<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
===========================================================================
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
JUNE 30, 1997 1-3574
HASTINGS MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
MICHIGAN 38-0633740
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
325 NORTH HANOVER STREET
HASTINGS, MICHIGAN 49058
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 616-945-2491
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No ______
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS JULY 28, 1997
----- --------------
<S> <C> <C>
Common stock, $2 par value 390,313 shares
</TABLE>
===========================================================================
<PAGE>
Hastings Manufacturing Company and Subsidiaries
Contents
===============================================
PART I - FINANCIAL INFORMATION
Page
Item 1 - Financial Statements:
Report on Review by Independent Certified Public
Accountants 3
Condensed Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 4-5
Condensed Consolidated Statements of Operations -
Three Months and Six Months Ended
June 30, 1997 and 1996 6
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996 7
Notes to Condensed Consolidated Financial
Statements 8-10
Review by Independent Certified Public Accountants 11
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 6 - Exhibits and Reports on Form 8-K 17
-2-
<PAGE>
Report on Review by Independent Certified Public Accountants
===============================================
Board of Directors
Hastings Manufacturing Company
Hastings, Michigan
We have reviewed the accompanying condensed consolidated balance sheet of
Hastings Manufacturing Company and subsidiaries as of June 30, 1997, and
the related condensed consolidated statements of operations for the
three-month and six-month periods ended June 30, 1997 and 1996, and cash
flows for the six-month period ended June 30, 1997 and 1996, included in
the accompanying Securities and Exchange Commission Form 10-Q for the
period ended June 30, 1997. These condensed consolidated financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial
statements for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1996, and the
related consolidated statements of operations, stockholders' equity and
cash flows for the year then ended (not presented herein). In our report
dated February 28, 1997, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of
December 31, 1996, is fairly stated in all material respects in relation to
the consolidated balance sheet from which it has been derived.
/s/BDO Seidman, LLP
BDO Seidman, LLP
Grand Rapids, Michigan
July 28, 1997
-3-
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
Hastings Manufacturing Company and Subsidiaries
Condensed Consolidated Balance Sheets
===============================================
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 183,958 $ 1,457,783
Accounts receivable, less allowance
for possible losses of $307,000
and $215,000 5,628,742 4,893,200
Refundable income taxes 46,773 66,667
Inventories:
Finished products 6,745,740 7,134,216
Work in process 402,728 415,581
Raw materials 1,732,076 1,751,323
Prepaid expenses and other assets 84,399 152,807
Future income tax benefits 1,937,468 2,413,877
----------- -----------
TOTAL CURRENT ASSETS 16,761,884 18,285,454
----------- -----------
PROPERTY AND EQUIPMENT
Land and improvements 657,343 660,168
Buildings 4,304,157 4,312,633
Machinery and equipment 18,002,171 17,035,465
----------- -----------
22,963,671 22,008,266
Less accumulated depreciation 14,740,334 14,071,826
----------- -----------
NET PROPERTY AND EQUIPMENT 8,223,337 7,936,440
----------- -----------
INTANGIBLE PENSION ASSET 941,583 941,583
FUTURE INCOME TAX BENEFITS 6,416,683 6,234,623
OTHER ASSETS 1,119,093 1,056,889
----------- -----------
$33,462,580 $34,454,989
=========== ===========
</TABLE>
-4-
<PAGE>
<TABLE>
Hastings Manufacturing Company and Subsidiaries
Condensed Consolidated Balance Sheets
===============================================
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks $ 3,100,000 $ 3,000,000
Accounts payable 1,150,407 1,479,361
Accruals:
Compensation 339,218 446,422
Pension plan contribution 649,241 359,441
Taxes other than income 197,965 283,347
Income taxes 42,732 -
Miscellaneous 38,303 240,737
Current portion of postretirement
benefit obligation 1,110,442 1,641,040
Current maturities of
long-term debt 1,462,500 1,462,500
------------ ------------
TOTAL CURRENT LIABILITIES 8,090,808 8,912,848
LONG-TERM DEBT,
less current maturities 1,296,875 2,028,125
PENSION AND DEFERRED COMPENSATION
OBLIGATIONS, less current portion 3,022,992 3,035,576
POSTRETIREMENT BENEFIT OBLIGATION,
less current portion 15,663,140 15,545,992
------------ ------------
TOTAL LIABILITIES 28,073,815 29,522,541
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $2 par value,
authorized and unissued
500,000 shares - -
Common stock, $2 par value,
1,750,000 shares authorized;
390,313 and 390,138 shares issued
and outstanding 780,626 780,276
Additional paid-in capital 145,788 140,206
Retained earnings 6,292,326 5,813,827
-5-
<PAGE>
Cumulative foreign currency
translation adjustment (639,569) (611,455)
Pension liability adjustment (1,190,406) (1,190,406)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,388,765 4,932,448
------------ ------------
$ 33,462,580 $ 34,454,989
============ ============
</TABLE>
See accompanying independent accountants' review report and notes to
condensed consolidated financial statements.
