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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File No. 1-924
AEROQUIP-VICKERS, INC.
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(Exact name of registrant as specified in its charter)
Ohio 34-4288310
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(State of Incorporation) (I.R.S. Employer
Identification No.)
3000 Strayer, Maumee, Ohio 43537-0050
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (419) 867-2200
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Shares, $5.00 Par Value Frankfurt Stock Exchange
Chicago Stock Exchange
New York Stock Exchange
Pacific Exchange, Inc.
The Stock Exchange (London)
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, 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 (Section 229.405 of this chapter) 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]
[Cover page continued]
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The aggregate market value of the Common Shares held by non-affiliates of the
registrant as of February 17, 1998, was $1,607,596,327.50.
The number of Common Shares, $5 Par Value, outstanding as of February 17, 1998,
was 28,138,613.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 Annual Report to Security Holders are filed as Exhibit (13)
filed hereto and are incorporated by reference into Parts I, II and IV.
Portions of the proxy statement for the annual meeting of security holders to be
held on April 16, 1998, are incorporated by reference into Part III.
This document, including exhibits, contains 98 pages.
The cover page consists of 2 pages.
The Exhibit Index is located at page 22.
[End of cover page]
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PART I
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ITEM 1. Business.
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(a) Aeroquip-Vickers, Inc., formerly known as TRINOVA Corporation,
("Aeroquip-Vickers") is a world leader in the manufacture and distribution of
engineered components and systems, sold through its operating companies,
Aeroquip Corporation ("Aeroquip") and Vickers, Incorporated ("Vickers"), to the
industrial, automotive and aerospace markets.
In 1997, Aeroquip-Vickers paid a quarterly dividend of $.20 per share, or $.80
per share for the year. In January 1998, the Company's Board of Directors
approved a first-quarter 1998 dividend of $.22 per share.
During 1997, the Company's Board of Directors authorized a program to purchase
up to $100 million of the Company's outstanding common stock and, in 1997, the
Company purchased 496,100 shares at a cost of $21.6 million under this and a
prior Board of Directors authorization. At December 31, 1997, $80.7 million of
additional common stock may be purchased under the current authorization. The
Company may make further purchases during 1998, but is not committed to purchase
a specific number of shares.
In 1997, the Company established a Medium-Term Note program and subsequently
issued debt in the amount of $100 million with interest rates from 6.61% to
7.58% and with various maturities to 2012. During the first quarter of 1998, the
Company issued an additional $31 million with interest rates from 6.89% to 7.09%
with maturity in 2018. Under provisions of current shelf registration statements
for the Medium-Term Note program, $219 million remains available for issuance.
In June 1997, the Company called its 6% convertible subordinated debentures for
redemption. The debentures, which were due to mature on October 15, 2002, were
convertible into common shares of the Company at a conversion price of $52.50
per share. Prior to the July 1997 redemption date, debentures in the amount of
$3.7 million were converted into 70,950 shares of common stock. In December
1997, the Company called its 9.55% senior sinking fund debentures for redemption
on February 3, 1998. Proceeds from additional borrowings in 1998 under the
Medium-Term Note program were used to redeem the debentures. The pretax loss
from redemption of the debentures amounting to approximately $2.5 million was
recognized in the 1998 first quarter.
On February 20, 1997, Aeroquip-Vickers announced that it planned to exit its
interior automotive plastics business. In accordance with this strategy, the
Company's Aeroquip subsidiary sold or closed eight facilities during 1997 that
had combined sales of approximately $67 million in 1997 and $132 million in
1996. The Company recorded a special charge of $30 million in 1997 ($18.5
million net of tax) related to exiting this business. A significant portion of
this charge was related to exiting this business in Germany.
On March 12, 1997, Aeroquip-Vickers announced that its Vickers subsidiary and
Sturman Industries, of Woodland Park, Colorado, formed a joint venture company
to develop and produce integrated digital electrohydraulic systems for mobile
equipment applications.
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In April 1997, Komatsu Ltd. and Vickers signed an agreement creating a global
alliance including the creation of a new joint-venture company, headquartered in
Tokyo.
In December 1997, Aeroquip Corporation signed a definitive agreement for the
purchase of the assets subject to certain liabilities of Aerotech South Africa
(Pty) Ltd. Aerotech's 1997 fiscal year sales were approximately $16.5 million.
The South African supplier of hose assemblies and fitting products will become
part of the Aeroquip Automotive Group.
In January 1998, Vickers signed a definitive agreement for the purchase of
Hydrokraft GmbH, an indirectly 100%-owned subsidiary of IWKA AG of Karlsruhe,
Germany. Hydrokraft manufactures high-pressure axial piston hydraulic pumps,
motors and transmissions for applications in stationary industrial equipment,
marine, mining, chemical processing, food processing and other markets.
Hydrokraft's 1997 sales were approximately $10 million.
(b) "Note 15 - Business Segments" on page 87 of Exhibit (13) filed hereunder is
incorporated herein by reference.
(c) A description of the business done and intended to be done by
Aeroquip-Vickers and its subsidiaries in each industry segment follows.
(1) INDUSTRIAL: Aeroquip manufactures and sells hose and hose assemblies;
hose fittings and adapters; tube fittings and adapters; couplings;
refrigeration/air conditioning connectors; and molded, extruded and co-extruded
plastic products.
Vickers manufactures and sells hydraulic, electrohydraulic, pneumatic
and electronic control devices; piston, vane and gear pumps and motors; open
architecture machine controls; hydraulic and pneumatic cylinders; hydraulic
power packages; electric motors and drives; hydraulic and lubrication
filtration; and fluid-evaluation products and services.
Principal markets for these products include construction, mining,
logging and farm equipment; machine tool; process industries; electrical
machinery; air conditioning/refrigeration; appliances and communications
equipment; electronics; lift truck; material handling; plant maintenance; and
housing and commercial construction. Sales are dispersed geographically across a
broad customer base. Products are sold directly to original equipment
manufacturers ("OEMs") and through a worldwide network of distributors serving
aftermarket and small- and medium-sized OEM customers.
The industrial business is highly competitive in terms of price,
quality and service. Aeroquip has significant market position worldwide for
industrial hose, fittings, couplings and adapters. Vickers has significant
market position worldwide for hydraulic and electrohydraulic controls; piston
and vane pumps and motors; hydraulic power packages; and electronic controls,
drives and motors. Aeroquip-Vickers serves many customers in the highly diverse
and fragmented industrial markets. Due to the diversity of Aeroquip-Vickers'
products, there are a large number of competitors scattered across a wide
variety of market segments, with no single competitor competing in each of
Aeroquip-Vickers' product lines.
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The order backlog for the industrial business was $232.7 million as
of December 31, 1997, compared to $184.9 million as of December 31, 1996.
Substantially all of the December 31, 1997, backlog is expected to be filled in
1998.
(2) AUTOMOTIVE: Aeroquip manufactures and sells air conditioning,
power steering, and oil and transmission cooler hose and hose assemblies;
bodyside moldings; decorative bumper strips; spoilers; rocker panel claddings;
and engine components.
The automotive operations of Aeroquip serve worldwide automobile,
light truck, sport utility and van manufacturers. Products are primarily sold
directly to manufacturers. Approximately 62% of worldwide sales of
Aeroquip-Vickers' automotive business are made to three major U.S. and one major
European automobile manufacturers.
The automotive industry is highly competitive in terms of price,
quality and service. Aeroquip is a preferred supplier to the major U.S. and
European automobile manufacturers. Competition for products in the automotive
industry is very fragmented.
(3) AEROSPACE: Aeroquip manufactures and sells hose, fittings,
couplings, swivels, V-band couplings, fuel-handling products, high-pressure tube
fittings, clamps and noise-reduction products.
Vickers manufactures and sells fixed- and variable-displacement
pumps; fuel pumps; hydraulic motors and motor packages; electric motorpumps and
generator packages; valves and valve packages; electrohydraulic and
electromechanical actuators; sensors and monitoring devices; and electronic
controllers.
The aerospace operations of Aeroquip and Vickers serve worldwide
commercial aerospace and defense markets including commercial aircraft, air
defense, cargo handling, combat and support vehicles, commuter aircraft,
engines, marine, military aircraft, military weaponry, missiles and naval
machinery. Products are sold directly to OEM businesses, commercial airlines and
the government and through a distributor network. Approximately 18% of
Aeroquip-Vickers' aerospace business sales are made to a major U.S. airframe
manufacturer.
The aerospace business is highly competitive in terms of price,
quality and service. Aeroquip has significant market position worldwide for
aerospace hose, fittings and quick-disconnect couplings. Vickers has significant
market position worldwide for aerospace fixed- and variable-displacement
hydraulic pumps, hydraulic motors and motor packages, and aerospace sensors and
monitoring devices.
Aeroquip-Vickers serves a large number of customers in the aerospace
and defense markets. Due to the diversity of Aeroquip-Vickers' products, there
are a large number of competitors scattered across a wide variety of market
segments, with no single competitor competing in each of Aeroquip-Vickers'
product lines.
The order backlog for the aerospace business was $379.2 million as of
December 31, 1997, compared to $341 million as of December 31, 1996.
Approximately 8% of the December 31, 1997, backlog is not expected to be
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filled in 1998 because certain contracts require deliveries after 1998.
Approximately 31% of the December 31, 1997, backlog represents direct government
contracts or subcontracts on government programs, which are subject to
termination for convenience by the U.S. Government.
(4) OTHER INFORMATION: Aeroquip-Vickers and its subsidiaries are
generally not dependent upon any one source for raw materials or purchased
components essential to their businesses, and it is anticipated that such raw
materials and components will be available in adequate quantities to meet
anticipated production schedules.
Patents owned by Aeroquip-Vickers are considered important to the
conduct of its present businesses. Aeroquip-Vickers is licensed under a number
of patents, no one of which, individually, is considered material to its
businesses. Aeroquip-Vickers is the owner of a number of U.S. and non-U.S.
trademark registrations.
Aeroquip-Vickers devotes engineering, research and development
efforts to new products and improvement of existing products and production
processes. During 1997, 1996 and 1995, Aeroquip-Vickers spent a total of $72.2
million, $74.9 million and $63 million, respectively, on these efforts.
Aeroquip-Vickers employed 14,780 persons at December 31, 1997.
(d) "Note 16 - Non-U.S. Operations" on page 89 of Exhibit (13) filed hereunder
is incorporated herein by reference. As assessed by Aeroquip-Vickers, the risk
attendant to non-U.S. operations, which is primarily in developed countries, is
not significantly greater than that attendant to its U.S. operations.
ITEM 2. Properties.
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A description of Aeroquip-Vickers' principal properties follows. Except
as otherwise indicated, all properties are owned by Aeroquip-Vickers or its
subsidiaries.
Aeroquip-Vickers' executive offices (leased) are located in Maumee,
Ohio.
INDUSTRIAL: Aeroquip Corporation has executive and administrative offices in
Maumee, Ohio (leased); technical centers in Ann Arbor, Michigan (leased) and
Maumee, Ohio (leased); and manufacturing facilities throughout the United States
and abroad, including plants in Mountain Home, Arkansas; Fitzgerald, Georgia;
New Haven, Indiana; Williamsport, Maryland; Forest City, Middlesex and Norwood,
North Carolina; Van Wert, Ohio; Gainesboro, Tennessee; Wausau, Wisconsin;
Guaratingueta, Brazil; Chambray-Les-Tours, France; Baden-Baden and Hann-Muenden,
Germany; Livorno, Italy; and Cardiff, United Kingdom. Aeroquip also owns or
leases warehouse, assembly and distribution facilities and sales offices in the
United States and abroad.
Vickers, Incorporated has executive and administrative offices in
Maumee, Ohio (leased); a technical center in Rochester Hills (leased), Michigan;
and manufacturing facilities throughout the United States and abroad, including
plants in Decatur, Alabama; Searcy, Arkansas; Carol Stream and Petersburg
(leased), Illinois; Jackson, Michigan; Lebanon, Ohio; Omaha,
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Nebraska; White City, Oregon; Greenwood, South Carolina; Memphis, Tennessee; Sao
Paulo, Brazil; Suzhou, China (leased); Mumbai and Pune, India; Casella and
Vignate (leased), Italy; and Bedford (leased), Havant and Telford (leased),
United Kingdom. Vickers also owns or leases warehouse, assembly and distribution
facilities and sales offices in the United States and abroad.
AUTOMOTIVE: Aeroquip has executive and administrative offices in Maumee, Ohio
(leased); technical and administrative offices in Mt. Clemens, Michigan
(leased); and manufacturing facilities throughout the United States and abroad,
including plants in Atlanta, Georgia; Clinton Township, Michigan (leased);
Mooresville, North Carolina; Fremont, Ohio; Livingston, Tennessee; Baden-Baden,
Germany; Alcala de Henares, Spain; and Brierley Hill, United Kingdom. Aeroquip
also owns or leases warehouse, assembly and distribution facilities and sales
offices in the United States and abroad.
AEROSPACE: Aeroquip Corporation has executive and administrative offices in
Maumee, Ohio (leased); and manufacturing facilities throughout the United States
and abroad, including plants in Toccoa, Georgia; Jackson, Michigan (leased);
Pau, France (leased); and Lakeside, United Kingdom (leased). Aeroquip also owns
or leases warehouse, assembly and distribution facilities and sales offices in
the United States and abroad.
Vickers, Incorporated has executive and administrative offices in
Maumee, Ohio (leased); and manufacturing facilities throughout the United States
and abroad, including plants in Los Angeles, California; Grand Rapids, Michigan;
Jackson, Mississippi; Hi-Nella, New Jersey; Glenolden, Pennsylvania; and
Bedhampton, United Kingdom. Vickers also owns or leases warehouse, assembly and
distribution facilities and sales offices in the United States and abroad.
ITEM 3. Legal Proceedings.
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As previously reported, on March 26, 1992, the United States
Environmental Protection Agency ("USEPA") issued an Administrative Order ("106
Order") under Section 106 of the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA") to Aeroquip-Vickers' subsidiary,
Aeroquip Corporation ("Aeroquip"), and five other Potentially Responsible
Parties ("PRPs") relative to the San Fernando Valley Burbank Operable Unit
("BOU"), involving groundwater contamination. (Reference is made to Part I, Item
3, of Aeroquip-Vickers' Annual Report on Form 10-K for the year ended December
31, 1994.) The 106 Order requires the six PRPs to design and construct a water
blending facility at a cost now estimated to be approximately $5.7 million.
Aeroquip-Vickers' portion of any such cost is estimated to be 18.33% based on a
cost-sharing agreement among the six PRPs which was executed by Aeroquip-Vickers
on July 6, 1992.
Also related to the BOU, on May 15, 1994, USEPA issued to Lockheed
Corporation ("Lockheed"), Aeroquip and other PRPs a Special Notice of Liability
under CERCLA for the remaining 18 years of operation and maintenance (O&M) costs
associated with the blending facility, as well as a water treatment facility
constructed by Lockheed under its BOU Consent Decree with
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USEPA. The Special Notice of Liability also covers USEPA's past response costs.
On April 26, 1994, Lockheed filed an action against Aeroquip and 105 other PRPs
seeking contribution toward costs Lockheed incurred to construct the water
treatment facility and related matters. In November 1995, a settlement agreement
was entered into among Lockheed and most of the members of a joint defense group
(the "Joint Defense Group"), including Aeroquip, which resolved this
contribution action. The settlement requires the payment of $16 million by the
Joint Defense Group. Aeroquip's portion of this amount is approximately
$104,000. This amount reflects a credit to Aeroquip for its prior expenditures
on the blending facility. The settlement is also intended to resolve Aeroquip's
potential liability for the interim remedy at the Glendale Superfund site (see
below), Aeroquip's potential liability for a toxic suit (known as the "Fournier"
matter) brought against Lockheed, and the claims by other Joint Defense Group
members against Aeroquip. USEPA and some of the Burbank PRPs are negotiating a
Second Consent Decree which will provide the settling parties with protection
against liability for certain matters related to the interim remedy now under
way. Under the proposed Second Consent Decree all work will be carried out by
the City of Burbank, and Lockheed will fund the Operation & Maintenance costs.
Aeroquip and five other PRPs will be responsible for any future design defects
in the blending facility and for possible other costs should USEPA decide to
reopen the Consent Decree based on changed circumstances or new information. The
Second Consent Decree has been executed by all parties including the United
States, and is awaiting lodging with the federal court.
In December 1997, Aeroquip and over 50 other Burbank Operable Unit
PRPs were sued by over 2800 plaintiffs in eight law suits pending in California
state court. The plaintiffs allege that hazardous and toxic waste dumped in the
BOU leached into the groundwater and was released into the air causing bodily
injury and property damage to the plaintiffs who were, for the most part,
residents of the Burbank area. Aeroquip denies the allegations in the complaints
and intends to vigorously defend itself in the litigation.
As previously reported, on November 13, 1992, the USEPA, Region IX,
issued a General Notice of Liability letter to Aeroquip-Vickers' subsidiary,
Sterer Engineering and Manufacturing Company, now known as the Sterer Division
of Vickers, Incorporated ("Vickers"). (Reference is made to Part I, Item 3, of
Aeroquip-Vickers' Annual Report on Form 10-K for the year ended December 31,
1994.) The letter notified Vickers of potential liability, as defined by Section
107(a) of CERCLA, that it may incur with respect to the San Fernando Valley
Glendale South Operable Unit, involving groundwater contamination. The USEPA
issued its Record of Decision ("ROD") on June 18, 1993. Twenty-seven PRPs (the
"PRP Group"), including Vickers, entered into an Administrative Order on Consent
with the USEPA on March 21, 1994, to conduct the Remedial Design ("RD") of the
interim remedy. The estimated cost of the RD is $4.7 million. Vickers' portion
of the RD costs is estimated to be 2.95%, based on an interim allocation
agreement among the PRPs.
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On November 26, 1996, the USEPA issued a Unilateral Administrative
Order under Section 106 of CERCLA to all PRPs, including Vickers, requiring the
PRPs to conduct the pre-construction phase of the interim remedy. On September
30, 1997 USEPA issued another administrative order directing the Glendale PRPs,
including Vickers, to carry out the interim remedial action work which includes
construction, operation and maintenance (over a twelve year period) of water
treatment facilities for the extraction and treatment of contaminated
groundwater. The PRP Group is implementing this Order. The PRP Group has entered
into an agreement to carry out an allocation of the costs for the Glendale
Operable Units interim remedy. The allocation process must accommodate two
separate allocations--first, the division of response costs for the Glendale
Operable Units between the Glendale PRPs and Lockheed Corporation on behalf of
all Burbank PRPs (see above) and, second, the internal division of response
costs among the intra Glendale PRPs. Allocation of costs between Lockheed and
other PRPs was determined by a technical arbitration panel and that decision has
been confirmed by a California court. Lockheed has appealed the Order, but is
participating in the funding of the interim remedy. In December 1997 a final
settlement agreement and mutual release was negotiated among the intra-Glendale
PRPs. The estimate for the cost of the interim remedy is a net present value of
$81 million. Vickers share is 1.04% of the total interim remedy work, assuming
the allocation between Lockheed and the PRP group remains unchanged from the
arbitration award. Vickers' allocated share of the interim remedy-related costs
is estimated to be in the range of $840,000 and $1.1 million.
As previously reported, on July 31, 1992, the Maine Department of
Environmental Protection issued an Administrative Enforcement Order to
Aeroquip-Vickers and its wholly owned subsidiaries, Aeroquip Corporation
("Aeroquip") and Sterling Engineered Products Inc. ("Sterling"), as well as one
other party, Pioneer Plastics Corporation ("Pioneer Plastics"), (collectively
the "respondents"), pursuant to Title 38, section 1304(12) of the Maine Revised
Statutes. (Reference is made to Part I, Item 3, of Aeroquip-Vickers' Annual
Report on Form 10-K for the year ended December 31, 1994.) The Order, which was
issued without a prior hearing, required the respondents to conduct a complete
Phase II environmental assessment of alleged soil and groundwater contamination
at a manufacturing site in Auburn, Maine, which was formerly owned by Sterling
and is now owned by Pioneer Plastics. The Order further required the respondents
to remediate any environmental contamination identified in the Phase II
assessment. On May 5, 1993, a Compliance Order on Consent ("COC") was entered
into by the State of Maine, Sterling and Pioneer Plastics. The COC replaces and
revokes the Order issued July 31, 1992. The COC requires Sterling to conduct a
site investigation and to develop and implement a remedial work plan. Sterling
was merged into Aeroquip Corporation effective December 31, 1996. The cost to
Aeroquip to conduct the COC site investigation, develop the remedial work plan
and complete a feasibility study (the "Feasibility Study") is estimated to be
approximately $1,900,000. Aeroquip's remediation costs are undetermined at this
time because the Feasibility Study has not been completed.
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A Vickers motor pump, which is a component of the hydraulic systems
provided by Aerospatiale for Airbus Industries for use in the A330/340 aircraft,
was involved in two separate fires which occurred on aircraft during ground
maintenance and cargo unloading procedures. No personal injuries occurred, and
Aerospatiale and Airbus Industries indicate that interim steps have been taken
to prevent further incidents. A French court has appointed a panel of experts to
investigate and report on the cause of the fires, related technical issues and
damages. Vickers is participating in the hearings held by the panel. The report
of the panel will be of an advisory nature and is not legally binding, but would
serve as evidence of the facts in the event that claims are subsequently made on
the merits. No claims for recovery of damages have been made at this time.
Evidence was recently presented to the panel through which Airbus and
Aerospatiale allege that the property damage to the aircraft involved is in
excess of $45 million and that the cost of retrofitting other A330/340 aircraft
will be approximately $45 million. Any property damage claims which might
ultimately be brought against Vickers as a result of the fires would be covered
by Vickers' aviation insurance. Vickers denies responsibility for any damages
and will vigorously defend its position. The proceedings are very preliminary
and, accordingly, it is impossible for Vickers to assess its exposure at this
time. Vickers has been advised that it may take in excess of two years for the
panel to submit its report.
Aeroquip-Vickers and certain subsidiaries are defendants in various
lawsuits. While the ultimate outcome of these lawsuits and the above matters
cannot now be predicted, management is of the opinion, based on the facts now
known to it, that the liability, if any, in these lawsuits (to the extent not
provided for by insurance or otherwise) and the above matters will not have a
material adverse effect upon Aeroquip-Vickers' consolidated financial position.
ITEM 4. Submission of Matters to a Vote of Security Holders.
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None.
EXECUTIVE OFFICERS OF THE REGISTRANT
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The names, ages, positions and recent business experience of the
executive officers of Aeroquip-Vickers as of February 17, 1998, are listed
below. Officers of Aeroquip-Vickers are elected annually in April by the Board
of Directors at the organization meeting immediately following the annual
meeting of shareholders.
<TABLE>
<CAPTION>
NAME AND POSITION AGE BUSINESS EXPERIENCE
- ---------------------------- --- ----------------------------------
<S> <C> <C>
Darryl F. Allen, 54 Chairman of the Board, President
Chairman of the Board, and Chief Executive Officer of
President and Chief Aeroquip-Vickers since 1991.
Executive Officer
</TABLE>
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<TABLE>
<S> <C> <C>
William R. Ammann, 56 Vice President-Administration and
Vice President-Administration Treasurer of Aeroquip-Vickers since
and Treasurer 1992.
James E. Kline, 56 Vice President and General Counsel
Vice President and of Aeroquip-Vickers since 1989.
General Counsel
James M. Oathout, 53 Corporate Secretary and Senior
Corporate Secretary and Attorney of Aeroquip-Vickers since
Senior Attorney March 1995. Secretary and
Associate General Counsel of
Aeroquip-Vickers from 1988 to
March 1995.
