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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________.
Commission File Number 1-3574
HASTINGS MANUFACTURING COMPANY
(Exact name of registrant as specified in its charter)
Michigan 38-0633740
(State of incorporation) (I.R.S. Employer 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
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $2.00 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of voting stock of Registrant held by non-affiliates
as of March 22, 1999 was $7,242,235.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of March 22, 1999:
Common Stock - $2 par value 789,526 Shares
Documents and Information Incorporated by Reference
Part III, Items 10, 11, 12 and 13 Proxy Statement for Annual Meeting
to be held May 4, 1999
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PART I
ITEM 1. BUSINESS.
Hastings Manufacturing Company (the "Company") is a Michigan
corporation organized in 1929 with its headquarters and U.S. manufacturing
facilities in Hastings, Michigan.
The Company is primarily a manufacturer of piston rings for
automotive and light duty truck applications for the replacement market.
In addition, certain of the Company's piston ring products are produced for
original equipment applications. To a lesser extent, the Company packages
and sells automotive mechanics' specialty tools and additives for engines,
transmissions and cooling systems. All of the Company's products are also
sold in Canada. Those products are produced and/or packaged and
distributed by the Company's Canadian subsidiary, Hastings, Inc., located in
Barrie, Ontario.
The Company distributes its replacement products through numerous
auto parts jobbers and warehouse distributors within the U.S. and Canada.
These products are also distributed nationally and internationally through
numerous large-scale engine rebuilders and various retailer outlets. The
Company now distributes the majority of its export sales on a direct
country basis. Prior to early 1997, international sales had been primarily
distributed through one U.S. based customer.
Prior to September 3, 1995, the Company maintained a position in
the manufacture and distribution of automotive and light truck related
filters. As of that date, those filter product line assets and operations
were sold to CLARCOR, Inc. of Rockford, Illinois. Certain filter
operations were continued through late 1996 for the purchaser under the
terms of a Transition Agreement. Per the terms of that agreement, the
Company was required to vacate its former Knoxville, Tennessee facility
during 1996. The Company's operations formerly located at that facility,
primarily piston ring packaging and distribution, were relocated to the
Hastings, Michigan facility in May of that year. Additional factors
related to the filter operations sale are included in Note 2 to the
Consolidated Financial Statements (included in Item 8).
As described in Note 3 to the Consolidated Financial Statements
(included in Item 8), in December 1996 the Company implemented a
restructuring plan designed to significantly reduce operating costs and
provide for more efficient operations at both the U.S. and Canadian
facilities. That plan included the curtailment of most Canadian based
piston ring manufacturing effective April 30, 1997. As noted, the
Company's Canadian subsidiary continues to distribute piston rings
throughout Canada. However, its product is now sourced from the U.S.
operations. The Canadian facility also continues to manufacture certain
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piston ring parts and provides packaging operations for tools and piston
ring sets. Effective in early 1999, the Canadian subsidiary became
responsible for all specialty tool distribution within the Canadian, U.S.,
and foreign markets.
Fiscal 1997 was a critical year for the Company as it exited the
filter transition and implemented its restructuring effort. The Company
returned to profitability for the first full year period since 1994. The
Company built upon that success through the 1998 fiscal year fueled by
added sales growth and a continued commitment to control its operating
costs. The leveraging of the realized sales growth against a modest
increase in operating expenses resulted in a favorable profit margin gain.
The Company made several significant operating changes in its way
of conducting business following its restructuring efforts. During 1997,
for instance, the Company made substantial progress in expanding its
overseas distribution channels on a country-direct basis. By the close of
1997, the Company had contracted new distribution in Australia, South
America, the Middle East, Israel, Puerto Rico, and South America. The
maturity of several of those markets contributed to the overall sales gain
achieved in 1998. That combined sales gain however, revealed certain
operating constraints within the Company's manufacturing capabilities. As
a result, the Company experienced a period of product shortages through the
latter half of 1998. In response to those pressures, the Company has begun
the implementation of lean manufacturing principles including the
conversion to a more cellular approach to certain manufacturing processes.
This conversion should result in production efficiencies through both
reduced product lead times and capacity improvements. This conversion
process will continue through much of the 1999 calendar year.
Beginning in 1996, and carrying over to 1997, the Company made
substantial strides in its quality and business control operations. The
Company's commitment to these initiatives was rewarded with QS-9000 and
ISO-9002 quality registrations in July 1997. In February 1999, and
following several successful follow-up audits, the Company was recommended
for upgrade to ISO-9001 thus giving recognition to its product design
capabilities.
The market for the Company's products is highly competitive.
The Company has two principal competitors in the pinston ring market. The
principal methods of competition in the industry are price, service,
product performance, and product availability. The Company ranks among the
three largest domestic producers of replacement piston rings.
Among the Company's trade names used in marketing its products
are "Hastings," "Casite," and "Flex-Vent," which are registered trademarks
in the United States and many foreign countries. The Company also holds a
number of patents and licenses. In the opinion of management, the
Company's business generally is not dependent upon patent protections.
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The Company ships orders to customers within a short period,
ordinarily one week or less from the time orders are received.
Accordingly, backlog is not significant in the business of the Company and
no separate figures of backlog are kept by the Company. The Company's
sales have limited seasonal fluctuations.
None of the practices of the Company or the industries in which
it operates create any unusual working capital requirements that would be
material to an understanding of the business taken as a whole.
The sales of the Company are to many customers and are not
dependent upon a single customer or a few customers. As stated in Note 12
to the Consolidated Financial Statements (included in Item 8), net sales to
one customer (Chrysler Corporation), however, represented approximately
$3,874,000, $3,180,000, and $3,155,000 of the Company's consolidated sales
for 1998, 1997, and 1996 respectively.
Raw materials essential to the production of the Company's
products are standard items obtainable in the open market and are purchased
from many vendors. The Company maintains its own foundry facility at the
Hastings, Michigan location for producing the cast iron material required
for many of its piston ring applications.
Research and development are performed by the Company's
engineering staff relating to improvements in products and production as
well as the design and testing of new products. The Company's expenditures
for research and development are not material.
The Company has no material governmental contracts.
Compliance with federal, state, and local environmental laws and
regulations governing discharges into the environment is not expected to
have a material effect upon the capital expenditures, earnings, or
competitive position of the Company.
The Company and its subsidiaries have a total employment of
approximately 465 employees. Employee relations at all of the Company's
plant locations are considered to be satisfactory.
While the Company maintains operations in Canada, there are no
unusual risks attendant to the Company's foreign operations. The products
of the Company are sold worldwide. Financial information regarding the
Company's geographic sales and long-lived assets is included in Note 12 to
the Consolidated Financial Statements contained in Item 8 below.
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ITEM 2. PROPERTIES.
The general offices and manufacturing and distribution plant,
which produces and distributes piston rings and, through the transition
date discussed in Item 1 above, produced filters and filter component parts
for CLARCOR Inc., are owned by the Company and are located at 325 North
Hanover Street, Hastings, Michigan. This facility consists of
approximately 260,000 square feet of production space, 154,000 square feet
of available warehouse area, and 35,000 square feet of office area.
The Company's wholly owned Canadian subsidiary, Hastings, Inc.,
owns and operates manufacturing and warehouse facilities for piston rings,
additives, and mechanics' specialty tools and is located in Barrie,
Ontario. This facility includes approximately 65,000 square feet of
production and warehouse space and 4,000 square feet of office space.
As of year-end, production levels within the Company's Hastings,
Michigan facility were near 80% of capacity.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any pending legal proceedings other
than routine litigation incidental to its business. In the opinion of
management, the outcome of any litigation currently pending will not
materially affect the Company's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of 1998 to a
vote of security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
The Company's common stock is traded on the American Stock
Exchange (ticker symbol HMF). On March 22, 1999, there were 789,526
outstanding shares and the approximate number of record shareholders
was 279.
High and low sales prices and cash dividends, per quarter, are as
set forth below. All results have been adjusted to reflect the two-for-one
stock split as discussed in Note 13 to the Consolidated Financial
Statements in Item 8 below.
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<TABLE>
<CAPTION>
1998 1997
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CASH CASH
STOCK PRICE DIVIDENDS STOCK PRICE DIVIDENDS
HIGH LOW PAID HIGH LOW PAID
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<S> <C> <C> <C> <C> <C> <C>
First Quarter. . . . $24-1/2 $19-7/8 $.075 $15-1/8 $12-1/2 $.05
Second Quarter . . . 24-3/4 22-3/4 .08 14-3/8 13 .05
Third Quarter. . . . 23 20-3/4 .08 19-5/8 13-3/8 .075
Fourth Quarter . . . 20-3/4 16-1/2 .08 20-3/4 18-7/8 .075
</TABLE>
The Company expects to continue its policy of paying regular
quarterly dividends, although this policy is dependent upon future
earnings, capital requirements, and financial condition. In addition, cash
dividends are restricted in accordance with the Company's loan agreements
as described in Note 6 to the Consolidated Financial Statements included in
Item 8 below. Unrestricted retained earnings under the agreements amounted
to $2,618,277 at December 31, 1998.
The Company made no unregistered sales of any of its securities
during 1998.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
1998 1997 1996<F2> 1995<F3> 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Sales . . . . . . . . . . . . $38,752,104 $35,574,954 $39,408,610 $63,228,312 $74,572,222
Net Income (Loss) . . . . . . . . 1,730,427 955,233 (884,843) (3,023,180) 448,921
Basic and Diluted
Earnings (Loss) per Share<F1> . 2.24 1.24 (1.15) (3.93) .58
Long-Term Debt. . . . . . . . . . 4,620,000 565,625 2,028,125 3,490,625 6,223,900
Total Assets. . . . . . . . . . . 36,188,500 33,390,331 34,454,989 37,547,568 47,854,279
Dividends per Share<F1> . . . . . .315 .25 .20 .20 .20
Average Shares Outstanding:<F1>
Basic . . . . . . . . . . . . . 771,496 768,516 768,516 768,516 768,516
Diluted . . . . . . . . . . . . 772,694 768,680 768,516 768,516 768,516
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<FN>
<F1> Average shares outstanding and the related per share results have been
adjusted to reflect the two-for-one stock split discussed in Note 13 to the
Consolidated Financial Statements included in Item 8 below.
<F2> The 1996 data includes non-recurring restructuring and relocation
costs totaling $819,900. Refer to Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Notes 2 and
3 to the Consolidated Financial Statements included in Item 8, "Financial
Statements and Supplementing Data."
<F3> The 1995 data includes the effects of the sale of filter operations
and the subsequent realignment of the organizational structure to a smaller
size. Refer to Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 2 to the Consolidated
Financial Statements included in Item 8, "Financial Statements and
Supplementary Data."
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
As noted in the Company's recent filings under the Securities
Exchange Act, 1997 reflected a full year of post-filter operating results
following the sale of the Company's filter assets and operations in September
1995. As such, 1998 versus 1997 comparisons are not impacted by the sale.
Certain comparisons between 1997 and 1996, however, continue to be impacted
by the transition period following the sale, which extended through most of
1996. The effects of the post-filter transition have been fully documented
in previous filings. In addition to the impact of the filter operations
sale, the Company announced a restructuring program in the fourth quarter
of 1996 as discussed in Note 3 to the Consolidated Financial Statements.
The impact from that program is likewise reflected in the following analysis,
as applicable.
For the year, the Company generated net income of $1,730,427
compared to net income of $955,233 in 1997. This enhanced profitability
was the result of various factors, each of which is more fully described
below. These factors include a net sales gain in 1998 of 8.9% over 1997
levels; a gross profit margin improvement driven by lower material costs
with overhead costs increasing at a slower pace than sales increases; and
continued control over operating expenses which increased a very modest
1.7% in comparison to the 12.1% increase in gross profit.
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RESULTS OF OPERATIONS
NET SALES
1998 COMPARED TO 1997
Net sales for 1998 increased $3,177,150, or 8.9%, from
$35,574,954 in 1997 to $38,752,104. This growth in net sales reflects
increases in piston ring volume within the Company's domestic aftermarket,
private brand, and export markets. The growth in the domestic aftermarket
reflects the continued success of the Company's increased focus on this
aspect of the piston ring market. The growth in the private brand area is
the result of increased volume to several major customers. The increase in
the export area reflects the on-going development and growth of the
Company's direct export efforts.
Net sales increased by $540,209, or 6.4%, in the fourth quarter
primarily due to the factors discussed above related to the annual sales
increase.
1997 COMPARED TO 1996
Net sales for 1997 decreased $3,833,656, or 9.7% from 1996. This
decrease reflects the impact of the filter transition. Filter operations
accounted for $5,992,800 in net sales for the full year of 1996, whereas
there are no filter sales included in the 1997 results. As such, net sales
for the remaining products in 1997 increased $2,159,144, or 6.5%.
COST OF SALES AND GROSS PROFIT
1998 COMPARED TO 1997
Cost of sales for 1998 increased $1,809,202, or 7.4%, from
$24,285,197 in 1997 to $26,094,399. The increase in cost of sales reflects
the corresponding increase in net sales. The gross profit margin increased
to 32.7% in 1998 from 31.7% in 1997. This increase is primarily due to a
decrease in certain raw material costs and overhead costs increasing at a
rate lower than the sales increase, offset largely by increased labor
costs. As disclosed in Note 4 to the Consolidated Financial Statements,
the positive effect resulting from the 1998 liquidation of certain LIFO
inventory layers was comparable to 1997 (approximately $60,600 and $53,000
pre-tax reduction in costs of sales for 1998 and 1997, respectively).
While overhead costs increased during 1998, the rate of increase trailed
the rate of sales increase due to the fixed nature of a large portion of
these costs. Labor costs increased in 1998 as a result of the collective
bargaining agreement and additional overtime required by increased customer
demand and the Company's efforts to significantly reduce the time from
customer order to product shipment.
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The gross profit margin generated in the fourth quarter (37.7%)
was higher than the margin reported through the third quarter of 1998
(31.1%) primarily because the factors noted above had their greatest impact
in the fourth quarter.
1997 COMPARED TO 1996
Cost of sales for 1997 decreased $5,013,944, or 17.1%, from 1996.
The gross profit margin increased to 31.7% for 1997 from 25.7% in 1996.
The aggregate cost of sales reduction, with the improvement in the gross
profit margin, reflects the absence of any filter related activity in 1997.
The 1996 results were affected by the transition agreement that the Company
had with the purchaser of the Company's filter operations. The agreement
restricted the Company to a minimum gross profit on filter products in
1996. In addition to the specific filter production costs included in the
1996 results, certain product driven distribution and support operating
costs are included in cost of sales. Following the 1996 relocation of
certain piston ring operations from the Company's Knoxville facility, which
was included in the filter sale, those operating costs decreased from
$3,785,000 in 1996 to $2,762,000 in 1997. Lastly, retiree medical costs,
which are allocated to cost of sales and operating expenses, decreased in
1997 compared to 1996. As discussed in Note 9 to the Consolidated
Financial Statements, in April 1997, the Company announced an amendment to
its postretirement benefit plans. The amendment resulted in an $870,000
reduction in cost of sales.
OPERATING EXPENSES
1998 COMPARED TO 1997
Operating expenses for 1998 increased $154,767, or 1.7%, from
$9,186,371 in 1997 to $9,341,138. Advertising expenses decreased $47,911,
or 12.8%, from the 1997 total. This decrease reflects the cost of a
biannual product catalog expense in 1997, combined with minor 1998
reductions in cooperative advertising, printed material, and various other
advertising costs. These 1998 reductions were offset slightly by an
increase in advertising support staff salaries. Selling expenses decreased
$179,737, or 5.8%, from the 1997 total. This decrease is primarily due to
a reduction in various sales personnel expenses, offset slightly by a sales
driven increase in agency commissions. General and administrative expenses
increased $382,415, or 6.7%, from the 1997 total. This increase is due
primarily to an increase in the provision for doubtful accounts receivable,
offset by a number of insignificant account decreases. The provision
increase, amounting to $422,500, relates primarily to two accounts which
management believes is not indicative of the collectability of remaining
accounts.
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Fourth quarter 1998 operating expenses were $227,809 higher than
the 1997 primarily due to a $220,600 charge relating to an uncollectible
accounts receivable.
1997 COMPARED TO 1996
Total operating expenses for 1997 decreased significantly from
1996. These reductions reflect the full elimination of any filter
sensitive expenses by the Company in 1997, as well as the favorable results
of the December 1996 restructuring plan discussed in Note 3 to the
Consolidated Financial Statements and a $180,000 reduction in retiree
medical costs relating to the plan amendment discussed above and in Note 9
to the Consolidated Financial Statements.
OTHER EXPENSES
1998 COMPARED TO 1997
Other expenses, net for 1998 increased by $5,987 over the 1997
net amount. Short-term borrowings in 1998 remained above the 1997 levels
through late August of this year, reflecting increased working capital
requirements as driven by the net sales increase. As discussed in the
"Liquidity and Capital Resources" section below, the Company restructured
its short- and long-term debt obligations in late August 1998. This debt
restructuring had a significant effect on the interest expense amounts for
both the fourth quarter and year-to-date periods. As a result, annual
interest expense increased $61,452, or 12.0%, from the 1997 total. For the
fourth quarter, interest expense was up $109,681, or 87.5%. Interest
expense will remain higher for the next several years as the Company
amortizes its long-term debt. This increase, however, should be offset by
lower pension expense and Pension Benefit Guaranty Corporation (PBGC)
premiums resulting from the increased funding position of the Company's
defined benefit pension plans. The 1998 and 1997 interest income amounts
were derived from the escrowed funds generated by the sale of the filter
operations which were held until early September of this year.
1997 COMPARED TO 1996
Other expenses, net for 1997 increased by $261,639 over the 1996
net amount. The net interest position reflects both lower expense and
income. This relationship represents a continued decline in net borrowings
resulting from normal long-term debt amortization combined with the use of
interest earning funds previously held through 1996 for capital equipment
acquisitions. The 1997 and 1996 interest income amounts both reflect the
interest derived from the escrowed funds noted earlier, while the 1996
amounts also reflect the interest earned on the funds held for capital
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acquisition. The favorable 1996 "Other, net" amount primarily reflects a
$204,500 gain from the termination of an interest rate swap agreement in
March of that year.
TAXES ON INCOME
The impact of income taxes on the reported results of the Company
is detailed in Note 10 to the Consolidated Financial Statements. The 1998
and 1997 effective tax rates of 37.9% and 39.4%, respectively, are higher
than the statutory federal rate of 34% due primarily to the impact of state
income taxes and certain nondeductible expenses. The 1996 effective tax
credit rate of 28.5% is lower than the statutory rate due primarily to the
increase in the valuation allowance for certain unused foreign tax credits
and the recognition of an accumulated state income tax obligation.
