FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission file number 1-924
Aeroquip-Vickers, Inc.
(Exact name of registrant as specified in its charter)
Ohio 34-4288310
(State of Incorporation) (I.R.S. Employer
Identification No.)
3000 Strayer, Maumee, OH 43537-0050
(Address of principal executive office)
Registrant's telephone number, including area code: (419) 867-2200
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
The number of Common Shares, $5 Par Value, outstanding as of July 24, 1998,
was 28,236,584.
This document, including exhibits, contains 56 pages.
The Exhibit Index is located on page 20.
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1998
INDEX TO INFORMATION IN REPORT
Aeroquip-Vickers, Inc.
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Financial Position -
June 30, 1998 and December 31, 1997 4
Condensed Statement of Income -
Three Months and Six Months Ended June 30, 1998 and 1997 5
Condensed Statement of Cash Flows -
Six Months Ended June 30, 1998 and 1997 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBIT INDEX 20
EXHIBIT (10)-1 - Change-in-Control Severance Agreement 21
for Chief Executive Officer
-2-
<PAGE>
EXHIBIT (10)-2 - Change-in-Control Severance Agreement 33
for Executive Officers
EXHIBIT (10)-3 - Change-in-Control Severance Agreement 45
for other executives
EXHIBIT 12 - Statement re: Computation of Ratios 55
EXHIBIT 27 - Financial Data Schedule 56
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<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
STATEMENT OF FINANCIAL POSITION
Aeroquip-Vickers, Inc.
(Dollars in thousands, except share data)
(Unaudited)
<CAPTION>
June 30 December 31
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 27,806 $ 18,736
Receivables 379,584 348,822
Inventories:
In-process and finished products 234,632 239,800
Raw materials and manufacturing supplies 70,018 54,967
---------- ----------
304,650 294,767
Other current assets 49,892 49,323
---------- ----------
TOTAL CURRENT ASSETS 761,932 711,648
Plants and properties 1,060,986 993,002
Less accumulated depreciation 542,628 518,860
---------- ----------
518,358 474,142
Goodwill 122,116 111,905
Other assets 83,553 78,901
---------- ----------
TOTAL ASSETS $1,485,959 $1,376,596
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 128,271 $ 84,044
Accounts payable 119,619 111,800
Income taxes 38,806 30,496
Other current liabilities 196,857 212,800
Current maturities of long-term debt 864 1,857
---------- ----------
TOTAL CURRENT LIABILITIES 484,417 440,997
Long-term debt 264,160 256,707
Postretirement benefits other than pensions 122,769 122,272
Other liabilities 45,677 46,421
SHAREHOLDERS' EQUITY
Common stock - par value $5 a share
Authorized - 100,000,000 shares
Outstanding - 28,216,414 and 28,064,981 shares,
respectively(after deducting 6,064,432 and 6,215,865
shares, respectively, in treasury) 141,082 140,325
Additional paid-in capital 45,276 41,288
Retained earnings 423,076 366,676
Accumulated other comprehensive income -
currency translation adjustments (40,498) (38,090)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 568,936 510,199
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,485,959 $1,376,596
========== ==========
<FN>
The Notes to Financial Statements are an integral part of this statement.
</FN>
</TABLE>
-4-
<PAGE>
<TABLE>
CONDENSED STATEMENT OF INCOME
Aeroquip-Vickers, Inc.
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 574,314 $ 556,278 $1,121,369 $1,094,704
Cost of products sold 422,739 409,241 825,562 815,192
---------- ---------- ---------- ----------
MANUFACTURING INCOME 151,575 147,037 295,807 279,512
Selling and general administrative
expenses 68,042 68,027 136,193 133,974
Engineering, research and development
expenses 18,469 17,432 36,780 35,262
Special charge -- -- -- 30,000
---------- ---------- ---------- ----------
OPERATING INCOME 65,064 61,578 122,834 80,276
Interest expense (7,126) (6,994) (13,853) (14,365)
Other income (expense) - net (2,297) (3,654) (7,467) (8,387)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 55,641 50,930 101,514 57,524
Income taxes 17,800 17,300 32,500 18,200
---------- ---------- ---------- ----------
NET INCOME $ 37,841 $ 33,630 $ 69,014 $ 39,324
========== ========== ========== ==========
NET INCOME PER SHARE
Basic $ 1.34 $ 1.20 $ 2.45 $ 1.41
Diluted 1.33 1.15 2.43 1.37
========== ========== ========== ==========
Cash dividends per share $ .22 $ .20 $ .44 $ .40
========== ========== ========== ==========
<FN>
The Notes to Financial Statements are an integral part of this statement.
</FN>
</TABLE>
-5-
<PAGE>
<TABLE>
CONDENSED STATEMENT OF CASH FLOWS
Aeroquip-Vickers, Inc.
(In thousands)
(Unaudited)
<CAPTION>
Six Months Ended
June 30
------------------------
1998 1997
------ ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 69,014 $ 39,324
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 33,835 33,510
Amortization 4,290 2,911
Special charge - 30,000
Changes in certain components of working
capital other than debt (30,394) (21,715)
Other (10,317) (11,313)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 66,428 72,717
INVESTING ACTIVITIES
Capital expenditures (74,229) (60,707)
Businesses acquired (23,544) -
Sale of businesses - 26,785
Other 1,783 (2,044)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (95,990) (35,966)
FINANCING ACTIVITIES
Net increase (decrease) in short- and long-term debt 47,553 (22,653)
Cash dividends (12,400) (11,189)
Purchase of common stock (248) (12,107)
Stock issuance under stock plans 4,769 12,780
Other (680) (452)
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 38,994 (33,621)
Effect of exchange rate changes on cash and
cash equivalents (362) (346)
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 9,070 2,784
Cash and cash equivalents at beginning of period 18,736 23,934
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 27,806 $ 26,718
======== ========
<FN>
The Notes to Financial Statements are an integral part of this statement.
</FN>
</TABLE>
-6-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Aeroquip-Vickers, Inc.
(Unaudited)
Note 1 - Basis of Presentation
The accompanying financial statements for the interim periods are unaudited.
In the opinion of management, all adjustments necessary for a fair
presentation of the results for the interim periods included herein have been
made. Operating results for the six months ended June 30, 1998, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. It is suggested that these financial statements be read in
conjunction with the audited 1997 financial statements and notes thereto
included in Aeroquip-Vickers, Inc.'s most recent annual report.
Note 2 - Redemption of Debt
In December 1997, the Company called its 9.55% senior sinking fund debentures
in the principal amount of $42 million for redemption on February 3, 1998.
The pretax loss from redemption of the 9.55% senior sinking fund debentures
amounting to $2.5 million was recognized in Other income (expense) - net in
the 1998 first quarter. In June 1997, the Company called its 6% convertible
subordinated debentures in the principal amount of $100 million for
redemption. The 6% convertible 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.
Note 3 - Accounting Pronouncements
In the 1998 first quarter, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
Statement requires that comprehensive income, which is the total of net income
and other comprehensive income, be reported in the financial statements.