Gregory R. Papp, 51 Corporate Controller of Aeroquip-
Corporate Controller Vickers since 1993. Vice President
and Controller of Aeroquip
Corporation from July 1991 to 1993.
David M. Risley, 53 Vice President - Finance and Chief
Vice President - Finance Financial Officer of Aeroquip-
and Chief Financial Officer Vickers since 1992. Group Vice
President - Administration and
Control of Aeroquip Corporation
from 1991 to 1992.
Howard M. Selland, 54 Executive Vice President of
Executive Vice President of Aeroquip-Vickers and President of
Aeroquip-Vickers and President Aeroquip Corporation since 1989.
Of Aeroquip Corporation
Philip G. Simonds, 57 Vice President-Taxation of
Vice President-Taxation Aeroquip-Vickers since 1983.
John H. Weber, 42 Executive Vice President of
Executive Vice President of Aeroquip-Vickers and President of
Aeroquip-Vickers and President Vickers, Incorporated since
of Vickers, Incorporated August 1996. Executive Vice
President of Vickers, Incorporated
from January 1996 to August 1996.
Group Vice President - Industrial
of Vickers, Incorporated from 1994
to August 1996. General Manager
Industrial Motors of General
Electric Company from 1992 to 1994.
</TABLE>
There are no family relationships among the persons named above.
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PART II
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ITEM 5. Market for Registrant's Common Equity and Related Stockholder
- ------ Matters.
"Stock Exchanges," "Stock Ownership," "Dividend Information,"
"Quarterly Common Stock Information" and "Dividend Payments per Share of Common
Stock" on page 91 of Exhibit (13) filed hereunder are incorporated herein by
reference.
ITEM 6. Selected Financial Data.
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"5-Year Summary of Selected Financial Data" on page 52 of Exhibit
(13) filed hereunder is incorporated herein by reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition
- ------ and Results of Operation.
"Financial Review and Analysis of Operations" on pages 53-63 of
Exhibit (13) filed hereunder are incorporated herein by reference.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
- -------
Not Applicable.
ITEM 8. Financial Statements and Supplementary Data.
- ------
"Quarterly Results of Operations (Unaudited)" of the registrant and
its subsidiaries on pages 64-65 and the consolidated financial statements of the
registrant and its subsidiaries on pages 66-90 of Exhibit (13) filed hereunder
are incorporated herein by reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
- ------ Financial Disclosure.
None.
PART III
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ITEM 10. Directors and Officers of the Registrant.
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"Election of Directors" on pages 1-2 of the proxy statement for the
annual meeting to be held on April 16, 1998, are incorporated herein by
reference. Information regarding executive officers is set forth in Part I of
this report under the caption "Executive Officers of the Registrant."
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ITEM 11. Executive Compensation.
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"Compensation of Directors" and "Executive Compensation" (excluding
material under the captions "Aeroquip-Vickers Stock Performance Graph" and
"Board Compensation Committee Report on Executive Compensation") on pages 3-4
and 5-9, respectively, of the proxy statement for the annual meeting to be held
on April 16, 1998, are incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
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"Security Ownership" on page 4 of the proxy statement for the annual
meeting to be held on April 16, 1998, is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions.
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None.
PART IV
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ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
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(a) The following documents are filed as a part of this report.
(1) The following consolidated financial statements of
Aeroquip-Vickers and its subsidiaries, included on pages 66-90 of Exhibit (13)
filed hereunder are incorporated by reference in Item 8.
Report of Ernst & Young LLP, Independent Auditors
Statement of Income - Years ended December 31, 1997, 1996 and 1995
Statement of Financial Position - December 31, 1997 and 1996
Statement of Cash Flows - Years ended December 31, 1997, 1996 and 1995
Statement of Shareholders' Equity - Years ended December 31, 1997, 1996
and 1995
Notes to Financial Statements - December 31, 1997
(2) The following consolidated financial statement schedule of
Aeroquip-Vickers and its subsidiaries is filed under Item 14(d):
SCHEDULE PAGE(S)
-------- -------
Schedule II - Valuation and qualifying accounts 19-21
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are either not required
under the related instructions or are inapplicable, and therefore have been
omitted.
<PAGE> 14
14
(3) The following exhibits are incorporated by reference hereunder,
and those exhibits marked with an asterisk (*) are management contracts or
compensatory plans or arrangements required to be filed as exhibits pursuant to
Item 14(c) of this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<S> <C>
(3)-2 Amended Articles of Incorporation (amended April 17, 1997), filed as
Exhibit (3) to Form 10-Q filed on May 8, 1997
(4)-1 Rights Agreement, dated January 26, 1989, between Aeroquip-Vickers,
Inc. (formerly TRINOVA Corporation) and First Chicago Trust Company
of New York filed as Exhibit (2) to Form 8-A filed on January 27,
1989, as amended by the First Amendment to Rights Agreement filed as
Exhibit (5) to Form 8 filed on July 1, 1992
(4)-2 Indenture, dated as of May 1, 1996, between Aeroquip-Vickers, Inc.
and the First National Bank of Chicago (as successor in interest to
NBD Bank) filed as Exhibit 4.1 to Form S-3 filed on August 29, 1997
(4)-3 First Supplemental Indenture, dated as of April 17, 1997, between
Aeroquip-Vickers, Inc. and the First National Bank of Chicago (as
successor in interest to NBD Bank) filed as Exhibit 4.2 to Form S-3
filed on August 29, 1997
(4)-4 Form of 7.875% Debentures due June 1, 2026, filed as Exhibit (4)-1
to Form 8-K filed on June 3, 1996
(4)-5 Form of Fixed Rate Notes, filed as Exhibit (4)-1(b) to Form 8-K
filed April 25, 1997
(4)-6 Form of Floating Rate Notes, filed as Exhibit (4)-2(b) to Form 8-K
filed April 25, 1997
(4)-7 Form of Fixed Rate Notes, filed as Exhibit (4)-1(a) to Form 8-K
filed on October 2, 1997
(4)-8 Form of Floating Rate Notes, filed as Exhibit (4)-1(b) to Form 8-K
filed on October 2, 1997
*(10)-4 Aeroquip-Vickers, Inc. 1994 Stock Incentive Plan, filed as Appendix
A to the proxy statement for the annual meeting held on April 21,
1994
*(10)-5 Aeroquip-Vickers 1989 Non-Employee Directors' Equity Plan, filed as
Exhibit (10)-12 to Form 10-K filed on March 18, 1994
*(10)-6 Aeroquip-Vickers, Inc. Plan for Optional Deferment of Directors'
Fees (amended and restated effective April 1, 1995), filed as
Exhibit (10)-8 to Form 10-K filed March 20, 1995
*(10)-7 Aeroquip-Vickers, Inc. Directors' Retirement Plan (amended and
restated effective January 1, 1990), filed as Exhibit (10)-9 to Form
10-K filed March 20, 1995
</TABLE>
<PAGE> 15
15
<TABLE>
<S> <C>
*(10)-8 Aeroquip-Vickers, Inc. Voluntary Deferred Compensation Plan
(effective April 1, 1995), filed as Exhibit (10)-11 to Form 10-K
filed March 20, 1995
*(10)-9 Aeroquip-Vickers, Inc. Supplemental Benefit Plan (amended and
restated effective January 1, 1995), filed as Exhibit (10)-10 to
Form 10-Q filed August 10, 1995
*(10)-10 Aeroquip-Vickers, Inc. 1998 Stock Incentive Plan, filed as Appendix
A to the proxy statement for the annual meeting of shareholders to
be held on April 16, 1998 (this plan is subject to shareholder
approval)
*(10)-11 Aeroquip-Vickers, Inc. Non-Employee Directors' Stock Award Plan,
filed as Appendix B to the proxy statement for the annual meeting of
shareholders to be held on April 16, 1998 (this plan is subject to
shareholder approval)
(99)-1 Aeroquip-Vickers, Inc. Directors' Charitable Award Program, filed as
Exhibit (99(i))-2 to Form 10-K filed on March 18, 1994
(99)-2 Credit Agreement, dated as of September 27, 1996, among
Aeroquip-Vickers, Inc. (formerly TRINOVA Corporation) (borrower) and
The Bank of Tokyo - Mitsubishi Trust Company; Citibank, N.A.;
Dresdner Bank AG, New York and Grand Cayman branches; The First
National Bank of Chicago; Morgan Guaranty Trust Company of New York;
The Chase Manhattan Bank; and Union Bank of Switzerland, Chicago
branch (banks); and Citibank, N.A. (administrative agent), filed as
Exhibit (99(i))-2 to Form 10-Q filed November 14, 1996
The following exhibits are filed hereunder:
(3)-1 Amended Code of Regulations (amended April 21, 1988)
*(10)-1 Aeroquip-Vickers, Inc. 1987 Stock Option Plan
*(10)-2 Change in Control Agreement for Officers (the Agreements executed by
the Company and various executive officers of the Company are
identical in all respects to the form of Agreement filed as Exhibit
(10)-2 except as to differences in the identity of the officers and
the dates of execution, and as to other variations directly
necessitated by said differences)
*(10)-3 Change in Control Agreement for Non-officers (the Agreements
executed by the Company and various non-officer employees of the
Company are identical in all respects to the form of Agreement filed
as Exhibit (10)-3 except as to differences in the identity of the
employees and the dates of execution, and as to other variations
directly necessitated by said differences)
(12) Statement re: Computation of Ratios
(13) Portions of the 1997 Annual Report to Security Holders (to the
extent incorporated by reference hereunder)
</TABLE>
<PAGE> 16
16
(21) Subsidiaries of the Registrant
(23) Consent of Independent Auditors
(24) Powers of Attorney
(27) Financial Data Schedule
(27)-1 Financial Data Schedule - 1997 Restated
(27)-2 Financial Data Schedule - 1996 Restated
(27)-3 Financial Data Schedule - 1995 Restated
(b) Aeroquip-Vickers did not file any reports on Form 8-K during the fourth
quarter of 1997.
(c) The exhibits which are listed under Item 14(a)(3) are filed or incorporated
by reference hereunder.
(d) The financial statement schedule which is listed under Item 14(a)(2) is
filed hereunder.
<PAGE> 17
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AEROQUIP-VICKERS, INC. (Registrant)
By: /S/ DARRYL F. ALLEN
-------------------------------------
Darryl F. Allen
Director, Chairman of the Board,
President and Chief Executive Officer
Date: March 19, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/S/ DARRYL F. ALLEN
- ------------------------------------------
Darryl F. Allen 3/19/97
Director, Chairman of the (Date)
Board, President and Chief
Executive Officer
(Principal Executive Officer)
/S/ DAVID M. RISLEY
- ------------------------------------------
David M. Risley 3/19/97
Vice President - Finance (Date)
and Chief Financial Officer
(Principal Financial Officer)
/S/ GREGORY R. PAPP
- ------------------------------------------
Gregory R. Papp 3/19/97
Corporate Controller
(Principal Accounting Officer)
PURDY CRAWFORD*
- ------------------------------------------
Purdy Crawford* 3/19/97
Director (Date)
<PAGE> 18
18
JOSEPH C. FARRELL*
- ------------------------------------------
Joseph C. Farrell* 3/19/97
Director (Date)
DAVID R. GOODE*
- ------------------------------------------
David R. Goode* 3/19/97
Director (Date)
PAUL A. ORMOND*
- ------------------------------------------
Paul A. Ormond* 3/19/97
Director (Date)
JOHN P. REILLY*
- ------------------------------------------
John P. Reilly* 3/19/97
Director (Date)
WILLIAM R. TIMKEN, JR.*
- ------------------------------------------
William R. Timken, Jr.* 3/19/97
Director (Date)
*By James E. Kline, Attorney-in-fact
/S/ JAMES E. KLINE
- ------------------------------------------
James E. Kline 3/19/97
Vice President and General Counsel (Date)
<PAGE> 19
19
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AEROQUIP-VICKERS, INC.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT (1) (2) BALANCE
DESCRIPTION BEGINNING CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS- AT END OF
OF PERIOD AND EXPENSES ACCOUNTS-DESCRIBE DESCRIBE PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts $ 16,032 $ 1,485 $ - $ (2,816)-A $ 14,701
Deferred tax valuation allowance 12,589 (1,767) - (2,064)-B 6,816
(1,942)-C
</TABLE>
Note A - Doubtful accounts charged off, net of recoveries
Note B - Effect of expiration of operating loss carryforward
Note C - Currency translation adjustments
<PAGE> 20
20
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AEROQUIP-VICKERS, INC.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT (1) (2) BALANCE
DESCRIPTION BEGINNING CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS- AT END OF
OF PERIOD AND EXPENSES ACCOUNTS-DESCRIBE DESCRIBE PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $ 13,241 $ 3,899 $ - $ (1,108)-A $ 16,032
Deferred tax valuation allowance 15,953 (3,853) - 489 -B 12,589
</TABLE>
Note A - Doubtful accounts charged off, net of recoveries
Note B - Currency translation adjustments
<PAGE> 21
21
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AEROQUIP-VICKERS, INC.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT (1) (2) BALANCE
DESCRIPTION BEGINNING CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS- AT END OF
OF PERIOD AND EXPENSES ACCOUNTS-DESCRIBE DESCRIBE PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts $ 15,179 $ 518 $ - $ (2,456)-A $ 13,241
Deferred tax valuation allowance 29,533 (16,142) - 2,562 -B 15,953
</TABLE>
Note A - Doubtful accounts charged off, net of recoveries
Note B - Currency translation adjustments
<PAGE> 22
22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE(S)
- ------- -------
<S> <C> <C>
(3)-1 Amended Code of Regulations (amended April 21, 1988) 25-30
(3)-2 Amended Articles of Incorporation (amended Incorporated
January 26, 1989), filed as Exhibit (3) to by Reference
Form 10-K filed on March 18, 1994
(4)-1 Rights Agreement, dated January 26, 1989, between Incorporated
Aeroquip-Vickers, Inc. (formerly TRINOVA Corporation) by Reference
and First Chicago Trust Company of New York filed as Exhibit
(2) to Form 8-A filed on January 27, 1989, as amended by the
First Amendment to Rights Agreement filed as Exhibit (5) to
Form 8 filed on July 1, 1992
(4)-2 Indenture, dated as of May 1, 1996, between Incorporated
Aeroquip-Vickers, Inc. and the First National by Reference
Bank of Chicago (as successor in interest to NBD Bank) filed as
Exhibit 4.1 to Form S-3 filed on August 29, 1997
(4)-3 First Supplemental Indenture, dated as of April 17, Incorporated
1997, between Aeroquip-Vickers, Inc. and the First by Reference
National Bank of Chicago (as successor in interest to NBD Bank)
filed as Exhibit 4.2 to Form S-3 filed on August 29, 1997
(4)-4 Form of 7.875% Debentures due June 1, 2026, filed as Incorporated
Exhibit (4)-1 to Form 8-K filed on June 3, 1996 by Reference
(4)-5 Form of Fixed Rate Notes, filed as Exhibit (4)-1(b) Incorporated
to Form 8-K filed April 25, 1997 by Reference
(4)-6 Form of Floating Rate Notes, filed as Exhibit Incorporated
(4)-2(b) to Form 8-K filed April 25, 1997 by Reference
(4)-7 Form of Fixed Rate Notes, filed as Exhibit (4)-1(a) Incorporated
to Form 8-K filed on October 2, 1997 by Reference
(4)-8 Form of Floating Rate Notes, filed as Exhibit Incorporated
(4)-1(b) to Form 8-K filed on October 2, 1997 by Reference
(10)-1 Aeroquip-Vickers, Inc. 1987 Stock Option Plan 31-34
(10)-2 Change in Control Agreement for Officers (the 35-43
Agreements executed by the Company and various
executive officers of the Company are identical in all respects
to the form of Agreement filed as Exhibit (10)-2 except as to
differences in the identity of the officers and the dates of
execution, and as to other variations directly necessitated by
said differences)
</TABLE>
<PAGE> 23
23
<TABLE>
<S> <C> <C>
(10)-3 Change in Control Agreement for Non-officers 44-50
(the Agreements executed by the Company and various
non-officer employees of the Company are identical in all
respects to the form of Agreement filed as Exhibit (10)-3
except as to differences in the identity of the employees and
the dates of execution, and as to other variations directly
necessitated by said differences)
(10)-4 Aeroquip-Vickers, Inc. 1994 Stock Incentive Plan, Incorporated
filed as Appendix A to the proxy statement for the by Reference
annual meeting held on April 21, 1994
(10)-5 Aeroquip-Vickers 1989 Non-Employee Directors' Incorporated
Equity Plan, filed as Exhibit (10)-12 to Form 10-K by Reference
filed on March 18, 1994
(10)-6 Aeroquip-Vickers, Inc. Plan for Optional Deferment Incorporated
of Directors' Fees (amended and restated effective by Reference
April 1, 1995), filed as Exhibit (10)-8 to Form 10-K filed
March 20, 1995
(10)-7 Aeroquip-Vickers, Inc. Directors' Retirement Plan Incorporated
(amended and restated effective January 1, 1990), by Reference
filed as Exhibit (10)-9 to Form 10-K filed
March 20, 1995
(10)-8 Aeroquip-Vickers, Inc. Voluntary Deferred Incorporated
Compensation Plan (effective April 1, 1995), filed by Reference
as Exhibit (10)-11 to Form 10-K filed March 20, 1995
(10)-9 Aeroquip-Vickers, Inc. Supplemental Benefit Plan Incorporated
(amended and restated effective January 1, 1995), by Reference
filed as Exhibit (10)-10 to Form 10-Q filed
August 10, 1995
(10)-10 Aeroquip-Vickers, Inc. 1998 Stock Incentive Plan, Incorporated
filed as Appendix A to the proxy statement for the by Reference
annual meeting of shareholders to be held on
April 16, 1998 (this plan is subject to shareholder
approval)
(10)-11 Aeroquip-Vickers, Inc. Non-Employee Directors' Incorporated
Stock Award Plan, filed as Appendix B to the proxy by Reference
statement for the annual meeting of shareholders to
be held on April 16, 1998 (this plan is subject to
shareholder approval)
(12) Statement re: Computation of Ratios 51
(13) Portions of the 1997 Annual Report to Security 52-91
Holders (to the extent incorporated by reference
hereunder)
</TABLE>
<PAGE> 24
24
<TABLE>
<S> <C> <C>
(21) Subsidiaries of the Registrant 92
(23) Consent of Independent Auditors 93
(24) Power of Attorney 94
(27) Financial Data Schedule 95
(27)-1 Financial Data Schedule - 1997 Restated 96
(27)-2 Financial Data Schedule - 1996 Restated 97
(27)-3 Financial Data Schedule - 1995 Restated 98
(99)-1 Aeroquip-Vickers, Inc. Directors' Charitable Incorporated
Award Program, filed as Exhibit (99(i))-2 to by Reference
Form 10-K filed on March 18, 1994
(99)-2 Credit Agreement, dated as of September 27, 1996, Incorporated
among Aeroquip-Vickers, Inc. (formerly TRINOVA by Reference
Corporation) (borrower) and The Bank of Tokyo - Mitsubishi
Trust Company; Citibank, N.A.; Dresdner Bank AG, New York and
Grand Cayman branches; The First National Bank of Chicago;
Morgan Guaranty Trust Company of New York; The Chase Manhattan
Bank; and Union Bank of Switzerland, Chicago branch (banks);
and Citibank, N.A. (administrative agent), filed as Exhibit
(99(i))-2 to Form 10-Q filed November 14, 1996
</TABLE>
<PAGE> 1
25
EXHIBIT (3)-1
AMENDED CODE OF REGULATIONS
OF
AEROQUIP-VICKERS, INC.
ARTICLE I
SHAREHOLDERS
Section 1. ANNUAL MEETING. The annual meeting of shareholders of the
corporation for the election of directors, the consideration of reports to be
laid before such meeting, and the transaction of such other business as may
properly be brought before such meeting, shall be held at two o'clock p.m., or
at such other time as may be designated by the Board of Directors, the Chairman
of the Board, or by the President and specified in the notice of the meeting, on
the third Thursday in April of each year, if not a legal holiday, and, if a
legal holiday, then on the next succeeding business day.
Section 2. SPECIAL MEETINGS. Special meetings of the shareholders of
the corporation may be held on any business day, when called by the Chairman of
the Board, or by the President, or by the Vice President authorized to exercise
the authority of the President in case of his absence, death or disability, or
by the Board acting at a meeting, or by a majority of the directors acting
without a meeting, or by persons who hold twenty-five percent of all shares
outstanding and entitled to vote thereat.
Section 3. PLACE OF MEETINGS. Meetings of shareholders shall be held
at the principal office of the corporation in the City of Maumee, Ohio, unless
the Board of Directors acting at a meeting, or a majority of directors acting
without a meeting, designates some other place within or without the State of
Ohio and causes the notice thereof to so specify.
Section 4. NOTICE OF MEETINGS. Not less than seven nor more than
sixty days before the date fixed for a meeting of shareholders, written notice
stating the time, place and purposes of such meeting shall be given by personal
delivery or by mail to each shareholder of record entitled to notice of the
meeting by or at the direction of the Chairman of the Board, the President or
the Secretary. If mailed, such notice shall be addressed to the shareholder at
his address as it appears on the records of the company.
Section 5. WAIVER OF NOTICE. Notice of shareholders meeting may be
waived in writing either before or after the holding of such meeting, which
writing shall be filed or entered upon the records of the company. The
attendance of any shareholder at such meeting without protesting, prior to or at
the commencement of the meeting, the lack of proper notice shall be deemed to be
a waiver by him of notice of such meeting.
<PAGE> 2
26
Section 6. QUORUM; ADJOURNMENT. At any meeting of shareholders the
holders of shares entitling them to exercise a majority of the voting power of
the corporation, present in person or by proxy, shall constitute a quorum for
such meeting, provided, however, that no action required by law, the Articles,
or these Regulations to be authorized or taken by the holders of a designated
proportion of the shares of the corporation, may be authorized or taken by a
lesser proportion.
At any meeting at which a quorum is present, all questions and
business which shall come before the meeting shall be determined by the vote of
the holders of a majority of such voting shares as are represented in person or
by proxy, except when a greater proportion is required by law, the Articles or
these Regulations.
The holders of a majority of the voting shares represented at a
meeting, whether or not a quorum is present, may adjourn such meeting from time
to time; if any meeting is adjourned, notice of adjournment need not be given if
the time and place to which it is adjourned are fixed and announced at such
meeting.
Section 7. PROXIES. A person who is entitled to attend a shareholders
meeting, to vote thereat, or to execute consents, waivers or releases, may be
represented at such meeting or vote thereat, and execute consents, waivers, and
releases and exercise any of his other rights by proxy or proxies appointed by a
writing signed by such person as provided by law.
Section 8. FINANCIAL REPORTS. At the annual meeting, there shall be
laid before the shareholders a financial statement consisting of: (1) a balance
sheet containing a summary of the assets, liabilities, stated capital and
surplus (showing separately any capital surplus arising from unrealized
appreciation of assets, other capital surplus, and earned surplus) of the
corporation as of a date not more than four months before such meeting, (2) a
statement of profit and loss and surplus, including a summary of profits,
dividends paid, and other changes in the surplus accounts of the corporation,
for the year ending with the date of such balance sheet.
An opinion signed by the President or a Vice President or the
Treasurer or an Assistant Treasurer, or by a public accountant or firm of public
accountants, shall be appended to such financial statement to the effect that
the financial statement presents fairly the financial position of the
corporation and the results of its operations in conformity with generally
accepted accounting principles applied on a basis consistent for the period
covered thereby, or such other opinion as is in accordance with sound accounting
practices.
<PAGE> 3
27
ARTICLE II
BOARD OF DIRECTORS
Section 1. GENERAL POWERS. Except where the law, the Articles of
Incorporation, or these Regulations require action to be authorized or taken by
shareholders, all of the authority of the corporation shall be exercised by its
Board of Directors.
