<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File No. 1-924
AEROQUIP-VICKERS, INC.
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(Exact name of registrant as specified in its charter)
OHIO 34-4288310
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(State of Incorporation) (I.R.S. Employer
Identification No.)
3000 STRAYER, MAUMEE, OHIO 43537-0050
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (419) 867-2200
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Shares, $5.00 Par Value Frankfurt Stock Exchange
Chicago Stock Exchange
New York Stock Exchange
Pacific Exchange, Inc.
The Stock Exchange (London)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
[Cover page continued]
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The aggregate market value of the Common Shares held by non-affiliates of the
registrant as of March 5, 1999, was $1,573,268,645.
The number of Common Shares, $5 Par Value, outstanding as of March 5, 1999, was
27,638,225.
DOCUMENTS INCORPORATED BY REFERENCE
None.
This document, including exhibits, contains 85 pages.
The cover page consists of 2 pages.
The Exhibit Index is located at pages 66-68.
[End of cover page]
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PART I
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ITEM 1. Business.
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(a) Aeroquip-Vickers, Inc. ("Aeroquip-Vickers") is a world leader in the
manufacture and distribution of engineered components and systems, sold through
its operating companies, Aeroquip Corporation ("Aeroquip") and Vickers,
Incorporated ("Vickers"), to the industrial, automotive and aerospace markets.
On February 1, 1999, Eaton Corporation and Aeroquip-Vickers, Inc. announced that
the companies had entered into an "Agreement and Plan of Merger" whereby Eaton
Corporation would acquire all of the outstanding shares of Aeroquip-Vickers,
Inc. for $58 per share in cash. The Boards of Directors of both companies have
approved the transaction, which is subject to normal closing conditions and the
approval of Aeroquip-Vickers shareholders. A special shareholders' meeting has
been called for April 8, 1999. The transaction is expected to be completed in
mid-April 1999.
In 1998, Aeroquip-Vickers paid a quarterly dividend of $.22 per share, or $.88
per share for the year.
During 1998, the Company purchased 657,500 shares of the Company's outstanding
common stock at a cost of $23.2 million. At December 31, 1998, $57.8 million of
additional common stock was available for purchase under the current Board of
Directors' authorization.
During 1998, the Company issued $65 million of medium-term notes with interest
rates from 6.40% to 7.09% due at various dates from 2005 to 2018. Under
provisions of the current shelf registration statement for the Medium-Term Note
program, $185 million remains available for issuance.
On February 3, 1998, the Company redeemed its 9.55% senior sinking fund
debentures. Proceeds from additional borrowings in 1998 under the Medium-Term
Note program were used to redeem the debentures. The pretax loss from redemption
of the debentures amounting to approximately $2.5 million was recognized in the
1998 first quarter.
On March 27, 1998, Vickers completed the acquisition of the assets of Precision
Hydrostatics, Inc. and the stock of Wooster Hydrostatics, Inc. Precision is
primarily an aftermarket supplier of remanufactured hydraulic products. Wooster
is an aftermarket supplier of remanufactured hydraulic parts and products.
On April 7, 1998, Vickers completed the purchase of Hydrokraft GmbH. Hydrokraft
manufactures high-pressure axial piston hydraulic pumps, motors and
transmissions for applications in stationary industrial equipment, marine,
mining, chemical processing, food processing and other markets.
On April 13, 1998, Aeroquip completed the acquisition of the assets of Aerotech
South Africa (Pty) Ltd. in Johannesburg, South Africa. Aerotech South Africa
supplies hose assemblies and fitting products to industrial and automotive
customers.
On April 16, 1998, Virgis W. Colbert, Executive Vice President of Miller Brewing
Company, was elected to the Board of Directors of Aeroquip-Vickers.
On May 11, 1998, Aeroquip completed the acquisition of Finimpresa S.r.l. and
Comaco S.r.l. of Milan, Italy. Finimpresa manufactures and distributes valves
and accessory products, and Comaco manufactures and distributes copper and
flexible linesets. Both products serve the residential and commercial air
conditioning and refrigeration markets. Finimpresa also manufactures and
distributes hydronic heating valves.
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On August 26, 1998, John H. Weber resigned as president of Vickers and executive
vice president of Aeroquip-Vickers to accept a position in another industry.
On December 14, 1998, Vickers purchased all of the outstanding capital stock of
M.C. Aerospace Corporation. M.C. Aerospace designs, develops and manufactures
high-precision hydraulic and pneumatic components for military and commercial
aircraft and military land vehicles. Its product lines include hydraulic and
pneumatic valves, pumps, compressors and drives.
(b) Financial information about the industry segments can be found in the
Company's financial statements at "Note 14 - Business Segments" on pages 40 to
43 herein.
(c) A description of the business done and intended to be done by
Aeroquip-Vickers and its subsidiaries in each industry segment follows.
The Aeroquip segment designs, manufactures and distributes fluid connectors and
plastic products. Fluid connectors include all pressure ranges of hose and hose
assemblies; fittings, adapters, couplings and swivels; automotive air
conditioning, power steering, and oil and transmission cooler components and
assemblies; tube fittings and assemblies; refrigeration/air conditioning
connectors; clamps and V-band couplings; fuel-handling products; noise-reduction
products; chemical containment products; and electronic fluid system products.
Aeroquip plastic products include molded, extruded and co-extruded plastic
products. The Aeroquip segment serves original equipment and aftermarket
customers in industrial markets located principally in the U.S., Europe,
Asia-Pacific and Brazil; original equipment and aftermarket customers in
aerospace and defense markets located principally in the U.S. and Europe; and
automobile, light truck, sport utility and van manufacturers in automotive
markets located principally in the U.S. and Europe.
Aeroquip's business is highly competitive in terms of price, quality and
service. Aeroquip serves many customers in the industrial, automotive and
aerospace markets. Due to the diversity of Aeroquip products, there are a large
number of competitors scattered across a wide variety of market segments, with
no single competitor competing in each of Aeroquip's product lines.
Aeroquip is a preferred supplier to the world's automobile manufacturers.
Aeroquip has significant market position worldwide for aerospace hose, fittings
and quick-disconnect couplings. Aeroquip has significant market position
worldwide for industrial hose, fittings, couplings and adapters. Approximately
26% of Aeroquip's 1998 sales were made to three automotive customers.
The order backlog for the Aeroquip industrial and aerospace businesses was
$143.6 million as of December 31, 1998, compared to $130.8 million as of
December 31, 1997. Approximately 85% of the December 31, 1998, backlog is
expected to be filled in 1999.
Approximately 14% of Aeroquip's backlog at December 31, 1998, represents direct
government contracts or subcontracts on government programs which are subject to
termination at the election of the government. In the event any such contract
was terminated, Aeroquip would be entitled to reimbursement for costs incurred
according to a formula set forth in the affected contract.
The Vickers segment designs, manufactures and distributes power and motion
control products. Vickers products include hydraulic, electrohydraulic,
pneumatic and electronic control devices; piston and vane pumps and motors; open
architecture machine controls; hydraulic and pneumatic cylinders; hydraulic
power packages; electric motors and drives; fuel pumps; electric motorpumps and
generator packages; electrohydraulic and electromechanical actuators; sensors
and monitoring devices; hydraulic and lubrication filtration; and
fluid-evaluation products and services. The Vickers segment
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serves original equipment and aftermarket customers in industrial markets
located principally in the U.S., Europe, Asia-Pacific and Brazil, and original
equipment and aftermarket customers in aerospace and defense markets located
principally in the U.S. and Europe.
Vickers' business is highly competitive in terms of price, quality and service.
Vickers serves many customers in the industrial and aerospace markets. Due to
the diversity of Vickers' products, there are a large number of competitors
scattered across a wide variety of market segments, with no single competitor
competing in each of Vickers' product lines.
Vickers has significant market position worldwide for hydraulic and
electrohydraulic controls; piston and vane pumps and motors; hydraulic power
packages; electronic controls, drives and motors; aerospace fixed- and
variable-displacement hydraulic pumps; hydraulic motors and motor packages; and
aerospace sensors and monitoring devices.
The order backlog for the Vickers business was $447.7 million as of December 31,
1998, compared to $481.2 million as of December 31, 1997. Approximately 90% of
the December 31, 1998, backlog is expected to be filled in 1999.
Approximately 21% of Vickers' backlog at December 31, 1998, represents direct
government contracts or subcontracts on government programs which are subject to
termination at the election of the government. In the event any such contract
was terminated, Vickers would be entitled to reimbursement for costs incurred
according to a formula set forth in the affected contract.
Aeroquip-Vickers and its subsidiaries are generally not dependent upon any one
source for raw materials or purchased components essential to their businesses,
and it is anticipated that such raw materials and components will be available
in adequate quantities to meet anticipated production schedules.
Aeroquip-Vickers owns or controls significant intellectual property, including a
sizable portfolio of patents, copyrights, trademarks and trade secrets, and is
involved in numerous licensing arrangements. Although Aeroquip-Vickers'
intellectual property plays an important role in maintaining Aeroquip-Vickers'
competitive position in the markets that it serves, no single patent, copyright,
trade secret or license, or group of related patents, copyrights, trade secrets
or licenses, is of such value to Aeroquip-Vickers that the business of
Aeroquip-Vickers would be materially affected by the expiration or termination
thereof. Aeroquip-Vickers continues to apply for patent and trademark protection
on its significant patentable developments in the United States and abroad.
Both the Aeroquip and Vickers names remain significant trademarks within the
respective industry segments. In addition, Aeroquip-Vickers owns a number of
trademarks, in the United States and abroad, applicable to certain of the
Aeroquip-Vickers products.
Aeroquip-Vickers devotes engineering, research and development efforts to new
products and improvement of existing products and production processes. During
1998, 1997 and 1996, Aeroquip-Vickers spent a total of $71.5 million, $72.2
million and $74.9 million, respectively, on these efforts.
Aeroquip-Vickers employed 15,168 persons at December 31, 1998.
(d) Financial information about foreign and U.S. sales and properties can be
found in the Company's financial statements at "Note 14 - Business Segments" on
pages 40 to 43 herein. As assessed by Aeroquip-Vickers, the risk attendant to
non-U.S. operations, which is primarily in developed countries, is not
significantly greater than that attendant to its U.S. operations.
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ITEM 2. Properties.
A description of Aeroquip-Vickers' principal properties follows. Except as
otherwise indicated, all properties are owned by Aeroquip-Vickers or its
subsidiaries.
Aeroquip-Vickers' executive offices (leased) are located in Maumee, Ohio.
AEROQUIP: Aeroquip has executive and administrative offices in Maumee (leased),
Ohio. Aeroquip has technical and administrative offices in Ann Arbor (leased)
and Mt. Clemens (leased), Michigan and Maumee (leased), Ohio; and manufacturing
facilities throughout the United States and abroad, including plants in Mountain
Home, Arkansas; Atlanta, Fitzgerald and Toccoa Georgia; New Haven, Indiana;
Williamsport, Maryland; Jackson, Michigan; Forest City, Middlesex, Mooresville
and Norwood, North Carolina; Fremont and Van Wert, Ohio; Gainesboro and
Livingston, Tennessee; Wausau, Wisconsin; Guaratingueta, Brazil;
Chambray-Les-Tours, and Serres-Castet (leased), France; Baden-Baden,
Hann-Muenden and Wolfsburg (leased), Germany; Livorno and Milan (leased), Italy;
Johannesburg (leased), South Africa; Alcala de Henares, Spain; and Brierley
Hill, Cardiff and Lakeside (leased), United Kingdom.
Aeroquip also owns or leases warehouse, assembly and distribution facilities and
sales offices in the United States and abroad.
VICKERS: Vickers, Incorporated has executive and administrative offices in
Maumee (leased), Ohio, and a technical center in Rochester Hills (leased),
Michigan. Vickers has manufacturing facilities throughout the United States and
abroad, including plants in Decatur, Alabama; Searcy, Arkansas; Los Angeles (2
locations, one leased), California; Carol Stream and Petersburg (leased),
Illinois; Grand Rapids, Jackson and Lake Orion, Michigan; Jackson, Mississippi;
Omaha, Nebraska; Hi-Nella, New Jersey; Lebanon (leased), South Lebanon and
Wooster, Ohio; White City, Oregon; Glenolden, Pennsylvania; Charleston and
Greenwood, South Carolina; Memphis, Tennessee; Sao Paulo, Brazil; Suzhou
(leased), China; Goeppingen (leased) and Wehrheim (leased), Germany; Mumbai and
Pune, India; Casella and Vignate (leased), Italy; and Bedford (leased),
Bedhampton, Havant and Telford (leased), United Kingdom.
Vickers also owns or leases warehouse, assembly and distribution facilities and
sales offices in the United States and abroad.
ITEM 3. Legal Proceedings.
As previously reported, on March 26, 1992, the United States Environmental
Protection Agency ("USEPA") issued an Administrative Order ("106 Order") under
Section 106 of the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA") to Aeroquip-Vickers' subsidiary, Aeroquip Corporation
("Aeroquip"), and five other Potentially Responsible Parties ("PRPs") relative
to the San Fernando Valley Burbank Operable Unit ("BOU"), involving groundwater
contamination. (Reference is made to Part I, Item 3, of Aeroquip-Vickers' Annual
Report on Form 10-K for the year ended December 31, 1994.) The 106 Order
required the six PRPs to design and construct a water blending facility.
Aeroquip's portion of the cost was 18.33% based on a cost-sharing agreement
among the six PRPs, dated July 6, 1992. The final cost to Aeroquip for its share
was approximately $950,000.
Also related to the BOU, on May 15, 1994, USEPA issued to Lockheed Corporation
("Lockheed"), Aeroquip and other PRPs a Special Notice of Liability under CERCLA
for the remaining 18 years of operation and maintenance (O&M) costs associated
with the blending facility, as well as the groundwater treatment facility
constructed by Lockheed under its BOU Consent Decree with USEPA. The Special
Notice of Liability also covered USEPA's past response costs. On April 26, 1994,
Lockheed filed an action against Aeroquip and 105 other PRPs seeking
contribution toward costs Lockheed incurred to construct the BOU groundwater
treatment facility and related matters. In November 1995, a
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settlement agreement was entered into by Lockheed and most of the members of a
joint defense group (the "Joint Defense Group"), including Aeroquip, to resolve
this contribution action. The settlement agreement was to be effective upon the
satisfaction of certain conditions, including the payment of $16 million by the
Joint Defense Group and entry of a Second Consent Decree. Aeroquip's portion of
the settlement was approximately $104,000. This amount reflects a credit to
Aeroquip for its prior expenditures on the blending facility. The settlement was
also intended to resolve Aeroquip's potential liability for the interim remedy
at the Glendale Superfund site (see below); Aeroquip's potential liability for a
toxic tort suit (known as the "Fournier" matter) brought against Lockheed; and
the claims by other Joint Defense Group members against Aeroquip. The Second
Consent Decree has been entered by the court, substantially resolving Aeroquip's
alleged CERCLA liability at the BOU with respect to claims encompassed by the
Second Consent Decree and the settlement agreement with Lockheed. Aeroquip and
five other PRPs remain responsible for any future design defects in the blending
facility; the PRPs also have potential liability with respect to the reopener
provisions of the Second Consent Decree.
In December 1997, Aeroquip and over 50 other BOU PRPs were sued by over 2,800
plaintiffs in eight lawsuits pending in California state court (the "Abel
consolidated cases"). The plaintiffs allege that hazardous and toxic waste
dumped in the BOU leached into the groundwater and was released into the air
causing bodily injury and property damage to the plaintiffs who were, for the
most part, residents of the Burbank area. On May 15, 1998, the Abel consolidated
cases were stayed as to Aeroquip and most of the defendants, other than
Lockheed. Subsequent to imposition of the stay, plaintiffs agreed to settle with
Aeroquip and a group of 22 other defendants. Aeroquip's share of this settlement
is expected to be less than $100,000. If for some reason the settlement is not
concluded and plaintiffs were to pursue their claims against Aeroquip, then
Aeroquip intends to continue to deny any liability and vigorously defend itself
in the litigation.
As previously reported, on November 13, 1992, the USEPA, Region IX, issued a
General Notice of Liability letter to Aeroquip-Vickers' subsidiary Sterer
Engineering and Manufacturing Company ("Sterer"). On December 31, 1994, Sterer
was merged into Vickers, Incorporated ("Vickers"). (Reference is made to Part I,
Item 3, of Aeroquip-Vickers' Annual Report on Form 10-K for the year ended
December 31, 1994.) The letter notified Vickers of potential liability, as
defined by Section 107(a) of CERCLA, that it may incur with respect to the San
Fernando Valley Glendale South Operable Unit, involving groundwater
contamination. The USEPA issued its Record of Decision ("ROD") on June 18, 1993.
Twenty-seven PRPs (the "PRP Group"), including Vickers, entered into an
Administrative Order on Consent with the USEPA on March 21, 1994, to conduct the
Remedial Design ("RD") of the interim remedy. The remedial design is complete at
an approximate cost of $6 million. Vickers' portion of the RD costs was
approximately 2.95%, based on an interim allocation agreement among the PRPs.
On November 26, 1996, the USEPA issued a Unilateral Administrative Order under
Section 106 of CERCLA to all PRPs, including Vickers, to conduct the
pre-construction phase of the interim remedy. On September 30, 1997, USEPA
issued another administrative order directing the PRPs, including Vickers, to
carry out the interim remedial action work which includes construction and
operation and maintenance (over a 12-year period) of water treatment facilities
for the extraction and treatment of contaminated groundwater. The PRP Group is
now implementing the interim remedy. The PRP Group has entered into an agreement
to allocate the costs. Cost allocation between Lockheed and other PRPs was
determined by a technical arbitration panel, and that decision has been
confirmed by a California court. Lockheed has appealed the allocation decision,
but is participating in the funding of the interim remedy. In December 1997, a
final settlement agreement and mutual release was negotiated among the
intra-Glendale PRPs. The estimate for the cost of the interim remedy is a net
present value of $81 million. Vickers' share is 1.04% of the total interim
remedy work, assuming the allocation between Lockheed and the
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PRP group remains unchanged from the arbitration award. Vickers' allocated share
of the interim remedy-related costs is estimated to be in the range of $840,000
and $1.1 million.
As previously reported, on July 31, 1992, the Maine Department of Environmental
Protection issued an Administrative Enforcement Order to Aeroquip-Vickers and
its wholly owned subsidiaries, Aeroquip Corporation ("Aeroquip") and Sterling
Engineered Products Inc. ("Sterling"), as well as one other party, Pioneer
Plastics Corporation ("Pioneer Plastics"), (collectively the "respondents"),
pursuant to Title 38, section 1304(12) of the Maine Revised Statutes. (Reference
is made to Part I, Item 3, of Aeroquip-Vickers' Annual Report on Form 10-K for
the year ended December 31, 1994.) The Order, required the respondents to
conduct a complete Phase II environmental assessment of alleged soil and
groundwater contamination at a manufacturing site in Auburn, Maine, which was
formerly owned by Sterling and is now owned by Pioneer Plastics. The Order
further required the respondents to remediate any environmental contamination
identified in the Phase II assessment. On May 5, 1993, a Compliance Order on
Consent ("COC") was entered into by the State of Maine, Sterling and Pioneer
Plastics. The COC replaces and revokes the Order issued July 31, 1992. The COC
requires Sterling to conduct a site investigation and to develop and implement a
remedial work plan. Sterling was merged into Aeroquip Corporation effective
December 31, 1996. The cost to Aeroquip to conduct the COC site investigation,
develop the remedial work plan and complete a feasibility study (the
"Feasibility Study") is estimated to be approximately $2,000,000. Aeroquip's
remediation costs are undetermined at this time because the Feasibility Study
has not been completed.
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. On January 14,
1999, the U. S. Department of Justice notified Aeroquip and Aeroquip-Vickers
that it was willing to enter into settlement negotiations to resolve these
alleged civil violations by entry of a consent decree and payment of an
undetermined civil penalty.
The Fitzgerald facility, which employs approximately 50 people, manufactures
custom-engineered extruded plastic products. The plant, with 1998 sales of
approximately $7 million, is located on 12 acres of land, with the building
occupying approximately 80,000 square feet.
A Vickers motor pump, which is a component of the hydraulic systems provided by
Aerospatiale for Airbus Industries for use in the A330/340 aircraft, was
involved in two separate fires which occurred on aircraft during ground
maintenance and cargo unloading procedures. No personal injuries occurred, and
Aerospatiale and Airbus Industries indicate that steps have been taken to
prevent further incidents. The panel of experts which was appointed to
investigate and report on the cause of the fires, related technical issues and
damages has issued a draft final report to the parties and to the French court.
The report of the panel, when completed, will be of an advisory nature and is
not legally binding, but would serve as evidence of the facts in the event that
claims are subsequently made on the merits. In its draft final report, the panel
expresses its belief that the Aerospatiale/Airbus system design, the Air
Malaysia and Air Mauritius maintenance practices and the Vickers pump design
were all causes of the incidents. Vickers will have an opportunity to comment on
the draft final report and plans to present arguments to the panel in the near
future. The last meeting of the panel to discuss technical issues has been
scheduled for April 1999.