As of December 31, 1998, the Company recorded net deferred income
tax assets of $7,115,493. The major components include the tax effect of
net operating loss carryforwards of $1,206,318 and net accrued retirement
and postretirement benefit obligations totaling $5,056,048. The
realization of these recorded benefits is dependent upon the generation of
future taxable income.
The net operating loss carryforwards fully expire in 2010, 2011,
and 2012, if not previously utilized. Management has prepared projections
of taxable income for future years indicating that the cumulative net
operating loss is expected to be fully utilized by the end of the first
quarter of 2000.
The Company further expects to be able to realize the deferred
tax assets related to the retirement and postretirement benefit obligations
as it pays these benefits. Such payments will constitute an expense that
is deductible for tax reporting purposes over many years. During each of
the ten years before the recent net operating loss carryforwards arose,
the Company has been able to deduct these benefits for tax reporting
purposes and reduce its current tax liability accordingly. As a result of
the 1997 amendment to the retiree medical plan as discussed in Note 9 to
the Consolidated Financial Statements, current tax deductible payments
are expected to exceed the annual expense recognition for financial
reporting purposes, thus accelerating the absorption of the future
periods' tax benefit.
Management believes that it is more likely than not that adequate
levels of future 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. In addition, based upon projected foreign source
income, management believes it is more likely than not that the foreign tax
credits will be utilized prior to their expiration.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements continue to be for
operating expenses such as 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. As a result of the full transition
out of filter operations, and the favorable impact of the subsequent
restructuring efforts, the Company expects to generate sufficient future
funds from operations and bank borrowings to fund its growth and operating
needs. In late August 1998, the Company entered into a $6,600,000 long-
term debt agreement with its primary lender. This new agreement allowed
the Company to take advantage of favorable interest rate conditions.
Borrowings under this new long-term debt agreement were used for several
purposes including: raising the Company's defined benefit plans to funding
levels that would alleviate the payment of the variable rate PBGC premiums;
consolidating the remaining long-term debt obligations; and paying down
certain short-term notes payable. As a result of this new long-term debt
agreement, the Company's short-term line with its primary lender was
reduced from $5,000,000 to $3,000,000. Total short-term lines available to
the Company as of December 31, 1998 totaled $5,200,000, of which $2,900,000
was unused. In connection with the floating rate debt exposure, the
Company entered into an interest rate swap agreement essentially fixing the
interest rate on that debt within a small range. The rate will fluctuate
between 7.45% to 7.95% depending upon certain Company performance
parameters. As of December 31, 1998 the "fixed" rate on those borrowings
was 7.70%.
During 1998, the Company used $1,192,259 of net cash for
operating activities. The realized net income, depreciation, and decrease
in deferred income taxes were offset by increases in accounts receivable,
inventories and other assets, and a decrease in the periodic postretirement
benefit obligation. The decline in the deferred income tax asset is
primarily the result of the additional funding of the Company's defined
benefit pension plans, as discussed above, and the partial utilization of
the net operating loss carryforwards. The increased accounts receivable
and inventory reflect the additional working capital requirements that are
necessary to support the higher sales level. The increase in the prepaid
pension asset of $2,675,688 was generated when the Company funded the
defined benefit plans to specified limits. As such, it did not have a
direct effect on operations during 1998. Excluding this item, net cash
generated from operating activities amounted to $1,483,429. The investing
activities for 1998 reflect the Company's continued commitment to enhancing
its production capabilities, as capital expenditures totaled $2,246,598.
Capital expenditures should decline in 1999 as the Company moves toward
adopting cellular manufacturing. Investing activities also reflect the
September 1998 release of escrowed funds relating to the 1995 sale of
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filter operations. These funds were subsequently used to reduce short-term
notes payable. Financing activities reflect the increased reliance on
short-term borrowings to help satisfy increased working capital needs.
Financing activities also reflect the proceeds from the new long-term debt
agreement and the subsequent utilization of a portion of the proceeds to
pay down short- and long-term debt. Dividends paid increased in 1998 due
to the continued improved operating results.
During 1997, the Company generated net cash of $2,129,643 from
operating activities. The realized net income, depreciation and decrease
in deferred income taxes were only partially countered by increased
accounts receivable and a reduction in the postretirement benefit
obligation. The decline in the deferred income tax asset is the result of
the partial utilization of the net operating loss carryforwards, while the
postretirement benefit factor reflects, in part, the impact from the
modification of the retiree health plan that was effective in April 1997.
The majority of the Company's 1997 investing activities reflect capital
equipment purchases that the Company utilized to enhance its production
capabilities. The financing activities for 1997 reflect a modest decrease
in reliance on short-term borrowings combined with the reduction of long-
term debt levels through normally scheduled quarterly payments.
During 1996, the Company generated net cash of $1,188,280 from
operating activities. The reported net loss and the reductions in accounts
payable and accruals were more than offset by depreciation and reductions
in accounts receivable and inventories. The realized reductions in
accounts payable, accounts receivable, and inventories were primarily a
result of the Company's full transition out of filter operations. The
outlay of $1,343,291 for capital expenditures in 1996 reflects, in part,
enhancements to the Hastings, Michigan facility in relation to the
inventory and shipping operations relocation from the Knoxville facility
subsequent to the filter operations sale. The financing activities for
1996 reflect a reduced reliance on short-term borrowings throughout most of
the year, combined with the reduction of long-term debt levels through
scheduled debt payments.
As noted throughout the above discussion, the Company has
realized its second consecutive year of significant sales increases from
its core product lines. This growth has resulted in an increased net
income level combined with increased working capital demands. The Company
will continue to monitor its working capital needs in order to balance its
cash and growth demands. At this time, the Company anticipates that
operations (which will be subject to minimal current cash outflows for U.S.
income taxes due to the utilization of the net operating loss
carryforwards), in combination with the balancing of available short-term
lines with operations, will generate cash flows that will be sufficient to
fund its working capital, capital outlays, and dividend requirements through
1999.
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NEW ACCOUNTING STANDARDS
SFAS No. 133, entitled "Accounting for Derivative Instruments and
Hedging Activities" and issued in June 1998, requires companies to recognize
all derivatives contracts as either assets or liabilities in the balance
sheet and to measure them at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge, the objective of
which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or
(ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives
contracts for speculative purposes. The Company does periodically enter
into interest rate swap and collar agreements to reduce the impact of
changes in interest rates on its floating rate borrowings. However, the
fair value of such derivatives are not significant. Accordingly, the
Company does not expect adoption of the new standard on January 1, 2000 to
materially affect its consolidated financial statements.
YEAR 2000 READINESS DISCLOSURE
The year 2000 (Y2K) issue is the result of computer programs
having been written using two digits, rather than four, to define the
applicable year. Any of the Company's computers, computer programs,
manufacturing and administrative equipment, or products that have date-
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. If any of the Company's systems that have date-
sensitive software use only two digits, system failures or miscalculations
may result causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in similar
normal business activities.
During 1995, the Company's internal data processing staff began
an evaluation of the Company's exposure to the effects of the Y2K issue.
As a member of certain automotive supplier trade associations, awareness of
the Y2K issue was both highlighted and documented beginning in early 1996.
At that point, the Company established a multi-disciplined committee to
coordinate the Company's efforts in addressing the Y2K impact. This
committee continues to include several members of the internal Executive
Committee with responsibility for full board-level reporting on this issue.
Through the efforts of this committee, the Company coordinates both internal
and external reviews of its Y2K exposure.
-13-
<PAGE>
Internally, this committee evaluated the general operating
systems for the Company as well as the security systems, telecommunications
networks, manufacturing equipment, and internal personal computer (PC)
operations. Through the second half of 1996 and much of 1997, the Company
utilized the services of an outside consultant, as well as its internal
resources, to convert its computer systems to be Y2K compliant. As of
December 31, 1998, the Company's core operating system and applications,
its PC operating systems and the majority of its PC applications were
believed to be compliant. The remaining PC applications are expected to be
compliant in mid-1999, pending installation of the next software release
or upgrade as needed. Manufacturing equipment testing has been completed
with no perceived Y2K exposure. At this point, the Company is
targeting a full-scale, live test of its operating systems for Y2K
compliance in mid-1999. Incremental costs related to the Y2K project,
primarily consisting of expenses related to the consultant, approximated
$120,000 through 1998 with $10,000, $80,000 and $30,000 charged to
operating expenses as incurred in 1998, 1997 and 1996, respectively.
Internal costs, which are not incremental in nature, have not been tracked
by the Company. Future costs to be incurred to complete Y2K compliance and
testing procedures, primarily related to direct Company personnel, are not
expected to be material.
With the inception of the committee in 1996, the Company began to
focus externally as well. The committee identified suppliers of products
and services deemed to be critical to the Company's operations, as well as
customers deemed to have the greatest Y2K exposure (e.g., EDI
communications). The Company has coordinated via surveys with these key
contacts. While the Company cannot guarantee Y2K compliance by its key
suppliers and customers, and in many cases will be relying on statements
from outside vendors without independent verification, preliminary results
indicate that these key suppliers and customers are aware of the issues and
are working to assure their compliance before the year 2000. At this time,
the Company is not aware of any key suppliers or customers who will not be
Y2K compliant by the year 2000. The Company's next steps will be to update
the solicitation of key customers, obtain more detailed information from
certain key suppliers and customers, and follow up with those companies who
did not respond to the original surveys.
In addition, final plans are being developed for the 1999 internal
compliance test procedures. Pending the results of that procedure, the
Company intends to prepare a contingency plan that will specify what
exposures it still perceives and what it plans to do if important components
are not expected to be Y2K compliant in a timely manner. The Company
expects to prepare and evaluate its contingency plan by mid-1999.
-14-
<PAGE>
FORWARD-LOOKING STATEMENTS
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. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to potential market risks on interest
rates relating to a swap agreement transacted with its primary lender in
connection with its long-term debt agreement. Management believes that the
fluctuation in interest rates in the near future will not have a material
impact on its consolidated financial statements taken as a whole. The
Company does not use derivative financial instruments for trading purposes.
-15-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Hastings Manufacturing Company and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 1998 and 1997
Hastings Manufacturing Company and Subsidiaries
Contents
===============================================
Consolidated Balance Sheets -
December 31, 1998 and 1997 14-15
Consolidated Statements of Income -
Years Ended December 31, 1998, 1997 and 1996 16
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1998, 1997 and 1996 17
Consolidated Statements of Cash Flows -
Years Ended December 31, 1998, 1997 and 1996 18-19
Notes to Consolidated Financial Statements 20-36
Report of Independent Certified Public Accountants 37
-16-
<PAGE>
<TABLE>
Hastings Manufacturing Company and Subsidiaries
Consolidated Balance Sheets
==================================================
<CAPTION>
DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 635,773 $ 558,172
Accounts receivable, less allowance for
possible losses of $210,000 and $215,000 5,489,165 5,148,906
Refundable income taxes - 13,475
Inventories (Note 4):
Finished products 8,317,084 7,460,534
Work in process 660,534 572,307
Raw materials 1,620,604 1,239,657
Prepaid expenses and other assets 75,655 75,669
Future income tax benefits (Note 10) 2,395,856 2,351,687
Other current assets (Note 2) - 958,517
----------- -----------
TOTAL CURRENT ASSETS 19,194,671 18,378,924
----------- -----------
PROPERTY AND EQUIPMENT
Land and improvements 635,692 658,243
Buildings 5,275,207 4,633,937
Machinery and equipment 19,503,267 18,180,840
----------- -----------
25,414,166 23,473,020
Less accumulated depreciation 16,411,078 15,156,120
----------- -----------
NET PROPERTY AND EQUIPMENT 9,003,088 8,316,900
----------- -----------
PREPAID PENSION ASSET (Notes 6 and 8) 2,675,688 -
INTANGIBLE PENSION ASSET (Note 8) 564,949 815,189
FUTURE INCOME TAX BENEFITS (Note 10) 4,719,637 5,828,923
-17-
<PAGE>
OTHER ASSETS 30,467 50,395
----------- -----------
$36,188,500 $33,390,331
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-18-
<PAGE>
<TABLE>
Hastings Manufacturing Company and Subsidiaries
Consolidated Balance Sheets
==================================================
<CAPTION>
DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to banks (Note 5) $ 2,300,000 $ 3,400,000
Accounts payable 1,536,612 1,475,098
Accruals:
Compensation 600,599 494,781
Pension plan contribution (Note 8) - 608,786
Income taxes 41,294 -
Taxes other than income 152,932 172,854
Miscellaneous 300,780 217,731
Current portion of postretirement
benefit obligation (Note 9) 1,044,175 1,110,442
Current maturities of long-term
debt (Note 6) 1,320,000 1,462,500
----------- -----------
TOTAL CURRENT LIABILITIES 7,296,392 8,942,192
LONG-TERM DEBT, less current
maturities (Note 6) 4,620,000 565,625
PENSION AND DEFERRED COMPENSATION
OBLIGATION, less current portion
(Note 8) 2,604,111 3,243,618
POSTRETIREMENT BENEFIT OBLIGATION,
less current portion (Note 9) 14,650,755 15,318,770
----------- -----------
TOTAL LIABILITIES 29,171,258 28,070,205
----------- -----------
COMMITMENTS AND CONTINGENCIES
(Notes 6, 8 and 9)
-19-
<PAGE>
STOCKHOLDERS' EQUITY (Notes 6, 7, 8 and 13)
Preferred stock, $2 par value,
authorized and unissued 500,000 shares - -
Common stock, $2 par value, 1,750,000
shares authorized; 789,526 and
780,626 shares issued and
outstanding 1,579,052 1,561,252
Additional paid-in capital 338,272 145,788
Retained earnings 7,273,410 5,793,219
Accumulated other comprehensive income:
Cumulative foreign currency
translation adjustment (981,073) (750,655)
Pension liability adjustment
($1,806,695 and $2,165,876, net of
tax of $614,276 and $736,398,
respectively) (Note 8) (1,192,419) (1,429,478)
----------- -----------
Total accumulated other comprehensive
income (2,173,492) (2,180,133)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 7,017,242 5,320,126
----------- -----------
$36,188,500 $33,390,331
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-20-
<PAGE>
<TABLE>
Hastings Manufacturing Company and Subsidiaries
Consolidated Statements of Income
==================================================
<CAPTION>
YEAR ENDED DECEMBER 31,
19987 19976 1996
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES $38,752,104 $35,574,954 $39,408,610
COST OF SALES (Note 9) 26,094,399 24,285,197 29,299,141
----------- ----------- -----------
Gross profit 12,657,705 11,289,757 10,109,469
----------- ----------- -----------
OPERATING EXPENSES
Advertising 325,070 372,981 349,660
Selling 2,940,478 3,120,215 3,593,143
General and administrative
(Note 9) 6,075,590 5,693,175 6,320,095
Non-recurring restructuring
and relocation costs
(Notes 2 and 3) - - 819,900
----------- ----------- -----------
9,341,138 9,186,371 11,082,798
----------- ----------- -----------
Operating income (loss) 3,316,567 2,103,386 (973,329)
----------- ----------- -----------
OTHER EXPENSES (INCOME)
Interest expense 571,774 510,322 570,397
Interest income (35,982) (47,062) (145,853)
Other, net (3,652) 62,893 (160,030)
----------- ----------- -----------
532,140 526,153 264,514
----------- ----------- -----------
Income (loss) before income tax
expense (benefit) 2,784,427 1,577,233 (1,237,843)
-21-
<PAGE>
INCOME TAX EXPENSE (BENEFIT)
(Note 10) 1,054,000 622,000 (353,000)
----------- ----------- -----------
NET INCOME (LOSS) $ 1,730,427 $ 955,233 $ (884,843)
=========== =========== ===========
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE OF COMMON
STOCK (Notes 11 and 13) $ 2.24 $ 1.24 $ (1.15)
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-22-
<PAGE>
<TABLE>
Hastings Manufacturing Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
==================================================
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME TOTAL
--------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996 $ 777,626 $119,318 $ 6,854,865 $(2,526,831) $ 5,224,978
Comprehensive income (loss):
Net loss - - (884,843) - (884,843)
Other comprehensive income (loss):
Foreign currency
translation adjustment - - - (11,054) (11,054)
Pension liability adjustment
($1,115,188, net of tax of
$379,164) (Note 8) - - - 736,024 736,024
-----------
724,970
-----------
Total comprehensive income (loss) (159,873)
Shares issued under restricted
stock plan, net of shares
forfeited 2,650 20,888 - - 23,538
Cash dividends ($.20 per share) - - (156,195) - (156,195)
---------- -------- ----------- ----------- -----------
BALANCE, December 31, 1996 780,276 140,206 5,813,827 (1,801,861) 4,932,448
Comprehensive income:
Net income - - 955,233 - 955,233
Other comprehensive income:
Foreign currency
translation adjustment - - - (139,200) (139,200)
Pension liability adjustment
(($362,230), net of tax of
($123,158)) (Note 8) - - - (239,072) (239,072)
-----------
(378,272)
-----------
-23-
<PAGE>
Total comprehensive income 576,961
Shares issued under restricted
stock plan, net of shares
forfeited 350 5,582 - - 5,932
Cash dividends ($.25 per share) - - (195,215) - (195,215)
Two-for-one stock split (Note 13) 780,626 - (780,626) - -
---------- -------- ----------- ----------- -----------
BALANCE, December 31, 1997 1,561,252 145,788 5,793,219 (2,180,133) 5,320,126
Comprehensive income:
Net income - - 1,730,427 - 1,730,427
Other comprehensive income:
Foreign currency
translation adjustment - - - (230,418) (230,418)
Pension liability adjustment
($359,181, net of tax of
$122,122) (Note 8) - - - 237,059 237,059
-----------
6,641
-----------
Total comprehensive income 1,737,068
Shares issued under restricted
stock plan, net of shares
forfeited 17,800 192,484 (3,300) - (206,984)
Cash dividends ($.315 per share) - - (246,936) - (246,936)
---------- -------- ----------- ----------- -----------
BALANCE, December 31, 1998 $1,579,052 $338,272 $ 7,273,410 $(2,173,492) $ 7,017,242
========== ======== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-24-
<PAGE>
<TABLE>
Hastings Manufacturing Company and Subsidiaries
Consolidated Statements of Cash Flows
==================================================
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 1,730,427 $ 955,233 $ (884,843)
Adjustments to reconcile net
income (loss) to net cash
from (for) operating activities:
Depreciation 1,464,944 1,337,100 1,255,252
Gain on sale of property
and equipment (1,991) - -
Deferred income taxes (benefit) 955,000 591,000 (370,000)
Change in postretirement
benefit obligation (734,282) (757,820) 70,058
Changes in operating assets and
liabilities:
Accounts receivable (420,582) (291,894) 1,764,615
Refundable income taxes 12,994 51,933 159,290
Inventories (1,434,958) (37,063) 709,006
Prepaid expenses and other
current assets (203) 31,656 (21,651)
Prepaid pension cost (2,675,688) - -
Other assets 20,274 93,315 (97,240)
Accounts payable and
accruals (108,194) 156,183 (1,396,207)
----------- ----------- -----------
Net cash from (for)
operating activities (1,192,259) 2,129,643 1,188,280
----------- ----------- -----------
Investing Activities
Capital expenditures (2,246,598) (1,770,302) (1,343,291)
Release of filer sale escrow funds 958,517 - -
Proceeds from sale of property
and equipment 7,899 1,299 -
----------- ----------- -----------
Net cash for investing activities (1,280,182) (1,769,003) (1,343,291)
----------- ----------- -----------
</TABLE>
-25-
<PAGE>
<TABLE>
Hastings Manufacturing Company and Subsidiaries
Consolidated Statements of Cash Flows
==================================================
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Financing Activities
Proceeds from issuance
of notes payable
to banks $ 9,500,000 $ 7,850,000 $ 9,900,000
Principal payments on
notes payable to banks (10,600,000) (7,450,000) (8,400,000)
Proceeds from issuance of
long-term debt to banks 6,600,000 - -
Principal payments on
long-term debt (2,688,125) (1,462,500) (1,560,500)
Dividends paid (246,936) (195,215) (156,195)
----------- ----------- -----------
Net cash from (for)
financing activities 2,564,939 (1,257,715) (216,695)
----------- ----------- -----------
Effect of Exchange Rate
Changes on Cash (14,897) (2,536) (80,017)
----------- ----------- -----------
Net Increase (Decrease) in Cash 77,601 (899,611) (451,723)
Cash, beginning of year 558,172 1,457,783 1,909,506
----------- ----------- -----------
Cash, end of year $ 635,773 $ 558,172 $ 1,457,783
=========== =========== ===========
Supplemental Cash Flow Information
Cash paid during the year for:
Income taxes, net of
refunds $ 52,593 $ (40,793) $ (172,890)
Interest 591,639 524,814 578,061
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-26-
<PAGE>
Hastings Manufacturing Company and Subsidiaries
Note to Consolidated Financial Statements
===============================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Hastings Manufacturing Company and subsidiaries (Company) is
primarily a manufacturer of automotive and light duty truck piston rings
for the replacement market. To a lesser extent, the Company packages and
sells automotive mechanics' specialty tools and additives for engines,
transmissions and cooling systems. The Company's headquarters and primary
manufacturing facilities are located in Hastings, Michigan. All of the
Company's products are also sold in Canada. These products are produced
and/or packaged and distributed by the Company's Canadian subsidiary,
Hastings, Inc., located in Barrie, Ontario.