Section 2. NUMBER OF DIRECTORS. Until changed in accordance with the
provisions of these Regulations, the number of directors of the corporation
(exclusive of directors, if any, to be elected by holders of Preferred Stock,
voting separately as a class pursuant to the Articles of Incorporation) shall
not be less than seven nor more than fifteen, the exact number within said
limits to be fixed from time to time by the affirmative vote of a majority of
the directors in office, either at a meeting or by action without a meeting,
provided that no reduction in the number of directors shall have the effect of
shortening the term of any incumbent directors. In the event that the number of
directors shall be increased, the unfilled positions shall be filled as provided
in Article II, Section 5.
Section 3. ELECTION OF DIRECTORS. Directors shall be elected at the
annual meeting of shareholders. At such meeting only persons nominated as
candidates shall be eligible for election as directors, and the candidates
receiving the greatest number of votes shall be elected.
Section 4. TERM OF OFFICE. Directors shall hold office until the
annual meeting next succeeding their election and until their successors are
elected and qualified, or until their earlier resignation, removal from office,
or death.
Section 5. VACANCIES. In the event of the occurrence of any vacancy
or vacancies in the Board, the remaining directors, though less than a majority
of the whole authorized number of directors, may, by the vote of a majority of
their number, fill such vacancy for the unexpired term.
Section 6. MEETINGS. Immediately after each annual meeting of the
shareholders, the newly elected directors shall hold an organization meeting for
the purpose of electing officers and transacting any other business. Notice of
such meeting need not be given. Other meetings of the Board may be held at any
time within or without the State of Ohio in accordance with the by-laws,
resolutions or other action by the Board. Written notice of the time and place
of each such other meeting of the directors shall be given to each director
either by personal delivery or by mail, by telegram or cablegram, at least two
(2) days before the meeting. Notice of any meeting of the Board need not be
given to any director, however, if waived by him in writing or by telegram or
cablegram, before or after such meeting is held, or if he shall be present at
such meeting; and any meeting of the Board shall be a legal meeting
<PAGE> 4
28
without any notice thereof having been given, if all the directors shall be
present thereat. Unless otherwise expressly stated in the notice thereof, any
business may be transacted at any meeting of the Board.
Section 7. QUORUM, ADJOURNMENT. Six members of the Board of Directors
shall constitute a quorum for a meeting, provided that a majority of directors
present at a meeting duly held, whether or not a quorum is present, may adjourn
such meeting from time to time; if any meeting is adjourned, notice of
adjournment need not be given if the time and place to which it is adjourned are
fixed and announced at such meeting. The act of a majority of the directors
present at a meeting at which a quorum is present is the act of the Board,
unless the act of a greater number is required by these Regulations or the
by-laws.
Section 8. COMMITTEES. The Board of Directors may from time to time
create or appoint an executive committee and any other committee or committees
of the Board, to consist of not less than three directors, and, to the extent
permitted by law, may delegate to any such committee any of the authority of the
Board, however conferred, other than that of filling vacancies in the Board or
in any committee of the Board. The directors may appoint one or more directors
as alternate members of any such committee, who may take the place of any absent
member or members at any meeting of such committee. Each such committee shall
serve at the pleasure of the Board, shall act only in the intervals between
meetings of the Board, and shall be subject to the control and direction of the
Board.
Section 9. BY-LAWS. The Board of Directors may adopt by-laws for its
own government, not inconsistent with the Articles of Incorporation or these
Regulations.
ARTICLE III
OFFICERS
Section 1. GENERAL PROVISIONS. The Board of Directors may elect a
Chairman of the Board and shall elect a President, a Secretary and a Treasurer
and such other officers as the Board may from time to time deem necessary. The
Chairman of the Board, if any, and the President shall be directors, but no one
of the other officers need be a director. Any two or more offices may be held by
the same person, but no officer shall execute, acknowledge or verify any
instrument in more than one capacity if such instrument is required to be
executed, acknowledged or verified by two or more officers.
Section 2. POWERS AND DUTIES. All officers, as between themselves and
the corporation shall respectively have such authority and perform such duties
as may be determined from time to time by the Board of Directors, and in the
absence of provision therefor by the Board, shall have such powers and duties as
generally pertain to their respective offices.
<PAGE> 5
29
The Board of Directors may from time to time delegate to any officer
authority to appoint and remove subordinate officers and to prescribe their
authority and duties.
Section 3. TERM OF OFFICE. The officers of the corporation shall hold
office during the pleasure of the Board of Directors, and unless sooner removed
by the Board of Directors, until the organization meeting of the Board of
Directors following the date of their election or until their successors are
chosen and qualified.
The Board of Directors may remove any officer at any time, with or
without cause, by the affirmative vote of a majority of directors in office. A
vacancy in any office occurring for whatever reason may be filled by the Board
of Directors.
ARTICLE IV
INDEMNIFICATION OF OFFICERS, DIRECTORS AND EMPLOYEES
Section 1. INDEMNIFICATION. The corporation shall indemnify, to the
full extent then permitted by law, any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director, officer or salaried employee of
the corporation, or is or was serving at the request of the corporation as a
director, officer or employee of another corporation, domestic or foreign,
non-profit or for profit, partnership, joint venture, trust or other enterprise.
The indemnification provided hereby shall not be deemed exclusive of any other
rights to which a person seeking indemnification may be entitled under any law,
the articles of incorporation or any agreement,vote of shareholders or of
disinterested directors or otherwise, both as to action in official capacities
and as to action in another capacity while he is a director, officer or salaried
employee of the corporation, and shall continue as to a person who has ceased to
be director, officer or salaried employee and shall inure to the benefit of the
heirs, executors and administrators of such a person.
Section 2. INSURANCE. The corporation may, to the full extent then
permitted by law and authorized by the directors, purchase and maintain
insurance on behalf of any persons described in the preceding paragraph against
any liability asserted against and incurred by any such person in any such
capacity or arising out of his status as such, whether or not the corporation
would have the power to indemnify such person against such liability.
<PAGE> 6
30
Section 3. INDEMNIFICATION AGREEMENTS. The corporation may enter into
agreements with any persons described in Section 1 of this Article IV to provide
indemnification against any liability asserted against or incurred by any such
person in such capacity, or arising out of his status as such, to the full
extent permitted by law.
ARTICLE V
SEAL
The Board of Directors shall provide a suitable seal containing the
name of the corporation. If deemed advisable by the Board of Directors,
duplicate seals may be provided and kept for the purposes of the corporation.
ARTICLE VI
AMENDMENTS
These Regulations may be amended or repealed and new regulations may
be adopted by the shareholders at a meeting held for such purpose by the
affirmative vote of the holders of shares entitling them to exercise a majority
of the voting power of the corporation on such proposal.
(Amended April 21, 1988)
<PAGE> 1
EXHIBIT (10)-1
31
TRINOVA CORPORATION
1987 STOCK OPTION PLAN
1. PURPOSE. The purpose of the 1987 Stock Option Plan (the "Plan" or the "1987
Plan") is to promote the interests of TRINOVA Corporation (the "Company") and
its shareholders by encouraging officers and other key employees of the Company,
its divisions and subsidiaries to acquire a proprietary interest in the Company
(as a greater incentive to increase the Company's earnings and to remain in its
employ) through the grant of stock options ("options"), with or without stock
appreciation rights ("rights"), to purchase or otherwise acquire $5 Par Value
Common Stock ("Common Shares") of the Company, or the transfer of Common Shares
subject to such terms and restrictions as a subcommittee of not less than three
disinterested members (i.e., those members who are not eligible, and have not
been eligible for at least one year prior to their appointment, to participate
in the Plan or in any other stock option plan of the Company or any affiliate)
of the Organization and Compensation Committee of the Board of Directors
("Board") or any similar successor committee ("Committee") of the Board of the
Company, appointed by the Board, may deem desirable and appropriate. The options
granted may be statutory options under applicable provisions of the Internal
Revenue Code and/or non-statutory options.
2. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee
subject to the provisions of the Plan. Without limiting the generality of the
foregoing, the Committee shall determine (a) the officers or other key employees
to be granted options or rights ("optionees") or receive awards of restricted
shares; (b) the times at which options or rights will be granted or restricted
shares will be transferred; (c) the terms of each option, including, but not
limited to, the number of optioned shares, the price of the optioned shares, the
time when the option shall become exercisable and the duration of the exercise
period, and the nature of the rights (if any) to be granted in connection with
the option; (d) the terms and restrictions, including risks of forfeiture,
imposed on any restricted shares transferred to an officer or other key
employee; (e) the nature of the restrictions (if any) to be placed on the option
or the optioned shares; and (f) the terms of each right, including but not
limited to, the number of optioned shares subject to the right, the value of the
right, the time when the right shall become exercisable and the duration of the
exercise period, and the form in which payment of the right will be made. The
Committee shall also prescribe the forms of the instruments evidencing any
options or rights granted; adopt, amend and rescind rules and regulations for
the administration of the Plan; construe and interpret the Plan, the rules and
regulations and the instruments; and make all other determinations necessary or
desirable for the administration of the Plan.
3. OPTION SHARES. Subject to the provisions of Section 10, the aggregate
number of Common Shares that may be issued or transferred under this Plan,
whether pursuant to options granted under the Plan or as restricted shares, or
pursuant to the exercise of rights upon the surrender of options, or that may be
the subject of options surrendered upon the exercise of rights granted under the
Plan, shall be 750,000 shares plus up to (a) 58,400 additional shares which
represent as of January 23, 1987 the aggregate number of shares available for
grants under the Company's 1982 Stock Option Plan (the "1982 Plan") and (b)
453,620 additional shares as of January 23, 1987 covered by outstanding options
granted under the 1982 Plan and the Company's 1975 Stock Option Plan to the
extent that such options expire, terminate or are cancelled without exercise.
Option shares may be unissued shares and/or treasury shares as the Board may
from time to time determine. Restricted stock granted pursuant to Section 7
shall be treasury stock. Except as provided in Section 6, Common Shares subject
to an option or right granted under the 1987 Plan,
<PAGE> 2
32
which expires, terminates or is cancelled without exercise, or restricted shares
which are forfeited to the Company because the risk of forfeiture materialized,
shall thereafter be available for the grant of other options, rights or transfer
as restricted shares under the 1987 Plan.
The Committee may, with the concurrence of the affected optionee, cancel any
option granted under this Plan. In the event of any such cancellation, the
Committee may authorize the granting of new options (which may or may not cover
the same number of shares which had been the subject of any prior option) in
such manner, at such option price and subject to the same terms, conditions and
discretions as, under this Plan, would have been applicable had the cancelled
options not been granted.
4. ELIGIBILITY. Options and rights shall be granted, and awards of restricted
shares shall be made, only to officers and other key employees of the Company,
its divisions or its subsidiary corporations. The members of the Committee shall
not be eligible, and shall not have been eligible for a period of at least one
year prior to their appointment, to participate in this Plan or in any other
plan of the Company or any affiliate entitling the participants therein to
acquire stock, stock options or stock appreciation rights. In the case of
options that are intended to qualify as "incentive stock options" under Section
422A of the Internal Revenue Code, the aggregate fair market value (determined
as of the time the options are granted) of the stock with respect to which such
options are exercisable for the first time by any optionee during any calendar
year (under this and all other stock option plans of the Company and any parent
and subsidiary corporations or predecessor of any such corporation) shall not
exceed $100,000. "Fair market value" (as used here and throughout the Plan)
means the closing price of the Company's Common Shares on the New York Stock
Exchange on the date specified. The closing price shall be determined from the
"NYSE-Composite Transactions" list printed in The Wall Street Journal or any
equivalent publication.
5. OPTION PRICE. Except as provided in Section 7, the option price shall be no
less than the greater of the fair market value of the optioned shares on the
date of grant or the par value of such shares. The option price shall be payable
in accordance with the terms of the option, in cash and/or in Common Shares of
the Company having a fair market value on the date of exercise equal to the
option price or applicable portion thereof, with such holding period for such
shares as the Committee may determine.
6. APPRECIATION RIGHTS. Rights may be granted in connection with any option,
either simultaneously with or subsequent to the grant of the option. A right
shall entitle the optionee to receive from the Company, upon surrender of the
related option, a payment equal to the value of the right. The value of the
right, as determined by the Committee, shall be expressed as a percentage (not
exceeding 100%) of the excess of the fair market value of the optioned shares on
the date of exercise of the rights over the option price. The Committee may
establish the maximum payment percentage, portion of the related options covered
by the rights and form of payment, which may be cash and/or Common Shares, at
the time of grant or thereafter. Rights shall be exercisable only when the
related options are exercisable and may be subject to more restrictive
provisions including a condition that a right may only be exercised if the
optionee is subject to Section 16(b) of the Securities Exchange Act of 1934 (the
"1934 Act"). Shares covered by options surrendered upon the exercise of rights
shall not be available for the grant of further options, rights or awards under
the Plan.
7. RESTRICTED STOCK. Common Shares may be transferred, and options may be
granted for Common Shares which are, in either case, for a period determined by
the Committee, and subject to a "substantial risk of forfeiture" and
"non-transferable," as defined in Section 83 of the Internal Revenue Code
("restricted shares"). Any such restricted shares transferred to an officer or
other key employee under this Plan may be transferred on such terms and
conditions as the Committee shall impose. Further, any options to acquire any
restricted shares shall be granted at such option price, if any, as determined
<PAGE> 3
33
by the Committee, less than the fair market value of Common Shares determined
without regard to any such restrictions, and shall entitle the optionee to
receive Common Shares by paying less than the fair market value at date of
grant, subject to such terms and conditions as the Committee shall impose. The
terms and conditions to which any restricted shares may be subject, imposed by
the Committee, may include prohibitions or restrictions on the transferability
of the optioned shares during the period of substantial risk of forfeiture.
8. NON-TRANSFERABILITY. Options or rights granted under the Plan shall be
transferable by the optionee only by will or the laws of descent and
distribution, and shall be exercisable during the optionee's lifetime only by
him.
9. NO RIGHTS TO EMPLOYMENT. Neither the Plan nor any option or right granted
under it shall alter the terms of employment of the optionee or the right of the
Company, its divisions or subsidiaries to terminate his employment.
10. ADJUSTMENTS. The Board may make or provide for such adjustments in the
option price and in the number or kind of shares of the Company's Common Shares
or other securities covered by outstanding options as such Board in its sole
discretion, exercised in good faith, may determine is equitably required to
prevent dilution or enlargement of the rights of optionees that would otherwise
result from (a) any stock dividend, stock split, combination of shares, issuance
of rights or warrants to purchase stock, recapitalization or other change in the
capital structure of the Company; (b) any merger, consolidation, separation,
reorganization, or partial or complete liquidation; or (c) any other corporate
transaction or event having an effect similar to any of the foregoing. The Board
may also make or provide for such adjustments in the number or kind of shares of
the Company's Common Shares or other securities which may be sold or transferred
under this Plan as such Board in its sole discretion, exercised in good faith,
may determine is appropriate to reflect any transaction or event described in
clause (a) of the preceding sentence.
11. TAX WITHHOLDING. Any compensation income realized or recognized by an
officer or other key employee with respect to (a) the exercise of any option or
rights granted under this Plan; (b) restricted shares transferred under this
Plan, including any such income resulting from any election under Section 83(b)
of the Internal Revenue Code; (c) the lapse of any such restrictions; or (d)
from a disposition of any shares acquired on the exercise of an incentive stock
option as defined in Section 422A (or other statutory option) prior to the
satisfaction of the required holding periods, shall be subject to withholding by
the Company or subsidiary of income, employment or other taxes required by
Federal, state, local or foreign law. The Committee may require that the
participant pay such withholding amount in cash directly to the Company or
subsidiary. The Committee shall have the right to retain, rather than issue or
transfer to the participant, the number of shares having a fair market value
equal to the required withholding amount. In the case of restricted shares that
cease to be subject to a substantial risk of forfeiture, or non-transferable, as
defined for purposes of Section 83 of the Internal Revenue Code, the Committee
shall have the right to retain the number of shares with a fair market value
equal to the required withholding amount.
In any case, the Committee may in its discretion satisfy the withholding
requirement by causing the Company or a subsidiary employing the officer or
other key employees to withhold the appropriate amount of any and all of such
taxes from any other compensation otherwise payable to the officer or other key
employee.
12. AMENDMENT AND TERMINATION OF THE PLAN. The Board may at any time amend or
terminate the Plan, provided that approval by the shareholders of the Company
shall be required for any amendment which would, in the absence of such
shareholder approval, cause transactions under the Plan to cease to qualify as
exempt transactions under Rule 16b-3 of the Securities and Exchange
<PAGE> 4
34
Commission or any similar successor rule promulgated under the 1934 Act,
increase the maximum number of shares subject to this Plan, or change the class
of employees eligible for participation under this Plan.
13. EFFECTIVE DATE. The Plan shall become effective on April 16, 1987, subject
to the Plan's approval by the shareholders of the Company at the Annual Meeting
on such date.
14. EFFECT ON THE 1982 PLAN. Options and stock appreciation rights granted under
the 1982 Plan and outstanding on the effective date of the 1987 Plan shall not
be adversely affected by the adoption of the 1987 Plan. Restricted shares
transferred under the 1982 Plan and outstanding as restricted shares on the
effective date of the 1987 Plan shall not be adversely affected by the adoption
of the 1987 Plan. However, no additional options or stock appreciation rights
shall be granted under the 1982 Plan after that date. After the effective date
of the 1987 Plan, no additional restricted shares shall be transferred under the
1982 Plan other than pursuant to the exercise after such effective date of
options or rights granted under the 1982 Plan. The 1982 Plan shall remain in
effect and shall govern such outstanding options, stock appreciation rights and
restricted shares transferred under the 1982 Plan until the last of such options
or stock appreciation rights is exercised or expires, terminates or is
cancelled, or in the case of restricted shares, the shares are forfeited, or
cease to be subject to the risk of forfeiture. As provided in Section 3, and
except as provided otherwise in Section 6, shares represented by such
outstanding options which are not exercised shall be available for the grant of
options or awards under the 1987 Plan.
<PAGE> 1
EXHIBIT (10)-2
35
Elected Officer Form
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT (this "Agreement") by and between TRINOVA Corporation,
an Ohio corporation (the "Company"), and _________________________________ (the
"Executive"), dated this _____ day of __________, 199__.
WITNESSETH THAT:
WHEREAS, the Company recognizes that today's business environment
makes it difficult to attract and retain highly qualified executive and key
professional personnel unless a degree of security can be offered to those
individuals against organizational and personnel changes which frequently follow
a change in control of a corporation; and
WHEREAS, even rumors of change-in-control transactions may cause key
employees to consider major career changes in an effort to assure financial
security for themselves and their families; and
WHEREAS, the Company desires to assure fair treatment of its key
employees in the event of a change in control and to allow them to make critical
career decisions without undue time pressure and financial uncertainty,
increasing their willingness to remain with the Company notwithstanding the
outcome of a possible change-in-control transaction; and
WHEREAS, the Company recognizes that many of its key management
employees will be involved in evaluating or negotiating any offers, proposals,
or other transactions which could result in a change in control of the Company
and, recognizing the fiduciary obligations of such officers, believes that it is
in the best interests of the Company and its shareholders to provide additional
assurance that such key employees are in a position, free from personal economic
and employment considerations, to be able as a practical matter to objectively
assess and aggressively pursue the interests of the Company's shareholders in
making these evaluations and carrying on such negotiations;
NOW THEREFORE, the parties agree as follows:
1. DEFINITIONS. When used herein, the following terms shall have the
meanings set forth below:
A. "Average Total Compensation" shall mean the sum of the
amounts determined under clauses (i) and (ii) below.
(i) The higher of the Executive's annual base salary
(without giving effect to any elected deferrals to
a plan under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code")) in
effect on (x) the day immediately prior to the day
on which the Change in Control occurred, or (y)
the Executive's Resignation Date or Termination
Date, as the case may be.
(ii)(a) If the Executive has been employed by the Company
for the last three full consecutive calendar
years, the average of the two highest aggregate
short-term annual incentive awards received by the
Executive under the Incentive Compensation Plan
attributable to services performed by
<PAGE> 2
36
the Executive during any calendar year in the last
five full calendar years (without regard to when
such awards were paid or accrued); or
(ii)(b) If the Executive has been employed by the Company
for at least one, but less than three full
consecutive calendar years, the average of the
aggregate short-term annual incentive awards
received by the Executive under the Incentive
compensation Plan attributable to services
performed by the Executive during each full
calendar year he has been employed by the Company
(without regard to when such awards were paid or
accrued); or
(ii)(c) If the Executive has been employed by the Company
for less than one full calendar year, the greater
of (x) his guaranteed annual incentive
compensation or (y) the aggregate short-term
annual incentive awards to which the Executive
would have been entitled under the Incentive
Compensation Plan of which the Executive was a
participant on the Termination Date or Resignation
Date, as the case may be, if he had worked for one
full calendar year at the base salary determined
under clause (i) above.
B. A "Beneficial Owner" of Voting Stock is any Person who would
be deemed to beneficially own such Voting Stock within the
meaning of Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or
any successor rules or regulations thereto.
C. "Benefit Period" shall mean a period of two years,
commencing with the Termination Date or Resignation Date,
except that if the Executive will reach age 65 within two
years after the Termination Date or Resignation Date, the
Benefit Period shall mean a period of years, including
fractional years, commencing with the Termination Date or
Resignation Date, and ending on the Executive's 65th
birthday.
D. "Cause" shall mean that, prior to any Termination or
Resignation, the Executive shall have committed:
(i) an intentional act of fraud, embezzlement or theft
in connection with his duties or in the course of
his employment with the Company;
(ii) intentional wrongful damage to property of the
Company; or
(iii) intentional wrongful disclosure of secret
processes or confidential information of the
Company;
and any such act shall have been materially harmful to the
Company. For purposes of this Agreement, no act, or failure
to act, on the part of the Executive shall be deemed
"intentional" if it was due primarily to an error in
judgment or negligence, but shall be deemed "intentional"
only if done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that his action or
omission was in the best interest of the Company.
Notwithstanding anything in this Agreement to the contrary,
the Executive shall not be deemed to have been terminated
for "Cause" hereunder unless and until there shall have been
delivered to the Executive a copy of a resolution duly
adopted by the affirmative vote of not less than
three-quarters of the Board of Directors of the Company (the
"Board") then in office at a meeting of the Board called and
held for such purpose (after reasonable notice to the
Executive and an
<PAGE> 3
37
opportunity for the Executive, together with his counsel,
to be heard before the Board), finding that, in the good
faith opinion of the Board, the Executive had committed an
act set forth above in this Paragraph 1.D and specifying
the particulars thereof in detail. Nothing herein shall
limit the right of the Executive or his beneficiaries to
contest the validity or propriety of any such
determination.
E. A "Change in Control" shall have occurred if any of the
following events shall occur:
(i) The Company is merged, consolidated or reorganized
into or with another corporation or other legal
person, and as a result of such merger,
consolidation or reorganization less than a
majority of the combined voting power of the
then-outstanding securities of such corporation or
person immediately after such transaction are held
in the aggregate by the holders of Voting Stock
immediately prior to such transaction;
(ii) If the Company sells all or substantially all of
its assets to any other corporation or other legal
person, less than a majority of the combined
voting power of the then-outstanding securities of
such corporation or person immediately after such
transaction are held in the aggregate by the
holders of Voting Stock immediately prior to such
sale;
(iii) There is a report filed on Schedule 13D or
Schedule 14D-1 (or any successor schedule, form or
report), each as promulgated pursuant to the
Exchange Act, disclosing that any Person has
become the Beneficial Owner of 20% or more of the
Voting Stock;
(iv) The Company files a report or proxy statement with
the Securities and Exchange Commission pursuant to
the Exchange Act disclosing in response to Form
8-K or Schedule 14A (or any successor schedule,
form or report or item therein) that a change in
control of the Company has or may have occurred or
will or may occur in the future pursuant to any
then-existing contract or transaction; or
(v) If during any period of two consecutive years,
individuals who at the beginning of any such
period constitute the Directors of the Company
cease for any reason to constitute at least a
majority thereof, unless the election, or the
nomination for election by the Company's
shareholders, of each Director of the Company
first elected during such period was approved by a
vote of at least two-thirds of the Directors of
the Company then still in office who were
Directors of the Company at the beginning of any
such period.