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No claims for recovery of damages have been made at this time. Evidence was
presented to the panel through which Airbus and Aerospatiale allege that the
property damage to the aircraft involved is in excess of $45 million. Based upon
the evidence presented supporting potential airline claims against Airbus, the
alleged cost of retrofitting other A330/340 aircraft cannot exceed $23 million.
Any property damage claims which might ultimately be brought against Vickers as
a result of the fires would be covered by Vickers' aviation insurance. Vickers
denies responsibility for any damages and will vigorously defend its position.
Because the draft final report indicates that all parties share responsibility
for the cause of the incidents, it is impossible for Vickers to determine at
this time what portion of any damages awarded in the event of claim would be
attributed to Vickers. The proceedings regarding determination of damages by the
expert panel will continue into June 1999.
Aeroquip-Vickers and certain subsidiaries are defendants in various lawsuits.
While the ultimate outcome of these lawsuits and the above matters cannot now be
predicted, management is of the opinion, based on the facts now known to it,
that the liability, if any, in these lawsuits (to the extent not provided for by
insurance or otherwise) and the above matters will not have a material adverse
effect upon Aeroquip-Vickers' consolidated financial position, results of
operations or cash flows.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
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ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
STOCK EXCHANGES - Aeroquip-Vickers' common stock is traded on the New York,
Chicago and Pacific Stock Exchanges, and on the London and Frankfurt Stock
Exchanges. Our NYSE ticker symbol is ANV.
QUARTERLY COMMON STOCK INFORMATION - The following table sets forth, for the
calendar quarter indicated, the high and low closing prices per Aeroquip-Vickers
common share as reported by the New York Stock Exchange:
<TABLE>
<CAPTION>
1998 1997
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Quarter Ended High Low High Low
<S> <C> <C> <C> <C>
March 31 $58.63 $44.94 $40.25 $33.50
June 30 72.25 55.88 48.38 33.00
September 30 60.00 28.75 57.50 47.88
December 31 38.50 22.81 55.81 47.31
</TABLE>
STOCK OWNERSHIP - On March 5, 1999, there were 8,305 record holders of
Aeroquip-Vickers' common stock. Although exact information is unavailable,
Aeroquip-Vickers estimates there are approximately 9,000 additional beneficial
owners, based upon the 1998 proxy solicitation.
DIVIDEND INFORMATION - Cash dividends have been paid without interruption on
common stock since 1933. The payment of dividends is subject to restrictions
described in Note 7 to the Company's financial statements on page 31 herein.
<TABLE>
<CAPTION>
DIVIDEND PAYMENTS PER SHARE OF COMMON STOCK
- -------------------------------------------
1998 1997
---- ----
<S> <C> <C>
March $ .22 $ .20
June .22 .20
September .22 .20
December .22 .20
------ ------
$ .88 $ .80
====== ======
</TABLE>
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ITEM 6. Selected Financial Data.
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<TABLE>
<CAPTION>
5-Year Summary of Selected Financial Data
Years Ended December 31 (1998-1994)
(Dollars in millions, except per share data)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $2,149.5 $2,112.3 $2,032.9 $1,884.0 $1,794.7
Income before cumulative
effect of accounting change 100.3 100.9a 102.7b 94.9 65.9
Net income 97.1 100.9 102.7 94.9 65.9
Income per share:
Basic:
Before cumulative
effect of accounting change 3.58 3.60 3.62 3.29 2.29
Net income 3.46 3.60 3.62 3.29 2.29
Diluted:
Before cumulative
effect of accounting change 3.56 3.51a 3.51b 3.20 2.26
Net income 3.44 3.51 3.51 3.20 2.26
Total assets 1,458.8 1,376.6 1,289.5 1,224.2 1,001.0
Long-term debt 278.3 256.7 257.7 302.4 234.9
Cash dividends per
common share .88 .80 .80 .72 .68
</TABLE>
(a) Includes a special charge of $30 million ($18.5 million net, or diluted net
income per share of $.63) to exit the Company's automotive interior
plastics business.
(b) Includes a combined net gain from sale of unconsolidated affiliates of $5
million (diluted net income per share of $.16) and a credit for settlement
of claims for prior years' research and development tax credits of $4
million (diluted net income per share of $.13).
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.
RESULTS OF OPERATIONS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," which was adopted in the 1998 fourth quarter. Statement
131 requires that segment financial information be reported on a basis
consistent with the Company's internal reporting used for evaluating segment
performance and allocating resources. Accordingly, in the 1998 fourth quarter,
the Company changed its business segments, which were previously based on
markets served, from Industrial, Automotive and Aerospace to Aeroquip and
Vickers. These segments reflect the way the Company is organized and managed and
how performance is measured. The Company evaluates performance and allocates
resources based on operating income before allocation of corporate costs.
Corporate costs represent the total of corporate headquarters costs. Although
Aeroquip and Vickers serve many of the same customers and markets, they are
managed separately because of significantly different product technologies and
manufacturing processes and the differing dynamics required to serve their
customers. The discussion of prior years' operations has been restated to
conform to the current year presentation. In order to provide additional
information to better understand the Company's operations, separate tables
showing sales and operating income by markets served are also included in this
discussion. Each market served has distinct characteristics, including differing
economic cycles, geographic potential, product life cycles and nature of
competition.
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1998 COMPARED WITH 1997
The following data provide highlights for the year 1998 compared with the year
1997.
<TABLE>
<CAPTION>
(dollars in thousands, YEAR ENDED DECEMBER 31 Percent
except per share data) ---------------------------- Increase
1998 1997 (Decrease)
-------- ---------- ----------
<S> <C> <C> <C>
CONSOLIDATED
Net sales $2,149,474 $2,112,293 1.8%
Manufacturing income 529,569 557,625 (5.0)
Manufacturing margin 24.6% 26.4%
Operating income 186,380 191,640 (a) (2.7)
Operating margin 8.7% 9.1%(a)
Income before cumulative effect
of accounting change 100,337 100,853 (a) (.5)
Net income 97,054 100,853 (a) (3.8)
Diluted income per share
before cumulative effect of
accounting change 3.56 3.51 (a) 1.4
Diluted net income per share 3.44 3.51 (a) (2.0)
AEROQUIP
Net sales 1,071,608 1,065,188 .6
Operating income 124,295 89,458 (a) 38.9
Operating margin 11.6% 8.4%(a)
VICKERS
Net sales 1,077,866 1,047,105 2.9
Operating income 90,407 132,599 (31.8)
Operating margin 8.4% 12.7%
</TABLE>
(a) After deducting a special charge of $30 million, or $18.5 million net
(diluted net income per share of $.63).
Consolidated net sales in 1998 of $2.15 billion were $37.2 million, or 1.8%,
higher than in 1997. Sales for the Aeroquip and Vickers segments were .6% and
2.9% higher than in the prior year, respectively. U.S. sales were $37.9 million,
or 2.8%, higher in 1998, while non-U.S. sales declined nearly $1 million. Sales
generated by companies acquired in 1998 amounted to $31.7 million, and were
principally outside the U.S., while sales for 1997 included $67 million from
facilities that were sold or closed during 1997. Changes in currency exchange
rates reduced non-U.S. sales, principally in the Asia-Pacific region, by nearly
$17 million.
Aeroquip's sales for 1998 increased $6.4 million, or .6%, over 1997 to $1.07
billion. Aeroquip's sales in industrial markets increased 2.6% in 1998, with
higher sales in the U.S. partially offset by declines in Europe and the
Asia-Pacific region. Sales of U.S. mobile and stationary equipment, truck and
bus, and residential air conditioning products improved over the prior year, but
sales declined in most industrial markets served outside the U.S., except
residential air conditioning and commercial refrigeration. Aeroquip acquired a
small business in Italy during the 1998 second quarter that supplies components
to European residential air conditioning and commercial refrigeration markets.
Changes in currency exchange rates reduced Aeroquip's 1998 sales in industrial
markets in Europe, Brazil and the Asia-Pacific region by nearly $5 million.
Aeroquip's sales in automotive markets in 1998 declined $26.3 million, or 5.8%,
from 1997 sales. During 1997, Aeroquip sold or closed eight facilities that had
combined sales in 1997 of approximately $67 million. After adjusting to exclude
sales originating from those facilities, Aeroquip's sales in U.S. automotive
markets were nearly the same as in 1997, and sales in non-U.S. automotive
markets were nearly 16% greater than in 1997. This growth in non-U.S. automotive
sales included results from a company acquired during 1998. Aeroquip's sales in
aerospace markets increased nearly 14% over 1997. Sales to commercial and
military OEM and commercial aftermarket customers increased in 1998, but sales
in the military aftermarket declined.
-11-
<PAGE> 12
Vickers' sales for 1998 increased $30.8 million, or 2.9%, over 1997 to $1.08
billion. Vickers' sales in industrial markets declined 1% from 1997, as sharply
higher sales in European markets were negated by declines in the U.S., Brazil
and the Asia-Pacific region. Changes in currency exchange rates contributed to
the decline in non-U.S. sales, most notably in the Asia-Pacific region.
Fourth-quarter sales in all major U.S. industrial markets declined from 1997,
particularly for agricultural and electronic machine control products, and led
to full year declines in sales for U.S. stationary equipment and electronic
machine control products. However, Vickers' sales for the year for U.S.
agricultural, mobile equipment, and truck and bus products showed improvement
over 1997. Vickers sales in aerospace markets, particularly in the U.S.,
increased substantially during 1998, leading to an overall increase of nearly
11.5% over the prior year. 1998 sales reflected strong increases over the prior
year in sales to commercial OEM and aftermarket customers, and to military OEMs.
Sales for military aftermarket applications declined approximately 5% from
1997's sales.
Consolidated manufacturing income fell $28.1 million, or 5%, from 1997.
Manufacturing margin likewise declined from 26.4% to 24.6%. Manufacturing income
for the Aeroquip segment improved over 1997, with a modest improvement in
manufacturing margin. Both manufacturing income and margin for Aeroquip's
industrial and aerospace products improved over 1997, and manufacturing margin
for its automotive products also improved, but manufacturing income declined.
Manufacturing income and margin for the Vickers segment declined significantly
from 1997. A number of factors contributed to the decline in manufacturing
income and margin for Vickers' industrial products, including the severe
economic downturn in the Asia-Pacific region and the sharp decline in new
orders, particularly during the last half of the year in the U.S. Manufacturing
income for Vickers' operations in the Asia-Pacific region was $12.9 million
lower in 1998 than in 1997. Losses associated with a new pump manufacturing
facility in the U.S. amounted to $7.9 million, and incurred severance and
related work force reduction costs charged to cost of products sold in the last
quarter of the year amounted to $1.7 million. Manufacturing income for Vickers'
aerospace products increased nearly 4% over 1997.
Operating income in 1998 amounting to $186.4 million was $5.3 million, or 2.7%,
lower than in 1997. Before a special charge of $30 million in 1997 to dispose of
Aeroquip's interior plastics facilities, as more fully discussed later,
operating income declined $35.3 million, or nearly 16%, from 1997. Before the
special charge, operating income in 1998 for the Aeroquip segment was $4.8
million, or 4%, higher than in 1997, but operating income for Vickers declined
$42.2 million, or 31.8%, from 1997. Operating income includes selling and
general administrative and engineering, research and development expenses
(SGA&E) that were $7.2 million, or 2.1%, higher than in 1997. SGA&E costs
associated with companies acquired in 1998 amounted to $5.6 million. In
addition, higher costs amounting to nearly $1 million in the Asia-Pacific region
during the first half of the year, and incurred severance and related work force
reduction costs totaling $1.2 million in the last quarter of the year
contributed to higher SGA&E costs in 1998. These higher SGA&E costs were
partially offset by cost reductions totaling $3 million resulting from
disposition of the interior plastics business.
-12-
<PAGE> 13
The following tables provide net sales and operating income for the year 1998
compared with the year 1997 by markets served.
<TABLE>
<CAPTION>
(dollars in thousands) YEAR ENDED DECEMBER 31 Percent
---------------------------- Increase
1998 1997 (DECREASE)
---- ---- ----------
<S> <C> <C> <C>
Net sales
Industrial $1,174,157 $1,170,192 .3%
Automotive 427,792 454,096 (5.8)
Aerospace 547,525 488,005 12.2
---------- ----------
Consolidated net sales $2,149,474 $2,112,293 1.8
========== ==========
Operating income
Industrial $ 68,707 $ 110,697 (37.9)
Automotive 47,009 20,007 (a) 135.0
Aerospace 98,986 91,353 8.4
Unallocated corporate (28,322) (30,417) 6.9
---------- ----------
Consolidated operating income $ 186,380 $ 191,640 (a) (2.7)
========== ==========
</TABLE>
(a) After deducting a special charge of $30 million.
The Company's combined sales in industrial markets increased $4 million, or .3%,
over 1997. Despite the decline in sales and orders from agricultural customers
that began in the third quarter and accelerated in the fourth quarter, full-year
1998 sales in U.S. industrial markets increased 1.8% over 1997, as U.S. sales
for the year to agricultural, residential air conditioning, mobile equipment,
and truck and bus customers improved over 1997. Higher sales in those markets
were partially offset by declines in sales of stationary industrial machinery
and electronic machine control products. Sales in European industrial markets
increased 7% over 1997, with particular strength in sales of residential air
conditioning and commercial refrigeration, and electronic machine control
products. Sales of industrial products in the Asia-Pacific region and Brazil
were 25% and 11.5% lower than in 1997, respectively, with a significant portion
of the sales decline in both regions due to changes in currency exchange rates.
Sales in automotive markets in 1998 declined 5.8% from 1997. During 1997,
Aeroquip sold or closed eight facilities that had combined sales in 1997 of
approximately $67 million. After adjusting to exclude sales originating from
those facilities, sales in U.S. automotive markets were nearly the same as in
1997, and sales in non-U.S. automotive markets were nearly 16% greater than in
1997. Sales of aerospace products increased more than 12% over the prior year.
In both the U.S. and Europe, the Company recognized increases in sales in all
aerospace markets served except the military aftermarket, which declined
approximately 6%.
Operating income for industrial declined $42 million, or 37.9%, from 1997. This
significant reduction in operating income was attributable to a number of
factors. Because of the severe economic downturn in the Asia-Pacific region,
operating income for the industrial operations of Aeroquip and Vickers in that
region was $14.7 million lower than in 1997. Operating losses, including SGA&E
expenses, associated with a new pump manufacturing facility amounted to $9.3
million in 1998 and incurred severance and related work force reduction costs in
the 1998 fourth quarter amounted to $4.5 million. In addition, the sharp decline
in new orders in the U.S. for the Vickers segment, particularly during the last
half of 1998, adversely affected industrial's operating income for 1998. Before
deducting the special charge of $30 million in 1997 to dispose of Aeroquip's
interior plastics facilities, operating income for automotive declined $3
million, or 6%, from the prior year. Relocation of certain manufacturing
operations and related costs for new facilities in the U.S. during 1998
contributed to lower automotive earnings. Operating income for aerospace
increased $7.6 million, or 8.4%, over 1997, principally due to the
year-over-year increase in sales volume.
-13-
<PAGE> 14
Charges to Other income (expense) - net were $4.5 million lower in 1998 than in
1997, primarily because exchange losses were $4.3 million lower in 1998. The
loss from redemption of the Company's 9.55% senior sinking fund debentures in
1998 in the amount of $2.5 million and the loss from redemption of the Company's
6% convertible subordinated debentures in 1997 in the amount of $1.5 million
were recorded in Other income (expense) -net.
The Company adopted the American Institute of Certified Public Accountants'
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," in
1998 and recognized the cumulative effect of an accounting change of $4.8
million ($3.3 million after tax, or $.12 per share) to charge to income start-up
costs for new facilities that had previously been deferred. Income before
cumulative effect of accounting change in 1998 amounted to $100.3 million, or
basic and diluted income per share of $3.58 and $3.56, respectively. These
amounts compare with net income in 1997 of $100.9 million, or basic and diluted
net income per share of $3.60 and $3.51, respectively. 1997 net income and net
income per share included the special charge to exit Aeroquip's automotive
interior plastics business amounting to $18.5 million net, or basic and diluted
net income per share of $.66 and $.63, respectively. The effective income tax
rate for 1998 before cumulative effect of accounting change was 32% and compares
with 33% for 1997 exclusive of the special charge. The income tax provision
included the benefit of utilization of operating loss carryforwards for which
valuation allowances had previously been provided amounting to $1.2 million and
$1.8 million in 1998 and 1997, respectively. Valuation allowances have been
provided for deferred tax assets relating to deductible temporary differences
and non-U.S. operating loss and foreign tax credit carryforwards where evidence
did not exist to indicate that it was more likely than not that the associated
deferred tax assets would be realized. Valuation allowances have generally been
provided where future taxable earnings are not predictable and other tax
planning strategies are not available.
1997 COMPARED WITH 1996
The following data provide highlights for the year 1997 compared with the year
1996.
<TABLE>
<CAPTION>
(dollars in thousands, YEAR ENDED DECEMBER 31 Percent
except per share data) ---------------------------- Increase
1997 1996 (DECREASE)
---------- ---------- ----------
<S> <C> <C> <C>
CONSOLIDATED
Net sales $2,112,293 $2,032,915 3.9%
Manufacturing income 557,625 512,179 8.9
Manufacturing margin 26.4% 25.2%
Operating income 191,640 (a) 176,575 8.5
Operating margin 9.1% (a) 8.7%
Net income 100,853 (a) 102,721 (b) (1.8)
Diluted net income per share 3.51 (a) 3.51 (b)
AEROQUIP
Net sales 1,065,188 1,099,914 (3.2)
Operating income 89,458 (a) 96,184 (7.0)
Operating margin 8.4% (a) 8.7%
VICKERS
Net sales 1,047,105 933,001 12.2
Operating income 132,599 110,571 19.9
Operating margin 12.7% 11.9%
</TABLE>
(a) After deducting a special charge of $30 million, or $18.5 million net
(diluted net income per share of $.63).
(b) Includes a net gain from sales of investments in affiliates amounting to
$17.3 million, or $5 million net (diluted net income per share of $.16) and
an income tax credit of $4 million (diluted net income per share of $.13).
-14-
<PAGE> 15
Consolidated net sales in 1997 of $2.11 billion were $79.4 million, or 3.9%,
greater than in 1996. Sales for the Aeroquip segment declined 3.2%, but sales
for the Vickers segment increased 12.2%. The sales decline for Aeroquip was due
to the sale or closure of certain interior automotive plastics plants. Sales for
these facilities that were sold or closed in 1997 were $67 million in 1997 and
$132 million in 1996. Exclusive of sales in both years for the divestitures,
consolidated net sales would have increased 7.6%. The divestitures are discussed
more specifically later. Companies acquired in 1996 generated 1997 sales
totaling approximately $41.9 million for the Vickers segment during the 1997
period for which there were no comparable 1996 sales. Including the results of
acquisitions, U.S. sales increased $64.5 million, or 5%, and non-U.S. sales
increased $14.9 million, or 2%. Changes in currency exchange rates reduced
non-U.S. sales, principally in the Aeroquip segment, by more than $44 million.
Aeroquip's sales for 1997 declined $34.7 million, or 3.2%, from 1996 to $1.07
billion. Aeroquip's sales in industrial markets were nearly the same as in 1996
as somewhat stronger sales in the U.S. and Brazil were offset by declines in
Europe. U.S. sales in mobile equipment and truck and bus markets remained
strong, but sales of residential air conditioning components were down in 1997
due to unseasonably cool spring and summer temperatures and high levels of
inventory at OEMs. Sales in European industrial markets declined primarily
because of the effects of currency exchange rate changes. Aeroquip's sales in
automotive markets declined nearly 10% from 1996 levels. As part of its strategy
to focus on fluid connectors in its automotive business, Aeroquip sold or closed
eight facilities during 1997 that had combined sales of approximately $67
million in 1997 and $132 million in 1996. Exclusive of the effects of these
divestitures, Aeroquip's sales in automotive markets increased approximately 4%.
This sales growth was recognized principally in European markets and was after
the significant effects of changes in currency exchange rates that lowered
Aeroquip's European automotive sales by nearly $28 million. Aeroquip's sales in
aerospace markets increased more than 10% over 1996. 1997 sales reflected
increases over 1996 in sales to commercial OEM and aftermarket customers and to
the military aftermarket, but sales for military original equipment applications
declined from the 1996 level.
Vickers' sales for 1997 increased $114.1 million, or 12.2%, over 1996 to $1.05
billion. Vickers' sales in industrial markets increased 4.6% over 1996. Sales in
industrial markets increased 5% in the U.S., 9% in Brazil and 18.7% in the
Asia-Pacific region, but declined nearly 3% in Europe. Industrial mobile
equipment and stationary industrial machinery product sales improved, although
sales were hindered by capacity constraints and delivery performance at a major
pump manufacturing facility. Vickers' sales in aerospace markets increased
substantially in both the U.S. and Europe, resulting in an overall increase of
nearly 33% over the prior year. 1997 sales reflected strong increases over 1996
in sales to commercial OEM and aftermarket customers and to the military
aftermarket. Sales for military original equipment applications declined from
the 1996 level.