-6-
<PAGE>
<TABLE>
Hastings Manufacturing Company and Subsidiaries
Condensed Consolidated Statements of Operations
===============================================
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, 1997 1996 1997 1996
<S> <C> <C> <C> <C>
NET SALES $ 9,602,232 $ 10,777,623 $ 18,354,389 $ 22,142,035
COST OF SALES 6,599,540 7,953,961 12,528,797 16,256,875
------------- ------------ ------------ -------------
Gross profit 3,002,692 2,823,662 5,825,592 5,885,160
------------- ------------ ------------ -------------
OPERATING EXPENSES
Advertising 92,124 113,911 199,142 215,885
Selling 733,722 984,658 1,532,897 1,966,290
General and administrative 1,486,263 1,661,837 2,932,744 3,454,898
Non-recurring relocation costs - 387,392 - 468,422
------------- ------------ ------------ -------------
2,312,109 3,147,798 4,664,783 6,105,495
------------- ------------ ------------ -------------
Operating income 690,583 (324,136) 1,160,809 (220,335)
------------- ------------ ------------ -------------
OTHER EXPENSE (INCOME)
Interest expense 134,020 151,367 257,123 264,590
Interest income (13,658) (46,040) (22,779) (93,147)
Other, net (5,545) (460) (4,376) (205,938)
------------- ------------ ------------ -------------
114,817 104,867 229,968 (34,495)
------------- ------------ ------------ -------------
Income (loss) before income
tax expense (benefit) 575,766 (429,003) 930,841 (185,840)
INCOME TAX EXPENSE (BENEFIT) 231,000 (159,000) 373,000 (75,000)
------------- ------------ ------------ -------------
NET INCOME (LOSS) $ 344,766 $ (270,003) $ 557,841 $ (110,840)
============= ============ ============ =============
NET INCOME (LOSS) PER SHARE
OF COMMON STOCK $ .88 $ (.69) $ 1.43 $ (.28)
AVERAGE SHARES OF COMMON
STOCK OUTSTANDING 390,211 389,798 390,175 389,308
DIVIDENDS PER SHARE OF
COMMON STOCK $ .10 $ .10 $ .20 $ .20
</TABLE>
See accompanying independent accountants' review report and notes to
condensed consolidated financial statements.
-7-
<PAGE>
<TABLE>
Hastings Manufacturing Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows
===============================================
<CAPTION>
Six months ended June 30, 1997 1996
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 557,841 $ (110,840)
Adjustments to reconcile net
income (loss) to net cash from
(for) operating activities:
Depreciation 678,194 693,582
Deferred income taxes 296,000 (53,000)
Gain on sale of property
and equipment (5,003) (588)
Change in postretirement
benefit obligation (413,450) 152,807
Changes in operating
assets and liabilities:
Accounts receivable (742,629) 618,476
Refundable income taxes 19,435 154,637
Inventories 406,925 (189,110)
Prepaid expenses and other
current assets 68,313 74,668
Other assets (62,199) (30,017)
Accounts payable and accruals (395,302) (1,777,055)
---------- -----------
Net cash from (for) operating activities 408,125 (466,440)
---------- -----------
INVESTING ACTIVITIES
Capital expenditures (976,258) (1,061,896)
Proceeds from sale of property
and equipment 6,316 1,000
---------- -----------
Net cash for investing activities (969,942) (1,060,896)
---------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of notes
payable to banks 3,600,000 5,900,000
Principal payments on notes
payable to banks (3,500,000) (4,900,000)
Principal payments on long-term debt (731,250) (731,250)
Dividends paid (78,122) (78,014)
---------- -----------
Net cash from (for) financing activities (709,372) 190,736
---------- -----------
-8-
<PAGE>
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,636) (472)
---------- -----------
NET DECREASE IN CASH (1,273,825) (1,337,072)
CASH, beginning of period 1,457,783 1,909,506
---------- -----------
CASH, end of period $ 183,958 $ 572,434
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 261,647 $ 272,061
Income taxes, net of refunds 14,268 2,812
</TABLE>
See accompanying independent accountants' review report and notes to
condensed consolidated financial statements.
-9-
<PAGE>
Hastings Manufacturing Company and Subsidiaries
Notes to Condensed Consolidated Financial Statements
====================================================
NOTE 1 In the opinion of the management of Hastings Manufacturing
Company and subsidiaries (Company), the accompanying
unaudited condensed consolidated financial statements
include all normal recurring adjustments considered
necessary to present fairly the financial position as of
June 30, 1997, and the results of operations for the three
months and six months ended June 30, 1997 and 1996, and cash
flows for the six months ended June 30, 1997 and 1996.
NOTE 2 The results of operations for the six months ended June 30,
1997, are not necessarily indicative of the results for all
of 1997.
NOTE 3 Net income (loss) per share is determined based on the
weighted average number of shares of common stock
outstanding during each period.
NOTE 4 The condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany balances, transactions and
stockholdings have been eliminated.