Notwithstanding the foregoing provisions of Paragraph
1.E(iii) or 1.E(iv) hereof, a "Change in Control" shall not
be deemed to have occurred for purposes of this Agreement
solely because (i) the Company, (ii) an entity in which the
Company directly or indirectly beneficially owns 50% or more
of the voting securities, or (iii) any Company-sponsored
employee stock ownership plan or any other employee benefit
plan of the Company, either files or becomes obligated to
file a report or a proxy statement under or in response to
Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or
any successor schedule, form or report or item therein)
under the Exchange Act, disclosing beneficial ownership by
it of shares of Voting Stock, whether in
<PAGE> 4
38
excess of 20% or otherwise, or because the Company reports
that a change in control of the Company has or may have
occurred or will or may occur in the future by reason of
such beneficial ownership.
F. "Incentive Compensation Plan" shall mean the plan approved
by shareholders of the Company on April 19, 1984 (or any
Operating Company Incentive Plan) and any amendments thereto
and restatements thereof, or any successor plan that may
become effective subsequent to the date of this Agreement
and prior to a Change in Control.
G. "Operating Company" shall mean any corporation of which the
Company owns directly or indirectly more than 50% of the
outstanding stock having by its terms ordinary voting power
to elect a majority of the board of directors of such
corporation, irrespective of whether at the time stock of
any other class or classes of such corporation shall have or
might have voting power by reason of the happening of any
contingency.
H. "Person" shall mean any "person," as the term "person" is
used and defined in Section 14(d)(2) of the Exchange Act,
and any "affiliate" or "associate" of any such person, as
the terms "affiliate" and "associate" are defined in Rule
12b-2 of the General Rules and Regulations under the
Exchange Act as in effect on the date of this Agreement.
I. "Resignation" shall mean resignation by the Executive of his
employment with the Company if any of the following has
occurred:
(i) Failure to elect or reelect the Executive to the
office of the Company which the Executive held
immediately prior to the Change in Control, or the
removal of the Executive as a Director of the
Company (or any successor thereto), if the
Executive shall have been a Director of the
Company immediately prior to the Change in
Control;
(ii) A significant adverse change in the nature or
scope of the authorities, powers, functions,
responsibilities or duties attached to the
position with the Company which the Executive held
immediately prior to the Change in Control, a
reduction in the aggregate Total Compensation
received by the Executive from the Company in any
calendar year following the Change in Control, or
the termination of the Executive's rights to any
employee benefits to which he was entitled
immediately prior to the Change in Control or a
reduction in scope or value thereof without the
prior written consent of the Executive, any of
which is not remedied within 10 calendar days
after receipt by the Company of written notice
from the Executive of such change, reduction or
termination, as the case may be;
(iii) A determination by the Executive made in good
faith that as a result of the Change in Control
and a change in circumstances thereafter
significantly affecting his position, including
without limitation, a change in the scope of the
business or other activities for which he was
responsible immediately prior to the Change in
Control, he has been rendered substantially unable
to carry out, has been substantially hindered in
the performance of, or has suffered a substantial
reduction in, any of the authorities, powers,
functions, responsibilities or duties attached to
the position held by the Executive immediately
prior to the Change in
<PAGE> 5
39
Control, which situation is not remedied within 10
calendar days after written notice to the Company
from the Executive of such determination;
(iv) The liquidation, dissolution, merger,
consolidation or reorganization of the Company or
transfer of all or a significant portion of its
business and/or assets, unless the successor or
successors (by liquidation, merger, consolidation,
reorganization or otherwise) to which all or a
significant portion of its business and/or assets
have been transferred (directly or by operation of
law) shall have assumed all duties and obligations
of the Company under this Agreement pursuant to
Paragraph 8 hereof;
(v) The Company shall relocate its principal executive
offices, or require the Executive to have his
principal location of work changed to any location
which is in excess of 100 miles from the location
thereof immediately prior to the Change of Control
or to travel away from his office in the course of
discharging his responsibilities or duties
hereunder significantly more (in terms of either
consecutive days or aggregate days in any calendar
year) than was required of him prior to the Change
of Control without, in either case, his prior
written consent; or
(vi) Without limiting the generality or effect of the
foregoing, any material breach of this Agreement
by the Company or any successor thereto.
J. "Resignation Date" shall be the last day worked by an
Executive who resigns his employment with the Company as
provided in Paragraph 1.I of this Agreement.
K. "Retirement Savings Plan" shall mean the TRINOVA Corporation
Retirement Savings and Profit Sharing Plan for Corporate
Employees as amended effective January 1, 1988 (or any
Operating Company defined contribution plan, including
profit sharing plans) and any amendments thereto and
restatements thereof, or any successor plan that may become
effective subsequent to the date of this agreement and prior
to a Change in Control.
L. "Termination" shall mean termination by the Company of the
Executive's employment for any reason other than the
following:
(i) death;
(ii) Total Disability, as defined in the Company's
long-term disability plan then in effect, and the
Executive begins actually to receive disability
benefits pursuant to such disability plan; or
(iii) Cause.
The Executive may also deem himself to have been terminated
under this Paragraph 1.L if the aggregate cash compensation
(including base salary (without giving effect to any elected
deferrals to a plan under Section 401(k) of the Code) plus
awards under the Incentive Compensation Plan) received by
the Executive in any calendar year following a Change in
Control is an amount less than the aggregate cash
compensation (including base salary (without giving effect
to any elected deferrals to a plan under Section 401(k) of
the Code) plus awards under the Incentive Compensation Plan)
received by the Executive in the full calendar year
immediately preceding the Change in Control;
<PAGE> 6
40
provided however, if the Executive was not employed by the
Company during all of the full calendar year immediately
preceding the Change in Control, the amount referred to
above with respect to the full calendar year immediately
preceding the Change in Control shall be the sum of the
amounts determined pursuant to Paragraphs 1.A(i) and
1.A(ii)(c).
M. "Termination Date" shall be the last day worked by an
Executive whose employment with the Company is terminated by
the Company other than for the reasons set forth in
Subparagraphs 1.L(i), (ii) or (iii) of this Agreement.
N. "Voting Stock" means all outstanding securities of the
Company entitled to vote generally in the election of
directors of the Company at the time in question.
2. PAYMENTS UPON TERMINATION OR RESIGNATION. Subject to Paragraph E
hereof, in the event of Termination within four years after the
Change in Control, or Resignation between six months and two years
after the Change in Control, the Executive shall receive:
A. An amount equal to the Executive's Average Total
Compensation, multiplied by the length, in years, including
fractional years, of the Benefit Period. This payment shall
be made by the Company within thirty calendar days after the
Executive's Termination Date or Resignation Date, as the
case may be.
B. A contribution by the Company (or, if applicable, the
Company shall cause the appropriate Operating Company to
make a contribution) in an amount equal to 2 times 4.5% of
the Executive's Average Total Compensation to be made within
thirty calendar days after the Executive's Termination Date
or Resignation Date, as the case may be, to the Executive's
account in the applicable Retirement Savings Plan. These
benefits shall be payable at the time and in the manner set
forth in such Plan as in effect immediately prior to the
Change in Control.
C. During the Benefit Period, the benefits associated with
continued participation in the employee health, life
insurance, disability income and other welfare benefit plans
of the Company and/or any Operating Company in which he was
participating immediately prior to the Change in Control,
upon provisions substantially similar to or more favorable
to the Executive than those contained in the respective
plans as of the Termination Date or the Resignation Date,
provided , however, that if participation by the Executive
in any of such plans is not permitted, due to the
requirements for eligibility for participation contained
therein, the Company shall (or shall cause the applicable
Operating Company to) pay or provide for the payment of the
benefits described in those plans to the Executive and/or
his dependents, or, if applicable, to his beneficiaries or
estate as if he were employed by the Company during the
Benefit Period in the position held by him immediately prior
to the Change in Control.
D. Reimbursement for the cost of outplacement services rendered
to the Executive as part of efforts made by the Executive to
obtain employment following his Termination Date or
Resignation Date.
E. In the event the "present value" (as determined under
Section 280G of the Code or any successor provision thereto)
of the amounts payable under Paragraphs 2.A through 2.D
hereof, when added to the "present value" (as determined
under Section 280G of the Code or any successor provision
thereto) of any other "parachute payments" (as that term is
defined in Section 280G of the Code or any successor
provision thereto) from the Company,
<PAGE> 7
41
exceeds an amount (the "299% Amount") equal to 299% of the
Executive's "base amount" (as that term is defined in
Section 280G of the Code (without regard to Section
280G(b)(2)(A)(ii) thereof) or any successor provision
thereto), then the amount of the payments otherwise payable
to the Executive pursuant to this Agreement shall be reduced
to the minimum extent necessary (but in no event to less
than zero) so that no such payment causes the 299% Amount to
be exceeded. The reduction, if any, contemplated by the
immediately preceding sentence shall be effected by reducing
to the extent necessary the benefits otherwise to be
provided by Paragraph 2.C hereof, and then, if necessary, by
reducing the benefits otherwise to be provided by Paragraph
2.B hereof, and then, if necessary, by reducing the benefits
provided by Paragraph 2.A hereof.
F. The determination of whether any amount otherwise payable
under Paragraphs 2.A through 2.D hereof causes the 299%
Amount to be exceeded shall be made, if requested by the
Executive or the Company, by Jones, Day, Reavis & Pogue or
such other counsel as may be selected for this purpose by
the Company's independent accounting firm and approved by
the Executive.
3. NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will
be difficult, and may be impossible, for the Executive to find
reasonably comparable employment following the Resignation Date or the
Termination Date, and the parties desire to avoid possible disputes
with respect to mitigation and offset matters. The Company also
acknowledges that, particularly in light of Paragraph 2.E hereof, its
Board of Directors has, following due consideration of the matter,
determined that the benefits provided by Paragraph 2 hereof are
reasonable. Accordingly, the parties hereto expressly agree that the
payment of the amounts specified in Paragraph 2 hereof by the Company
to the Executive in accordance with the terms of this Agreement will
be liquidated damages, and that the Executive shall not be required to
mitigate the amounts provided for in Paragraph 2 of this Agreement by
seeking other employment or otherwise, nor shall any profits, income,
earnings or other benefits from any source whatsoever create any
mitigation, offset, reduction or any other obligation on the part of
the Executive hereunder or otherwise, except that the welfare benefits
provided by Paragraph 2.C hereof shall be reduced to the extent
comparable welfare benefits are actually received by the Executive
from another employer following the Executive's Resignation Date or
Termination Date, as the case may be, until the expiration of the
Benefit Period.
4. ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement or the breach thereof, shall be settled by arbitration
in the City of Toledo, Ohio, in accordance with the laws of the State
of Ohio by three arbitrators, one of whom shall be appointed by the
Company, one by the Executive and the third of whom shall be appointed
by the first two arbitrators. If the first two arbitrators cannot
agree on the appointment of a third arbitrator, then the third
arbitrator shall be appointed by the Chief Judge of the United States
District Court for the Northern District of Ohio. The arbitration
shall be conducted in accordance with the rules of the American
Arbitration Association, except with respect to the selection of
arbitrators, which shall be as provided in this Paragraph 4. Judgment
upon the award rendered by the arbitrators may be entered in any court
having jurisdiction thereof. In the event that the Executive
determines in good faith to retain legal counsel and/or incur other
reasonable costs or expenses in connection with any such arbitration
or to enforce any or all of the Executive's rights under this
Agreement or under any arbitration award, the Company shall pay 50% of
the first $10,000 of attorneys' fees, costs, and expenses incurred by
the Executive in connection with the enforcement of his rights,
including the enforcement of any arbitration award in court,
<PAGE> 8
42
regardless of the final outcome. The Company shall pay all such costs
and expenses in excess of $10,000 incurred by the Executive.
5. NOTICES. Any notices, requests, demands, and other communications,
provided for in or pertinent to this Agreement shall be sufficient if
delivered to the other party hereto by means of a written notice,
mailed by United States registered or certified mail, return receipt
requested, postage prepaid to either the Executive's last known
address, or to the Company's principal executive offices, as the case
may be.
6. GOVERNING LAW. The provisions of this Agreement shall be construed and
governed in accordance with the laws of the State of Ohio without
giving effect to the principles of conflict of laws of such State.
7. AMENDMENT. This Agreement may be amended or canceled by mutual
agreement of the parties in writing without the consent of any other
person and, so long as the Executive lives, no person, other than the
parties hereto shall have any rights under or interest in this
Agreement or the subject matter hereof.
8. Successors and Binding Agreement.
A. The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization
or otherwise) to all or substantially all of the business
and/or assets of the Company, by agreement in form and
substance satisfactory to the Executive, expressly to assume
and agree to perform this Agreement in the same manner and
to the same extent the Company would be required to perform
if no such succession had taken place. This Agreement shall
be binding upon and inure to the benefit of the Company and
any successor to the Company, including without limitation
any persons acquiring directly or indirectly all or
substantially all of the business and/or assets of the
Company whether by purchase, merger, consolidation,
reorganization or otherwise (and such successor shall
thereafter be deemed the "Company" for the purposes of this
Agreement), but shall not otherwise be assignable,
transferable or delegable by the Company.
B. This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal
representatives, executors, administrators, successors,
heirs, distributees and/or legatees.
C. This Agreement is personal in nature and neither of the
parties hereto shall, without the consent of the other,
assign, transfer or delegate this Agreement or any rights or
obligations hereunder except as expressly provided in
Paragraph 8.A hereof. Without limiting the generality of the
foregoing, the Executive's right to receive payments
hereunder shall not be assignable, transferable or
delegable, whether by pledge, creation of a security
interest or otherwise, other than by a transfer by his will
or by the laws of descent and distribution and, in the event
of any attempted assignment or transfer contrary to this
Paragraph 8.C, the Company shall have no liability to pay
any amount so attempted to be assigned, transferred or
delegated.
9. VALIDITY. If any provision of this Agreement or the application of any
provision hereof to any person or circumstances is held invalid,
unenforceable or otherwise illegal, the remainder of this Agreement
and the application of such provision to any other person or
circumstances shall not be affected, and the provision so held to be
invalid, unenforceable or otherwise illegal shall be reformed to the
extent (and only to the extent) necessary to make it enforceable,
valid and legal.
<PAGE> 9
43
10. SCOPE OF AGREEMENT. This Agreement is not a contract for employment
for any period of time, does not constitute a guarantee of employment
and shall not be deemed to confer any benefit on the Executive in the
absence of a Change in Control.
11. TERM. The period during which this Agreement shall be in effect (the
"Term") shall commence as of the date hereof and shall expire as of
the later of (i) the close of business on December 31, 1992 and (ii)
the expiration of the Benefit Period, provided, however, that (A)
commencing on January 1, 1989 and each January 1 thereafter, the Term
of this Agreement shall automatically be extended for an additional
year unless, not later than September 30 of the immediately preceding
year, the Company or the Executive shall have given notice that it or
he, as the case may be, does not wish to have the Term extended and
(B) subject to Paragraph 10 hereof, if, prior to a Change in Control,
the Executive ceases for any reason to be an officer of the Company,
thereupon the Term shall be deemed to have expired and this Agreement
shall immediately terminate and be of no further effect.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and,
pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, and its
corporate seal to be hereunto affixed and attested by its secretary, all as of
the day and year first above written.
____________________________________
Executive
ATTEST: TRINOVA CORPORATION
___________________________________ By: _______________________________
Secretary Vice President
(Seal)
<PAGE> 1
44
EXHIBIT (10)-3
Other Executives Form
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT (this "Agreement") by and between TRINOVA Corporation,
an Ohio corporation (the "Company"), and _______________________________ (the
"Executive"), dated this _____ day of ____________, 199__.
WITNESSETH THAT:
WHEREAS, the Company recognizes that today's business environment
makes it difficult to attract and retain highly qualified executive and key
professional personnel unless a degree of security can be offered to those
individuals against organizational and personnel changes which frequently follow
a change in control of a corporation; and
WHEREAS, even rumors of change-in-control transactions may cause key
employees to consider major career changes in an effort to assure financial
security for themselves and their families; and
WHEREAS, the Company desires to assure fair treatment of its key
employees in the event of a change in control and to allow them to make critical
career decisions without undue time pressure and financial uncertainty,
increasing their willingness to remain with the Company notwithstanding the
outcome of a possible change-in-control transaction; and
WHEREAS, the Company recognizes that many of its key management
employees will be involved in evaluating or negotiating any offers, proposals,
or other transactions which could result in a change in control of the Company
and, recognizing the fiduciary obligations of such executives, believes that it
is in the best interests of the Company and its shareholders to provide
additional assurance that such key employees are in a position, free from
personal economic and employment considerations, to be able as a practical
matter to objectively assess and aggressively pursue the interests of the
Company's shareholders in making these evaluations and carrying on such
negotiations;
NOW THEREFORE, the parties agree as follows:
1. DEFINITIONS. When used herein, the following terms shall have the
meanings set forth below:
A. "Average Total Compensation" shall mean the sum of the
amounts determined under clauses (i) and (ii) below.
(i) The higher of the Executive's annual base
salary (without giving effect to any elected
deferrals to a plan under Section 401(k) of the
Internal Revenue Code of 1986, as amended (the
"Code")) in effect on (x) the day immediately
prior to the day on which the Change in Control
occurred, or (y) the Executive's Termination
Date.
(ii)(a) If the Executive has been employed by the
Company for the last three full consecutive
calendar years, the average of the two highest
aggregate short-term annual incentive awards
received by the Executive under the Incentive
Compensation Plan attributable to services
performed by the Executive during any calendar
year in the last five
<PAGE> 2
45
full calendar years (without regard to when
such awards were paid or accrued); or
(ii)(b) If the Executive has been employed by the
Company for at least one, but less than three
full consecutive calendar years, the average of
the aggregate short-term annual incentive
awards received by the Executive under the
Incentive compensation Plan attributable to
services performed by the Executive during each
full calendar year he has been employed by the
Company (without regard to when such awards
were paid or accrued); or
(ii)(c) If the Executive has been employed by the
Company for less than one full calendar year,
the greater of (x) his guaranteed annual
incentive compensation or (y) the aggregate
short-term annual incentive awards to which the
Executive would have been entitled under the
Incentive Compensation Plan of which the
Executive was a participant on the Termination
Date, if he had worked for one full calendar
year at the base salary determined under clause
(i) above.
B. A "Beneficial Owner" of Voting Stock is any Person who
would be deemed to beneficially own such Voting Stock
within the meaning of Rule 13d-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or any successor rules or regulations thereto.
C. "Benefit Period" shall mean a period of one year,
commencing with the Termination Date, except that if the
Executive will reach age 65 within one year after the
Termination Date, the Benefit Period shall mean a period
of a fractional year, commencing with the Termination Date
and ending on the Executive's 65th birthday.
D. "Cause" shall mean that, prior to any Termination, the
Executive shall have committed:
(i) an intentional act of fraud, embezzlement or
theft in connection with his duties or in the
course of his employment with the Company;
(ii) intentional wrongful damage to property of the
Company; or
(iii) intentional wrongful disclosure of secret
processes or confidential information of the
Company;
and any such act shall have been materially harmful to the
Company. For purposes of this Agreement, no act, or
failure to act, on the part of the Executive shall be
deemed "intentional" if it was due primarily to an error
in judgment or negligence, but shall be deemed
"intentional" only if done, or omitted to be done, by the
Executive not in good faith and without reasonable belief
that his action or omission was in the best interest of
the Company. Notwithstanding anything in this Agreement to
the contrary, the Executive shall not be deemed to have
been terminated for "Cause" hereunder unless and until
there shall have been delivered to the Executive a copy of
a resolution duly adopted by the affirmative vote of not
less than three-quarters of the Board of Directors of the
Company (the "Board") then in office at a meeting of the
Board called and held for such purpose (after reasonable
notice to the Executive and an opportunity for the
Executive, together with his counsel, to be heard before
the Board), finding that, in the good faith opinion
<PAGE> 3
46
of the Board, the Executive had committed an act set forth
above in this Paragraph 1.D and specifying the particulars
thereof in detail. Nothing herein shall limit the right of
the Executive or his beneficiaries to contest the validity
or propriety of any such determination.
E. A "Change in Control" shall have occurred if there is a
report filed on Schedule 13D or Schedule 14D-1 (or any
successor schedule, form or report), each as promulgated
pursuant to the Exchange Act, disclosing that any Person
has become the Beneficial Owner of 20% or more of the
Voting Stock; provided, however, that in the event that
prior to the Termination Date, such Person files a report
on Schedule 13D or Schedule 14D-1 (or any successor
schedule, form or report) disclosing that it is no longer
a Beneficial Owner of 20% or more of the Voting Stock,
then a "Change in Control" shall not be deemed to have
occurred for the purposes of this Agreement.
Notwithstanding the foregoing provisions of Paragraph 1.E,
a "Change in Control" shall not be deemed to have occurred
for purposes of this Agreement solely because (i) the
Company, (ii) an entity in which the Company directly or
indirectly beneficially owns 50% or more of the voting
securities, or (iii) any Company-sponsored employee stock
ownership plan or any other employee benefit plan of the
Company, either files or becomes obligated to file a
report or a proxy statement under or in response to
Schedule 13D or Schedule 14D-1 (or any successor schedule,
form or report or item therein) under the Exchange Act,
disclosing beneficial ownership by it of shares of Voting
Stock, whether in excess of 20% or otherwise, or because
the Company reports that a change in control of the
Company has or may have occurred or will or may occur in
the future by reason of such beneficial ownership.
F. "Incentive Compensation Plan" shall mean the plan approved
by shareholders of the Company on April 19, 1984 (or any
Operating Company Incentive Plan) and any amendments
thereto and restatements thereof, or any successor plan
that may become effective subsequent to the date of this
Agreement and prior to a Change in Control.
G. "Operating Company" shall mean any corporation of which
the Company owns directly or indirectly more than 50% of
the outstanding stock having by its terms ordinary voting
power to elect a majority of the board of directors of
such corporation, irrespective of whether at the time
stock of any other class or classes of such corporation
shall have or might have voting power by reason of the
happening of any contingency.
H. "Person" shall mean any "person," as the term "person" is
used and defined in Section 14(d)(2) of the Exchange Act,
and any "affiliate" or "associate" of any such person, as
the terms "affiliate" and "associate" are defined in Rule
12b-2 of the General Rules and Regulations under the
Exchange Act as in effect on the date of this Agreement.
I. "Retirement Savings Plan" shall mean the TRINOVA
Corporation Retirement Savings and Profit Sharing Plan for
Corporate Employees as amended effective January 1, 1988
(or any Operating Company defined contribution plan,
including profit sharing plans) and any amendments thereto
and restatements thereof, or any successor plan that may
become effective subsequent to the date of this agreement
and prior to a Change in Control.
J. "Termination" shall mean termination by the Company of the
Executive's employment for any reason other than the
following:
<PAGE> 4
47
(i) death;
(ii) Total Disability, as defined in the Company's
long-term disability plan then in effect, and
the Executive begins actually to receive
disability benefits pursuant to such disability
plan; or
(iii) Cause.
