relevant
plan, program or practice, Awards received by Participants under the Plan shall
not be deemed a part of a Participant's regular, recurring compensation for
purposes of calculating payments or benefits under any other Company benefit
plan, program or practice or any severance policy of the Company. Further, the
Company may adopt other compensation programs, plans or arrangements for
employees below the level of Senior Executive Officer as it deems necessary and
appropriate.
XIV. SUCCESSORS AND ASSIGNS
The Plan shall be binding on all successors and assigns of a Participant,
including, without limitation, the estate of such Participant and the executor,
administrator or trustee of such estate, or any receiver or trustee in
bankruptcy or representative of the Participant's creditors.
XV. EFFECTIVE DATE
This Plan shall be effective as of the date it is approved by the Board of
Directors of the Company. Notwithstanding the foregoing, the adoption of this
Plan is expressly conditioned upon the approval by the Company's shareholders at
the annual meeting of the Company's shareholders held in 1996. If the
shareholders of the Company shall fail to approve this Plan prior to such date,
this Plan shall terminate and cease to be of any further force or effect.
Subject to earlier termination pursuant to Section XI, the Plan shall have a
term of five years from its effective date. After termination of the Plan, no
future Awards may be granted.
XVI. INTERPRETATION
The Plan is designed to comply with Section 162(m) of the Code, and all
provisions hereof shall be construed in a manner consistent with that intent.
4
<PAGE> 36
APPENDIX A
COOPER INDUSTRIES, INC.
<TABLE>
<S> <C>
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. A-1
Consolidated Financial Statements:
Report of Management...................................... A-13
Report of Independent Auditors............................ A-14
Consolidated Income Statements for the three years ended
December 31, 1997...................................... A-15
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... A-16
Consolidated Statements of Cash Flows for the three years
ended December 31, 1997................................ A-17
Consolidated Statements of Shareholders' Equity for the
three years ended December 31, 1997.................... A-18
Notes to Consolidated Financial Statements................ A-19
</TABLE>
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Acquisitions and Divestitures During the last three years, Cooper's
continuing operations have completed 18 acquisitions and 3 divestitures. The
acquisitions have been in complementary product lines that enhance areas of
strength, while the dispositions have been of noncore or under-performing
businesses. In 1995, Cooper divested the remaining businesses comprising the
former Petroleum & Industrial Equipment segment through an exchange offer with
shareholders for common stock of Cooper Cameron Corporation ("Cooper Cameron").
On May 30, 1997, Cooper completed the sale of its Kirsch window treatment
division for $216.0 million. For the five months ended May 30, 1997, and the
year ended December 31, 1996, Kirsch had revenues of $97.4 million and $252.9
million, and operating earnings of $4.8 million and $20.0 million, respectively.
Nonrecurring Income and Expenses In the third quarter of 1995, Cooper
began to sell the common shares of Belden Inc. ("Belden") that it retained
following the 1993 initial public offering of Belden's common stock. In 1995,
Cooper recognized gains from the sale of the Belden marketable equity securities
of $.05 per share.
In 1996, Cooper sold the remaining common shares of Belden and all of the
shares of Cooper Cameron retained in the 1995 exchange offer with shareholders.
Also in 1996, Cooper initiated a strategic review of most of its businesses and
operations. Actions resulting from this review included (1) the decision to
retain an investment banking firm to evaluate the possible sale of Kirsch; (2) a
change in the strategic direction of the automotive brake business and the
write-down of long-lived assets and goodwill associated with certain brake
product lines; and (3) nonrecurring charges related primarily to facility
closings and consolidations and resolution of environmental litigation. The 1996
nonrecurring charges, when combined with the realization of gains from the sale
of marketable equity securities, resulted in a net gain of $.05 per share.
On May 30, 1997, Cooper completed the sale of its Kirsch window treatment
division. The sale resulted in a gain of $69.8 million. During 1997, Cooper also
exchanged a portion of its DECSSM (Debt Exchangeable for Common Stock) for
Wyman-Gordon Company ("Wyman-Gordon") common stock and realized a gain of $23.2
million. Cooper incurred charges of $83.9 million for actions management
committed to during 1997 after concluding an evaluation of (1) geographic
manufacturing and distribution facilities within the Tools & Hardware segment,
(2) certain sales, marketing and distribution activities within the Automotive
Products segment and (3) information systems relating to year 2000 compliance
efforts. The 1997 charges included adjustments to the carrying value of assets
of $54.8 million and accruals for continuing obligations for replaced systems
and facility consolidations of $29.1 million. Cooper also recorded a tax benefit
of $6.1 million related to favorable settlements of state income tax issues in
1997. For 1997, the nonrecurring gains, net of the nonrecurring charges, and the
tax benefit increased earnings per share by $.10.
Cooper currently is not considering additional consolidations in the
Electrical Products segment. The Tools & Hardware segment is currently in the
process of consolidating certain international manufacturing and distribution
facilities and the Automotive Products segment is currently in the process of
consolidating sales, marketing and distribution activities. In addition, during
1997, Cooper began negotiations with Standard Motor Products, Inc. ("SMP") to
exchange Cooper's temperature control business for the brake products business
owned by SMP. In December 1997, Cooper received the necessary government
approvals for completion of the transaction with SMP. Closing of the business
exchange is subject to negotiation of a definitive agreement and is currently
anticipated to occur in the first quarter of 1998.
Cooper is continuing to evaluate strategic alternatives related to the
Automotive Products segment. During early 1998, Cooper anticipates completing
the exit of Automotive Products remanufacturing activities and all product lines
included in the temperature control businesses and completing the consolidation
of the Automotive Products sales, marketing and distribution activities.
Adjustments to the carrying value of assets and accruals, noted above, were
recorded for projects committed to by management. Severance and certain other
costs related to projects committed to by management are not expensed until
affected employees are notified. A majority of the consolidations have been
announced and such costs were accrued and expended by the end of 1997. Cash
expenditures related to the payout of accrued severance and other expenditures
related to the committed consolidations in 1998 will not be significant.
However, Cooper could incur additional expenses as the projects are completed,
resulting from consolidation disruptions to operations and additional
consolidation expenses. These additional expenses are currently not anticipated
to be significant to any quarterly period in 1998. In addition, other gains or
charges could be incurred during 1998 as
A-1
<PAGE> 38
management completes its evaluation of strategic alternatives related to the
Automotive Products segment or adds to the strategic projects committed to in
the Tools & Hardware segment.
With the exception of the sale of Kirsch, the actions committed to in 1997
will not have a continuing significant impact on revenues, segment operating
earnings or cash flows. See Notes 2 and 6 of Notes to Consolidated Financial
Statements for additional information on nonrecurring gains and charges.
Capitalization Effective January 1, 1995, Cooper exchanged all of its
outstanding $1.60 Convertible Exchangeable Preferred Stock for $691.2 million of
7.05% Convertible Subordinated Debentures due 2015 and $3.8 million in cash
related to fractional shares. While the exchange increased the debt-to-total
capitalization ratio above Cooper's preferred target, it generated in excess of
$20 million per year of additional net cash flows. During the first half of
1997, Cooper completed calls for redemption of all of its outstanding 7.05%
Convertible Subordinated Debentures with a total of $610 million converted to
approximately 14.8 million shares of Cooper Common stock and approximately $80
million redeemed for cash.
On June 30, 1995, Cooper reduced common shares outstanding by 9.5 million
shares through the completion of the exchange offer with its shareholders for
the common stock of Cooper Cameron. In December 1995, Cooper issued $222.8
million in 6% Exchangeable Notes (DECSSM -- Debt Exchangeable for Common Stock)
due January 1, 1999. The notes are mandatorily exchangeable into shares of
Wyman-Gordon common stock owned by Cooper or, at Cooper's option, into cash in
lieu of shares. The notes are, in effect, a monetization of Cooper's investment
in Wyman-Gordon common stock. In addition, Cooper retained the first 16% of
appreciation in the fair market value of the Wyman-Gordon common stock between
the date of issuance of the notes and their maturity, plus 13.8% of any
additional appreciation beyond the first 16%. During 1997, Cooper exchanged
$33.8 million of its DECS for Wyman-Gordon common stock. At December 31, 1997, a
minimum of $85.4 million after income taxes will be realized as a gain on the
Wyman-Gordon common stock through the DECS monetization. This gain plus any
additional appreciation will be realized upon redemption of the DECS.
During 1997, Cooper purchased approximately 3.6 million shares of its
Common stock for $192 million. This action was taken as part of the remaining
$275 million Common stock repurchase authorization program to maintain Cooper's
debt-to-total capitalization between 35% and 45%.
Cooper has invested $586 million in capital assets related to modernization
and expansion of facilities plus significant amounts related to the integration
of newly acquired businesses and the revitalization of existing ones during the
last three years. More importantly, Cooper today is a much different company
than it was in 1994, and one that is well prepared for the increasingly
competitive global marketplace.
YEAR 2000 INFORMATION SYSTEMS ASSESSMENTS
Many of Cooper's purchased and internally developed information systems
programs were written using two digits rather than four to identify a year. With
the turn of the century, time sensitive software using two digits may not
identify the year 2000, which could result in system failures and
miscalculations disrupting the ability to conduct normal business operations.
Cooper completed an assessment of its major information systems for year 2000
compliance during 1997 and developed detailed plans to resolve all major issues
by the end of 1998. Cooper has nine divisions with multiple hardware platforms
and software products in use. At the time the assessment was completed, several
businesses were, in the normal course, upgrading software and systems to
increase efficiency and customer responsiveness. Therefore, while the assessment
expedited certain systems conversions and upgrades, it did not initiate all of
the actions subsequently described. Cooper also assesses major information
systems of newly acquired businesses for year 2000 compliance as part of its
assessment program.
Four of Cooper's divisions are implementing new enterprise systems with the
remaining divisions revising or upgrading existing software to be year 2000
compliant. One of the divisions implementing a new enterprise system began the
rollout in 1997 with the other three divisions planning the rollouts in the
second and third quarters of 1998. Where possible, businesses have abandoned
home-grown or highly customized applications with purchased, year 2000 compliant
replacements or upgrades. In some situations, operations within a business
abandoned existing software and migrated to consolidated hardware and software
that is year 2000 compliant. Where these solutions were not possible, businesses
have contracted with third parties or committed internal resources to ensure
that all major systems are year 2000 compliant. Cooper believes it was close to
fifty percent complete with its efforts to convert software or install systems
that are year 2000 compliant at the end of 1997. While most efforts are
anticipated to be completed by the end of 1998, it is likely that certain
efforts will be delayed into early 1999.
A-2
<PAGE> 39
Cooper has also initiated formal communications with its significant
suppliers and large customers to determine the potential risk of disruption to
Cooper's operations if these companies fail to remediate year 2000 issues. The
greatest year 2000 compliance risk to Cooper is that implementation of new
enterprise systems will be delayed beyond the anticipated completion dates in
1998 and the severe shortage of qualified information systems personnel, both
internally and externally, could delay compliance efforts.
Cooper's total annual capital investment has not increased significantly
over historical expenditures, although like most companies the investment in
information technology has become a larger percentage of annual capital
expenditures. During the period 1996 through 1998, Cooper estimates that it will
have capital expenditures of close to $100 million on information technology
related to new systems installations. During 1997 and until completion of year
2000 compliance efforts, considerable internal resources are being devoted to
these projects. In addition to the internal resources, Cooper has been
incurring, and anticipates continuing to incur, approximately $2 million of
quarterly expense in its compliance efforts.
The capital expenditures and expenses of the projects, the estimated
percentage of completion to date, and the dates on which Cooper believes it will
complete the year 2000 compliance efforts are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
RESULTS OF OPERATIONS
The financial information and discussions that follow, along with the
Consolidated Financial Statements and related footnotes, will aid in
understanding Cooper's results of operations as well as its financial position,
cash flows and indebtedness.
REVENUES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Electrical Products......................................... $2,568.3 $2,407.5 $2,089.7
Tools & Hardware............................................ 749.9 720.1 702.9
Automotive Products......................................... 1,873.2 1,903.2 1,758.8
-------- -------- --------
Continuing Revenues............................... 5,191.4 5,030.8 4,551.4
Kirsch...................................................... 97.4 252.9 259.5
-------- -------- --------
Total Revenues.................................... $5,288.8 $5,283.7 $4,810.9
======== ======== ========
</TABLE>
1997 vs. 1996 Revenues Cooper's 1997 revenues, excluding Kirsch, increased
3% over 1996. Excluding the impact of eight 1997 acquisitions and the carryover
impact of 1996 acquisitions, revenues for 1997 increased 2%. The strengthening
of the U.S. dollar against most of the functional currencies in which
international operations conduct business reduced revenues measured in U.S.
dollars by approximately $80 million or 1.5% compared to 1996. The strong dollar
also had a negative unquantifiable impact on export sales.
The Electrical Products segment contributed close to 50% of Cooper's
continuing revenues in 1997, as revenues increased 7% over 1996. Excluding the
effects of 1997 acquisitions and the carryover impact of 1996 acquisitions,
revenues increased 5%. Revenue growth is attributable to strong sales increases
of distribution and transmission equipment and circuit protection products.
Lighting fixtures also benefited from strong demand in the housing and
nonresidential construction markets. Strong international demand in Mexico and
Canada for construction materials was offset somewhat by a soft European market
and the effects of a strong dollar.
The Tools & Hardware segment made up approximately 14% of Cooper's
continuing revenues in 1997, with revenues increasing 4% over the prior year.
Excluding the carryover impact of 1996 acquisitions, revenues increased 2%
compared to 1996. Sales of domestic hand-held power tools and worldwide assembly
equipment grew to meet continued demand from the automotive and aerospace
industries. Providing a partial offset to this increase was a slight decline in
demand for hand tool products in North America and the effects of a stronger
U.S. dollar against most European currencies.
A-3
<PAGE> 40
The Automotive Products segment contributed 36% of Cooper's continuing
revenues in 1997 with revenues decreasing slightly from the prior year.
Excluding the effects of two small 1997 acquisitions and the carryover impact of
one 1996 acquisition, revenues declined 2% from the prior year. Sales in the
original equipment market improved as vehicle production levels increased on
existing vehicle platform contracts. Sales in the aftermarket were hampered by
weak demand in most product lines. Temperature control product sales and
remanufactured product lines declined due primarily to competitive price
pressures. Wiper volume declined significantly in the first half of 1997 as more
normal winter weather patterns were experienced in 1997 than in 1996.
1996 vs. 1995 Revenues Cooper's 1996 revenues increased 10% over 1995.
Excluding the impact of seven 1996 acquisitions, the carryover impact of 1995
acquisitions (including the CEAG acquisition on December 31, 1995) and one small
1996 divestiture, revenues for 1996 were up 5%.
The Electrical Products segment comprised approximately 46% of Cooper's
total revenues in 1996, as revenues increased 15% over 1995. Excluding the
effects of 1996 acquisitions and the carryover impact of 1995 acquisitions
(including the CEAG acquisition on December 31, 1995), revenues increased 6%.
Sales of electrical construction materials, lighting fixtures and power
distribution products benefited from continued strength in industrial production
and commercial and industrial construction and renovation activity. Strong
international demand for a number of the segment's transformer and power
management products and a recovery from the 1995 economic downturn in Mexico
contributed to the revenue increase. New product introductions also added to
revenues in 1996.
The Tools & Hardware segment, including Kirsch, made up approximately 18%
of Cooper's total revenues in 1996, with revenues increasing slightly over the
1995 level. Excluding the effects of two small 1996 acquisitions, revenues were
flat when compared to 1995. Sales of power tools and assembly equipment
continued to grow to meet demand from the automotive and aircraft assembly
industries, both domestically and internationally. However, slowing demand in
the European markets for hand tools and drapery hardware products and the
disruptions from the implementation of a new hand tools distribution center in
North America offset the revenue gains from power tools and assembly equipment.
The Automotive Products segment contributed approximately 36% of Cooper's
total revenues in 1996, with revenues increasing 8% over 1995. Excluding the
effects of two 1996 acquisitions and carryover impact of one 1995 acquisition,
revenues increased 5% over the prior year. Harsh winter weather and lean
distributor inventories boosted domestic aftermarket demand for wiper blades and
ignition products early in the year. New customers for lighting products and a
partial recovery from the 1995 economic downturn in Mexico also increased
revenues. Product sales in the original equipment market improved as a result of
increased light vehicle production and increased placement of products on new
vehicle platforms. However, a decline in sales of temperature control products,
the result of a mild summer and related product returns; a decline in domestic
sales of heavy duty brake components, the result of decreases in original
equipment production; and lower European aftermarket sales, influenced by weak
economic conditions there, offset some of the gains made in other product
categories.