The accompanying consolidated financial statements are
condensed and do not contain all of the information and
footnote disclosures required by generally accepted
accounting principles for complete financial statements.
NOTE 5 Under the terms of a debt agreement, the Company is subject
to specific limitations and restrictions pertaining to
working capital, net worth, dividends, etc.
On March 13, 1996, the Company terminated its interest rate
swap agreement with a commercial bank. This agreement,
having a notional principal amount at the time of
termination of $6,487,500, effectively limited the Company's
interest rate exposure to a fixed rate of 6.92% on its
floating rate borrowings. At termination, the Company
received $204,500 from the bank as a result of favorable
interest rates. This amount is included in "Other, net"
expenses in the accompanying 1996 condensed consolidated
statement of operations.
-10-
<PAGE>
At the same time, in order to continue to limit its interest
rate exposure, the Company entered into an interest rate
collar agreement with a current notional principal amount of
$3 million. This agreement provides for a cap rate on
floating rate borrowings of 8.25% and a related floor rate
of 6.75%.
NOTE 6 As disclosed in Note 2 to the Company's consolidated
financial statements included in its 1996 Annual Report on
Form 10-K, effective on September 3, 1996, the Company
entered into an agreement and sold its filter product line
assets to CLARCOR Inc. (CLARCOR) of Rockford, Illinois. The
Company and CLARCOR also entered into a Transition Agreement
on that date whereby the Company continued to manufacture
and supply certain filters and filter component parts to
CLARCOR through a transition period, which was completed
during the third quarter of 1996. The Transition Agreement
also provided for the reimbursement to the Company of
certain administrative costs directly related to the
manufacture and supply of filters and filter components to
CLARCOR.
Filter-related assets amounted to approximately $1,329,700
at June 30, 1996, comprised of $1,026,000 of accounts
receivable and $303,700 of inventory. No amounts remained
at December 31, 1996.
Of the total $720,400 employee severance benefits accrued
and expensed in September 1995 relating to the sale,
$369,900 was paid through June 30, 1996 ($147,800 and
$223,000 was paid during the three and six months ended June
30, 1996, respectively).
Expense reimbursement for the three and six months ended
June 30, 1996, included in net sales, amounted to $292,300
and $765,900, respectively.
Sales, exclusive of the above expense reimbursement, and
estimated operating profit amounts for filter operations
were approximately as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
<S> <C> <C> <C>
Sales $ 2,178,000 $ 4,906,000
Estimated operating profit 314,000 611,000
</TABLE>
-11-
<PAGE>
In conjunction with the sale of its filter operations, the
Company relocated its piston ring packaging operations from
its former Knoxville, Tennessee facility to its Hastings,
Michigan facility in 1996. The relocation and associated
training costs, all of which were incurred during the first
and second quarters of 1996, are non-recurring in nature.
While these costs are directly related to the 1995 sale of
filter operations and the restructuring of the Company's
remaining operations, they were expensed as incurred in 1996
as required by recently issued accounting standards. Total
costs incurred during the three and six months ended June
30, 1996 amounted to $81,030 and $387,392, respectively, and
are included as "Non-recurring restructuring and relocation
costs" in the accompanying 1996 condensed consolidated
statement of operations.
NOTE 7 As disclosed in Note 3 to the Company's consolidated
financial statements included in its 1996 Annual Report on
Form 10-K, in December 1996, management and the Board of
Directors approved a restructuring plan. The plan was
designed to significantly reduce operating costs and provide
a more streamlined and efficient operating structure
concentrating on piston ring manufacturing. Total estimated
restructuring costs, amounting to $351,500, were accrued and
expensed in the fourth quarter of 1996. Of the total,
$247,000 and $104,500 related to employee severance benefits
and consulting fees, respectively. All of the consulting
fees were paid prior to December 31, 1996. Of the $247,000
of employee severance benefits, $237,500 was paid through
June 30, 1997 ($126,600 and $211,700 was paid during the
three and six months ended June 30, 1997).
NOTE 8 One of the many costs reviewed by management as part of its
restructuring plan, discussed in Note 7, is the cost of its
postretirement benefit plans. For each of the past two
years, such costs have exceeded $1.6 million, a cost level
that was expected to continue unless plan changes were made.
In early April 1997, the Company announced the amendment of
its postretirement benefit plans, principally to adjust the
cost-sharing provisions. The amendment resulted in a
reduction of the Company's accumulated postretirement
benefit obligation of $7.35 million, which created an
unrecognized prior service benefit. Pre-tax expense for
1997, including amortization of the unrecognized prior
service benefit over a period of 15 years, is expected to be
reduced by approximately $1,050,000, including $330,000
relating to the second quarter. The balance will be
reflected in the third and fourth quarters.
-12-
<PAGE>
Hastings Manufacturing Company and Subsidiaries
Review by Independent Certified Public Accountants
==================================================
The June 30, 1997 and 1996, condensed consolidated financial
statements included in this filing on Form 10-Q have been reviewed by
BDO Seidman, LLP, Independent Certified Public Accountants, in
accordance with established professional standards and procedures for
such a review.