The Company distributes its products primarily through numerous
auto parts jobbers and warehouse distributors for sale primarily in the
automotive replacement market throughout the U.S. and Canada. Certain of
the Company's piston rings are produced for original equipment
applications. The Company distributes the majority of its export sales on
a direct country basis. Prior to early 1997, international sales had
historically been distributed through one U.S. customer. The Company
performs ongoing credit evaluations of its customers and provides reserves
for probable credit losses.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
parent company and its subsidiaries. Upon consolidation, all significant
intercompany accounts and transactions are eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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.
-27-
<PAGE>
REVENUE RECOGNITION
The Company recognizes revenue when its products are shipped to
its customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments, comprised
of cash, short-term receivables and payables, notes payable to banks
(variable interest rate) and long-term debt (variable interest rate)
approximates their carrying values. The fair value of the Company's
interest rate swap agreement, as disclosed in Note 6, is not material.
INVENTORIES
Inventories are stated at cost, not in excess of market. The
Company uses the last-in, first-out (LIFO) method of determining costs for
U.S. raw material inventories. Remaining inventories are valued using the
first-in, first-out (FIFO) method.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed primarily by the straight-line
method for financial reporting purposes, based on the estimated useful
lives of the respective assets, and accelerated methods with minimum lives
for income tax purposes.
RETIREMENT PLANS
The Company sponsors noncontributory, defined benefit plans which
cover all employees of the Company who are covered by collective bargaining
agreements. The plans provide benefits based on an employee's earnings and
years of benefit service. The Company funds these plans in amounts
consistent with the funding requirements of federal laws and regulations.
As discussed in Note 6, the Company provided additional funding to the
plans during 1998. The plans' assets are invested in stocks, bonds,
annuities and short-term investments.
The Company also sponsors defined contribution retirement savings
plans for its employees and has entered into a deferred compensation
agreement with a former officer as described in Note 8.
The Company provides certain healthcare and life insurance
benefits for eligible retired employees. Postretirement benefits are
accounted for on the accrual basis, during the employee's years of service,
based on the expected cost of providing benefits to that employee and the
employee's beneficiaries and covered dependents.
-28-
<PAGE>
STOCK OPTIONS
The Company applies the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and
related interpretations in accounting for its stock option plan. Under APB
25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
ADVERTISING COSTS
All advertising costs are expensed in the period in which they
are incurred.
INCOME TAXES
The Company provides deferred income taxes based on enacted
income tax rates in effect on the dates temporary differences between the
financial reporting and tax bases of assets and liabilities reverse. The
effect on deferred tax assets and liabilities of a change in income tax
rates is recognized in income in the period that includes the enactment
date. To the extent that available evidence about the future raises doubt
about the realization of a deferred tax asset, a valuation allowance is
established.
As disclosed in Note 10, the Company has recorded deferred tax
assets reflecting the benefit of net operating loss carryforwards expiring
in 2010, 2011 and 2012, foreign tax credit carryforwards expiring through
2003, accrued pension and postretirement obligations estimated to be
payable in varying amounts over the next 25 to 30 years and other net
deductible temporary differences. Realization of the recorded income tax
benefits is dependent on generating sufficient taxable income and foreign
source income prior to expiration of the loss carryforwards and foreign tax
credit carryforwards. Although realization is not assured, management
believes it is more likely than not that all of the deferred tax assets
will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of
future taxable income and foreign source income during the carryforward
periods are reduced.
No provision for income taxes has been made on the accumulated
undistributed earnings of approximately $3,795,000 of the Canadian
subsidiary. These earnings are intended to be permanently reinvested in
facilities and other assets and have borne income taxes that would offset,
in major part, any tax liability resulting from their distribution.
-29-
<PAGE>
BASIC AND DILUTED EARNINGS PER SHARE
Basic earnings per share (EPS) is based on the weighted average
number of shares of common stock outstanding during each period. It
excludes the dilutive effects of additional common shares that would have
been outstanding if the shares, under the Company's stock option plan, had
been issued. It also excludes the dilutive effect of contingently issuable
shares, outstanding under the Company's restricted stock plan described in
Note 7, to the extent those shares have not yet been vested. Diluted EPS
includes the effects of the Company's stock options and contingently
issuable shares. Basic and diluted EPS are retroactively adjusted for
stock dividends and stock splits.
INTEREST RATE AGREEMENTS
The Company enters into interest rate swap and collar
agreements to reduce the impact of changes in interest rates on its
floating rate borrowings. Interest rate swap agreements are contracts to
exchange floating rate for fixed rate interest payments over the life of
the agreements without the exchange of the underlying notional amounts.
Interest rate collar agreements limit the Company's interest rates on
floating rate borrowings to a range within a minimum (floor) and a maximum
(cap) interest rate. The notional amounts of interest rate agreements are
used to measure interest to be paid or received and do not represent the
amount of exposure to credit loss. The differential paid or received on
interest rate agreements is recognized as an adjustment to interest
expense.
The counterparty to the Company's interest rate agreements is a
commercial bank with which the Company has other financial relationships.
While the Company is exposed to credit loss in the event of nonperformance
by the counterparty, the Company does not anticipate nonperformance by the
other party, and no material loss would be expected from such non-
performance.
The Company does not enter into interest rate agreements, or
other derivative financial instruments, for trading purposes.
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's Canadian operations,
where the functional currency is the Canadian dollar, are translated at the
exchange rate in effect at year-end for assets and liabilities. Income and
expense items are translated at the average exchange rate for the year.
Related translation adjustments are reported as a separate component of
accumulated other comprehensive income. Gains and losses from foreign
currency transactions, which are not significant, are included in current
earnings.
-30-
<PAGE>
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," issued in September 1997, was adopted by
the Company during 1998. SFAS No. 130 requires that all components of
comprehensive income and total comprehensive income be reported in one of
the following: a statement of income and comprehensive income, a statement
of comprehensive income or a statement of stockholders' equity. The
Company has elected to report comprehensive income in its consolidated
statements of stockholders' equity. Comprehensive income is comprised of
net income and all changes to stockholders' equity, except those due to
investments by owners and distributions to owners. For the Company,
components of comprehensive income include net income, the foreign currency
translation adjustment relating to the Company's Canadian operations and
the pension liability adjustment relating to the Company's underfunded
pension plan, as disclosed in Note 8.
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," issued in June 1997 and which supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," establishes
standards for the way that public companies report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of a
company about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. Operating segments
which exhibit similar characteristics are permitted to be aggregated into a
single operating segment for financial reporting purposes. As defined by
SFAS No. 131, the Company has two operating segments, U.S. operations and
Canadian operations, based on management's geographic reporting
responsibilities. As discussed in the previous "Nature of Operations"
section, all of the Company's products are sold in both the U.S. and
Canada. In addition, the operating segments' production processes, types of
customers, distribution methods, regulatory environment and expected long-
term financial performance are very similar. Because management believes
aggregation of its two operating segments is consistent with the objective
and basic principles of SFAS No. 131, financial information regarding its
operating segments has been aggregated for financial reporting purposes.
Additional information required to be disclosed by SFAS No. 131 is included
in Note 12.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," issued in February 1998, revises employers'
disclosures about pension and other postretirement benefit plans. It does
-31-
<PAGE>
not change the measurement or recognition of those plans. SFAS No. 132
standardizes the disclosure requirements to the extent practicable,
requires additional information on changes in the benefit obligations and
fair values of plan assets that will facilitate financial analysis and
eliminates certain disclosures that are no longer as useful as when they
were first required to be presented. Information required to be disclosed
by SFAS No. 132 is included in Notes 8 and 9.
SFAS No. 130, 131 and 132 were first effective for the Company's
1998 consolidated financial statements. As required, prior year
information has been restated to conform to the provisions of the new
standards. The implementation of these new standards did not affect
results of operations or financial position.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," issued in June 1998, requires companies to recognize all
derivatives contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge, the objective of
which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative
not designated as a hedging instrument, the gain or loss is recognized in
income in the period of change. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives
contracts for speculative purposes. The Company does periodically enter
into interest rate swap and collar agreements to reduce the impact of
changes in interest rates on its floating rate borrowings. However, the
fair value of such derivatives are not significant. Accordingly, the
Company does not expect adoption of the new standard on January 1, 2000 to
materially affect its consolidated financial statements.
NOTE 2 - SALE OF FILTER OPERATIONS
Effective on September 3, 1995, the Company sold its filter
product line assets to CLARCOR Inc. (CLARCOR) of Rockford, Illinois. The
sale was accounted for as a sale of a portion of a segment of a business.
As part of the sale, the Company and CLARCOR entered into a Transition
Agreement which provided for the Company's manufacture and supply to
CLARCOR of certain filters and filter component parts until certain
manufacturing equipment, located at the Company's Hastings, Michigan plant,
could be moved and set up at CLARCOR's plant facilities. It also provided
for the reimbursement of certain administrative costs directly related to
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<PAGE>
the manufacture and supply of filters and filter components to CLARCOR.
The transition period was completed during the third quarter of 1996.
Expense reimbursement included in 1996 net sales amounted to $736,000.
The Transition Agreement also included certain provisions for the
continued distribution (not manufacture) of filter products through the
Company's Canadian subsidiary, at the discretion of CLARCOR. In early
November 1996, the Company received notification from CLARCOR that this
arrangement would terminate on December 31, 1996. Related distribution
revenue, included in 1996 net sales, amounted to $1,123,000.
Total filter sales and estimated operating profit for 1996
approximated $5,992,800 and $525,000, respectively. The estimated
operating profit, which reflects those operating expenses for which the
Company estimated would not recur as a result of the sale, includes
$625,000 of reduced filter cost of sales resulting from liquidation of LIFO
inventories caused by the elimination of all remaining filter inventory.
In 1996, during the course of the transition period, the Company
relocated its piston ring packaging operations from Knoxville, Tennessee to
Hastings, Michigan. The relocation and associated training costs were non-
recurring in nature. These costs, all of which were incurred during the
first and second quarters of 1996, totaled approximately $468,400 and are
included in "Non-recurring restructuring and relocation costs" in the
accompanying 1996 consolidated statement of income.
At December 31, 1997, "Other current assets" consisted of
$958,517 held in escrow relating to the sale. These funds were released
from escrow in September 1998. Of the total $720,400 employee severance
benefits accrued and expensed in September 1995 relating to the sale,
$457,834 was paid through December 31, 1998, with the remaining $262,566
balance to be paid in monthly payments through 2005. No other filter-
related assets or liabilities remained at December 31, 1998 and 1997.
NOTE 3 - RESTRUCTURING COSTS
In December 1996, management and the Board of Directors approved
a restructuring plan designed to significantly reduce operating costs and
provide for a more streamlined and efficient operating structure
concentrating on piston ring manufacturing. Operating results for 1996,
exclusive of non-recurring restructuring and relocation costs discussed
here and in Note 2, were adversely affected by two major factors. First,
fulfilling the Company's production and administrative responsibilities
under the filter Transition Agreement, discussed in Note 2, proved more
costly than anticipated. Second, with the assistance of an outside
corporate consulting firm, management determined that staffing remained at
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<PAGE>
too high of a level throughout the remainder of 1996 based on actual and
anticipated revenues. These factors, in addition to the CLARCOR
notification discussed in Note 2, precipitated the restructuring plan.
In addition to reducing staffing levels at both the U.S. and
Canadian manufacturing facilities, the restructuring plan called for the
termination of most Canadian piston ring manufacturing effective April 30,
1997. The Canadian subsidiary continues to distribute piston rings
throughout Canada, being sourced entirely by U.S. operations. This
facility also continues to manufacture certain piston ring parts and
provide packaging operations for automotive mechanics' specialty tools and
piston ring sets.
Total restructuring costs, all recognized in the fourth quarter
of 1996, amounted to $351,500 and are included in "Non-recurring
restructuring and relocation costs" in the accompanying 1996 consolidated
statement of income. Of the total, $247,000 and $104,500 related to
employee severance benefits and consulting fees, respectively, and were
paid during 1996 and 1997.
NOTE 4 - INVENTORIES
Inventories valued using the LIFO method were $2,654,000 and
$2,272,000 at December 31, 1998 and 1997, respectively.
If the FIFO method of inventory valuation had been used by the
Company, inventories would have been $1,212,000 and $1,387,000 higher than
reported at December 31, 1998 and 1997, respectively.
Reduction of inventory quantities in 1998, 1997 and 1996 resulted
in a liquidation of LIFO inventories carried at lower costs prevailing in
prior years as compared to current years' purchases. The effect of these
reductions increased net income (or reduced the net loss) by $40,000,
$35,000 and $447,300 ($.05, $.05 and $.58 per share, on a diluted basis, as
adjusted for the stock split discussed in Note 13) for 1998, 1997 and 1996,
respectively. Of the $447,300 amount for 1996, $412,500 resulted from the
elimination of all remaining filter inventory during 1996.
NOTE 5 - SHORT-TERM BORROWINGS
In August 1998, the Company entered into a loan agreement with
its primary lender which provides for an unsecured $6,600,000 term credit
loan (see Note 6) and an unsecured $3,000,000 credit authorization for
revolving credit loans and letters of credit. Under the agreement, the
Company's short-term line with its primary lender was reduced from
$5,000,000 to $3,000,000. Interest for both the short-term and long-term
borrowings is based on three different pricing options: a negotiated rate,
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<PAGE>
a Eurodollar rate plus a factor and a floating rate (greater of the federal
funds rate plus a factor or the prime rate). The effective Eurodollar rate
and floating rate are increased by a margin rate, ranging from 1.50% to
2.00%, which is based upon certain Company performance parameters. The
Company maintains two additional unsecured lines of credit with banks
aggregating $2,200,000, with interest rates based on prime. Of the
$5,200,000 total short-term lines available to the Company at December 31,
1998, $2,900,000 was unused.
At December 31, 1997, the Company maintained unsecured lines of
credit with various banks aggregating $4,700,000 with interest at
negotiated rates based upon prime or LIBOR. Available borrowings amounted
to $1,300,000 at December 31, 1997.
The weighted average interest rate on short-term borrowings
outstanding at December 31, 1998 and 1997 was 9.10% and 8.25%,
respectively. The interest rate on short-term borrowings in effect at
December 31, 1998 was unusually high as it is based on the federal funds
interest rate which typically increases as of the last day of the calendar
year. The weighted average interest rate on the Company's short-term
borrowings for the seven-day period preceding December 31, 1998 was 7.4%.
NOTE 6 - LONG-TERM DEBT
As discussed in Note 5, the Company restructured its short-term
and long-term borrowing arrangements in August 1998. The entire $6,600,000
under the term loan portion of the new loan agreement was borrowed and was
used to additionally fund the Company's defined benefit plans, to pay off
the previously outstanding long-term debt and, as discussed in Note 5, to
reduce short-term notes payable. The additional funding to the Company's
defined benefit plans resulted in the $2,675,688 prepaid pension asset in
the accompanying consolidated balance sheets at December 31, 1998. The
term loan is payable in quarterly principal payments of $330,000, plus
interest based on the pricing options discussed in Note 5. In connection
with the $6,600,000 term loan, the Company entered into an interest rate
swap agreement essentially to fix the interest rate on these long-term
borrowings at 5.95% plus the margin, discussed in Note 5, resulting in an
interest rate range of 7.45% to 7.95%. At December 31, 1998, the interest
rate in effect on these long-term borrowings was 7.70% and the notional
amount of the swap agreement amounted to $5,940,000. Of the $5,940,000
outstanding long-term debt balance at December 31, 1998, $1,320,000 is due
in 1999. Remaining maturities are $1,320,000 annually for the years 2000
through 2002 with the $660,000 balance due in 2003.