Other comprehensive income consists of foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain security
investments. Amounts that had previously been recognized in other
comprehensive income are to be reclassified to net income in the period
realized. Historically, the Company's only component of other comprehensive
income has been foreign currency items. On an annual basis, disclosure of
comprehensive income will be incorporated into the Statement of Shareholders'
Equity. Since this statement is not presented on a quarterly basis, following
are details of comprehensive income for the three- and six- month periods
ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $ 37,841 $ 33,630 $ 69,014 $ 39,324
Other comprehensive income
(loss) - currency translation
adjustments during the period (3,291) 1,617 (2,281) (9,332)
Reclassification of realized
amounts to net income -- -- (127) 2,133
--------- --------- --------- ---------
Comprehensive income $ 34,550 $ 35,247 $ 66,606 $ 32,125
========= ========= ========= =========
</TABLE>
-7-
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
Aeroquip-Vickers, Inc.
(Unaudited)
The Company is currently evaluating its segment disclosures and will adopt
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," in the 1998 fourth
quarter. This Statement 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. In June
1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This Statement will become effective for fiscal years
beginning after June 15, 1999. Early application is permitted. The Company
is currently evaluating the effect of the provisions of this Statement on its
accounting and reporting policies, but does not presently expect that adoption
of this Statement will have a material adverse effect on the Company's
consolidated financial position or results of operations.
Note 4 - Special Charge
In the 1997 first quarter, the Company announced plans to exit its automotive
interior plastics business and recorded a special charge of $30 million ($18.5
million net, or diluted net income per share of $.62 for the 1997 six-month
period [$.63 for the year]), comprised principally of severance, lease
termination and asset disposition costs. As a result, the Company sold or
closed eight facilities during 1997 that had combined 1997 sales of
approximately $67 million (approximately $17 million in the 1997 second
quarter and $48 million in the six-month period ended June 30, 1997).
Note 5 - Income Taxes
The effective income tax rate for the 1998 second quarter and six-month period
was 32%. The income tax provision for the six-month period ended June 30,
1997, included a credit of $11.5 million related to the special charge for
costs to exit the automotive interior plastics business. The effective income
tax rate for the 1997 second quarter and six-month period exclusive of this
item was 33.9%.
-8-
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
Aeroquip-Vickers, Inc.
(Unaudited)
Note 6 - Net Income per Share
Following is a reconciliation of income and average shares for purposes of
calculating basic and diluted net income per share (in thousands, except per
share amounts):
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
- -------- -------- ------- ------
Basic Net Income per Share
- --------------------------
Net income $ 37,841 $ 33,630 $ 69,014 $ 39,324
======== ======== ======== ========
Average common shares outstanding 28,199 27,948 28,158 27,966
======== ======== ======== ========
Basic Net Income per Share $ 1.34 $ 1.20 $ 2.45 $ 1.41
======== ======== ======== ========
Diluted Net Income per Share
- ----------------------------
Net income $ 37,841 $ 33,630 $ 69,014 $ 39,324
After-tax equivalent of interest
expense on 6% convertible debentures -- 930 -- 1,860
--------- -------- -------- --------
Income for purposes of computing
diluted net income per share $ 37,841 $ 34,560 $ 69,014 $ 41,184
========= ======== ======== ========
Average common shares outstanding 28,199 27,948 28,158 27,966
Dilutive stock options 255 167 240 155
Assumed conversion of 6% convertible
debentures -- 1,905 -- 1,905
--------- -------- -------- --------
Average common shares for purposes
of computing diluted net income
per share 28,454 30,020 28,398 30,026
========= ======== ======== ========
Diluted Net Income per Share $ 1.33 $ 1.15 $ 2.43 $ 1.37
========= ======== ======== ========
The 6% convertible debentures were redeemed in July 1997.
-9-
<PAGE>
<TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL REVIEW AND ANALYSIS OF OPERATIONS
Analysis of Operations
Second Quarter 1998 Compared with Second Quarter 1997
The following data provide highlights for the second quarter 1998 compared
with the second quarter 1997.
<CAPTION>
Percent
(dollars in thousands, __ Second Quarter _ Increase
except per share data) 1998 1997 (Decrease)
<S> <C> <C> <C>
CONSOLIDATED
Net sales $ 574,314 $ 556,278 3.2%
Manufacturing income 151,575 147,037 3.1
Manufacturing margin (%) 26.4 26.4
Operating income 65,064 61,578 5.7
Operating margin (%) 11.3 11.1
Net income 37,841 33,630 12.5
Net income per share
Basic 1.34 1.20 11.7
Diluted 1.33 1.15 15.7
INDUSTRIAL
Net sales 323,296 317,455 1.8
Operating income 33,148 32,587 1.7
Operating margin (%) 10.3 10.3
Order intake 311,019 320,747 (3.0)
Order backlog at June 30 210,530 216,138 (2.6)
AUTOMOTIVE
Net sales 108,236 117,278 (7.7)
Operating income 11,821 13,141 (10.0)
Operating margin (%) 10.9 11.2
AEROSPACE
Net sales 142,782 121,545 17.5
Operating income 26,402 21,629 22.1
Operating margin (%) 18.5 17.8
Order intake 141,937 138,360 2.6
Order backlog at June 30 395,671 366,112 8.1
<FN>
In the 1998 second quarter, the Company set a number of quarterly records,
including new highs for consolidated net sales, manufacturing income,
operating income and margin, net income and net income per share. In
addition, second-quarter records included new highs for industrial and
aerospace sales, aerospace operating income and margin, and aerospace order
intake.
</FN>
</TABLE>
-10-
<PAGE>
Analysis of Operations - Continued
Consolidated net sales for the 1998 second quarter increased $18 million, or
3.2%, over the 1997 second quarter. Sales for the industrial and aerospace
segments increased 1.8% and 17.5%, respectively. Sales for the automotive
segment declined 7.7% from the 1997 second quarter, primarily due to the sale
or closure of the Company's interior plastics facilities during 1997 that had
second-quarter 1997 sales of $17 million. Including sales generated by
companies acquired in 1998, which were principally outside the U.S.,
consolidated U.S. sales increased $18.9 million, or 5.3%, but non-U.S. sales
declined $.9 million. Changes in currency exchange rates lowered non-U.S.
sales more than $9 million.
Second-quarter 1998 industrial segment sales were $5.8 million, or 1.8%,
higher than in the 1997 second quarter. U.S. industrial sales increased $6.5
million, or 3%, and sales in Europe increased $7.1 million, or 10.9%. Second-
quarter 1998 sales for Brazil were flat compared with the 1997 second quarter,
but sales in Asia-Pacific declined $7.3 million, or 26.9%. The Asia-Pacific
sales decline was partially the result of the economic downturn in the region,
but was also, in part, due to changes in exchange rates. Industrial order
intake declined $9.7 million, or 3%, from the 1997 second quarter, principally
due to lower order intake in the Asia-Pacific region. Order backlog at June
30, 1998, was $5.6 million, or 2.6%, lower than at June 30, 1997.