-13-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Following the sale of the Company's filter assets and operations in
September 1995, the quarterly and annual results were directly
impacted by the effects of that transaction. The Company was
committed to a period of transition out of the filter operations at
both the parent level and through our Canadian subsidiary, Hastings,
Inc. Through the last half of 1996, those final commitments were
fulfilled. In addition, in December 1996, the Company implemented a
restructuring plan to reflect the expected post-transition operating
level.
While direct filter operations are not expected to impact the 1997
results, comparative operations from 1996 and 1995 continue to be
reflected in various relationships as indicated throughout the
following analysis.
RESULTS OF OPERATIONS
NET SALES
Net sales in the second quarter of 1997 declined $1,175,391, or 10.9%,
from $10,777,623 in the second quarter of 1996 to $9,602,232. Net
sales for the first half of 1997 have declined $3,787,646, or 17.1%,
from $22,142,035 in the first half of 1996 to $18,354,389. As
reported in Note 6, the net sales volume from filter operations were
$2,178,000 in the second quarter of 1996 and $4,906,000 through the
first half of that year. There are no filter-sensitive sales included
in the comparative 1997 results. As such, net sales from the remaining
products have increased by $1,002,000, or 11.7%, and $1,118,000, or
6.5%, for the comparative second quarter and six-month periods,
respectively. Once again, the Company continued to experience
consistently higher volume within the domestic piston ring distributor
market resulting from its refocused efforts begun in early 1996. New
account activity, gained throughout 1996, is now favorably impacting
current period results. Private brand and original equipment volume
slightly trails the 1996 comparative periods. A work stoppage at one
of the domestic automotive firms had a minimal adverse impact upon the
second quarter's net sales results. Export piston ring activity also
trails the 1996 results following the termination of the relationship
with our former primary export representative in late 1996. Export piston
ring volume did, however, increase in the second quarter of 1997 from the
first quarter's level and is expected to accelerate further through the
second half of this year.
Net sales in the second quarter of 1996 declined $7,976,536, or 42.5%,
from the second quarter of 1995 and declined $12,946,847, or 36.9%, in
-14-
<PAGE>
the first half of 1996 from the first half of 1995. As sales for the
remaining product lines were flat through the first half of 1996,
these comparative declines resulted directly from reduced filter
related activity between the two years. Through early September 1995,
the Company retained its full filter related operations. Subsequent
to that date, and through early December 1996, the Company supplied a
declining volume of filter component parts and services to the
purchaser under the terms of the transition agreement.
COST OF SALES AND GROSS PROFIT
Cost of sales during the second quarter of 1997 decreased $1,354,421,
or 17.0%, from $7,953,961 in the second quarter of 1996 to $6,599,540.
For the first half of 1997, cost of sales decreased by $3,728,078, or
22.9%, from $16,256,875 to $12,528,797. The corresponding 1997 gross
profit margins increased. The reduced cost of sales totals primarily
reflect the absence of the filter related volume as detailed above.
The increased gross margin percentages reflect the higher margins
generated by the remaining product lines comprising the 1997 sales
activity. Under terms of the transition agreement, the gross margin
on filter related sales during 1996 was minimal. There was, however,
some benefit derived through the first half of 1996 from the
liquidation of LIFO reserves as the balance of the Company's filter
related inventories were processed into components and sold. The
gross profit margin declined to 31.3% in the second quarter of 1997
from 32.3% in the first quarter of 1997 due, in part, to a sales mix
change with a higher relative volume of export piston ring activity in
the second quarter. The export piston ring sales market has traditionally
generated a lower gross margin reflecting the level of operating expenses
required to service that sales volume. Individual product cost factors
(material, labor and overhead) have remained quite steady through the
second quarter. Recent production efficiency gains, as measured by the
results of an incentive program, are expected to minimize any significant
cost pressures on labor and overhead costs through the balance of this
year.
Cost of sales during the second quarter of 1996 decreased $6,858,859,
or 46.3%, from the second quarter of 1995. For the first half of
1996, cost of sales decreased by $11,059,976, or 40.5%, from the first
half of 1995. Again, the primary factor in these relationships was
the significant net sales decline resulting from the filter operations
sale in September 1995. The gross margin percentage generated in the
1996 comparative quarterly and six-month periods was higher than the
levels attained in the comparable 1995 periods. Despite the pricing
limitations imposed by the transition agreement, the 1996 results were
favorably impacted by the above noted LIFO reserve reductions.