The term loan agreement requires the Company to maintain certain
financial balances and ratios and limits the amount of cash dividends.
Unrestricted retained earnings under the agreement amounted to $2,618,277
at December 31, 1998.
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<PAGE>
In March 1996, the Company terminated its interest rate swap
agreement related to its floating rate borrowings outstanding at the time,
receiving $204,500 from the bank as a result of favorable interest rates.
This amount is included in "Other, net" in the accompanying 1996
consolidated statement of income. At the same time, in order to continue
to limit its interest rate exposure, the Company entered into an interest
rate collar agreement which was in effect until the August 1998 debt
restructuring discussed above. The collar agreement provided for a cap
rate on floating rate borrowings of 8.25% and a related floor of 6.75%.
At December 31, 1997, the Company had outstanding long-term debt
totaling $2,028,125, with $1,462,500 due in 1998, under two term loans
payable in quarterly installments through May 1999. Interest on these
borrowings was based on LIBOR. As discussed above, these borrowings were
paid off with the proceeds of the August 1998 borrowing.
NOTE 7 - STOCKHOLDERS' EQUITY
STOCKHOLDERS' RIGHTS PLAN
On February 13, 1996, the Company's Board of Directors authorized
the adoption of a Series A Preferred Stock Purchase Rights Plan (Plan).
Under the Plan, a dividend distribution of one Series A Preferred Stock
Purchase Right (Right) was made for each outstanding share of common stock,
payable to shareholders of record on March 8, 1996. The Plan is designed
to protect shareholders against unsolicited attempts to acquire control of
the Company in a manner that does not offer a fair price to all
shareholders. In addition, it is intended to help protect and preserve
ownership of the Company's principal tradenames and trademarks.
Each Right entitles shareholders to purchase one one-hundredth of
a share of preferred stock from the Company at a price of $100 per share,
subject to adjustment. The Rights will become exercisable only if a person
or group (Acquiring Person) acquires 15% or more of the Company's common
stock or announces a tender offer that would result in ownership of 30% or
more of the common stock. A person beneficially owning 15% or more of the
outstanding shares of common stock on February 13, 1996, or any affiliates
or associates thereof, do not constitute an Acquiring Person under the
Plan.
The Company's Series A Preferred Stock consists of 500,000 shares
authorized, at $2 par value, none of which are issued. Shares of preferred
stock are reserved at a level sufficient to permit the exercise in full of
all the outstanding Rights. Under terms specified in the Plan, the Company
has the right to redeem the Rights at one cent per Right.
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<PAGE>
STOCK OPTION PLAN
The Company's Stock Option and Restricted Stock Plan of 1997
permits the grant of options to directors, officers and key employees to
purchase shares of common stock. A total of 38,000 shares (all share and
option amounts adjusted for the two-for-one stock split discussed in Note
13) are authorized for grant under the plan. During both 1998 and 1997,
12,850 options were granted under the plan. The options, which were
immediately vested upon grant, may be exercised for up to ten years after
the date of the grant.
A summary of activity for the plan is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
------------------------- ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ -------- ------ --------
<S> <C> <C> <C> <C>
Options outstanding,
beginning of year 12,850 $ 20.125 - $ -
Granted 12,850 18.250 12,850 20.125
Exercised - - - -
Terminated (1,700) 20.125 - -
------ -------- ------ -------
Options outstanding,
end of year 24,000 $ 19.121 12,850 $20.125
====== ======== ====== =======
Options exercisable,
end of year 11,150 $ 20.125 - $ -
====== ======== ====== =======
Options available for
grant, end of year 14,000 25,150
====== ======
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS
No. 123, "Accounting For Stock-Based Compensation," relating to its stock
option plan. Accordingly, no compensation cost has been recognized. Had
compensation cost for the Company's stock options been determined based on
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<PAGE>
their fair values at the grant dates consistent with the provisions of SFAS
No. 123, the Company's net income and earnings per share, on a diluted
basis, would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
---------- --------
<S> <C> <C> <C>
Net income - as reported $1,730,427 $955,233
Net income - pro forma 1,654,919 871,533
Earnings per share on a
diluted basis - as reported 2.24 1.24
Earnings per share on a
diluted basis - pro forma 2.14 1.13
========== ========
</TABLE>
The weighted average fair values per option at the date of
grant for options granted under the plan during 1998 and 1997 was $6.17 and
$7.32, respectively. The fair values of the option awards were estimated
using the Black-Scholes option-pricing model with the following weighted-
average assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997
---------- --------
<S> <C> <C> <C>
Dividend yield 1.50% 1.50%
Expected volatility 35.98% 34.00%
Risk-free interest rate 4.51% 5.71%
Expected life in years 5.00 5.00
===== =====
</TABLE>
RESTRICTED STOCK PLAN
The Company has established a restricted stock plan under which
certain officers and key employees may be awarded shares of restricted
stock as deferred compensation. Shares awarded pursuant to the plan are
restricted as to sale and transfer for periods of up to five years. The
stock awards vest 20% per year over the five-year period if predetermined
corporate performance goals are met. If goals are not met, the current
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<PAGE>
year's vesting amount is forfeited. If there is a change in control of the
Company, the shares will vest immediately. The recipient of the award has
all the rights of a shareholder, provided that all performance goals are
met. During 1998, 1997 and 1996, the Company awarded 10,600, 5,000 and
5,600 shares, respectively, of its common stock valued at $219,700, $68,438
and $71,400, respectively, as deferred compensation which is charged to
expense based upon the vesting schedule and upon achievement of the
performance goals. Shares valued at $21,402 (1,700 shares), $62,506 (4,650
shares) and $47,862 (2,950 shares) were forfeited during 1998, 1997 and
1996, respectively. Share amounts have been adjusted for the stock split
discussed in Note 13.
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<PAGE>
NOTE 8 - PENSION AND RETIREMENT SAVINGS
Information regarding the Company's defined benefit plans as of
and for the years ended December 31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year $16,999,923 $16,361,101 $16,902,042
Service cost 10,403 14,073 23,316
Interest cost 1,127,711 1,187,023 1,177,904
Actuarial (gain) loss 198,040 898,019 (314,453)
Benefits paid (1,480,157) (1,460,293) (1,427,708)
----------- ----------- -----------
Benefit obligation, end of year 16,855,920 16,999,923 16,361,101
----------- ----------- -----------
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning of year 13,407,163 12,729,054 12,083,154
Actual return on plan assets 1,118,034 1,815,742 1,134,411
Employer contributions 3,727,181 322,826 936,389
Benefits paid (1,480,157) (1,460,459) (1,424,900)
----------- ----------- -----------
Fair value of plan assets, end of year 16,772,221 13,407,163 12,729,054
----------- ----------- -----------
Funded status (83,699) (3,592,760) (3,632,047)
Unrecognized actuarial loss 2,147,995 2,168,785 2,253,620
Unrecognized transition
obligation 611,392 815,189 1,018,986
----------- ----------- -----------
Net amount recognized in the
consolidated balance sheets $ 2,675,688 $ (608,786) $ (359,441)
=========== =========== ===========
AMOUNTS RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEETS
Prepaid pension cost $ 2,675,688 $ - $ -
Pension obligation (2,371,644) (2,981,065) (2,745,228)
Accrued pension plan contribution - (608,786) (359,441)
Intangible asset 564,949 815,189 941,583
Accumulated other comprehensive
income, before tax effect 1,806,695 2,165,876 1,803,645
----------- ----------- -----------
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<PAGE>
Net amount recognized in the
consolidated balance sheets $ 2,675,688 $ (608,786) $ (359,441)
=========== =========== ===========
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
DECEMBER 31
Discount rate 6.75% 7.00% 7.50%
Expected return on plan assets 8.00% 8.00% 8.00%
Range of expected compensation
increase 0-5.5% 0-5.5% 0-5.5%
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 10,403 $ 14,073 $ 23,316
Interest cost 1,127,711 1,187,023 1,177,904
Expected return on plan assets (1,052,551) (946,392) (914,140)
Amortization of unrecognized
transition obligation 203,797 203,797 203,797
Amortization of unrecognized
net loss 153,347 113,670 145,566
----------- ----------- -----------
Net periodic benefit cost $ 442,707 $ 572,171 $ 636,443
=========== =========== ===========
</TABLE>
The above represents the aggregation of amounts for the Company's
two defined benefit plans. As of December 31, 1998, one of the plans had
an accumulated benefit obligation in excess of plan assets. For that plan,
the benefit obligation and accumulated benefit obligation, which are equal,
amounted to $14,888,810 and the fair value of plan assets amounted to
$14,659,752.
The Company's foreign subsidiary maintains a defined contribution
retirement savings plan. Due to overfunding of the plan, there were no
contributions in 1998, 1997 and 1996.
The Company has two defined contribution retirement savings
plans, covering substantially all domestic employees, which are funded
solely through contributions based on formulas as defined in the plan
agreements. The assets are held in trust for the sole benefit of the
employees. Contribution expense was $668,000, $569,000 and $656,000 for
1998, 1997 and 1996, respectively, relating to these plans.
As part of the sale of its filter operations, as described in
Note 2, the Company entered into a deferred compensation agreement with a
former officer of the Company. The deferred compensation benefits are to
be paid over a period of ten years, commencing in November 1995. Deferred
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<PAGE>
compensation expense, representing the present value of future payments,
amounted to $343,450 in 1995 and was included as a cost of the filter
operations sale. At December 31, 1998 and 1997, respectively, the deferred
compensation liability amounted to $262,566 and $290,347, of which $30,086
and $27,780 was due within one year.
NOTE 9 - POSTRETIREMENT BENEFIT PLANS
Information regarding the Company's postretirement benefit
plans as of and for the years ended December 31, 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning of year $ 9,824,296 $ 18,801,763 $ 19,437,103
Service cost 49,855 93,153 216,106
Interest cost 669,152 851,571 1,350,383
Amendment - (7,346,249) -
Actuarial (gain) loss 298,894 (1,251,069) (656,325)
Benefits paid (949,725) (1,324,872) (1,545,504)
------------ ------------ ------------
Benefit obligation, end of year $ 9,892,472 $ 9,824,297 $ 18,801,763
============ ============ ============
Funded status $ (9,892,472) $ (9,824,297) $(18,801,763)
Unrecognized prior service benefit
relating to 1997 plan amendment (6,465,014) (6,968,577) -
Unrecognized actuarial loss 662,556 363,662 1,614,731
------------ ------------ ------------
Net amount recognized in the
consolidated balance sheets (15,694,930) (16,429,212) (17,187,032)
Less current portion (1,044,175) (1,110,442) (1,641,040)
------------ ------------ ------------
Long-term portion $(14,650,755) $(15,318,770) $(15,545,992)
============ ============ ============
WEIGHTED-AVERAGE DISCOUNT RATE
ASSUMPTION AS OF DECEMBER 31 6.75% 7.00% 7.50%
============ ============ ============
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<PAGE>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 49,855 $ 93,153 $ 216,106
Interest cost 669,152 851,571 1,350,383
Amortization of unrecognized
prior service cost (503,563) (377,672) -
Amortization of unrecognized
net loss - - 49,072
------------ ------------ ------------
Net periodic benefit cost $ 215,444 $ 567,052 $ 1,615,561
============ ============ ============
</TABLE>
Because the Company's contributions to the plans are fixed on a
per active and retired employee basis, assumed inflationary increases or
decreases in health care costs would have no impact on the postretirement
benefit obligation at December 31, 1998, or on the future annual aggregate
service and interest costs.
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 by $7,346,249, which created
an unrecognized prior service benefit. Net periodic postretirement benefit
cost for 1997, including amortization of the unrecognized prior service
benefit over a period of 15 years, was reduced by approximately $1,050,000
(approximately $870,000 related to "Cost of Sales" and $180,000 related to
"General and Administrative" expenses) as a result of the plan amendment.
In early 1998, the Company received a letter from legal representatives of
its bargaining unit retirees requesting a meeting with Company management
and legal counsel to discuss the Company's legal obligation to provide the
postretirement benefits at the pre-amendment level. While negotiations
continue as of the date of this report, management believes that adjustments
to the plans, if any, will not have a material effect on the financial
position or results of operations of the Company.
NOTE 10 - INCOME TAXES
The components of income (loss) before income taxes are as
follows:
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<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C> <C>
Domestic $2,717,888 $1,648,915 $(1,087,158)
Foreign 66,539 (71,682) (150,685)
---------- ---------- -----------
$2,784,427 $1,577,233 $(1,237,843)
========== ========== ===========
</TABLE>
Income tax expense (benefit) is made up of the following
components:
<TABLE>
<CAPTION>
Year ended December 31, 1998
DEFERRED-
VALUATION
ALLOWANCE
CURRENT DEFERRED CHANGE TOTAL
-------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Domestic $ 68,000 $ 985,000 $ - $1,026,000
Foreign 31,000 (3,000) - 28,000
-------- --------- --------- ----------
$ 99,000 $ 955,000 $ - $1,054,000
======== ========= ========= ==========
Year ended December 31, 1997
Domestic $ 39,000 $ 602,000 $ - $ 641,000
Foreign (8,000) (11,000) - (19,000)
-------- --------- --------- ---------
$ 31,000 $ 591,000 $ - $ 622,000
======== ========= ========= =========
Year ended December 31, 1996
Domestic $ 54,000 $(399,000) $ 40,000 $(305,000)
Foreign (37,000) (11,000) - (48,000)
-------- --------- --------- ---------
$ 17,000 $(410,000) $ 40,000 $(353,000)
======== ========= ========= =========
</TABLE>
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<PAGE>
The tax effects of temporary differences that give rise to the
net future income tax benefit are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
---------- ----------
<S> <C> <C> <C>
Deferred income tax assets:
Postretirement benefit
obligation $5,336,277 $5,625,932
Pension obligation - 886,652
Current asset valuation
allowances 751,214 736,138
Net operating loss carryforwards 1,206,318 796,643
Foreign tax credit carryforwards 316,924 304,659
Deferred compensation 89,268 98,718
Other 293,393 273,295
---------- ----------
Total deferred income tax assets 7,993,394 8,722,037
---------- ----------
Deferred income tax liabilities:
Accumulated depreciation (437,023) (374,306)
Prepaid pension costs (280,229) -
Other (160,649) (167,121)
---------- ----------
Total deferred income tax liabilities (877,901) (541,427)
---------- ----------
Net deferred income tax assets 7,115,493 8,180,610
Less current portion 2,395,856 2,351,687
---------- ----------
Noncurrent portion $4,719,637 $5,828,923
========== ==========
</TABLE>
The Company's net operating loss carryforwards for federal income
tax purposes amounted to $3,547,994 at December 31, 1998, of which $686,098
expires in 2010, $100,185 in 2011 and $2,761,711 in 2012, if not previously
utilized. Foreign tax credits, amounting to $316,924 at December 31, 1998,
expire through 2003, if not previously utilized.
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<PAGE>
Income taxes differed from the amount computed by applying the
federal statutory rate of 34% to income before income tax expense (benefit)
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
---------- -------- ---------
<S> <C> <C> <C> <C>
Computed "expected" tax
(benefit) $ 947,000 $536,000 $(421,000)
Increase (decrease) in
tax resulting from:
Valuation allowance change
due to foreign tax credits - - 40,000
State income taxes, net of
federal income tax
benefit 38,000 44,000 36,000
Other 69,000 42,000 (8,000)
---------- -------- ---------
$1,054,000 $622,000 $(353,000)
========== ======== =========
</TABLE>
NOTE 11 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators in the basic
and diluted EPS calculations follows:
-46-
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
---------- -------- ---------
<S> <C> <C> <C>
Numerator:
Net income (loss) used for
both basic and diluted
EPS calculation $1,730,427 $955,233 $(884,843)
========== ======== =========
Denominator:
Weighted average shares
outstanding for the
period - used for basic
EPS calculation 771,496 768,516 768,516
Dilutive effect of stock
options and contingently
issuable shares 1,198 164 -
---------- -------- ---------
Weighted average shares
outstanding for the
period - used for diluted
EPS calculation 772,694 768,680 768,516
========== ======== =========
</TABLE>
All outstanding shares have been adjusted for the two-for-one
stock split discussed in Note 13.
NOTE 12 - GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION
The Company's net sales were made to customers in the following
countries:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
United States $29,178,656 $26,592,046 $28,982,205
Canada 4,101,109 4,552,463 5,004,885
Other foreign countries 5,472,339 4,430,445 5,421,520
----------- ----------- -----------
Consolidated total $38,752,104 $35,574,954 $39,408,610
=========== =========== ===========
</TABLE>
-47-
<PAGE>
The location of the Company's long-lived assets is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
United States $ 7,781,410 $ 7,098,006 $ 6,754,303
Canada 1,221,678 1,218,894 1,182,137
----------- ----------- -----------
Consolidated total $ 9,003,088 $ 8,316,900 $ 7,936,440
=========== =========== ===========
</TABLE>
Net sales to one customer represented approximately $3,874,000,
$3,180,000 and $3,155,000 of the Company's consolidated sales for 1998,
1997 and 1996, respectively.
NOTE 13 - STOCK SPLIT
On February 17, 1997, the Board of Directors authorized a two-
for-one stock split, effected in the form of a stock dividend, effective
March 23, 1997, payable to shareholders of record on March 2, 1997. On a
split basis, the Company had 780,626 shares outstanding at December 31,
1997. An amount equal to the par value of the common shares issued will be
transferred from retained earnings to common stock to effect the stock
split. This transfer has been reflected in the consolidated statements of
stockholders' equity at December 31, 1997. All references to number of
common shares, except shares authorized, and to all per share information
have been adjusted to reflect the stock split on a retroactive basis.
-48-
<PAGE>
Report of Independent Certified Public Accountants
Hastings Manufacturing Company
Hastings, Michigan
We have audited the accompanying consolidated balance sheets of
Hastings Manufacturing Company and subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Hastings Manufacturing Company and subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/BDO Seidman, LLP
BDO Seidman, LLP
Grand Rapids, Michigan
February 26, 1999
-49-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated herein by
reference from the sections entitled "Directors and Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's
definitive proxy statement relating to its Annual Meeting of Shareholders
to be held May 4, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by
reference from the sections entitled "Compensation of Directors," "Executive
Compensation," and "Deferred Compensation" and in the Registrant's
definitive proxy statement relating to its Annual Meeting of Shareholders
to be held May 4, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by
reference from the section entitled "Voting Securities" in the Registrant's
definitive proxy statement relating to its Annual Meeting of Shareholders
to be held May 4, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item, if any, is incorporated
herein by reference from the sections entitled "Directors and Executive
Officers" and "Compensation Committee Interlocks and Insider Participation"
in the Registrant's definitive proxy statement relating to its Annual
Meeting of Shareholders to be held May 4, 1999.