Automotive segment sales declined $9 million, or 7.7%, from the 1997 second
quarter. During 1997, the Company sold or closed eight automotive interior
plastics facilities that had second-quarter 1997 sales of $17 million. After
adjusting the 1997 second quarter to exclude sales originating from those
facilities, second-quarter 1998 U.S. sales were $1.3 million, or 4.3%, lower
than in the prior year, but non-U.S. sales were $9.3 million, or 13%, higher.
The growth in non-U.S. automotive sales reflects continued strong demand in
Europe for fluid connectors for use in automotive air conditioning and power
steering applications.
Second-quarter 1998 aerospace segment sales were $21.2 million, or 17.5%,
higher than in the 1997 second quarter. Sales were up 19.1% in the U.S. and
7.8% in Europe. The 1998 second-quarter sales reflected increases over the
1997 second quarter in sales to OEM and aftermarket customers for both
commercial and military applications. Second-quarter order intake was $3.6
million, or 2.6%, higher than in the 1997 second quarter, and order backlog at
June 30, 1998, was $29.6 million, or 8.1%, higher than at June 30, 1997.
Consolidated manufacturing income increased $4.5 million, or 3.1%, over the
1997 second quarter. Manufacturing margin was 26.4% for both periods.
Manufacturing income for the industrial segment improved over the prior year,
but the income growth was diminished by the adverse effects of exchange rate
changes in Europe and Asia-Pacific, and start-up costs associated with a new
pump manufacturing facility in the U.S. Manufacturing income for the
automotive segment declined from the prior-year's second quarter as lower U.S.
automotive sales volume and new facility start-up costs more than offset the
positive contributions of the strong fluid connector sales in Europe.
Manufacturing income for the aerospace segment increased more than 11%,
principally due to higher sales volume and manufacturing efficiencies in the
1998 second quarter.
-11-
<PAGE>
Analysis of Operations - Continued
Selling and general administrative and engineering, research and development
expenses were $1.1 million higher in the 1998 second quarter than in the
comparable 1997 period, but as a percent of sales, declined from 15.4% in the
1997 second quarter to 15.1% in the 1998 second quarter. Continued
development of infrastructure in the industrial segment's Asia-Pacific region
and costs associated with businesses acquired contributed to the overall
increase, while the 1997 disposition of the interior plastics business
contributed to a reduction of overhead costs in the automotive segment.
Interest expense for the 1998 second quarter amounted to $7.1 million,
compared with $7 million in the 1997 second quarter. Average debt levels were
slightly higher in the 1998 second quarter, but the effect of the higher debt
levels was offset by lower interest rates. Certain debt obligations,
principally the Company's 7.95% notes in the amount of $75 million that were
repaid in 1997 and the 9.55% sinking fund debentures in the amount of $42
million that were repaid in the 1998 first quarter, were replaced with debt
bearing lower interest rates.
Net income for the 1998 second quarter amounted to $37.8 million, or diluted
net income per share of $1.33, compared with 1997 second-quarter net income of
$33.6 million, or $1.15 per share. The effective income tax rate for the 1998
second quarter was 32%, compared with 33.9% for the 1997 second quarter.
-12-
<PAGE>
Analysis of Operations - Continued
<TABLE>
Six Months 1998 Compared with Six Months 1997
The following data provide highlights for the 1998 first six months compared
with the first six months of 1997.
<CAPTION>
Six Months
Ended Percent
(dollars in thousands, June 30 Increase
except per share data) 1998 1997 (Decrease)
<S> <C> <C> <C>
CONSOLIDATED
Net sales $1,121,369 $1,094,704 2.4%
Manufacturing income 295,807 279,512 5.8
Manufacturing margin (%) 26.4 25.5
Operating income 122,834
80,276 (a) 11.4(b)
Operating margin (%) 11.0 10.1 (b)
Net income 69,014
39,324 (a) 19.4(b)
Net income per share
Basic 2.45 1.41 (a)18.4(b)
Diluted 2.43 1.37 (a)22.1(b)
INDUSTRIAL
Net sales 633,744 609,293 4.0
Operating income 60,227 57,193 5.3
Operating margin (%) 9.5 9.4
Order intake 625,144 638,342 (2.1)
AUTOMOTIVE
Net sales 209,969 245,209 (14.4)
Operating income 24,520 (
5,370)(a) (.4) (b)
Operating margin (%) 11.7 1
0.0 (b)
AEROSPACE
Net sales 277,656 240,202 15.6
Operating income 50,425 40,260 25.2
Operating margin (%) 18.2 16.8
Order intake 294,409 267,503 10.1
<FN>
(a) After deducting a special charge of $30 million ($18.5 million net, or
basic and diluted net income per share of $.66 and $.62, respectively).
(b) Before deducting a special charge of $30 million ($18.5 million net, or
basic and diluted net income per share of $.66 and $.62, respectively).
</FN>
</TABLE>
In the six-month period ended June 30, 1998, the Company set a number of six-
month records, including new highs for consolidated net sales, manufacturing
income, operating income, operating margin, net income and net income per
share. First six-month records also included new highs for industrial and
aerospace sales, aerospace operating income and margin, automotive margin and
aerospace order intake.
-13-
<PAGE>
Analysis of Operations - Continued
Consolidated net sales for the first six months of 1998 increased $26.7
million, or 2.4%, over the comparable 1997 period. Sales for the industrial
and aerospace segments increased 4% and 15.6%, respectively. Automotive sales
declined 14.4% from the first six months of 1997, primarily due to the sale or
closure of the Company's interior plastics facilities during 1997 that had
sales during the first six months amounting to $48 million. Including sales
generated by companies acquired in 1998, which were principally outside the
U.S., consolidated U.S. sales increased $38.4 million, or 5.5%, but non-U.S.
sales declined $11.7 million, or 3%. Changes in currency exchange rates
lowered non-U.S. sales more than $20 million.
Industrial sales for the first six months of 1998 increased $24.5 million, or
4%, over sales for the comparable 1997 period. U.S. industrial sales
increased $28.6 million, or 6.9%, and sales in Europe increased $6.5 million,
or 5%. The sales increase in Europe was after the adverse effects of changes
in currency exchange rates amounting to $4.2 million. Sales in Brazil were
flat compared with the prior year, while sales in Asia-Pacific declined $10.6
million, or 21.4%. More than half of the decline in Asia-Pacific sales for
the six-month period was due to changes in exchange rates, with the remainder
of the decline attributable to the economic downturn in the region.
Automotive sales declined $35.2 million, or 14.4%, from the 1997 six-month
period. Sales for the first six months of 1997 from facilities that were sold
or closed in 1997 amounted to $48 million. After adjusting sales for the
first six months of 1997 to exclude sales originating from these facilities,
U.S. sales for the first six months of 1998 were flat in comparison with the
prior year and non-U.S. sales increased $14 million, or 10.1%. This non-U.S.
sales increase included the adverse effects of changes in currency exchange
rates amounting to more than $7 million.