The Executive may also deem himself to have been
terminated under this Paragraph 1.J if the aggregate cash
compensation (including base salary (without giving effect
to any elected deferrals to a plan under Section 401(k) of
the Code) plus awards under the Incentive Compensation
Plan) received by the Executive in any calendar year
following a Change in Control is an amount less than the
aggregate cash compensation (including base salary
(without giving effect to any elected deferrals to a plan
under Section 401(k) of the Code) plus awards under the
Incentive Compensation Plan) received by the Executive in
the full calendar year immediately preceding the Change in
Control; provided however, if the Executive was not
employed by the Company during all of the full calendar
year immediately preceding the Change in Control, the
amount referred to above with respect to the full calendar
year immediately preceding the Change in Control shall be
the sum of the amounts determined pursuant to Paragraphs
1.A(i) and 1.A(ii)(c).
K. "Termination Date" shall be the last day worked by an
Executive whose employment with the Company is terminated
by the Company other than for the reasons set forth in
Subparagraphs 1.J(i), (ii) or (iii) of this Agreement.
L. "Voting Stock" means all outstanding securities of the
Company entitled to vote generally in the election of
directors of the Company at the time in question.
2. PAYMENTS UPON TERMINATION. Subject to Paragraph E hereof, in the
event of Termination within four years after the Change in Control,
the Executive shall receive:
A. An amount equal to the Executive's Average Total
Compensation, multiplied by the length, by a year or a
fractional year, of the Benefit Period. This payment shall
be made by the Company within thirty calendar days after
the Executive's Termination Date.
B. A contribution by the Company (or, if applicable, the
Company shall cause the appropriate Operating Company to
make a contribution) in an amount equal to 1 times 4.5% of
the Executive's Average Total Compensation to be made
within thirty calendar days after the Executive's
Termination Date to the Executive's account in the
applicable Retirement Savings Plan. These benefits shall
be payable at the time and in the manner set forth in such
Plan as in effect immediately prior to the Change in
Control.
C. During the Benefit Period, the benefits associated with
continued participation in the employee health, life
insurance, disability income and other welfare benefit
plans of the Company and/or any Operating Company in which
he was participating immediately prior to the Change in
Control, upon provisions substantially similar to or more
favorable to the Executive than those contained in the
respective plans as of the Termination Date, provided,
however, that if participation by the Executive in any of
such plans is not permitted, due to the requirements
<PAGE> 5
48
for eligibility for participation contained therein, the
Company shall (or shall cause the applicable Operating
Company to) pay or provide for the payment of the benefits
described in those plans to the Executive and/or his
dependents, or, if applicable, to his beneficiaries or
estate as if he were employed by the Company during the
Benefit Period in the position held by him immediately
prior to the Change in Control.
D. Reimbursement for the cost of outplacement services
rendered to the Executive as part of efforts made by the
Executive to obtain employment following his Termination
Date.
E. In the event the "present value" (as determined under
Section 280G of the Code or any successor provision
thereto) of the amounts payable under Paragraphs 2.A
through 2.D hereof, when added to the "present value" (as
determined under Section 280G of the Code or any successor
provision thereto) of any other "parachute payments" (as
that term is defined in Section 280G of the Code or any
successor provision thereto) from the Company, exceeds an
amount (the "299% Amount") equal to 299% of the
Executive's "base amount" (as that term is defined in
Section 280G of the Code (without regard to Section
280G(b)(2)(A)(ii) thereof) or any successor provision
thereto), then the amount of the payments otherwise
payable to the Executive pursuant to this Agreement shall
be reduced to the minimum extent necessary (but in no
event to less than zero) so that no such payment causes
the 299% Amount to be exceeded. The reduction, if any,
contemplated by the immediately preceding sentence shall
be effected by reducing to the extent necessary the
benefits otherwise to be provided by Paragraph 2.C hereof,
and then, if necessary, by reducing the benefits otherwise
to be provided by Paragraph 2.B hereof, and then, if
necessary, by reducing the benefits provided by Paragraph
2.A hereof.
F. The determination of whether any amount otherwise payable
under Paragraphs 2.A through 2.D hereof causes the 299%
Amount to be exceeded shall be made, if requested by the
Executive or the Company, by Jones, Day, Reavis & Pogue or
such other counsel as may be selected for this purpose by
the Company's independent accounting firm and approved by
the Executive.
3. NO MITIGATION OBLIGATION. The Company hereby acknowledges that it
will be difficult, and may be impossible, for the Executive to find
reasonably comparable employment following the Termination Date, and
the parties desire to avoid possible disputes with respect to
mitigation and offset matters. The Company also acknowledges that,
particularly in light of Paragraph 2.E hereof, its Board of Directors
has, following due consideration of the matter, determined that the
benefits provided by Paragraph 2 hereof are reasonable. Accordingly,
the parties hereto expressly agree that the payment of the amounts
specified in Paragraph 2 hereof by the Company to the Executive in
accordance with the terms of this Agreement will be liquidated
damages, and that the Executive shall not be required to mitigate the
amounts provided for in Paragraph 2 of this Agreement by seeking
other employment or otherwise, nor shall any profits, income,
earnings or other benefits from any source whatsoever create any
mitigation, offset, reduction or any other obligation on the part of
the Executive hereunder or otherwise, except that the welfare
benefits provided by Paragraph 2.C hereof shall be reduced to the
extent comparable welfare benefits are actually received by the
Executive from another employer following the Executive's Termination
Date until the expiration of the Benefit Period.
4. ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement or the breach thereof, shall be settled by arbitration
in the City of Toledo, Ohio, in accordance with the laws of the State
<PAGE> 6
49
of Ohio by three arbitrators, one of whom shall be appointed by the
Company, one by the Executive and the third of whom shall be
appointed by the first two arbitrators. If the first two arbitrators
cannot agree on the appointment of a third arbitrator, then the third
arbitrator shall be appointed by the Chief Judge of the United States
District Court for the Northern District of Ohio. The arbitration
shall be conducted in accordance with the rules of the American
Arbitration Association, except with respect to the selection of
arbitrators, which shall be as provided in this Paragraph 4. Judgment
upon the award rendered by the arbitrators may be entered in any
court having jurisdiction thereof. In the event that the Executive
determines in good faith to retain legal counsel and/or incur other
reasonable costs or expenses in connection with such arbitration to
enforce any or all of the Executive's rights under this Agreement or
under any arbitration award, the Company shall pay 50% of the first
$10,000 of attorneys' fees, costs, and expenses incurred by the
Executive in connection with the enforcement of his rights, including
the enforcement of any arbitration award in court, regardless of the
final outcome. The Company shall pay all such costs and expenses in
excess of $10,000 incurred by the Executive.
5. NOTICES. Any notices, requests, demands, and other communications,
provided for in or pertinent to this Agreement shall be sufficient if
delivered to the other party hereto by means of a written notice,
mailed by United States registered or certified mail, return receipt
requested, postage prepaid to either the Executive's last known
address, or to the Company's principal executive offices, as the case
may be.
6. GOVERNING LAW. The provisions of this Agreement shall be construed
and governed in accordance with the laws of the State of Ohio without
giving effect to the principles of conflict of laws of such State.
7. AMENDMENT. This Agreement may be amended or canceled by mutual
agreement of the parties in writing without the consent of any other
person and, so long as the Executive lives, no person, other than the
parties hereto shall have any rights under or interest in this
Agreement or the subject matter hereof.
8. Successors and Binding Agreement.
A. The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation,
reorganization or otherwise) to all or substantially all
of the business and/or assets of the Company, by agreement
in form and substance satisfactory to the Executive,
expressly to assume and agree to perform this Agreement in
the same manner and to the same extent the Company would
be required to perform if no such succession had taken
place. This Agreement shall be binding upon and inure to
the benefit of the Company and any successor to the
Company, including without limitation any persons
acquiring directly or indirectly all or substantially all
of the business and/or assets of the Company whether by
purchase, merger, consolidation, reorganization or
otherwise (and such successor shall thereafter be deemed
the "Company" for the purposes of this Agreement), but
shall not otherwise be assignable, transferable or
delegable by the Company.
B. This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal
representatives, executors, administrators, successors,
heirs, distributees and/or legatees.
C. This Agreement is personal in nature and neither of the
parties hereto shall, without the consent of the other,
assign, transfer or delegate this Agreement or any rights
or obligations hereunder except as expressly provided in
Paragraph 8.A hereof.
<PAGE> 7
50
Without limiting the generality of the foregoing, the
Executive's right to receive payments hereunder shall not
be assignable, transferable or delegable, whether by
pledge, creation of a security interest or otherwise,
other than by a transfer by his will or by the laws of
descent and distribution and, in the event of any
attempted assignment or transfer contrary to this
Paragraph 8.C, the Company shall have no liability to pay
any amount so attempted to be assigned, transferred or
delegated.
9. VALIDITY. If any provision of this Agreement or the application of
any provision hereof to any person or circumstances is held invalid,
unenforceable or otherwise illegal, the remainder of this Agreement
and the application of such provision to any other person or
circumstances shall not be affected, and the provision so held to be
invalid, unenforceable or otherwise illegal shall be reformed to the
extent (and only to the extent) necessary to make it enforceable,
valid and legal.
10. SCOPE OF AGREEMENT. This Agreement is not a contract for employment
for any period of time, does not constitute a guarantee of employment
and shall not be deemed to confer any benefit on the Executive in the
absence of a Change in Control.
11. TERM. The period during which this Agreement shall be in effect (the
"Term") shall commence as of the date hereof and shall expire as of
the later of (i) the close of business on December 31, 1992 and (ii)
termination of the Benefit Period, provided, however, that (A)
commencing on January 1, 1989 and each January 1 thereafter, the Term
of this Agreement shall automatically be extended for an additional
year unless, not later than September 30 of the immediately preceding
year, the Company or the Executive shall have given notice that it or
he, as the case may be, does not wish to have the Term extended and
(B) subject to Paragraph 10 hereof, if, prior to a Change in Control,
the Executive ceases for any reason to be an employee of the Company,
thereupon the Term shall be deemed to have expired and this Agreement
shall immediately terminate and be of no further effect.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and,
pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executed in its name on its behalf, and its
corporate seal to be hereunto affixed and attested by its secretary, all as of
the day and year first above written.
____________________________________
Executive
ATTEST: TRINOVA CORPORATION
___________________________________ By: _______________________________
Secretary Vice President
(Seal)
<PAGE> 1
51
EXHIBIT (12)
<TABLE>
<CAPTION>
STATEMENT RE: COMPUTATION OF RATIOS
(In thousands, except per share data)
Year Ended December 31
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED
CHARGES
Income before income taxes and
cumulative effect of accounting
change $ 148,153 $ 153,421 $ 128,196 $ 101,255 $ 17,111
Dividends received, net of equity
in earnings (loss) of
unconsolidated affiliates 1,605 9,961 (3,704) 1,213 1
Fixed charges 46,034 41,712 31,762 30,249 33,370
--------- --------- --------- --------- ---------
Income before cumulative effect
of accounting change for
computation purposes $ 195,792 $ 205,094 $ 156,254 $ 132,717 $ 50,482
========= ========= ========= ========= =========
FIXED CHARGES
Interest expense, including interest
related to corporate owned life
insurance $ 37,971 $ 34,963 $ 24,477 $ 22,582 $ 25,516
Portion of rent expense representing
interest 6,819 6,288 6,903 7,303 7,490
Amortization of debt expense and
debt discount 1,244 461 382 364 364
--------- --------- --------- --------- ---------
Total fixed charges $ 46,034 $ 41,712 $ 31,762 $ 30,249 $ 33,370
========= ========= ========= ========= =========
Ratio of Earnings to Fixed
Charges 4.3x 4.9x 4.9x 4.4x 1.5x
========= ========= ========= ========= =========
</TABLE>
For the purpose of computing the ratio of earnings to fixed charges, "earnings"
consist of income before income taxes and cumulative effect of accounting
change, plus fixed charges and dividends received, net of equity in earnings
(loss) of unconsolidated affiliates. Fixed charges consists of interest expense,
the portion of rent expense representing interest and amortization of debt
discount.
<PAGE> 1
52
EXHIBIT (13)
PORTIONS OF THE 1997 ANNUAL
REPORT TO SHAREHOLDERS
5-Year Summary of Selected Financial Data
Years Ended December 31 (1997-1993)
(Dollars in millions, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ 2,112.3 $ 2,032.9 $ 1,884.0 $ 1,794.7 $ 1,643.8
Income before cumulative
effect adjustment 100.9a 102.7b 94.9 65.9 10.5c
Net income (loss) 100.9 102.7 94.9 65.9 (59.7)
Income (loss) per share:
Basic:
Before cumulative
effect adjustment 3.60 3.62 3.29 2.29 .37
Net income (loss) 3.60 3.62 3.29 2.29 (2.11)
Diluted:
Before cumulative
effect adjustment 3.51a 3.51b 3.20 2.26 .37c
Net income (loss) 3.51 3.51 3.20 2.26 (2.11)
Total assets 1,376.6 1,289.5 1,224.2 1,001.0 972.2
Long-term debt 256.7 257.7 302.4 234.9 246.2
Cash dividends per
common share .80 .80 .72 .68 .68
<FN>
(a) Includes a special charge of $30 million ($18.5 million net, or diluted net income per share of $.63) to exit the Company's
automotive interior plastics business.
(b) Includes a combined net gain from sale of unconsolidated affiliates of $5 million (diluted net income per share of $.16) and
a credit for settlement of claims for prior years' research and development tax credits of $4 million (diluted net income per
share of $.13).
(c) Includes a special charge for severance and other personnel-related costs amounting to $26 million ($18.2 million net, or
diluted net income per share of $.64) and a provision for unsuccessfully contested prior years' value-added taxes in Brazil
amounting to $7 million ($4.7 million net, or diluted net income per share of $.17).
</FN>
</TABLE>
<PAGE> 2
53
FINANCIAL REVIEW AND ANALYSIS OF OPERATIONS
Results of Operations
1997 Compared with 1996
The following data provide highlights for the year 1997 compared with the year
1996.
<TABLE>
<CAPTION>
Year Ended December 31 Percent
(dollars in thousands, -------------------------- Increase
except per share data) 1997 1996 (Decrease)
---------- ---------- -----------
<S> <C> <C> <C>
CONSOLIDATED
Net sales $2,112,293 $2,032,915 3.9%
Manufacturing income 557,625 512,179 8.9
Manufacturing margin 26.4% 25.2%
Operating income 191,640 (a) 176,575 8.5
Operating margin 9.1% (a) 8.7%
Net income 100,853 (a) 102,721 (b) (1.8)
Net income per share
Basic 3.60 (a) 3.62 (b) (.6)
Diluted 3.51 (a) 3.51 (b) -
INDUSTRIAL
Net sales 1,170,192 1,138,501 2.8
Operating income 107,032 105,703 1.3
Operating margin 9.1% 9.3%
Order intake 1,226,494 1,135,852 8.0
Order backlog at December 31 232,731 184,865 25.9
AUTOMOTIVE
Net sales 454,096 503,781 (9.9)
Operating income 19,019 (a) 35,082 (45.8)
Operating margin 4.2% (a) 7.0%
AEROSPACE
Net sales 488,005 390,633 24.9
Operating income 90,006 59,637 50.9
Operating margin 18.4% 15.3%
Order intake 530,511 431,460 23.0
Order backlog at December 31 379,224 340,957 11.2
</TABLE>
(a) After deducting a special charge of $30 million ($18.5 million net, or
basic and diluted net income per share of $.66 and $.63, respectively).
(b) Includes a net gain from sales of affiliates amounting to $17.3 million
($5 million net, or basic and diluted net income per share of $.18 and
$.16, respectively) and an income tax credit of $4 million (basic and
diluted net income per share of $.14 and $.13, respectively).
<PAGE> 3
54
Consolidated net sales in 1997 of $2.11 billion were a record for the Company
and were $79.4 million, or 3.9%, greater than in 1996. Sales for the industrial
and aerospace segments increased 2.8% and 24.9%, respectively, but automotive
segment sales declined 9.9%. The sales decline for the automotive segment was
due to the sale or closure of certain interior plastics plants. Sales for these
facilities that were sold or closed in 1997 were $67 million in 1997 and $132
million in 1996. Exclusive of sales in both years for the divestitures,
consolidated net sales would have increased 7.6%. The divestiture is discussed
more specifically later. Companies acquired in 1996 generated 1997 sales during
the period for which there were no comparable 1996 sales totaling approximately
$41.9 million. Including the results of acquisitions, U.S. sales increased $64.5
million, or 5%, and non-U.S. sales increased $14.9 million, or 2%. Changes in
currency exchange rates reduced non-U.S. sales, principally in the automotive
segment, by more than $44 million.
Industrial segment sales for 1997 of $1.17 billion were also a record and were
up $31.7 million, or 2.8%, over 1996. U.S. industrial sales increased $31.3
million, or 4.1%. U.S. sales to mobile equipment, truck and bus, and stationary
industrial machinery markets remained strong, although sales were hindered by
capacity constraints and delivery performance at a major pump manufacturing
facility. The Company has a new pump manufacturing facility that will be coming
into full production in 1998 that will relieve this production constraint. Sales
of residential air conditioning components were down in 1997 due to unseasonably
cool spring and summer temperatures. European industrial sales declined $16.8
million, or 6.3%, from 1996, principally the result of the effects of currency
exchange rate changes. Industrial sales in Asia-Pacific and Brazil collectively
increased $17.2 million, or 15%, over 1996. Industrial order intake of $1.23
billion increased $90.6 million, or 8%, over 1996 and was a record for the third
consecutive year. Industrial order backlog at December 31, 1997, of $232.7
million was an all-time high, and was $47.9 million, or 25.9%, higher than at
December 31, 1996.
Automotive segment sales for 1997 declined $49.7 million, or 9.9%, from 1996. As
part of its strategy to focus on fluid connectors (hose and attached fittings)
in its automotive business, the Company announced in the 1997 first quarter its
plans to exit the automotive interior plastics business. The Company sold or
closed eight facilities during 1997 that had combined sales of approximately $67
million in 1997 and $132 million in 1996. Automotive fluid connector sales
increased $13.5 million, or 5.3%, over 1996. This sales growth was recognized
principally in European markets and was after the effects of changes in currency
exchange rates which reduced European automotive sales by nearly $28 million.
<PAGE> 4
55
Aerospace sales amounting to $488 million also set an all-time high and were
$97.4 million, or 24.9%, over sales in 1996. $33.8 million of this increase
resulted from sales generated by a business acquired in the 1996 fourth quarter.
U.S. sales increased $88.3 million, or 26.7%, and non-U.S. sales increased $9.1
million, or 15.1%. 1997 sales reflected strong increases over 1996 in sales to
commercial OEM and aftermarket customers and to the military aftermarket. Sales
for military original equipment applications declined from the 1996 level.
Aerospace order intake of $530.5 million also set a record and was $99.1
million, or 23%, higher than 1996 orders. Order backlog at $379.2 million was
$38.3 million, or 11.2%, over the December 31, 1996, backlog.
Consolidated manufacturing income increased $45.4 million, or 8.9%, over 1996.
Manufacturing margin improved from 25.2% in 1996 to 26.4% in 1997. Manufacturing
income and margin for the industrial segment declined slightly from the prior
year, principally due to manufacturing performance issues at a major pump
manufacturing facility, reduced volume for air conditioning components and the
effects of currency exchange rate changes in Europe. Exclusive of the special
charge, manufacturing income and margin for the automotive segment improved
substantially over the prior year, reflecting the positive effects of
divestiture of the automotive interior plastics facilities. Manufacturing
margins for the remainder of the automotive segment, principally fluid
connectors, have traditionally surpassed those in the interior plastics
business. Manufacturing income and margin for the aerospace segment improved
over that of the prior year, principally due to the substantial increase in
sales volume.
In conjunction with its plans to exit the automotive interior plastics business,
in the 1997 first quarter the Company recorded a special charge of $30 million,
comprised principally of severance, lease termination and asset disposition
costs. A significant portion of this charge related to exiting operations in
Germany. The sale or closure of these facilities resulted in a reduction of
approximately 1,500 employees from the Company's workforce. The planned actions
to which this special charge relates were substantially completed during 1997.
After exiting this business, the Company's primary automotive focus is now fluid
connectors. Automotive fluid connectors, used for conveying fluids in air
conditioning, power steering and oil cooling systems in cars, light trucks, vans
and sport utility vehicles, is a business that utilizes technologies and
processes developed from Aeroquip's industrial fluid power expertise.
Selling and general administrative and engineering, research and development
expenses were nearly the same as in 1996 but as a percent of sales were 15.9% in
1997 compared with 16.5% in 1996. Selling and general administrative expenses in
Europe were substantially lower in 1997 as a result of organizational
realignments and continuing process improvements. Such costs,
<PAGE> 5
56
however, were higher in Asia-Pacific due to the expansion of operations in the
region and also higher in the U.S., particularly the aerospace segment, due to
significantly higher levels of business activity in 1997. Selling and general
administrative expenses for the automotive segment were lower in 1997 due to
disposition of the interior plastics business.
On April 11, 1997, the Company announced that it had entered into a
joint-venture and global product and technology alliance with Komatsu Ltd., a
world leader in the construction equipment market. This agreement is intended to
extend the Company's product offering into the Japanese mobile equipment market
and to provide opportunities for the development of new products for mobile
equipment customers. This agreement will also enable the Company to sell the
full range of hydraulic products of Komatsu and Komatsu Zenoah under the Vickers
brand name on a worldwide basis through the Vickers global sales network. Risk
factors associated with these forward-looking statements include, among other
things, the acceptance of the Company's and Komatsu's products in expanding
markets, the ability to cost-effectively develop new products, imposition of
expanded barriers to trade and continued cooperation by the parties under terms
of the alliance. The Company also entered into a joint-venture agreement with
Sturman Industries for development of integrated digital electrohydraulic
systems.
Interest expense for 1997 was $1.4 million higher than in 1996. The increase was
primarily attributable to a higher interest rate on long-term debt that was
issued in 1996. Other income (expense) - net for 1996 included a gain of $17.3
million resulting from the sales of investments in unconsolidated affiliates.
In the 1997 fourth quarter, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share." This Statement prescribes
the disclosure of two earnings per share amounts - basic and diluted. The
difference between the two earnings per share amounts is the effect of
potentially dilutive securities outstanding. The effect for Aeroquip-Vickers was
$.09 in 1997 and was attributable to convertible debt and stock options. Since
the Company redeemed its outstanding convertible debt in 1997, this earnings per
share differential will be less in future periods as evidenced by the fact that
the earnings per share difference in the 1997 fourth quarter was only $.01.
In accordance with provisions of the Statement, all prior-period earnings per
share data were restated.
Net income for 1997 amounted to $100.9 million. Basic and diluted net income per
share was $3.60 and $3.51, respectively. 1997 net income and net income per
share included the special charge to exit the automotive interior plastics
business amounting to $18.5 million net, or basic and diluted net income per
share of $.66 and $.63, respectively. These amounts compare with 1996 net income
of $102.7 million and basic and diluted net income per share of $3.62
<PAGE> 6
57
and $3.51, respectively. Net income for 1996 included a net gain of $5 million
(basic and diluted net income per share of $.18 and $.16, respectively) from the
sale of unconsolidated affiliates and a credit for settlement of claims for
prior years' research and development tax credits of $4 million (basic and
diluted net income per share of $.14 and $.13, respectively). The income tax
provision for 1997 included a credit of $11.5 million related to the special
charge to exit the automotive interior plastics business. Exclusive of this
item, the effective income tax rate for 1997 was 33% and compares with the 1996
effective income tax rate of 31.1% before special items.
<PAGE> 7
58
1996 COMPARED WITH 1995
The following data provide highlights for the year 1996 compared with the year
1995.