SEGMENT OPERATING EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
------ ------ ------
Reported Segment Operating Earnings: (IN MILLIONS)
<S> <C> <C> <C>
Electrical Products......................................... $445.7 $405.3 $355.5
Tools & Hardware............................................ 77.1 91.4 96.5
Automotive Products......................................... 143.5 87.3 180.7
------ ------ ------
Continuing Segment Operating Earnings............. 666.3 584.0 632.7
Kirsch...................................................... 74.6 20.0 14.7
------ ------ ------
Segment Operating Earnings........................ $740.9 $604.0 $647.4
====== ====== ======
</TABLE>
A-4
<PAGE> 41
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
------ ------ ------
Segment Operating Earnings Excluding Nonrecurring Items: (IN MILLIONS)
<S> <C> <C> <C>
Electrical Products......................................... $461.6 $408.3 $355.5
Tools & Hardware............................................ 99.6 91.4 96.5
Automotive Products......................................... 186.9 189.3 180.7
------ ------ ------
Continuing Segment Operating Earnings............. 748.1 689.0 632.7
Kirsch...................................................... 4.8 22.0 14.7
------ ------ ------
Segment Operating Earnings........................ $752.9 $711.0 $647.4
====== ====== ======
</TABLE>
1997 vs. 1996 Segment Operating Earnings Segment operating earnings in
1997 include nonrecurring charges of $81.8 million for adjustments to the
carrying value of assets, accruals for facility consolidations and related
severance and other obligations committed to by management. Reported segment
operating earnings also include a $69.8 million gain on the sale of Kirsch.
Segment operating earnings in 1996 include nonrecurring charges of an $85.3
million write-down of assets in the Automotive Products segment and $21.7
million in other nonrecurring charges related primarily to facility closings and
consolidations. See Nonrecurring Income and Expenses in the Overview section and
Note 2 of Notes to Consolidated Financial Statements. Excluding nonrecurring
items in 1997 and nonrecurring charges of $107 million in 1996, segment
operating earnings increased 6% over 1996. Excluding Kirsch results from both
years, segment operating earnings increased 9% over 1996. Acquisitions
contributed approximately $11 million or 2% of the increase in segment operating
earnings over 1996.
The Electrical Products segment operating earnings, excluding nonrecurring
charges of $15.9 million in 1997 and $3.0 million in 1996, improved 13% over the
prior year and contributed 62% of Cooper's continuing segment operating
earnings. Return on revenues improved in 1997 to 18% from 17% in 1996. The 1997
acquisitions and the carryover impact of 1996 acquisitions contributed
approximately $8 million of the increase in earnings. Excluding this impact and
nonrecurring items, segment operating earnings were up 11% over 1996. This
strong growth in earnings is primarily attributable to cost savings in
transformer products, strong revenue growth in higher margin distribution and
certain transmission equipment and circuit protection products and cost
containment across all businesses. All electrical products businesses had
increases in return on revenues, excluding nonrecurring charges, during 1997.
The Tools & Hardware segment operating earnings, excluding nonrecurring
items of $22.5 million in 1997 and Kirsch, increased 9% from 1996 and
contributed 13% of the continuing segment operating earnings. The incremental
earnings of the carryover impact of two small acquisitions was less than $1.5
million. Return on revenues increased to 13.3%, up .6 percentage points from the
prior year. Increased sales of hand-held power tools and assembly equipment and
leveraging of costs, primarily in the power tools and assembly equipment
businesses, were the primary drivers of the performance. The absence of
implementation costs incurred in the 1996 warehouse and distribution system
conversion at the hand tools operations also contributed to the increase in
return on revenues, partially offset by lower sales volume for hand tools.
The Automotive Products segment operating earnings, excluding nonrecurring
charges of $43.4 million in 1997 and $102.0 million in 1996, decreased 1% from
the prior year. The segment contributed 25% of continuing segment operating
earnings. Without the impact of two acquisitions, operating earnings declined
2%. Return on revenues increased from 9.9% in 1996 to 10.0% in 1997. Lower sales
volume in the domestic aftermarket for most chassis, temperature control and
wiper products, coupled with competitor price pressures, and a weak European
aftermarket for ignition products contributed to the earnings decline. Increased
sales in the original equipment market, lower spending on promotional expenses
and other costs and lower depreciation and amortization due to the 1996
write-down of brake assets provided a partial offset.
1996 vs. 1995 Segment Operating Earnings Segment operating earnings in
1996, excluding nonrecurring charges, included an $85.3 million write-down of
assets in the Automotive Products segment and $21.7 million in other
nonrecurring charges related primarily to facility closings and consolidations.
See Nonrecurring Income and Expense in the Overview section and Note 2 of Notes
to Consolidated Financial Statements. Excluding nonrecurring charges of $107
million, segment operating earnings in 1996 increased 10% over 1995.
Acquisitions contributed approximately $45 million or 7% of the increase in
segment operating earnings over 1995.
The Electrical Products segment operating earnings, excluding nonrecurring
charges, improved 15% from 1995, and contributed 57% of Cooper's total segment
operating earnings. Return on revenues decreased only slightly in 1996
A-5
<PAGE> 42
to 16.8% due to an unfavorable mix of power distribution products and a
proportionately lower contribution of higher-margin fuse products. Excluding
nonrecurring charges, return on revenues declined less than .1 percentage
points. The 1996 acquisitions and the carryover impact of 1995 acquisitions,
including CEAG, added approximately $36 million of incremental earnings to 1996.
Excluding this impact, segment operating earnings were up 4% over 1995. This
resulted from the growth in revenues from improvements in construction markets,
cost reduction efforts and a more favorable product line mix beginning in the
third quarter of 1996.
The Tools & Hardware segment operating earnings, excluding Kirsch, declined
$5.1 million when compared to 1995 with the segment, including Kirsch,
contributing 16% of total segment operating earnings before nonrecurring
charges. The incremental earnings impact from 1996 acquisitions was less than $2
million. Return on revenues, excluding Kirsch, of 12.7% in 1996 was below the
1995 level of 13.7%. The favorable impact from prior cost improvement actions,
including the consolidation of forged hand tools manufacturing, and increased
sales of power assembly tools were offset by implementation costs incurred in
the warehouse and distribution system conversion at the hand tools operations
and the effects of slower European markets. Kirsch results included nonrecurring
expenses of $2 million for legal and other costs related to sales of imported
mini blinds containing lead paint.
The Automotive Products segment operating earnings, before nonrecurring
expenses of $102 million, increased 5% from 1995 and contributed 27% of total
segment operating earnings. Acquisitions provided all of the increase in the
Automotive Products segment operating earnings. Return on revenues, before
nonrecurring expenses, declined from 10.3% in 1995 to 9.9% in 1996. Increased
sales in the North American market for most ignition, wiper, lighting and
steering and suspension products in 1996 contributed to earnings. However, the
North American reduction in production of vehicles utilizing heavy-duty brake
products; continuing severe price competition for brake and temperature control
products and a weak European aftermarket offset the increased sales and related
earnings and contributed to the decline in return on revenues. In addition,
customer changeover costs more than doubled in 1996 as a result of adding two
new large customers and several smaller customers. Price competition continued
in 1996, offsetting many of the efficiency gains achieved through facility
consolidations.
OTHER INCOME AND EXPENSE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Segment Operating Earnings(1)............................... $740.9 $604.0 $647.4
Other Income................................................ 14.2 23.0 25.5
Nonrecurring Gains.......................................... 23.2 150.4 11.7
General Corporate Expense................................... (61.2) (77.3) (55.6)
Interest Expense............................................ (90.4) (142.1) (151.0)
------ ------ ------
Income from Continuing Operations before Income Taxes..... $626.7 $558.0 $478.0
====== ====== ======
</TABLE>
- ---------------
(1) Includes nonrecurring gain on sale of Kirsch and nonrecurring charges.
Other Income Other income in 1997 declined compared to 1996 due to the
absence of dividends on marketable equity securities and the utilization of cash
to reduce average debt outstanding.
General Corporate Expense General corporate expenses decreased $16.1
million in 1997 compared to 1996. Excluding nonrecurring charges, general
corporate expenses decreased $7.3 million in 1997 compared to 1996. The 1997 and
1996 expenses included nonrecurring charges of $2.1 million and $10.9 million,
respectively. The 1997 charge relates primarily to information systems and the
1996 charge related primarily to environmental litigation. The remainder of the
decrease was primarily due to lower costs for retirements and severance. General
corporate expenses increased $21.7 million in 1996 compared to 1995. The 1996
general corporate expense includes $10.9 million in nonrecurring expenses
related to environmental litigation. The remainder of the increase from 1995 is
related to costs in connection with the executive incentive plan adopted by
shareholders in 1996 and severance and retirement expenses.
Nonrecurring Gains Nonrecurring gains decreased by $127.2 million in 1997
from 1996. The gain on the exchange of the Wyman-Gordon DECS of $23.2 million
was recognized in 1997 while 1996 included $150.4 million in gains on the sale
of marketable equity securities of Belden and Cooper Cameron. Nonrecurring gains
increased $138.7 million in 1996 from 1995 due to lower gains on sales of
marketable equity securities in 1995.
A-6
<PAGE> 43
Interest Expense Interest expense for 1997 decreased $51.7 million from
1996. The majority of the decrease was due to the conversion during 1997 of $610
million of Cooper's 7.05% Convertible Subordinated Debentures to Cooper Common
stock. Average debt levels in 1997, excluding the $610 million converted debt,
were also lower than 1996 and contributed to the decline in interest expense.
Interest expense decreased $8.9 million in 1996 from the 1995 level. The decline
was driven by lower average interest rates and lower average debt levels.
INCOME FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
--------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Income from continuing operations before income taxes....... $626.7 $558.0 $478.0
Income taxes................................................ 232.1 242.6 197.4
------ ------ ------
Income from continuing operations........................... $394.6 $315.4 $280.6
====== ====== ======
Diluted earnings per share from continuing operations....... $ 3.26 $ 2.77 $ 2.41
====== ====== ======
</TABLE>
1997 vs. 1996 Income from Continuing Operations Income from continuing
operations before income taxes for 1997, exclusive of 1997 net nonrecurring
gains of $9.1 million and 1996 net nonrecurring gains of $32.5 million,
increased to $617.6 million from $525.5 million, an 18% increase. This increase
was primarily the result of the increased segment earnings and lower interest
expense.
The effective tax rate decreased from 43.5% in 1996 to 37.0% in 1997. The
1996 rate was higher than normal due to the asset write-down which included the
write-off of nondeductible goodwill. Excluding the impact of this write-down,
the effective tax rate was 41.2%. The effective tax rate for 1997 includes $6.1
million related to the favorable settlements of several state income tax issues.
Excluding the 1997 nonrecurring tax benefit, the 1997 effective tax rate was
38%. The rate reduction from 41.2% to 38.0% stems from Cooper's tax planning
efforts, including changing its international tax structure, maximizing tax
incentives for exports and increasing research and development tax credits. In
addition, the impact of nondeductible goodwill on the effective tax rate is
reduced as earnings increase.
Income from continuing operations increased 25% over 1996. The 1997 net
income includes the effect of (1) the redemption and conversion of Cooper's
7.05% Convertible Subordinated Debentures, (2) the purchase of approximately 3.6
million shares of Cooper's Common stock, (3) the absence of the Kirsch business
for seven months of 1997, and (4) a $6.1 million benefit from settlements of
several state income tax matters. Diluted earnings per share from continuing
operations increased 18% from the 1996 level. The lower interest expense in 1997
related to the conversion of $610 million of 7.05% Convertible Subordinated
Debentures to Cooper Common stock, had no effect on diluted earnings per share
as the interest expense is excluded and the equivalent Cooper Common stock are
included in the calculation of diluted earnings per share for both 1997 and
1996.
While the purchase of Cooper Common stock and the impact of the $80 million
of 7.05% Convertible Subordinated Debentures redeemed for cash reduced average
shares utilized in the computation of diluted earnings per share, the funding of
these two items increased interest expense, offsetting most of the benefit on
diluted earnings per share. After considering the impact of additional common
stock equivalents, primarily resulting from an increase in market price of a
share of Cooper Common stock during the year, diluted earnings per share were
not impacted by the net reduction in average shares during 1997. The absence of
the Kirsch operations, net of the effect of lower interest expense resulting
from repaying debt with the net proceeds of the sale, reduced earnings per share
for 1997 by approximately $.05. Earnings per share for 1997 also includes
contributions of $.10 of nonrecurring gains (net of nonrecurring expenses) and
the favorable settlements of several state income tax issues. Earnings per share
for 1996 include a contribution of $.05 per share (net of nonrecurring expenses)
from the sale of marketable equity securities.
1996 vs. 1995 Income from Continuing Operations Income from continuing
operations before income taxes, exclusive of the third quarter 1996 gain of
$107.2 million on the sale of marketable equity securities and the $85.3 million
write-down in the Automotive Products segment, increased 12% to $536.1 million
compared to $478.0 million in 1995. The increase results primarily from the
increase in operating earnings and the reduction in interest expense offset
partially by an increase in general corporate expense.
The effective tax rate increased to 43.5% in 1996 from 41.3% in 1995. The
increase resulted primarily from the asset write-down in the Automotive Products
segment, which included a write-down of goodwill that was not
A-7
<PAGE> 44
deductible for income tax purposes. Excluding the gain on the sale of marketable
equity securities and the nonrecurring write-down, the effective tax rate
decreased from 41.3% in 1995 to 41.2% in 1996.
Income from continuing operations increased 12% due to the factors outlined
above, while diluted earnings per share from continuing operations increased
15%. The full-year impact of the reduction in average shares outstanding
resulting from the Cooper Cameron Exchange Offer completed in mid-year 1995,
accounted for $.09 per share of the earnings per share increase. See Note 18 of
Notes to Consolidated Financial Statements. Both 1996 and 1995 earnings per
share include a net contribution (net of nonrecurring expenses in 1996) of $.05
per share from the sale of marketable equity securities.
PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0%
Cost of Sales............................................... 67.8% 68.2% 68.5%
Selling and Administrative.................................. 17.5% 17.9% 17.5%
</TABLE>
1997 vs. 1996 Percentage of Revenues Cost of sales, as a percentage of
revenues, declined to 67.8% in 1997 from 68.2% in 1996. The decline resulted
primarily from product cost improvements and containments and an overall
favorable mix of higher margin electrical products. Most of the improvement in
cost of sales as a percentage of revenue was in the Electrical Products segment,
with the Tools & Hardware segment, excluding Kirsch, improving to a lesser
extent and the Automotive Products segment being flat with the prior year.
Selling and administrative expenses decreased, as a percentage of revenues, to
17.5% in 1997 from 17.9% in 1996. The inclusion of Kirsch for five months in
1997 and for the full year in 1996, represented .2 percentage points of the
improvement. Each of the segments contributed to the remaining improvement.
Lower general corporate expenses discussed under "General Corporate Expense"
also contributed to the improvement.
1996 vs. 1995 Percentage of Revenues Cost of sales, as a percentage of
revenues, declined to 68.2% from 68.5% in 1995. The improvement in the cost of
sales percentage reflects the continued improvement in operating efficiencies
achieved through manufacturing and distribution improvement programs, the
emphasis beginning in 1995 on top line growth through new products, market
penetration and acquisitions offset in part by disruptions resulting from
consolidations and facility closings and the large increase in transformer
sales, which carry a lower margin. Selling and administrative expense, as a
percentage of revenues, increased to 17.9% in 1996 from 17.5% in 1995. The
increase of .4 percentage points in 1996, is primarily attributable to higher
selling and administrative expenses of the CEAG acquisition, acquired December
31, 1995, the higher corporate general expenses discussed under "General
Corporate Expense", additional investments in personnel and other sales
expenses, primarily in the business comprising the Electrical Products segment,
and high customer changeover expenses in the Automotive Products segment.