-15-
<PAGE>
OPERATING EXPENSES
Total operating expenses for the second quarter of 1997 decreased
$835,689, or 26.5%, from $3,147,798 to $2,312,109. For the 1997
six-month period, these expenses decreased $1,440,712, or 23.6%, from
$6,105,495 in the first half of 1996 to $4,664,783. This reduction
reflects the full elimination of any filter sensitive expenses by the
Company in 1997, as well as the interim results of the restructuring
plan as reported in the 1996 Annual Report. Advertising costs are now
down slightly in both the second quarter and six-month periods
reflecting an impact from the restructuring as well as a reduction in
outlays for printed materials. Selling expenses, down consistently
both in the second quarter and six-month periods, continue to reflect
the full phase-out of filter support activities by the Company's
Canadian subsidiary as of the end of 1996. In addition, this expense
category reflects lower personnel support costs associated with the
parent corporation's restructuring efforts and a lower level of direct
account promotion costs. Though down in total for 1997, the current
year's selling expenses do include increased costs associated with
volume-sensitive items such as sales staff and agency commissions.
General and administrative expenses decreased $175,574, or 10.6%, from
the second quarter of 1996 and are down $522,154, or 15.1%, from the
comparative six-months of that year. This expense total reflects
consistent declines in most of the personnel driven expenses again
reflecting the impact of the restructuring effort. In addition, many
of the general office support costs have declined reflecting the
general reduction in the post-filter operating environment. The
Company has also realized lower group health care costs reflecting
certain changes. Costs associated with the active employee base are
down due primarily to staffing reductions in the past year and the
conversion of certain personnel to a managed care program. As
described in Note 8, the Company has likewise realized a cost
reduction in its retiree medical expense level reflecting cost-sharing
provisions implemented during the second quarter of 1997. Insurance
programs for both active employees and retirees were reviewed as a part of
the restructuring program and were targeted and modified to reflect
the post-filter operating levels. The "Non-recurring relocation
costs" category for both comparative periods in 1996 reflects costs
associated with the relocation of certain inventories and shipping
operations out of the Company's former Knoxville, Tennessee facility.
Total operating expenses during both the second quarter and first half
of 1996 decreased significantly from the comparative periods in 1995.
Again, the filter operations sale is the primary factor in these
relationships as the Company scaled back multiple programs and
personnel relative to the refocused operations. As noted above,
however, 1996 did absorb significant operating expenses associated
with the post-filter transition including both the inventory
relocation effort in the first half of that year and the subsequent
restructuring costs in the final quarter of that year.
-16-
<PAGE>
OTHER EXPENSES (INCOME)
Other expenses netted to $114,817 for the second quarter of 1997
compared to $104,867 for the second quarter of 1996. For the
six-month period, this total netted to $229,968 for 1997 versus a net
income result of $34,495 for the first half of 1996. The net interest
position reflects both lower expense and income in the 1997
comparative periods. This reflects a slight reduction in our net
borrowed position combined with the elimination of funds previously
held for capital equipment acquisition. The 1997 interest income
amount primarily reflects the balance of escrowed funds held through
September 1998 related to the filter operations sale. The 1996 "Other
net" six-month results reflect a $205,000 gain from the termination of
an interest rate swap agreement in March of that year.
TAXES ON INCOME
The 1997 effective tax rate of 40.1% is higher than the domestic
federal rate due primarily to the impact of various state income taxes
and the impact of a higher statutory rate applied to the earnings of
the Canadian subsidiary.
As of June 30, 1997, the Company maintained net deferred income tax
assets of $8,354,000. The major components include the tax effects of
net operating loss carryforwards and accrued retirement and
postretirement benefit obligations. The realization of this recorded
benefit is dependent upon the generation of future taxable income.
Management believes it is more likely than not that adequate levels of
future taxable income will be generated to absorb the net operating
loss carryforwards, the deductible amounts related to the retirement
and postretirement benefit obligations and the remaining net
deductible temporary differences.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirement continues to be for operating
expenses, including labor costs and raw materials, and for funding
accounts receivable, capital expenditures and long-term debt service.
Historically, the Company's primary sources of cash have been from
operations and from bank borrowings. The sale of the filter
operations in 1995 had a significant impact upon the 1995 and 1996
cash flow activities. Considering its full transition out of the filter
product line, and the impact of the restructuring required to support the
smaller organization, the Company expects to generate sufficient future
funds from operations and bank borrowings to fund its growth and operating
needs.
-17-
<PAGE>
During the first half of 1997, the Company generated net cash of
$408,125 from operating activities. The realized net income and
absorbed depreciation, combined with reductions in the deferred income
tax asset, inventories, and prepaid assets, were more than sufficient
to absorb the net increase in accounts receivable and the net decline
in accounts payable and accruals. The deferred income tax asset
reduction reflects the Company's favorable first half performance
while the accounts payable and accruals decline reflects the normal
payment of various year-end liabilities. The investing activities
for the first half of 1997 reflect a significant portion of the full
year's anticipated outlays for capital equipment. Net equipment
outlays for the second quarter of 1997 were $196,523 following outlays
of $779,735 in the first quarter of this year. The financing
activities for the first half of 1997 reflect the continued normal
amortization of the Company's long-term debt position, as well as a
reduced volatility in and reliance upon, its short-term debt lines
usage.