<TABLE>
<CAPTION>
Year Ended December 31 Percent
(dollars in thousands, -------------------------- Increase
except per share data) 1996 1995 (Decrease)
---------- ---------- -----------
<S> <C> <C> <C>
CONSOLIDATED
Net sales $2,032,915 $1,884,013 7.9%
Manufacturing income 512,179 476,343 7.5
Manufacturing margin 25.2% 25.3%
Operating income 176,575 159,209 10.9
Operating margin 8.7% 8.5%
Net income 102,721 (a) 94,896 8.2
Net income per share
Basic 3.62 (a) 3.29 10.0
Diluted 3.51 (a) 3.20 9.7
INDUSTRIAL
Net sales 1,138,501 1,051,106 8.3
Operating income 105,703 121,962 (13.3)
Operating margin 9.3% 11.6%
Order intake 1,135,852 1,061,553 7.0
Order backlog at December 31 184,865 201,460 (8.2)
AUTOMOTIVE
Net sales 503,781 494,016 2.0
Operating income 35,082 24,107 45.5
Operating margin 7.0% 4.9%
AEROSPACE
Net sales 390,633 338,891 15.3
Operating income 59,637 38,631 54.4
Operating margin 15.3% 11.4%
Order intake 431,460 327,827 31.6
Order backlog at December 31 340,957 266,423 28.0
</TABLE>
(a) Includes a net gain from sales of affiliates amounting to $17.3 million
($5 million net, or basic and diluted net income per share of $.18 and
$.16, respectively) and an income tax credit of $4 million (basic and
diluted net income per share of $.14 and $.13, respectively).
<PAGE> 8
59
Consolidated net sales in 1996 of $2.03 billion were $148.9 million, or 7.9%,
greater than in 1995. Sales for the industrial, automotive and aerospace
segments increased 8.3%, 2.0% and 15.3%, respectively. Businesses acquired in
the 1995 fourth quarter and during 1996 generated 1996 sales of nearly $119
million, principally in the industrial segment. Including the results of these
acquisitions, U.S. sales increased $116 million, or 9.9%, and non-U.S. sales
increased $32.9 million, or 4.6%. Changes in currency exchange rates reduced
non-U.S. sales by nearly $17 million.
Industrial segment sales for 1996 of $1.14 billion were $87.4 million, or 8.3%,
greater than in 1995. Industrial segment sales for 1996 included full-year sales
for Vickers Electronic Systems acquired in December 1995, and for Summa
Manufacturing Company since its acquisition in June 1996. U.S. industrial sales
increased $88 million, or 13.1%, over 1995. Industrial operations in
Asia-Pacific continued to expand, contributing to a 1996 sales increase of
nearly 8% over 1995. Sales in Europe were flat compared with 1995, and sales in
Brazil declined 19.3%. Order intake increased 7% over 1995. Order backlog at
December 31, 1996, was $184.9 million.
Automotive segment sales for 1996 of $503.8 million increased $9.8 million, or
2%, over 1995. U.S. automotive sales were $16.8 million, or 7.6%, lower than in
1995, principally the result of concluding a number of automotive platform
programs with U.S. car manufacturers in the latter half of 1995. As a result,
following the closing of two automotive plastics plants in 1995, a third
plastics plant was closed in 1996. European automotive sales increased $26.6
million, or 9.7%, despite the unfavorable effects of changes in currency
exchange rates. The increased European volume was driven by higher sales of
fluid connectors for use in autos and light trucks. During the year, the Company
announced that its automotive segment had won new fluid connectors business that
is expected to generate sales in Europe and the U.S. totaling nearly $800
million over several years beginning in 1997 and continuing through the year
2002. Inasmuch as this announcement constitutes a forward-looking statement, it
is important to bear in mind that the value of this new business is based on
customers' anticipated production of the new models, the expected level of
consumer acceptance and the expected increase in worldwide demand for automotive
power steering and air conditioning systems.
Aerospace segment sales for 1996 of $390.6 million represented a $51.7 million,
or 15.3%, increase over 1995. U.S. sales increased 15.7% and European sales
increased 12.8%, reflecting continued strength across all original equipment and
aftermarket sectors. 1996 sales included full-year sales for two small
acquisitions that were completed in late 1995 and sales since acquisition for
the Electrical Engineering & Manufacturing Company that was acquired in early
December 1996. Aerospace order intake of $431.5 million represented a 31.6%
increase over 1995 order intake, and order backlog increased to $341 million,
which was 28% higher than at December 31, 1995.
<PAGE> 9
60
Consolidated manufacturing income increased $35.8 million, or 7.5%, over 1995,
but manufacturing margin declined slightly from 25.3% to 25.2%. Manufacturing
income for the industrial segment was flat compared with the prior year, but
manufacturing margin declined due to the performance of the Brazilian
operations, lower profit margins for companies recently acquired and a shift in
product mix. Automotive manufacturing income increased 14.3%, and manufacturing
margin improved from the prior year due to the benefits recognized from
downsizing of facilities and from a favorable mix of product sales. Higher sales
volume and continued process improvements contributed to a 25.5% increase in
manufacturing income and a 2.6 percentage-point increase in manufacturing margin
for the aerospace segment over 1995.
Selling and general administrative and engineering, research and development
expenses were $18.5 million, or 5.8%, higher in 1996, but as a percent of sales
were slightly lower than in 1995. The increase in overhead expenses was
principally due to costs associated with companies recently acquired in the
industrial segment, but also represents expanding initiatives for new product
and business development.
Interest expense for 1996 was $6.6 million higher than in 1995. The increase was
attributable to higher average debt levels during 1996, principally the result
of acquisitions. In the 1996 second quarter, the Company sold its 35% interest
in Yokohama Aeroquip K.K., and its 49% interest in Aeroquip Mexicana S.A. The
two transactions resulted in a combined pretax gain of $17.3 million reported in
Other income (expense) - net in the Statement of Income. The combined pretax
gain included net translation gains of $6.4 million previously deferred in the
currency translation component of equity. The Company expects that the sales of
its interests in the two unconsolidated affiliates will stimulate growth in its
industrial markets in Mexico and the Asia-Pacific region.
Net income for 1996 amounted to $102.7 million and diluted net income per share
of $3.51 compared with net income of $94.9 million, or diluted net income per
share of $3.20, in 1995. Net income for 1996 included a net gain of $5 million,
or diluted net income per share of $.16, from the sale of unconsolidated
affiliates and a credit for settlement of claims for prior years' research and
development tax credits of $4 million, or diluted net income per share of $.13.
Exclusive of these items, the effective income tax rate for 1996 was 31.1%,
compared with 26% in 1995. The 26% effective income tax rate for 1995 reflected,
among other things, the utilization of tax loss carryforwards outside the U.S.
for which deferred tax valuation allowances had previously been provided.
<PAGE> 10
61
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash provided by operating activities in 1997 amounted to $137.7 million,
compared with $125.8 million in 1996. Working capital requirements for 1997
included $31.1 million to finance a higher level of receivables and $47.2
million for growth in inventories. These cash requirements were partially offset
by lower cash requirements for payables and income taxes.
In 1997, the Company received $43.4 million from the sales of its automotive
interior plastics facilities. In 1996, the Company received $40.3 million from
the sales of its joint ventures in Japan and Mexico and an injection-molding
plastics products facility. Also during 1996, the Company completed two business
acquisitions. The adjusted aggregate purchase prices for these business
acquisitions amounted to $42.5 million.
Capital expenditures totaled $139.8 million in 1997. This represents the highest
capital expenditure level in the Company's history and includes more than $23
million to bring a new state-of-the-art pump manufacturing facility on line, as
well as other expenditures for capacity expansion and equipment modernization
and replacement. An increase in spending is projected for 1998 in support of the
Company's growth initiatives and continued manufacturing process improvements.
Quarterly dividend payments were $.20 per share in 1997, or $.80 per share for
the year. In January 1998, the Company's Board of Directors approved a
first-quarter 1998 dividend of $.22 per share.
During 1997, the Company's Board of Directors authorized a program to purchase
up to $100 million of the Company's outstanding common stock and, in 1997, the
Company purchased 496,100 shares at a cost of $21.6 million under this and a
prior Board of Directors authorization. At December 31, 1997, $80.7 million of
additional common stock may be purchased under the current authorization. The
Company may make further purchases during 1998, but is not committed to purchase
a specific number of shares.
In 1997, the Company established a Medium Term Note program and subsequently
issued debt in the amount of $100 million with interest rates from 6.61% to
7.58% and with various maturities to 2012. The remaining borrowing capacity at
December 31, 1997 under provisions of current shelf registration statements for
the Medium Term Note program was $250 million. The Company also maintains a
revolving credit agreement with a consortium of U.S. and non-U.S. banks expiring
in 2001 under which the Company may borrow up to $175 million. The agreement is
intended to support the Company's commercial paper borrowings and, to the extent
not so utilized, provide domestic borrowing capacity. The remaining borrowing
capacity under this agreement at December 31, 1997, was $138.8 million. In
addition to this agreement, the Company has uncommitted arrangements with
various banks to provide short-term financing as necessary.
<PAGE> 11
62
In June 1997, the Company called its 6% convertible subordinated debentures for
redemption. The debentures, which were due to mature on October 15, 2002, were
convertible into common shares of the Company at a conversion price of $52.50
per share. Prior to the July 1997 redemption date, debentures in the amount of
$3.7 million were converted into 70,950 shares of common stock. In December
1997, the Company called its 9.55% senior sinking fund debentures for redemption
on February 3, 1998. Proceeds from additional borrowings in 1998 under the
Medium Term Note program will be used to redeem the debentures. The pretax loss
from redemption of the debentures amounting to approximately $2.5 million will
be recognized in the 1998 first quarter.
The Company expects that cash flow from operating activities and remaining
available credit lines will be sufficient to meet normal operating requirements
including payment of debt obligations maturing in the near term, planned
acquisitions and planned capital expenditures.
In 1997, the Company expanded the objectives of its foreign exchange risk
management program. The revised policy focuses on, among other things,
mitigating the exchange risk of certain forecasted and recorded transactions. In
line with policy guidelines, the Company will use forward exchange contracts and
currency options to manage certain of these exposures. In December 1997, the
Company entered into currency option contracts to hedge certain forecasted
monthly purchases and sales transactions denominated in currencies other than
the functional currencies of the originating locations that otherwise would
expose the Company to foreign currency exchange rate risk. The Company also
expanded its use of forward exchange contracts to hedge the effects of changes
in exchange rates on certain recorded receivables and payables denominated in
currencies other than the functional currencies of the originating locations.
Forward exchange and option contracts are entered into with major commercial
banks with high credit ratings. Forward exchange contracts and options are not
held for trading or speculative purposes and the Company is not a party to any
leveraged derivatives. The terms of contracts in place at December 31, 1997, are
one year or less.
The Company or certain of its subsidiaries have been named parties to various
lawsuits, claims and proceedings, including being named potentially responsible
parties (PRP) for site investigation and cleanup costs under the Comprehensive
Environmental Response, Compensation, and Liability Act (Superfund) or similar
regulations with respect to certain sites, as well as other product liability,
tort and contract claims and lawsuits which have arisen in the ordinary course
of the Company's business. While the ultimate outcome of the various lawsuits,
claims and proceedings, including PRP designations and other environmental
matters, cannot now be predicted, the Company believes that costs, in excess of
amounts provided or covered by insurance as it relates to litigation, arising
out of these matters, will not have a material adverse effect on the Company's
consolidated financial position.
<PAGE> 12
63
The Company is in the process of assessing and taking actions to correct
problems caused by the inability of certain of its information systems to
properly process transactions using dates in the Year 2000 and beyond, or to
operate at the turn of the century. The Year 2000 Issue is faced by virtually
all manufacturing and services companies that use computer systems to support
business operations and that incorporate computer systems in their products. In
1997, the Company's Information Technology leadership team prepared an
assessment of the Year 2000 Issue exposure in each operating unit within the
Corporate entity. During 1998, the Company will continue its efforts to assure
completion of system testing and auditing in a timely and effective manner.
The Company is also developing responses to customer inquiries relative to its
Year 2000 readiness, and assessing readiness of its supplier base. From a cost
perspective, the Company has budgeted the necessary funds to address Year 2000
Issue related projects. The incremental cost of compliance is anticipated to be
relatively low as both Aeroquip and Vickers are in the process of replacing
existing systems with packaged software which is date compliant. These systems
replacement projects have been undertaken to optimize business operations and
have been incorporated into the capital budgets of the Company. Risk factors
which may affect the Company's ability to meet its implementation schedule to
process transactions and operate efficiently in the Year 2000 and beyond
include, but are not necessarily limited to availability of date compliant
software from vendors; availability of necessary resources, both internal and
external, to install new purchased software or reprogram existing software and
complete the necessary testing; and readiness of customers, vendors and service
providers to operate in the Year 2000.
Portions of the narrative set forth in this Financial Review and Analysis of
Operations, which are not historical in nature, are forward-looking statements.
The Company's actual performance may differ from that contemplated by the
forward-looking statements as a result of a variety of factors, which include,
in addition to those mentioned elsewhere herein, the condition of the economy,
the condition of the markets that the Company serves and the success of the
Company's strategic plans and contemplated capital investments.
<PAGE> 13
64
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------------------
Three Months Ended
----------------------------------------------------------------- Year Ended
Mar 31 Jun 30 Sep 30 Dec 31 Dec 31
------- ------- ------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 538,426 $ 556,278 $ 494,777 $ 522,812 $2,112,293
Manufacturing income 132,475 147,037 134,406 143,707 557,625
Net income 5,694 33,630 30,104 31,425 100,853
Net income per share
Basic .20 1.20 1.07 1.12 3.60
Diluted .20 1.15 1.05 1.11 3.51
Average shares outstanding
Basic 27,974 27,948 28,153 28,150 28,050
Diluted 28,116 30,020 29,036 28,372 29,369
1996
-----------------------------------------------------------------------------
Three Months Ended
----------------------------------------------------------------- Year Ended
Mar 31 Jun 30 Sep 30 Dec 31 Dec 31
------- ------- ------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 512,113 $ 517,924 $ 492,983 $ 509,895 $2,032,915
Manufacturing income 126,257 133,909 122,854 129,159 512,179
Net income 24,415 33,060 20,757 24,489 102,721
Net income per share
Basic .85 1.16 .73 .88 3.62
Diluted .83 1.11 .72 .85 3.51
Average shares outstanding
Basic 28,755 28,551 28,286 27,949 28,384
Diluted 30,689 30,516 30,228 29,914 30,335
</TABLE>
<PAGE> 14
65
(a) The 1996 and first three quarters of 1997 net income per share amounts
have been restated to comply with Statement of Financial Accounting
Standards No. 128, "Earnings per Share." For purposes of computing
diluted net income per share, the assumed conversion of the Company's 6%
convertible debentures was included in average shares outstanding as
follows: 1,904,762 shares for each of the 1996 periods and the 1997
second quarter; 627,667 shares in the 1997 third quarter; and 1,109,298
shares for the year 1997. Net income was increased for the after-tax
equivalent of interest expense on the convertible debentures.
(b) The 1997 first quarter included a special charge of $30 million ($18.5
million net, or diluted net income per share of $.66 [$.63 for the year])
to exit the Company's automotive interior plastics business.
(c) In the 1997 third quarter, the annual effective income tax rate was
reduced. The cumulative year-to-date adjustment increased third-quarter
net income by $1.3 million, or diluted net income per share of $.05.
(d) The 1997 fourth quarter included income amounting to $4.3 million ($2.6
million net, or diluted net income per share of $.09) from recovery of
previously incurred development and pre-production costs with an
aerospace customer arising from the termination of a component design and
production supply contract, reduced by a charge of $2.6 million ($1.6
million net, or diluted net income per share of $.05) to recognize a
product liability claim from an industrial customer for a unique product
that is no longer manufactured.
(e) The income tax provision for the 1996 first quarter included a credit for
settlement of claims for prior years' research and development credits of
$4 million, or diluted net income per share of $.13.
(f) The 1996 second quarter included a combined net gain from sale of
unconsolidated affiliates amounting to $5 million, or diluted net income
per share of $.16.
(g) In the 1996 fourth quarter, the annual effective income tax rate was
reduced. The cumulative year-to-date adjustment increased fourth-quarter
net income by $1.9 million, or diluted net income per share of $.06.
<PAGE> 15
66
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Shareholders and Board of Directors
Aeroquip-Vickers, Inc.
We have audited the accompanying statement of financial position of
Aeroquip-Vickers, Inc. (name changed from TRINOVA Corporation) and subsidiaries
as of December 31, 1997 and 1996, and the related statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Aeroquip-Vickers,
Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/S/ ERNST & YOUNG LLP
------------------------------
Toledo, Ohio
January 21, 1998
<PAGE> 16
67
STATEMENT OF INCOME
Years ended December 31, 1997, 1996 and 1995
(In thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales $2,112,293 $2,032,915 $1,884,013
Cost of products sold 1,554,668 1,520,736 1,407,670
---------- ---------- ----------
MANUFACTURING INCOME 557,625 512,179 476,343
Selling and general administrative
expenses 263,824 260,712 254,141
Engineering, research and development
expenses 72,161 74,892 62,993
Special charge 30,000 -- --
---------- ---------- ----------
OPERATING INCOME 191,640 176,575 159,209
Interest expense (27,171) (25,813) (19,199)
Other income (expense) - net (16,316) 2,659 (11,814)
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 148,153 153,421 128,196
Income taxes 47,300 50,700 33,300
---------- ---------- ----------
NET INCOME $ 100,853 $ 102,721 $ 94,896
========== ========== ==========
NET INCOME PER SHARE
Basic $ 3.60 $ 3.62 $ 3.29
========== ========== ==========
Diluted $ 3.51 $ 3.51 $ 3.20
========== ========== ==========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
<PAGE> 17
68
STATEMENT OF FINANCIAL POSITION
December 31, 1997 and 1996
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 18,736 $ 23,934
Receivables 348,822 342,712
Inventories 294,767 262,169
Other current assets 49,323 45,272
----------- -----------
TOTAL CURRENT ASSETS 711,648 674,087
Plants and properties 993,002 997,350
Less accumulated depreciation 518,860 559,867
----------- -----------
474,142 437,483
Other assets 190,806 177,917
----------- -----------
TOTAL ASSETS $ 1,376,596 $ 1,289,487
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 84,044 $ 31,819
Accounts payable 111,800 106,205
Income taxes 30,496 21,150
Other accrued liabilities 212,800 188,973
Current maturities of long-term debt 1,857 76,809
----------- -----------
TOTAL CURRENT LIABILITIES 440,997 424,956
Long-term debt 256,707 257,727
Postretirement benefits other than pensions 122,272 121,793
Other liabilities 46,421 38,595
SHAREHOLDERS' EQUITY
Common stock - par value $5 a share
Authorized - 100,000,000 shares
Outstanding - 28,064,981 and
27,912,077 shares, respectively
(after deducting 6,215,865 and
6,297,819 shares, respectively, in treasury) 140,325 139,559
Additional paid-in capital 41,288 20,675
Retained earnings 366,676 307,398
Currency translation adjustments (38,090) (21,216)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 510,199 446,416
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,376,596 $ 1,289,487
=========== ===========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
<PAGE> 18
69
STATEMENT OF CASH FLOWS
Years ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 100,853 $ 102,721 $ 94,896
Adjustments to reconcile net income
to net cash provided by operating activities:
Special charge 30,000 -- --
Depreciation 66,562 68,684 63,697
Amortization 6,639 4,789 902
Gain on sales of affiliates -- (17,300) --
Dividends received from affiliates -- 9,932 39
Deferred income taxes (467) 11,997 (7,051)
Changes in certain assets and liabilities,
excluding effects from special charge,
acquisitions and dispositions
- -Receivables (31,073) (44,783) (38,820)
- -Inventories (47,215) 10,656 (28,693)
- -Accounts payable 19,018 (75) 1,483
- -Income taxes 15,969 (15,929) 15,216
- -Other assets, payables and accruals (9,354) (5,991) 27,001
Restructuring payments - net (16,666) 810 (7,104)
Other 3,418 274 (4,781)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 137,684 125,785 116,785
INVESTING ACTIVITIES
Capital expenditures (139,811) (90,626) (93,955)
Businesses acquired -- (42,540) (113,841)
Sales of businesses and affiliates 43,381 40,261 --
Other 1,561 1,483 697
----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (94,869) (91,422) (207,099)
FINANCING ACTIVITIES
Cash dividends (22,465) (22,705) (20,800)
Increase (decrease) in notes payable 50,866 (1,444) 30,776
Long-term borrowings 100,000 107,145 75,886
Repayments of long-term borrowings (172,669) (77,465) (9,041)
Purchases of common stock (21,590) (32,213) (5,473)
Stock issuance under stock plans 20,133 3,287 6,087
Other (924) (2,440) --
----------- ----------- -----------
NET CASH (USED) PROVIDED
BY FINANCING ACTIVITIES (46,649) (25,835) 77,435
Effect of exchange rate changes on
cash and cash equivalents (1,364) (780) 1,137
----------- ----------- -----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (5,198) 7,748 (11,742)
Cash and cash equivalents at beginning of year 23,934 16,186 27,928
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,736 $ 23,934 $ 16,186
=========== =========== ===========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
<PAGE> 19
70
STATEMENT OF SHAREHOLDERS' EQUITY
Years ended December 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Additional Currency
Common Paid-In Retained Translation
Stock Capital Earnings Adjustments
--------- ----------- -------- -----------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 $ 143,979 $ 12,511 $ 184,930 $ (21,374)
Net income 94,896
Cash dividends paid ($.72 a share) (20,800)
Issuance of 215,478 shares, net of
shares exchanged, under stock plans 1,077 5,422
Purchase of 186,200 treasury shares (931) (4,542)
Translation adjustments - net 5,704
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1995 144,125 17,933 254,484 (15,670)
Net income 102,721
Cash dividends paid ($.80 a share) (22,705)
Issuance of 108,990 shares, net of
shares exchanged, under stock plans 545 2,742
Purchase of 1,022,100 treasury shares (5,111) (27,102)
Translation adjustments - net (5,546)
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1996 139,559 20,675 307,398 (21,216)
Net income 100,853
Cash dividends paid ($.80 a share) (22,465)
Issuance of 578,054 shares, net of
shares exchanged, under stock plans 2,891 17,242
Issuance of 70,950 shares upon
conversion of long-term debt 355 3,371
Purchase of 496,100 treasury shares (2,480) (19,110)
Translation adjustments - net (16,874)
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1997 $ 140,325 $ 41,288 $ 366,676 $ (38,090)
========= ========= ========= =========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
<PAGE> 20
71
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(Dollars in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Change of Company Name: In 1997, shareholders of the Company approved a change
in the Company's name to Aeroquip-Vickers, Inc.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries. Affiliated companies in which the
Company's ownership is 20% to 50% are accounted for by the equity method. All
significant intercompany transactions and accounts are eliminated upon
consolidation.
Use of Estimates: The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make certain
estimates and exercise judgment affecting the reported amounts in the statements
of income, financial position and cash flows, including the disclosures in the
notes to financial statements. Actual results could differ from those estimates.
Cash Equivalents: Marketable securities that are highly liquid and have original
maturities of three months or less are classified as cash equivalents. The
carrying amount approximates fair value.
Inventories: Inventories are stated at the lower of cost or market. Inventory
costs for U.S. operations are determined principally by the last-in, first-out
(LIFO) method. The remaining inventory costs are determined primarily by the
first-in, first-out (FIFO) method.
Plants and Properties: Plants and properties are carried at cost. Depreciation
is generally computed by the straight-line method over the estimated useful
lives of the respective assets. In general, depreciation is provided at annual
rates of 2.5% to 3% on buildings and 8% to 12% on equipment.