Aerospace sales grew $37.5 million, or 15.6%, over the comparable 1997 period.
This sales increase was attributable to U.S. operations, since a modest
increase in volume in Europe was offset by adverse effects of changes in
currency exchange rates.
Consolidated manufacturing income increased $16.3 million, or 5.8%, over the
first six months of 1997, and manufacturing margin increased from 25.5% to
26.4%. Manufacturing income for the industrial segment increased 3.8% despite
the unfavorable effects of exchange rate changes and start-up costs.
Manufacturing income for the automotive segment declined primarily because of
lower U.S. sales in the second quarter and new facility start-up costs.
Manufacturing income for the aerospace segment increased nearly 16%, primarily
the result of increased aerospace sales volume and manufacturing efficiencies.
Selling and general administrative and engineering, research and development
expenses were $3.7 million, or 2.2%, higher than in the comparable 1997 six-
month period. Continued expenditures for development in the Asia-Pacific
region and additional costs associated with acquisitions contributed to the
higher costs, while disposition of the interior plastics business contributed
to a reduction of overhead costs in the automotive segment.
-14-
<PAGE>
Analysis of Operations - Continued
In the 1997 first quarter, the Company announced plans to exit its automotive
interior plastics business and recorded a special charge of $30 million ($18.5
million net, or diluted net income per share of $.62 for the 1997 six-month
period [$.63 for the year]), comprised principally of severance, lease
termination and asset disposition costs. As a result, the Company sold or
closed eight facilities during 1997 that had combined 1997 sales of
approximately $67 million ($48 million in the six-month period ended June 30,
1997).
Interest expense for the 1998 six-month period was $.5 million lower than in
1997, primarily due to lower average interest rates in the first six months of
1998. Other income (expense) - net for the first six months of 1998 included
a loss of $2.5 million resulting from the first-quarter redemption of the
Company's 9.55% sinking fund debentures.
Net income for the 1998 six-month period amounted to $69 million, or diluted
net income per share of $2.43, which compares with income for the 1997 six-
month period of $57.8 million, or $1.99 per share, before deducting the
special charge to exit the automotive interior plastics business. Net income
per share for 1998 included a charge of $.05 per share for redemption of the
9.55% debentures. Net income for the 1997 first six months, after deducting
the special charge of $18.5 million net of tax, or $.62 per share for the six-
month period, was $39.3 million, or diluted net income per share of $1.37.
The effective income tax rate for the 1998 six-month period was 32%, compared
with 33.9% for the 1997 six-month period exclusive of the special charge.
Liquidity and Capital Resources
Cash provided by operating activities for the first six months of 1998
amounted to $66.4 million, compared with $72.7 million for the comparable 1997
period. Working capital requirements of $30.4 million included $30.2 million
to finance a higher level of receivables, $3.2 million for growth in
inventories and $8.2 million to reduce payables and accruals. These cash
requirements were partially offset by the effects of increases in the
liability for income taxes. Working capital requirements for 1997 of $21.7
million included $37.8 million to finance a higher level of receivables and
$18.5 million for growth in inventories, which were partially offset by the
effects of increases in payables and income taxes.
Capital expenditures during the first six months of 1998 totaled $74.2 million
compared with $60.7 million in 1997. The Company expects that its capital
spending for the year 1998 in support of its growth initiatives and continued
manufacturing process improvements will exceed 1997 capital expenditures of
$139.8 million. The Company spent $23.5 million during the first six months
of 1998 to acquire four businesses in the industrial segment and a business in
the automotive segment. In the first six months of 1997, the Company received
$26.8 million from sales of certain of its automotive interior plastics
facilities.
Dividend payments in the first six months of 1998 were $.44 per share, or
$12.4 million. The dividend declared for the 1998 third quarter to be paid in
September was $.22 per share. The debt-to-capitalization ratio (debt divided
by debt plus equity) was 40.9% at June 30, 1998, compared with 40.2% at
December 31, 1997.
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Liquidity and Capital Resources - Continued
In the 1998 first quarter, the Company retired its 9.55% senior sinking fund
debentures in the amount of $42 million. Additional borrowings under the
Company's Medium Term Note program and short-term debt were used to redeem the
debentures and to meet other funding requirements. The remaining borrowing
capacity at June 30, 1998, under provisions of current shelf registration
statements for the Medium Term Note program, was $200 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 June 30,
1998, was $105.4 million. In addition to this agreement, the Company has
uncommitted arrangements with various banks to provide short-term financing as
necessary.
The Company expects that cash flow from operating activities and remaining
available credit lines will be sufficient to meet normal operating
requirements including debt obligations maturing in the near term and planned
capital expenditures.
Other
The Company is currently evaluating its segment disclosures and will adopt
Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information," in the 1998 fourth
quarter. This Statement 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. In June
1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This Statement will become effective for fiscal years
beginning after June 15, 1999. Early application is permitted. The Company
is currently evaluating the effect of the provisions of this Statement on its
accounting and reporting policies, but does not presently expect that adoption
of this Statement will have a material adverse effect on the Company's
consolidated financial position or results of operations.
The Company is continuing its efforts to assess and remediate 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. During the 1998 first quarter, the Company completed an
inventory and identification of its mission critical information systems
relative to Year 2000 compliance and developed specific project plans to
correct Year 2000 related deficiencies. Each operating unit of the Company is
now engaged in the remediation of its Year 2000 issues.
A Year 2000 steering committee has been formed composed of the Company's
information technology leadership and other key executives to review and
provide oversight of all Year 2000 related activities. A Year 2000 program
office has also been established as an adjunct to the steering committee to
facilitate Year 2000 communications and coordinate Year 2000 efforts among the
Company's operating units.
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<PAGE>
Other - Continued
The Company is now preparing detailed testing plans with the assistance of
third-party service providers to test and assess its mission critical systems
for Year 2000 compliance. This testing will commence in the latter part of
1998. The Company is also testing its embedded systems used in the manufacture
and distribution of its products for Year 2000 compliance to avert any
disruption in the supply of product to its customers.
The Company has surveyed and is now assessing Year 2000 readiness on the part
of the Company's supply base, and is responding to Year 2000 inquiries from
customers and financial institutions. The Company is also preparing for Year
2000 on-site assessments conducted by major OEM customers and industry groups.
These assessments are expected during the latter part of 1998 and early 1999.
From a cost perspective, the Company has budgeted the necessary funds to
address Year 2000 related projects. The Company believes that the incremental
cost of Year 2000 compliance activities is not material due to its extensive
use of packaged software which is now date compliant or can be made compliant
by installing vendor-supplied updates.
Risk factors which may affect the Company's ability to meet its Year 2000
project plan and the ability of the Company's information systems to operate
properly into the next century include but are not limited to, the
availability and adequacy of date compliant software from vendors and the
availability of necessary resources, both internal and external, to install
new purchased software or reprogram existing systems and complete the
necessary testing. In addition, the Company cannot predict the outcome of the
Year 2000 assessment of its supply base or the ability of its customers to
achieve Year 2000 compliance by the end of 1999 nor the impact of either on
the future operating results of the Company.