Consolidated manufacturing income increased $45.4 million, or 8.9%, over 1996.
Manufacturing margin improved from 25.2% in 1996 to 26.4% in 1997. Manufacturing
income and margin for the Aeroquip segment improved in 1997. Although
manufacturing margin remained nearly the same in 1997 as in the prior year for
Aeroquip's industrial and aerospace products, manufacturing income increased.
Moreover, manufacturing income and margin for Aeroquip's automotive products
improved significantly over the prior year, reflecting the positive effects of
the divestiture of the automotive interior plastics facilities. Manufacturing
income for the Vickers segment improved over the prior year, but with a small
decline in manufacturing margin. Manufacturing income and margin for Vickers'
industrial products declined, principally due to manufacturing performance
issues at a major pump manufacturing facility where manufacturing income was
$15.1 million lower than in the prior year. Manufacturing income for Vickers'
aerospace products increased significantly, primarily due to the substantial
increase in sales volume.
The Aeroquip segment recorded a special charge of $30 million in the 1997 first
quarter to exit its automotive interior plastics business. The special charge
included a provision for severance payments of $6.3 million to terminate
approximately 1,500 salaried and hourly employees, principally in
-15-
<PAGE> 16
Germany. The special charge also included lease termination costs amounting to
$6.9 million; asset disposition costs, including environmental costs, amounting
to $9.6 million; litigation costs amounting to $3 million; and other costs
amounting to $4.2 million. The planned actions to which this special charge
related were substantially completed during 1997, and as of December 31, 1998,
all costs had been incurred.
Operating income for 1997 increased $15.1 million, or 8.5%, over 1996 to $191.6
million. Operating income in 1997 for Aeroquip was $6.7 million, or 7%, lower
than in 1996 because of the special charge amounting to $30 million that was
discussed above. Before the special charge, Aeroquip's operating income was
$23.3 million, or 24.2%, higher than in 1996. Operating income for Vickers
increased $22 million, or 19.9%. Operating income includes selling and general
administrative and engineering, research and development expenses (SGA&E) that
were nearly the same in 1997 as in 1996, but as a percent of sales were 15.9% in
1997 compared with 16.5% in 1996. SGA&E costs for Vickers' European operations
were substantially lower than in 1997 as a result of organizational realignments
and continuing process improvements. Such costs, however, were higher in
Asia-Pacific due to the expansion of operations in the region and were also
higher in the U.S. due to higher levels of business activity. The disposition of
its automotive interior plastics business also served to reduce Aeroquip's SGA&E
costs in 1997.
The following tables provide net sales and operating income for the year 1997
compared with the year 1996 according to markets served.
<TABLE>
<CAPTION>
(dollars in thousands, YEAR ENDED DECEMBER 31 Percent
except per share data) ---------------------------- Increase
1997 1996 (DECREASE)
---------- ---------- ----------
<S> <C> <C> <C>
Net sales
Industrial $1,170,192 $1,138,501 2.8%
Automotive 454,096 503,781 (9.9)
Aerospace 488,005 390,633 24.9
---------- ----------
Consolidated net sales $2,112,293 $2,032,915 3.9
========== ==========
Operating income
Industrial $ 110,697 $ 109,462 1.1
Automotive 20,007 (a) 36,352 (45.0)
Aerospace 91,353 60,941 49.9
Unallocated corporate (30,417) (30,180) (.8)
---------- ----------
Consolidated operating income $ 191,640 (a) $ 176,575 8.5
========== ==========
</TABLE>
(a) After deducting a special charge of $30 million.
The Company's combined sales for Aeroquip and Vickers in industrial markets
increased $31.7 million, or 2.8%, over 1996. Sales in U.S. industrial markets
increased 4.1% over 1996, as U.S. sales to mobile equipment, truck and bus, and
stationary industrial machinery customers remained strong. Sales of residential
air conditioning components were down in 1997 due to unseasonably cool spring
and summer temperatures and high levels of inventory at OEMs. Sales in European
industrial markets declined 6.3% from 1996, principally the result of the
effects of currency exchange rate changes. Sales of industrial products in
Asia-Pacific and Brazil collectively increased 15% over 1996. Sales in
automotive markets declined nearly 10% from 1996. As part of its strategy to
focus on fluid connectors in its automotive business, Aeroquip sold or closed
eight facilities during 1997 that had combined sales of approximately $67
million in 1997 and $132 million in 1996. Exclusive of the effects of these
divestitures, sales of automotive products increased approximately 4%. This
sales growth was recognized principally in European markets and was after the
significant effects of changes in currency exchange rates that lowered
Aeroquip's European automotive sales by nearly $28 million. Sales in aerospace
markets increased nearly 25% over 1996, reflecting strong increases in sales to
commercial OEM and aftermarket customers and to the
-16-
<PAGE> 17
military aftermarket. Sales for military original equipment applications
declined from the 1996 level.
Operating income for industrial increased $1.2 million, or 1.1%. A small decline
in manufacturing income for industrial was more than offset by reductions in
selling and general administrative and engineering, research and development
expenses due to organizational realignments and process improvements. Operating
income for automotive declined $16.3 million, or 45%, due to the special charge
of $30 million discussed earlier. Before considering the special charge,
operating income for automotive increased $13.7 million, reflecting the positive
effects of the divestiture and higher fluid connector sales in Europe. Operating
income for aerospace improved $30.4 million, or 49.9%, over that of the prior
year, principally due to the substantial increase in sales volume.
Interest expense for 1997 was $1.4 million higher than in 1996. The increase was
primarily attributable to a higher interest rate on long-term debt that was
issued in 1996. Other income (expense) - net for 1996 included a gain of $17.3
million resulting from the sales of investments in unconsolidated affiliates.
Net income for 1997 amounted to $100.9 million. Basic and diluted net income per
share was $3.60 and $3.51, respectively. 1997 net income and net income per
share included the special charge to exit Aeroquip's automotive interior
plastics business amounting to $18.5 million net, or basic and diluted net
income per share of $.66 and $.63, respectively. These amounts compare with 1996
net income of $102.7 million and basic and diluted net income per share of $3.62
and $3.51, respectively. Net income for 1996 included a net gain of $5 million
(basic and diluted net income per share of $.18 and $.16, respectively) from the
sale of unconsolidated affiliates and a credit for settlement of claims for
prior years' research and development tax credits of $4 million (basic and
diluted net income per share of $.14 and $.13, respectively). The income tax
provision for 1997 included a credit of $11.5 million related to the special
charge to exit Aeroquip's automotive interior plastics business. Exclusive of
this item, the effective income tax rate for 1997 was 33% and compares with the
1996 effective income tax rate of 31.1% before special items. The income tax
provision included the benefit of utilization of operating loss carryforwards
for which valuation allowances had previously been provided amounting to $1.8
million and $3.7 million in 1997 and 1996, respectively. Valuation allowances
have been provided for deferred tax assets relating to deductible temporary
differences and non-U.S. operating loss carryforwards where evidence did not
exist to indicate that it was more likely than not that the associated deferred
tax assets would be realized. Valuation allowances have generally been provided
where future taxable earnings are not predictable and other tax planning
strategies are not available.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities in 1998 amounted to $177.5 million,
compared with $137.7 million in 1997. Working capital requirements in 1998
included $21.9 million to reduce payables and accruals. These cash requirements
were partially offset by the effects of reductions to receivables and
inventories.
Capital expenditures during 1998 totaled $142.2 million compared with $139.8
million in 1997. In addition, the Company spent $30.7 million during 1998 to
acquire two companies in the Aeroquip segment and four companies in the Vickers
segment. In 1997, the Company received $43.4 million from the sales of its
automotive interior plastics facilities. Quarterly dividend payments were $.22
per share in 1998, or $.88 per share for the year. In January 1999, the
Company's Board of Directors approved a first-quarter 1999 dividend of $.22.
During 1998, the Company purchased 657,500 shares of its common stock at a cost
of $23.2 million. At December 31, 1998, $57.8 million of additional common stock
was available for purchase under the current Board of Directors authorization.
-17-
<PAGE> 18
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 December 31, 1998, under provisions of a current shelf registration
statement for the Medium Term Note program, was $185 million. The Company also
maintains a revolving credit agreement with a consortium of U.S. and non-U.S.
banks expiring in 2001 under which the Company may borrow up to $175 million.
The agreement is intended to support the Company's commercial paper borrowings
and, to the extent not so utilized, provide domestic borrowing capacity. The
remaining borrowing capacity under this agreement at December 31, 1998, was $120
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.
At December 31, 1998, the Company had forward exchange contracts outstanding
with notional and carrying amounts of $14.3 million and $121,000, respectively,
and option contracts maturing at various dates through November 1999, with
notional and carrying amounts of $28 million and $204,000, respectively. At
December 31, 1997, the Company had forward exchange contracts outstanding with
notional and carrying amounts of $12.8 million and $227,000, respectively, and
option contracts that matured at various dates through December 1998, with
notional and carrying amounts of $61.6 million and $600,000, respectively. The
effect of the Company's hedging activities on net income was not significant in
1998 or 1997.
CONTINGENCIES
The Company or certain of its subsidiaries have been named parties to various
lawsuits, claims and proceedings including being named potentially responsible
parties (PRP) for site investigation and cleanup costs under the Comprehensive
Environmental Response, Compensation, and Liability Act (superfund) or similar
regulations with respect to certain sites, as well as other product liability,
tort and contract claims and lawsuits which have arisen in the ordinary course
of the Company's business. While the ultimate outcome of the various lawsuits,
claims and proceedings, including PRP designations and other environmental
matters, cannot now be predicted, the Company believes that costs, in excess of
amounts provided or covered by insurance as it relates to litigation, arising
out of these matters, will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
YEAR 2000
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-related deficiencies. Each operating unit of the Company
is now engaged in the remediation and testing of its information systems for
Year 2000 compliance.
A Year 2000 steering committee was 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 was also
established as an adjunct to the steering committee to facilitate Year 2000
communications and coordinate Year 2000 efforts among the Company's operating
units.
During the 1998 third quarter, the Company engaged an independent consultant to
conduct a review of the Year 2000 program office and gauge operating unit
progress to date on Year 2000-related issues. The independent consultant
-18-
<PAGE> 19
reported to the Company's senior management and Board of Directors that the Year
2000 program office management is sound and that the Company is managing Year
2000 projects according to plan.
The Company commenced testing of its mission-critical systems for Year 2000
compliance in the 1998 fourth quarter. This testing is being performed on an
"end-to-end" basis to assure that every major technology platform used by the
Company properly supports all business processes associated with acceptance of
orders, manufacture of product, shipment of product, and collection of payment.
Additionally, all supporting accounting and financial reporting systems are
being tested. The independent consultant is providing oversight and guidance
during the testing process. Following the successful conclusion of the Year 2000
compliance testing, the Year 2000 program office and the independent consultant
will report the test results to the Company's senior management and the Board of
Directors. Year 2000 compliance testing is expected to conclude in the 1999
third quarter.
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. All remediation efforts and audits for
the embedded systems are targeted to be completed in the 1999 third quarter. The
Company has recently concluded testing of its microprocessor- based product line
and has certified its Year 2000 compliance to the customer base.
In order to assure continuous flow of products to end customers, the Company has
surveyed and is now assessing Year 2000 readiness on the part of the Company's
supply chain. The majority of suppliers responding to the Company's initial
survey indicated that they were in the process of implementing their own Year
2000 compliance programs. As a result of the preliminary nature of the initial
survey results, the Company is planning a supplemental survey and plans to
conduct on-site assessments of its critical suppliers. Based upon the outcome of
the Company's final assessment of its external supply chain components, any
business process or systems contingency plan will be developed and implemented
accordingly.
The Company is responding to Year 2000 inquiries from customers and financial
institutions. The Company will conduct on-site assessments of selected
independent distributors during the first half of 1999. Major OEM customers and
industry groups are conducting Year 2000 on-site assessments. To date, all
on-site assessments conducted by OEM customers or their designees have rated the
assessed Aeroquip-Vickers facilities as "low risk" relative to Year 2000
compliance. On-site OEM customer assessments are expected to continue into mid
1999.
From a cost perspective, the Company has budgeted the necessary funds to address
Year 2000-related projects. The Company estimates that its historical and
estimated costs of Year 2000 remediation will amount to approximately $17
million. This estimate includes costs directly related to fixing Year 2000
issues, costs associated with the accelerated replacement of non-compliant
systems, and costs associated with compensation of internal employees who are
assigned to work exclusively on Year 2000 projects.
The Company anticipates that its mission-critical systems will be Year 2000
compliant by the end of the 1999 third quarter. Failure to reach this
anticipated goal, however, could have a material effect on the Company's
business, results of operations or financial condition. 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 chain or the ability of its
customers to achieve Year 2000 compliance by the end of 1999 or the impact of
either on the future operating results of the Company.
-19-
<PAGE> 20
SUBSEQUENT EVENT
During the 1998 third quarter, the Industrial & Mobile business of Vickers (I&M)
began to experience a significant reduction in demand for its products in
certain industries as well as unfavorable sales mix in the products it did sell.
These developments were described in a press release issued on September 16,
1998, wherein the Company stated that it had lowered its expectations for the
1998 third quarter due to a number of factors, including the decline in higher
margin distributor business in North America, the continued economic turmoil in
the Asia-Pacific region, start-up costs for the new Greenwood, South Carolina,
pump facility and the negative effect of changes in currency exchange rates.
Aeroquip-Vickers management initiated a review of I&M in an effort to better
understand the industry dynamics affecting the business. Following this review,
Aeroquip-Vickers' management concluded that I&M faced a number of operational
challenges, including certain management issues, that would require substantial
time and resources to properly address. As a consequence of this review,
Aeroquip-Vickers' management began to consider various alternatives including a
restructuring, a sale or other disposition of I&M.
In late October 1998, the Company contacted a representative of Eaton
Corporation (Eaton) to explore acquisition of I&M by Eaton or a business
combination with Eaton involving I&M. Over a period of time, Eaton's interest
broadened to pursue acquisition of Aeroquip-Vickers in its entirety and,
following lengthy negotiations involving numerous meetings, on February 1, 1999,
Eaton and Aeroquip-Vickers announced that the companies had entered into an
"Agreement and Plan of Merger" whereby Eaton would acquire all of the
outstanding shares of Aeroquip-Vickers for $58 per share in cash. The Boards of
Directors of both companies have approved the transaction, which is subject to
normal closing conditions and the approval of Aeroquip-Vickers shareholders at a
special shareholders' meeting on April 8, 1999. The transaction is expected to
be completed in April 1999.
* * * * * * *
Portions of this narrative, which are not historical in nature, are
forward-looking statements. The forward-looking statements made in this
narrative, as well as all other forward-looking statements or information
provided by the Company or its officers and employees, whether written or oral,
are made in reliance upon the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements of the Company are
based on, among other things, the performance of the U.S. and international
economies and the industrial, aerospace and automotive markets in which
Aeroquip-Vickers does business. These statements should be considered in light
of risks and uncertainties and other factors which may affect the Company's
actual performance including its ability to continually improve margins by
achieving anticipated cost reductions in manufacturing processes, to
consistently win new business in each of its industries by delivering quality
products and maintaining competitive pricing, and to successfully implement its
growth strategies.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
- -------
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, and 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 exposed to market risks relating to fluctuations in interest
rates and currency exchange rates. The Company utilizes a mix of fixed- and
floating-rate debt to finance its investments and on going operations. The
Company also enters into forward exchange and option contracts to manage its
exposures to changes in currency exchange rates. In accordance with its
-20-
<PAGE> 21
established policies, the Company enters into forward exchange contracts to
hedge certain of its firm commitments, including foreign currency denominated
receivables and payables, and enters into option contracts to hedge certain of
its projected foreign currency sales and purchases. Forward exchange and option
contracts are entered into with major commercial banks with high credit ratings.
Forward exchange and option contracts are not entered into or held for trading
or speculative purposes, and the Company is not a party to any leveraged
derivatives. The terms of these contracts are generally one year or less. The
Company's potential loss from a hypothetical 10% adverse change in interest
rates and currency exchange rates as it relates to financial instruments would
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows. See Notes 1 and 11 of Notes to
Financial Statements for further discussion of the Company's accounting policies
for and fair values of financial instruments.
ITEM 8. Financial Statements and Supplementary Data.
- ------
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Shareholders and Board of Directors
Aeroquip-Vickers, Inc.
We have audited the accompanying statement of financial position of
Aeroquip-Vickers, Inc. and subsidiaries at December 31, 1998 and 1997 and the
related statements of income, shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1998. Our audits also included
the financial statement schedule listed at Item 14(a)(2). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Aeroquip-Vickers,
Inc. and subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 1 of Notes to Financial Statements, the Company changed its
method of accounting for start-up activities in 1998.
/s/ ERNST & YOUNG LLP
Toledo, Ohio
January 27, 1999
-21-
<PAGE> 22
<TABLE>
<CAPTION>
STATEMENT OF INCOME
Years ended December 31, 1998, 1997 and 1996
(In thousands, except per share data)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales $2,149,474 $2,112,293 $2,032,915
Cost of products sold 1,619,905 1,554,668 1,520,736
---------- ---------- ----------
MANUFACTURING INCOME 529,569 557,625 512,179
Selling and general administrative
expenses 271,718 263,824 260,712
Engineering, research and development
expenses 71,471 72,161 74,892
Special charge -- 30,000 --
---------- ---------- ----------
OPERATING INCOME 186,380 191,640 176,575
Interest expense (27,013) (27,171) (25,813)
Other income (expense) - net (11,830) (16,316) 2,659
---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 147,537 148,153 153,421
Income taxes 47,200 47,300 50,700
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 100,337 100,853 102,721
Cumulative effect of accounting change,
net of income tax benefit of $1,549 (3,283) -- --
---------- ---------- ----------
NET INCOME $ 97,054 $ 100,853 $ 102,721
========== ========== ==========
BASIC INCOME PER SHARE
Before cumulative effect of
accounting change $ 3.58 $ 3.60 $ 3.62
Cumulative effect of accounting
change (.12) -- --
---------- ---------- ----------
Basic net income per share $ 3.46 $ 3.60 $ 3.62
========== ========== ==========
DILUTED INCOME PER SHARE
Before cumulative effect of
accounting change $ 3.56 $ 3.51 $ 3.51
Cumulative effect of accounting
change (.12) -- --
---------- ---------- ----------
Diluted net income per share $ 3.44 $ 3.51 $ 3.51
========== ========== ==========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
-22-
<PAGE> 23
<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL POSITION
December 31, 1998 and 1997
(Dollars in thousands, except per share data)
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 17,310 $ 18,736
Receivables 341,825 348,822
Inventories 302,236 294,767
Other current assets 52,146 49,323
----------- -----------
TOTAL CURRENT ASSETS 713,517 711,648
Plants and properties 1,119,557 993,002
Less accumulated depreciation 571,340 518,860
----------- -----------
548,217 474,142
Other assets 197,067 190,806
----------- -----------
TOTAL ASSETS $ 1,458,801 $ 1,376,596
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 101,829 $ 84,044
Accounts payable 113,698 111,800
Income taxes 27,167 30,496
Other accrued liabilities 197,726 212,800
Current maturities of long-term debt 1,035 1,857
----------- -----------
TOTAL CURRENT LIABILITIES 441,455 440,997
Long-term debt 278,343 256,707
Postretirement benefits other than pensions 121,715 122,272
Other liabilities 48,469 46,421
SHAREHOLDERS' EQUITY
Common stock - par value $5 a share
Authorized - 100,000,000 shares
Outstanding - 27,600,520 and
28,064,981 shares, respectively
(after deducting 6,680,326 and
6,215,865 shares, respectively, in treasury) 138,003 140,325
Additional paid-in capital 47,841 41,288
Retained earnings 419,178 366,676
Accumulated other comprehensive income (loss) -
currency translation adjustments (36,203) (38,090)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 568,819 510,199
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,458,801 $ 1,376,596
=========== ===========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
-23-
<PAGE> 24
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
(In thousands)
1998 1997 1996
-------- -------- --------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 97,054 $ 100,853 $ 102,721
Adjustments to reconcile net income
to net cash provided by operating activities:
Cumulative effect of accounting change,
net of income tax benefit 3,283 -- --
Special charge -- 30,000 --
Depreciation 70,661 66,562 68,684
Amortization 8,986 6,639 4,789
Gain on sales of affiliates -- -- (17,300)
Dividends received from affiliates -- -- 9,932
Deferred income taxes 511 (467) 11,997
Changes in certain assets and liabilities,
excluding effects from special charge,
acquisitions and dispositions
- -Receivables 14,807 (31,073) (44,783)
- -Inventories 4,113 (47,215) 10,656
- -Accounts payable (6,806) 19,018 (75)
- -Income taxes (4,654) 15,969 (15,929)
- -Other assets, payables and accruals (18,438) (9,354) (5,991)
Restructuring payments - net 9,370 (16,666) 810
Other (1,404) 3,418 274
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 177,483 137,684 125,785
INVESTING ACTIVITIES
Capital expenditures (142,243) (139,811) (90,626)
Businesses acquired (30,741) -- (42,540)
Sales of businesses and affiliates -- 43,381 40,261
Other 1,532 1,561 1,483
---------- ---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (171,452) (94,869) (91,422)
FINANCING ACTIVITIES
Cash dividends (24,673) (22,465) (22,705)
Increase (decrease) in notes payable 12,406 50,866 (1,444)
Long-term borrowings 65,000 100,000 107,145
Repayments of long-term borrowings (44,301) (172,669) (77,465)
Purchases of common stock (23,166) (21,590) (32,213)
Stock issuance under stock plans 7,518 20,133 3,287
Other (773) (924) (2,440)
---------- ---------- ----------
NET CASH USED BY FINANCING ACTIVITIES (7,989) (46,649) (25,835)
Effect of exchange rate changes on
cash and cash equivalents 532 (1,364) (780)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,426) (5,198) 7,748
Cash and cash equivalents at beginning of year 18,736 23,934 16,186
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,310 $ 18,736 $ 23,934
========== ========== ==========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
-24-
<PAGE> 25
<TABLE>
<CAPTION>
STATEMENT OF SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
(Dollars in thousands, except per share data)
Accumulated
Other
Comprehensive
Income (Loss) -
Additional Currency
Common Paid-In Retained Translation
Stock Capital Earnings Adjustments Total
--------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1996 $ 144,125 $ 17,933 $ 254,484 $ (15,670) $ 400,872
Net income 102,721 102,721
Other comprehensive income:
Currency translation adjustments
during the year 841
Reclassification of realized amounts
to net income (6,387) (5,546)
---------
Total comprehensive income 97,175
Cash dividends paid ($.80 share) (22,705) (22,705)
Issuance of 108,990 shares, net of
shares exchanged, under stock plans 545 2,742 3,287
Purchase of 1,022,100 treasury shares (5,111) (27,102) (32,213)
--------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1996 139,559 20,675 307,398 (21,216) 446,416
Net income 100,853 100,853
Other comprehensive income:
Currency translation adjustments
during the year (19,144)
Reclassification of realized amounts
to net income 2,270 (16,874)
---------
Total comprehensive income 83,979
Cash dividends paid ($.80 a share) (22,465) (22,465)
Issuance of 578,054 shares, net of
shares exchanged, under stock plans 2,891 17,242 20,133
Issuance of 70,950 shares upon
conversion of long-term debt 355 3,371 3,726
Purchase of 496,100 treasury shares (2,480) (19,110) (21,590)
--------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1997 140,325 41,288 366,676 (38,090) 510,199
Net income 97,054 97,054
Other comprehensive income:
Currency translation adjustments
during the year 2,014
Reclassification of realized amounts
to net income (127) 1,887
---------
Total comprehensive income 98,941
Cash dividends paid ($.88 a share) (24,673) (24,673)
Issuance of 193,039 shares, net of
shares exchanged, under stock plans 965 6,553 7,518
Purchase of 657,500 treasury shares (3,287) (19,879) (23,166)
--------- --------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1998 $ 138,003 $ 47,841 $ 419,178 $ (36,203) $ 568,819
========= ========= ========= ========= =========
</TABLE>
The Notes to Financial Statements are an integral part of this statement.