DISCONTINUED OPERATIONS
In September 1994, Cooper announced its decision to discontinue its
Petroleum & Industrial Equipment segment through an exchange offer with holders
of Cooper Common stock. On June 30, 1995, Cooper's Common shareholders exchanged
9.5 million shares of their Cooper Common stock for common stock of Cooper
Cameron Corporation, a newly formed company that included all of the assets and
liabilities of the four divisions that comprised Cooper's Petroleum & Industrial
Equipment segment, as well as $375 million of allocated indebtedness. See Note
18 of the Notes to Consolidated Financial Statements for additional information.
In the second quarter of 1995, Cooper recorded a charge of $186.6 million
($1.45 per diluted share) to reflect the actual loss on the split-off of Cooper
Cameron. The charge was composed of the difference between the historical cost
of Cooper's investment in Cooper Cameron remaining after the September 1994
estimated charge and the market value of Cooper Cameron common stock during the
first few days the common stock traded on a national exchange ($162.8 million),
additional Cooper Cameron operating losses during the period October 1, 1994
through June 30, 1995 ($20.3 million) and additional transaction costs ($3.5
million). The additional operating losses and transaction costs resulted
primarily from the delay in completing the exchange transaction and the
recording by Cooper Cameron of a $17 million pretax charge in the second quarter
of 1995 for the write-down of receivables due from customers in Iran.
A-8
<PAGE> 45
Under the provisions of the Asset Transfer Agreement between Cooper and
Cooper Cameron, Cooper Cameron was responsible, other than for certain agreed
amounts of estimated operating losses, for its cash requirements between October
1, 1994 and the expiration date of the Exchange Offer. Other than for income tax
liabilities for periods prior to the completion of the Exchange Offer, Cooper
did not retain any liabilities, contingent or otherwise, with respect to the
discontinued operations.
EARNINGS OUTLOOK
The following sets forth Cooper's general business outlook for 1998, based
on current expectations. The statements are forward looking and actual results
may differ materially. The comparative figures for 1998 include the effects of
acquisitions made during 1997 and exclude 1997 nonrecurring items and the Kirsch
division from the Tools & Hardware segment.
Electrical Products segment revenues are expected to increase by
approximately fifteen percent, Tools & Hardware segment revenues are expected to
increase approximately five percent and Automotive Products segment revenues are
expected to be about the same as 1997 revenues. Cooper expects operating
earnings for the Electrical Products segment to increase by approximately ten to
fifteen percent. Operating earnings for both the Tools & Hardware segment and
the Automotive Products segment are expected to increase by approximately five
to ten percent.
The above statements are forward looking, and actual results may differ
materially. The above statements are based on a number of assumptions, risks and
uncertainties. The primary economic assumptions include, without limitation, (1)
modest growth in the domestic economy; (2) a modest improvement in European
markets; (3) a modest increase in construction spending worldwide; (4) no
significant change in raw material costs; (5) no major customer consolidation in
the automotive aftermarket; and (6) no significant adverse changes in the
relationship of the currencies of Western European countries to the U.S. dollar.
The estimates also assume, without limitation, no significant change in
competitive conditions and such other risk factors as are discussed from time to
time in Cooper's periodic filings with the Securities and Exchange Commission.
PRICING AND VOLUME
In each of Cooper's segments, the nature of many of the products sold is
such that an accurate determination of the changes in unit volume of sales is
neither practical nor, in some cases, meaningful. Each segment produces a family
of products, within which there exist considerable variations in size,
configuration and other characteristics.
It is Cooper's best judgment that, excluding the year-to-year effects of
acquisitions and divestitures, unit volume increased in the Electrical Products
and Tools & Hardware segments but decreased in the Automotive Products segment
in 1997. During 1996, Cooper's best judgment is that unit volume increased in
the Electrical Products and Automotive Products segments and decreased in the
Tools & Hardware segment.
During the three-year period ending in 1997, Cooper was unable to increase
prices to fully offset cost increases in selected product offerings in all
segments. Cooper has been able to control costs through manufacturing
improvements and other actions during this period so that the inability to
increase prices has not significantly affected profitability in the segments.
EFFECT OF INFLATION
During each year, inflation has had a relatively minor effect on Cooper's
results of operations. This is true primarily for three reasons. First, in
recent years, the rate of inflation in Cooper's primary markets has been fairly
low. Second, Cooper makes extensive use of the LIFO method of accounting for
inventories. The LIFO method results in current inventory costs being matched
against current sales dollars, such that inflation affects earnings on a current
basis. Finally, many of the assets and liabilities included in Cooper's
Consolidated Balance Sheets are recorded in connection with business
combinations that are accounted for as purchases. At the time of such
acquisitions, the assets and liabilities are adjusted to fair market value and,
therefore, the cumulative long-term effect of inflation is reduced.
A-9
<PAGE> 46
LIQUIDITY AND CAPITAL RESOURCES
Operating Working Capital
For purposes of this discussion, operating working capital is defined as
receivables and inventories less accounts payable.
In 1997, operating working capital, as reported in the consolidated balance
sheet, increased $31.1 million. Excluding acquisitions consummated in December
1997, operating working capital decreased $19.5 million as a result of a $17.3
million decrease in accounts receivable, a $36.4 million decrease in inventories
and a $34.2 million decrease in accounts payable. Excluding the impact of the
December 1997 acquisitions, operating working capital turns increased from 3.8
to 4.0 turns in 1997, a 5% improvement.
In 1996, operating working capital decreased $58 million as a reduction in
accounts receivable of $33 million and an increase in accounts payable of $32
million contributed to the improvement. Operating working capital turns
increased in excess of 10%.
In 1995, operating working capital decreased $16 million primarily driven
by a reduction of inventories during the year. All three segments contributed to
the reduction of inventory. Management attention was focused in 1995 on reducing
the build up of inventories that occurred in 1994.
Cash Flows
Net cash provided by operating activities in 1997 totaled $494 million.
These funds, along with $216 million in proceeds from the sale of Kirsch and an
increase in debt of $213 million (net of acquisition related assumed debt), were
used to finance net cash outflows for acquisitions of $387 million, capital
expenditures of $196 million, dividends of $157 million and purchases of
Cooper's Common stock of $192 million.
Net cash provided by operating activities in 1996 totaled $562 million. The
cash generated from operating activities, and $259 million provided from the
sales of marketable equity securities and fixed assets, was utilized to finance
net cash flows for acquisitions of $257 million, capital expenditures of $202
million, dividends of $143 million and debt reduction of $227 million.
Net cash flows provided by operating activities in 1995 totaled $550
million. This cash, in addition to $40 million generated by sales of fixed
assets and marketable equity securities, was used to fund capital spending of
$188 million, dividends of $164 million, debt reduction of $186 million and
discontinued operations of $48 million.
In connection with accounting for purchase business combinations, Cooper
records, to the extent appropriate, accruals for the costs of closing duplicate
facilities, severing redundant personnel and integrating the acquired business
into existing Cooper operations. Cash flow from operating activities for each of
the three years in the period ended December 31, 1997, is reduced by the amounts
expended on the various accruals established in connection with each
acquisition. At December 31, 1997, Cooper had accruals totaling $26.0 million
related to these activities. Cooper spent $9.3 million, $24.3 million and $47.0
million in 1997, 1996 and 1995, respectively. Spending in 1998 and future years
is not expected to be at these levels, as most of the major projects related to
earlier acquisitions have been completed and recent acquisitions do not involve
significant restructuring activities. Cooper does not believe that future
spending will impair Cooper's overall financial flexibility. See Note 7 of the
Notes to Consolidated Financial Statements for further information.
Debt
The ratio of debt-to-total capitalization was 36.3%, 50.3% and 54.5% at
year-end 1997, 1996 and 1995, respectively. The 1997 and 1996 debt-to-total
capitalization ratio includes the noncash effect of marking the DECS to market.
The 1997 ratio reflects the conversion of $610 million of 7.05% Convertible
Subordinated Debentures into Cooper Common stock and the subsequent purchase of
$192 million of Cooper Common stock. The 1995 ratio reflected the exchange, on
January 1, 1995, of the $1.60 Convertible Exchangeable Preferred Stock for 7.05%
Convertible Subordinated Debentures and the $614.1 million reduction in
shareholders' equity from the June 30, 1995 exchange of Cooper Common stock for
Cooper Cameron common stock.
During 1996, Cooper filed a shelf registration statement for $300 million
of medium-term notes and issued $50 million of five-year notes at an average
rate of 5.74%. At December 31, 1997, $250 million was available for issuance
under the shelf registration statement.
A-10
<PAGE> 47
During 1997, Cooper called for redemption its 7.05% Convertible
Subordinated Debentures. Cooper retired all $690 million of the debentures. Of
these debentures, a total of $610 million was converted to approximately 14.8
million shares of Cooper Common stock and approximately $80 million was redeemed
for cash.
Cooper has targeted a 35% to 45% debt-to-total capitalization ratio and
intends to utilize cash flows to maintain approximately a minimum of a 35%
debt-to-total capitalization ratio with excess cash utilized to purchase shares
of Cooper's Common stock or fund acquisitions.
Capital Expenditures and Commitments
Capital expenditures on projects to reduce product costs, improve product
quality, increase manufacturing efficiency and operating flexibility, or expand
product capacity were $196 million in 1997, $202 million in 1996 and $188
million in 1995. Projected capital expenditures for 1998 are anticipated to
exceed 1997 expenditures by ten to fifteen percent. The 1998 anticipated capital
spending represents approximately 55% for various cost-reduction and
capacity-maintenance projects, including machinery and equipment modernization
and enhancement and computer hardware and software projects, 14% for capacity
expansion, 9% related to environmental matters and 22% for other items.
Interest Rate and Foreign Currency Risk
Changes in interest rates and foreign currency exchange rates affect
Cooper's earnings and cash flows. In countries where Cooper has significant
investments and where practical, debt is either borrowed in the local functional
currency or foreign currency forward contracts are entered into to, in effect,
exchange U.S. dollar denominated debt into local functional currency debt. While
the purpose of borrowing in local functional currencies is primarily driven by
tax planning considerations, it also reduces the cash flow risk as a significant
portion of cash flows generated by the operations are utilized to pay interest
and principal on the debt. The earnings risk is also reduced since interest
expense is in the same currency as the operating earnings are generated.
Cooper uses forward foreign currency exchange contracts to reduce the risk
associated with changes in the exchange rates for firm commitments and
anticipated sales or purchases where a product is manufactured or purchased in
one country and sold or consumed in the manufacturing process in another
country. Cooper's policy is to hedge firm commitments to eliminate this risk if
natural hedges do not exist. Anticipated sales or purchases are hedged at the
discretion of the operating businesses. Substantially all forward contracts
expire within one year. At December 31, 1997, insignificant amounts of
anticipated sales and purchases were hedged. Cooper believes that the effects of
currency movements on the respective underlying hedged transactions offset any
gain or loss on forward exchange contracts.
The table below provides information about Cooper's financial instruments
at December 31, 1997 that are sensitive to changes in interest rates. The table
presents principal cash flows by expected maturity dates and weighted average
interest rates for debt obligations.
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 THEREAFTER TOTAL
----- ------ ------ ----- ----- ---------- ------
(IN MILLIONS, WHERE APPLICABLE)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed rate.................. $57.8 $235.7(1) $ 0.5 $50.4 $60.3 $250.0 $654.7
Average interest rate....... 6.0% 6.5% 6.5% 6.6% 6.6% 6.7% 6.0%
Variable rate............... $ 0.5 $ 58.4 $545.4 $ 0.5 $ 0.5 $ 70.5 $675.8
Average interest rate....... 5.8% 5.7% 5.6% 6.1% 6.1% 6.1% 5.8%
</TABLE>
- ---------------
(1)Includes $235.2 of 6.0% DECS which are mandatorily exchangeable into shares
of Wyman-Gordon common stock, or at Cooper's option, into cash in lieu of
shares. Cooper anticipates delivering the Wyman-Gordon common stock upon
redemption of the DECS in 1999.
A-11
<PAGE> 48
The table below provides information about Cooper's financial instruments
at December 31, 1997 in excess of $5 million that are sensitive to foreign
currency exchange rate changes by functional currency. For foreign currency
denominated debt obligations, the table provides principal cash flows, weighted
average interest rates by expected maturity dates and the applicable foreign
currency exchange rate. For foreign currency forward contracts, the table
presents the notional amounts and weighted average exchange rates by contractual
maturity dates. These notional amounts are used to calculate the contractual
payments to be exchanged under the contracts. All amounts are presented in U.S.
dollar equivalents.
<TABLE>
<CAPTION>
1998 2000
------------ ------------
(IN MILLIONS, WHERE APPLICABLE)
<S> <C> <C>
U.S. Dollar Functional Currency
Long-term debt denominated in German Deutschemark........... -- $ 128.3
Average interest rate....................................... -- 4.0%
Foreign currency exchange rate.............................. -- .56
Forward Exchange Contracts:
Sell Pounds Sterling/Buy U.S. Dollars
Notional amount........................................... $ 175.3 --
Average contract rate..................................... 1.66 --
Buy Australian Dollars/Sell U.S. Dollars
Notional amount........................................... $ 7.2 --
Average contract rate..................................... .67 --
Buy Italian Lira/Sell U.S. Dollars
Notional amount........................................... $ 5.4 --
Average contract rate..................................... .00057 --
Pounds Sterling Functional Currency
Forward Exchange Contracts:
Buy U.S. Dollars/Sell Pounds Sterling
Notional amount........................................... $ 5.0 --
Average contract rate..................................... 1.63 --
</TABLE>
See Note 16 of Notes to Consolidated Financial Statements for additional
information regarding the fair value of Cooper's financial instruments.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 Reporting Comprehensive Income ("FAS No.
130") and No. 131 Disclosures About Segments of an Enterprise and Related
Information ("FAS No. 131"). Both FAS No. 130 and FAS No. 131 are effective for
Cooper's calendar year ending December 31, 1998.
FAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial statements.
Comprehensive income is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources. Upon
adopting the new standard in 1998, Cooper will report and display comprehensive
income which includes net income plus non-owner changes in equity such as the
change in foreign currency translation, the minimum pension liability, and
unrealized gains or losses on investments in marketable equity securities.
FAS No. 131 changes the way segment information is presented from an
industry segment approach to a management approach. Under the management
approach, segments are determined based on the operations regularly reviewed by
the chief operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance. FAS No. 131 also allows the
presentation of information on an internally reported basis and changes certain
other disclosures. Cooper is managed in a similar structure to the present
segment disclosures and information reviewed with the Board of Directors and
senior management is in a similar format. Cooper has not presently determined
the extent to which the segment groupings and related disclosures will be
revised when FAS No. 131 is adopted, but does not anticipate major revisions
that would make the information lack all comparability with the current
presentation.
A-12
<PAGE> 49
REPORT OF MANAGEMENT
The management of Cooper Industries is responsible for the preparation,
integrity and fair presentation of the accompanying Consolidated Financial
Statements. Such Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles and, as such, include
amounts based on informed estimates and judgments of management. Management also
prepared the other information included in the 1998 Proxy Statement and is
responsible for its accuracy and consistency with the Consolidated Financial
Statements.
The Consolidated Financial Statements have been audited by an independent
accounting firm, Ernst & Young LLP, which was given unrestricted access to all
financial records and related data, including minutes of meetings of
shareholders, the Board of Directors, and committees of the Board. Management
believes that all representations made to the independent auditors during their
audit were valid and appropriate.
Cooper maintains a system of internal control designed to provide
reasonable assurance to Cooper's management and Board of Directors that assets
are safeguarded against loss, that transactions are authorized, executed and
recorded in accordance with management's instructions, and accounting records
are reliable for preparing published financial statements. The system of
internal control includes: a documented organizational structure and division of
responsibility; regular management review of financial performance and internal
control activities; comprehensive written policies and procedures (including a
code of conduct to foster a sound ethical climate) that are communicated
throughout Cooper; and the careful selection, training and development of
employees. Cooper's internal audit department monitors the operation of the
internal control system and reports findings and recommendations to management
and the Audit Committee. Prompt corrective action is taken to address control
deficiencies and other opportunities for improving the internal control system.
The Audit Committee of the Board of Directors, which is composed entirely
of directors who are not officers or employees of Cooper, meets periodically
with management, the independent auditors, and the director of internal audit to
discuss the adequacy of internal control and to review accounting, reporting,
auditing and other internal control matters. The internal and independent
auditors have unrestricted access to the Audit Committee.