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 due to a variety of factors,
which include among other things, 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.
PART II - OTHER INFORMATION
Aeroquip-Vickers, Inc.
Item 1. Legal Proceedings - On June 9, 1998, the Company became aware of an
investigation at the Aeroquip automotive facility located in
Fitzgerald, Georgia by the U.S Environmental Protection Agency. The
EPA is investigating alleged violations of the Clean Air Act from
approximately 1993 to 1995. The agency's allegations include: the
release of ozone depleting substances into the environment from
refrigerant equipment; use of non-certified technicians to service
and maintain such equipment; the performance of refrigerant
maintenance without the proper recovery equipment; and providing
false statements to the agency. No civil or criminal charges have
been filed. The company is also investigating the matter.
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The Fitzgerald facility, which employs approximately 50 people,
manufactures custom-engineered extruded plastic products. The plant,
with 1997 sales of approximately $6 million, is located on 12 acres
of land, with the building occupying approximately 80,000 square
feet.
Item 5. Other Information - Shareholder proposals which are not covered by
Rule 14a-8 of the Securities Exchange Act of 1934 and which are
intended to be presented at the 1999 annual shareholders' meeting
must be received by the Secretary of Aeroquip-Vickers, Inc. no later
than January 24, 1999. Failure to submit such shareholder proposals
by the specified date will result in management proxies being allowed
to use their discretionary voting authority when the proposal is
raised at the annual meeting, without any discussion of the matter in
the proxy statement.
The deadline set forth in the Company's 1998 proxy statement for
shareholder proposals which are covered by Rule 14a-8 of the
Securities Exchange Act of 1934 continues to apply for shareholder
proposals to be included in the proxy statement.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed hereunder as part of Part I:
Exhibit (10)-1 Change in Control Severance Agreement for Chief Executive
Officer
Exhibit (10)-2 Change in Control Severance Agreement for Executive 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, the dates of execution, the identity of the
employer of the executive [operating subsidiary or
parent corporation], and as to other variations
directly necessitated by said differences)
Exhibit (10)-3 Change in Control Severance Agreement for other
executives (the Agreements executed by the Company and
various other executives 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 executives and the dates of execution, and as to
other variations directly necessitated by said differences)
Exhibit (12) Statement re: Computation of Ratios
The following exhibit is filed as part of Part II:
Exhibit (27) Financial Data Schedule
(b) There were no reports on Form 8-K filed for the quarter ended June 30,
1998.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Aeroquip-Vickers, Inc.
By /S/ DARRYL F. ALLEN
--------------------------------------
August 11, 1998 Darryl F. Allen
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
By /S/ DAVID M. RISLEY
--------------------------------------
August 11, 1998 David M. Risley
Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit No. Page No.
(10)-1 Change-in-Control Severance Agreement for 21
Chief Executive Officer
(10)-2 Change-in-Control Severance Agreement for 33
Executive 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,
the dates of execution, the identity of the employer
of the executive [operating subsidiary or parent
corporation], and as to other variations directly
necessitated by said differences)
(10)-3 Change-in-Control Severance Agreement for other 45
executives (the Agreements executed by the Company
and various other executives 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 executives and the dates of
execution, and as to other variations directly
necessitated by said differences)
(12) Statement re: Computation of Ratios 55
(27) Financial Data Schedule 56
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EXHIBIT (10)-1
CHANGE-IN-CONTROL
SEVERANCE AGREEMENT
THIS AMENDED AND RESTATED CHANGE-IN-CONTROL SEVERANCE AGREEMENT (this
"Agreement") by and between AEROQUIP-VICKERS, INC., an Ohio corporation (the
"Company"), and Darryl F. Allen (the "Executive"), dated this 30th day of
June, 1998.
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") or any similar qualified or nonqualified
plan) 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.
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<PAGE>
(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 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 three
years, commencing with the Termination Date or Resignation
Date, except that if the Executive will reach age 65 within
three 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, 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 or
any Operating Company;
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<PAGE>
(ii) intentional wrongful damage to
property of the Company or any Operating Company;
(iii) intentional wrongful
disclosure of secret processes or confidential
information of the Company or any Operating Company;
or
(iv) intentional wrongful
engagement in any Competitive Activity;
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 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) The Company sells or otherwise
transfers all or substantially all of its assets to
another corporation or other legal person, and less
than a majority of the combined voting power of the
then-outstanding securities of such corporation or
person immediately after such transactions are held in
the aggregate by the holders of Voting Stock
immediately prior to such sale;
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<PAGE>
(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;
(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; or
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 or any Operating
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. "Competitive Activity" means the Executive's
participation, without the written consent of an officer of
the Company, in the management of any business enterprise if
such enterprise engages in substantial and direct
competition with the Company and such enterprise's sales of
any product or service competitive with any product or
service of the Company amounted to 10% of such enterprise's
net sales for its most recently completely fiscal year and
if the Company's consolidated net sales of said product or
service amounted to 10% of the Company's consolidated net
sales for
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<PAGE>
its most recently completed fiscal year.
"Competitive Activity" will not include (i) the mere
ownership of securities in any such enterprise and the
exercise of rights appurtenant thereto or (ii) participation
in the management of any such enterprise other than in
connection with the competitive operations of such
enterprise.
G. "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.
H. "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.
I. "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.
J. "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 or the position, or a
substantially equivalent office or position of or with
the Company and/or an Operating 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 or any Operating 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 and any Operating 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
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<PAGE>
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 (which determination will be conclusive and
binding upon the parties hereto provided it has been
made in good faith and in all events will be presumed
to have been made in good faith unless otherwise shown
by the Company by clear and convincing evidence) 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
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 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 requires the Executive
to have his principal location of work changed to any
location which is in excess of 25 miles from the
location thereof immediately prior to the Change in
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 or in any calendar quarter when annualized for
purposes of comparison to any prior year) than was
required of the Executive prior to the Change in
Control without in either case, his or her 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.
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<PAGE>
K. "Resignation Date" shall be the last day worked
by an Executive who resigns his employment with the Company
as provided in Paragraph 1.J of this Agreement.
L. "Savings Plans" shall mean the Aeroquip-Vickers
Savings and Profit Sharing Plan and the Aeroquip-Vickers
Supplemental Benefit Plan and any amendments thereto and
restatements thereof, or any successor plans that may become
effective subsequent to the date of this agreement and prior
to a Change in Control.
M. "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.M 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).
N. "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.M(i), (ii) or (iii) of this
Agreement.
O. "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.
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<PAGE>
2. Operation of Agreement. This Agreement will be effective
and binding immediately upon its execution, but, anything in this
Agreement to the contrary notwithstanding, this Agreement will not
be operative unless and until a Change in Control occurs. Upon
the occurrence of a Change in Control at any time during the Term,
without further action, this Agreement shall become immediately
operative.