-25-
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(Dollars in thousands, except per share data)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries. Affiliated companies in which the
Company's ownership is 20% to 50% are accounted for by the equity method. All
significant intercompany transactions and accounts are eliminated upon
consolidation.
Use of Estimates: The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make certain
estimates and exercise judgment affecting the reported amounts in the statements
of income, financial position and cash flows, including disclosures in the Notes
to Financial Statements. Actual results could differ from those estimates.
Revenue Recognition: Revenue is recognized when products are shipped to
customers.
Cash Equivalents: Marketable securities that are highly liquid and have original
maturities of three months or less are classified as cash equivalents. The
carrying amount approximates fair value.
Inventories: Inventories are stated at the lower of cost or market. Inventory
costs for U.S. operations are determined principally by the last-in, first-out
(LIFO) method. The remaining inventory costs are determined principally by the
first-in, first-out (FIFO) method.
Plants and Properties: Plants and properties are carried at cost. Depreciation
is generally computed by the straight-line method over the estimated useful
lives of the respective assets. In general, depreciation is provided at annual
rates of 2.5% to 3% on buildings and 8% to 12% on equipment.
Intangibles: Intangible assets are carried at cost less accumulated amortization
and consist principally of goodwill. Goodwill represents the excess of cost over
fair value of assets acquired, which is amortized over periods from 15 to 40
years using the straight-line method. Other intangibles include software and
patents which are amortized over periods from five to 15 years using the
straight-line method. The carrying amounts for goodwill and other long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that such carrying amounts may not be recoverable. For any long-lived
assets that are determined to be impaired, a loss would be recognized for the
difference between the carrying value and the fair value for assets to be held.
Life Insurance: The Company's investment in corporate-owned life insurance is
recorded net of policy loans. Net life insurance expense, including interest
expense of $6,300, $10,800 and $9,150 on policy loans in 1998, 1997 and 1996,
respectively, is included in Other income (expense) - net in the Statement of
Income.
Accounting Pronouncements: The Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards Nos. 130, "Reporting
Comprehensive Income," and 131, "Disclosures about Segments of an Enterprise and
Related Information," in 1997. In 1998, the FASB issued Statements Nos. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," and
133, "Accounting for Derivative Instruments and Hedging Activities." Statement
130 requires that comprehensive income, which includes net income and other
comprehensive income consisting of foreign currency
-26-
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
items, minimum pension liability adjustments, and unrealized gains and losses on
certain security investments, be reported as a total in the financial
statements. Historically, the Company's only component of other comprehensive
income has been foreign currency items. The Company adopted Statement 130
effective January 1, 1998, and reclassified financial statements for prior
periods to reflect application of this Statement. Statement 131 requires that
operating segment financial information be reported on a basis consistent with
the Company's internal reporting that is used for evaluating segment performance
and allocating resources. Statement 132 revises and standardizes disclosures
about pensions and other postretirement benefit obligations and requires that
information about changes in benefit obligations and fair values of plan assets
be reported. Among other provisions, Statement 133 requires that all derivatives
be recognized as assets or liabilities in the Statement of Financial Position
and that those instruments be measured at fair value. The Company adopted
Statement Nos. 131 and 132 in 1998, changing its reportable segments and
providing the required disclosures for each of the statements. Prior-period
segment information and pension and postretirement benefit obligation
information were restated in accordance with the provisions of the statements.
The adoption of Statement Nos. 130, 131 and 132 did not affect the Company's
results of operations or consolidated financial position. Statement 133 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, and has
not determined when it will adopt the Statement. The Company does not expect
that adoption of this Statement will have a material adverse effect on its
consolidated financial position or results of operations.
In 1998, The American Institute of Certified Public Accountants issued
Statements of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," and 98-5, "Reporting on the
Costs of Start-Up Activities." SOP 98-1 requires the capitalization of certain
costs incurred after the date of adoption in connection with acquiring or
developing software for internal use. The Company adopted SOP 98-1 in 1998, and
since the Company's previous capitalization policy was similar to the
requirements of SOP 98-1, the adoption of this standard did not have a material
effect on the Company's consolidated financial position or results of
operations. SOP 98-5 requires that the costs of start-up activities, including
organization costs, be expensed as incurred and that initial application of this
standard be reported as the cumulative effect of a change in accounting
principle. The Company adopted SOP 98-5 in 1998, and recognized the cumulative
effect of an accounting change of $4,832 ($3,283 after tax, or $.12 per share).
The effect of this change in accounting was not material to income before
cumulative effect of accounting change for the year ended December 31, 1998.
Stock Options: The Company follows the intrinsic value method of accounting for
stock options under Accounting Principles Board Opinion No. 25. When stock
options are exercised, common stock is credited for the par value of shares
issued; additional paid-in capital is credited for the consideration received in
excess of par value and any related income tax benefits.
Derivative Financial Instruments: The Company uses forward exchange contracts
and option contracts to manage certain foreign exchange exposures. The Company
enters into forward exchange contracts to hedge the effects of changes in
exchange rates on certain recorded receivables and payables that are denominated
in currencies other than the functional currencies of the originating locations.
Forward exchange contracts are marked to market with changes in market value
recorded in income as foreign exchange gains or
-27-
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
losses, offsetting the losses or gains on the underlying transactions. The
Company enters into option contracts to hedge certain anticipated transactions.
These option contracts are designated as hedges of certain forecasted monthly
purchases and sales transactions that are denominated in currencies other than
the functional currencies of the originating locations, that otherwise would
expose the Company to foreign currency exchange rate risk. Gains on option
contracts are included in sales and cost of products sold when realized.
Premiums on option contracts are deferred and amortized to cost of products sold
on a straight-line basis over the life of the contracts. Forward exchange and
option contracts are entered into with major commercial banks with high credit
ratings. Forward exchange and option contracts are not held for trading or
speculative purposes, and the Company is not a party to any leveraged
derivatives. The terms of these contracts are generally one year or less.
-28-
<PAGE> 29
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - INCOME PER SHARE
Following is a reconciliation of income and average shares for purposes of
calculating basic and diluted income per share:
1998 1997 1996
---- ---- ----
Basic Income per Share
- --------------------------
<S> <C> <C> <C>
Income before cumulative effect of
accounting change $ 100,337 $ 100,853 $ 102,721
Cumulative effect of accounting
change (3,283) -- --
---------- ---------- ----------
Net Income $ 97,054 $ 100,853 $ 102,721
========== ========== ==========
Average common shares outstanding 28,035,748 28,049,749 28,384,089
========== ========== ==========
Basic Income per Share
Before cumulative effect of
accounting change $ 3.58 $ 3.60 $ 3.62
Cumulative effect of accounting change (.12) -- --
---------- ---------- ----------
Basic net income per share $ 3.46 $ 3.60 $ 3.62
========== ========== ==========
Diluted Income per Share
- ------------------------
Income before cumulative effect
of accounting change $ 100,337 $ 100,853 $102,721
After-tax equivalent of interest
expense on 6% convertible debentures -- 2,192 3,720
---------- ---------- ----------
Income for purpose of computing diluted
income per share before cumulative
effect of accounting change 100,337 103,045 106,441
Cumulative effect of accounting change (3,283) -- --
---------- ---------- ----------
Income for purpose of computing
diluted income per share $ 97,054 $ 103,045 $ 106,441
========== ========== ==========
Average common shares outstanding 28,035,748 28,049,749 28,384,089
Dilutive stock options 156,979 209,927 46,019
Assumed conversion of 6%
convertible debentures -- 1,109,298 1,904,762
---------- ---------- ----------
Average common shares for purpose
of computing diluted income per share 28,192,727 29,368,974 30,334,870
========== ========== ==========
Diluted Income per Share
Before cumulative effect of
accounting change $ 3.56 $ 3.51 $ 3.51
Cumulative effect of accounting change (.12) -- --
---------- ---------- ----------
Diluted net income per share $ 3.44 $ 3.51 $ 3.51
========== ========== ==========
</TABLE>
Options to purchase an average of 160,600 and 771,000 shares of common stock
were outstanding during 1998 and 1996, respectively, that were not included in
the computation of diluted income per share because the option exercise prices
were greater than the average market price of common shares and, therefore, the
effect would have been anti-dilutive.
-29-
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - SPECIAL CHARGE
In 1997, the Company's Aeroquip segment exited its automotive interior plastics
business and recorded a special charge of $30,000 ($18,500 net, or diluted net
income per share of $.63). The special charge included a provision for severance
payments of $6.3 million to terminate approximately 1,500 salaried and hourly
employees, principally in Germany. The special charge also included lease
termination costs amounting to $6.9 million; asset disposal costs, including
environmental costs, amounting to $9.6 million; litigation costs amounting to
$3 million; and other costs amounting to $4.2 million. The Company sold or
closed eight facilities during 1997 that had combined sales of approximately
$67,000 and $132,000 in 1997 and 1996, respectively. The planned actions to
which this special charge related were substantially completed during 1997, and
as of December 31, 1998, all costs had been incurred.
NOTE 4 - ACQUISITIONS
During 1998, the Company's Aeroquip segment acquired two companies and its
Vickers segment acquired four companies for an aggregate purchase price of
$30,741, including acquisition costs. In 1996, the Company's Vickers segment
acquired two companies for an aggregate purchase price of $46,116, including
acquisition costs.
All of the above acquisitions were accounted for as purchases, and their
operations were included in the Statement of Income from their respective
acquisition dates. Had these acquisitions occurred as of the beginning of the
respective years, the pro forma results of operations giving effect to the
acquisitions would not be materially different from the net sales, net income
and net income per share presented in the Statement of Income.
NOTE 5 - GAIN ON SALE OF UNCONSOLIDATED AFFILIATES
In 1996, the Company sold its 35% interest in Yokohama Aeroquip K.K. and its 49%
interest in Aeroquip Mexicana S.A. The two transactions resulted in a net
combined pretax gain of $17,300 ($5,000 net, or diluted net income per share of
$.16). The combined pretax gain included a net translation gain of $6,387
previously deferred in accumulated other comprehensive income.
NOTE 6 - INVENTORIES
Inventory costs determined by the LIFO method accounted for approximately 58%
and 61% of total inventories at December 31, 1998 and 1997, respectively. If all
inventories valued by the LIFO method had been valued at current costs, these
inventories would have been approximately $27,591 and $27,884 higher than
reported at December 31, 1998 and 1997, respectively.
NOTE 7 - DEBT
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
7.875% senior debentures, due June 1, 2026 $100,000 $100,000
Medium term notes - interest rates from 6.40%
to 7.58% - due at various dates from 2002 to 2018 165,000 100,000
9.55% senior sinking fund debentures -- 42,000
Industrial revenue bonds - interest rates from
5.8% to 7.625% - due at various dates to 2013 7,264 7,300
Other 7,114 9,264
-------- --------
279,378 258,564
Less current maturities 1,035 1,857
-------- --------
$278,343 $256,707
======== ========
</TABLE>
-30-
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - DEBT (Continued)
In December 1997, the Company called its 9.55% senior sinking fund debentures
for redemption on February 3, 1998. The debentures were due to mature in
February 2018. Proceeds from additional borrowings under the Company's Medium
Term Note program were used to redeem the debentures. The loss from redemption
of the debentures amounting to approximately $2,500 was recorded in Other income
(expense) - net in 1998. In June 1997, the Company called its 6% convertible
subordinated debentures for redemption and recorded a loss of $1,487 in Other
income (expense) - net. The debentures, which were due to mature in October
2002, were convertible into common shares of the Company at a conversion price
of $52.50 per share. Prior to the redemption date, debentures in the amount of
$3,726 were converted into 70,950 shares of common stock.
In 1997, the Company established a Medium Term Note program. The remaining
borrowing capacity at December 31, 1998, under provisions of a shelf
registration statement designated for the Medium Term Note program was $185,000.
Under terms of a revolving credit agreement, expiring August 31, 2001, with a
consortium of U.S. and non-U.S. banks, the Company can borrow up to $175,000.
Borrowings under the credit agreement bear interest at rates agreed to by the
Company and lenders. The agreement is maintained to support the Company's
commercial paper borrowings and, to the extent not so utilized, to provide
domestic borrowings. The remaining borrowing capacity under this agreement at
December 31, 1998, was $120,000. Covenants of the revolving credit agreement and
certain other debt instruments require the Company to maintain certain financial
ratios, including a limitation that the Company's debt-to-capitalization ratio
(exclusive of the effects of the change in accounting for postretirement benefit
obligations) not exceed a specified amount. At December 31, 1998, retained
earnings of $255,000 were available for the payment of cash dividends and
purchase of common stock.
Maturities of long-term debt in 1999 and in the four succeeding years are
$1,035, $355, $271, $25,188 and $97. Interest paid on short- and long-term debt
during 1998, 1997 and 1996 amounted to $28,446, $27,664 and $27,392,
respectively. The weighted-average interest rate of outstanding notes payable at
December 31, 1998 and 1997, was 6.4% and 6.5%, respectively.
NOTE 8 - CONTINGENCIES
The Company or certain of its subsidiaries have been named parties to various
lawsuits, claims and proceedings, including being named potentially responsible
parties (PRP) for site investigation and cleanup costs under the Comprehensive
Environmental Response, Compensation, and Liability Act (Superfund) or similar
regulations with respect to certain sites, as well as other product liability,
tort and contract claims and lawsuits which have arisen in the ordinary course
of the Company's business. While the ultimate outcome of the various lawsuits,
claims and proceedings, including PRP designations and other environmental
matters, cannot now be predicted, the Company believes that any costs in excess
of amounts provided, or covered by insurance as it relates to litigation,
arising out of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash flows.
-31-
<PAGE> 32
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES
The components of income before income taxes and cumulative effect of accounting
change consist of the following:
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
U.S. $ 64,772 $ 84,300 $ 73,644
Non-U.S. 82,765 63,853 79,777
-------- -------- --------
$147,537 $148,153 $153,421
======== ======== ========
Income tax expense consists of the following:
1998 1997 1996
------ ------ ------
Current:
U.S. federal $ 20,101 $ 23,231 $ 21,920
State and local 2,279 2,070 2,676
Non-U.S. 24,309 22,466 14,107
-------- -------- --------
46,689 47,767 38,703
Deferred:
U.S. federal 952 (136) 4,356
Non-U.S. (441) (331) 7,641
-------- -------- --------
511 (467) 11,997
-------- -------- --------
$ 47,200 $ 47,300 $ 50,700
======== ======== ========
Reconciliation of the statutory U.S. federal income tax rate to the effective
income tax rate before cumulative effect of accounting change follows:
1998 1997 1996
------ ------ -----
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
State and local taxes, net of U.S.
federal tax benefit .9 .9 1.1
Basis differences on affiliates sold -- -- 4.1
Research and development credit (2.9) (1.9) (2.6)
Taxes in excess of (less than) the
U.S. tax rate on non-U.S. earnings,
including utilization of net operating
loss carryforwards (1.0) 1.0 (3.2)
Other -- (3.1) (1.4)
---- ---- -----
Effective income tax rate 32.0% 31.9% 33.0%
==== ==== =====
</TABLE>
-32-
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES (Continued)
The effects of temporary differences and loss carryforwards giving rise to
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Gross Deferred Tax Assets:
Postretirement benefits other than pensions $ 42,729 $ 42,704
Tax credits and loss carryforwards 14,943 8,668
Employee benefit accruals 15,088 14,289
Other 14,728 9,617
--------- ---------
87,488 75,278
Gross Deferred Tax Liabilities:
Depreciation (38,067) (33,241)
Other (8,741) (7,980)
--------- ---------
(46,808) (41,221)
Valuation allowances (12,969) (6,816)
--------- ---------
Net deferred tax assets $ 27,711 $ 27,241
========= =========
The components of net deferred tax assets are recorded in the Statement of Financial Position as follows:
1998 1997
------ ------
Current assets $ 10,066 $ 3,679
Non-current assets 27,711 30,958
Non-current liabilities (10,066) (7,396)
--------- ---------
$ 27,711 $ 27,241
========= =========
</TABLE>
Valuation allowances increased $6,153 in 1998 and decreased $5,773 and $3,364 in
1997 and 1996, respectively.
At December 31, 1998, the Company had net non-U.S. operating loss and foreign
tax credit carryforwards of $20,700 and $8,200, respectively, for income tax
purposes. Loss carryforwards of approximately $13,800 have no expiration dates.
The remaining net operating loss and foreign tax credit carryforwards expire in
years through 2008. Income tax expense for the years 1998, 1997 and 1996 was
reduced by $1,190, $1,770 and $3,730, respectively, due to utilization of
operating loss carryforwards. Non-U.S. operating loss carryforwards in the
amount of $4,900 and $5,600 expired in 1998 and 1997, respectively, resulting in
the loss of future tax benefits and a reduction in valuation allowances in the
amount of $1,800 and $2,100, respectively. The Company does not provide deferred
income taxes on undistributed earnings of certain of its non-U.S. subsidiaries
which have been reinvested indefinitely. Undistributed earnings of non-U.S.
subsidiaries for which U.S. income taxes have not been provided approximated
$150,300 at December 31, 1998. Should these earnings be remitted, certain
countries would impose withholding taxes that would be available for use as
credits against any U.S. federal income tax liability, subject to certain
limitations. It is not practical to estimate the amount of tax that would be
payable should the Company remit these earnings.
Income taxes paid during 1998, 1997 and 1996 amounted to $51,343, $31,798 and
$54,633, respectively.
-33-
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
NOTE 10 - LEASES
The Company and its subsidiaries lease a variety of real property and equipment.