<TABLE>
<S> <C> <C>
/s/ H. John Riley, Jr. /s/ D. Bradley McWilliams /s/ Terry A. Klebe
H. John Riley, Jr. D. Bradley McWilliams Terry A. Klebe
Chairman, President and Senior Vice President and Vice President and
Chief Executive Officer Chief Financial Officer Controller
</TABLE>
A-13
<PAGE> 50
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cooper Industries, Inc.
We have audited the accompanying consolidated balance sheets of Cooper
Industries, Inc. as of December 31, 1997 and 1996, and the related consolidated
income statements, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cooper
Industries, Inc. at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Houston, Texas
January 23, 1998
A-14
<PAGE> 51
COOPER INDUSTRIES, INC.
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues.................................................... $5,288.8 $5,283.7 $4,810.9
Cost of sales............................................... 3,588.3 3,605.7 3,297.5
Selling and administrative expenses......................... 925.3 945.4 841.1
Goodwill amortization....................................... 65.1 65.2 60.8
Nonrecurring gains.......................................... (93.0) (150.4) (11.7)
Nonrecurring charges........................................ 83.9 117.9 --
Other (income) expense, net................................. 2.1 (0.2) (5.8)
Interest expense............................................ 90.4 142.1 151.0
-------- -------- --------
Income from continuing operations before income taxes..... 626.7 558.0 478.0
Income taxes................................................ 232.1 242.6 197.4
-------- -------- --------
Income from continuing operations......................... 394.6 315.4 280.6
Charge for discontinued operations.......................... -- -- (186.6)
-------- -------- --------
Net income........................................ $ 394.6 $ 315.4 $ 94.0
======== ======== ========
Income per Common share
Basic:
Income from continuing operations...................... $ 3.36 $ 2.94 $ 2.52
Charge for discontinued operations..................... -- -- (1.67)
-------- -------- --------
Net income........................................ $ 3.36 $ 2.94 $ 0.85
======== ======== ========
Diluted:
Income from continuing operations...................... $ 3.26 $ 2.77 $ 2.41
Charge for discontinued operations..................... -- -- (1.45)
-------- -------- --------
Net income........................................ $ 3.26 $ 2.77 $ 0.96
======== ======== ========
Cash dividends per Common share............................. $ 1.32 $ 1.32 $ 1.32
======== ======== ========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
A-15
<PAGE> 52
COOPER INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- --------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 30.3 $ 16.1
Receivables................................................. 991.7 959.4
Inventories................................................. 958.2 971.1
Other....................................................... 156.5 151.5
-------- --------
Total current assets.............................. 2,136.7 2,098.1
-------- --------
Property, plant and equipment, less accumulated
depreciation.............................................. 1,198.8 1,241.3
Intangibles, less accumulated amortization.................. 2,389.9 2,154.9
Investments in marketable equity securities................. 274.8 367.1
Deferred income taxes and other assets...................... 52.3 89.0
-------- --------
Total assets...................................... $6,052.5 $5,950.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term debt............................................. $ 139.0 $ 98.2
Accounts payable............................................ 574.5 586.2
Accrued liabilities......................................... 589.5 581.8
Accrued income taxes........................................ 23.8 37.3
Current maturities of long-term debt........................ 58.3 77.8
-------- --------
Total current liabilities......................... 1,385.1 1,381.3
-------- --------
Long-term debt.............................................. 1,272.2 1,737.7
Postretirement benefits other than pensions................. 558.0 606.4
Other long-term liabilities................................. 260.6 334.8
-------- --------
Total liabilities................................. 3,475.9 4,060.2
-------- --------
Common stock, $5.00 par value............................... 615.0 540.2
Capital in excess of par value.............................. 679.8 150.1
Retained earnings........................................... 1,514.5 1,275.3
Common stock held in treasury, at cost...................... (149.7) --
Unearned employee stock ownership plan compensation......... (66.5) (92.9)
Other....................................................... (16.5) 17.5
-------- --------
Total shareholders' equity........................ 2,576.6 1,890.2
-------- --------
Total liabilities and shareholders' equity........ $6,052.5 $5,950.4
======== ========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
A-16
<PAGE> 53
COOPER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 394.6 $ 315.4 $ 94.0
Charge for discontinued operations........................ -- -- 186.6
------- ------- -------
Income from continuing operations......................... 394.6 315.4 280.6
Adjustments to reconcile to net cash provided by operating
activities:
Depreciation and amortization.......................... 219.6 233.8 218.8
Deferred income taxes.................................. (3.4) 13.3 65.4
Gain on sales of marketable equity securities and DECS
exchange.............................................. (23.2) (150.4) (11.7)
Gain on disposition of business........................ (69.8) -- --
Nonrecurring asset write-down.......................... 54.8 85.3 --
Changes in assets and liabilities:(1)
Receivables.......................................... (31.3) 46.6 (12.1)
Inventories.......................................... (37.1) 3.3 68.2
Accounts payable and accrued liabilities............. 8.0 (1.2) 16.6
Accrued income taxes................................. (15.3) 28.5 (33.2)
Other assets and liabilities, net.................... (2.6) (12.2) (42.3)
------- ------- -------
Net cash provided by operating activities......... 494.3 562.4 550.3
------- ------- -------
Cash flows from investing activities:
Cash paid for acquired businesses......................... (386.5) (257.2) (11.9)
Proceeds from disposition of business..................... 216.0 2.3 --
Capital expenditures...................................... (195.7) (201.9) (188.4)
Proceeds from sales of marketable equity securities....... -- 231.4 14.4
Proceeds from sales of property, plant and equipment...... 8.3 27.6 25.4
------- ------- -------
Net cash used in investing activities............. (357.9) (197.8) (160.5)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuances of debt........................... 564.7 316.0 704.7
Repayments of debt........................................ (351.8) (542.7) (890.3)
Dividends................................................. (157.4) (142.6) (164.0)
Acquisition of treasury shares............................ (191.5) -- --
Activity under employee stock plans and other............. 15.6 1.7 (5.8)
------- ------- -------
Net cash used in financing activities............. (120.4) (367.6) (355.4)
------- ------- -------
Cash flows used by discontinued operations.................. -- -- (47.7)
Effect of exchange rate changes on cash and cash
equivalents............................................... (1.8) 1.4 5.7
------- ------- -------
Increase (decrease) in cash and cash equivalents............ 14.2 (1.6) (7.6)
Cash and cash equivalents, beginning of year................ 16.1 17.7 25.3
------- ------- -------
Cash and cash equivalents, end of year...................... $ 30.3 $ 16.1 $ 17.7
======= ======= =======
</TABLE>
- ---------------
(1)Net of the effects of acquisitions, divestitures and translation.
The Notes to Consolidated Financial Statements are an integral part of
these statements. See Note 17 for information on noncash investing and financing
activities.
A-17
<PAGE> 54
COOPER INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
$1.60
CONVERTIBLE CAPITAL UNEARNED
EXCHANGEABLE IN EXCESS EMPLOYEE STOCK
PREFERRED COMMON OF PAR RETAINED TREASURY OWNERSHIP PLAN
STOCK STOCK VALUE EARNINGS STOCK COMPENSATION OTHER
------------ ------ --------- -------- -------- -------------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1994............. $30.6 $584.6 $1,176.5 $1,153.4 $ -- $(147.4) $ (56.6)
Net income.......................... 94.0
Common stock dividends.............. (148.4)
Exchange of Common stock for Cooper
Cameron common stock............. (47.5) (382.6) 2.6
Redemption of $1.60 Preferred for
7.05% Convertible Subordinated
Debentures....................... (30.6) (664.4)
Stock issued under employee stock
plans............................ 1.8 12.0
Principal payments by ESOP.......... 25.4
Adjustment for minimum pension
liability........................ 8.7
Translation loss.................... (15.0)
Unrealized gain on investments in
marketable equity securities..... 126.8
Reclassification to realized gain... (7.2)
Other activity...................... 0.5 0.1 1.3 (2.2)
----- ------ -------- -------- ------- ------- -------
BALANCE DECEMBER 31, 1995............. -- 539.4 141.6 1,100.3 -- (121.6) 56.7
Net income.......................... 315.4
Common stock dividends.............. (142.6)
Stock issued under employee stock
plans............................ 0.5 4.4
Principal payments by ESOP.......... 28.7
Adjustment for minimum pension
liability........................ (1.5)
Translation loss.................... (4.9)
Unrealized gain on investments in
marketable equity securities..... 60.3
Reclassification to realized gain... (93.2)
Other activity...................... 0.3 4.1 2.2 0.1
----- ------ -------- -------- ------- ------- -------
BALANCE DECEMBER 31, 1996............. -- 540.2 150.1 1,275.3 -- (92.9) 17.5
Net income.......................... 394.6
Common stock dividends.............. (157.4)
Conversion of 7.05% Convertible
Subordinated Debentures.......... 73.9 536.3
Purchase of treasury shares......... (191.5)
Stock issued under employee stock
plans............................ 0.7 (7.5) 40.9
Principal payments by ESOP.......... 26.4
Adjustment for minimum pension
liability........................ 27.6
Translation loss.................... (38.1)
Unrealized loss on investments in
marketable equity securities..... (9.1)
Reclassification to realized gain... (14.4)
Other activity...................... 0.2 0.9 2.0 0.9 --
----- ------ -------- -------- ------- ------- -------
BALANCE DECEMBER 31, 1997............. $ -- $615.0 $ 679.8 $1,514.5 $(149.7) $ (66.5) $ (16.5)(1)
===== ====== ======== ======== ======= ======= =======
</TABLE>
- ---------------
(1)At December 31, 1997, "Other" included the minimum pension liability of
$(20.1) million, net of tax, cumulative translation adjustments of $(107.3)
million and the unrealized gain on Cooper's investment in Wyman-Gordon, net
of the increase in the market value of the DECS, of $110.9 million, net of
tax.
The Notes to Consolidated Financial Statements are an integral part of these
statements.
A-18
<PAGE> 55
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The Consolidated Financial Statements include the
accounts of Cooper Industries, Inc. ("Cooper") and its majority-owned
subsidiaries. Affiliated companies are accounted for on the equity method where
Cooper owns more than 20% but less than 50% of the affiliate unless significant
economic, political or contractual considerations indicate that the cost method
is appropriate.
USE OF 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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS: For purposes of the consolidated statements of cash flows,
Cooper considers all investments purchased with original maturities of three
months or less to be cash equivalents.
INVENTORIES: Inventories are carried at cost or, if lower, net realizable value.
On the basis of current costs, 71% of inventories at December 31, 1997 and 1996
were carried on the last-in, first-out (LIFO) method. The remaining inventories,
which are primarily located outside the United States, are carried on the
first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost.
Depreciation is provided over the estimated useful lives of the related assets
using primarily the straight-line method. This method is applied to group asset
accounts, which in general have the following lives: buildings -- 10 to 40
years; machinery and equipment -- 3 to 18 years; and tooling, dies, patterns and
other -- 5 to 10 years.
INTANGIBLES: Intangibles consist primarily of goodwill related to purchase
acquisitions. With minor exceptions, the goodwill is being amortized over 40
years from the respective acquisition dates. The carrying value of goodwill is
reviewed at the lowest level feasible whenever there are indications that the
goodwill may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on undiscounted cash flows over the remaining
amortization periods, the carrying value of the goodwill will be reduced by the
estimated shortfall in discounted cash flows.
INVESTMENTS IN MARKETABLE EQUITY SECURITIES: Marketable equity securities
received or retained in connection with the divestiture of businesses are
reflected as available-for-sale securities and are stated at fair market value
at each balance sheet date, with unrealized gains and losses, net of tax,
reported as a component of shareholders' equity. The cost of securities sold is
determined based on the specific identification method for purposes of recording
realized gains and losses.
DERIVATIVE FINANCIAL INSTRUMENTS: On a recurring basis, foreign currency forward
exchange contracts and commodity contracts are entered into to reduce risks of
adverse changes in foreign exchange rates and commodity prices. All contracts
are hedges of actual or anticipated transactions with the gain or loss on the
contract recognized in the same period and in the same category of income or
expense as the underlying hedged transaction. Cooper does not enter into
speculative derivative transactions or hedges of anticipated transactions unless
there is a high probability the transactions will occur. Due to the short term
of contracts and a restrictive policy, contract terminations or anticipated
transactions that do not occur are rare and insignificant events which are
accounted for through income in the period they occur. As discussed in Note 6,
in December 1995, Cooper hedged its investment in marketable equity securities
of Wyman-Gordon Company ("Wyman-Gordon"). Cooper currently is not a party to any
interest rate swap agreements used to manage its interest rate risk. Cooper's
policy is to recognize the interest rate differential to be received or paid
over the lives of the interest rate swap as an adjustment to interest expense.
COMMON STOCK BASED COMPENSATION: Cooper follows the intrinsic value method of
accounting for stock options and performance-based stock awards as prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees.
INCOME PER COMMON SHARE: In the fourth quarter of 1997, Cooper adopted Statement
of Financial Accounting Standards No. 128, Earnings Per Share. The new
accounting standard required all prior periods' income per Common share to be
restated based on a new computational method for average shares outstanding.
Adopting the new standard had no impact on previously reported fully diluted,
currently referred to as diluted, income per Common share from
A-19
<PAGE> 56
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
continuing operations and increased primary, currently referred to as basic,
income per common share $.01 in each of the years ended December 31, 1996 and
1995. Unlike primary earnings per share, basic earnings per share excludes the
dilutive effects of common stock equivalents. Adopting the new standard also
increased 1995 diluted net income by $.12 per share as the new standard requires
the use of income from continuing operations rather than net income to determine
whether common stock equivalents are antidilutive.
RECLASSIFICATION: Certain amounts in the Consolidated Income Statements for the
years ended December 31, 1996 and 1995 have been reclassified to conform to the
1997 presentation.
NOTE 2: NONRECURRING ITEMS
During 1997, Cooper realized a gain of $69.8 million ($43.3 million after
income taxes) from the sale of Kirsch (See Note 3) and exchanged a portion of
its DECS(SM) (Debt Exchangeable for Common Stock) for Wyman-Gordon common stock
and realized a gain of $23.2 million ($14.4 million after income taxes) (See
Note 6). Cooper also incurred charges of $83.9 million ($52.0 million after
income taxes) for actions management committed to during the period after
concluding an evaluation of (1) geographic manufacturing and distribution
facilities within the Tools & Hardware segment; (2) certain sales, marketing and
distribution activities within the Automotive Products segment; and (3)
information systems relating to year 2000 compliance efforts. The 1997 charges
include adjustments to the carrying value of assets of $54.8 million and
accruals for continuing obligations for replaced systems and facility
consolidations of $29.1 million. The charges decreased operating earnings of the
Electrical Products segment by $15.9 million, Tools & Hardware segment by $22.5
million, and the Automotive Products segment by $43.4 million and increased
general corporate expenses by $2.1 million. The gains, combined with
nonrecurring charges and a $6.1 million income tax benefit related to the
settlements of certain state income tax matters (See Note 11), resulted in a net
$.10 per share of nonrecurring income being recognized in 1997.
Cooper has begun a consolidation of certain international manufacturing and
distribution facilities in the Tools & Hardware segment and the consolidation of
certain sales, marketing and distribution activities in the Automotive Products
segment. Adjustments to the carrying value of assets and accruals were recorded
for projects committed to by management. Severance and certain other costs
related to projects committed to by management are not expensed until the
affected employees are notified. A majority of the consolidations have been
announced and such costs were accrued and expensed during 1997. The remaining
committed but unannounced consolidations are not anticipated to result in
significant additional expenses.
During 1997, Cooper began negotiations with Standard Motor Products, Inc.
("SMP") to exchange Cooper's temperature control business for the brake products
business owned by SMP. In December 1997, Cooper received the necessary
government approval for completion of the transaction with SMP. Closing of the
business exchange is subject to negotiation of a definitive agreement and is
currently anticipated to occur in the first quarter of 1998.