3. Payments Upon Termination. In the event of Termination
within three years after a Change in Control or Resignation
between six months and two years after a 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 payment by the Company (or, if applicable, the
Company shall cause the appropriate Operating Company to
make a payment) in an amount equal to three times the
Company's average aggregate contribution to the Executive's
accounts in the Savings Plans for the last three full years
preceding the Change in Control, to be made within thirty
calendar days after the Executive's Termination Date or
Resignation Date, as the case may be.
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.
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<PAGE>
E. If the Executive is a Disqualified Individual
(as the term "Disqualified Individual" is defined in Section
280G of the Code, or any successor provision thereto) and if
any payment to the Executive, whether under this Agreement
or otherwise, would be an Excess Parachute Payment (as the
term "Excess Parachute Payment" is defined in Section 280G
of the Code or any successor provision thereto) but for the
application of this sentence, 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 portion of
the payments made to the Executive, as so reduced,
constitutes an Excess Parachute Payment. 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 determinations under Paragraph 2.E hereof
shall be made by the Company's independent accounting firm.
4. Interest. Without limiting the rights of the Executive at
law or in equity, if the Company fails to make any payment or
provide any benefit required to be made or provided hereunder on a
timely basis, the Company will pay interest on the amount or
value thereof at an annualized rate of interest equal to the
so-called composite "prime rate" as quoted from time to time
during the relevant period in the Midwest Edition of The Wall
Street Journal. Such interest will be payable as it accrues on
demand. Any change in such prime rate will be effective on and as
of the date of such change.
5. 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 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 3.E hereof, its Board of Directors has,
following due consideration of the matter, determined that the
benefits provided by Paragraph 3 hereof are reasonable.
Accordingly, the parties hereto expressly agree that the payment
of the amounts specified in Paragraph 3 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 3 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 3.C hereof
shall be
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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.
6. Arbitration and Legal Expenses. 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 6. 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, regardless of the
final outcome. The Company shall pay all such costs and expenses
in excess of $10,000 incurred by the Executive.
7. Competitive Activity. During a period ending one year
following the Termination Date or Resignation Date, if the
Executive shall have received or shall be receiving benefits under
Section 3, the Executive shall not, without the prior written
consent of the Company, which consent shall not be unreasonably
withheld, engage in any Competitive Activity.
8. Withholding of Taxes. The Company may withhold from any
amounts payable under this Agreement all federal, state, city or
other taxes as the Company is required to withhold pursuant to any
law or government regulation or ruling.
9. 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.
10. 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 laws of
such State.
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11. 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.
12. 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 12.A hereof. Without limiting the generality
of the foregoing, the Executive's right to receive payments
hereunder shall not be assignable, transferrable 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 12.C, the Company shall have no liability to pay
any amount so attempted to be assigned, transferred or
delegated.
13. 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.
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14. 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.
15. Survival. Notwithstanding any provision of this Agreement
to the contrary, the parties' respective rights and obligations
under Sections 3, 4 and 6 will survive any termination or
expiration of this Agreement or the termination of the Executive's
employment following a Change in Control for any reason
whatsoever.
16. 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 latest of (i) December 31 of the second calendar
year after the calendar year in which this Agreement is executed;
(ii) the expiration of the Benefit Period; and (iii) three years
after the date of the first Change in Control; provided, however,
in the absence of a Change in Control that (A) commencing on
January 1 of the calendar year after the calendar year in which
this Agreement is executed and each January 1 thereafter, the date
specified in clause (i) above shall be automatically 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 14 hereof,
if, prior to a Change in Control, the Executive ceases for any
reason to be an employee of the Company, whether or not the
Executive then becomes or continues to be an employee of an
Operating Company, thereupon the Term shall be deemed to have
expired and this Agreement shall immediately terminate and be of
no further effect.
17. Prior Agreement. This Agreement amends and restates the
Agreement, dated as of May 23, 1991 (the "Prior Agreement"),
between the Company and the Executive, which Prior Agreement
shall, without further action, be superseded as of the date first
above written.
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 assistant secretary,
all as of the day and year first above written.
/S/ DARRYL F. ALLEN
Executive
ATTEST: AEROQUIP-VICKERS, INC.
/S/ MICHELLE L. POTTER By: /S/ JAMES E. KLINE
Assistant Secretary James E. Kline
Vice President & General Counsel
(Seal)
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EXHIBIT (10)-2 Executive Officer Form
CHANGE-IN-CONTROL SEVERANCE AGREEMENT
THIS AMENDED AND RESTATED CHANGE-IN-CONTROL SEVERANCE AGREEMENT (this
"Agreement") by and between AEROQUIP-VICKERS, INC., an Ohio corporation (the
"Company"), and __________________ (the "Executive"), dated this ___ day of
June, 1998.
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") or any similar qualified or nonqualified
plan) 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.
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(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 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, 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 or
any Operating Company;
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(ii) intentional wrongful damage to
property of the Company or any Operating Company;
(iii) intentional wrongful disclosure of
secret processes or confidential information of the
Company or any Operating Company; or
(iv) intentional wrongful engagement in
any Competitive Activity;
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 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) The Company sells or otherwise
transfers all or substantially all of its assets to
another corporation or other legal person and less
than a majority of the combined voting power of the
then-outstanding securities of such corporation or
person immediately after such transactions are held in
the aggregate by the holders of Voting Stock
immediately prior to such sale;
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(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;
(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; or
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 or any Operating
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. "Competitive Activity" means the Executive's
participation, without the written consent of an officer of
the Company, in the management of any business enterprise if
such enterprise engages in substantial and direct
competition with the Company and such enterprise's sales of
any product or service competitive with any product or
service of the Company amounted to 10% of such enterprise's
net sales for its most recently completely fiscal year and
if the Company's consolidated net sales of said product or
service amounted to 10% of the Company's consolidated net
sales for
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<PAGE>
its most recently completed fiscal year.
"Competitive Activity" will not include (i) the mere
ownership of securities in any such enterprise and the
exercise of rights appurtenant thereto or (ii) participation
in the management of any such enterprise other than in
connection with the competitive operations of such
enterprise.
G. "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.
H. "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.
I. "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.
J. "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 or the position, or a
substantially equivalent office or position of or with
the Company and/or an Operating 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 or any Operating 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 and any Operating 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
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<PAGE>
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
(which determination will be conclusive and binding
upon the parties hereto provided it has been made in
good faith and in all events will be presumed to have
been made in good faith unless otherwise shown by the
Company by clear and convincing evidence) 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
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 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 requires the Executive
to have his principal location of work changed to any
location which is in excess of 25 miles from the
location thereof immediately prior to the Change in
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 or in any calendar quarter when annualized for
purposes of comparison to any prior year) than was
required of the Executive prior to the Change in
Control without in either case, his or her 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.
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K. "Resignation Date" shall be the last day worked
by an Executive who resigns his employment with the Company
as provided in Paragraph 1.J of this Agreement.