Rent expense under operating leases amounted to approximately $22,554, $20,457
and $18,863 for 1998, 1997 and 1996, respectively. Future minimum rental
payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 19,499
2000 14,752
2001 12,232
2002 7,758
2003 6,893
Thereafter 11,526
--------
$ 72,660
========
</TABLE>
NOTE 11 - FINANCIAL INSTRUMENTS
Fair value for long-term debt, including current maturities, at December 31,
1998 and 1997, was $292,000 and $269,000, respectively. Fair value for notes
payable at December 31, 1998 and 1997, approximated the carrying amounts at
those dates.
At December 31, 1998, the Company had forward exchange contracts outstanding
with notional amounts equivalent to $14,300. The carrying amount of these
outstanding forward exchange contracts was $121. Fair value was approximately
equal to the carrying amount. These forward exchange contracts will mature at
various dates through April 1999. At December 31, 1997, the Company had forward
exchange contracts outstanding with notional amounts equivalent to $12,800. The
carrying amount of these outstanding forward exchange contracts was $227. Fair
value was approximately equal to the carrying amount. These forward exchange
contracts matured at various dates through April 1998.
At December 31, 1998, the Company held option contracts maturing at various
dates through November 1999, with notional amounts equivalent to $28,000. Fair
value of these option contracts was approximately $204. At December 31, 1997,
the Company held option contracts maturing at various dates through December
1998, with notional amounts equivalent to $61,600. Fair value of these option
contracts was approximately $600.
NOTE 12 - BENEFIT PLANS
The Company sponsors trusteed defined-contribution pension plans as its primary
source of retirement benefits for U.S. and certain non-U.S. employees. In
addition, the Company sponsors trusteed defined-benefit pension plans that cover
a limited number of U.S. employees. The Company also provides access to
postretirement benefits under life insurance and health care plans for most
retired U.S. employees. Various pension plans are also in effect for
subsidiaries operating outside the U.S., including trusteed or insured,
government-sponsored and unfunded plans.
-34-
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - BENEFIT PLANS (Continued)
Following is a reconciliation of the changes in benefit obligations and fair
values of plan assets for defined-benefit pension and postretirement benefit
plans for the two-year period ended December 31, 1998, and a summary of funded
status as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Pension Postretirement
Plans Plans
---------------- ----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligations at beginning
of year $ 160,600 $ 157,800 $ 102,600 $ 111,100
Service cost 2,400 2,200 1,700 1,700
Interest cost 11,500 11,300 7,400 8,100
Participant contributions 300 200 100 200
Plan amendments 300 1,600 -- --
Actuarial (gains) losses 16,000 1,700 (600) (10,700)
Benefit payments (10,000) (9,500) (8,100) (7,800)
Settlements (2,800) -- -- --
Exchange rate changes 1,700 (4,700) -- --
--------- --------- --------- ---------
Benefit obligations at end of year $ 180,000 $ 160,600 $ 103,100 $ 102,600
========= ========= ========= =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year $ 181,400 $ 154,200 $ -- $ --
Actual return on plan assets 19,400 38,200 -- --
Employer contributions 1,000 900 8,000 7,600
Participant contributions 300 200 100 200
Benefit payments (10,000) (9,500) (8,100) (7,800)
Settlements (1,700) -- -- --
Exchange rate changes 1,000 (2,600) -- --
--------- --------- --------- ---------
Fair value of plan assets at end of year $ 191,400 $ 181,400 $ -- $ --
========= ========= ========= =========
FUNDED STATUS
Funded status at end of year $ 11,400 $ 20,800 $(103,100) $(102,600)
Unrecognized gains (19,500) (33,700) (9,815) (9,172)
Unrecognized transition obligations (1,500) 400 -- --
Unrecognized prior service cost (credit) 4,800 6,200 (8,800) (10,500)
--------- --------- --------- ---------
Accrued benefit cost $ (4,800) $ (6,300) $(121,715) $(122,272)
========= ========= ========= =========
AMOUNTS RECORDED IN THE STATEMENT
OF FINANCIAL POSITION CONSIST OF:
Prepaid benefit cost $ 24,400 $ 15,500 $ -- $ --
Accrued benefit cost (29,200) (21,800) (121,715) (122,272)
--------- --------- --------- ---------
Net amount recorded $ (4,800) $ (6,300) $(121,715) $(122,272)
========= ========= ========= =========
</TABLE>
-35-
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - BENEFIT PLANS (Continued)
The aggregate accumulated benefit obligations and fair value of pension plan
assets at the end of each year for plans that have an accumulated benefit
obligation in excess of plan assets were as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Projected benefit obligations $39,593 $35,039
Accumulated benefit obligations 37,456 33,358
Plan assets 15,570 14,228
</TABLE>
Components of net periodic benefit cost for the defined-benefit pension and
postretirement benefit plans, total contributions charged to pension expense for
the defined-contribution plans, and pension expense for other non-U.S. pension
plans are summarized below:
<TABLE>
<CAPTION>
Pension Plans Postretirement Plans
------------------------------ ------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost $ 2,400 $ 2,200 $ 2,400 $ 1,700 $ 1,700 $ 1,700
Interest cost 11,500 11,300 11,300 7,400 8,100 8,200
Expected return on plan assets (14,800) (13,700) (13,000) -- -- --
Amortization of (gains) losses (600) (200) (200) -- -- --
Amortization of transition
obligation 200 200 300 -- -- --
Amortization of prior service
cost 700 500 400 (1,600) (1,700) (1,700)
-------- -------- -------- -------- -------- --------
Net periodic benefit cost (income)
of defined benefit plans (600) 300 1,200 7,500 8,100 8,200
Defined contribution plans 38,700 42,000 37,000 -- -- --
Other non-U.S. pension plans 1,100 1,000 1,200 -- -- --
-------- -------- -------- -------- -------- --------
Totals $ 39,200 $ 43,300 $ 39,400 $ 7,500 $ 8,100 $ 8,200
======== ======== ======== ======== ======== ========
</TABLE>
The Company's health care plans are contributory. In general, most participants
meeting eligibility requirements and retiring after January 1, 1995, share in
the cost of postretirement health care benefits by paying, in the form of a
premium, the excess, if any, of the average of the Company's annual per-capita
claims cost in the previous year over the amount of the Company's contribution
as stated in the plans.
Following are the weighted-average assumptions used in determining the Company's
benefit obligations and net periodic benefit cost. The measurement date for
these plans was principally September 30.
-36-
<PAGE> 37
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - BENEFIT PLANS (Continued)
Pension Benefits Postretirement Benefits
------------------------------ -------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Discount rate:
<S> <C> <C> <C> <C> <C> <C>
U.S. 7.0% 7.5% 7.5% 7.0% 7.5% 7.5%
Non-U.S. 6.4 7.2 7.5
Expected return on plan assets 9.5 10.0 10.0
Rate of compensation increase 4.0 4.0 4.0
Projected health care cost
trend rates:
Under age 65 7.95 8.6 9.1
Over age 65 5.95 6.4 6.7
Ultimate 5.0 5.25 5.25
Year ultimate health care cost
trend rate is achieved 2008 2008 2008
</TABLE>
The projected health care cost trend rates listed above for under and over age
65 participants represent assumed increases in per capita cost of covered health
care benefits for 1999, 1998 and 1997, respectively. For future years, the rates
are assumed to decrease gradually and remain at the ultimate trend rate
thereafter. Because the amount of the Company's annual contribution to retiree
health care costs is limited, changes to the assumed health care cost trend
rates do not have a significant effect on the amounts reported for the health
care plans. Following are the effects of a one-percentage-point change in the
assumed health care cost trend rates.
<TABLE>
<CAPTION>
One-Percentage- One-Percentage-
Point Increase Point Decrease
---------------- ---------------
<S> <C> <C>
Effect on total 1998 service and
interest cost components of net periodic
post-retirement health care benefit cost $ 331 $ (308)
Effect on the health care component of
the accumulated postretirement benefit
obligation as of September 30, 1998 4,430 (4,121)
</TABLE>
NOTE 13 - CAPITAL STOCK AND EMPLOYEE STOCK OPTIONS
The Company has rights outstanding as set forth in a Rights Agreement, whereby
holders of common stock have one right for each share of common stock
outstanding. When exercisable, each right entitles its holder to buy one
one-hundredth of a new preferred share for $150. The Company has 4,000,000
shares of serial preferred stock authorized, of which no shares were outstanding
at December 31, 1998 or 1997. In the absence of further Board of Directors
action, the rights generally will become exercisable and allow the holder to
acquire the Company's common stock at a discounted price if a person or group
acquires 20% or more of the outstanding shares of the Company's common stock.
Rights held by persons who exceed the 20% threshold will be void. Under certain
circumstances, the rights will entitle the holder to buy shares in an acquiring
entity at a discounted price. The Agreement also includes an exchange option
that, in general, after the rights become exercisable, allows the Board of
Directors to, at its option, effect an exchange of part or all of the rights,
other than rights that have become void, for shares of the Company's common
stock. Under this option, the Company would issue one share of its common stock
for each right, subject to adjustment in certain
-37-
<PAGE> 38
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - CAPITAL STOCK AND EMPLOYEE STOCK OPTIONS (Continued)
circumstances. The Company may, at its option, redeem all rights for $.01 per
right, generally at any time prior to the rights becoming exercisable. The
rights will expire on February 7, 2009, unless earlier redeemed, exchanged or
amended by the Board of Directors.
In 1998, the Company's shareholders approved the 1998 Stock Incentive Plan (the
Plan) which permits the issuance of stock options, stock appreciation rights
(SARs), performance awards and restricted stock awards to selected salaried
employees as approved by the Organization and Compensation Committee of the
Board of Directors. The number of shares of common stock that may be issued or
transferred under the Plan may not exceed 1,772,299 shares (1,700,000 shares as
designated in the Plan, plus 72,299 remaining shares available for grant under
terms of the prior plan).
Among other considerations, options may be granted to selected employees to
purchase common stock at prices not less than 100% of the fair market value on
the date of grant. Options expire 10 years after date of grant. Options granted
under the Plan become exercisable ratably over a three-year period commencing
one year following date of grant. Options that expire, terminate or are canceled
without exercise are available for the grant of new awards.
Performance awards may be granted to selected employees to receive future
payments contingent on continuous service with the Company and achievement of
pre-established goals. In January 1998 and 1997, 16,925 and 44,314 shares of
common stock, respectively, were distributed to participants as performance
awards under provisions of a plan that was discontinued in 1998. At December 31,
1998, there were no outstanding SARs, performance awards or restricted stock
awards.
Also in 1998, the Company's shareholders approved the Non-Employee Directors'
Stock Award Plan (Directors' Plan). The Directors' Plan provides, among other
considerations, that upon election or re-election to the Board, each eligible
director will receive a stock option covering 1,200 common shares and a stock
award covering 200 common shares. Stock options are granted to purchase common
stock at the fair market value of the Company's common stock on the date of
grant. Stock options are exercisable ratably over a three-year period commencing
one year following date of grant and expire 10 years after date of grant. Stock
awards vest and become payable on the first anniversary following date of grant.
The Company accounts for stock options in accordance with Accounting Principles
Board Opinion No. 25 and related interpretations. As a result, no compensation
expense for stock options has been recognized in the financial statements
because such options were granted at market value at date of grant. However, pro
forma information regarding net income and net income per share is required by
Statement of Financial Accounting Standards No. 123, and has been determined for
disclosure purposes as if the Company had accounted for stock options under the
fair value method as prescribed by that Statement. The fair values of the
Company's stock options were estimated as of the dates of grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Risk-free interest rates 5.49% 5.8% 6.52%
Expected dividend yields 1.7% 1.9% 2.3%
Expected stock price volatility .330 .323 .319
Weighted-average expected option life 5 years 5 years 6 years
</TABLE>
-38-
<PAGE> 39
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - CAPITAL STOCK AND EMPLOYEE STOCK OPTIONS (Continued)
For purposes of pro forma disclosures, the estimated fair values of stock
options are amortized to expense over the options' vesting periods. The
estimated fair value per share of options granted during 1998, 1997 and 1996 was
$16.86, $13.43 and $11.36, respectively. Pro forma income and income per share
before cumulative effect of accounting change are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C> <C>
Income before cumulative
effect of accounting change As reported $100,337 $100,853 $102,721
Pro forma 98,248 99,505 101,293
Diluted income per share before
cumulative effect of accounting
change As reported 3.56 3.51 3.51
Pro forma 3.48 3.46 3.46
</TABLE>
Options outstanding at December 31, 1998, with a range of exercise prices from
$22.50 to $33.75 had a weighted-average remaining contractual life of
approximately 6.4 years and options with a range of exercise prices from $42.13
to $60.31 had a weighted-average remaining contractual life of approximately
nine years.
At December 31, 1998, the Company had 2,787,331 shares of common stock reserved
for issuance in connection with stock options.
The following table summarizes employee stock option activity:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ --------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Shares Price Shares Price
------------------------ --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 1,129,911 $ 35.44 1,405,950 $ 31.30 1,164,980 $ 30.67
Granted 353,500 51.73 342,000 42.13 349,000 33.02
Exercised (195,713) 32.57 (592,041) 29.52 (86,030) 29.18
Forfeited (80,158) 42.24 (16,998) 34.77 (4,500) 33.58
Canceled (11,335) 30.96 (9,000) 33.44 (17,500) 33.52
Outstanding at December 31 1,196,205 40.30 1,129,911 35.44 1,405,950 31.30
Exercisable at December 31 587,190 34.31 587,754 32.38 1,059,950 30.74
Available for future awards
at December 31 1,491,126 58,133 391,060
</TABLE>
In addition to the above, 9,800 options and stock awards were granted to
directors in 1998 under the Directors' Plan at a weighted-average exercise price
of $60.31. All options granted were outstanding at December 31, 1998, and none
were exercisable at that date. 90,200 options are available for future awards at
December 31, 1998.
-39-
<PAGE> 40
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - BUSINESS SEGMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which was adopted in 1998. Statement 131 requires that
segment financial information be reported on a basis consistent with the
Company's internal reporting used for evaluating segment performance and
allocating resources. Accordingly, in 1998, the Company changed its business
segments, which were previously based on markets served, from Industrial,
Automotive and Aerospace to Aeroquip and Vickers. These segments reflect the way
the Company is organized and managed and how performance is measured. The
Company evaluates performance and allocates resources based on operating income
before allocation of corporate costs. Corporate costs represent the total of
corporate headquarters costs. Although Aeroquip and Vickers serve many of the
same customers and markets, they are managed separately because of significantly
different product technologies and manufacturing processes and the differing
dynamics required to serve their customers. Amounts for prior years have been
restated to conform to the current year presentation.
The Aeroquip segment designs, manufactures and distributes fluid connectors and
plastic products. Fluid connectors include all pressure ranges of hose and hose
assemblies; fittings, adapters, couplings and swivels; automotive air
conditioning, power steering, and oil and transmission cooler components and
assemblies; tube fittings and assemblies; refrigeration/air conditioning
connectors; clamps and V-band couplings; fuel-handling products; noise-reduction
products; chemical containment products; and electronic fluid system products.
Aeroquip plastic products include molded, extruded and co-extruded plastic
products. The Aeroquip segment serves original equipment and aftermarket
customers in industrial markets located principally in the U.S., Europe,
Asia-Pacific and Brazil; original equipment and aftermarket customers in
aerospace and defense markets located principally in the U.S. and Europe; and
automobile, light truck, sport utility and van manufacturers in automotive
markets located principally in the U.S. and Europe.
The Vickers segment designs, manufactures and distributes power and motion
control products. Vickers products include hydraulic, electrohydraulic,
pneumatic and electronic control devices; piston and vane pumps and motors; open
architecture machine controls; hydraulic and pneumatic cylinders; hydraulic
power packages; electric motors and drives; fuel pumps; electric motorpumps and
generator packages; electrohydraulic and electromechanical actuators; sensors
and monitoring devices; hydraulic and lubrication filtration; and
fluid-evaluation products and services. The Vickers segment serves original
equipment and aftermarket customers in industrial markets located principally in
the U.S., Europe, Asia-Pacific and Brazil, and original equipment and
aftermarket customers in aerospace and defense markets located principally in
the U.S. and Europe.
The accounting policies for the reportable segments are the same as those
described in Note 1 - Significant Accounting Policies. Intersegment sales are
not significant.
-40-
<PAGE> 41
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - BUSINESS SEGMENTS (Continued)
The following information relates to business segments:
<TABLE>
<CAPTION>
Reconciling
Amounts-
Corporate
and
Eliminations
Aeroquip Vickers Net Totals
---------- --------- -------------------- ----------
1998
- ----
<S> <C> <C> <C> <C>
Net sales $1,071,608 $1,077,866 $ -- $2,149,474
Depreciation and amortization 35,284 42,017 2,346 79,647
Segment income 124,295 90,407 -- 214,702 (A)
Investments in unconsolidated affiliates 1,585 -- -- 1,585
Segment assets 581,553 795,070 82,178 1,458,801
Capital expenditures 73,554 64,833 3,856 142,243
Expenditures for businesses acquired 11,762 18,979 -- 30,741
========== ========== ========== ==========
1997
- ----
Net sales $1,065,188 $1,047,105 $ -- $2,112,293
Depreciation and amortization 35,139 35,625 2,437 73,201
Segment income 89,458 132,599 -- 222,057 (A)
Investments in unconsolidated affiliates 945 637 -- 1,582
Segment assets 535,701 771,650 69,245 1,376,596
Capital expenditures 66,195 70,315 3,301 139,811
========== ========== ========== ==========
1996
- ----
Net sales $1,099,914 $ 933,001 $ -- $2,032,915
Depreciation and amortization 39,314 31,499 2,660 73,473
Segment income 96,184 110,571 -- 206,755 (A)
Investments in unconsolidated affiliates 1,041 1,152 -- 2,193
Segment assets 570,300 667,381 51,806 1,289,487
Capital expenditures 50,893 38,356 1,377 90,626
Expenditures for businesses acquired -- 42,540 -- 42,540
========== ========== ========== ==========
</TABLE>
Note A - See following reconcilement of total segment income to income before
income taxes and cumulative effect of accounting change.
-41-
<PAGE> 42
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - BUSINESS SEGMENTS (Continued)
Following is a reconciliation of total segment income to income before income
taxes and cumulative effect of accounting change:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Segment income $ 214,702 $ 222,057 $ 206,755
Less unallocated corporate costs 28,322 30,417 30,180
---------- ---------- ----------
Consolidated operating income 186,380 191,640 176,575
Interest expense (27,013) (27,171) (25,813)
Other income (expense) - net (11,830) (16,316) 2,659
---------- ---------- ----------
income before income taxes and cumulative
effect of accounting change $ 147,537 $ 148,153 $ 153,421
========== ========== ==========
Following are net sales by product groupings:
Power and Motion Control $1,077,866 $1,047,105 $ 933,001
Fluid Connectors 929,022 858,769 824,388
Plastics 142,586 206,419 275,526
---------- ---------- ----------
$2,149,474 $2,112,293 $2,032,915
========== ========== ==========
</TABLE>
-42-
<PAGE> 43
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - BUSINESS SEGMENTS (Continued)
Following are net sales to external customers and plants and properties by
geographic area. Net sales are reported based on the geographic location from
which the sales originated. Amounts reported for plants and properties are based
on the country where located.
<TABLE>
<CAPTION>
Plants and
Net Sales Properties
--------- ----------
1998
- ----
<S> <C> <C>
United States $1,394,277 $ 410,699
Europe
United Kingdom 271,660 60,768
Germany 226,786 36,040
Other Europe 140,257 17,977
---------- ----------
Total Europe 638,703 114,785
Other 116,494 22,733
---------- ----------
Totals $2,149,474 $ 548,217
========== ==========
1997
- ----
United States $1,356,334 $ 362,776
Europe
United Kingdom 245,965 52,653
Germany 252,627 26,859
Other Europe 125,548 12,693
---------- ----------
Total Europe 624,140 92,205
Other 131,819 19,161
---------- ----------
Totals $2,112,293 $ 474,142
========== ==========
1996
- ----
United States $1,291,875 $ 330,368
Europe
United Kingdom 238,590 47,754
Germany 270,254 33,063
Other Europe 117,567 10,361
---------- ----------
Total Europe 626,411 91,178
Other 114,629 15,937
---------- ----------
Totals $2,032,915 $ 437,483
========== ==========
</TABLE>
-43-
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS
NOTE 15 - OTHER INFORMATION
<TABLE>
<CAPTION>
1998 1997
---------- ----------
RECEIVABLES
<S> <C> <C>
Receivables $ 356,664 $ 363,523
Less allowance for doubtful accounts 14,839 14,701
--------- ---------
$ 341,825 $ 348,822
INVENTORIES ========= =========
In-process and finished products $ 231,842 $ 239,800
Raw materials and manufacturing supplies 70,394 54,967
--------- ---------
$ 302,236 $ 294,767
========= =========
OTHER CURRENT ASSETS
Deferred income taxes $ 10,066 $ 3,679
Prepaid expenses and other current assets 42,080 45,644
--------- ---------
$ 52,146 $ 49,323
========= =========
PLANTS AND PROPERTIES - AT COST
Land and improvements $ 22,634 $ 21,458
Buildings 223,405 198,882
Machinery and equipment 801,692 694,572
Construction in progress 71,826 78,090
--------- ---------
$1,119,557 $ 993,002
========= =========
OTHER ASSETS
Goodwill, net of accumulated amortization of $17,045
and $13,077 in 1998 and 1997, respectively $ 124,890 $ 111,905
Deferred income taxes 27,711 30,958
Receivables, deposits and other assets 44,466 47,943
--------- ---------
$ 197,067 $ 190,806
========= =========
NOTES PAYABLE
Commercial paper $ 55,096 $ 36,177
Short-term notes payable to banks 46,733 47,867
--------- ---------
$ 101,829 $ 84,044
========= =========
OTHER ACCRUED LIABILITIES
Employees' compensation and amounts
withheld therefrom $ 106,502 $ 117,107
Taxes, other than income taxes 7,309 10,177
Other accrued liabilities 83,915 85,516
--------- ---------
$ 197,726 $ 212,800
========= =========
</TABLE>
-44-
<PAGE> 45
NOTES TO FINANCIAL STATEMENTS
NOTE 16 - SUBSEQUENT EVENT (Unaudited)
On February 1, 1999, Eaton Corporation and Aeroquip-Vickers, Inc. announced that
the companies had entered into an "Agreement and Plan of Merger" whereby Eaton
Corporation would acquire all of the outstanding shares of Aeroquip-Vickers,
Inc. for $58 per share in cash. The Boards of Directors of both companies have
approved the transaction, which is subject to normal closing conditions and the
approval of Aeroquip-Vickers shareholders. The transaction is expected to be
completed in April 1999.
QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The following is a summary of the quarterly results of operations for the years
ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------
Three Months Ended
----------------------------------------------------------- Year Ended
Mar 31 Jun 30 Sep 30 Dec 31 Dec 31
------- ------- ------- ------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 547,055 $ 574,314 $ 508,974 $ 519,131 $2,149,474
Manufacturing income 144,232 151,575 123,821 109,941 529,569
Income before cumulative
effect of accounting change 31,173 37,841 23,931 7,392 100,337
Cumulative effect of
accounting change (3,283) -- -- -- (3,283)
Net income 27,890 37,841 23,931 7,392 97,054
Basic income per share
before cumulative effect
of accounting change 1.11 1.34 .85 .27 3.58
Cumulative effect of
accounting change (.12) -- -- -- (.12)
Basic net income per share .99 1.34 .85 .27 3.46
Diluted income per share
before cumulative effect of
accounting change 1.10 1.33 .85 .27 3.56
Cumulative effect of
accounting change (.12) -- -- -- (.12)
Diluted net income per share .98 1.33 .85 .27 3.44
Average shares outstanding
Basic 28,119 28,199 28,166 27,669 28,036
Diluted 28,336 28,454 28,302 27,674 28,193
</TABLE>
-45-
<PAGE> 46
QUARTERLY RESULTS OF OPERATIONS (Unaudited) (Continued)
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------
Three Months Ended
------------------------------------------------------- Year Ended
Mar 31 Jun 30 Sep 30 Dec 31 Dec 31
------- ------- ------- ------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 538,426 $ 556,278 $ 494,777 $ 522,812 $2,112,293
Manufacturing income 132,475 147,037 134,406 143,707 557,625
Net income 5,694 33,630 30,104 31,425 100,853
Net income per share
Basic .20 1.20 1.07 1.12 3.60
Diluted .20 1.15 1.05 1.11 3.51
Average shares outstanding
Basic 27,974 27,948 28,153 28,150 28,050
Diluted 28,116 30,020 29,036 28,372 29,369
</TABLE>
(a) The 1998 fourth quarter includes non-recurring charges (principally
incurred severance costs) of $5 million, $3.1 million net (diluted net
income per share of $.11).
(b) In 1997, the Company redeemed its outstanding 6% convertible debentures,
which were common stock equivalents. For purposes of computing diluted net
income per share in 1997, the assumed conversion of the convertible
debentures was included in average shares outstanding as follows: 1,904,762
shares in the 1997 second quarter, 627,667 shares in the 1997 third quarter
and 1,109,298 shares for the year.
(c) The 1997 first quarter included a special charge of $30 million, $18.5
million net (diluted net income per share of $.66 [$.63 for the year]) to
exit Aeroquip's automotive interior plastics business.
(d) In the 1997 third quarter, the annual effective income tax rate was
reduced. The cumulative year-to-date adjustment increased third-quarter net
income by $1.3 million (diluted net income per share of $.05).
(e) The 1997 fourth quarter included income amounting to $4.3 million, $2.6
million net (diluted net income per share of $.09) from recovery of
previously incurred development and pre-production costs with a Vickers
aerospace customer arising from the termination of a component design and
production supply contract, reduced by a charge of $2.6 million, $1.6
million net (diluted net income per share of $.05) to recognize a product
liability claim from an Aeroquip industrial customer for a unique product
that is no longer manufactured.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
ITEM 10. Directors and Officers of the Registrant.
Following is a list of all of the directors of Aeroquip-Vickers, Inc. including
their ages, positions and recent business experience:
-46-
<PAGE> 47
DARRYL F. ALLEN (55). An Aeroquip-Vickers director since 1984, Mr. Allen has
been Aeroquip-Vickers' Chairman of the Board since 1991 and Aeroquip-Vickers'
President and Chief Executive Officer since 1986. He is a director of Milacron
Inc. and Fifth Third Bancorp.
VIRGIS W. COLBERT (59). An Aeroquip-Vickers director since 1998, Mr. Colbert is
Executive Vice President of the Miller Brewing Company (consumer products) and
has held his current position since July 1997. From 1995 to 1997, Mr. Colbert
was Senior Vice President - World Wide Operations for Miller Brewing Company.
From 1993 to 1995, Mr. Colbert was Senior Vice President - Plant Operations for
Miller Brewing Company. He is also a member of the Board of Directors of Miller
Brewing Company, a wholly-owned subsidiary of Philip Morris Companies Inc., and
Delphi Automotive Systems.
PURDY CRAWFORD (67). An Aeroquip-Vickers director since 1990, Mr. Crawford is
Chairman and a director of Imasco Limited (a major Canadian consumer products
and services corporation with operations in Canada and the United States) and
Chairman and a director of CT Financial Services Inc. and Canada Trustco
Mortgage Company (98% owned by Imasco). From 1986 until May 1995, Mr. Crawford
was the Chief Executive Officer of Imasco. He is also a director of Avenor Inc.;
Camco, Inc.; Canadian National Railway Company; Inco Limited; Maple Leaf Foods
Inc.; Nova Scotia Power; Petro-Canada; and Woolworth Corporation.
JOSEPH C. FARRELL (63). An Aeroquip-Vickers director since 1994, Mr. Farrell is
the retired Chairman and Chief Executive Officer of The Pittston Company (coal
and minerals, security, transportation, air freight services and home security
services). Mr. Farrell was Chairman, President and Chief Operating Officer of
The Pittston Company from 1991 to 1997. He is also a director of Universal Corp.
and ASA Limited.
DAVID R. GOODE (58). An Aeroquip-Vickers director since 1993, Mr. Goode is
Chairman of the Board, President and Chief Executive Officer of Norfolk Southern
Corporation (transportation holding company). Mr. Goode has been in his current
position with Norfolk Southern Corporation since 1992. He is a director of
Caterpillar Inc., Georgia-Pacific Corporation and Texas Instruments
Incorporated.
PAUL A. ORMOND (49). An Aeroquip-Vickers director since 1992, Mr. Ormond is
President and Chief Executive Officer of HCR Manor Care (long-term care, skilled
nursing and rehabilitative services). Mr. Ormond was Chairman, President and
Chief Executive Officer of HCR Manor Care from October 1991 to September 1998.
He is a director of National City Bank, a wholly-owned subsidiary of National
City Corp.
JOHN P. REILLY (55). An Aeroquip-Vickers director since 1991, Mr. Reilly has
been a Partner of Reilly, Erwin & Company L.L.C. since September 1997. Reilly,
Erwin & Company L.L.C. works in partnership with Bessemer Holdings, L.P. to make
acquisitions and equity investments. Mr. Reilly held an advisory position with
Tomkins PLC (a U.K. based multi-industry company) from April 1997 to September
1997. He was President and Chief Executive Officer of Stant Corporation from
January 1997 to April 1997. Mr. Reilly was Chairman of the Board, President and
Chief Executive Officer of Figgie International Inc. from May 1995 to January
1997, was President & Chief Executive Officer of Figgie International Inc. from
February 1995 to May 1995, and was Chief Executive Officer of Figgie
International Inc. from January 1995 to February 1995. Mr. Reilly was President
and Chief Operating Officer of Brunswick Corporation from 1993 to 1994. He is a
non-employee director of Figgie International Inc.
WILLIAM R. TIMKEN, JR. (60). An Aeroquip-Vickers director since 1973, Mr. Timken
is Chairman, President and Chief Executive Officer of The Timken Company
(tapered roller bearings and quality alloy steel). He was Chairman of the Board
of The Timken Company from 1975 to November 1997. He is a director of Diebold
Incorporated.
-47-
<PAGE> 48
Following is a list of each of the Executive Officers of Aeroquip-Vickers, Inc.
including their names, ages, positions and recent business experience.
<TABLE>
<CAPTION>
NAME AND POSITION AGE BUSINESS EXPERIENCE
- ---------------------------- --- ---------------------------------
<S> <C> <C>
Darryl F. Allen, 55 Chairman of the Board, President
Chairman of the Board, and Chief Executive Officer of
President and Chief Aeroquip-Vickers since 1991.
Executive Officer Chairman of the Board and President
of Vickers, Incorporated since
December 1998.
William R. Ammann, 57 Vice President-Administration and
Vice President-Administration Treasurer of Aeroquip-Vickers since
and Treasurer 1992.
James E. Kline, 57 Vice President and General Counsel
Vice President and of Aeroquip-Vickers since 1989.
General Counsel
James M. Oathout, 54 Corporate Secretary and Senior
Corporate Secretary and Attorney of Aeroquip-Vickers since
Senior Attorney March 1995. Secretary and Associate
General Counsel of Aeroquip-Vickers from
1988 to March 1995.
Gregory R. Papp, 52 Corporate Controller of Aeroquip-
Corporate Controller Vickers since 1993. Vice President and
Controller of Aeroquip Corporation from July
1991 to 1993.
David M. Risley, 54 Vice President - Finance and Chief
Vice President - Finance Financial Officer of Aeroquip-
and Chief Financial Officer Vickers since 1992. Group Vice President
- Administration and Control of Aeroquip
Corporation from 1991 to 1992.
Howard M. Selland, 55 Executive Vice President of
Executive Vice President of Aeroquip-Vickers and President of
Aeroquip-Vickers and President Aeroquip Corporation since 1989.
Of Aeroquip Corporation
Philip G. Simonds, 58 Vice President-Taxation of
Vice President-Taxation Aeroquip-Vickers since 1983.
</TABLE>
There are no family relationships among the persons named above.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
In February 1999, it came to the Company's attention that Purdy Crawford, a
director of Aeroquip-Vickers, was the owner of 106 common shares of
Aeroquip-Vickers which were not reported as owned by Mr. Crawford in Section 16
filings. These 106 common shares were purchased by a trust for the benefit of
Mr. Crawford through the Aeroquip-Vickers Dividend Reinvestment Plan during the
period 1991 to 1996. The shares were reported late on Mr. Crawford's Form 5 for
1998.
-48-
<PAGE> 49
ITEM 11. Executive Compensation
Summary Compensation
THE FOLLOWING TABLE SETS FORTH THE ANNUAL COMPENSATION, THE LONG-TERM
COMPENSATION AND ALL OTHER COMPENSATION OF THE NAMED executive officers
for each of the last three completed fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION
--------------------------
ANNUAL COMPENSATION AWARDS(2) PAYOUTS(3)
-------------------------- --------------------------
SECURITIES ALL OTHER
UNDERLYING LTIP COMPENSA-
NAME AND SALARY BONUS(1) OPTIONS PAYOUTS TION(4)
PRINCIPAL POSITION YEAR ($) ($) (#) ($) ($)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Darryl F. Allen 1998 $ 710,000 $ 267,200 60,000 $ N/A $227,131
Chairman of the 1997 660,000 773,900 50,000 283,000 208,612
Board, President 1996 635,000 450,700 50,000 581,700 206,834
and Chief Executive
Officer of
Aeroquip-Vickers
Howard M. Selland 1998 $ 442,000 $ 421,400 25,000 $ N/A $178,964
Executive Vice 1997 423,077 441,400 20,000 131,400 121,171
President of 1996 405,000 180,300 20,000 269,100 84,157
Aeroquip-Vickers and
President of
Aeroquip Corporation
William R. Ammann 1998 $ 316,250 $ 91,200 14,000 $ N/A $ 87,330
Vice President - 1997 306,224 265,700 11,000 84,900 84,582
Administration and 1996 296,740 155,100 11,000 173,400 85,081
Treasurer of
Aeroquip-Vickers
</TABLE>
-49-
<PAGE> 50
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION
--------------------------
ANNUAL COMPENSATION AWARDS(2) PAYOUTS(3)
----------------------- --------------------------
SECURITIES ALL OTHER
UNDERLYING LTIP COMPENSA-
NAME AND SALARY BONUS(1) OPTIONS PAYOUTS TION(4)
PRINCIPAL POSITION YEAR ($) ($) (#) ($) ($)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
James E. Kline 1998 $ 296,250 $ 91,200 12,000 $ N/A $ 84,230
Vice President 1997 286,282 265,700 11,000 84,900 80,772
and General Counsel 1996 271,747 155,100 11,000 173,400 82,327
of Aeroquip-Vickers
David M. Risley 1998 $ 281,000 $ 91,200 14,000 $ N/A $ 81,865
Vice President - 1997 265,000 265,700 11,000 84,900 76,708
Finance and Chief 1996 250,000 155,100 11,000 173,400 77,278
Financial Officer
of Aeroquip-Vickers
-------------------------------------------------------------------------------------------------
</TABLE>
(1) The payouts shown in this column were made pursuant to the Annual Executive
Incentive Plan.
(2) The awards shown in this column were made pursuant to the Aeroquip-Vickers,
Inc. 1994 Stock Incentive Plan and the Aeroquip-Vickers, Inc. 1998 Stock
Incentive Plan. Although both stock incentive plans permit grants of stock
appreciation rights, no stock appreciation rights were outstanding as of
December 31, 1998.
(3) The amounts shown in this column reflect the amount of cash and the value
of Common Shares paid out under the Mid-Term Incentive Plan for the Plan
periods 1995-1997 and 1994-1996, respectively. The Mid-Term Incentive Plan
ended on December 31, 1997.
(4) The amounts shown in this column consist of annual company contributions
(including the company match and the company profit-sharing allocation)
under Aeroquip-Vickers' savings and profit-sharing plan and the
Aeroquip-Vickers, Inc. Supplemental Benefit Plan. (See the table below.)
-50-
<PAGE> 51
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Savings and
Profit-Sharing Plan Supplemental Benefit Plan
Match Profit-Sharing Match Profit-Sharing Total
- --------------------------------------------------------------------------------------------
1998
<S> <C> <C> <C> <C> <C>
Allen $4,800 $15,200 $39,717 $167,414 $227,131
Selland 4,800 15,200 21,702 137,262 178,964
Ammann 4,800 15,200 12,659 54,671 87,330
Kline 4,800 15,200 12,059 52,171 84,230
Risley 4,800 15,200 11,601 50,264 81,865
- --------------------------------------------------------------------------------------------
</TABLE>
-51-
<PAGE> 52
The following table contains information concerning grants of stock options made
during the last completed fiscal year to each of the named executive officers of
Aeroquip-Vickers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS GRANT DATE VALUE
---------------------------------------------------------------------- --------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES EXERCISE GRANT DATE
GRANTED(1) IN FISCAL PRICE(1) EXPIRATION PRESENT VALUE (2)
NAME (#) YEAR ($/SH) DATE ($)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Darryl F. Allen 60,000 17.0% $51.813 7/23/08 $1,011,600
Howard M. Selland 25,000 7.1% 51.813 7/23/08 $ 421,500
William R. Ammann 14,000 4.0% 51.813 7/23/08 $ 236,040
James E. Kline 12,000 3.4% 51.813 7/23/08 $ 202,320
David M. Risley 14,000 4.0% 51.813 7/23/08 $ 236,040
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) Options were granted on July 23, 1998, under the Aeroquip-Vickers, Inc. 1998
Stock Incentive Plan. The options become exercisable as follows: one-third
become exercisable on July 23, 1999, one-third become exercisable on July 23,
2000, and one-third become exercisable on July 23, 2001. The exercise price of
$51.813 was the closing price of Aeroquip-Vickers Common Shares on the New York
Stock Exchange - Composite Transactions list on July 22, 1998.
(2) Valuation is based on the Black-Scholes option pricing model using the
following assumptions: risk-free interest rate of 5.49%, expected annual
dividend yield of 1.7%, expected volatility of .33 and expected five-year time
to exercise. Aeroquip-Vickers does not advocate or necessarily agree that the
Black-Scholes model can properly determine the value of an option. The actual
value, if any, a named executive officer may realize will depend on the excess
of the stock price over the exercise price on the date the option is exercised
so that there is no assurance the value realized by the named executive officer
will be at or near the value estimated by the Black-Scholes model.
-52-
<PAGE> 53
The following table contains information concerning exercise of stock options
during the last completed fiscal year by each of the named executive officers
of Aeroquip-Vickers, and the fiscal year-end value of unexercised options held
by such executive officers:
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES(1)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END
(#) ($)
SHARES ACQUIRED ----------------------------- ---------------------------
ON EXERCISE VALUE REALIZED
NAME (#) ($) EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Darryl F. Allen 30,000 $858,750 150,001 109,999 $ 0 $ 0
Howard M. Selland 0 0 40,001 44,999 0 0
William R. Ammann 10,000 295,000 53,001 24,999 42,500 0
James E. Kline 0 0 7,334 22,999 0 0
David M. Risley 0 0 33,001 24,999 0 0
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The options shown in this table were granted under the Aeroquip-Vickers,
Inc. 1987 Stock Option Plan and the Aeroquip-Vickers, Inc. 1994 and 1998 Stock
Incentive Plans.
(2) The options become exercisable as follows: One-third of the grant amount
becomes exercisable on the first anniversary of the grant date, one-third of the
grant becomes exercisable on the second anniversary of the grant date, and the
remaining one-third becomes exercisable on the third anniversary of the grant
date.
-53-
<PAGE> 54
DIRECTOR COMPENSATION
During 1998, each director who was not an employee of the company was paid an
annual retainer of $25,000 ($27,500 for committee chairmen), plus a $1,000 fee
for each Board or committee meeting attended.
During 1998, the Directors' Retirement Plan was amended to prohibit any further
retirement eligibility beyond December 31, 1997, and to convert the present
value of accrued retirement benefits for current non-employee directors to a
stock unit account. Pursuant to the 1998 amendment, a deferred common stock
account was created for each non-employee director. Each director's account is
credited with dividend equivalents converted into additional units of Common
Stock as dividends on the Common Shares are paid. Upon retirement or at age 70,
each non-employee director will receive, as a distribution, a number of Common
Shares equal to the number of stock units held in his account.
Under the Aeroquip-Vickers, Inc. Non-Employee Directors' Stock Award Plan, each
non-employee director will receive upon election or re-election to the Board at
each annual meeting of the company both a stock option grant and an award of
deferred Common Shares. The awards made for 1998 for each non-employee director
consisted of 200 deferred Common Shares and options to purchase 1,200 Common
Shares.
Under the Aeroquip-Vickers, Inc. Plan for Optional Deferment of Directors' Fees,
a director may defer his or her annual retainer fees until his or her
directorship ceases, at which time the deferred amounts will be paid in cash in
a lump sum or installments commencing on a date designated by the director. A
director may elect to have all, or a specified percentage, of his or her
deferred fees credited to a recordkeeping account either in dollar amounts or in
units equal in value to one Common Share of Aeroquip-Vickers. Each recordkeeping
account to which fees have been credited in dollar amounts will be credited
quarterly with accrued interest at a rate equal to two percentage points in
excess of the Moody's Corporate Bond Yield Average. Each recordkeeping account
to which fees have been credited in units will be credited with additional units
equal in value to the amount of cash dividends paid on Common Shares of
Aeroquip-Vickers. Upon the death of a director prior to distribution of the
entire balance of his or her account, such balance shall be paid as soon as is
administratively feasible in a lump sum to the beneficiary or beneficiaries
designated by the director, or, in the absence of such designation, to the
estate of the director.
Under the Aeroquip-Vickers, Inc. 1989 Non-Employee Directors' Equity Plan,
non-employee directors were entitled to receive awards consisting of such number
of Common Shares of Aeroquip-Vickers as have an aggregate fair market value on
the date of the grant of $25,000 rounded upward to the nearest 10 shares.