During 1997, Cooper also assessed the impact of existing system
capabilities to function at the turn of the century. Four of Cooper's nine
divisions are implementing new enterprise systems with the remaining divisions
modifying or replacing existing software. Where possible, businesses have
abandoned home-grown or highly customized applications with purchased, year 2000
compliant replacements or upgrades. In some situations, operations within a
business abandoned existing software and migrated to consolidated hardware and
software that is year 2000 compliant. Where these solutions were not possible,
businesses either contracted to third parties or committed internal resources to
ensure that all major systems are year 2000 compliant. Cooper recorded a $43.7
million charge in 1997 primarily related to the adjustment in the carrying value
of abandoned hardware and software. While depreciation and amortization are
reduced by the effect of the write-down, depreciation and amortization of new
systems and equipment, as well as expenses incurred to revise current software
to be year 2000 compliant, and implementation costs of new systems, are likely
to exceed the reduction in depreciation and amortization in most future periods.
During the third quarter of 1996 Cooper completed a strategic review of its
automotive brake business, resulting in a write-down of approximately 21% of the
long-lived assets of the business. The Wagner brake product lines, acquired as
part of the McGraw-Edison acquisition in 1985, were subjected to intense
competitive pricing and anticipated profitability improvements during 1996 were
not being realized. As a result of the review of the Wagner brake products,
Cooper replaced Wagner technology with technology acquired in the 1994
acquisition of Abex Friction Products.
A-20
<PAGE> 57
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Based on the strategic review, Cooper concluded that the projected undiscounted
cash flows of certain Wagner product lines would not recover the carrying value
of the long-lived assets and goodwill associated with these product lines.
Accordingly, Cooper recorded an $85.3 million write-down, including $31.5
million in goodwill, in the third quarter of 1996. The write-down reduced
depreciation and amortization costs equivalent to approximately $.03 per share
in 1997. Cooper has incurred expenses executing its revised brake strategy,
which have offset some of the benefit of the reduced depreciation and
amortization in 1997.
During 1996, Cooper initiated a strategic review of most of its businesses.
As a result of those actions and certain legal matters, Cooper incurred
nonrecurring charges totaling $32.6 million during 1996. A total of $3.0 million
was incurred in the Electrical Products segment primarily related to a
write-down of property and equipment at a facility; $2.0 million in the Tools &
Hardware segment for legal and other costs related to sales of imported mini
blinds containing lead paint; $16.7 million in the Automotive Products segment
primarily related to costs incurred on facility closings and consolidations; and
$10.9 million of corporate costs primarily related to environmental litigation.
Cooper anticipates future cost savings from the facility closings and
consolidations, however, the amounts are not quantifiable with any degree of
accuracy. The nonrecurring charges of $32.6 million have an insignificant effect
on future earnings and expenditures beyond 1996 are insignificant. During 1996,
Cooper realized $150.4 million in gains on the sale of marketable equity
securities (See Note 6). These gains combined with nonrecurring charges resulted
in a net $.05 per share of nonrecurring income being recognized in 1996. In
1995, Cooper realized a gain of $.05 per share from the sale of marketable
equity securities (See Note 6).
NOTE 3: ACQUISITIONS AND DIVESTITURES
In 1997, Cooper completed one large acquisition, seven small product-line
acquisitions and the divestiture of Kirsch. In December 1997, Cooper acquired
Menvier-Swain Group plc ("Menvier-Swain") for a total cost of approximately
$274.5 million. Menvier-Swain manufactures and markets emergency lighting, fire
detection and security systems primarily in Europe. The seven small product line
acquisitions had an aggregate cost of $184.2 million. A total of $349.3 million
of goodwill was recorded, on a preliminary basis, with respect to the
acquisitions. Five of the small acquisitions and Menvier-Swain were in the
Electrical Products segment, and the other two small acquisitions were in the
Automotive Products segment. On May 30, 1997, Cooper completed the sale of its
Kirsch window treatment division for $216 million. For the five months ended May
30, 1997, and the year ended December 31, 1996, Kirsch had revenues of $97.4
million and $252.9 million, and operating earnings of $4.8 million and $20.0
million, respectively. Kirsch was part of the Tools & Hardware segment.
In 1996, Cooper completed seven small product-line acquisitions and one
small divestiture. The total cost of the acquisitions was approximately $97.4
million. A total of $74.2 million of goodwill was recorded, including 1997
revisions of $.9 million with respect to the acquisitions. Three acquisitions
and the divestiture were in the Electrical Products segment, two were in the
Tools & Hardware segment and two were in the Automotive Products segment.
In 1995, Cooper completed one large acquisition, two small product-line
acquisitions, and the divestiture, through an exchange offer with shareholders,
of Cooper Cameron Corporation ("Cooper Cameron") (See Note 18). Effective
December 31, 1995, Cooper acquired CEAG Sicherheitstechnik GmbH ("CEAG") from
Asea Brown Boveri AG, Mannheim. The total cost of the acquisition, which was
paid on January 5, 1996, was approximately $164 million. CEAG manufactures and
markets explosion proof electrical products and business security and emergency
lighting products. The two small product-line acquisitions had an aggregate cost
of $13.5 million. A total of $139.5 million of goodwill was recorded with
respect to the three acquisitions. One small acquisition was in the Automotive
Products segment and the two other acquisitions were in the Electrical Products
segment.
The acquisitions have been accounted for as purchases and the results of
the acquisitions are included in Cooper's consolidated income statements since
the respective acquisition dates.
A-21
<PAGE> 58
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4: INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN MILLIONS)
<S> <C> <C>
Raw materials............................................... $ 295.7 $ 302.9
Work-in-process............................................. 178.7 205.2
Finished goods.............................................. 512.1 513.8
Perishable tooling and supplies............................. 54.5 54.2
-------- --------
1,041.0 1,076.1
Excess of current standard costs over LIFO costs............ (82.8) (105.0)
-------- --------
Net Inventories................................... $ 958.2 $ 971.1
======== ========
</TABLE>
NOTE 5: PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Property, plant and equipment:
Land and land improvements................................ $ 71.5 $ 82.9
Buildings................................................. 543.4 569.7
Machinery and equipment................................... 1,196.1 1,171.5
Tooling, dies and patterns................................ 189.0 171.0
All other................................................. 263.1 303.0
Construction in progress.................................. 134.8 103.7
--------- ---------
2,397.9 2,401.8
Accumulated depreciation.................................. (1,199.1) (1,160.5)
--------- ---------
$ 1,198.8 $ 1,241.3
========= =========
Intangibles:
Goodwill.................................................. $ 2,906.0 $ 2,614.7
Other..................................................... 17.1 17.8
--------- ---------
2,923.1 2,632.5
Accumulated amortization.................................. (533.2) (477.6)
--------- ---------
$ 2,389.9 $ 2,154.9
========= =========
</TABLE>
NOTE 6: INVESTMENTS IN MARKETABLE EQUITY SECURITIES
At December 31, 1997 and 1996, Cooper's investment in marketable equity
securities consisted of its investment in Wyman-Gordon common stock. During
1996, Cooper sold its remaining common shares of Belden Inc. and all of the
shares of Cooper Cameron common stock (See Note 18). In December 1995, Cooper
issued 16.5 million DECS at $13.50 which, at maturity, are mandatorily
exchangeable into shares of Wyman-Gordon common stock or, at Cooper's option,
into cash in lieu of shares. The number of shares or the amount of cash will be
based on the average market value of Wyman-Gordon common stock on the 20 trading
days prior to maturity on January 1, 1999 (the "WGC Maturity Price"). If the WGC
Maturity Price is greater than or equal to $15.66 per share, each DECS will be
exchangeable at maturity into the equivalent of .862 shares of Wyman-Gordon
common stock. If the WGC Maturity Price is less than or equal to $13.50 per
share, each DECS will be exchangeable at maturity into one Wyman-Gordon share.
If the WGC Maturity Price is between $13.50 and $15.66 per share, each DECS will
be exchangeable into a fraction of shares of Wyman-Gordon common stock between
.862 and 1, based on an exchange ratio. If the DECS are redeemed for cash, the
amount of cash will be equal to the number of Wyman-Gordon shares exchangeable
under the terms of the DECS times the WGC Maturity Price.
A-22
<PAGE> 59
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The DECS are a hedge of Cooper's investment in Wyman-Gordon common stock
and will result in Cooper realizing a minimum after-tax gain of $85.4 million
upon redemption of the DECS. This unrealized gain, plus any additional
appreciation of the investment in Wyman-Gordon common stock since the issuance
of the DECS, is included in shareholders' equity as an unrealized gain on
investments in marketable equity securities, net of tax. At December 31, 1997
and 1996, Cooper's long-term debt includes an increase in the market value of
Wyman-Gordon common stock related to the DECS of $47.9 million and $93.7
million, respectively. The offset to the debt increase, net of tax, decreased
the unrealized gain on investments in marketable equity securities included in
shareholders' equity. During 1997, Cooper exchanged a portion of the DECS for
Wyman-Gordon common stock and realized a gain of $23.2 million ($14.4 million
after income taxes).
The aggregate fair value of the marketable equity securities was $274.8
million and $367.1 million at December 31, 1997 and 1996, respectively. Gross
unrealized gains on investments in marketable equity securities were $218.5
million ($170.6 million, net of the increase in the fair market value of the
DECS) and $300.8 million ($207.1 million, net of the increase in the fair market
value of the DECS) at December 31, 1997 and 1996, respectively. During 1996 and
1995, marketable equity securities were sold for proceeds of $231.4 million and
$14.4 million, respectively, resulting in realized gains of $150.4 million and
$11.7 million, respectively. Cooper incurred nonrecurring charges during 1996
which, when combined with the gains from the sale of marketable equity
securities, resulted in Cooper realizing $.05 per share in 1996. In 1995, Cooper
realized $.05 per share from the sale of marketable equity securities.
NOTE 7: ACCRUED LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Salaries, wages and employee benefit plans.................. $236.8 $201.5
Product and environmental liability accruals................ 77.8 95.0
Commissions and customer incentives......................... 76.3 80.3
Facility integration of acquired businesses................. 26.0 48.0
Other (individual items less than 5% of total current
liabilities).............................................. 172.6 157.0
------ ------
$589.5 $581.8
====== ======
</TABLE>
At December 31, 1997, Cooper had accruals of $28.8 million with respect to
potential product liability claims and $104.9 million with respect to potential
environmental liabilities, including $55.9 million classified as a long-term
liability, based on Cooper's current estimate of the most likely amount of
losses that it believes will be incurred.
The product liability accrual consists of $8.2 million of known claims with
respect to ongoing operations, $12.8 million of known claims for previously
divested operations and $7.8 million which represents an estimate of claims that
have been incurred but not yet reported. While Cooper is generally self-insured
with respect to product liability claims, Cooper has insurance coverage for
individual 1997 claims above $3.0 million. Insurance levels have varied from
year to year.
Environmental remediation costs are accrued based on estimates of known
environmental remediation exposures. Such accruals are adjusted as information
develops or circumstances change. The environmental liability accrual includes
$39.6 million related to sites owned by Cooper and $65.3 million for retained
environmental liabilities related to sites previously owned by Cooper and
third-party sites where Cooper was a contributor. Third-party sites usually
involve multiple contributors where Cooper's liability will be determined based
on an estimate of Cooper's proportionate responsibility for the total cleanup.
The amount actually accrued for such sites is based on these estimates as well
as an assessment of the financial capacity of the other potentially responsible
parties.
It has been Cooper's consistent practice to include the entire product
liability accrual and a significant portion of the environmental liability
accrual as current liabilities, although only approximately 10-20% of the
balance classified as current will be spent on an annual basis. The annual
effect on earnings for product liability is essentially equal to the amounts
disbursed. In the case of environmental liability, the annual expense is
considerably smaller than the disbursements, since the vast majority of Cooper's
environmental liability has been recorded in connection with
A-23
<PAGE> 60
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquired companies. The change in the accrual balances from year to year
reflects the effect of acquisitions and divestitures as well as normal expensing
and funding.
Cooper has not utilized any form of discounting in establishing its product
or environmental liability accruals. While both product liability and
environmental liability accruals involve estimates that can have wide ranges of
potential liability, Cooper has taken a proactive approach and has managed the
costs in both of these areas over the years. Cooper does not believe that the
nature of its products, its production processes, or the materials or other
factors involved in the manufacturing process subject Cooper to unusual risks or
exposures for product or environmental liability. Cooper's greatest exposure to
inaccuracy in its estimates is with respect to the constantly changing
definitions of what constitutes an environmental liability or an acceptable
level of cleanup.
In connection with acquisitions accounted for using the purchase method of
accounting, Cooper records, to the extent appropriate, accruals for the costs of
closing duplicate facilities, severing redundant personnel and integrating the
acquired business into existing Cooper operations. Significant accruals include
plant shut-down and realignment costs, and facility relocations. The following
table summarizes the accrual balances and activity during each of the last three
years:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Activity during each year:
Balance, beginning of year.............. $ 48.0 $ 65.6 $122.3
Spending................................ (9.3) (24.3) (47.0)
Kirsch disposition...................... (0.4) -- --
Reclassifications....................... (15.8) (2.2) (27.8)
Acquisitions -- initial allocation...... 4.7 4.1 .1
Acquisitions -- final allocation
adjustment............................ 1.2 4.9 13.8
Translation............................. (2.4) (0.1) 4.2
------ ------ ------
Balance, end of year.................... $ 26.0 $ 48.0 $ 65.6
====== ====== ======
Balances by category of accrual:
Plant shut-down and realignment......... $ 17.5 $ 37.7 $ 43.2
Other facility relocations and
severance............................. 5.2 6.8 8.5
Other realignment and integration....... 3.3 3.5 13.9
------ ------ ------
$ 26.0 $ 48.0 $ 65.6
====== ====== ======
Balances by acquisition:
Champion................................ $ 1.2 $ 10.4 $ 21.4
Moog Automotive......................... .2 2.5 13.3
Abex Friction Products.................. 9.1 12.4 13.3
Other................................... 15.5 22.7 17.6
------ ------ ------
$ 26.0 $ 48.0 $ 65.6
====== ====== ======
</TABLE>
Plant shut-down and realignment includes the costs to terminate personnel,
shut down the facilities, terminate leases and similar costs. The spending
related primarily to downsizing and consolidating international facilities in
Mexico, Venezuela, Belgium and the United Kingdom totaling $7.7 million and
$26.3 million in 1996 and 1995, respectively. Other facility relocations and
severance include costs to consolidate sales and marketing operations of the
acquired company into Cooper operations, termination costs of redundant
personnel and shut-down costs of redundant warehouses and the acquired
companies' headquarters. Other realignment and integration costs include costs
to liquidate joint ventures, exit product lines and miscellaneous costs.
During the three years ended December 31, 1997, accruals reversed to income
were insignificant. Reclassifications were substantially all related to
termination and other benefit payments due former employees and lease
obligations on closed facilities reclassified to trade accounts payable and
other accrued liabilities. Acquisitions-final allocation adjustment represents
adjustments to goodwill for finalization of the purchase price allocations
recorded in the previous year. Substantially all spending related to these
accruals represented cash outlays by Cooper. The amounts related to
A-24
<PAGE> 61
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the acquisitions of CEAG on the last business day of 1995, Abex on the last
business day of 1994 and Zanxx in November 1994 were preliminary estimates that
were finalized in the year following the acquisition. The CEAG, Abex and Zanxx
acquisitions had insignificant accruals for terminations and no significant
individual exit plan costs were accrued.
NOTE 8: LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN MILLIONS)
<S> <C> <C>
3.98%-6.47%* commercial paper and Deutschemark denominated
bank loans maturing at various dates through January
1998...................................................... $ 528.3 $ 151.3
7.05% convertible subordinated debentures, due 2015......... -- 690.4
6.41%-7.99% second series medium-term notes, due through
2010...................................................... 357.6 429.6
6.0% exchangeable notes, due 1999........................... 235.2 316.5
7.19%-7.74%* Pound Sterling bank loans and notes payable
maturing at various dates through 2005.................... 88.2 94.2
5.74% third series medium-term notes, due 2001.............. 50.0 50.0
5.52%* floating-rate ESOP notes, due through 1999........... 16.0 40.5
Other....................................................... 55.2 43.0
-------- --------
1,330.5 1,815.5
Current maturities.......................................... (58.3) (77.8)
-------- --------
Long-term portion........................................... $1,272.2 $1,737.7
======== ========
</TABLE>
- ---------------
* Weighted average interest rates at December 31, 1997. The weighted average
interest rates on commercial paper and bank loans, Pounds Sterling bank loans
and notes and ESOP notes were, 3.35%, 6.42% and 5.12%, respectively at
December 31, 1996.