L. "Savings Plans" shall mean the Aeroquip-Vickers
Savings and Profit Sharing Plan and the Aeroquip-Vickers
Supplemental Benefit Plan and any amendments thereto and
restatements thereof, or any successor plans that may become
effective subsequent to the date of this agreement and prior
to a Change in Control.
M. "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.M 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).
N. "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.M(i), (ii) or (iii) of this
Agreement.
O. "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. Operation of Agreement. This Agreement will be effective
and binding immediately upon its execution, but, anything in this
Agreement to the contrary notwithstanding, this Agreement will not
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be operative unless and until a Change in Control occurs.
Upon the occurrence of a Change in Control at any time during the
Term, without further action, this Agreement shall become
immediately operative.
3. Payments Upon Termination. In the event of Termination
within three years after a Change in Control or Resignation
between six months and two years after a 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 payment by the Company (or, if applicable, the
Company shall cause the appropriate Operating Company to
make a payment) in an amount equal to two times the
Company's average aggregate contribution to the Executive's
accounts in the Savings Plans for the last three full years
preceding the Change in Control, to be made within thirty
calendar days after the Executive's Termination Date or
Resignation Date, as the case may be.
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. If the Executive is a Disqualified Individual
(as the term "Disqualified Individual" is defined in Section
280G of the Code, or any successor provision thereto) and if
any payment to the Executive, whether under this Agreement
or otherwise,
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would be an Excess Parachute Payment (as the
term "Excess Parachute Payment" is defined in Section 280G
of the Code or any successor provision thereto) but for the
application of this sentence, 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 portion of
the payments made to the Executive, as so reduced,
constitutes an Excess Parachute Payment. 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 determinations under Paragraph 2.E hereof
shall be made by the Company's independent accounting firm.
4. Interest. Without limiting the rights of the Executive at
law or in equity, if the Company fails to make any payment or
provide any benefit required to be made or provided hereunder on a
timely basis, the Company will pay interest on the amount or
value thereof at an annualized rate of interest equal to the
so-called composite "prime rate" as quoted from time to time
during the relevant period in the Midwest Edition of The Wall
Street Journal. Such interest will be payable as it accrues on
demand. Any change in such prime rate will be effective on and as
of the date of such change.
5. 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 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 3.E hereof, its Board of Directors has,
following due consideration of the matter, determined that the
benefits provided by Paragraph 3 hereof are reasonable.
Accordingly, the parties hereto expressly agree that the payment
of the amounts specified in Paragraph 3 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 3 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 3.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.
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6. Arbitration and Legal Expenses. 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 6. 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, regardless of the
final outcome. The Company shall pay all such costs and expenses
in excess of $10,000 incurred by the Executive.
7. Competitive Activity. During a period ending one year
following the Termination Date or Resignation Date, if the
Executive shall have received or shall be receiving benefits under
Section 3, the Executive shall not, without the prior written
consent of the Company, which consent shall not be unreasonably
withheld, engage in any Competitive Activity.
8. Withholding of Taxes. The Company may withhold from any
amounts payable under this Agreement all federal, state, city or
other taxes as the Company is required to withhold pursuant to any
law or government regulation or ruling.
9. 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.
10. 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 laws of
such State.
11. 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.
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<PAGE>
12. 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 12.A hereof. Without limiting the generality
of the foregoing, the Executive's right to receive payments
hereunder shall not be assignable, transferrable 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 12.C, the Company shall have no liability to pay
any amount so attempted to be assigned, transferred or
delegated.
13. 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.
14. 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.
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<PAGE>
15. Survival. Notwithstanding any provision of this Agreement
to the contrary, the parties' respective rights and obligations
under Sections 3, 4 and 6 will survive any termination or
expiration of this Agreement or the termination of the Executive's
employment following a Change in Control for any reason
whatsoever.
16. 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 latest of (i) December 31 of the second calendar
year after the calendar year in which this Agreement is executed;
(ii) the expiration of the Benefit Period; and (iii) three years
after the date of the first Change in Control; provided, however,
in the absence of a Change in Control that (A) commencing on
January 1 of the calendar year after the calendar year in which
this Agreement is executed and each January 1 thereafter, the date
specified in clause (i) above shall be automatically 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 14 hereof,
if, prior to a Change in Control, the Executive ceases for any
reason to be an employee of the Company, whether or not the
Executive then becomes or continues to be an employee of an
Operating Company, thereupon the Term shall be deemed to have
expired and this Agreement shall immediately terminate and be of
no further effect.
17. Prior Agreement. This Agreement amends and restates the
Agreement, dated as of _______________, ____ (the "Prior
Agreement"), between the Company and the Executive, which Prior
Agreement shall, without further action, be superseded as of the
date first above written.
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 assistant secretary,
all as of the day and year first above written.
___________________________________
Executive
ATTEST: AEROQUIP-VICKERS, INC.
__________________________________ By: ______________________________
Assistant Secretary Darryl F. Allen
Chairman, President &
Chief Executive Officer
(Seal)
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EXHIBIT (10)-3
Other Executive Form
CHANGE-IN-CONTROL SEVERANCE AGREEMENT
THIS AMENDED AND RESTATED CHANGE-IN-CONTROL SEVERANCE AGREEMENT (this
"Agreement") by and between AEROQUIP-VICKERS, INC., an Ohio corporation (the
"Company"), and ____________________________ (the "Executive"), dated this
_______ day of June, 1998.
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") or any
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similar qualified or nonqualified plan)
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 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 or
any Operating Company;
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<PAGE>
(ii) intentional wrongful damage to
property of the Company or any Operating Company;
(iii) intentional wrongful disclosure of
secret processes or confidential information of the
Company or any Operating Company; or
(iv) intentional wrongful engagement in
any Competitive Activity;
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 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 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 or any
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<PAGE>
Operating 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. "Competitive Activity" means the Executive's
participation, without the written consent of an officer of
the Company, in the management of any business enterprise if
such enterprise engages in substantial and direct
competition with the Company and such enterprise's sales of
any product or service competitive with any product or
service of the Company amounted to 10% of such enterprise's
net sales for its most recently completely fiscal year and
if the Company's consolidated net sales of said product or
service amounted to 10% of the Company's consolidated net
sales for its most recently completed fiscal year.
"Competitive Activity" will not include (i) the mere
ownership of securities in any such enterprise and the
exercise of rights appurtenant thereto or (ii) participation
in the management of any such enterprise other than in
connection with the competitive operations of such
enterprise.
G. "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.
H. "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.
I. "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.
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<PAGE>
J. "Savings Plans" shall mean the Aeroquip-Vickers
Savings and Profit Sharing Plan and the Aeroquip-Vickers
Supplemental Benefit Plan and any amendments thereto and
restatements thereof, or any successor plans that may become
effective subsequent to the date of this agreement and prior
to a Change in Control.
K. "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.K 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).
L. "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.K(i), (ii) or (iii) of this
Agreement.