-50-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
ITEM 14(a)1. FINANCIAL STATEMENTS.
(A) The following financial statements are filed as part of this
document in Item 8, "Financial Statements and Supplementary Data."
PAGE
Consolidated Balance Sheets as of December 31, 1998 and 1997 14-15
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 16
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996 17
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 18-19
Notes to Consolidated Financial Statements 20-36
Report of Independent Certified Public Accountants 37
(B) Financial Statement Schedule
Report of Independent Certified Public Accountants 46
Schedule II - Valuation and Qualifying Accounts 47
ITEM 14(a)2. FINANCIAL STATEMENT SCHEDULES.
The Financial Statement Schedule set forth in the Index to
Financial Statement Schedules hereto is filed as a part of this Form 10-K
Report.
ITEM 14(a)3. EXHIBITS.
NUMBER
3(a) Amended Articles of Incorporation of Hastings Manufacturing
Company, filed as an exhibit to the Form 10-Q Quarterly Report
for the period ended September 30, 1998, are here incorporated by
reference.
3(b) Bylaws of Hastings Manufacturing Company, filed as an exhibit to
the Form S-8 Registration Statement (File No. 333-74489) filed
on March 16, 1999, are here incorporated by reference.
-51-
<PAGE>
4(a) NBD Bank Amended and Restated Letter Agreement for $6,600,000
Term Loan and $3,000,000 Credit Authorization to Make Revolving
Credit Loans and Issue Letters of Credit dated August 28, 1998,
filed as an exhibit to the Form 10-Q Quarterly Report for the
period ended September 30, 1998, is here incorporated by
reference.
4(b) Restated Master Agreement dated August 10, 1998, regarding an
interest rate swap transaction between Hastings Manufacturing
Company and NBD Bank, filed as an exhibit to the Form 10-Q
Quarterly Report for the period ended September 30, 1998, is here
incorporated by reference.
4(c) Commercial Line of Credit Agreement and Note, dated as of January
23, 1998, between Hastings Manufacturing Company and Hastings
City Bank, filed as an exhibit to the Form 10-Q Quarterly Report
for the period ended June 30, 1998, is here incorporated by
reference.
4(d) Preferred Stock Purchase Rights Plan, filed as an exhibit to Form
8-K filed with the Securities and Exchange Commission on February
15, 1996, is here incorporated by reference.
4(e) Confirmation, dated as of March 12, 1996, regarding an interest
rate collar transaction between Hastings Manufacturing Company
and NBD Bank, filed as an exhibit to the Form 10-K Annual Report
for the year ended December 31, 1996, is here incorporated by
reference.
10(a) List of Recipients of Indemnity Agreement and Form of Indemnity
Agreement.
10(b) 1990 Restricted Stock Plan.<F1>
10(c) Asset Purchase Agreement between Hastings Manufacturing Company
and CLARCOR Inc. dated as of September 3, 1995, filed as an
exhibit to the Form 8-K filed with the Securities and Exchange
Commission on September 20, 1995, is incorporated herein by
reference.
10(d) Transition Agreement, dated September 3, 1995, among Hastings
Filters, Inc., Hastings Manufacturing Company and Hastings, Inc.
and joined in by CLARCOR Inc., filed as an exhibit to the Form
10-Q Quarterly Report for the period ended September 30, 1997, is
incorporated herein by reference.
-52-
<PAGE>
10(e) Stock Option and Restricted Stock Plan of 1997, filed as Exhibit
A to the Company's Proxy Statement for its 1998 annual Meeting,
is here incorporated by reference.<F1>
10(f) Form of Incentive Stock Option Agreement for use under the 1997
Stock Option and Restricted Plan of 1997.<F1>
10(g) Form of Nonqualified Stock Option Agreement for use under the
Stock Option and Restricted Stock Plan of 1997.<F1>
21 Subsidiaries of Hastings Manufacturing Company.
23 Consent of BDO Seidman, LLP
24 Powers of Attorney
27 Financial Data Schedule as of December 31, 1998 and for the year
then ended.
- ---------------------
<F1> Management contract or compensatory plan or arrangement.
ITEM 14(b). REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the fourth quarter of
1998.
-53-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
on Form 10-K to be signed below on its behalf by the undersigned, thereunto
duly authorized.
HASTINGS MANUFACTURING COMPANY
(registrant)
Dated: March 31, 1999 By /S/ THOMAS J. BELLGRAPH
Thomas J. Bellgraph
Its Vice President, Finance
(Principal Financial and
Accounting Officer)
-54-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated below (such
persons constituting a majority of the board of directors).
SIGNATURE TITLE DATE
/S/ ANDREW F. JOHNSON Co-Chief Executive March 31, 1999
Andrew F. Johnson Officer, President/
Operations and
Director
/S/ MARK R. S. JOHNSON Co-Chief Executive March 31, 1999
Mark R. S. Johnson Officer, President/
Marketing and
Director
*/S/ DALE W. KOOP Director March 31, 1999
Dale W. Koop
*/S/ MONTY C. BENNETT Director March 31, 1999
Monty C. Bennett
*/S/ DOUGLAS A. DECAMP Director March 31, 1999
Douglas A. DeCamp
________________________ Director March __, 1999
William R. Cook
*/S/ NEIL A. GARDNER Director March 31, 1999
Neil A. Gardner
*/S/ RICHARD L. FOSTER Director March 31, 1999
Richard L. Foster
*By /S/ THOMAS J. BELLGRAPH
Thomas J. Bellgraph
Attorney In Fact
-55-
<PAGE>
HASTINGS MANUFACTURING COMPANY
AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULES
FORM 10-K ITEM 14(a)2
YEAR ENDED DECEMBER 31, 1998
-56-
<PAGE>
HASTINGS MANUFACTURING COMPANY
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
PAGE
Report of Independent Certified Public Accountants
on Financial Statement Schedule 46
Schedule:
II - Valuation and Qualifying Accounts 47
Other schedules have been omitted because they were inapplicable or
otherwise not required.
-57-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Hastings Manufacturing Company
Hastings, Michigan
The audits referred to in our report dated February 26, 1999 relating to
the consolidated financial statements of Hastings Manufacturing Company and
subsidiaries, which is contained in Item 8 of this Form 10-K, included the
audit of the financial statement schedule listed in the accompanying index.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Grand Rapids, Michigan
February 26, 1999
-58-
<PAGE>
<TABLE>
HASTINGS MANUFACTURING COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------- ---------- ------------------------ ----------- ----------
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTIONS/ END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD
- ----------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ $ $ $ $
Year Ended December 31, 1998:
Allowance for possible
losses and receivables 215,000 458,400 -- 463,500 210,000
======= ======= ======= ======= =======
Year Ended December 31, 1997:
Allowance for possible
losses on receivables 215,000 36,000 -- 36,000 215,000
======= ======= ======= ======= =======
Year Ended December 31, 1996:
Allowance for possible
losses on receivables 225,000 5,300 -- 15,300 215,000
======= ======= ======= ======= =======
</TABLE>
-59-
<PAGE>
EXHIBIT INDEX
NUMBER
3(a) Amended Articles of Incorporation of Hastings Manufacturing
Company, filed as an exhibit to the Form 10-Q Quarterly Report
for the period ended September 30, 1998, are here incorporated by
reference.
3(b) Bylaws of Hastings Manufacturing Company, filed as an exhibit to
the Form S-8 Registration Statement (File No. 333-74489) filed
on March 16, 1999, are here incorporated by reference.
4(a) NBD Bank Amended and Restated Letter Agreement for $6,600,000
Term Loan and $3,000,000 Credit Authorization to Make Revolving
Credit Loans and Issue Letters of Credit dated August 28, 1998,
filed as an exhibit to the Form 10-Q Quarterly Report for the
period ended September 30, 1998, is here incorporated by
reference.
4(b) Restated Master Agreement dated August 10, 1998, regarding an
interest rate swap transaction between Hastings Manufacturing
Company and NBD Bank, filed as an exhibit to the Form 10-Q
Quarterly Report for the period ended September 30, 1998, is here
incorporated by reference.
4(c) Commercial Line of Credit Agreement and Note, dated as of January
23, 1998, between Hastings Manufacturing Company and Hastings
City Bank, filed as an exhibit to the Form 10-Q Quarterly Report
for the period ended June 30, 1998, is here incorporated by
reference.
4(d) Preferred Stock Purchase Rights Plan, filed as an exhibit to Form
8-K filed with the Securities and Exchange Commission on February
15, 1996, is here incorporated by reference.
4(e) Confirmation, dated as of March 12, 1996, regarding an interest
rate collar transaction between Hastings Manufacturing Company
and NBD Bank, filed as an exhibit to the Form 10-K Annual Report
for the year ended December 31, 1996, is here incorporated by
reference.
10(a) List of Recipients of Indemnity Agreement and Form of Indemnity
Agreement.
10(b) 1990 Restricted Stock Plan.<F1>
-60-
<PAGE>
10(c) Asset Purchase Agreement between Hastings Manufacturing Company
and CLARCOR Inc. dated as of September 3, 1995, filed as an
exhibit to the Form 8-K filed with the Securities and Exchange
Commission on September 20, 1995, is incorporated herein by
reference.
10(d) Transition Agreement, dated September 3, 1995, among Hastings
Filters, Inc., Hastings Manufacturing Company and Hastings, Inc.
and joined in by CLARCOR Inc., filed as an exhibit to the Form
10-Q Quarterly Report for the period ended September 30, 1997, is
incorporated herein by reference.
10(e) Stock Option and Restricted Stock Plan of 1997, filed as Exhibit
A to the Company's Proxy Statement for its 1998 annual Meeting,
is here incorporated by reference.<F1>
10(f) Form of Incentive Stock Option Agreement for use under the 1997
Stock Option and Restricted Plan of 1997.<F1>
10(g) Form of Nonqualified Stock Option Agreement for use under the
Stock Option and Restricted Stock Plan of 1997.<F1>
21 Subsidiaries of Hastings Manufacturing Company.
23 Consent of BDO Seidman, LLP
24 Powers of Attorney
27 Financial Data Schedule as of December 31, 1997 and for the year
then ended.
- ---------------------
<F1> Management contract or compensatory plan or arrangement.
-61-
<PAGE>
EXHIBIT 10(a)
LIST OF RECIPIENTS OF INDEMNITY AGREEMENTS
On May 10, 1988, Hastings Manufacturing Company entered into an
Indemnity Agreement in the form attached hereto with each officer and/or
director listed below:
Stephen I. Johnson
Mark R.S. Johnson
Andrew F. Johnson
Robert H. Wallin
William R. Cook
Roderick G. Miller
Monty C. Bennett
Dale W. Koop
Neil A. Gardener
Richard L. Foster
Donald A. DeCamp
Thomas J. Bellgraph
Laura J. Lykins
<PAGE>
INDEMNITY AGREEMENT
This Agreement is made as of the 10th day of May, 1988, by and
between HASTINGS MANUFACTURING COMPANY, a Michigan corporation ("Hastings")
and the undersigned officer and/or director of Hastings ("Indemnitee").
WHEREAS, it is essential to Hastings to retain and attract as
directors and officers the most capable persons available; and
WHEREAS, the substantial increase in corporate litigation
subjects directors and officers to expense litigation risks at the same
time that the availability of directors' and officers' liability insurance
has been severely limited; and
WHEREAS, it is now and has always been the express policy of
Hastings to indemnify its directors and officers so as to provide them with
the maximum possible protection permitted by law; and
WHEREAS, Indemnitee does not regard the protection available
under Hastings' Articles of Incorporation and Bylaws as adequate in the
present circumstances, and may not be willing to continue to serve as a
director or officer without adequate protection, and Hastings desires
Indemnitee to serve in such capacity.
NOW, THEREFORE, the parties agree as follows:
SECTION 1. DEFINITIONS. As used in this Agreement:
(a) "Expenses" shall mean all costs, expenses and
obligations paid or incurred in connection with investigating,
litigating, being a witness in, defending or participating in, or
preparing to litigate, defend, be a witness in or participate in
any matter that is the subject of a Proceeding (as defined
below), including attorneys' and accountants' fees and court
costs.
(b) "Proceeding" shall mean any threatened, pending, or
completed action, suit or proceeding, or any inquiry or
investigation, whether brought by or in the right of Hastings or
otherwise and whether of a civil, criminal, administrative or
investigative nature, in which Indemnitee may be or may have been
involved as a party or otherwise by reason of the fact that
Indemnitee is or was a director, officer, employee, agent or
<PAGE>
fiduciary of Hastings, or by reason of any action taken by
Indemnitee or any inaction on Indemnitee's part while acting as a
director, officer, employee, agent or fiduciary of Hastings, or
by reason of the fact that Indemnitee is or was serving at the
request of Hastings as a director, officer, employee, agent or
fiduciary of another corporation, partnership, joint venture,
trust or other enterprise.
(c) "Resolution Costs" shall include any amount paid in
connection with a Proceeding and in satisfaction of a judgment,
fine, penalty or any amount paid in settlement.
SECTION 2. AGREEMENT TO SERVE. Indemnitee agrees to serve as a
director and/or officer of Hastings for so long as Indemnitee is duly
elected or appointed or until the tender of Indemnitee's written
resignation.
SECTION 3. INDEMNIFICATION. The indemnification provided under
this Agreement shall be as follows:
(a) Hastings shall indemnify Indemnitee against all
Expenses actually and reasonably incurred by Indemnitee in
connection with any Proceeding. Additionally, in any Proceeding
other than a Proceeding by or in the right of Hastings, Hastings
shall indemnify Indemnitee against all Resolution Costs actually
and reasonably incurred by Indemnitee in connection with such
Proceeding. No indemnification shall be made under this
subsection:
(i) with respect to remuneration paid to Indemnitee if
it shall be determined by a final judgment or other final
adjudication that such remuneration was in violation of law;
(ii) on account of any suit in which judgment is
rendered against Indemnitee for an accounting of profits
made from the purchase or sale by Indemnitee of securities
of Hastings pursuant to the provisions of Section 16(b) of
the Securities Exchange Act of 1934 and amendments thereto,
or similar provisions of any federal, state, or local law;
(iii) on account of Indemnitee's conduct which is
determined by a final judgment or other final adjudication
to have been knowingly fraudulent, deliberately dishonest or
willful misconduct;
-2-
<PAGE>
(iv) on account of Indemnitee's conduct which by a
final judgment or other final adjudication is determined to
have been in bad faith, in opposition to the best interests
of Hastings or produced an unlawful personal benefit;
(v) with respect to a criminal proceeding if the
Indemnitee knew or reasonably should have known that
Indemnitee's conduct was illegal; or
(vi) if a final decision by a court having
jurisdiction in the matter shall determine that such
indemnification is not lawful.
(b) In addition to any indemnification provided under
Subsection 3(a) above, Hastings shall indemnify Indemnitee
against any Expenses or Resolution Costs incurred by Indemnitee,
regardless of the nature of the Proceeding in which Expenses
and/or Resolution Costs were incurred, if such Expenses or
Resolution Costs would have been covered under the directors' and
officers' liability insurance policies, if any, in effect on the
effective date of this Agreement or any such insurance policies
which become effective on any subsequent date.
(c) In addition to any indemnification provided under
Subsections 3(a) and 3(b) above, Hastings shall provide
Indemnitee, to the fullest extent allowed by law as presently or
hereafter enacted or interpreted, with indemnification against
any Expenses and/or Resolution Costs incurred by Indemnitee in
connection with any Proceeding. To the extent a change in the
Michigan Business Corporation Act (whether by statute or judicial
decision) permits greater indemnification, either by agreement or
otherwise, than presently provided by law or this Agreement, it
is the intent of the parties hereto that Indemnitee shall enjoy
by this Agreement the greater benefits so afforded by such
change.
(d) Without limiting Indemnitee's right to indemnification
under any other provision of this Agreement, Hastings shall
indemnify Indemnitee in accordance with the provisions of this
Subsection if Indemnitee is a party to or threatened to be made a
party to or otherwise involved in any Proceeding by or in the
right of Hastings to procure a judgment in its favor by reason of
the fact that Indemnitee was or is a director and/or officer of
Hastings or is or was serving at the request of Hastings as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against
all Expenses actually and reasonably incurred by Indemnitee and
any amounts paid by Indemnitee in settlement of such Proceeding,
-3-
<PAGE>
but only if Indemnitee acted in good faith in a manner which
Indemnitee reasonably believed to be in or not opposed to the
best interests of Hastings, except that no indemnification shall
be made under this Subsection in respect of any claim, issue or
matter as to which Indemnitee shall have been adjudged to be
liable to Hastings in the performance of his duty to Hastings,
unless and only to the extent that any court in which such
Proceeding was brought shall determine upon application that,
despite the adjudication of liability but in view of all the
circumstances of the case, Indemnitee is fairly and reasonably
entitled to indemnity for such amounts as such court shall deem
proper.
(e) Notwithstanding anything in this Agreement to the
contrary, prior to a Change in Control (as hereinafter defined),
Indemnitee shall not be entitled to indemnification pursuant to
this Agreement in connection with any Proceeding initiated by
Indemnitee against Hastings or any director, officer, employee,
agent or fiduciary of Hastings (in such capacity) unless Hastings
has joined in or consented to the initiation of such Proceeding.
SECTION 4. PAYMENT OF INDEMNIFICATION.
(a) Expenses incurred by the Indemnitee and subject to
indemnification under Section 3 above shall be paid directly by
Hastings or reimbursed to the Indemnitee within two (2) days
after the receipt of a written request of the Indemnitee
providing that Indemnitee undertakes to repay any amount paid or
advanced under this Section to the extent that it is ultimately
determined that Indemnitee is not entitled to such
indemnification.
(b) Except as otherwise provided in Section 4(a) above, any
indemnification under Section 3 above shall be made no later than
thirty (30) days after receipt by Hastings of the written request
of Indemnitee, unless within said thirty (30) day period the
Board of Directors, by a majority vote of a quorum consisting of
directors who are not parties to such Proceeding, determines that
the Indemnitee is not entitled to the indemnification set forth
in Section 3 or unless the Board of Directors refers the
Indemnitee's indemnification request to independent legal
counsel. In cases where there are no directors who are not
parties to the Proceeding, the indemnification request is
referred to independent legal counsel. If the indemnification
request is referred to independent legal counsel, then Indemnitee
shall be paid no later than forty-five (45) days after
Indemnitee's initial request to Hastings unless within that time
-4-
<PAGE>
independent legal counsel presents to the Board of Directors a
written opinion stating in unconditional terms that
indemnification is not allowed under Section 3 of this Agreement.