Non-employee directors who were directors on the effective date of the plan
(April 20, 1989) received an award on that date, and each person who thereafter
became a non-employee director was entitled to receive an award on the date of
his initial election. Each non-employee director was entitled to receive a
second, final award on the date of his re-election which most nearly coincided
with the fifth anniversary of his initial award. All Common Shares granted
pursuant to the awards are subject to forfeiture for a five-year period. In
1998, the Aeroquip-Vickers, Inc. 1989 Non-Employee Directors' Equity Plan was
amended to limit participation to individuals who were elected to the Board
prior to April 16, 1998. Only one director, Joseph Farrell, has not received his
second award under the plan and will be eligible for his final award if he is
re-elected to the Aeroquip-Vickers' Board of Directors at the 1999 annual
meeting of shareholders.
The Aeroquip-Vickers, Inc. Directors' Charitable Award Program was established
to recognize the interest of Aeroquip-Vickers and its directors in supporting
worthy educational institutions and other charitable organizations and to
provide an additional method of funding for the Aeroquip-Vickers Foundation. The
Program is also intended to assist Aeroquip-Vickers in attracting and retaining
directors of outstanding experience and ability. All directors,
-54-
<PAGE> 55
including Darryl F. Allen, currently participate in the Program. The Program is
administered by the Organization and Compensation Committee of the Board of
Directors. Each director may recommend up to nine charitable organizations that
qualify under section 501(c)(3) of the Internal Revenue Code. The recommendation
of a director who dies or becomes disabled while serving on the Board or after
completing five years of Board service will be considered by the Committee after
the director's death. If the recommendation is approved, Aeroquip-Vickers will
donate an aggregate of $900,000 in nine equal installments to the designated
charity or charities. Aeroquip-Vickers will also donate $100,000 to the
Aeroquip-Vickers Foundation after the director's death. Aeroquip-Vickers
purchased life insurance policies on the lives of its current directors to fund
the Program, and the Program provides for establishment of a fully funded trust
upon a change in control. The Program also permits self-funding.
Aeroquip-Vickers believes that the after-tax cost of the Program over its life
will be relatively small compared to the benefits it provides. Directors derive
no personal financial or tax benefit from the Program because all insurance
proceeds and tax deductions accrue solely to Aeroquip-Vickers.
Change in Control Agreements
- ----------------------------
Aeroquip-Vickers has entered into agreements with Messrs. Allen, Ammann, Kline,
Risley, Selland and each of its other executive officers. These agreements are
designed primarily to aid in ensuring continued management in the event of an
actual or threatened change in control of Aeroquip-Vickers (as defined in the
agreements). The agreements provide that in the event an executive officer is
terminated by Aeroquip-Vickers other than upon his death, disability or for
cause (as defined in the agreements) within three years after a change in
control, he would be entitled to: (i) a lump sum payment equal to two years' (or
in the case of Mr. Allen, three years') salary and incentive compensation under
the Annual Executive Incentive Compensation Plan (based upon an average of his
highest compensation in two of the previous five years); (ii) a contribution by
Aeroquip-Vickers to the executive's retirement savings plan account in an amount
equal to two times (or, in the case of Mr. Allen, three times) the company's
average aggregate contribution to the executive's accounts in the savings plan
for the previous three years; and (iii) continued participation in
Aeroquip-Vickers' welfare-benefit plans for two years (or, in the case of
Mr. Allen, three years). The officer would also be entitled to receive the
payments and benefits described above if he resigned within a period between
six months and two years following a change in control for reasons set forth
in the agreements relating to changed circumstances.
-55-
<PAGE> 56
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
- -------
Information with respect to ownership by beneficial owners of more than 5%
of any class of Aeroquip-Vickers common shares is set forth below. This
information is based upon reports filed by certain beneficial owners with the
Securities and Exchange Commission pursuant to Sections 13(d) or 13(g) of the
Securities Exchange Act of 1934 as of February 28, 1999.
<TABLE>
<CAPTION>
Name & Address Amount & Nature
of Beneficial of Beneficial Percent of
Owner Ownership Class
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Morgan Stanley Dean
Witter & Co. 3,856,424 (1) 13.9%
and its subsidiaries
1585 Broadway
New York, NY 10036
Gabelli Funds, Inc.
and its affiliates 5,350,350 (2) 19.29%
One Corporate Center
Rye, NY 10580
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Morgan Stanley Dean Witter & Co. and its subsidiaries have sole voting
power over 0 shares, shared voting power over 3,367,735 shares, sole
dispositive power over 0 shares and shared dispositive power over 3,856,424
shares.
(2) Gabelli Funds, Inc. and its related entities have sole voting power over
5,270,250 shares, shared voting power over 0 shares, sole dispositive power
over 5,350,350 shares and shared dispositive power over 0 shares.
The following table sets forth, as of February 28, 1999, information known to
Aeroquip-Vickers concerning the beneficial ownership of Aeroquip-Vickers common
shares by each of its present directors individually, each of the named
executive officers individually, and all present directors and executive
officers as a group. The totals for each person and for the group include shares
held personally; shares held by immediate family members sharing the same
household; shares held as of February 28, 1999, under Aeroquip-Vickers' dividend
reinvestment plan and savings and profit-sharing plan; and shares that may be
acquired within 60 days following February 28, 1999, through the exercise of
stock options.
-56-
<PAGE> 57
<TABLE>
<CAPTION>
AMOUNT & NATURE OF PERCENT
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1)(3) OF CLASS(2)
- ------------------------------------------------------------------------------
<S> <C> <C>
Virgis W. Colbert 1,403 *
- --------------------------------------------------------------------------------
Purdy Crawford 6,355 *
- --------------------------------------------------------------------------------
Joseph C. Farrell 6,113 *
- --------------------------------------------------------------------------------
David R. Goode 2,893 *
- --------------------------------------------------------------------------------
Paul A. Ormond 3,013 *
- --------------------------------------------------------------------------------
John P. Reilly 4,273 *
- --------------------------------------------------------------------------------
William R. Timken, Jr. 5,003 *
- --------------------------------------------------------------------------------
Darryl F. Allen(3) 347,477 1%
- --------------------------------------------------------------------------------
Chairman of the Board, President
and Chief Executive Officer of
Aeroquip-Vickers
William R. Ammann(3) 102,605 *
- --------------------------------------------------------------------------------
Vice President - Administration and
Treasurer of Aeroquip-Vickers
James E. Kline(3) 42,821 *
- --------------------------------------------------------------------------------
Vice President and General Counsel
of Aeroquip-Vickers
David M. Risley(3) 76,616 *
- --------------------------------------------------------------------------------
Vice President - Finance and Chief
Financial Officer of Aeroquip-Vickers
Howard M. Selland(3) 108,679 *
- --------------------------------------------------------------------------------
Executive Vice President of
Aeroquip-Vickers and President of
Aeroquip Corporation
All Directors and Executive
Officers as a Group (18 persons) 858,270 3%(4)
- --------------------------------------------------------------------------------
</TABLE>
*Indicates beneficial ownership of less than 1.0%
(1) Each director and named executive officer has sole voting and
dispositive power with respect to all Common Shares indicated except
that (i) 5,727 shares listed for Darryl F. Allen are held by Mr.
Allen's wife, and (ii) 450 shares listed for Darryl F. Allen are held
by one of Mr. Allen's children, who resides with Mr. Allen; Mr.
Allen has disclaimed beneficial ownership of such shares.
(2) Each director and named executive officer, other than Mr. Allen, owns
less than 1% of the outstanding Aeroquip-Vickers common Shares as of
February 28, 1999.
(3) A portion of the total for the named executive officers and the group
includes Aeroquip-Vickers common shares that could be acquired within
60 days following February 28, 1999 through the exercise of stock
options: 260,000 common shares for Darryl F. Allen; 78,000 common
shares for William R. Ammann; 30,333 common shares for James E. Kline;
58,000 common shares for David M. Risley; 85,000 common shares for
Howard M. Selland; and 628,233 Common Shares for all executive
officers included in the group of directors and executive officers.
Two hundred three shares of restricted stock issued pursuant to the
Non-employee Directors' Stock Award Plan have been included in the
total for each director. The restrictions on these shares lapsed upon
the filing of the preliminary proxy statement on February 12, 199.
These 1,421 shares are also included in the group total.
(4) For the purpose of computing the percent of class, the
Aeroquip-Vickers common shares for which all directors and executive
officers as a group may acquire beneficial ownership within 60 days
following February 28, 1999, through the exercise of stock options,
are deemed to be outstanding.
-57-
<PAGE> 58
ITEM 13. Certain Relationships and Related Transactions.
- -------
None.
PART IV
-------
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- -------
(a) The following documents are filed as a part of this report.
(1) The following consolidated financial statements of
Aeroquip-Vickers and its subsidiaries are filed as part of this report.
Report of Ernst & Young LLP, Independent Auditors
Statement of Income - Years ended December 31, 1998, 1997 and 1996
Statement of Financial Position - December 31, 1998 and 1997
Statement of Cash Flows - Years ended December 31, 1998, 1997 and 1996
Statement of Shareholders' Equity - Years ended December 31, 1998, 1997
and 1996
Notes to Financial Statements - December 31, 1998
(2) The following consolidated financial statement schedule of
Aeroquip-Vickers and its subsidiaries is filed under Item 14(d):
<TABLE>
<CAPTION>
SCHEDULE PAGE(S)
-------- -------
<S> <C>
Schedule II - Valuation and qualifying accounts 63-65
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are either not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(3) The following exhibits are incorporated by reference hereunder,
and those exhibits marked with an asterisk (*) are management contracts or
compensatory plans or arrangements required to be filed as exhibits pursuant to
Item 14(c) of this report:
EXHIBIT
NUMBER
- --------
(3)-1 Amended Code of Regulations (amended April 21, 1988), filed as Exhibit
(3)-1 to Form 10-K filed on March 19, 1998
(4)-1 Rights Agreement, dated February 7, 1999, between Aeroquip-Vickers,
Inc. and First Chicago Trust Company of New York filed as Exhibit 4.1
to Form 8-A filed on December 22, 1998
(4)-2 Indenture, dated as of May 1, 1996, between Aeroquip-Vickers, Inc. and
the First National Bank of Chicago (as successor in interest to NBD
Bank) filed as Exhibit 4.1 to Form S-3 filed on August 29, 1997
(4)-3 First Supplemental Indenture, dated as of April 17, 1997, between
Aeroquip-Vickers, Inc. and the First National Bank of Chicago (as
successor in interest to NBD Bank) filed as Exhibit 4.2 to Form S-3
filed on August 29, 1997
-58-
<PAGE> 59
(4)-4 Form of 7.875% Debentures due June 1, 2026, filed as Exhibit (4)-1 to
Form 8-K filed on June 3, 1996
(4)-5 Form of Fixed Rate Notes, filed as Exhibit (4)-1(b) to Form 8-K filed
April 25, 1997
(4)-6 Form of Floating Rate Notes, filed as Exhibit (4)-2(b) to Form 8-K
filed April 25, 1997
(4)-7 Form of Fixed Rate Notes, filed as Exhibit (4)-1(a) to Form 8-K filed
on October 2, 1997
(4)-8 Form of Floating Rate Notes, filed as Exhibit (4)-1(b) to Form 8-K
filed on October 2, 1997
*(10)-1 Aeroquip-Vickers, Inc. 1987 Stock Option Plan, filed as Exhibit (10)-1
to Form 10-K filed on March 19, 1998
*(10)-2 Change in Control Severance Agreement for Chief Executive Officer,
filed as Exhibit (10)-1 to Form 10-Q filed on August 11, 1998
*(10)-3 Change in Control Severance Agreement for Executive Officers, filed as
Exhibit (10)-2 to Form 10-Q filed on August 11, 1998 (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)-4 Change in Control Severance Agreement for other executives, filed as
Exhibit (10)-3 to Form 10-Q filed on August 11, 1998 (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)
*(10)-5 Aeroquip-Vickers, Inc. 1994 Stock Incentive Plan, filed as Appendix A
to the proxy statement for the annual meeting held on April 21, 1994
*(10)-6 Aeroquip-Vickers 1989 Non-Employee Directors' Equity Plan, filed as
Exhibit (10)-12 to Form 10-K filed on March 18, 1994
*(10)-7 Aeroquip-Vickers, Inc. Plan for Optional Deferment of Directors' Fees
(amended and restated effective April 1, 1995), filed as Exhibit
(10)-8 to Form 10-K filed March 20, 1995
*(10)-8 Aeroquip-Vickers, Inc. Directors' Retirement Plan (amended and
restated effective January 1, 1998), filed as Exhibit 4(c) to Form S-8
filed May 7, 1998
*(10)-9 Aeroquip-Vickers, Inc. Voluntary Deferred Compensation Plan (effective
April 1, 1995), filed as Exhibit (10)-11 to Form 10-K filed March 20,
1995
*(10)-10 Aeroquip-Vickers, Inc. Supplemental Benefit Plan (amended and restated
effective January 1, 1995), filed as Exhibit (10)-10 to Form 10-Q
filed August 10, 1995
*(10)-11 Aeroquip-Vickers, Inc. 1998 Stock Incentive Plan, filed as Appendix A
to the proxy statement for the annual meeting of shareholders held on
April 16, 1998
-59-
<PAGE> 60
*(10)-12 Aeroquip-Vickers, Inc. Non-Employee Directors' Stock Award Plan, filed
as Appendix B to the proxy statement for the annual meeting of
shareholders held on April 16, 1998
(99)-1 Aeroquip-Vickers, Inc. Directors' Charitable Award Program, filed as
Exhibit (99(i))-2 to Form 10-K filed on March 18, 1994
(99)-2 Credit Agreement, dated as of September 27, 1996, among
Aeroquip-Vickers, Inc. (formerly TRINOVA Corporation) (borrower) and
The Bank of Tokyo - Mitsubishi Trust Company; Citibank, N.A.; Dresdner
Bank AG, New York and Grand Cayman branches; The First National Bank
of Chicago; Morgan Guaranty Trust Company of New York; The Chase
Manhattan Bank; and Union Bank of Switzerland, Chicago branch (banks);
and Citibank, N.A. (administrative agent), filed as Exhibit (99(i))-2
to Form 10-Q filed November 14, 1996
The following exhibits are filed hereunder:
(3)-2 Amended Articles of Incorporation (amended December 10, 1998)
(12) Statement re: Computation of Ratios
(21) Subsidiaries of the Registrant
(23) Consent of Independent Auditors
(24) Powers of Attorney
(27) Financial Data Schedule
(27)-1 Financial Data Schedule - 1998 Restated
(b) Aeroquip-Vickers filed current reports on Form 8-K on December 22,
1998, February 2, 1999 and February 12, 1999, which are incorporated
by reference hereunder.
(c) The exhibits which are listed under Item 14(a)(3) are filed or
incorporated by reference hereunder.
(d) The financial statement schedule which is listed under Item 14(a)(2)
is filed hereunder.
-60-
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AEROQUIP-VICKERS, INC. (Registrant)
By: /s/ DARRYL F. ALLEN
--------------------------------
Darryl F. Allen
Director, Chairman of the Board,
President and Chief Executive Officer
Date: March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ DARRYL F. ALLEN
- ---------------------------------------
Darryl F. Allen 3/26/99
Director, Chairman of the (Date)
Board, President and Chief
Executive Officer
(Principal Executive Officer)
/s/ DAVID M. RISLEY
- ---------------------------------------
David M. Risley 3/26/99
Vice President - Finance (Date)
and Chief Financial Officer
(Principal Financial Officer)
/s/ GREGORY R. PAPP
- ---------------------------------------
Gregory R. Papp 3/26/99
Corporate Controller
(Principal Accounting Officer)
VIRGIS W. COLBERT*
- ---------------------------------------
Virgis W. Colbert* 3/26/99
Director (Date)
-61-
<PAGE> 62
PURDY CRAWFORD*
- ---------------------------------------
Purdy Crawford* 3/26/99
Director (Date)
JOSEPH C. FARRELL*
- ---------------------------------------
Joseph C. Farrell* 3/26/99
Director (Date)
DAVID R. GOODE*
- ---------------------------------------
David R. Goode* 3/26/99
Director (Date)
PAUL A. ORMOND*
- ---------------------------------------
Paul A. Ormond* 3/26/99
Director (Date)
JOHN P. REILLY*
- ---------------------------------------
John P. Reilly* 3/26/99
Director (Date)
WILLIAM R. TIMKEN, JR.*
- ---------------------------------------
William R. Timken, Jr.* 3/26/99
Director (Date)
*By James E. Kline, Attorney-in-fact
/s/ JAMES E. KLINE
- ------------------------------------------
James E. Kline 3/26/99
Vice President and General Counsel (Date)
-62-
<PAGE> 63
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AEROQUIP-VICKERS, INC.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT (1) (2) BALANCE
DESCRIPTION BEGINNING CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS AT END OF
OF PERIOD AND EXPENSES ACCOUNTS-DESCRIBE DESCRIBE PERIOD
- ----------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $ 14,701 $ 4,770 $ - $ 4,632 -A $ 14,839
Deferred tax valuation allowance 6,816 7,927 - (1,810)-B 12,969
36 -C
</TABLE>
Note A - Doubtful accounts charged off, net of recoveries
Note B - Effect of expiration of operating loss carryforward
Note C - Currency translation adjustments
-63-
<PAGE> 64
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AEROQUIP-VICKERS, INC.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT (1) (2) BALANCE
DESCRIPTION BEGINNING CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS AT END OF
OF PERIOD AND EXPENSES ACCOUNTS-DESCRIBE DESCRIBE PERIOD
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts $ 16,032 $ 1,485 $ - $ (2,816)-A $ 14,701
Deferred tax valuation allowance 12,589 (1,767) - (2,064)-B 6,816
(1,942)-C
</TABLE>
Note A - Doubtful accounts charged off, net of recoveries
Note B - Effect of expiration of operating loss carryforward
Note C - Currency translation adjustments
-64-
<PAGE> 65
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
AEROQUIP-VICKERS, INC.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT (1) (2) BALANCE
DESCRIPTION BEGINNING CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS AT END OF
OF PERIOD AND EXPENSES ACCOUNTS-DESCRIBE DESCRIBE PERIOD
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $ 13,241 $ 3,899 $ - $ (1,108)-A $ 16,032
Deferred tax valuation allowance 15,953 (3,853) - 489 -B 12,589
</TABLE>
Note A - Doubtful accounts charged off, net of recoveries
Note B - Currency translation adjustments
-65-
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT PAGE(S)
- ------- -------
<S> <C> <C>
(3)-1 Amended Code of Regulations (amended April 21, 1988) Incorporated
filed as Exhibit (3)-1 to Form 10-K filed on by Reference
March 19, 1998
(3)-2 Amended Articles of Incorporation (amended 69
December 10, 1998)
(4)-1 Rights Agreement, dated February 7, 1999, between Incorporated
Aeroquip-Vickers, Inc. and First Chicago Trust by Reference
Company of New York filed as Exhibit 4.1 to
Form 8-A filed on December 22, 1998
(4)-2 Indenture, dated as of May 1, 1996, between Incorporated
Aeroquip-Vickers, Inc. and the First National by Reference
Bank of Chicago (as successor in interest to NBD
Bank) filed as Exhibit 4.1 to Form S-3 filed on
August 29, 1997
(4)-3 First Supplemental Indenture, dated as of April 17, Incorporated
1997, between Aeroquip-Vickers, Inc. and the First by Reference
National Bank of Chicago (as successor in interest
to NBD Bank) filed as Exhibit 4.2 to Form S-3 filed
on August 29, 1997
(4)-4 Form of 7.875% Debentures due June 1, 2026, filed as Incorporated
Exhibit (4)-1 to Form 8-K filed on June 3, 1996 by Reference
(4)-5 Form of Fixed Rate Notes, filed as Exhibit (4)-1(b) Incorporated
to Form 8-K filed April 25, 1997 by Reference
(4)-6 Form of Floating Rate Notes, filed as Exhibit Incorporated
(4)-2(b) to Form 8-K filed April 25, 1997 by Reference
(4)-7 Form of Fixed Rate Notes, filed as Exhibit (4)-1(a) Incorporated
to Form 8-K filed on October 2, 1997 by Reference
(4)-8 Form of Floating Rate Notes, filed as Exhibit Incorporated
(4)-1(b) to Form 8-K filed on October 2, 1997 by Reference
(10)-1 Aeroquip-Vickers, Inc. 1987 Stock Option Plan, Incorporated
filed as Exhibit (10)-1 to Form 10-K filed on by Reference
March 24, 1998
(10)-2 Change in Control Severance Agreement for Chief Incorporated
Executive Officer, filed as Exhibit (10)-1 to by Reference
Form 10-Q filed on August 11, 1998
(10)-3 Change in Control Severance Agreement for Executive Incorporated
Officers, filed as Exhibit (10)-2 to Form 10-Q by Reference
filed on August 11, 1998 (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)
</TABLE>
-66-
<PAGE> 67
<TABLE>
<CAPTION>
<S> <C> <C>
(10)-4 Change in Control Severance Agreement for other Incorporated
executives, filed as Exhibit (10)-3 to Form 10-Q by Reference
filed on August 11, 1998 (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)
(10)-5 Aeroquip-Vickers, Inc. 1994 Stock Incentive Plan, Incorporated
filed as Appendix A to the proxy statement for the by Reference
annual meeting held on April 21, 1994
(10)-6 Aeroquip-Vickers 1989 Non-Employee Directors' Incorporated
Equity Plan, filed as Exhibit (10)-12 to Form 10-K by Reference
filed on March 18, 1994
(10)-7 Aeroquip-Vickers, Inc. Plan for Optional Deferment Incorporated
of Directors' Fees (amended and restated effective by Reference
April 1, 1995), filed as Exhibit (10)-8 to Form 10-K
filed March 20, 1995
(10)-8 Aeroquip-Vickers, Inc. Directors' Retirement Plan Incorporated
(amended and restated effective January 1, 1998), by Reference
filed as Exhibit 4(c) to Form S-8 filed May 7, 1998
(10)-9 Aeroquip-Vickers, Inc. Voluntary Deferred Incorporated
Compensation Plan (effective April 1, 1995), filed by Reference
as Exhibit (10)-11 to Form 10-K filed March 20, 1995
(10)-10 Aeroquip-Vickers, Inc. Supplemental Benefit Plan Incorporated
(amended and restated effective January 1, 1995), by Reference
filed as Exhibit (10)-10 to Form 10-Q filed
August 10, 1995
(10)-11 Aeroquip-Vickers, Inc. 1998 Stock Incentive Plan, Incorporated
filed as Appendix A to the proxy statement for by Reference
the annual meeting of shareholders held on
April 16, 1998
(10)-12 Aeroquip-Vickers, Inc. Non-Employee Directors' Incorporated
Stock Award Plan, filed as Appendix B to the proxy by Reference
statement for the annual meeting of shareholders
held on April 16, 1998
(12) Statement re: Computation of Ratios 81
(21) Subsidiaries of the Registrant 82
(23) Consent of Independent Auditors 83
(24) Power of Attorney 84
(27) Financial Data Schedule 85
(27)-1 Financial Data Schedule - 1998 Restated 86
(99)-1 Aeroquip-Vickers, Inc. Directors' Charitable Incorporated
Award Program, filed as Exhibit (99(i))-2 to by Reference
Form 10-K filed on March 18, 1994
</TABLE>
-67-
<PAGE> 68
<TABLE>
<CAPTION>
<S> <C> <C>
(99)-2 Credit Agreement, dated as of September 27, 1996, Incorporated
among Aeroquip-Vickers, Inc. (formerly TRINOVA by Reference
Corporation) (borrower) and The Bank of Tokyo -
Mitsubishi Trust Company; Citibank, N.A.; Dresdner
Bank AG, New York and Grand Cayman branches;
The First National Bank of Chicago; Morgan Guaranty
Trust Company of New York; The Chase Manhattan Bank;
and Union Bank of Switzerland, Chicago branch (banks);
and Citibank, N.A. (administrative agent), filed as Exhibit
(99(i))-2 to Form 10-Q filed November 14, 1996
</TABLE>
-68-
<PAGE> 1
EXHIBIT (3)-2
AMENDED ARTICLES OF INCORPORATION
(AMENDED DECEMBER 10, 1998)
FIRST: The name of the Corporation is Aeroquip-Vickers, Inc.