The Company has now absorbed significant change during the past
two-year period. With its final transition out of all filter
activities and the benefits derived thus far from the restructuring
effort, the Company anticipates that operations (which will not
be subject to current cash outflows for U.S. income taxes due to
utilization of the net operating loss carryforwards), will generate
adequate cash flows to fund its working capital, capital outlays and
dividend needs through 1997.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
With the exception of historical matters, the matters discussed in
this commentary include certain predictions and projections that may
be considered forward-looking statements under securities laws,
including, but not limited to, those statements under the captions
"Net Sales," "Cost of Sales and Gross Profit," "Taxes on Income" and
"Liquidity and Capital Resources." These statements are subject to a
number of important risks and uncertainties that could cause actual
results to differ materially including, but not limited to, economic,
competitive, governmental and technological factors affecting the Company's
operations, markets, products, services and prices. The Company undertakes
no obligation to update, amend, or clarify forward-looking statements,
whether as a result of new information, future events or otherwise.
-18-
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of Hastings Manufacturing
Company was held on May 6, 1997. The purpose of the meeting
was to elect directors.
(a) The name of each director elected at the meeting (along
with the number of votes cast for or authority withheld)
and the name of each other director whose term of office
as a director continued after the meeting follows:
<TABLE>
<CAPTION>
VOTES CAST
-------------------------
AUTHORITY
ELECTED DIRECTORS FOR WITHHELD
------------------------------------------------------------------
<S><C> <C> <C>
Mark R.S. Johnson 275,900 1,600
Dale W. Koop 275,900 1,600
Douglas A. DeCamp 275,900 1,600
DIRECTORS WHO CONTINUE TO SERVE
-------------------------------
Andrew J. Johnson
William R. Cook
Monty C. Bennett
Richard L. Foster
Neil A. Gardner
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT. The following document is filed as an exhibit to this
report on Form 10-Q:
EXHIBIT
NUMBER DOCUMENT
------ --------
4 Fourth Amendment, dated as of May 31, 1997, to
the NBD Bank, N.A. $4,000,000 Credit Authorization
and Master Promissory Note, dated May 31, 1994.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K have been filed during
the quarter for which this report is filed.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
HASTINGS MANUFACTURING COMPANY
Date: August 13, 1997 /S/MONTY C. BENNETT
Monty C. Bennett
Its Vice-President, Employee
Relations, Secretary and
Director
Date: August 13, 1997 /S/THOMAS J. BELLGRAPH
Thomas J. Bellgraph
Its Vice-President, Finance
-20-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DOCUMENT
- ------ --------
4 Fourth Amendment, dated as of May 31, 1997, to the NBD
Bank, N.A. $4,000,000 Credit Authorization and Master
Promissory Note, dated May 31, 1994.
27 Financial Data Schedule.
<PAGE>
EXHIBIT 4
FOURTH AMENDMENT TO LETTER AGREEMENT
THIS FOURTH AMENDMENT TO LETTER AGREEMENT, dated as of May 31, 1997
(this "Amendment"), is between HASTINGS MANUFACTURING COMPANY, a Michigan
corporation (the "Company"), and NBD BANK, a Michigan banking corporation,
formerly known as NBD Bank, N.A. (the "Bank").
RECITALS
A. The Company and the Bank are parties to a letter agreement dated
May 31, 1994, as amended by a First Amendment to Letter Agreement dated as
of May 2, 1995, by a Second Amendment to Letter Agreement dated as of
September 30, 1995 and by a Third Amendment to Letter Agreement dated as of
May 31, 1996 (as amended, the "Letter Agreement"), pursuant to which the
Bank agreed, subject to the terms and conditions thereof, to extend credit
to the Company in a maximum principal amount of $4,000,000.
B. The Company has requested that the Bank amend the Letter
Agreement as set forth herein to provide, among other things, for the
extension of the Termination Date (as defined in the Letter Agreement) from
May 31, 1997 to May 31, 1998, for the amendment of certain covenants and
for certain other changes as more particularly described herein.
C. The parties now desire to amend certain terms and provisions of
the Letter Agreement as set forth herein.
TERMS
In consideration of the premises and of the mutual agreements herein
contained, the parties agree as follows:
ARTICLE I. AMENDMENTS. Upon fulfillment of the conditions set forth in
Article III hereof, the Letter Agreement shall be amended as follows:
1.1 The reference to "May 31, 1997" in the definition of "Termination
Date" in Section 1 of the Letter Agreement shall be deemed to refer to "May
31, 1998".
1.2 The reference to "May 31, 1997" in Section 2 of the Letter
Agreement shall be deemed to refer to "May 31, 1998".
1.3 Section 10(a) of the Letter Agreement shall be deemed deleted in
its entirety and replaced with the following language:
<PAGE>
"(a) CURRENT RATIO. Permit or suffer the
ratio of consolidated Current Assets of the Company and
its Subsidiaries to consolidated Current Liabilities of
the Company and its Subsidiaries to be less than 1.75
to 1.00 at any time."