If a Change in Control (as defined in Section 5) occurs and
results in individuals who were directors prior to the
circumstances giving rise to the Change in Control ceasing for
any reason to constitute a majority of the Board of Directors,
the above determination, if any, shall be made by independent
legal counsel and not the Board of Directors. Hastings agrees to
pay the reasonable fees of the independent legal and to fully
indemnify such counsel against any and all expenses (including
attorneys' fees), claims, liabilities and damages arising out of
or relating to this Agreement or its engagement pursuant thereto.
If there has not been a Change in Control as defined in Section
5, independent legal counsel shall be selected by the Board or
Directors or the executive committee of the board, and if there
has been a Change in Control, the independent legal counsel shall
be selected by Indemnitee.
(c) The right to indemnification payments as provided by
this Agreement shall be enforceable by Indemnitee in any court of
competent jurisdiction. The burden of proving that
indemnification is not permitted by this Agreement shall be on
Hastings or on the person challenging the indemnification.
Neither the failure of Hastings, including its Board of
Directors, to have made a determination prior to the commencement
of any Proceeding that indemnification is proper, nor an actual
determination by Hastings, including its Board of Directors or
independent legal counsel, that indemnification is not proper,
shall bar an action by Indemnitee to enforce this Agreement or
create a presumption that Indemnitee is not entitled to
indemnification under this Agreement. If the Board of Directors
or independent legal counsel determines in accordance with
Section 4(b) above that Indemnitee would not be permitted to be
indemnified in whole or in part, Indemnitee shall have the right
to commence litigation in any court in the State of Michigan
having subject matter jurisdiction thereof and in which venue is
proper seeking an independent determination by the court or
challenging any such determination by the Board of Directors or
independent legal counsel, and Hastings hereby consents to
service of process and to appear in any such proceeding.
Expenses incurred by Indemnitee in connection with successfully
establishing Indemnitee's right to indemnification, in whole or
in part, shall also be reimbursed by Hastings.
SECTION 5. ESTABLISHMENT OF TRUST. In the event of a Potential
Change in Control of Hastings, as hereafter defined, Hastings shall, upon
written request by Indemnitee, create a trust for the benefit of the
-5-
<PAGE>
Indemnitee and from time to time upon written request of Indemnitee shall
fund such trust in an amount sufficient to satisfy any and all Expenses or
Resolution Costs that may properly be subject to indemnification under
Section 3 above anticipated at the time of each such request. The amount
or amounts to be deposited in the trust pursuant to this funding obligation
shall be determined by a majority vote of a quorum consisting of directors
who are not parties to such Proceeding, the executive committee of the
Board of Directors or the President of Hastings. If all such individuals
are parties to the Proceeding, the amount or amounts to be deposited in the
trust shall be determined by independent counsel. The terms of the trust
shall provide that upon a Change in Control: (i) the trust shall not be
revoked or the principal thereof invaded, without the written consent of
the Indemnitee; (ii) the trustee shall advance, within two (2) business
days of a request by the Indemnitee, any amount properly payable to
Indemnitee under Subsection 4(a) of this Agreement; (iii) the trust shall
continue to be funded by the Corporation in accordance with the funding
obligation set forth above; (iv) the trustee shall promptly pay to the
Indemnitee all amounts for which the Indemnitee shall be entitled to
indemnification pursuant to this Agreement or otherwise; and (v) all
unexpended funds in such trust shall revert to Hastings upon a final
determination by a court of competent jurisdiction that the Indemnitee has
been fully indemnified under the terms of this Agreement. The trustee
shall be chosen by the Indemnitee and shall be a national or state bank
having a combined capital and surplus of not less than $50,000,000.
Nothing in this Section shall relieve Hastings of any of its obligations
under this Agreement. At the time of each draw from the trust fund, the
Indemnitee shall provide the trustee with a written request providing that
Indemnitee undertakes to repay such amount to the extent that it is
ultimately determined that Indemnitee is not entitled to such
indemnification. Any funds, including interest or investment earnings
thereon, remaining in the trust fund shall revert and be paid to Hastings
if: (i) a Change in Control has not occurred; and (ii) if the executive
committee of the Board of Directors or the Chairman or Chief Executive
Officer of Hastings determines that the circumstances giving rise to that
particulate funding of the trust no longer exists.
For purposes of this Section and Section 7 hereof, a "Change in
Control" shall mean a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14a
promulgated under the Securities Exchange Act of 1934, as amended
("Exchange Act"), provided that, without limitation, such a change in
control shall be deemed to have occurred if: (i) during any period of two
consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of Hastings and any new director whose
election by the Board of Directors or nomination for election by Hastings'
shareholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning
of the period or whose election or nomination for election was previously
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so approved, cease for any reason to constitute a majority thereof; (ii)
the shareholders of Hastings approve a merger or consolidation of Hastings
with any other corporation, other than a merger or consolidation which
would result in the voting securities of Hastings outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or
by being converted into voting securities of the surviving entity) at least
80% of the total voting power represented by the voting securities of
Hastings or such surviving entity outstanding immediately after such merger
or consolidation; or (iii) the shareholders of Hastings approve a plan of
complete liquidation of Hastings or an agreement for the sale or
disposition by Hastings of all or substantially all of Hastings' assets.
For purposes of this Section, a "Potential Change in Control"
shall be deemed to have occurred if (i) Hastings enters into an agreement,
the consummation of which would result in the occurrence of a Change in
Control; (ii) any person (including Hastings) publicly announces an
intention to take or to consider taking actions which once consummated
would constitute a Change in Control; or (iii) the Board of Directors
adopts a resolution to the effect that, for purposes of this Agreement, a
Potential Change in Control has occurred.
SECTION 6. PARTIAL INDEMNIFICATION; SUCCESSFUL DEFENSE. If
Indemnitee in entitled under any provision of this Agreement to
indemnification by Hastings for some or a portion of the Expenses or
Resolution Costs actually and reasonably incurred by Indemnitee but not,
however, for the total amount thereof, Hastings shall nevertheless
indemnify Indemnitee for the portion of such Expenses or Resolution Costs
to which Indemnitee is entitled. Moreover, notwithstanding any other
provision of this Agreement, to the extent that Indemnitee has been
successful on the merits or otherwise in defense of any or all claims
relating in whole or in part to a Proceeding or in defense of any issue or
matter therein, including dismissal without prejudice, Indemnitee shall be
indemnified against all Expenses incurred in connection therewith.
SECTION 7. CONSENT. Unless and until a Change in Control has
occurred, Hastings shall not be liable to indemnify Indemnitee under this
Agreement for any amounts paid in settlement of any Proceeding made without
Hastings' written consent. Hastings shall not settle any Proceeding in any
manner which would impose any penalty or limitation on Indemnitee without
Indemniteels written consent. Neither Hastings nor the Indemnitee will
unreasonably withhold their consent to any proposed settlement.
SECTION 8. SEVERABILITY. If this Agreement or any portion hereof
(including any provision within a single section, subsection or sentence)
shall be held to be invalid, void or otherwise unenforceable on any ground
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by any court of competent jurisdiction, Hastings shall nevertheless
indemnify Indemnitee as to any Expenses or Resolution Costs with respect to
any Proceeding to the full extent permitted by law or any applicable
portion of this Agreement that shall not have been invalidated, declared
void or otherwise held to be unenforceable.
SECTION 9. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The
indemnification provided by this Agreement shall be in addition to any
other rights to which Indemnitee may be entitled under the Articles of
Incorporation, the Bylaws, any agreement, any vote of shareholders or
disinterested directors, the Michigan Business Corporation Act, or
otherwise, both as to actions in Indemnitee's official capacity and as to
actions in another capacity while holding such office.
SECTION 10. NO PRESUMPTION. For purposes of this Agreement, the
termination of any claim, action, suit or proceeding, by judgment, order,
settlement (whether with or without court approval) or conviction, or upon
a plea of nolo contendere, or its equivalent, shall not create a
presumption that Indemnitee did not meet any particular standard of conduct
or have any particular belief or that a court has determined that
indemnification is not permitted by applicable law.
SECTION 11. SUBROGATION. In the event of payment under this
Agreement, Hastings shall be subrogated to the extent of such payment to
all of the rights of recovery of Indemnitee, who shall execute all
documents required and shall do everything that may be necessary to secure
such rights, including the execution of such documents necessary to enable
Hastings to effectively bring suit to enforce such rights.
SECTION 12. NO DUPLICATION OF PAYMENTS. Hastings shall not be
liable under this Agreement to make any payment to the extent Indemnitee
has otherwise actually received payment (under any insurance policy, Bylaw
or otherwise) of the amounts otherwise indemnifiable hereunder.
SECTION 13. NOTICE. Indemnitee shall, as a condition precedent to
his right to be indemnified under this Agreement, give to Hastings notice
in writing as soon as practicable of any claim for which indemnity will or
could be sought under this Agreement. Notice to Hastings shall be directed
to Hastings Manufacturing Company, 325 North Hanover, Hastings, Michigan
49058, Attention: Secretary (or to such other individual or address as
Hastings shall designate in writing to Indemnitee). Notice shall be deemed
received three (3) days after the date postmarked if sent by prepaid mail
properly addressed. In addition, Indemnitee shall give Hastings such
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information and cooperation as it may reasonably require and shall be
within Indemnitee's power to give.
SECTION 14. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall constitute the original.
SECTION 15. CONTINUATION OF INDEMNIFICATION. The indemnification
rights provided to Indemnitee under this Agreement, including the right
provided under Subsection 4(a) above, shall continue after Indemnitee has
ceased to be a director, officer, employee, agent or fiduciary of Hastings
or any other corporation, partnership, joint venture, trust or other
enterprise in which Indemnitee served in any such capacity at the request
of Hastings.
SECTION 16. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties hereto, and their respective
successors and assigns, including any direct or indirect successor by
purchase, merger, consolidation or otherwise to all or substantially all
of-the business or assets of Hastings, spouse, heirs, and personal and
legal representatives.
SECTION 17. APPLICABLE LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of Michigan
applicable to contracts made and to be performed in such state without
giving effects to the principles of conflicts of laws.
SECTION 18. LIABILITY INSURANCE. To the extent Hastings maintains
an insurance policy or policies providing directors' and officers'
liability insurance, Indemnitee shall be covered by such policy or
policies, in accordance with its or their terms, to the maximum extent of
the coverage available for any director, officer, employee, agent or
fiduciary of Hastings.
SECTION 19. PERIOD OF LIMITATIONS. No legal action shall be
brought and no cause of action shall be asserted by or on behalf of
Hastings or any affiliate of Hastings against Indemnitee, Indemnitee's
spouse, heirs, executors or personal or legal representatives after the
expiration of two (2) years from the date of accrual of such cause of
action, and any claim or cause of action of Hastings or its affiliate shall
be extinguished and deemed released unless asserted by the timely filing of
a legal action within such two (2) year period; provided, however, that if
any shorter period of limitations is otherwise applicable to any such cause
of action such shorter period shall govern.
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SECTION 20. AMENDMENTS; WAIVER. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by
both of the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute
a continuing waiver.
ATTEST: HASTINGS MANUFACTURING COMPANY
______________________________ By __________________________________________
Monty C. Bennett Mark R. S. Johnson
Secretary Executive Vice President - Marketing
INDEMNITEE
_____________________________________________
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EXHIBIT 10(b)
1990 RESTRICTED STOCK PLAN
ARTICLE 1
PURPOSE
The purpose of this Plan is to provide an opportunity for the
executive officers and certain other key employees of Hastings
Manufacturing Company ("Hastings") or its subsidiaries to acquire shares of
Common Stock of Hastings, thereby giving such persons an additional
incentive to contribute to the prosperity of Hastings, and to assist
Hastings in attracting, rewarding, and retaining well-qualified executive
personnel.
ARTICLE 2
DEFINITIONS
The following words have the following meanings unless a
different meaning is plainly required by the context:
2.1 "Board" means the board of directors of Hastings.
2.2 "Change in Control" means a change in control of the Company of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14a promulgated under the Exchange Act, provided
that, without limitation, such change in control shall be deemed to have
occurred if (a) any "Person" (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly
or indirectly, of securities of the Company representing 25 percent or more
of the combined voting power of the Company's then outstanding securities,
or (b) during any period of 2 consecutive years, individuals who at the
beginning of such period constitute the Board cease for any reason to
constitute at least a majority of the Board (unless the election or
nomination for election by the Company's shareholders of each new director
was approved by a vote of at least two-thirds of the directors then still
in office who were directors at the beginning of the period).
2.3 "Common Stock" means the Common Stock (par value $2 per share) of
Hastings.
2.4 "Code" means the Internal Revenue Code of 1986, as amended.
<PAGE>
2.5 "Committee" means the Compensation Committee of the Board or such
other committee as the Board shall designate for the purpose of
administration of the Plan. No Committee member while a member shall be
eligible to participate in this Plan or in any other plan of the Company
providing for the issuance of stock or stock options, nor have been
eligible to so participate within the 1-year period immediately prior to
appointment to the Committee.
2.6 "Competition" means participation, directly or indirectly, in the
ownership, management, financing, or control of any business which is the
same as or similar to the present or future businesses of Hastings or its
subsidiaries. Such participation could be by way of employment, consulting
services, directorship, or officership. Ownership of less than 5 percent
of the shares of any corporation whose shares are publicly traded on any
national or regional stock exchange or over the counter shall not be deemed
competition.
2.7 "Disability" of an employee means that by reason of accident,
physical illness, or mental illness, (a) the employee does not fulfill his
normal responsibility as an employee of Hastings for a period of at least 1
year, (b) Hastings and the employee agree that the employee is or will be
unable to perform his or her normal responsibilities as an employee for a
period of at least 1 year, or (c) there is a dispute as to disability and a
physician or panel of physicians determines that the employee is or will be
unable to perform his or her normal responsibility for a period of at least
1 year. Disputes regarding existence or date of disability shall be
determined by a licensed physician selected by agreement of Hastings and
the employee. Such physician's fees shall be paid by Hastings. If they
cannot agree upon a physician, the dispute shall be determined by a
majority of a panel of three licensed physicians, one selected by Hastings,
one selected by the employee, and the third selected by the first two.
Hastings and the employee shall each pay the fees of the physician they
select, and the fees of the third physician shall be shared equally. The
date of disability shall be the beginning of the 1-year period or the date
determined to be the onset of the disability by the physician or panel of
physicians.
2.8 "Employee" means any executive officer in the service of Hastings
or any of its subsidiaries, except any person who serves only as a
director. An individual's status as an Employee shall not be affected by a
leave of absence without pay.
2.9 "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2.10 "Performance Goals" means goals concerning the performance of
Hastings that will be set each year by the Board or by the Committee.
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2.11 "Retirement" means the voluntary termination of all employment by
the employee.
2.12 "Plan" means Hastings' 1990 Restricted Stock Plan as in effect
from time to time.
2.13 "Recipient" means an Employee to whom Restricted Stock has been
awarded under Article 3 of the Plan.
2.14 "Restricted Period" means a period of up to 5 years following the
date of the award of the Restricted Stock during which the Recipient will
forfeit Recipient's right to receive all or a portion of the Restricted
Stock upon termination of employment or upon Hastings' failure to meet
certain corporate performance goals. The Restricted Period for grant of
Restricted Stock may provide for delayed vesting, which means periodic
lapsing of the restrictions.
2.15 "Restricted Stock" means Common Stock awarded to a Recipient
under Articles 4 and 5 of the Plan, which stock is subject to the
restrictions of Article 6 of the Plan.
2.16 "Restricted Stock Agreement" means an agreement between Hastings
and a Recipient that sets forth the terms and conditions of an individual
award of Restricted Stock.
2.17 "Subsidiary" means any corporation of which a majority of the
outstanding voting stock is directly or indirectly owned or controlled by
Hastings, or by one or more subsidiaries.
2.18 "Vest" or "vesting" means the time when the restrictions on
transfer of the Restricted Stock lapse or are removed.
ARTICLE 3
ADMINISTRATION
3.1 The Committee shall administer the Plan, shall have sole
authority to award Restricted Stock under the Plan to any Employee, and
shall determine all questions arising in connection with the Plan,
including its interpretation. All decisions with respect to the Plan and
its interpretation made by the Committee shall be final; provided, however,
that the Committee may not award Restricted Stock to any voting member of
the Committee. No member of the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any
Restricted Stock awarded under it.
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3.2 If so directed by the Board of Directors, the Committee shall
consult with the Company's Compensation Committee or with the Board of
Directors prior to awarding Restricted Stock to any Recipient.
3.3 The awarding of Restricted Stock pursuant to the Plan shall be
entirely within the discretion of the Committee and nothing herein
contained shall be construed to give an Employee any right to participate
under the Plan or receive any Restricted Stock under it.
ARTICLE 4
RESTRICTED STOCK
4.1 Twenty thousand shares of authorized Common Stock may be
available for awards of Restricted Stock under the Plan. Such shares may
be either unissued or treasury shares. If any such shares are forfeited
through termination of employment, failure to meet corporate performance
goals, or otherwise prior to lapse of restrictions, such shares may be
reissued in subsequent grants of Restricted Stock under the Plan.
4.2 Restricted Stock awarded under the Plan shall be subject to the
restrictions set forth in Article 6.
4.3 Each award of Restricted Stock under the Plan shall be evidenced
by a Restricted Stock Agreement containing the terms and conditions of the
award as described in Article 6 and such other provisions as the Committee
may deem appropriate.
4.4 All or a portion of the Restricted Stock granted to a Recipient
may be released from restrictions or be forfeited from time to time
according to the terms of the Plan and the applicable Restricted Stock
Agreement. After the Restricted Period shall lapse with respect to shares
of the stock, such shares shall no longer be deemed Restricted Stock
whether or not the certificates for those shares have been delivered to the
Recipient.
4.5 Any certificates evidencing shares of Restricted Stock awarded
pursuant to the Plan shall be registered in the name of the Recipient and
deposited, together with a stock power endorsed in blank, with Hastings.
At the discretion of the Committee, any such certificates may be deposited
in a bank designated by the Committee or delivered to the Recipient. Each
such certificate shall bear the following legend:
The shares represented by this certificate were issued
subject to certain restrictions under the Hastings Manufacturing
Company 1990 Restricted Stock Plan. A copy of the Plan is on
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file in the office of the Secretary of Hastings Manufacturing
Company. This certificate is held subject to the terms and
conditions contained in a restricted stock agreement which
includes a prohibition against the sale or transfer of the stock
represented by this certificate except in compliance with that
agreement.