Cooper has U.S. committed credit facilities of $835 million that expire in
2000, and $315 million that expire in 1998. At December 31, 1997, Cooper had an
effective "shelf" registration statement, which may be used to issue an
additional $250 million of medium-term notes from time to time.
At December 31, 1997, Cooper had $551.7 million of its $1.15 billion U.S.
committed credit facilities available, after considering commercial paper
backup. At December 31, 1996, $1.02 billion of its total $1.22 billion U.S.
committed credit facilities was available after considering commercial paper
backup, and none of its 30 million Pound Sterling credit facility was available.
The 30 million Pound Sterling credit facility expired in 1997 and was not
re-established. The agreements for the credit facilities require that Cooper
maintain certain financial ratios, including a prescribed limit on debt as a
percentage of total capitalization. Retained earnings are unrestricted as to the
payment of dividends, except to the extent that payment would cause a violation
of the prescribed limit on the debt to total capitalization ratio.
Interest rates on Cooper's commercial paper and U.S. bank loans were
generally 2.8% below the U.S. prime rate during 1997 and 1996. Total interest
paid during 1997, 1996 and 1995 was $107 million, $141 million and $134 million,
respectively.
Commercial paper of $400 million and bank loans of $202.7 million were
reclassified to long-term debt at December 31, 1997 and 1996, respectively,
reflecting Cooper's intention to refinance these amounts during the twelve-
month period following the balance sheet date through either continued
short-term borrowing or utilization of available credit facilities.
Effective January 1, 1995, Cooper exchanged all of the outstanding $1.60
Convertible Exchangeable Preferred Stock for $691.2 million of 7.05% Convertible
Subordinated Debentures due 2015 and $3.8 million in cash related to fractional
shares. During 1997, Cooper called for redemption the outstanding debentures
with a total of $610 million converting to approximately 14.8 million shares of
Cooper Common stock and approximately $80 million being redeemed for cash.
A-25
<PAGE> 62
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 1995, Cooper issued $222.8 million in 6% Exchangeable Notes
(DECS) due January 1, 1999. At maturity, the notes are mandatorily exchangeable
into shares of Wyman-Gordon common stock owned by Cooper or, at Cooper's option,
into cash in lieu of shares. During 1997, Cooper exchanged a portion of the DECS
($33.8 million) for Wyman-Gordon common stock (See Note 6). At December 31, 1997
and 1996, Cooper's long-term debt includes $47.9 million and $93.7 million,
respectively, which represents the increase in the market value of the
Wyman-Gordon common stock exchangeable into the DECS. The offset to the debt
increase, net of tax, decreased the unrealized gain on investments in marketable
equity securities, both of which are included in shareholders' equity.
The floating-rate ESOP notes are indebtedness of Cooper's ESOP. Cooper has
guaranteed the payment of the ESOP notes; accordingly, the notes are reported as
Cooper's debt (See Note 14).
Maturities of long-term debt for the five years subsequent to December 31,
1997 are $58.3 million, $294.1 million, $545.9 million, $50.9 million and $60.8
million, respectively. Cooper anticipates delivering Wyman-Gordon common stock
in settlement of the DECS, which represents $235.2 million of the 1999
maturities. The future net minimum lease payments under capital leases and
obligations under operating leases are not significant.
NOTE 9: COMMON AND PREFERRED STOCK
COMMON STOCK
At December 31, 1997, 1996 and 1995, 250,000,000 shares of Common stock
were authorized of which 120,161,446 and 108,038,851 and 107,876,821 shares were
issued and outstanding at December 31, 1997, 1996 and 1995, respectively. During
1997, Cooper issued 14,785,831 shares in exchange for the redemption of the
7.05% Convertible Subordinated Debentures (See Note 8). During the year ended
December 31, 1997, Cooper purchased 3,645,017 shares as treasury stock at an
average price of $52.54 per share and 813,387 of these shares were reissued in
connection with employee stock plans. During 1995, Cooper exchanged 9,500,000
shares of Cooper Common stock for Cooper Cameron common stock (See Note 18). At
December 31, 1997, Cooper had 12,818,206 shares reserved for the Dividend
Reinvestment Plan, grants and exercises of stock options, performance-based
stock awards and subscriptions under the Employee Stock Purchase Plan and other
plans.
Under the terms of the Dividend Reinvestment Plan, any holder of Common
stock may elect to have cash dividends and up to $24,000 per year in cash
payments invested in Common stock without incurring any brokerage commissions or
service charges.
Under a Shareholder Rights Plan adopted by the Board of Directors in 1997,
share purchase Rights were declared as a dividend at the rate of one Right for
each share of Common stock. Each Right entitles the holder to buy one one-
hundredth of a share of Series A Participating Preferred Stock at a purchase
price of $225 per one one-hundredth of a share or, in certain circumstances
Common stock having a value of twice the purchase price. Each Right becomes
exercisable only in certain circumstances constituting a potential change of
control on a basis considered inadequate by the Board of Directors. The Rights
expire August 5, 2007 and, at Cooper's option, may be redeemed prior to
expiration for $.01 per Right.
PREFERRED STOCK
At December 31, 1997 and 1996, Cooper was authorized to issue 1,340,750
shares of Preferred stock with no par value, 10,000,000 shares of $2.00 par
value Preferred stock and 2,821,079 shares of $1.00 par value Preferred stock.
At December 31, 1997 and 1996, no Preferred shares were issued or outstanding.
NOTE 10: STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
Under Cooper stock option plans, officers, directors and key employees may
be granted options to purchase Cooper's Common stock at no less than 100% of the
market price on the date the option is granted. Options generally become
exercisable ratably over a three-year period commencing one year from the date
of grant and have a maximum term of ten years. The plans also provide for the
granting of performance-based stock awards to certain key executives.
Cooper follows the intrinsic value method of accounting for stock options
and performance-based stock awards as prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
A-26
<PAGE> 63
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interpretations. Accordingly, no compensation expense is recognized under
Cooper's fixed stock option plans or Employee Stock Purchase Plan. Compensation
expense of $8.2 million, $7.1 million and $3.8 million was recognized in the
consolidated income statements during 1997, 1996 and 1995, respectively for the
performance-based stock awards. If compensation expense for stock options and
performance-based stock awards granted under Cooper's stock based compensation
plans during 1997 and 1996 was recognized using the alternative fair value
method of accounting under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, net income and earnings per share would
have decreased by approximately 1.2% in both 1997 and 1996. The fair value was
estimated on the date of grant, using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in 1997 and
1996, respectively: dividend yield of 2.8% and 3.2%, expected volatility of
20.1% and 20.3%, risk free interest rates of 6.4% and 6.1% and expected lives of
7 years and 6 years.
A summary of the status of Cooper's fixed stock option plans for officers
and employees as of December 31, 1997 and activity during the three years ended
December 31, 1997 is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........ 3,189,083 $44.05 2,748,219 $46.48 2,951,660 $49.19
Granted................................. 974,900 $45.06 1,044,000 $39.06 903,700 $39.06
Exercised............................... (491,165) $41.67 (12,679) $39.06 (125,500) $37.75
Canceled................................ (559,741) $50.68 (590,457) $46.68 (981,641) $48.91
--------- --------- ---------
Outstanding at end of year.............. 3,113,077 $43.55 3,189,083 $44.05 2,748,219 $46.48
========= ========= =========
Options exercisable at end of year...... 1,361,573 1,571,842 1,416,896
Options available for grant at end of
year.................................. 4,706,406 5,760,467 1,676,054
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------- ----------------------
WEIGHTED
SHARES AVERAGE WEIGHTED SHARES WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT CONTRACTUAL EXERCISE AT EXERCISE
EXERCISE PRICES 12/31/97 LIFE PRICE 12/31/97 PRICE
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$39.06 1,531,406 5.9 $39.06 681,902 $39.06
$45.06 902,000 9.1 $45.06 -- --
$50.13 - $52.81 679,671 .6 $51.64 679,671 $51.64
--------- ---------
3,113,077 5.6 1,361,573
========= =========
</TABLE>
During 1997, options to purchase 9,000 shares of Common stock were granted
to nonemployee directors at an exercise price of $45.44 and options for 6,000
shares were exercised at $27.13 per share. During 1996, options to purchase
9,000 shares of Common stock were granted to nonemployee directors at an
exercise price of $42.13 and options for 8,000 shares were exercised at $27.00
per share. During 1995, options for 4,000 shares were granted, net of the annual
retainer fee, at $17.31 per share and options for 6,000 shares were exercised at
$25.44 per share. At December 31, 1997, options under the director plans for
12,000 Common shares were exercisable at $14.69 to $24.00 per share, and 174,800
shares were reserved for future grants.
EMPLOYEE STOCK PURCHASE PLAN
Participants in the Employee Stock Purchase Plan receive an option to
purchase Common stock at a price that is the lesser of 90% of the market value
on the offering date or 100% of the market value on the purchase date. On
September 8, 1997, a total of 575,135 shares were sold to employees at $35.33
per share. At December 31, 1997, subscriptions for 711,332 shares of Common
stock were outstanding at $45.68 per share or, if lower, the average market
price on September 10, 1999, which is the purchase date. At December 31, 1997,
an aggregate of 3,042,973 shares of Common stock were reserved for future
issuance.
A-27
<PAGE> 64
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11: INCOME TAXES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS, EXCEPT FOR
PERCENTAGES)
<S> <C> <C> <C>
Components of income before income taxes:
U.S. operations........................................... $526.0 $434.7 $384.9
Foreign operations........................................ 100.7 123.3 93.1
------ ------ ------
Income from continuing operations before income
taxes............................................ $626.7 $558.0 $478.0
====== ====== ======
Components of income tax expense:
Current:
U.S. Federal........................................... $166.9 $156.9 $ 82.1
U.S. state and local................................... 26.2 20.9 23.3
Foreign................................................ 42.4 51.5 26.6
------ ------ ------
235.5 229.3 132.0
------ ------ ------
Deferred:
U.S. Federal........................................... 4.2 2.2 51.0
U.S. state and local................................... (9.3) 10.2 5.8
Foreign................................................ 1.7 .9 8.6
------ ------ ------
(3.4) 13.3 65.4
------ ------ ------
Income tax expense................................ $232.1 $242.6 $197.4
====== ====== ======
Total income taxes paid..................................... $252.1 $208.4 $158.2
====== ====== ======
Effective tax rate reconciliation:
U.S. Federal statutory rate............................... 35.0% 35.0% 35.0%
State and local income taxes.............................. 2.4 2.8 3.4
Foreign statutory rate differential....................... (1.0) (.4) (.5)
Nondeductible goodwill.................................... 3.4 4.0 4.7
Automotive asset goodwill write-down...................... -- 2.3 --
State tax settlements(1).................................. (1.0) -- --
Foreign Sales Corporation................................. (0.8) (0.5) (0.6)
Tax credits............................................... (1.0) (0.2) --
Other..................................................... -- .5 (0.7)
------ ------ ------
Effective tax rate attributable to continuing
operations....................................... 37.0% 43.5% 41.3%
====== ====== ======
</TABLE>
- ---------------
(1) During 1997, Cooper settled several state income tax matters and recognized
a $6.1 million benefit in its income tax provision.
A-28
<PAGE> 65
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
(IN MILLIONS)
<S> <C> <C>
Components of deferred tax liabilities and assets:
Deferred tax liabilities:
Property, plant and equipment and intangibles.......... $(121.4) $(143.6)
Unrealized net gain on investments in marketable equity
securities and DECS................................... (59.7) (72.5)
Inventories............................................ (63.8) (63.8)
Employee medical program funding....................... (11.5) (11.5)
Employee stock ownership plan.......................... (22.0) (19.7)
Pension plans.......................................... (30.2) (24.8)
Other.................................................. (53.0) (65.1)
------- -------
Total deferred tax liabilities.................... (361.6) (401.0)
------- -------
Deferred tax assets:
Postretirement benefits other than pensions............ 226.2 242.6
Accrued liabilities.................................... 195.0 193.1
Minimum pension liability.............................. 13.3 31.9
Net operating loss carryforwards....................... 2.3 15.2
Other.................................................. 19.8 29.7
------- -------
Total deferred tax assets......................... 456.6 512.5
------- -------
Valuation allowances...................................... (16.3) (16.3)
------- -------
Net deferred tax assets........................... $ 78.7 $ 95.2
======= =======
</TABLE>
The U.S. Federal portion of the above provision includes U.S. tax expected
to be payable on the foreign portion of Cooper's income before income taxes when
such earnings are remitted. Cooper's liabilities for continuing operations at
December 31, 1997 and 1996 include the additional U.S. tax estimated to be
payable on substantially all unremitted earnings of foreign subsidiaries.
NOTE 12: PENSION PLANS
Cooper and its subsidiaries have numerous pension plans covering
substantially all domestic employees and pension and similar arrangements in
accordance with local customs covering employees at foreign locations. The
assets of the various domestic and foreign plans are maintained in various
trusts and consist primarily of equity and fixed-income securities. Funding
policies range from five to thirty years. Pension benefits for salaried
employees are generally based upon career earnings. Benefits for hourly
employees are generally based on a dollar unit, multiplied by years of service.
Aggregate pension expense amounted to $37.8 million, $41.5 million and $40.7
million during 1997, 1996 and 1995, respectively. The amount of expense with
respect to Cooper's various defined benefit pension plans is set forth in the
table below. During 1997, 1996 and 1995, expense with respect to domestic and
foreign defined contribution plans (primarily related to various groups of
hourly employees) amounted to $18.7 million, $18.9 million and $16.2 million,
respectively. Also included in pension expense are gains and losses on
curtailments and settlements and other matters. Cooper partially or completely
settled or curtailed one salaried plan in 1997 resulting in a net loss of $.5
million and four defined benefit plans for hourly employees in 1995 resulting in
a reversion to Cooper of surplus assets totaling $1.0 million during 1995.
A-29
<PAGE> 66
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Components of defined benefit plan net pension expense:
Service cost -- benefits earned during the year............. $23.1 $23.7 $21.6
Interest cost on projected benefit obligation............... 69.7 69.1 67.6
Actual return on assets..................................... (93.7) (79.2) (65.9)
Net amortization and deferral............................... 19.5 9.0 1.2
----- ----- -----
Net pension expense......................................... $18.6 $22.6 $24.5
===== ===== =====
</TABLE>
The funded status of the plans at December 31 was as follows:
<TABLE>
<CAPTION>
ASSETS EXCEED ACCUMULATED BENEFITS
ACCUMULATED BENEFITS EXCEED ASSETS
--------------------- ---------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation............................ $(585.7) $(476.3) $(291.9) $(419.9)
======= ======= ======= =======
Accumulated benefit obligation....................... $(618.8) $(509.2) $(318.3) $(446.1)
======= ======= ======= =======
Projected benefit obligation......................... $(632.3) $(529.0) $(330.8) $(453.0)
Plan assets at fair value.............................. 762.8 624.3 212.5 319.0
------- ------- ------- -------
Projected benefit obligation less than (in excess of)
plan assets.......................................... 130.5 95.3 (118.3) (134.0)
Unrecognized net (gain) loss........................... (52.2) (46.1) 51.8 75.2
Unrecognized net (asset) obligation from adoption
date................................................. (5.6) (7.7) 2.3 4.5
Unrecognized prior service cost........................ (3.7) (4.4) 7.2 5.1
Adjustment required to recognize minimum liability..... -- -- (41.2) (86.8)
------- ------- ------- -------
Pension asset (liability) at end of year............... $ 69.0 $ 37.1 $ (98.2) $(136.0)
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
-------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Actuarial assumptions used:
Discount Rate................................... 7 1/2% 6-7 1/4% 7 1/2% 6 1/2-8 1/4%
Rate of compensation increase................... 4 3/4% 4-6% 4 3/4% 4-6%
Expected long-term rate of return on assets..... 8 1/2% 7 1/2-9 3/4% 8 1/2% 7 1/2-10%
</TABLE>
NOTE 13: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The benefits provided under Cooper's various postretirement plans other
than pensions, all of which are unfunded, include retiree medical care, dental
care, prescriptions and life insurance, with medical care accounting for
approximately 90% of the total. While Cooper has numerous plans, primarily
resulting from Cooper's extensive acquisition activity, the vast majority of the
annual expense is related to employees who are already retired. In fact, as a
result of actions taken by Cooper starting in 1989, virtually no active salaried
employees continue to earn retiree medical benefits, and the number of active
hourly employees earning such benefits has been greatly diminished.