1.4 Section 10(b) of the Letter Agreement shall be deemed deleted in
its entirety and replaced with the following language:
"(b) TANGIBLE NET WORTH. Permit or suffer
the consolidated Tangible Net Worth of the Company and
its Subsidiaries to be less than the sum of (i)
$16,500,000 at any time plus (ii) beginning July 1,
1997, an amount equal to 50% of consolidated Cumulative
Net Income of the Company and its Subsidiaries."
1.5 Section 10(c) of the Letter Agreement shall be deemed deleted in
its entirety and replaced with the following language:
"(c) TOTAL LIABILITIES TO TANGIBLE NET WORTH.
Permit or suffer the ratio of the consolidated Total
Liabilities of the Company and its Subsidiaries to the
consolidated Tangible Net Worth of the Company and its
Subsidiaries to be greater than 2.20 to 1.00 at any
time."
1.6 Exhibit A to the Letter Agreement is hereby deleted in its
entirety and Exhibit A attached hereto is hereby substituted in place of
Exhibit A thereof.
ARTICLE II. REPRESENTATIONS. The Company represents and warrants to the
Bank that:
2.1 The execution, delivery and performance of this Amendment are
within its powers, have been duly authorized and are not in contravention
with any law, of the terms of its Articles of Incorporation or By-laws, or
any material undertaking to which it is a party or by which it is bound.
2.2 This Amendment is the legal, valid and binding obligations of the
Company enforceable against it in accordance with the respective terms
hereof.
2.3 After giving effect to the amendments herein contained, the
representations and warranties contained in Section 11 of the Letter
Agreement are true on and as of the date hereof with the same force and
effect as if made on and as of the date hereof, PROVIDED, THAT, the
representations and warranties contained in Section 11(f) of the Letter
Agreement shall be deemed to have been made with respect to the financial
-2-
<PAGE>
statements most recently delivered pursuant to Section 9(d) of the Letter
Agreement.
2.4 After giving effect to the amendments contained in Article 1
hereof, the representations and warranties contained in Section 11 of the
Letter Agreement are true and correct on and as of the date hereof with the
same force and effect as if made on and as of the date hereof, and no Event
of Default or event or condition which, with notice or lapse of time or
both could become such an Event of Default shall have occurred and be
continuing or will exist under the Letter Agreement as of the effective
date hereof.
ARTICLE III. CONDITIONS OF EFFECTIVENESS. This Amendment shall not become
effective until each of the following has been satisfied:
3.1 Copies of resolutions adopted by the Board of Directors of the
Company, certified by an officer of the Company, as being true and correct
and in full force and effect without amendment as of the date hereof,
authorizing the Company to enter into this Amendment and any other
documents or agreements executed pursuant hereto, if any, shall have been
delivered to the Bank.
3.2 This Amendment shall be signed by the Company and the Bank.
3.3 The Company shall deliver a duly executed copy of a new
promissory note in the principal amount of $4,000,000 in the form of
Exhibit A attached hereto.
ARTICLE IV. MISCELLANEOUS.
4.1 References in the Letter Agreement to "this Agreement" and
references in any note, certificate, instrument or other document to the
"Letter Agreement" or "Authorization Agreement" shall be deemed to be
references to the Letter Agreement as amended hereby and as further amended
from time to time.
4.2 The Company agrees to pay and to save the Bank harmless for the
payment of all costs and expenses arising in connection with this
Amendment, including the reasonable fees of counsel to the Bank in
connection with preparing this Amendment and the related documents.
4.3 The Company acknowledges and agrees that the Bank has fully
performed all of its obligations under all documents executed in
connection with the Letter Agreement and all actions taken by the Bank is
reasonable and appropriate under the circumstances and within its rights
under the Letter Agreement and all other documents executed in connection
therewith and otherwise available. The Company represents and warrants
-3-
<PAGE>
that it is not aware of any claims or causes of action against the Bank, or
any of its successors or assigns. Notwithstanding this representation and
as further consideration for the agreements and understandings herein, the
Company and its heirs, successors and assigns, hereby release the Bank and
its heirs, successors and assigns from any liability, claim, right or cause
of action which now exists or hereafter arises, whether known or unknown,
arising from or in any way related to facts in existence as of the date
hereof to any agreements or transactions between the Bank and the Company
or to any acts or omissions of the Bank in connection therewith or
otherwise.
4.4 Except as expressly amended hereby, the Company agrees that the
Letter Agreement, the promissory note and all other documents and
agreements executed by the Company in connection with the Letter Agreement
in favor of the Bank are ratified and confirmed and shall remain in full
force and effect and that it has no set off, counterclaim or defense with
respect to any of the foregoing. Terms used but not defined herein shall
have the respective meanings ascribed thereto in the Letter Agreement.
4.5 This Amendment shall be governed by and construed in accordance
with the laws of the State of Michigan, without giving effect to choice of
law principles of such State.
4.6 This Amendment may be signed upon any number of counterparts with
the same effect as if the signatures thereto and hereto were upon the same
instrument.