M. "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. Operation of Agreement. This Agreement will be effective
and binding immediately upon its execution, but, anything in this
Agreement to the contrary notwithstanding, this Agreement will not
be operative unless and until a Change in Control occurs. Upon
the occurrence of a Change in Control at any time during the Term,
without further action, this Agreement shall become immediately
operative.
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<PAGE>
3. Payments Upon Termination. In the event of Termination
within three 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 payment by the Company (or, if applicable, the
Company shall cause the appropriate Operating Company to
make a payment) in an amount equal to one times the
Company's average aggregate contribution to the Executive's
accounts in the Savings Plans for the last three full years
preceding the Change in Control, to be made within thirty
calendar days after the Executive's Termination Date.
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 one 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 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. If the Executive is a Disqualified Individual
(as the term "Disqualified Individual" is defined in Section
280G of the Code, or any successor provision thereto) and if
any payment to the Executive, whether under this Agreement
or otherwise, would be an Excess Parachute Payment (as the
term "Excess Parachute Payment" is defined in Section 280G
of the Code or any successor provision thereto) but for the
application of this sentence, 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 portion of
the payments made to the Executive, as so reduced,
constitutes an Excess Parachute Payment. The reduction, if
any, contemplated by the immediately preceding sentence
shall be effected by
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<PAGE>
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 determinations under Paragraph 2.E hereof
shall be made by the Company's independent accounting firm.
4. Interest. Without limiting the rights of the Executive at
law or in equity, if the Company fails to make any payment or
provide any benefit required to be made or provided hereunder on a
timely basis, the Company will pay interest on the amount or value
thereof at an annualized rate of interest equal to the so-called
composite "prime rate" as quoted from time to time during the
relevant period in the Midwest Edition of The Wall Street Journal.
Such interest will be payable as it accrues on demand. Any change
in such prime rate will be effective on and as of the date of such
change.
5. 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
3.E hereof, its Board of Directors has, following due
consideration of the matter, determined that the benefits provided
by Paragraph 3 hereof are reasonable. Accordingly, the parties
hereto expressly agree that the payment of the amounts specified
in Paragraph 3 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 3 of this Agreement by
seeking other employment or otherwise, nor shall nay 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 3.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.
6. Arbitration and Legal Expenses. 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
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<PAGE>
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 6. 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, regardless of the
final outcome. The Company shall pay all such costs and expenses
in excess of $10,000 incurred by the Executive.
7. Competitive Activity. During a period ending one year
following the Termination Date, if the Executive shall have
received or shall be receiving benefits under Section 3, the
Executive shall not, without the prior written consent of the
Company, which consent shall not be unreasonably withheld, engage
in any Competitive Activity.
8. Withholding of Taxes. The Company may withhold from any
amounts payable under this Agreement all federal, state, city or
other taxes as the Company is required to withhold pursuant to any
law or government regulation or ruling.
9. 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.
10. 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 laws of
such State.
11. 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.
12. 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
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<PAGE>
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 12.A hereof. Without limiting the generality
of the foregoing, the Executive's right to receive payments
hereunder shall not be assignable, transferrable 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 12.C, the Company shall have no liability to pay
any amount so attempted to be assigned, transferred or
delegated.
13. 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.
14. 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.
15. Survival. Notwithstanding any provision of this Agreement
to the contrary, the parties' respective rights and obligations
under Sections 3, 4 and 6 will survive any termination or
expiration of this Agreement or the termination of the Executive's
employment following a Change in Control for any reason
whatsoever.
16. 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 latest of (i) December 31 of the second calendar
year after the calendar year in which this Agreement is executed;
(ii) the expiration of the Benefit Period; and (iii) three years
after
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<PAGE>
the date of the first Change in Control; provided, however,
in the absence of a Change in Control that (A) commencing on
January 1 of the calendar year after the calendar year in which
this Agreement is executed and each January 1 thereafter, the date
specified in clause (i) above shall be automatically 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 14 hereof,
if, prior to a Change in Control, the Executive ceases for any
reason to be an employee of the Company, whether or not the
Executive then becomes or continues to be an employee of an
Operating 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 assistant secretary,
all as of the day and year first above written.
___________________________________
Executive
ATTEST: AEROQUIP-VICKERS, INC.
________________________________ By: ________________________________
Secretary Darryl F. Allen
Chairman, President &
Chief Executive Officer
(Seal)
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EXHIBIT 12
<TABLE>
STATEMENT RE: COMPUTATION OF RATIOS
Aeroquip-Vickers, Inc.
(Dollars in thousands)
<CAPTION>
Six Months
Ended Year Ended December 31
June 30 -----------------------------------------
1998 1997 1996 1995 1994 1993
------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED
CHARGES
Income before income taxes and
cumulative effect of accounting
change $101,514 $148,153 $153,421 $128,196 $101,255 $ 17,111
Dividends received, net of equity
in earnings (loss) of
unconsolidated affiliates 563 1,605 9,961 (3,704) 1,213 1
Fixed charges 25,485 46,034 41,712 31,762 30,249 33,370
-------- -------- -------- -------- -------- --------
Income before cumulative effect
of accounting change for
computation purposes $127,562 $195,792 $205,094 $156,254 $132,717 $ 50,482
======== ======== ======== ======== ======== ========
FIXED CHARGES
Interest expense, including
interest related to corporate
owned life insurance $ 19,337 $ 37,971 $ 34,963 $ 24,477 $ 22,582 $ 25,516
Portion of rent expense
representing interest 3,545 6,819 6,288 6,903 7,303 7,490
Amortization of debt expense
and debt discount 2,603 1,244 461 382 364 364
-------- -------- -------- -------- -------- --------
Total fixed charges $ 25,485 $ 46,034 $ 41,712 $ 31,762 $ 30,249 $ 33,370
======== ======== ======== ======== ======== ========
Ratio of Earnings to
Fixed Charges 5.0x 4.3x 4.9x 4.9x 4.4x 1.5x
======== ======== ======== ======== ======== ========
<FN>
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.
</FN>
</TABLE>
-55-
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 31,112
<SECURITIES> 0
<RECEIVABLES> 370,415
<ALLOWANCES> (14,171)
<INVENTORY> 284,739
<CURRENT-ASSETS> 728,788
<PP&E> 984,786
<DEPRECIATION> 536,728
<TOTAL-ASSETS> 1,365,291
<CURRENT-LIABILITIES> 451,225
<BONDS> 257,628
<COMMON> 141,150
0
0
<OTHER-SE> 350,160
<TOTAL-LIABILITY-AND-EQUITY> 1,365,291
<SALES> 1,589,481
<TOTAL-REVENUES> 1,589,481
<CGS> 1,175,563
<TOTAL-COSTS> 1,175,563
<OTHER-EXPENSES> 30,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,610
<INCOME-PRETAX> 101,228
<INCOME-TAX> 31,800
<INCOME-CONTINUING> 69,428
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,428
<EPS-PRIMARY> 2.41
<EPS-DILUTED> 2.41
</TABLE>