Additionally, Cooper continues to amend its various plans to provide for
appropriate levels of cost sharing and other cost-control measures.
A-30
<PAGE> 67
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------ ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost -- benefits earned during the year............. $ 0.6 $ 0.6 $ 0.6
Interest cost on accumulated postretirement benefit
obligation................................................ 30.2 30.5 36.5
Net amortization and deferral............................... (12.7) (10.5) (19.0)
------ ------ -----
Postretirement benefit cost................................. $ 18.1 $ 20.6 $18.1
====== ====== =====
</TABLE>
Amounts recognized in the consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees.................................................. $356.8 $452.9
Employees eligible to retire.............................. 24.3 7.5
Other employees........................................... 10.2 12.6
------ ------
391.3 473.0
Unrecognized prior service costs............................ 13.9 22.0
Unrecognized net gain....................................... 152.8 111.4
------ ------
Accrued postretirement benefit cost......................... $558.0 $606.4
====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1996
------------------- ---------------------
(IN MILLIONS, EXCEPT PERCENTAGES)
<S> <C> <C>
Actuarial assumptions:
Discount rate...................................... 6.75% 7.23%
Ensuing year to 2002 health care cost trend rate... 11% ratable to 5.5% 11.5% ratable to 5.5%
Effect of 1% change in health care cost trend rate:
Increase in APBO................................... $34.8 $40.9
Increase in expense................................ $ 2.7 $ 2.7
</TABLE>
NOTE 14: COOPER SAVINGS AND EMPLOYEE STOCK OWNERSHIP PLANS
All full-time domestic employees, except for certain bargaining unit
employees, are eligible to participate in the Cooper Savings Plan ("CO-SAV").
Under the terms of the Plan, employee savings deferrals are partially matched
with contributions by Cooper of Common stock consisting of either an allocation
of shares in Cooper's Employee Stock Ownership Plan ("ESOP") or new shares
issued to the ESOP.
Cooper makes annual contributions to the ESOP to fund the payment of
principal and interest on ESOP debt (See Note 8). All dividends received by the
ESOP are used to pay debt service. As the debt is repaid, unallocated shares are
allocated to participants to satisfy Cooper's matching obligation or to replace
dividends on allocated shares with Cooper Common shares.
For shares purchased by the ESOP prior to 1994, compensation expense is
equal to Cooper's matching obligation, adjusted for the difference between the
fair market value and cost of the shares released. Compensation expense is
reduced by the amount of dividends paid on unallocated ESOP shares available for
future matching. In addition, all shares issued to the ESOP are considered
outstanding for purposes of computing earnings per share. For shares purchased
by the ESOP in 1994, compensation expense is recorded equal to the amount of
Cooper's CO-SAV matching obligation, with the difference between the fair market
value and cost of shares released recorded as an adjustment to capital in excess
of par value. Dividends paid on unallocated shares are recorded as a reduction
of ESOP debt and accrued interest. Unallocated shares are not treated as
outstanding in the earnings per share computation.
A-31
<PAGE> 68
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Dividends paid on unallocated shares purchased prior to 1994 of $1.6
million and $2.3 million during 1997 and 1996, respectively, were used to reduce
the amount of cash required to fund principal and interest payments on ESOP
debt. Dividends paid on allocated ESOP shares purchased prior to 1994 of $4.7
million and $4.3 million during 1997 and 1996, respectively, were used to pay
additional principal and interest payments in order to release shares equivalent
to the dividend amount to participants in the savings plan. Cooper contributed
an additional $21.6 million and $26.6 million in cash to the ESOP during 1997
and 1996, respectively, to fund principal and interest payments on debt
associated with shares purchased prior to 1994.
During 1994, Cooper sold 1.6 million shares to the ESOP for $82.3 million
in cash. The 1994 sales were funded by loans between the ESOP and Cooper, which
for financial statement purposes are treated as eliminated intercompany loans.
The fair value of the remaining unallocated ESOP shares purchased during 1994
was $34.0 million at December 31, 1997. The number of allocated, committed to be
released, and unallocated ESOP shares held at December 31, 1997 and 1996 is
summarized below.
<TABLE>
<CAPTION>
SHARES PURCHASED SHARES PURCHASED
IN 1994 PRIOR TO 1994
------------------ ----------------------
1997 1996 1997 1996
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Allocated....................................... 619,320 668,146 3,638,849 3,532,167
Committed to be released........................ 8,156 11,271 60,510 130,275
Unallocated..................................... 692,942 740,880 725,412 1,327,446
</TABLE>
Compensation expense with respect to the CO-SAV plan and the ESOP was $18.9
million, $23.5 million and $21.7 million and interest expense on ESOP debt was
$1.4 million, $2.7 million and $4.2 million in 1997, 1996 and 1995,
respectively.
NOTE 15: INDUSTRY SEGMENTS, DOMESTIC AND INTERNATIONAL OPERATIONS
INDUSTRY SEGMENTS
Cooper's operations consist of three segments: Electrical Products, Tools &
Hardware and Automotive Products. Markets for Cooper's products and services are
worldwide, with the United States being the largest market.
The Electrical Products segment manufactures and markets electrical and
electronic distribution and circuit protection products and lighting fixtures
for use in residential, commercial and industrial construction, maintenance and
repair and products for use by utilities and industries for primary power
distribution and control.
The Tools & Hardware segment produces and markets tools and hardware items
for use in residential, commercial and industrial construction, maintenance and
repair and for general industrial and consumer use. This segment manufactured
and marketed window treatments through May 30, 1997.
The Automotive Products segment manufactures and distributes spark plugs,
wiper blades, lamps, brake friction materials and other products for use by the
automotive aftermarket and in automobile assemblies. In addition, this segment
manufactures and distributes suspension, steering, temperature control,
driveline and brake system components and material for the automotive
aftermarket.
Intersegment sales and related receivables for each of the years presented
were immaterial.
A-32
<PAGE> 69
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial information by industry segment was as follows:
<TABLE>
<CAPTION>
REVENUES OPERATING EARNINGS IDENTIFIABLE ASSETS
------------------------------ --------------------------- ------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------------ --------------------------- ------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
-------- -------- -------- ------- ------- ------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Electrical Products(1)............ $2,568.3 $2,407.5 $2,089.7 $ 445.7 $ 405.3 $ 355.5 $2,464.4 $1,985.0 $2,000.4
Tools & Hardware(1)(2)............ 847.3 973.0 962.4 151.7 111.4 111.2 548.9 773.2 759.7
Automotive Products(1)............ 1,873.2 1,903.2 1,758.8 143.5 87.3 180.7 2,547.6 2,594.0 2,635.3
-------- -------- -------- ------- ------- ------- -------- -------- --------
$5,288.8 $5,283.7 $4,810.9 740.9 604.0 647.4 5,560.9 5,352.2 5,395.4
======== ======== ========
Other income...................... 14.2 23.0 25.5
Nonrecurring gains(3)............. 23.2 150.4 11.7
General corporate(1).............. (61.2) (77.3) (55.6) 487.1 575.3 646.0
Interest expense.................. (90.4) (142.1) (151.0)
------- ------- -------
Consolidated income from
continuing
operations before income
taxes........................... $ 626.7 $ 558.0 $ 478.0
======= ======= =======
Investments in unconsolidated
affiliates...................... 4.5 22.9 22.5
-------- -------- --------
Consolidated assets............... $6,052.5 $5,950.4 $6,063.9
======== ======== ========
</TABLE>
- ---------------
(1)The respective 1997 and 1996 operating earnings amount includes nonrecurring
expenses of $15.9 million and $3.0 million for Electrical Products, $22.5
million and $2.0 million for Tools & Hardware and $43.4 million and $102.0
million (including an $85.3 million asset write-down) for Automotive Products
and $2.1 million and $10.9 million for general corporate expense (See Note
2).
(2)The Tools & Hardware segment includes revenues and operating earnings for the
Kirsch division through May 30, 1997. Operating earnings include a gain on
the sale of Kirsch of $69.8 million in 1997.
(3)Includes gain on the exchange of DECS of $23.2 million in 1997 and gains on
the sale of investments in marketable equity securities of $150.4 million and
$11.7 million in 1996 and 1995, respectively (See Note 6).
- ---------------
<TABLE>
<CAPTION>
DEPRECIATION GOODWILL AMORTIZATION CAPITAL EXPENDITURES
------------------------ ------------------------ ------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------ ------------------------ ------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
------ ------ ------ ------ ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Electrical Products........... $ 61.2 $ 63.4 $ 52.6 $27.9 $26.9 $23.1 $ 79.2 $ 79.1 $ 62.4
Tools & Hardware.............. 26.5 35.2 36.1 4.5 4.6 4.8 37.0 32.7 31.6
Automotive Products........... 64.9 67.4 66.2 32.7 33.7 32.9 78.4 87.1 85.7
Corporate..................... 1.9 2.6 3.1 -- -- -- 1.1 3.0 8.7
------ ------ ------ ----- ----- ----- ------ ------ ------
$154.5 $168.6 $158.0 $65.1 $65.2 $60.8 $195.7 $201.9 $188.4
====== ====== ====== ===== ===== ===== ====== ====== ======
</TABLE>
A-33
<PAGE> 70
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOMESTIC AND INTERNATIONAL OPERATIONS
Transfers between domestic and international operations, principally
inventory transfers, are designed to charge the receiving organization at
third-party arms-length prices that are generally sufficient to recover
manufacturing costs and provide a reasonable return. Export sales to
unaffiliated customers included in domestic sales were $366.9 million, $302.5
million and $268.5 million in 1997, 1996 and 1995, respectively. Of total export
sales, approximately 39% in 1997, 41% in 1996 and 39% in 1995 were to Asia,
Africa, Australia and the Middle East; 26% in 1997, 25% in 1996 and 27% in 1995
were to Canada and Europe; 35% in 1997, and 34% in 1996 and 1995 were to Latin
America. Domestic and international financial information was as follows:
<TABLE>
<CAPTION>
REVENUES OPERATING EARNINGS IDENTIFIABLE ASSETS
------------------------------ ------------------------ ------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------------ ------------------------ ------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
-------- -------- -------- ------ ------ ------ -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic(1)....................... $4,297.7 $4,294.2 $4,030.2 $628.8 $459.9 $540.8 $4,128.6 $4,132.8 $4,171.2
-------- -------- -------- ------ ------ ------ -------- -------- --------
International:(1)
Europe.......................... 678.8 737.9 537.5 58.7 88.2 56.1 1,125.9 987.9 959.2
Canada.......................... 219.1 256.7 250.8 14.9 6.3 10.7 138.1 146.6 131.9
Other........................... 290.0 257.2 225.7 39.6 50.4 39.9 363.9 311.9 280.5
-------- -------- -------- ------ ------ ------ -------- -------- --------
Sub-total International....... 1,187.9 1,251.8 1,014.0 113.2 144.9 106.7 1,627.9 1,446.4 1,371.6
Eliminations:
Transfers to International...... (153.5) (178.2) (165.4) -- -- -- (42.8) (57.1) (62.1)
Transfers to Domestic........... (43.3) (84.1) (67.9) -- -- -- (141.0) (158.3) (75.4)
Other........................... -- -- -- (1.1) (.8) (.1) (11.8) (11.6) (9.9)
-------- -------- -------- ------ ------ ------ -------- -------- --------
$5,288.8 $5,283.7 $4,810.9 740.9 604.0 647.4 5,560.9 5,352.2 5,395.4
======== ======== ========
Other income...................... 14.2 23.0 25.5
Nonrecurring gains(2)............. 23.2 150.4 11.7
General corporate(3).............. (61.2) (77.3) (55.6) 487.1 575.3 646.0
Interest expense.................. (90.4) (142.1) (151.0)
------ ------ ------
Consolidated income from
continuing operations before
income taxes.................... $626.7 $558.0 $478.0
====== ====== ======
Investments in unconsolidated
affiliates...................... 4.5 22.9 22.5
-------- -------- --------
Consolidated assets............... $6,052.5 $5,950.4 $6,063.9
======== ======== ========
</TABLE>
- ---------------
(1) The 1997 domestic, Europe and other operating earnings amount includes
nonrecurring expenses of $56.8 million, $15.3 million and $9.7 million,
respectively. The 1996 domestic operating earnings includes nonrecurring
expenses of $107.0 million. The 1997 domestic operating earnings also
include a gain on the sale of Kirsch of $69.8 million.
(2) Includes gain on the exchange of DECS of $23.2 million in 1997 and gains on
the sale of investments in marketable equity securities of $150.4 million
and $11.7 million in 1996 and 1995, respectively (See Note 6).
(3) Includes nonrecurring expenses of $2.1 million and $10.9 million in 1997 and
1996, respectively.
- ---------------
International revenues by destination, based on the location products were
delivered, were as follows by segment:
<TABLE>
<CAPTION>
INTERNATIONAL REVENUES
------------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Electrical Products......................................... $ 612.7 $ 578.6 $ 355.2
Tools & Hardware(1)......................................... 319.6 357.2 354.8
Automotive Products......................................... 543.8 537.5 506.6
-------- -------- --------
$1,476.1 $1,473.3 $1,216.6
======== ======== ========
</TABLE>
- ---------------
(1) Includes $29.1 million in 1997, $83.3 million in 1996 and $90.0 in 1995 of
Kirsch revenues.
A-34
<PAGE> 71
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 16: OFF-BALANCE-SHEET RISK, CONCENTRATIONS OF CREDIT RISK AND FAIR VALUE OF
FINANCIAL INSTRUMENTS, INCLUDING DERIVATIVES
As a result of having sales and purchases and other transactions
denominated in currencies other than the functional currencies used by Cooper's
businesses, Cooper is exposed to the effect of foreign exchange rate
fluctuations on its cash flows and earnings. To the extent possible, Cooper
utilizes natural hedges to minimize the effect on cash flows of fluctuating
foreign currencies. When natural hedges are not sufficient, it is Cooper's
policy to enter into forward foreign exchange contracts to hedge all significant
transactions for periods consistent with the terms of the underlying
transactions. Cooper does not engage in speculative transactions. While forward
contracts affect Cooper's results of operations, they do so only in connection
with the underlying transactions. Gains and losses on these contracts offset
losses and gains on the transactions being hedged. The volume of forward
activity engaged in by Cooper from year to year fluctuates in proportion to the
level of worldwide cross-border transactions, and contracts generally have
maturities that do not exceed one year. The table below summarizes, by currency,
the contractual amounts of Cooper's forward exchange contracts at December 31,
1997 and 1996.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
British Pound Sterling(1)................................... $175.3 $ 7.7
Canadian Dollar............................................. -- 58.2
German Deutschemark......................................... 4.1 27.8
Italian Lira................................................ 5.4 16.9
Spanish Peseta.............................................. 1.3 10.6
Australian Dollar........................................... 7.2 6.9
Japanese Yen................................................ 2.2 4.6
Dutch Guilder............................................... 2.5 1.8
Other....................................................... 11.0 12.8
------ ------
$209.0 $147.3
====== ======
</TABLE>
- ---------------
(1)Substantially all of the British Pound Sterling forward contracts were
entered into in December 1997 and matured in January 1998.
In an effort to reduce interest expense on Cooper's fixed-rate borrowings,
Cooper entered into an interest rate swap in 1991, which matured in February
1996, that converted a $50 million fixed rate borrowing into a floating-rate
borrowing resulting in an effective interest rate of 6.2% during 1995.