IN WITNESS WHEREOF, the parties signing this Amendment have caused
this Amendment to be executed and delivered as of the date first above
written.
HASTINGS MANUFACTURING COMPANY
By: /S/THOMAS J. BELLGRAPH
Thomas J. Bellgraph
Its: Vice President - Finance
NBD BANK
By: /S/THOMAS A. GAMM
Thomas A. Gamm
Its: Vice President
-4-
<PAGE>
MASTER PROMISSORY NOTE
$4,000,000.00 Detroit, Michigan
May 31, 1997
For value received, and in any event no later than May 31, 1998,
HASTINGS MANUFACTURING COMPANY (the "Borrower") promises to pay to the
order of NBD BANK (the "Bank"), at the Bank's principal office in the State
of Michigan, in lawful money of the United States of America and in
immediately available funds, the principal sum of Four Million and 00/100
Dollars ($4,000,000.00), or such lesser amount as is indicated on the
Bank's records, together with interest computed on the balance from time to
time unpaid on the basis of the actual number of days elapsed in a year of
360 days at the rate(s) per annum determined from time to time pursuant to
the "Letter Agreement", as defined below, and reflected on the Bank's
records, which interest shall be payable in accordance with the terms set
forth in the Letter Agreement, and to pay interest on overdue principal
from the date of demand or default until paid at the Overdue Rate (as
defined in the Letter Agreement).
In no event shall the interest rate exceed the maximum rate
allowed by law. Any interest which would for any reason be deemed unlawful
under applicable law shall be applied to principal.
WAIVER: The Borrower and each endorser of this note and any
other party liable for the debt evidenced by this note severally waives
demand, presentment, notice of dishonor and protest of this note, and
consents to any extension or postponement of time of its payment without
limit as to number or period, to the addition of any party, and to the
release, discharge, or suspension of any rights and remedies against any
person who may be liable for the payment of this note. No delay on the
part of the holder in the exercise of any right or remedy shall operate as
a waiver. No single or partial exercise by the holder of any right or
remedy shall preclude any future exercise of that right or remedy or the
exercise of any other right or remedy. No waiver or indulgence by the
holder of any default shall be effective unless it is in writing and signed
by the holder, nor shall a waiver on one occasion be construed as a bar to
or waiver of any right on any future occasion.
This note is issued in substitution for and replacement of, but
not in satisfaction of, a Master Promissory Note dated May 31, 1996 in the
maximum principal amount of $4,000,000 and evidences a debt under the terms
of a certain letter agreement between the Bank and the Borrower dated May
31, 1994, as amended by a First Amendment to Letter Agreement dated as of
May 2 1995, by a Second Amendment to Letter Agreement dated as of September
30, 1995, by a Third Amendment to Letter Agreement dated as of May 31,
1996, and by a Fourth Amendment to Letter Agreement dated as of May 31,
<PAGE>
1997, and as further amended from time to time (the "Letter Agreement"),
which is incorporated by reference for additional terms and conditions,
including default and acceleration provisions.
WAIVER OF JURY TRIAL: The Bank and the Borrower, after consulting
or having had the opportunity to consult with counsel, knowingly,
voluntarily and intentionally waive any right either of them may have to a
trial by jury in any litigation based upon or arising out of this note, or
any related instrument or agreement or any of the transactions
contemplated by this note, or any course of conduct, dealing, statements
(whether oral or written), or actions of either of them. Neither the Bank
nor the Borrower shall seek to consolidate, by counterclaim or otherwise,
any such action in which a jury trial has been waived with any other action
in which a jury trial cannot be or has not been waived. These provisions
shall not be deemed to have been modified in any respect or relinquished by
either the Bank or the Borrower except by a written instrument executed by
both of them.
Address:
HASTINGS MANUFACTURING COMPANY
325 North Hanover
Hastings, Michigan 49058
Attention: Treasurer By: /S/THOMAS J. BELLGRAPH
Thomas J. Bellgraph
Its: Vice President-Finance
-2-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE HASTINGS MANUFACTURING COMPANY AND SUBSIDIARIES FORM
10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1997, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 183,958
<SECURITIES> 0
<RECEIVABLES> 5,628,742
<ALLOWANCES> 307,000
<INVENTORY> 8,880,544
<CURRENT-ASSETS> 16,761,884
<PP&E> 22,963,671
<DEPRECIATION> 14,740,334
<TOTAL-ASSETS> 33,462,580
<CURRENT-LIABILITIES> 8,090,808
<BONDS> 2,759,375
<COMMON> 780,626
0
0
<OTHER-SE> 4,608,139
<TOTAL-LIABILITY-AND-EQUITY> 33,462,580
<SALES> 18,354,389
<TOTAL-REVENUES> 18,354,389
<CGS> 12,528,797
<TOTAL-COSTS> 12,528,797
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 88,200
<INTEREST-EXPENSE> 257,123
<INCOME-PRETAX> 930,841
<INCOME-TAX> 373,000
<INCOME-CONTINUING> 557,841
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 557,841
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.43
</TABLE>