4.6 Certificates for shares of stock released from the restrictions
shall be delivered to the Recipient upon request within a reasonable period
of time. The Recipient shall sign all documents necessary and appropriate
to facilitate such delivery.
4.7 If any increase, decrease, or adjustment in the Common Stock of
Hastings is made as a result of a stock dividend, stock split, reverse
stock split, recapitalization, added rights, or any other similar corporate
event, or as a result of a merger, consolidation, or other reorganization
of Hastings, the Board shall make an appropriate adjustment in the
aggregate number of shares subject to the Plan, and the maximum number of
shares which may be awarded to any Recipient; provided, however, that any
fractional shares resulting from any such adjustment may be eliminated.
ARTICLE 5
CALCULATION AND VESTING OF AWARDS
5.1 The Board of Directors or the Committee shall establish
Performance Goals for each calendar year in order to establish a standard
for determining the extent to which Restricted Stock awards for such
calendar year shall vest. One set of Performance Goals shall be so
established which shall be applicable to all or to specified categories of
Plan participants and shall reflect what the Board of Directors or the
Committee believes represents a challenging goal for either Hastings or a
division or subsidiary of Hastings, for either one, all, or some
combination of (a) aftertax rate of return on shareholders' equity,
(b) pretax rate of return on sales, (c) pretax rate of return on assets,
(d) sales growth rate, or (e) any other standard considered appropriate by
the Committee. Individual Performance Goals for eligible Recipients may
also be established. Rate of return, sales growth rates and any other
standards for Performance Goals shall be computed based on the amounts
shown in Hastings' annual certified financial statements; provided,
however, that the Committee may adjust such amounts for such extraordinary
and special items or other unusual charges or credits as it shall deem
appropriate for purposes of the Plan. In determining whether or not the
Performance Goals established for a particular calendar year have been met,
the Board of Directors or the Committee may exclude from its calculations
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any figures attributable to the acquisition of another corporation by
Hastings.
5.2 The Committee may grant awards of Restricted Stock to Recipients
for such numbers of shares of Restricted Stock as the Committee shall deem
appropriate in each instance. Any such grant is subject to approval by the
Board of Directors if the Board directs the Committee to submit such awards
to the Board for approval. The Restricted Period shall be 5 years for each
award. For each year during that 5-year term for which the applicable
Performance Goals are met, 20 percent of the Restricted Shares awarded to
the Recipient shall vest in the Recipient. For each year during the 5-year
term for which the applicable Performance Goals are not met, 20 percent of
the Restricted Shares awarded to the Recipient shall be forfeited by the
Recipient.
ARTICLE 6
TERMS AND CONDITIONS OF RESTRICTED STOCK
The award of Restricted Stock under the Plan shall be subject to
the following terms and conditions:
6.1 In addition to the requirement that the Performance Goals be met,
the Restricted Stock shall be awarded on the condition that the Recipient
remain in the employment of Hastings, or one or more of its parents or
subsidiaries during the Restricted Period applicable to designated shares
except as otherwise provided in this Article 6; but such condition shall
have no effect on the right of Hastings or any subsidiary to terminate the
Recipient's employment at any time.
6.2 Unless otherwise provided in the Restricted Stock Agreement, in
the event of the death or Disability of the Recipient during the Restricted
Period,
(a) With respect to any calendar year at the end of which
the Recipient is living and actively employed by Hastings, the
Recipient shall vest in any shares of Restricted Stock set to
vest or be forfeited with respect to the Performance Goals
applicable to the Plan in the same manner as otherwise provided
in this Plan, regardless of whether or not the Recipient's death
or disability occurs prior to or after the date on which it is
determined to what extent the Performance Goals for that calendar
year have been met.
(b) With respect to the calendar year in which the
Recipient's death or termination of employment because of
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disability occurs, if the Recipient has additional shares of
Restricted Stock that would have vested or been forfeited because
of Hastings' attainment or non-attainment of the Performance
Goals established for the calendar year in which the Recipient's
death or termination of employment because of disability occurs,
then as of the end of that calendar year the Recipient or the
Recipient's estate shall forfeit or become vested in such shares
in the same manner as if the Recipient were alive and employed by
Hastings at the time of final determination as to whether or not
those Performance Goals were met.
(c) For the calendar year following the calendar year in
which the Recipient's death or termination of employment because
of disability occurred, if the Recipient has additional shares of
Restricted Stock that would have vested or been forfeited because
of Hastings' attainment or non-attainment of the Performance
Goals established for that calendar year (following the calendar
year in which the Recipient's death or termination of employment
because of disability occurred), then as of the end of that
second calendar year the Recipient or the Recipient's estate
shall forfeit or become vested in such shares in the same manner
as if the Recipient were alive and employed by Hastings at the
time of final determination as to whether or not those
Performance Goals were met.
(d) Any unvested shares of Restricted Stock that would vest
only upon the attainment by Hastings of Performance Goals for a
calendar year later than the calendar year following the calendar
year in which the Recipient's death or termination of employment
by reason of disability occurred shall be forfeited by the
Recipient as of the date of the Recipient's death or termination
of employment by reason of disability.
6.3 In the event of Retirement by the Recipient, the Recipient's
right to the Restricted Stock shall cease and terminate as of the date of
Retirement unless, upon notice from the Recipient of a proposed Retirement
date, the Committee consents to waive the termination of the Recipient's
right to the Restricted Stock in connection with the proposed Retirement.
With such consent, the restrictions shall lapse or the Restricted Stock
shall be forfeited at the normal time periods, depending on whether or not
the Performance Goals of the Company are met, unless vesting of the
Restricted Stock is otherwise accelerated under this Article 6 or unless
the provisions concerning Competition apply.
6.4 In the event of a Change in Control during the Restricted Period,
the Recipient's right to all of the Recipient's Restricted Stock shall,
upon election by the Recipient and consent by the Committee as constituted
at the time of Change in Control within 90 days of such Change in Control,
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vest as of the date of the Change in Control and upon such election the
Recipient's Restricted Stock may be transferred free of the restrictions
under this Plan, except for those restrictions described in Paragraph 6.9
of this article; provided, however, that if the vesting, when considered
with all other payments and benefits from the Company to the Recipient,
constitutes a "parachute payment," as defined in Section 280G(b)(2) of the
Code, then the Recipient's right to the Restricted Stock shall vest only to
the extent that the aggregate present value of all payments and benefits in
the nature of compensation, to which Section 280G(b)(2) of the Code
applies, does not exceed 299 percent of the annualized average of the
Recipient's gross income from the Company for federal income tax purposes
during the 5-year period ending on the last day of the Company's taxable
year preceding the date of the Change in Control.
6.5 If the Recipient enters into Competition with Hastings or
terminates his or her employment during the Restricted Period for any
reason other than Retirement with the Committee's consent, death or
Disability, the Recipient's right to the Restricted Stock which has not
vested shall cease and terminate as of the date of competition or
termination and the Recipient shall promptly surrender to Hastings such
Restricted Stock held by the Recipient together with any distribution on
such stock made after the date of termination. Hastings may use the stock
power provided hereunder to complete the reregistration of any certificate
and may divide any shares represented by a certificate into restricted and
nonrestricted shares.
6.6 The shares of Restricted Stock which have not vested shall not be
sold, exchanged, transferred, pledged, or otherwise disposed of by the
Recipient during the Restricted Period, other than to Hastings pursuant to
Paragraphs 6.5 and 6.7 of this article or by will or by the laws of descent
or distribution. The Recipient shall agree to execute from time to time at
the request of Hastings such stock powers with respect to the Restricted
Stock as may be appropriate to facilitate the reregistration of the
Restricted Stock pursuant to the Plan.
6.7 If any assignment, pledge, transfer, or other disposition,
voluntary or involuntary, of the Restricted Stock which has not vested
shall be made or attempted during the Restricted Period, except as provided
above in Paragraph 6.5 of this article, the Recipient's right to the
Restricted Stock shall immediately cease and terminate and the Recipient
shall promptly surrender to Hastings all such Restricted Stock in
Recipient's possession.
6.8 During the Restricted Period, the Recipient shall have all rights
of a shareholder with respect to the Restricted Stock, including (a) the
right to vote any shares at shareholders' meetings, (b) the right to
receive, without restriction, all cash dividends paid with respect to such
Restricted Stock, and (c) the right to participate with respect to such
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Restricted Stock in any stock dividend, stock split, recapitalization, or
other adjustment in the Common Stock of Hastings or any merger,
consolidation, or other reorganization involving an increase or decrease or
adjustment in the Common Stock of Hastings; provided, however, that if any
Performance Goals are not met and any shares of Restricted Stock are
accordingly forfeited, these rights of the Recipient with respect to such
shares shall terminate immediately upon that forfeiture. Any new,
additional, or different shares or other security received by the Recipient
pursuant to any such stock dividend, stock split, recapitalization, or
reorganization shall be subject to the same terms, conditions, and
restrictions as those relating to the Restricted Stock for which such
shares were received.
6.9 The Recipient shall represent and warrant that the Recipient is
acquiring the Restricted Stock for the Recipient's own account and
investment and without any intention to resell or distribute the Restricted
Stock. The Recipient shall agree not to resell or distribute such
Restricted Stock after the Restricted Period except upon such conditions as
Hastings may reasonably specify to insure compliance with federal and state
securities laws. Hastings may require appropriate legends to be placed on
the certificates to meet such requirements.
6.10 Hastings shall have a right of first refusal with respect to any
proposed sale or other disposition of any vested Restricted Shares. The
Recipient must notify Hastings in writing of any such proposed sale or
disposition, and that notice must contain all the terms of the proposed
sale or disposition. Hastings shall have 30 days after receipt of that
written notice to purchase from the Recipient the number of such shares
which are the subject of the proposed sale or other disposition, with that
purchase to be at the same price and upon the same terms as those of the
proposed sale or other disposition. If Hastings does not exercise its
right of first refusal within 30 days, or earlier notifies the Recipient in
writing that Hastings waives its right of first refusal with respect to the
proposed sale or other disposition, the Recipient may consummate the sale
or other disposition, but only at the price and upon the terms proposed.
The shares shall remain subject to this right of first refusal after any
such transfer, and all stock certificates representing shares awarded
hereunder shall bear an appropriate legend reflecting such right.
ARTICLE 7
WITHHOLDING TAX
Hastings shall have the right to withhold, with respect to any
stock distributed under the Plan, any taxes required by law to be withheld
because of such distribution. Such withholding may be deducted from any
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wages or other property held by Hastings for distribution to the Recipient.
If there are insufficient funds or property to provide for any such
withholding, Hastings may condition delivery of the shares upon deposit of
the appropriate withholding amount by the Recipient.
ARTICLE 8
EFFECTIVE DATE, AMENDMENT, AND TERMINATION OF PLAN
This Plan shall be effective when it has been approved by the
Board of Directors of Hastings. The Board may amend, suspend, or terminate
the Plan or any portion thereof at any time; provided that no amendment,
suspension, or termination shall impair the rights of any Recipient,
without the Recipient's consent, in any Restricted Stock previously
granted. The Committee may amend the Plan to the extent necessary for the
efficient administration of the Plan, or to conform it to the provisions of
any federal or state law or regulation.
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EXHIBIT 10(f)
Option No.: ISO99-________________ Grantee:___________________________
Grant Date: ______________________ Expiration Date: __________________
Number of Shares: ________________ Exercise Price: ___________________
- ---------------------------------------------------------------------------
HASTINGS MANUFACTURING COMPANY
________________
INCENTIVE STOCK
OPTION AGREEMENT
PURSUANT TO
STOCK OPTION AND RESTRICTED
STOCK PLAN OF 1997
________________
This Incentive Stock Option Agreement (the "Agreement") is made
as of the Grant Date set forth above by and between HASTINGS MANUFACTURING
COMPANY ("Hastings") and the grantee named above (the "Grantee").
The Hastings Manufacturing Company Stock Option and Restricted
Stock Plan of 1997 (the "Plan") is administered by the Compensation
Committee of Hastings's Board of Directors (the "Committee"). The
Committee has determined that the Grantee is eligible to participate in the
Plan and to grant to the Grantee an option to purchase shares of Hastings'
common stock, $2 par value ("Common Stock"), from Hastings. All of the
rights of the Grantee are subject to the terms, conditions and provisions
of the Plan, which are incorporated by reference into this Agreement.
The Grantee acknowledges receipt of a copy of the Plan and the
Plan Description and accepts this option subject to all of the terms,
conditions and provisions of the Plan, and subject to the following further
terms and conditions:
1. GRANT. Hastings grants to the Grantee an option to purchase
shares of Hastings' Common Stock as set forth above. This option is an
incentive stock option as defined in Section 422(b) of the Internal Revenue
Code of 1986, as amended (the "Code"). If the aggregate fair market value
(determined at the time of grant) of the stock with respect to which
incentive stock options are exercisable for the first time by the Grantee
<PAGE>
during any calendar year exceeds $100,000, taking into account options
under the Plan and all other stock option plans of Hastings, options
exceeding the $100,000 limitation shall be considered nonqualified stock
options.
2. PRICE. The price of the shares of Common Stock to be purchased
upon exercise of this option shall be the Exercise Price per share set
forth above (subject to adjustment as provided in the Plan).
3. EXERCISE. The right to exercise this option shall commence on
the Grant Date shown above and shall terminate on the Expiration Date shown
above, unless earlier terminated under the Plan. The Grantee's right to
exercise this option shall vest in the manner specified in EXHIBIT A. The
Committee may, in its sole discretion, accelerate the vesting of the option
at any time before full vesting; PROVIDED, HOWEVER, that if any such
acceleration would cause a portion of the option not to qualify as an
incentive stock option, the Committee may divide the option and stock
issued upon exercise into incentive stock option shares and nonqualified
option shares. The Grantee shall deliver to Hastings at the time of payment
an executed notice of exercise in the form of EXHIBIT B, which shall be
effective upon receipt by the Chief Financial Officer at Hastings' main
office, accompanied by full payment (as set forth below) of the option
price. Hastings will deliver to the Grantee a certificate or certificates
for such shares; PROVIDED, HOWEVER, that the time of delivery may be
postponed for such period as may be required for Hastings with reasonable
diligence to comply with any registration requirements under the Securities
Act of 1933, the Securities Exchange Act of 1934, any requirements under
any other law or regulation applicable to the issuance, listing or transfer
of such shares, or any agreement or regulation of any exchange or quotation
service upon which shares of Common Stock may be listed or quoted for
trading. If the Grantee fails to accept delivery of and pay for all or any
part of the number of shares specified in the notice upon tender or
delivery of the shares, the Grantee's right to exercise the option with
respect to such undelivered shares shall terminate.
4. PAYMENT BY THE GRANTEE. The Exercise Price for each share
purchased under this option shall be payable in cash (or by certified
check, bank draft or money order) or, if the Committee consents, in shares
of Common Stock (including Common Stock to be received upon a simultaneous
exercise) or other consideration substantially equivalent to cash. The
Committee may permit payment of all or a portion of the Exercise Price in
the form of a promissory note or in installments according to terms
approved by the Committee. The Board of Directors of Hastings may restrict
or suspend the power of the Committee to permit such loans and may require
that adequate security be provided. For purposes of payment to Hastings in
whole or in part with shares of Common Stock (including shares of Common
Stock to be received upon a simultaneous exercise), shares of Common Stock
-2-
<PAGE>
shall be valued as follows: (a) if shares of Common Stock are listed or
quoted for trading on an exchange or quotation system, at the mean of the
highest and lowest sales prices of shares of Common Stock reported on such
exchange or system that is the primary stock exchange or system for trading
of Common Stock on the date of exercise, or if such exchange or system is
closed on that date, the last preceding date on which such exchange or
system was open for trading and on which shares of Common Stock were
traded; or (b) if shares of Common Stock are not listed or quoted for
trading on an exchange or quotation system, at a price determined by the
Board of Directors. Such payment shall be made by delivery, or
satisfactory assurances of delivery, to Hastings of the certificate(s)
representing all of the shares of Common Stock to be used as payment, duly
endorsed for transfer or accompanied by stock powers duly endorsed, in
forms sufficient to vest lawful title in Hastings. The Grantee shall
represent and warrant to Hastings with respect to all Common Stock used as
payment under the terms of this Agreement that the Grantee has good and
marketable title to the shares to be used as payment and the absolute right
to sell, assign, transfer and deliver the shares to Hastings pursuant to
this Agreement, free and clear of all liens, pledges, encumbrances,
options, rights of first refusal or other claims of any nature whatsoever,
except transfer restrictions required under applicable federal and state
securities laws. Payment with Common Stock may be used in combination with
payment with cash.
5. REGISTRATION AND LISTING. The stock options granted under this
Agreement are conditional upon (a) the effective registration or exemption
of the Plan, the options granted under the Plan and the stock to be
received upon exercise of options under the Securities Act of 1933 and
applicable state or foreign securities laws, and (b) the effective listing
of the stock on any applicable stock exchange or quotation system.
6. ACCELERATION. This option shall be immediately exercisable in
the event of any Change in Control of Hastings. "Change in Control" is
defined in the Plan.
7. TRANSFERABILITY. Unless the Committee consents otherwise, this
option shall not be sold, exchanged, transferred, pledged, assigned or
otherwise alienated or hypothecated during the term of the option except by
will or the laws of descent or distribution.
8. TERMINATION FOR "CAUSE." This option shall terminate at the
times provided in the Plan. For purposes of this Agreement, "cause" for
termination of employment shall have the meaning given to that term under
any employment or other severance agreement between the Grantee and
Hastings; in the absence of any such agreement or any definition of such
term, "cause" for the purposes of this Agreement shall mean the Grantee's
neglect, continued failure or inability to perform, or poor performance of,
-3-
<PAGE>
duties, consistent failure to attain assigned objectives, misappropriation
of corporate property, intentional damage to Hastings property, activities
in aid of a competitor, insubordination, dishonesty, conviction of a crime
involving moral turpitude or performance of any act (including any
dishonest or fraudulent act) detrimental to the interests of Hastings.
9. CORPORATE CHANGES. In the event of any stock dividend, stock
split or other increase or reduction in the number of shares of Common
Stock outstanding, the number and class of shares covered by this option,
and the Exercise Price, are subject to adjustment as provided in the Plan.
10. ADMINISTRATION. The Committee has full power and authority to
interpret the provisions of the Plan, to supervise the administration of
the Plan and to make all other determinations considered necessary or
advisable under the Plan. All determinations, interpretations and
selections made by the Committee regarding the Plan shall be final and
conclusive.