Intangibles: Intangible assets are included in Other assets at cost less
accumulated amortization and consist principally of goodwill. Goodwill
represents the excess of cost over fair value of assets acquired, for which the
amortization periods are principally 30 to 40 years using the straight-line
method. Other intangibles include software and patents for which the
amortization periods range from five to 15 years on a straight-line basis. The
carrying amounts for goodwill and other long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that such
carrying amounts may not be recoverable. For any long-lived assets that are
determined to be impaired, a loss would be recognized for the difference between
the carrying value and the fair value for assets to be held.
Life Insurance: The Company's investment in corporate-owned life insurance is
recorded net of policy loans. Net life insurance expense, including interest
expense of $10,800, $9,150 and $5,278 on policy loans in 1997, 1996 and 1995,
respectively, is included in Other income (expense) - net in the Statement of
Income.
<PAGE> 21
72
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Pronouncements: The Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, "Earnings per
Share," in 1997. The Company adopted this accounting standard on December 31,
1997. All prior-period earnings per share data, including quarterly earnings per
share, have been restated in accordance with provisions of the Statement. The
FASB also issued Statement of Financial Accounting Standards Nos. 130,
"Reporting Comprehensive Income," and 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company will adopt the provisions of
Statement Nos. 130 and 131 in 1998. Statement 130 requires that comprehensive
income, which includes net income and other comprehensive income consisting of
foreign currency items, minimum pension liability adjustments and unrealized
gains and losses on certain security investments, be reported as a total in the
financial statements. Historically, the Company's only component of other
comprehensive income has been foreign currency items. Statement No. 131 requires
that operating segment financial information be reported on a basis consistent
with the Company's internal reporting that is used for evaluating segment
performance and allocating resources. Adoption of Statement Nos. 130 and 131
will have no effect on the Company's consolidated results of operations,
financial position or cash flows. However, adoption of Statement No. 131 will
affect the disclosure of business segment information.
Stock Options: The Company follows the intrinsic value method of accounting for
stock options under Accounting Principles Board Opinion No. 25. When stock
options are exercised, common stock is credited for the par value of shares
issued; additional paid-in capital is credited for the consideration received in
excess of par value and any related income tax benefits.
Derivative Financial Instruments: The Company uses forward exchange contracts
and currency options to manage certain foreign exchange exposures. The Company
enters into forward exchange contracts to hedge the effects of changes in
exchange rates on certain recorded receivables and payables that are denominated
in currencies other than the functional currencies of the originating locations.
Forward exchange contracts are marked to market with changes in market value
recorded in income as foreign exchange gains or losses offsetting the losses or
gains on the underlying transactions, i.e., the fair value method. The Company
enters into currency option contracts to hedge certain anticipated transactions.
These currency option contracts are designated as hedges of certain forecasted
monthly purchases and sales transactions that are denominated in currencies
other than the functional currencies of the originating locations, that
otherwise would expose the Company to foreign currency exchange rate risk. Gains
on currency options are included in sales and cost of products sold when
realized. Premiums on currency options are deferred and amortized to cost of
products sold on a straight-line basis over the life of the contracts. Forward
exchange and option contracts are entered into with major commercial banks with
high credit ratings. Forward exchange contracts and options are not held for
trading or speculative purposes, and the Company is not a party to any leveraged
derivatives. The terms of these contracts are generally one year or less.
<PAGE> 22
73
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition: Revenue is recognized when products are shipped to
customers.
NOTE 2 - NET INCOME PER SHARE
Following is a reconciliation of income and average shares for purposes of
calculating basic and diluted net income per share:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Basic Net Income per Share
- --------------------------
Net income $ 100,853 $ 102,721 $ 94,896
========== ========== ==========
Average common shares outstanding 28,049,749 28,384,089 28,867,936
========== ========== ==========
Basic Net Income per Share $3.60 $3.62 $3.29
========== ========== ==========
Diluted Net Income per Share
- ----------------------------
Net income $ 100,853 $102,721 $ 94,896
After-tax equivalent of interest
expense on 6% convertible debentures 2,192 3,720 3,720
---------- ---------- ----------
Income for purposes of computing
diluted net income per share $ 103,045 $106,441 $ 98,616
========== ========== ==========
Average common shares outstanding 28,049,749 28,384,089 28,867,936
Dilutive stock options 209,927 46,019 56,742
Assumed conversion of 6%
convertible debentures 1,109,298 1,904,762 1,904,762
---------- ---------- ----------
Average common shares for purposes
of computing diluted net income
per share 29,368,974 30,334,870 30,829,440
========== ========== ==========
Diluted Net Income per Share $3.51 $3.51 $3.20
========== ========== ==========
</TABLE>
The 6% convertible debentures were redeemed in July 1997 (see Note 7). As a
result, the difference between basic and diluted net income per share will
diminish in future periods.
<PAGE> 23
74
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - NET INCOME PER SHARE (Continued)
Options to purchase an average of 771,000 and 495,615 shares of common stock
were outstanding during 1996 and 1995, respectively, that were not included in
the computation of diluted net income per share because the option exercise
prices were greater than the average market price of common shares and,
therefore, the effect would have been anti-dilutive.
NOTE 3 - SPECIAL CHARGE
In 1997, the Company exited its automotive interior plastics business and
recorded a special charge of $30,000 ($18,500 net, or diluted net income per
share of $.63), comprised principally of severance, lease termination and asset
disposition costs. The Company sold or closed eight facilities during 1997 that
had combined sales of approximately $67,000, $132,000 and $144,000 in 1997, 1996
and 1995, respectively. The sale or closure of these facilities resulted in a
reduction of approximately 1,500 employees from the Company's workforce. The
planned actions to which this special charge relates were substantially
completed during 1997.
NOTE 4 - ACQUISITIONS
On December 7, 1996, the Company acquired certain assets and liabilities and the
business of the Electrical Engineering & Manufacturing Company (EEMCO), a
division of DATRON Inc., for $36,345. EEMCO is a designer and manufacturer of
actuators, specialty motors and generators, flight control systems, electronic
controls and actuation systems for commercial and military aerospace
applications. It also provides overhaul and repair services for its products.
In June 1996, the Company acquired all of the issued and outstanding capital
stock of Summa Manufacturing Corporation (Summa) for $9,771. Summa is a
manufacturer of vane pumps and replacement parts for mobile and industrial
applications. Effective December 30, 1995, the Company acquired certain assets
and liabilities and the business of the Electronic Systems Division, now Vickers
Electronic Systems (VES), from Cincinnati Milacron Inc. for $105,267. VES
designs and manufactures computer controls, software and drives used in machine
tools and plastics processing equipment. Also in December 1995, the Company
acquired certain assets and liabilities and the businesses of two operations
serving the aerospace market for an aggregate purchase price of $7,767.
All of the aforementioned acquisitions were accounted for as purchases, and
their operations were included in the Statement of Income from their respective
acquisition dates. Had these acquisitions occurred as of the beginning of the
respective years, the pro forma results of operations giving effect to the
acquisitions would not be materially different from the net sales, net income
and net income per share presented in the Statement of Income.
<PAGE> 24
75
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - GAIN ON SALE OF UNCONSOLIDATED AFFILIATES
In 1996, the Company sold its 35% interest in Yokohama Aeroquip K.K. and its 49%
interest in Aeroquip Mexicana S.A. The two transactions resulted in a net
combined pretax gain of $17,300 ($5,000 net, or diluted net income per share of
$.16). The combined pretax gain included net translation gains of $6,387
previously deferred in the currency translation component of equity.
NOTE 6 - INVENTORIES
Inventory costs determined by the LIFO method accounted for approximately 61%
and 54% of the total inventories at December 31, 1997 and 1996, respectively. If
all inventories valued by the LIFO method had been valued at current costs,
these inventories would have been approximately $27,884 and $32,768 higher than
reported at December 31, 1997 and 1996, respectively.
NOTE 7 - DEBT
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
7.875% senior debentures, due June 1, 2026 $100,000 $100,000
Medium term notes - interest rates from 6.61%
to 7.58% - due at various dates from 2002
to 2012 100,000 --
9.55% senior sinking fund debentures,
due February 1, 2018 42,000 42,000
6% convertible subordinated debentures,
due October 15, 2002 -- 100,000
7.95% notes, due May 1, 1997 -- 75,000
Industrial revenue bonds - interest rates from
5.8% to 7.625% - due at various dates to 2013 7,300 7,333
Other 9,264 10,203
-------- --------
258,564 334,536
Less current maturities 1,857 76,809
-------- --------
$256,707 $257,727
======== ========
</TABLE>
In June 1997, the Company called its 6% convertible subordinated debentures for
redemption. The debentures, which were due to mature on October 15, 2002, were
convertible into common shares of the Company at a conversion price of $52.50
per share. Prior to the redemption date, debentures in the amount of $3,726 were
converted into 70,950 shares of common stock.
<PAGE> 25
76
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - DEBT (Continued)
The 9.55% senior sinking fund debentures are subject to redemption prior to
February 1, 2018, at the option of the Company, in whole or in part, at
specified declining redemption prices plus accrued interest. In December 1997,
the Company called these debentures for redemption on February 3, 1998. Proceeds
from additional borrowings in 1998 under the Company's Medium Term Note program
will be used to redeem the debentures. The pretax loss from redemption of the
debentures amounting to approximately $2,500 will be recognized in the 1998
first quarter.
During 1996, the Company filed a shelf registration statement with the
Securities and Exchange Commission and issued thereunder $100,000 of 30-year
debentures due June 1, 2026. In 1997, the Company established a $150,000 Medium
Term Note program, committing to this program the remaining debt capacity of
$150,000 under the 1996 shelf registration. Upon issuance, each series of notes
may mature nine months or more from date of issuance and may have either a fixed
or floating rate of interest. Notes in the amount of $100,000 were issued under
this program in 1997. Also in 1997, the Company filed another shelf registration
statement with the Securities and Exchange Commission, committing an additional
$200,000 to the Medium Term Note program. The remaining borrowing capacity under
the Medium Term Note program at December 31, 1997, was $250,000.
Under terms of a revolving credit agreement, negotiated in 1996 and expiring
August 31, 2001, with a consortium of U.S. and non-U.S. banks, the Company may
borrow up to $175,000. Borrowings under the credit line bear interest at rates
agreed to by the Company and lenders. This agreement is maintained to support
the Company's commercial paper borrowings and, to the extent not so utilized, to
provide domestic borrowings. The remaining borrowing capacity under this
agreement at December 31, 1997, was $138,800. Covenants of the revolving credit
agreement and certain other debt instruments require the Company to maintain
certain financial ratios, including a limitation that the Company's
debt-to-capitalization ratio (exclusive of the effects of the change in
accounting for postretirement benefit obligations) not exceed a specified
amount. At December 31, 1997, retained earnings of $237,000 were available for
the payment of cash dividends and purchase of common stock.
Maturities of long-term debt in 1998 and in the four succeeding years are
$1,857, $1,143, $909, $261 and $170. Interest paid on all debt during 1997, 1996
and 1995 amounted to $27,664, $27,392 and $19,250, respectively. The
weighted-average interest rate of outstanding notes payable at December 31, 1997
and 1996, was 6.5% and 5.7%, respectively.
<PAGE> 26
77
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - CONTINGENCIES
The Company or certain of its subsidiaries have been named parties to various
lawsuits, claims and proceedings, including being named potentially responsible
parties (PRP) for site investigation and cleanup costs under the Comprehensive
Environmental Response, Compensation, and Liability Act (Superfund) or similar
regulations with respect to certain sites, as well as other product liability,
tort and contract claims and lawsuits which have arisen in the ordinary course
of the Company's business. While the ultimate outcome of the various lawsuits,
claims and proceedings, including PRP designations and other environmental
matters, cannot now be predicted, the Company believes that costs, in excess of
amounts provided or covered by insurance as it relates to litigation, arising
out of these matters, will not have a material adverse effect on the Company's
consolidated financial position.
NOTE 9 - INCOME TAXES
The components of income before income taxes consist of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
U.S. $ 84,300 $ 73,644 $ 45,506
Non-U.S. 63,853 79,777 82,690
-------- -------- --------
$148,153 $153,421 $128,196
======== ======== ========
</TABLE>
Income tax expense consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current:
U.S. federal $ 23,231 $ 21,920 $ 21,131
State and local 2,070 2,676 1,810
Non-U.S. 22,466 14,107 17,410
-------- -------- --------
47,767 38,703 40,351
Deferred:
U.S. federal (136) 4,356 (6,787)
Non-U.S. (331) 7,641 (264)
-------- -------- --------
(467) 11,997 (7,051)
-------- -------- --------
$ 47,300 $ 50,700 $ 33,300
======== ======== ========
</TABLE>
<PAGE> 27
78
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES (Continued)
The effects of temporary differences and loss carryforwards giving rise to
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Gross Deferred Tax Assets
Postretirement benefits other than pensions $ 42,704 $ 42,849
Tax loss carryforwards 8,668 15,885
Employee benefit accruals 14,289 11,992
Other 9,617 2,320
--------- ---------
75,278 73,046
Gross Deferred Tax Liabilities
Depreciation (33,241) (32,169)
Other (7,980) (6,226)
--------- ---------
(41,221) (38,395)
Valuation allowances (6,816) (12,589)
--------- ---------
Net deferred tax assets $ 27,241 $ 22,062
========= =========
</TABLE>
The components of net deferred tax assets are classified in the Statement of
Financial Position as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Current assets $ 3,679 $ 837
Non-current assets 30,958 28,189
Non-current liabilities (7,396) (6,964)
--------- ---------
Net deferred tax assets $ 27,241 $ 22,062
========= =========
</TABLE>
<PAGE> 28
79
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES (Continued)
Valuation allowances decreased $5,773, $3,364 and $13,580 in 1997, 1996 and
1995, respectively.
Reconciliation of the statutory U.S. federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State and local taxes, net of U.S.
federal tax benefit .9 1.1 1.0
Basis differences on affiliates sold - 4.1 -
Research and development credit (1.9) (2.6) -
Taxes in excess of (less than) the
U.S. tax rate on non-U.S. earnings,
including utilization of net operating
loss carryforwards 1.0 (3.2) (9.1)
Other (3.1) (1.4) (.9)
---- ---- -----
Effective income tax rate 31.9% 33.0% 26.0%
==== ==== =====
</TABLE>
At December 31, 1997, the Company had non-U.S. net operating loss carryforwards
of $24,700 for income tax purposes. Loss carryforwards of approximately $11,900
have no expiration dates and the remainder expire in years through 2000. Income
tax expense for the years 1997, 1996 and 1995 was reduced by $1,770, $3,730 and
$5,440, respectively, due to utilization of operating loss carryforwards.
Non-U.S. operating loss carryforwards in the amount of $5,600 expired in 1997,
resulting in the loss of future tax benefits and a reduction in valuation
allowances in the amount of $2,100.
The Company does not provide deferred income taxes on undistributed earnings of
certain of its non-U.S. subsidiaries which have been reinvested indefinitely.
Undistributed earnings of non-U.S. subsidiaries for which U.S. income taxes have
not been provided approximated $120,900 at December 31, 1997. Should these
earnings be remitted, certain countries will impose withholding taxes that will
be available for use as credits against any U.S. federal income tax liability,
subject to certain limitations. It is not practical to estimate the amount of
tax that would be payable should the Company remit these earnings.
Income taxes paid during 1997, 1996 and 1995 amounted to $31,798, $54,633 and
$25,135, respectively.
<PAGE> 29
80
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - LEASES
The Company and its subsidiaries lease a variety of real property and equipment.
Rent expense under operating leases amounted to approximately $20,457, $18,863
and $20,709 for 1997, 1996 and 1995, respectively. Future minimum rental
payments required under operating leases that have initial or remaining
noncancelable lease terms in excess of one year as of December 31, 1997, are as
follows:
<TABLE>
<S> <C> <C>
1998 $ 14,447
1999 11,035
2000 8,412
2001 6,714
2002 5,018
Thereafter 13,698
--------
$ 59,324
========
</TABLE>
NOTE 11 - FINANCIAL INSTRUMENTS
At December 31, 1997, long-term debt amounting to $258,564, including current
maturities, had an estimated fair value of $269,000. Estimated fair value for
long-term debt, including current maturities, at December 31, 1996, was
$339,677. Fair value for notes payable at December 31, 1997 and 1996, was
approximately equal to the carrying amounts at those dates.
At December 31, 1997, the Company had forward exchange contracts outstanding
with notional amounts equivalent to $12,800. The carrying amounts of these
outstanding forward exchange contracts were $227. Fair value was approximately
equal to the carrying amounts. These forward exchange contracts will mature at
various dates through April 1998.
At December 31, 1997, the Company held currency option contracts maturing at
various dates through December 1998, with notional amounts equivalent to
$61,600. Fair value of these currency option contracts was approximately $600.
The Company had no forward exchange or currency option contracts outstanding at
December 31, 1996.
<PAGE> 30
81
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - RETIREMENT PLANS
The Company has trusteed defined-contribution plans as its primary retirement
vehicle covering most full-time U.S. employees and certain non-U.S. employees.
Annual expense for the major defined-contribution plans is based primarily upon
employee participation and earnings of the Company. The Company follows the
policy of funding retirement plan contributions accrued.
The Company also has trusteed defined-benefit plans covering a limited number of
full-time U.S. employees. The defined-benefit plans typically provide for full
vesting after five years of service, and benefits are principally based on
employee earnings and/or length of service. The Company's funding policy for
these plans is to make annual contributions at least sufficient to meet minimum
legal funding requirements. Various plans are also in effect for subsidiaries
operating outside the U.S., including trusteed or insured, government-sponsored
and unfunded plans.
The following table sets forth the funded status and amounts recorded in the
Company's Statement of Financial Position for defined-benefit plans.
<TABLE>
<CAPTION>
1997 1996
------------------------------ -----------------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Actuarial present value
of benefit obligation:
Vested benefit obligation $118,100 $ 33,000 $110,300 $ 34,800
======== ======== ======== ========
Accumulated benefit obligation $119,900 $ 33,400 $111,600 $ 36,100
======== ======== ======== ========
Projected benefit obligation $125,600 $ 35,000 $117,700 $ 40,100
Plans' assets at fair value 167,200 14,200 139,000 15,200
-------- -------- -------- --------
Projected benefit obligation
(in excess of) less than
plans' assets 41,600 (20,800) 21,300 (24,900)
Unrecognized net gain (25,500) (8,200) (5,700) (6,900)
Unrecognized net (asset)
obligation less amortization (800) 1,200 (800) 1,600
Unrecognized prior service cost 4,600 1,600 3,300 1,800
-------- -------- -------- --------
Net pension asset (liability)
recorded in the Statement
of Financial Position $ 19,900 $(26,200) $ 18,100 $(28,400)
======== ======== ======== ========
</TABLE>
<PAGE> 31
82
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - RETIREMENT PLANS (Continued)
Components of net periodic pension cost for the defined-benefit plans and the
total contributions charged to pension expense for the defined-contribution
plans are summarized below.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Defined-benefit plans:
Service cost - benefits earned $ 2,200 $ 2,400 $ 2,300
Interest cost 11,300 11,300 11,200
Actual return on plans' assets (37,800) (13,500) (22,700)
Net amortization and deferral 24,600 1,000 10,900
-------- -------- --------
Net pension cost - defined-benefit plans 300 1,200 1,700
Defined-contribution plans 42,000 37,000 37,700
Other non-U.S. retirement plans 1,000 1,200 1,400
-------- -------- --------
Total $ 43,300 $ 39,400 $ 40,800
======== ======== ========
</TABLE>
The defined-benefit plans' assets consist of equity securities, corporate and
government bonds, and real estate. Following are assumptions used in determining
the plans' net periodic pension cost and benefit obligations. The measurement
dates for these plans were principally September 30.
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Discount rates:
U.S. 7.5% 7.5% 7.5%
Non-U.S. 7.2 7.5 7.5
Rates of increase in future compensation:
U.S. 4.0 4.0 4.0
Non-U.S. 3.0-5.0 3.0-5.5 3.0-6.0
Long-term rate of return on assets 10.0 10.0 10.0
</TABLE>
<PAGE> 32
83
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company and its subsidiaries provide access to benefits under life insurance
and health care plans for most retired U.S. and certain retired non-U.S.
employees and eligible spouses (participants). Generally, benefits for most
covered retirees outside the U.S. are provided through government-sponsored or
retiree-funded programs. Benefits for U.S. retirees are generally subject to
participant contributions, deductibles, co-payment provisions and certain other
limitations. The Company has reserved the right to amend or terminate these
benefit plans at any time.
Most U.S. health care plans recognize that the Company, as the secondary
provider to Medicare, will contribute toward the cost of providing health care
benefits for participants who retire at age 65 or older and have at least 10
years of service at retirement. The amount of the Company's contribution for
participants retiring after January 1, 1995, except for one group for which the
date is January 1, 1997, is limited to an established amount. Accordingly, as
medical costs escalate, those participants who retire subsequent to the above
dates will share in the cost of the benefits by paying the difference between
the Company's average annual per-capita claims costs and the established amount.
During a transition period, the Company will also contribute toward the cost of
health care for participants who retire prior to age 65, providing they had met
certain age and service-period requirements as of January 1, 1995. The amount of
the Company's contribution will not exceed the established amount. Such
participants will share in the cost of benefits by paying the difference between
the Company's average annual per-capita claims costs and the established amount.
Those participants retiring before reaching age 65 who do not meet the age and
service-period requirements will have the option to purchase health care
benefits at full cost until becoming eligible for a Company contribution at age
65.
Components of postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Service cost - benefits earned $ 1,700 $ 1,700 $ 1,400
Interest cost 8,100 8,200 7,600
Net amortization and deferral (1,700) (1,700) (1,700)
--------- --------- ---------
Postretirement benefit cost $ 8,100 $ 8,200 $ 7,300
========= ========= =========
</TABLE>
<PAGE> 33
84
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (Continued)
The Company's postretirement benefit plans are not funded. The status of the
plans at December 31, 1997 and 1996 (based on measurement of the accumulated
postretirement benefit obligation at September 30), is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 67,904 $ 74,273
Plans' participants fully eligible
to receive benefits 13,382 14,280
Other active plan participants 21,319 22,594
--------- ---------
102,605 111,147
Unrecognized prior service cost 10,471 12,101
Unrecognized net gains (losses) 9,196 (1,455)
--------- ---------
Accrued postretirement benefits
other than pensions $ 122,272 $ 121,793
========= =========
</TABLE>
Following are assumptions used in determining the postretirement benefit cost
and the accumulated postretirement benefit obligation:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Discount rate 7.5% 7.5% 7.5%
Projected health care cost trend rates:
Under age 65 8.6 9.1 9.6
Over age 65 6.4 6.7 7.0
Ultimate 5.25 5.25 5.25
Year ultimate health care cost trend
rate is achieved 2008 2008 2008
</TABLE>
The projected health care cost trend rates listed above for under and over age
65 participants represent assumed increases in per capita cost of covered health
care benefits for 1998, 1997 and 1996, respectively. For future years, the rates
are assumed to decrease gradually and remain at the ultimate trend rate
thereafter. A one-percentage-point increase in the projected health care cost
trend rates would increase the 1997 postretirement benefit cost by $500 and the
accumulated postretirement benefit obligation as of September 30, 1997, by
$4,800.
<PAGE> 34
85
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - CAPITAL STOCK AND EMPLOYEE STOCK OPTIONS
The Company has rights outstanding as set forth in a Rights Agreement, whereby
holders of common stock have one right for each share of common stock
outstanding. When exercisable, each right entitles its holder to buy one
one-hundredth of a new preferred share for $125. The Company has 4,000,000
shares of serial preferred stock authorized, of which no shares were outstanding
at December 31, 1997 or 1996. If a person or group acquires 20% or more of the
Company's outstanding common stock without complying with the Ohio Control
Share Acquisition Act, or engages in certain self-dealing transactions,
holders of rights will be entitled to purchase (a) common stock of the Company
at one-half the market price, or (b) shares of an acquiring company at one-half
the market price, depending upon the circumstances of the transaction. The
Company may redeem the rights at a price of $.01 per right at any time prior to
the rights becoming exercisable. The rights expire in 1999.