In the normal course of business, Cooper has letters of credit, performance
bonds and other guarantees which are not reflected in the consolidated balance
sheets. In the past, no significant claims have been made against these
financial instruments. Management believes the likelihood of performance under
these instruments is minimal and expects no material losses to occur in
connection with these instruments. Cooper's other off-balance-sheet risks are
not material.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to trade receivables are limited
due to the wide variety of customers and no one customer exceeding 3% of
accounts receivable. Credit risk is also limited by the world-wide markets into
which Cooper's products are sold, as well as their dispersion across many
different geographic areas.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cooper's financial instruments consist primarily of cash and cash
equivalents, trade receivables, trade payables, debt instruments and foreign
currency forward contracts. The book values of cash and cash equivalents, trade
receivables and trade payables are considered to be representative of their
respective fair values. Cooper had approximately $1.5 billion and $1.9 billion
of debt instruments at December 31, 1997 and 1996, respectively. The book value
of these instruments was approximately equal to fair value at December 31, 1997
and 1996. Based on year-end
A-35
<PAGE> 72
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
exchange rates and the various maturity dates of the foreign currency forward
contracts, Cooper estimates that the contract value is representative of the
fair value of these items at December 31, 1997 and 1996.
NOTE 17: SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES
The following noncash transactions have been excluded from the consolidated
statements of cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Assets acquired and liabilities assumed or incurred from the
acquisition of businesses:
Fair value of assets acquired............................. $ 532.1 $ 131.6 $ 249.9
Cash used to acquire businesses, net of cash acquired..... (386.5) (93.2) (175.9)(1)
------- ------- -------
Liabilities assumed or incurred............................. $ 145.6(2) $ 38.4 $ 74.0
======= ======= =======
Noncash increase (decrease) in net assets from:
Conversion of 7.05% Convertible Subordinated Debentures
into Cooper Common stock............................... $ 610.0 $ -- $ --
Exchange of DECS for Wyman-Gordon common stock............ 33.8 -- --
Retirement of Cooper Common shares exchanged for Cooper
Cameron common shares.................................. -- -- 427.5
Exchange of $1.60 Convertible Exchangeable Preferred Stock
into 7.05% Convertible Subordinated Debentures......... -- -- 691.2
</TABLE>
- ---------------
(1) Includes approximately $164 million at December 31, 1995 for the acquisition
of CEAG that was paid on January 5, 1996 (See Note 3).
(2) Includes $46.2 million of notes exchanged for Menvier-Swain common stock.
NOTE 18: DISCONTINUED OPERATIONS
In September 1994, Cooper announced its decision to establish its Petroleum
& Industrial Equipment segment as an independent publicly traded company, Cooper
Cameron, through an exchange offer with Cooper's common shareholders. The
exchange offer was completed on June 30, 1995, at which time 9.5 million shares
of Cooper Common stock were exchanged for 85.5% of Cooper Cameron common stock.
The Petroleum & Industrial Equipment segment split-off has been accounted for as
a discontinued operation.
During the second quarter of 1995, Cooper recorded an additional charge of
$186.6 million, with no tax benefit, to reflect the actual loss on the split-off
of Cooper Cameron. This additional charge was composed of the difference between
the historical cost of Cooper's investment in Cooper Cameron remaining after the
initial September 1994 estimated charge and the market value of Cooper Cameron
common stock during the first few days the common stock traded on a national
exchange ($162.8 million), additional Cooper Cameron operating losses during the
period October 1, 1994 through June 30, 1995 ($20.3 million) and additional
transaction costs ($3.5 million). The additional operating losses and
transaction costs resulted primarily from the delay in completing the exchange
transaction and the recording by Cooper Cameron of a $17 million pretax charge
in the second quarter of 1995 for the write-down of receivables due from
customers in Iran.
Cooper retained a 14.5% interest in Cooper Cameron, which was accounted for
as a marketable equity security. Cooper sold its entire investment in Cooper
Cameron common stock during 1996 (See Note 6).
A-36
<PAGE> 73
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 19: NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
BASIC DILUTED
------------------------------ ------------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------ ------------------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- -------- -------- --------
($ IN MILLIONS, SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations..... $ 394.6 $ 315.4 $ 280.6 $ 394.6 $ 315.4 $ 280.6
Charge for discontinued operations.... -- -- (186.6) -- -- (186.6)
Interest expense on 7.05% Convertible
Subordinated Debentures, net of
income taxes........................ -- -- -- 5.8 29.2 29.2
-------- -------- -------- -------- -------- --------
Net income applicable to Common
stock............................... $ 394.6 $ 315.4 $ 94.0 $ 400.4 $ 344.6 $ 123.2
======== ======== ======== ======== ======== ========
Weighted average Common shares
outstanding......................... 117,459 107,284 111,510 117,459 107,284 111,510
======== ======== ========
Incremental shares from assumed
conversions:
Options, performance-based stock
awards and other employee
awards........................... 1,201 613 442
7.05% Convertible Subordinated
Debentures....................... 4,270 16,731 16,731
-------- -------- --------
Weighted average Common shares and
Common share equivalents............ 122,930 124,628 128,683
======== ======== ========
</TABLE>
NOTE 20: UNAUDITED QUARTERLY OPERATING RESULTS
<TABLE>
<CAPTION>
1997 (BY QUARTER)
-----------------------------------------
1 2 3 4
-------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues.................................................... $1,318.9 $1,384.9 $1,296.9 $1,288.1
Cost of sales............................................... 905.7 938.4 883.1 861.1
Selling and administrative expenses......................... 240.8 238.8 222.5 223.2
Goodwill amortization....................................... 16.0 16.1 16.3 16.7
Nonrecurring gains.......................................... -- (69.8) (23.2) --
Nonrecurring charges........................................ -- 70.5 13.4 --
Other (income) expense, net................................. 1.5 (0.6) -- 1.2
Interest expense............................................ 29.6 21.3 19.4 20.1
-------- -------- -------- --------
Income before income taxes.................................. 125.3 170.2 165.4 165.8
Income taxes(1)............................................. 47.6 64.7 62.9 56.9
-------- -------- -------- --------
Net income.................................................. $ 77.7 $ 105.5 $ 102.5 $ 108.9
======== ======== ======== ========
Income per Common share:(2)(3)
Basic..................................................... $ 0.71 $ 0.89 $ 0.85 $ 0.91
======== ======== ======== ========
Diluted................................................... $ 0.67 $ 0.86 $ 0.84 $ 0.90
======== ======== ======== ========
</TABLE>
- ---------------
(1)Includes $6.1 million related to the favorable settlements of state income
tax issues in the fourth quarter.
(2)Includes gain, net of nonrecurring expenses, on the exchange of the DECS of
$.05 in the third quarter and $.05 related to the favorable settlements of
state tax issues in the fourth quarter.
(3)Adoption of Statement of Financial Accounting Standards No. 128, Earnings Per
Share increased the second and third quarter 1997 Basic Income per Common
Share $.01 each quarter.
A-37
<PAGE> 74
COOPER INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996 (BY QUARTER)
-----------------------------------------
1 2 3 4
-------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues................................................... $1,291.7 $1,351.4 $1,308.1 $1,332.5
Cost of sales.............................................. 897.1 919.3 889.8 899.5
Selling and administrative expenses........................ 233.6 232.8 235.5 243.5
Goodwill amortization...................................... 16.2 16.4 16.4 16.2
Nonrecurring gains......................................... (10.9) (9.5) (107.2) (22.8)
Nonrecurring charges....................................... 10.9 8.3 85.3 13.4
Other (income) expense, net................................ 1.5 (2.3) (0.5) 1.1
Interest expense........................................... 37.6 36.8 35.4 32.3
-------- -------- -------- --------
Income before income taxes................................. 105.7 149.6 153.4 149.3
Income taxes(1)............................................ 43.6 61.3 76.1 61.6
-------- -------- -------- --------
Net income................................................. $ 62.1 $ 88.3 $ 77.3 $ 87.7
======== ======== ======== ========
Income per Common share:(2)(3)
Basic.................................................... $ 0.58 $ 0.82 $ 0.72 $ 0.82
======== ======== ======== ========
Diluted.................................................. $ 0.56 $ 0.77 $ 0.68 $ 0.76
======== ======== ======== ========
</TABLE>
- ---------------
(1)Income before income taxes includes a net nonrecurring gain of $21.9 million
and income taxes include a $12.9 million effect related to the goodwill
write-down included in the Automotive Products asset write-down in the third
quarter of 1996.
(2)Includes gains from the sale of marketable equity securities, net of
nonrecurring expense, of $.01 and $.04 in the second and fourth quarters,
respectively.
(3)Adoption of Statement of Financial Accounting Standards No. 128, Earnings Per
Share increased the fourth quarter of 1996 Basic Income per Common Share
$.01.
A-38
<PAGE> 75
- -------------------------------------------------------------------------------
[X] Please mark your 9327
votes as in this
example.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL NOMINEES AND FOR
PROPOSALS 2 AND 3.
1. Election of Directors. FOR WITHHELD
Nominees: [ ] [ ]
A.J.P. Belda
H.S. Hook
F.A. Olson
J.D. Ong
To withhold your vote for any nominee(s), write the name(s) here:
-----------------------------------------------------------------
2. Approval of Directors' Retainer Fee Stock Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. Approval of Amendment to Management Annual Incentive Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
I plan to attend the meeting. [ ]
Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee, or guardian, please
give full title as such.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGNATURE(S) DATE
- -------------------------------------------------------------------------------
FOLD AND DETACH HERE (over)
THIS IS YOUR PROXY. [COOPER INDUSTRIES, INC. LOGO]
YOUR VOTE IS IMPORTANT
SERVICES AVAILABLE TO COOPER SHAREHOLDERS
TO ADDRESS OUR SHAREHOLDERS' NEEDS, WE OFFER THE FOLLOWING PROGRAMS:
o DIRECT DEPOSIT OF DIVIDEND MONIES INTO YOUR BANK ACCOUNT
o A DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
o A 24-HOUR TOLL-FREE INFORMATION LINE FOR ACCESS TO RECENT NEWS ABOUT
COOPER: (800) 371-9242
o A WORLD WIDE WEB ADDRESS: www.cooperindustries.com
o AN E-MAIL ADDRESS: [email protected]
o A 24-HOUR TELEPHONE RESPONSE CENTER AT OUR TRANSFER AGENT, FIRST CHICAGO
TRUST COMPANY OF NEW YORK, FOR ASSISTANCE WITH YOUR INQUIRIES CONCERNING
YOUR COOPER STOCK ACCOUNT
For information about direct deposit of dividends, dividend reinvestment or
inquiries concerning your Cooper Common Stock, you may contact First Chicago
Trust by calling (800) 371-9242 or (201) 324-1225, or by writing to: First
Chicago Trust Company of New York, P.O. Box 2500, Jersey City, NJ 07303-2500.
For hearing impaired: (201) 222-4955, E-mail address: [email protected]
World Wide Web address: http://www.fctc.com.
<PAGE> 76
PROXY
COOPER INDUSTRIES, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
APRIL 28, 1998
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS [COOPER INDUSTRIES, INC. LOGO]
The undersigned shareholder of Cooper Industries, Inc. ("Cooper") appoints
H. John Riley, Jr. and Diane K. Schumacher, or either of them, proxies, with
full power of substitution, to vote all shares of stock that the shareholder
would be entitled to vote if present at the Annual Meeting of Shareholders of
Cooper on Tuesday, April 28, 1998, at 11:00 a.m. (Central Time) in the Chase
Center Auditorium, 601 Travis Street, Houston, Texas, and at any adjournments
thereof, with all powers the shareholder would possess if present. The
shareholder hereby revokes any proxies previously given with respect to such
meeting.
THIS PROXY WILL BE VOTED AS SPECIFIED ON THE REVERSE SIDE, BUT IF NO
SPECIFICATION IS MADE, IT WILL BE VOTED FOR THE NOMINEES FOR DIRECTOR (A.J.P.
BELDA, H.S. HOOK, F.A. OLSON, J.D. ONG) AND PROPOSALS 2 AND 3 AND IN THE
DISCRETION OF THE PROXIES ON OTHER MATTERS AS MAY COME BEFORE THE MEETING OR
ANY ADJOURNMENT THEREOF.
This card also constitutes voting instructions for any shares held for the
shareholder in Cooper's Dividend Reinvestment and Stock Purchase Plan, the
Cooper Industries, Inc. Stock Ownership Plan and the Cooper Industries, Inc.
Savings Plans, as well as any shares acquired through Cooper's Employee Stock
Purchase Plan that are being held in a book-entry account at First Chicago
Trust Company of New York, as described in the Notice of Meeting and Proxy
Statement.
(Please date and sign on the reverse side)
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS AND QUARTERS INDICATED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 SEP-30-1997 JUN-30-1997 DEC-31-1996
<CASH> 30,300 14,700 15,200 16,100
<SECURITIES> 0 0 0 0
<RECEIVABLES> 991,700 988,200 1,010,200 959,400
<ALLOWANCES> 0 0 0 0
<INVENTORY> 958,200 935,800 933,400 971,100
<CURRENT-ASSETS> 2,136,700 2,075,900 2,136,300 2,098,100
<PP&E> 2,397,900 2,319,200 2,282,200 2,401,800
<DEPRECIATION> 1,199,100 1,172,200 1,150,200 1,160,500
<TOTAL-ASSETS> 6,052,500 5,814,700 5,920,400 5,950,400
<CURRENT-LIABILITIES> 1,385,100 1,321,300 1,374,000 1,381,300
<BONDS> 1,272,200 1,098,500 1,109,000 1,737,700
0 0 0 0
0 0 0 0
<COMMON> 615,000 615,000 615,000 540,200
<OTHER-SE> 1,961,600 1,908,700 1,944,700 1,350,000
<TOTAL-LIABILITY-AND-EQUITY> 6,052,500 5,814,700 5,920,400 5,950,400
<SALES> 5,288,800 4,000,700 2,703,800 5,283,700
<TOTAL-REVENUES> 5,288,800 4,000,700 2,703,800 5,283,700
<CGS> 3,588,300 2,727,200 1,844,100 3,605,700
<TOTAL-COSTS> 3,588,300 2,727,200 1,844,100 3,605,700
<OTHER-EXPENSES> 83,900 83,900 70,500 117,900
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 90,400 70,300 50,900 142,100
<INCOME-PRETAX> 626,700 460,900 295,500 558,000
<INCOME-TAX> 232,100 175,200 112,300 242,600
<INCOME-CONTINUING> 394,600 285,700 183,200 315,400
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 394,600 285,700 183,200 315,400
<EPS-PRIMARY> 3.36 2.45 1.60 2.94
<EPS-DILUTED> 3.26 2.36 1.52 2.77
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS AND QUARTERS INDICATED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 JUN-30-1996 MAR-03-1996 DEC-31-1995
<CASH> 9,800 16,200 14,400 17,700
<SECURITIES> 0 0 0 0
<RECEIVABLES> 1,025,700 1,070,700 986,000 992,700
<ALLOWANCES> 0 0 0 0
<INVENTORY> 981,200 983,800 981,200 963,500
<CURRENT-ASSETS> 2,131,500 2,188,300 2,119,200 2,127,300
<PP&E> 2,257,700 2,304,200 2,285,900 2,268,300
<DEPRECIATION> 1,093,700 1,089,200 1,069,600 1,036,200
<TOTAL-ASSETS> 5,974,900 6,183,300 6,115,700 6,063,900
<CURRENT-LIABILITIES> 1,339,800 1,376,900 1,389,600 1,382,400
<BONDS> 1,858,000 2,017,100 1,993,600 1,865,300
0 0 0 0
0 0 0 0
<COMMON> 540,100 540,100 539,700 539,400
<OTHER-SE> 1,306,400 1,307,300 1,245,000 1,177,000
<TOTAL-LIABILITY-AND-EQUITY> 5,974,900 6,183,300 6,115,700 6,063,900
<SALES> 3,951,200 2,643,100 1,291,700 4,810,900
<TOTAL-REVENUES> 3,951,200 2,643,100 1,291,700 4,810,900
<CGS> 2,706,200 1,816,400 897,100 3,297,500
<TOTAL-COSTS> 2,706,200 1,816,400 897,100 3,297,500
<OTHER-EXPENSES> 104,500 19,200 10,900 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 109,800 74,400 37,600 151,000
<INCOME-PRETAX> 408,700 255,300 105,700 478,000
<INCOME-TAX> 181,000 104,900 43,600 197,400
<INCOME-CONTINUING> 227,700 150,400 62,100 280,600
<DISCONTINUED> 0 0 0 (186,600)
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 227,700 150,400 62,100 94,000
<EPS-PRIMARY> 2.12 1.40 .58 .85
<EPS-DILUTED> 2.00 1.32 .56 .84
</TABLE>