11. SHAREHOLDER RIGHTS. The Grantee shall have no rights as a
shareholder with respect to any shares covered by this option until the
date of issuance of a stock certificate to the Grantee for such shares.
12. EMPLOYMENT BY HASTINGS. The grant of this option shall not
impose upon Hastings or any subsidiary any obligation to retain the Grantee
in its employ for any given period or upon any specific terms of
employment. Hastings or any subsidiary may at any time dismiss the Grantee
from employment, free from any liability or claim under the Plan, unless
otherwise expressly provided in any written agreement with the Grantee.
13. ILLEGALITY. The Grantee will not exercise this option, and
Hastings will not be obligated to issue any shares to the Grantee under
this option, if the exercise thereof or the issuance of such shares shall
constitute a violation by the Grantee or Hastings of any provisions of any
law, order or regulation of any governmental authority.
14. CERTIFICATIONS. The Grantee acknowledges that he or she has been
furnished and has read the Plan Description relating to the Plan. The
Grantee hereby represents and warrants that the Grantee is acquiring the
option granted under this Agreement for the Grantee's own account and
investment and without any intent to resell or distribute the shares upon
exercise of the option. The Grantee shall not resell or distribute the
shares received upon exercise of the option except in compliance with such
conditions as Hastings may reasonably specify to ensure compliance with
federal and state securities laws.
15. AGREEMENT CONTROLS. The Plan is incorporated in this Agreement
by reference. Capitalized terms not defined in this Agreement shall have
-4-
<PAGE>
those meanings provided in the Plan. In the event of any conflict between
the terms of this Agreement and the terms of the Plan, the provisions of
this Agreement shall control.
16. EFFECTIVE DATE. This option shall be effective as of the date
set forth at the top of this Agreement.
17. NOTICE OF DISQUALIFYING DISPOSITION. The Grantee agrees to
notify Hastings if the Grantee sells shares acquired through the proper
exercise of this option within two years of the date of this option or
within one year of the exercise of this option to enable Hastings to claim
the deduction to which it will thereby become entitled.
This option has been issued by the Board of Directors upon
recommendation of the Compensation Committee of Hastings.
HASTINGS MANUFACTURING COMPANY
By: _________________________________________
Its:_________________________________________
"Hastings"
X____________________________________________
"Grantee"
-5-
<PAGE>
EXHIBIT A
VESTING SCHEDULE
<TABLE>
<CAPTION>
DATE OF VESTING NUMBER OF SHARES
<S> <C> <C>
_________________ ________________
_________________ ________________
_________________ ________________
_________________ ________________
_________________ ________________
</TABLE>
<PAGE>
EXHIBIT B
HASTINGS MANUFACTURING COMPANY
STOCK OPTION AND RESTRICTED STOCK PLAN OF 1997
NOTICE OF EXERCISE
Date ________________
Hastings Manufacturing Company
325 North Hanover Street
Hastings, Michigan 49058
Re: Option No. ________________
Gentlemen:
I hereby exercise Option No. _____________ granted to me on
_______________, to the extent of ____________________ shares of the Common
Stock, $2 par value, of Hastings Manufacturing Company.
Pursuant to the terms and conditions of such option, I am
enclosing herewith payment in the amount of _____________________________
Dollars ($___________) or hereby enclose shares having an aggregate market
value of _____________________________ Dollars ($__________).
Very truly yours,
________________________________________
Register shares in the name of: ________________________________________
Address: ________________________________________
________________________________________
Social Security Number: ________________________________________
<PAGE>
EXHIBIT 10(g)
Option No.: NQ99-__________________ Grantee: __________________________
Grant Date: _______________________ Expiration Date: __________________
Number of Shares: _________________ Exercise Price: ___________________
- ---------------------------------------------------------------------------
HASTINGS MANUFACTURING COMPANY
________________
NON-QUALIFIED
STOCK OPTION AGREEMENT
PURSUANT TO
STOCK OPTION AND RESTRICTED
STOCK PLAN OF 1997
________________
This Non-Qualified Stock Option Agreement (the "Agreement") is
made as of the Grant Date set forth above by and between HASTINGS
MANUFACTURING COMPANY ("Hastings") and the grantee named above (the
"Grantee").
The Hastings Manufacturing Company Stock Option and Restricted
Stock Plan of 1997 (the "Plan") is administered by the Compensation
Committee of Hastings's Board of Directors (the "Committee"). The
Committee has determined that the Grantee is eligible to participate in the
Plan and to grant to the Grantee an option to purchase shares of Hastings'
common stock, $2 par value ("Common Stock"), from Hastings. All of the
rights of the Grantee are subject to the terms, conditions and provisions
of the Plan, which are incorporated by reference into this Agreement.
The Grantee acknowledges receipt of a copy of the Plan and the
Plan Description and accepts this option subject to all of the terms,
conditions and provisions of the Plan, and subject to the following further
terms and conditions:
1. GRANT. Hastings grants to the Grantee an option to purchase
shares of Hastings' Common Stock, as set forth above. This option is a
non-qualified option and is not an incentive stock option under Section 422
of the Internal Revenue Code of 1986, as amended (the "Code").
<PAGE>
2. PRICE. The price of the shares of Common Stock to be purchased
upon exercise of this option shall be the Exercise Price per share set
forth above (subject to adjustment as provided in the Plan).
3. EXERCISE. The right to exercise this option begins on the Grant
Date shown above and shall terminate on the Expiration Date shown above,
unless earlier terminated under the Plan. The Grantee's right to exercise
this option shall vest in the manner specified in EXHIBIT A. The Committee
may, in its sole discretion, accelerate vesting of the option at any time
before full vesting. The Grantee shall deliver to Hastings at the time of
payment an executed notice of exercise in the form of EXHIBIT B, which
shall be effective upon receipt by the Chief Financial Officer at Hastings'
main office, accompanied by full payment (as set forth below) of the option
price. Hastings will deliver to the Grantee a certificate or certificates
for such shares; PROVIDED, HOWEVER, that the time of delivery may be
postponed for such period as may be required for Hastings with reasonable
diligence to comply with any registration requirements under the Securities
Act of 1933, the Securities Exchange Act of 1934, any requirements under
any other law or regulation applicable to the issuance, listing or transfer
of such shares, or any agreement or regulation of any exchange or quotation
service upon which shares of Common Stock may be listed or quoted for
trading. If the Grantee fails to accept delivery of and pay for all or any
part of the number of shares specified in the notice upon tender or
delivery of the shares, the Grantee's right to exercise the option with
respect to such undelivered shares shall terminate.
4. PAYMENT BY GRANTEE. The Exercise Price for each share purchased
under this option shall be payable in cash (or by certified check, bank
draft or money order) or, if the Committee consents, in shares of Common
Stock (including Common Stock to be received upon a simultaneous exercise)
or other consideration substantially equivalent to cash. The Committee may
permit payment of all or a portion of the Exercise Price in the form of a
promissory note or in installments according to terms approved by the
Committee. The Board of Directors of Hastings may restrict or suspend the
power of the Committee to permit such loans and may require that adequate
security be provided. For purposes of payment to Hastings in whole or in
part with shares of Common Stock (including shares of Common Stock to be
received upon a simultaneous exercise), shares of Common Stock shall be
valued as follows: (a) if shares of Common Stock are listed or quoted for
trading on an exchange or quotation system, at the mean of the highest and
lowest sales prices of shares of Common Stock reported on such exchange or
system that is the primary stock exchange or system for trading of Common
Stock on the date of exercise, or if such exchange or system is closed on
that date, the last preceding date on which such exchange or system was
open for trading and on which shares of Common Stock were traded; or (b) if
shares of Common Stock are not listed or quoted for trading on an exchange
or quotation system, at a price determined by the Board of Directors. Such
-2-
<PAGE>
payment shall be made by delivery, or satisfactory assurances of delivery,
to Hastings of the certificate(s) representing all of the shares of Common
Stock to be used as payment, duly endorsed for transfer or accompanied by
stock powers duly endorsed, in forms sufficient to vest lawful title in
Hastings. The Grantee shall represent and warrant to Hastings with respect
to all Common Stock used as payment under the terms of this Agreement that
the Grantee has good and marketable title to the shares to be used as
payment and the absolute right to sell, assign, transfer and deliver the
shares to Hastings pursuant to this Agreement, free and clear of all liens,
pledges, encumbrances, options, rights of first refusal or other claims of
any nature whatsoever, except transfer restrictions required under
applicable federal and state securities laws. Payment with Common Stock
may be used in combination with payment with cash.
5. REGISTRATION AND LISTING. The stock options granted under this
Agreement are conditional upon (a) the effective registration or exemption
of the Plan, the options granted under the Plan and the stock to be
received upon exercise of options under the Securities Act of 1933 and
applicable state or foreign securities laws, and (b) the effective listing
of the stock on any applicable stock exchange or quotation system.
6. TAX WITHHOLDING. Hastings or one of its subsidiaries shall be
entitled to (a) withhold and deduct from the Grantee's future wages (or
from other amounts that may be due and owing to the Grantee from Hastings
or a subsidiary), or make other arrangements for the collection of, all
legally required amounts necessary to satisfy any and all federal, state
and local withholding and employment-related taxes attributable to the
option granted under this Agreement, including, without limitation, the
grant, exercise or vesting of, or payment of dividends with respect to, the
option; or (b) require the Grantee promptly to remit the amount of such
withholding to Hastings or a subsidiary before taking any action with
respect to the option. Unless the Committee provides otherwise,
withholding may be satisfied by withholding Common Stock to be received
upon exercise or by delivery to Hastings of previously owned Common Stock.
7. ACCELERATION. This option shall be immediately exercisable in
the event of any Change in Control of Hastings. "Change in Control" is
defined in the Plan.
8. TRANSFERABILITY. Unless the Committee consents otherwise, this
option shall not be sold, exchanged, transferred, pledged, assigned or
otherwise alienated or hypothecated during the term of the option except by
will or the laws of descent or distribution.
9. TERMINATION FOR "CAUSE." This option shall terminate at the
times provided in the Plan. For purposes of this Agreement, "cause" for
termination of employment shall have the meaning given to that term under
-3-
<PAGE>
any employment or other severance agreement between the Grantee and
Hastings; in the absence of any such agreement or any definition of such
term, "cause" for the purposes of this Agreement shall mean the Grantee's
neglect, continued failure or inability to perform, or poor performance of,
duties, consistent failure to attain assigned objectives, misappropriation
of corporate property, intentional damage to Hastings property, activities
in aid of a competitor, insubordination, dishonesty, conviction of a crime
involving moral turpitude or performance of any act (including any
dishonest or fraudulent act) detrimental to the interests of Hastings.
10. CORPORATE CHANGES. In the event of any stock dividend, stock
split or other increase or reduction in the number of shares of Common
Stock outstanding, the number and class of shares covered by this option,
and the Exercise Price, are subject to adjustment as provided in the Plan.
11. ADMINISTRATION. The Committee has full power and authority to
interpret the provisions of the Plan, to supervise the administration of
the Plan and to make all other determinations considered necessary or
advisable under the Plan. All determinations, interpretations and
selections made by the Committee regarding the Plan shall be final and
conclusive.
12. SHAREHOLDER RIGHTS. The Grantee shall have no rights as a
shareholder with respect to any shares covered by this option until the
date of the issuance of a stock certificate to the Grantee for such shares.
13. EMPLOYMENT BY HASTINGS. The grant of this option shall not
impose upon Hastings or any subsidiary any obligation to retain the Grantee
in its employ for any given period or upon any specific terms of
employment. Hastings or any subsidiary may at any time dismiss the Grantee
from employment, free from any liability or claim under the Plan, unless
otherwise expressly provided in any written agreement with the Grantee.
14. ILLEGALITY. The Grantee will not exercise this option, and
Hastings will not be obligated to issue any shares to the Grantee under
this option, if the exercise thereof or the issuance of such shares shall
constitute a violation by the Grantee or Hastings of any provisions of any
law, order or regulation of any governmental authority.
15. CERTIFICATIONS. The Grantee acknowledges that he or she has been
furnished and has read the Plan Description relating to the Plan. The
Grantee hereby represents and warrants that the Grantee is acquiring the
option granted under this Agreement for the Grantee's own account and
investment and without any intent to resell or distribute the shares upon
exercise of the option. The Grantee shall not resell or distribute the
shares received upon exercise of the option except in compliance with such
conditions as Hastings may reasonably specify to ensure compliance with
federal and state securities laws.
-4-
<PAGE>
16. AGREEMENT CONTROLS. The Plan is incorporated in this Agreement
by reference. Capitalized terms not defined in this Agreement shall have
those meanings provided in the Plan. In the event of any conflict between
the terms of this Agreement and the terms of the Plan, the provisions of
this Agreement shall control.
17. EFFECTIVE DATE. This option shall be effective as of the date
set forth at the top of this Agreement.
This option has been issued by the Board of Directors upon
recommendation of the Compensation Committee of Hastings.
HASTINGS MANUFACTURING COMPANY
By:__________________________________________
Its:_________________________________________
"Hastings"
X____________________________________________
"Grantee"
-5-
<PAGE>
EXHIBIT A
<TABLE>
VESTING SCHEDULE
<CAPTION>
DATE OF VESTING NUMBER OF SHARES
<S> <C> <C>
________________ _______________
________________ _______________
________________ _______________
________________ _______________
________________ _______________
</TABLE>
<PAGE>
EXHIBIT B
HASTINGS MANUFACTURING COMPANY
STOCK OPTION AND RESTRICTED STOCK PLAN OF 1997
NOTICE OF EXERCISE
Date ________________
Hastings Manufacturing Company
325 North Hanover Street
Hastings, Michigan 49058
Re: Option No. ________________
Gentlemen:
I hereby exercise Option No. _____________ granted to me on
_______________, to the extent of ____________________ shares of the Common
Stock, $2 par value, of Hastings Manufacturing Company.
Pursuant to the terms and conditions of such option, I am
enclosing herewith payment in the amount of ______________________________
Dollars ($___________) or hereby enclose shares having an aggregate market
value of _____________________________ Dollars ($__________). I authorize
Hastings or my subsidiary employer to withhold from any regular cash
compensation payable to me any taxes required to be withheld under federal,
state or local law as a result of this exercise. If required by Hastings,
I agree to remit to Hastings, in cash, any such taxes prior to Hastings's
delivery of any shares of Common Stock purchased through this exercise.
Very truly yours,
________________________________________
Register shares in the name of: ________________________________________
Address: ________________________________________
________________________________________
Social Security Number: ________________________________________
<PAGE>
EXHIBIT 21
<TABLE>
SUBSIDIARIES OF REGISTRANT
<CAPTION>
JURISDICTION OF PERCENT
NAME OF SUBSIDIARY INCORPORATION OWNERSHIP
- ------------------ --------------- ---------
<S> <C> <C>
Hastings, Inc. Ontario 100%
HMC, Inc. (formerly Douglas Corporation) Michigan 100%
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference and use of our report
dated February 26, 1999 on the consolidated financial statements of
Hastings Manufacturing Company and subsidiaries which appears on page 37
of this Form 10-K for the year ended December 31, 1998 in the previously
filed S-8 registration statement (Registration No. 333-74489) for that
company's Stock Option and Restricted Stock Plan of 1997.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Grand Rapids, Michigan
March 31, 1999
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that the person whose
signature appears below constitutes and appoints ANDREW F. JOHNSON and
THOMAS J. BELLGRAPH, and each of them, such individual's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for such individual and in his or her name, place and
stead, in any and all capacities, to sign the Form 10-K of HASTINGS
MANUFACTURING COMPANY for the year ended December 31, 1998, together with
any and all amendments thereto, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission or other regulatory authority, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be
done in and about the premises as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Signature: /S/ DALE W. KOOP
Print Name: DALE W. KOOP
Title: DIRECTOR
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that the person whose
signature appears below constitutes and appoints ANDREW F. JOHNSON and
THOMAS J. BELLGRAPH, and each of them, such individual's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for such individual and in his or her name, place and
stead, in any and all capacities, to sign the Form 10-K of HASTINGS
MANUFACTURING COMPANY for the year ended December 31, 1998, together with
any and all amendments thereto, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission or other regulatory authority, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be
done in and about the premises as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Signature: /S/MONTY C. BENNETT
Print Name: MONTY C. BENNETT
Title: DIRECTOR
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that the person whose
signature appears below constitutes and appoints ANDREW F. JOHNSON and
THOMAS J. BELLGRAPH, and each of them, such individual's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for such individual and in his or her name, place and
stead, in any and all capacities, to sign the Form 10-K of HASTINGS
MANUFACTURING COMPANY for the year ended December 31, 1998, together with
any and all amendments thereto, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission or other regulatory authority, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be
done in and about the premises as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Signature: /S/DOUGLAS A. DECAMP
Print Name: DOUGLAS A DECAMP
Title: DIRECTOR
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that the person whose
signature appears below constitutes and appoints ANDREW F. JOHNSON and
THOMAS J. BELLGRAPH, and each of them, such individual's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for such individual and in his or her name, place and
stead, in any and all capacities, to sign the Form 10-K of HASTINGS
MANUFACTURING COMPANY for the year ended December 31, 1998, together with
any and all amendments thereto, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission or other regulatory authority, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be
done in and about the premises as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Signature: /S/NEIL A. GARDNER
Print Name: NEIL A. GARDNER
Title: DIRECTOR
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that the person whose
signature appears below constitutes and appoints ANDREW F. JOHNSON and
THOMAS J. BELLGRAPH, and each of them, such individual's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for such individual and in his or her name, place and
stead, in any and all capacities, to sign the Form 10-K of HASTINGS
MANUFACTURING COMPANY for the year ended December 31, 1998, together with
any and all amendments thereto, and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission or other regulatory authority, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be
done in and about the premises as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Signature: /S/RICHARD L. FOSTER
Print Name: RICHARD L. FOSTER
Title: DIRECTOR
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE HASTINGS MANUFACTURING COMPANY AND SUBSIDIARIES FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 635,773
<SECURITIES> 0
<RECEIVABLES> 5,489,165
<ALLOWANCES> 210,000
<INVENTORY> 10,598,222
<CURRENT-ASSETS> 19,194,671
<PP&E> 25,414,166
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0
0
<OTHER-SE> 5,438,190
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<SALES> 38,752,104
<TOTAL-REVENUES> 38,752,104
<CGS> 26,094,399
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<INCOME-TAX> 1,054,000
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<EPS-PRIMARY> 2.24
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</TABLE>