The Company's 1994 Stock Incentive Plan (the 1994 Plan) permits the issuance of
stock options, stock appreciation rights (SARs) and performance awards to
selected salaried employees as approved by the Organization and Compensation
Committee of the Board of Directors. The number of shares of common stock that
may be issued or transferred under the 1994 Plan may not exceed 1,419,900
shares.
Options may be granted to selected employees to purchase common stock at a price
not less than 100% of fair market value on the date of grant. The term of each
award will be determined by the Organization and Compensation Committee. All
options granted as of December 31, 1997, expire 10 years after date of grant.
Options granted prior to 1996 became exercisable one year after date of grant.
Options granted thereafter become exercisable ratably over a three-year period
commencing one year following date of grant. Options that expire, terminate or
are canceled without exercise are available for the grant of new awards.
Performance awards may be granted to selected employees to receive future
payments contingent on continuous service with the Company and achievement of
pre-established goals under provisions of the Company's Mid-Term Incentive Plan.
Such awards may be settled in cash, common shares available under the 1994 Plan
or a combination of both as determined by the Organization and Compensation
Committee. In January 1998, 1997 and 1996, 16,925, 44,314 and 40,977 shares,
respectively, of common stock were distributed to participants as performance
awards under provisions of the Mid-Term Incentive Plan for the three-year
periods ended December 31, 1997, 1996 and 1995, respectively. In 1998, the
Company discontinued its Mid-Term Incentive Plan.
The Company accounts for its employee stock options in accordance with
Accounting Principles Board Opinion No. 25 and related interpretations. As a
result, no compensation expense for employee stock options has been recognized
in the financial statements because such options were granted at market value at
date of grant. However, pro forma information regarding net income and net
income per share is required by Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," and has been determined for
disclosure purposes as if the Company had accounted for employee stock options
under the fair value method as prescribed by that statement. The fair values of
the Company's employee stock options were estimated as of the dates of grant
using the Black-Scholes option pricing model with the following assumptions for
1997, 1996 and 1995, respectively:
<PAGE> 35
86
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - CAPITAL STOCK AND EMPLOYEE STOCK OPTIONS (Continued)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rates 5.8% 6.52% 6.23%
Expected dividend yields 1.9% 2.30% 2.13%
Expected stock price volatility .323 .319 .329
Weighted-average expected option life 5 years 6 years 6 years
</TABLE>
For purposes of pro forma disclosures, the estimated fair values of employee
stock options are amortized to expense over the options' vesting periods. The
estimated fair values per share of options granted during 1997, 1996 and 1995
were $13.43, $11.36 and $11.73, respectively. Pro forma net income and net
income per share for 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C> <C>
Net income As reported $100,853 $102,721 $ 94,896
Pro forma 99,505 101,293 93,616
Diluted net income
per share As reported 3.51 3.51 3.20
Pro forma 3.46 3.46 3.16
</TABLE>
Options outstanding at December 31, 1997, had a range of exercise prices from
$22.50 to $42.13 and a weighted-average remaining contractual life of
approximately eight years.
At December 31, 1997, the Company had 1,204,969 shares of common stock reserved
for issuance in connection with stock options and performance awards.
The following table summarizes stock option activity for the years 1997, 1996
and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- ---------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Shares Price Shares Price
-------------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 1,405,950 $ 31.30 1,164,980 $ 30.67 1,097,230 $ 29.29
Granted 342,000 42.13 349,000 33.02 312,500 33.75
Exercised (592,041) 29.52 (86,030) 29.18 (200,350) 27.72
Forfeited (16,998) 34.77 (4,500) 33.58 (9,000) 33.75
Canceled (9,000) 33.44 (17,500) 33.52 (35,400) 31.46
Outstanding at December 31 1,129,911 35.44 1,405,950 31.30 1,164,980 30.67
Exercisable at December 31 587,754 32.38 1,059,950 30.74 861,480 29.58
Available for future awards
at December 31 58,133 391,060 762,374
</TABLE>
<PAGE> 36
87
NOTES TO FINANCIAL STATEMENTS
NOTE 15 - BUSINESS SEGMENTS
The Company is managed as two businesses - Aeroquip and Vickers, through the
industrial, automotive and aerospace business segments. Aeroquip and Vickers are
worldwide manufacturers and distributors of components and systems to
industrial, automotive and aerospace markets. Sales are direct to customers
through Company sales personnel, or indirect through independent distributors.
The industrial business segment serves original equipment and aftermarket
customers in various worldwide markets (principally in the U.S., Europe,
Asia-Pacific and Brazil) including construction, mining, logging and farm
equipment; machine tool; process industries; electrical machinery; air
conditioning/refrigeration; electronics; lift truck; material handling; plant
maintenance; and housing and commercial construction.
The automotive business segment serves worldwide automobile, light truck, sport
utility and van manufacturers (principally in the U.S. and Europe).
The aerospace business segment serves original equipment and aftermarket
customers in worldwide commercial aerospace and defense markets (principally in
the U.S. and Europe) including commercial aircraft, air defense, cargo handling,
combat and support vehicles, commuter aircraft, engines, marine, defense
aircraft, military weaponry, missiles and naval machinery.
Products include all pressure ranges of hose, fittings, adapters and couplings;
hydraulic pumps, motors and cylinders; electric motors and drives; hydraulic and
electronic controls; filters; fluid-evaluation products and services; and a
variety of custom-engineered molded and extruded plastic products.
Operating income is net sales less operating expenses. Operating expenses
include cost of products sold; selling and general administrative expenses; and
engineering, research and development expenses. Operating income for 1997
included a charge of $30,000 in the automotive segment to exit the interior
plastics business (see Note 3). Identifiable assets by business segment include
all assets directly identified with those operations. Corporate assets consist
of cash, receivables, properties and deferred charges.
<PAGE> 37
88
NOTES TO FINANCIAL STATEMENTS
NOTE 15 - BUSINESS SEGMENTS (Continued)
The following data relate to business segments:
<TABLE>
<CAPTION>
Depreciation
Identi- and
Operating fiable Amortization Capital
Net Sales Income Assets Expense Expenditures
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1997
- ----
Industrial $1,170,192 $ 107,032 $ 849,171 $ 42,334 $ 93,563
Automotive 454,096 19,019(a) 167,843 13,750 24,048
Aerospace 488,005 90,006 315,679 14,680 18,899
---------- ---------- ---------- ---------- ----------
$2,112,293 216,057 1,332,693 70,764 136,510
==========
Corporate (24,417) 42,321 2,437 3,301
Investments in
affiliates - 1,582 - -
---------- ---------- ---------- ----------
$ 191,640(a) $1,376,596 $ 73,201 $ 139,811
========== ========== ========== ==========
1996
- ----
Industrial $1,138,501 $ 105,703 $ 765,734 $ 39,941 $ 58,221
Automotive 503,781 35,082 236,113 17,945 17,715
Aerospace 390,633 59,637 255,221 12,927 13,313
---------- ---------- ---------- ---------- ----------
$2,032,915 200,422 1,257,068 70,813 89,249
==========
Corporate (23,847) 30,226 2,660 1,377
Investments in
affiliates - 2,193 - -
---------- ---------- ---------- ----------
$ 176,575 $1,289,487 $ 73,473 $ 90,626
========== ========== ========== ==========
1995
- ----
Industrial $1,051,106 $ 121,962 $ 709,503 $ 31,151 $ 58,298
Automotive 494,016 24,107 235,665 19,042 21,848
Aerospace 338,891 38,631 200,315 12,029 12,198
---------- ---------- ---------- ---------- ----------
$1,884,013 184,700 1,145,483 62,222 92,344
==========
Corporate (25,491) 39,679 2,377 1,611
Investments in
affiliates - 38,989 - -
---------- ---------- ---------- ----------
$ 159,209 $1,224,151 $ 64,599 $ 93,955
========== ========== ========== ==========
</TABLE>
(a) Includes a special charge amounting to $30,000.
<PAGE> 38
89
NOTES TO FINANCIAL STATEMENTS
NOTE 16 - NON-U.S. OPERATIONS
U.S. net sales include export sales to unaffiliated non-U.S. customers of
$185,541, $186,132 and $150,212 in 1997, 1996 and 1995, respectively.
Currency exchange losses charged to Other income (expense) - net amounted
to $4,293, $2,846 and $1,849 in 1997, 1996 and 1995, respectively.
The following summary of financial data pertains to the Company and its
non-U.S. operations. The geographic groupings of non-U.S. operations have
been based on similarities of business environments and geographic
proximity.
<TABLE>
<CAPTION>
United
States Europe Other Eliminations Consolidated
------ ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
1997
- ----
Net sales $1,356,334 $ 624,140 $ 131,819 $ - $2,112,293
Operating income (loss) 155,151 37,234 (745) - 191,640(a)
Identifiable assets 987,461 323,624 119,286 55,357 1,375,014
Total assets 989,043 323,624 119,286 55,357 1,376,596
Total liabilities 727,831 150,267 50,932 62,633 866,397
========== ========== =========== ========== ===========
1996
- ----
Net sales $1,291,875 $ 626,411 $ 114,629 $ - $2,032,915
Operating income 123,337 51,432 1,806 - 176,575
Identifiable assets 907,912 332,225 87,999 40,842 1,287,294
Total assets 910,105 332,225 87,999 40,842 1,289,487
Total liabilities 726,536 140,598 29,087 53,150 843,071
========== ========== ========== ========== ==========
1995
- ----
Net sales $1,175,509 $ 592,799 $ 115,705 $ - $1,884,013
Operating income 111,029 35,707 12,473 - 159,209
Identifiable assets 806,641 321,995 83,165 26,639 1,185,162
Total assets 845,630 321,995 83,165 26,639 1,224,151
Total liabilities 676,523 141,636 31,325 26,205 823,279
========== ========== ========== ========== ==========
</TABLE>
(a) Includes a special charge amounting to $9,700 in the United
States and $20,300 in Europe, totaling $30,000.
<PAGE> 39
90
NOTES TO FINANCIAL STATEMENTS
NOTE 17 - OTHER INFORMATION
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
RECEIVABLES
- -----------
Receivables $363,523 $358,744
Less allowance for doubtful accounts 14,701 16,032
-------- --------
$348,822 $342,712
======== ========
INVENTORIES
- -----------
In-process and finished products $239,800 $202,214
Raw materials and manufacturing supplies 54,967 59,955
-------- --------
$294,767 $262,169
======== ========
OTHER CURRENT ASSETS
- --------------------
Deferred income taxes $ 3,679 $ 837
Prepaid expenses and other current assets 45,644 44,435
-------- --------
$ 49,323 $ 45,272
======== ========
PLANTS AND PROPERTIES - AT COST
- -------------------------------
Land and improvements $ 21,458 $ 22,543
Buildings 198,882 205,948
Machinery and equipment 694,572 718,289
Construction in progress 78,090 50,570
-------- --------
$993,002 $997,350
======== ========
OTHER ASSETS
- ------------
Goodwill, net of accumulated amortization of $13,077
and $9,509 in 1997 and 1996, respectively $111,905 $110,005
Deferred income taxes 30,958 28,189
Receivables, deposits and other assets 47,943 39,723
-------- --------
$190,806 $177,917
======== ========
NOTES PAYABLE
- -------------
Commercial paper $ 36,177 $ 27,657
Short-term notes payable to banks 47,867 4,162
-------- --------
$ 84,044 $ 31,819
======== ========
OTHER ACCRUED LIABILITIES
- -------------------------
Employees' compensation and amounts
withheld therefrom $117,107 $111,561
Taxes, other than income taxes 10,177 6,433
Other accrued liabilities 85,516 70,979
-------- --------
$212,800 $188,973
======== ========
</TABLE>
<PAGE> 40
91
INVESTOR INFORMATION
STOCK EXCHANGES
- ---------------
Aeroquip-Vickers' common stock is traded on the New York, Chicago and Pacific
Stock Exchanges, and on the London and Frankfurt Stock Exchanges. Our NYSE
ticker symbol is ANV.
STOCK OWNERSHIP
- ---------------
On December 31, 1997, there were 9,071 record holders of Aeroquip-Vickers'
common stock. Although exact information is unavailable, Aeroquip-Vickers
estimates there are approximately 7,000 additional beneficial owners, based upon
the 1997 proxy solicitation.
DIVIDEND INFORMATION
- --------------------
Cash dividends have been paid without interruption on common stock since 1933.
The payment of dividends is subject to restrictions described in Note 7 of Notes
to Financial Statements.
QUARTERLY COMMON STOCK INFORMATION
- ----------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
Quarter Ended High Low Close High Low Close
<S> <C> <C> <C> <C> <C> <C>
March 31 40.38 33.50 33.50 32.75 27.25 31.88
June 30 49.38 32.63 47.25 36.00 31.25 33.38
September 30 57.50 47.50 49.00 33.75 27.88 31.63
December 31 56.25 46.00 49.06 37.13 29.00 36.38
</TABLE>
DIVIDEND PAYMENTS PER SHARE OF COMMON STOCK
- -------------------------------------------
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
March $ .20 $ .20
June .20 .20
September .20 .20
December .20 .20
-------- --------
$ .80 $ .80
</TABLE>
<PAGE> 1
92
EXHIBIT (21)
AEROQUIP-VICKERS, INC.
SUBSIDIARIES OF THE REGISTRANT
The assets and business of all subsidiaries listed below are included in the
1997 consolidated financial statements of the Registrant. In addition to those
named, 8 U.S. and 22 non-U.S. consolidated subsidiaries and 4 affiliated
companies that are accounted for by the cost and/or equity methods are not
disclosed. The undisclosed subsidiaries and affiliated companies in the
aggregate do not constitute a significant subsidiary.
<TABLE>
<CAPTION>
Incorporated or Percent of
Organized - Voting Securities
Company State or Country Owned
- ---------------------------------- ------------------ -----------------
<S> <C> <C>
Aeroquip-Vickers, Inc. Ohio Registrant
SUBSIDIARIES OF REGISTRANT
Aeroquip Corporation Michigan 100
Aeroquip International Inc. Delaware 100
Vickers, Incorporated Delaware 100
Vickers International Inc. Delaware 100
Aeroquip A.G. Switzerland 100
Aeroquip do Brasil, S.A. Brazil 99.5
Aeroquip Iberica S.A. Spain 100
Aeroquip Inoac Company Michigan 51
Aeroquip-Vickers International GmbH Germany 100
Aeroquip Ltd. Barbados 100
Aeroquip-Vickers Export Trading Company Virgin Islands 100
Aeroquip-Vickers Inc. Canada 100
Aeroquip-Vickers Limited United Kingdom 100
Aeroquip-Vickers Pte. Ltd. Singapore 100
Aeroquip-Vickers Pty. Ltd. Australia 100
Aeroquip-Vickers S.A. France 100
Aeroquip-Vickers Sdn. Bhd. Malaysia 100
Aeroquip-Vickers S.p.A. Italy 100
Vickers do Brasil Ltda. Brazil 100
Vickers Systems Asia Pacific Pte. Ltd. Singapore 100
Vickers Systems International Ltd. India 51
Vickers Systems Limited Hong Kong 100
</TABLE>
<PAGE> 1
93
EXHIBIT (23)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of Aeroquip-Vickers, Inc. of our report dated January 21, 1998,
included in Exhibit 13 to Form 10-K.
Our audits also included the financial statement schedule of
Aeroquip-Vickers, Inc. listed in Item 14(a)(2). This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
We also consent to the incorporation by reference in Registration
Statement No. 333-34663 on Form S-3 and Post-Effective Amendment No. 1 to
Registration Statement No. 333-1709 both dated August 29, 1997, and in the
related prospectus dated September 19, 1997; Registration Statement No. 333-1709
on Form S-3 and Post-Effective Amendment No. 2 to Registration Statement No.
33-9127 on Form S-3 both dated March 14, 1996, and in the related Prospectus
dated March 20, 1996; Post-Effective Amendment No. 2 to Registration Statement
No. 33-14682 on Form S-8 dated April 28, 1989; Registration Statement No.
33-28638 on Form S-8 dated May 10, 1989; Registration Statement No. 33-54059 on
Form S-8 dated June 10, 1994; Registration Statement No. 33-55399 on Form S-8
dated September 8, 1994; and Registration Statement No. 333-33047 on Form S-8
dated August 7, 1997, of our report dated January 21, 1998, with respect to the
financial statements of Aeroquip-Vickers, Inc. incorporated herein by reference,
and our report included in the preceding paragraph with respect to the financial
statement schedule included in this Annual Report (Form 10-K) of
Aeroquip-Vickers, Inc.
/S/ ERNST & YOUNG LLP
Toledo, Ohio
March 23, 1998
<PAGE> 1
94
Exhibit 24
DIRECTORS OF
AEROQUIP-VICKERS, INC.
ANNUAL REPORT ON FORM 10-K
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned directors of
Aeroquip-Vickers, Inc., an Ohio corporation ("Aeroquip-Vickers"), do hereby
constitute and appoint Darryl F. Allen, James E. Kline and William R. Ammann,
and each of them, a true and lawful attorney in their name, place and stead, in
any and all capacities, to sign their names to Aeroquip-Vickers' Annual Report
on Form 10-K for the year ended December 31, 1997, and any and all amendments to
such Form 10-K, and to cause the same to be filed with the Securities and
Exchange Commission, granting unto said attorneys and each of them full power
and authority to do and perform any act and thing necessary and proper to be
done in the premises, as fully to all intents and purposes as the undersigned
could do if personally present, and the undersigned hereby ratify and confirm
all that said attorneys or any one of them shall lawfully do or cause to be done
by virtue hereof.
This Power of Attorney may be executed in multiple counterparts, each
of which shall be deemed an original with respect to the person executing it.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of
the 22ND day of January, 1998.
/S/ PURDY CRAWFORD /S/ PAUL A. ORMOND
Purdy Crawford Paul A. Ormond
Director Director
/S/ JOSEPH C. FARRELL /S/ JOHN P. REILLY
Joseph C. Farrell John P. Reilly
Director Director
/S/ DAVID R. GOODE /S/ WILLIAM R. TIMKEN, JR.
David R. Goode William R. Timken, Jr.
Director Director
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT
OF FINANCIAL POSITION AND THE CONDENSED STATEMENT OF OPERATIONS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 18,736
<SECURITIES> 0
<RECEIVABLES> 363,523
<ALLOWANCES> 14,701
<INVENTORY> 294,767
<CURRENT-ASSETS> 711,648
<PP&E> 993,002
<DEPRECIATION> 518,860
<TOTAL-ASSETS> 1,376,596
<CURRENT-LIABILITIES> 440,997
<BONDS> 256,707
<COMMON> 140,325
0
0
<OTHER-SE> 369,874
<TOTAL-LIABILITY-AND-EQUITY> 1,376,596
<SALES> 2,112,293
<TOTAL-REVENUES> 2,112,293
<CGS> 1,554,668
<TOTAL-COSTS> 1,554,668
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,171
<INCOME-PRETAX> 148,153
<INCOME-TAX> 47,300
<INCOME-CONTINUING> 100,853
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 100,853
<EPS-PRIMARY> 3.60
<EPS-DILUTED> 3.51
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF FINANCIAL POSITION AND THE CONDENSED STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 31,112 26,718 37,277
<SECURITIES> 0 0 0
<RECEIVABLES> 370,415 388,062 384,445
<ALLOWANCES> 14,171 14,751 14,239
<INVENTORY> 284,739 276,273 265,213
<CURRENT-ASSETS> 728,788 732,813 725,575
<PP&E> 984,786 984,471 985,213
<DEPRECIATION> 536,728 543,468 554,326
<TOTAL-ASSETS> 1,365,291 1,361,284 1,339,346
<CURRENT-LIABILITIES> 451,225 474,070 478,551
<BONDS> 257,628 257,763 258,808
0 0 0
0 0 0
<COMMON> 141,150 140,214 139,954
<OTHER-SE> 350,160 327,811 300,263
<TOTAL-LIABILITY-AND-EQUITY> 1,365,291 1,361,284 1,339,346
<SALES> 1,589,481 1,094,704 538,426
<TOTAL-REVENUES> 1,589,481 1,094,704 538,426
<CGS> 1,175,563 815,192 405,951
<TOTAL-COSTS> 1,175,563 815,192 405,951
<OTHER-EXPENSES> 30,000 30,000 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 20,610 14,365 7,371
<INCOME-PRETAX> 101,228 57,524 6,594
<INCOME-TAX> 31,800 18,200 900
<INCOME-CONTINUING> 69,428 39,324 5,694
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 69,428 39,324 5,694
<EPS-PRIMARY> 2.48 1.41 .20
<EPS-DILUTED> 2.41 1.37 .20
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF FINANCIAL POSITION AND THE CONDENSED STATEMENT OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996
<CASH> 23,934 33,082 18,538 19,051
<SECURITIES> 0 0 0 0
<RECEIVABLES> 358,744 373,150 363,444 357,629
<ALLOWANCES> 16,032 15,148 14,299 14,526
<INVENTORY> 262,169 249,783 254,912 252,270
<CURRENT-ASSETS> 674,087 687,284 664,868 656,958
<PP&E> 997,350 992,939 973,196 965,328
<DEPRECIATION> 559,867 563,711 546,406 540,584
<TOTAL-ASSETS> 1,289,487 1,274,618 1,248,133 1,255,640
<CURRENT-LIABILITIES> 424,956 429,746 409,096 383,079
<BONDS> 257,727 251,962 252,304 302,301
0 0 0 0
0 0 0 0
<COMMON> 139,559 140,298 142,317 143,007
<OTHER-SE> 306,857 288,045 279,998 263,960
<TOTAL-LIABILITY-AND-EQUITY> 1,289,487 1,274,618 1,248,133 1,255,640
<SALES> 2,032,915 1,523,020 1,030,037 512,113
<TOTAL-REVENUES> 2,032,915 1,523,020 1,030,037 512,113
<CGS> 1,520,736 1,140,000 769,871 385,856
<TOTAL-COSTS> 1,520,736 1,140,000 769,871 385,856
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 25,813 19,361 13,127 6,285
<INCOME-PRETAX> 153,421 120,632 89,675 30,515
<INCOME-TAX> 50,700 42,400 32,200 6,100
<INCOME-CONTINUING> 102,721 78,232 57,475 24,415
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 102,721 78,232 57,475 24,415
<EPS-PRIMARY> 3.62 2.74 2.01 .85
<EPS-DILUTED> 3.51 2.66 1.94 .83
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT
OF FINANCIAL POSITION AND THE CONDENSED STATEMENT OF OPERATIONS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 16,186
<SECURITIES> 0
<RECEIVABLES> 305,387
<ALLOWANCES> 13,241
<INVENTORY> 269,284
<CURRENT-ASSETS> 616,405
<PP&E> 959,286
<DEPRECIATION> 533,925
<TOTAL-ASSETS> 1,224,151
<CURRENT-LIABILITIES> 360,173
<BONDS> 302,352
0
0
<COMMON> 144,125
<OTHER-SE> 256,747
<TOTAL-LIABILITY-AND-EQUITY> 1,224,151
<SALES> 1,884,013
<TOTAL-REVENUES> 1,884,013
<CGS> 1,407,670
<TOTAL-COSTS> 1,407,670
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,199
<INCOME-PRETAX> 128,196
<INCOME-TAX> 33,300
<INCOME-CONTINUING> 94,896
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 94,896
<EPS-PRIMARY> 3.29
<EPS-DILUTED> 3.20
</TABLE>