SECOND: The principal office of the Corporation is located in the City
of Maumee, Lucas County, Ohio.
THIRD: The purposes of the Corporation are:
(a) To manufacture, develop, process, produce, fabricate, design,
hold, buy, sell, exchange, export, import, lease, transport, store, manage, and
deal in and with, and patent, and receive and grant licenses with respect to the
use, sale and manufacture of, machinery, equipment, apparatus, devices,
transportation, facilities, tools, chemicals, and goods, wares, merchandise,
processes, patents, formulae, choses in action and other tangible or intangible
personal property of every kind and description;
(b) To acquire, own, construct, rebuild, repair, use, lease, operate,
manage, sell, mine, quarry and otherwise dispose of and deal in and with any
real estate, natural resources, laboratories, buildings and other structures, or
any interests therein;
(c) To acquire, hold, guarantee, sell, assign, exchange and otherwise
dispose of or deal in and with shares of stock and other securities of whatever
nature issued by other corporations, governments, firms, trusts or individuals;
(d) To carry on any one or more of the activities aforesaid on its own
behalf or for others, and to transact any and all business incidental to any of
the foregoing purposes.
The purposes of the Corporation may from time to time be changed by
amendment of these Articles.
FOURTH: The number of shares which the Corporation is authorized to
have outstanding is 104,000,000, consisting of 4,000,000 shares of Serial
Preferred Stock without par value (hereinafter called "Serial Preferred Stock")
and 100,000,000 Common Shares of the par value of $5 per share (hereinafter
called "Common Shares").
The shares of such classes shall have the following express terms:
Paragraph 1. EXPRESS TERMS OF THE SERIAL PREFERRED STOCK
Section 1. The Serial Preferred Stock may be issued from time to time
in one or more series. All shares of Serial Preferred Stock shall be of equal
rank and shall be identical, except in respect of the matters that may be fixed
by the Board of Directors as hereinafter provided and each share of each series
shall be identical with all other shares of such series, except as to the date
from which dividends are cumulative. Subject to the provisions of Sections 2 to
8, both inclusive, of this Paragraph, which provisions shall apply to all Serial
Preferred Stock, the Board of Directors hereby is authorized to cause such
shares to be issued in one or more series and with respect to each such series
prior to the issuance thereof to fix:
(a) The designation of the series, which may be by
distinguishing number, letter or title.
(b) The number of shares of the series, which number the Board
of Directors may (except where otherwise provided in the
creation of
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the series) increase or decrease (but not below the number
of shares thereof then outstanding).
(c) The annual dividend rate of the series.
(d) The dates at which dividends, if declared, shall be payable,
and the dates from which dividends shall be cumulative.
(e) The redemption rights and price or prices, if any, for
shares of the series.
(f) The terms and amount of any sinking fund provided for the
purchase or redemption of shares of the series.
(g) The amounts payable on shares of the series in the event of
any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation.
(h) Whether the shares of the series shall be convertible into
Common Shares and, if so, the conversion rate or rates, any
adjustments thereof, and all other terms and conditions upon
which such conversion may be made.
(i) Restrictions (in addition to those set forth in Section 6(b)
and 6(c) of this Paragraph) on the issuance of shares of the
same series or of any other class or series.
The Board of Directors is authorized to adopt, from time to time,
amendments to the Articles of Incorporation fixing, with respect to each such
series, the matters described in clauses (a) to (i), both inclusive, of this
Section 1.
Section 2. The holders of Serial Preferred Stock of each series, in
preference to the holders of Common Shares and of any other class of shares
ranking junior to the Serial Preferred Stock, shall be entitled to receive out
of any funds legally available and when and as declared by the Board of
Directors dividends in cash at the rate for such series fixed in accordance with
the provisions of Section 1 of this Paragraph and no more, payable quarterly on
the dates fixed for such series. Such dividends shall be cumulative, in the case
of shares of each particular series, from and after the date or dates fixed with
respect to such series. No dividends may be paid upon or declared or set apart
for any of the Serial Preferred Stock for any quarterly dividend period unless
at the same time a like proportionate dividend for the same quarterly dividend
period, ratably in proportion to the respective annual dividend rates fixed
therefor, shall be paid upon or declared or set apart for all Serial Preferred
Stock of all series then issued and outstanding and entitled to receive such
dividend.
Section 3. In no event so long as any Serial Preferred Stock shall be
outstanding shall any dividend, except a dividend payable in Common Shares or
other shares ranking junior to the Serial Preferred Stock, be paid or declared
or any distribution be made except as aforesaid on the Common Shares or any
other shares ranking junior to the Serial Preferred Stock, nor shall any Common
Shares or any other shares ranking junior to the Serial Preferred Stock be
purchased, retired or otherwise acquired by the Corporation:
(a) Unless all accrued and unpaid dividends on Serial Preferred Stock,
including the full dividends for the current quarterly dividend
period, shall have been declared and paid or a sum sufficient for
payment thereof set apart; and
(b) Unless there shall be no arrearages with respect to the redemption of
Serial Preferred Stock of any series from any sinking fund provided
for shares of such series in accordance with the provisions of Section
1 of this Paragraph.
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Section 4.
(a) Subject to the express terms of each series and to the provisions of
Section 6(b)(iii) of this Paragraph 1, the Corporation may from time
to time redeem all or any part of the Serial Preferred Stock of any
series at the time outstanding (i) at the option of the Board of
Directors at the applicable redemption price for such series fixed in
accordance with the provisions of Section 1 of this Paragraph, or (ii)
in fulfillment of the requirements of any sinking fund provided for
shares of such series at the applicable sinking fund redemption price,
fixed in accordance with the provisions of Section 1 of this
Paragraph, together in each case with accrued and unpaid dividends to
the redemption date.
(b) Notice of every such redemption shall be mailed, postage prepaid, to
the holders of record of the Serial Preferred Stock to be redeemed at
their respective addresses then appearing on the books of the
Corporation, not less than thirty (30) days nor more than sixty (60)
days prior to the date fixed for such redemption. At any time before
or after notice has been given as above provided, the Corporation may
deposit the aggregate redemption price of the shares of Serial
Preferred Stock to be redeemed with any bank or trust company in
Toledo, Ohio, or New York, New York, having capital and surplus of
more than Five Million Dollars ($5,000,000), named in such notice,
directed to be paid to the respective holders of the shares of Serial
Preferred Stock so to be redeemed, in amounts equal to the redemption
price of all shares of Serial Preferred Stock so to be redeemed, on
surrender of the stock certificate or certificates held by such
holders, and upon the making of such deposit such holders shall cease
to be shareholders with respect to such shares, and after such notice
shall have been given and such deposit shall have been made such
holders shall have no interest in or claim against the Corporation
with respect to such shares except only to receive such money from
such bank or trust company without interest or the right to exercise,
before the redemption date, any unexpired privileges of conversion. In
case less than all of the outstanding shares of Serial Preferred Stock
are to be redeemed, the Corporation shall select by lot the shares so
to be redeemed in such manner as shall be prescribed by its Board of
Directors.
If the holders of shares of Serial Preferred Stock which shall have
been called for redemption shall not, within ten years after such
deposit, claim the amount deposited for the redemption thereof, any
such bank or trust company shall, upon demand, pay over to the
Corporation such unclaimed amounts and thereupon such bank or trust
company and the Corporation shall be relieved of all responsibility in
respect thereof and to such holders.
(c) Any shares of Serial Preferred Stock which are redeemed by the
Corporation pursuant to the provisions of this Section 4 and any
shares of Serial Preferred Stock which are purchased and delivered in
satisfaction of any sinking fund requirements provided for shares of
such series and any shares of Serial Preferred Stock which are
converted in accordance with the express terms thereof shall be
cancelled and not reissued. Any shares of Serial Preferred Stock
otherwise acquired by the Corporation shall resume the status of
authorized and unissued shares of Serial Preferred Stock without
serial designation.
Section 5.
(a) The holders of Serial Preferred Stock of any series shall, in case of
liquidation, dissolution or winding up of the affairs of the
Corporation, be entitled to receive in full out of the assets of the
Corporation, including its capital, before any amount shall be paid or
distributed among the holders of the Common Shares or any
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other shares ranking junior to the Serial Preferred Stock, the amounts
fixed with respect to shares of such series in accordance with Section
1 of this Paragraph, plus in either event an amount equal to all
dividends accrued and unpaid thereon to the date of payment of the
amount due pursuant to such liquidation, dissolution or winding up of
the affairs of the Corporation. In case the net assets of the
Corporation legally available therefor are insufficient to permit the
payment upon all outstanding shares of Serial Preferred Stock of the
full preferential amount to which they are respectively entitled, then
such net assets shall be distributed ratably upon outstanding shares
of Serial Preferred Stock in proportion to the full preferential
amount to which each such share is entitled.
After payment to holders of Serial Preferred Stock of the full
preferential amounts as aforesaid, holders of Serial Preferred Stock
as such shall have no right or claim to any of the remaining assets of
the Corporation.
(b) The merger or consolidation of the Corporation into or with any other
corporation, or the merger of any other corporation into it, or the
sale, lease or conveyance of all or substantially all the property or
business of the Corporation, shall not be deemed to be a dissolution,
liquidation or winding up, voluntary or involuntary, for the purposes
of this Section 5.
Section 6.
(a) The holders of Serial Preferred Stock shall be entitled to one vote
for each share of such stock upon all matters presented to the
shareholders; and, except as otherwise provided herein or required by
law, the holders of Serial Preferred Stock and the holders of Common
Shares shall vote together as one class on all matters.
If, and so often as, the Corporation shall be in default in the
payment of six (6) full quarterly dividends (whether or not
consecutive) on any series of Serial Preferred Stock at the time
outstanding, whether or not earned or declared, the holders of Serial
Preferred Stock of all series, voting separately as a class and in
addition to all other rights to vote for Directors, shall be entitled
to elect, as herein provided, two (2) members of the Board of
Directors of the Corporation; provided, however, that the holders of
shares of Serial Preferred Stock shall not have or exercise such
special class voting rights except at meetings of the shareholders for
the election of Directors at which the holders of not less than
thirty-five per cent (35%) of the outstanding shares of Serial
Preferred Stock of all series then outstanding are present in person
or by proxy; and provided further that the special class voting rights
provided for herein when the same shall have become vested shall
remain so vested until all accrued and unpaid dividends on the Serial
Preferred Stock of all series then outstanding shall have been paid,
whereupon the holders of Serial Preferred Stock shall be divested of
their special class voting rights in respect of subsequent elections
of Directors, subject to the revesting of such special class voting
rights in the event hereinabove specified in this paragraph.
In the event of default entitling the holders of Serial Preferred
Stock to elect two (2) Directors as above specified, a special meeting
of the shareholders for the purpose of electing such Directors shall
be called by the Secretary of the Corporation upon written request of,
or may be called by, the holders of record of at least ten per cent
(10%) of the shares of Serial Preferred Stock of all series at the
time outstanding, and notice thereof shall be given in the same manner
as that required for the annual
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meeting of shareholders; provided, however, that the Corporation shall
not be required to call such special meeting if the annual meeting of
shareholders shall be held within ninety (90) days after the date of
receipt of the foregoing written request from the holders of Serial
Preferred Stock. At any meeting at which the holders of Serial
Preferred Stock shall be entitled to elect Directors, the holders of
thirty-five per cent (35%) of the then outstanding shares of Serial
Preferred Stock of all series, present in person or by proxy, shall be
sufficient to constitute a quorum, and the vote of the holders of a
majority of such shares so present at any such meeting at which there
shall be such a quorum shall be sufficient to elect the members of the
Board of Directors which the holders of Serial Preferred Stock are
entitled to elect as hereinabove provided.
(b) The affirmative vote of the holders of at least two-thirds of the
shares of Serial Preferred Stock at the time outstanding, given in
person or by proxy at a meeting called for the purpose at which the
holders of Serial Preferred Stock shall vote separately as a class,
shall be necessary to effect any one or more of the following (but so
far as the holders of Serial Preferred Stock are concerned, such
action may be effected with such vote):
(i) Any amendment, alteration or repeal of any of the provisions of
the Articles of Incorporation or of the Regulations of the
Corporation which affects adversely the voting powers, rights or
preferences of the holders of Serial Preferred Stock; provided,
however, that, for the purpose of this clause (i) only, neither
the amendment of the Articles of Incorporation so as to authorize
or create, or to increase the authorized or outstanding amount
of, Serial Preferred Stock or of any shares of any class ranking
on a parity with or junior to the Serial Preferred Stock, nor the
amendment of the provisions of the Regulations so as to increase
the number of Directors of the Corporation shall be deemed to
affect adversely the voting powers, rights or preferences of the
holders of Serial Preferred Stock; and provided further, that if
such amendment, alteration or repeal affects adversely the rights
or preferences of one or more but not all series of Serial
Preferred Stock at the time outstanding, only the affirmative
vote of the holders of at least two-thirds of the number of the
shares at the time outstanding of the series so affected shall be
required;
(ii) The authorization or creation of, or the increase in the
authorized amount of, any shares of any class, or any security
convertible into shares of any class, ranking prior to the Serial
Preferred Stock; or
(iii) The purchase or redemption (for sinking fund purposes or
otherwise) of less than all of the Serial Preferred Stock then
outstanding except in accordance with a stock purchase offer made
to all holders of record of Serial Preferred Stock, unless all
dividends upon all Serial Preferred Stock then outstanding for
all previous quarterly dividend periods shall have been declared
and paid or funds therefor set apart and all accrued sinking fund
obligations applicable thereto shall have been complied with.
(c) The affirmative vote of the holders of at least a majority of the
shares of Serial Preferred Stock at the time outstanding, given in
person or by proxy at a meeting called for the purpose at which the
holders of Serial Preferred Stock shall vote separately as a class,
shall be necessary to effect any one or more of the following (but so
far as the holders of Serial Preferred Stock are concerned, such
action may be effected with such vote):
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(i) The sale, lease or conveyance by the Corporation of all or
substantially all of its property or business, or its
consolidation with or merger into any other corporation unless
the corporation resulting from such consolidation or merger will
have after such consolidation or merger no class of shares either
authorized or outstanding ranking prior to or on a parity with
the Serial Preferred Stock except the same number of shares
ranking prior to or on a parity with the Serial Preferred Stock
and having the same rights and preferences as the shares of the
Corporation authorized and outstanding immediately preceding such
consolidation or merger, and each holder of Serial Preferred
Stock immediately preceding such consolidation or merger shall
receive the same number of shares, with the same rights and
preferences, of the resulting corporation; or
(ii) The authorization of any shares ranking on a parity with the
Serial Preferred Stock or an increase in the authorized number of
shares of Serial Preferred Stock.
Section 7. The holders of Serial Preferred Stock shall have no pre-emptive
right to purchase or have offered to them for purchase any shares or other
securities of the Corporation, whether now or hereafter authorized.
Section 8. For the purpose of this Paragraph 1:
Whenever reference is made to shares "ranking prior to the Serial Preferred
Stock" or "on a parity with the Serial Preferred Stock," such reference shall
mean and include all shares of the Corporation in respect of which the rights of
the holders thereof as to the payment of dividends or as to distributions in the
event of a voluntary or involuntary liquidation, dissolution or winding up of
the affairs of the Corporation are given preference over, or rank on an equality
with (as the case may be) the rights of the holders of Serial Preferred Stock;
and whenever reference is made to shares "ranking junior to the Serial Preferred
Stock," such reference shall mean and include all shares of the Corporation in
respect of which the rights of the holders thereof as to the payment of
dividends and as to distributions in the event of a voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation are
junior and subordinate to the rights of the holders of Serial Preferred Stock.
Paragraph 1(a). EXPRESS TERMS OF THE $4.75 CUMULATIVE CONVERTIBLE PREFERRED
STOCK, SERIES A.
There is hereby established a first series of Serial Preferred Stock to
which the following provisions shall be applicable:
Section 1. DESIGNATION OF SERIES. The series shall be designated "$4.75
Cumulative Convertible Preferred Stock, Series A" (hereinafter called "Series A
Preferred Stock").
Section 2. NUMBER OF SHARES. The number of shares of Series A Preferred
Stock is 1,357,100, which number the Board of Directors may increase or decrease
(but not below the number of shares of the series then outstanding).
Section 3. DIVIDEND RATE. The dividend rate for Series A Preferred Stock is
$4.75 per share per annum.
Section 4. DIVIDEND PAYMENT DATES; CUMULATION DATES. The dates at which
dividends on the Series A Preferred Stock shall be payable are March 10, June
10, September 10 and December 10 of each year. Dividends on Series A Preferred
Stock shall be cumulative from and after the date of issuance thereof.
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Section 5. REDEMPTION PRICES. The Series A Preferred Stock shall not be
redeemable by the Corporation prior to January 1, 1974. Thereafter the
redemption prices for the Series A Preferred Stock shall be as follows:
<TABLE>
<CAPTION>
If the Redemption
Date Is During the
12-Month Period Redemption
Beginning January 1 Price
------------------ ----------
<S> <C>
1974 $104.75
1975 103.75
1976 102.75
1977 101.75
1978 100.75
Thereafter 100.00
</TABLE>
Section 6. LIQUIDATION RIGHTS. The amount payable on Series A Preferred
Stock in the event of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation shall be an amount equal to $100.00
per share.
Section 7. CONVERSION RIGHTS.
(a) Subject to the provisions for adjustment hereinafter set forth, shares
of the Series A Preferred Stock shall be convertible at any time at
the option of the holder thereof, upon surrender to any transfer agent
for such series of the certificate or certificates evidencing the
shares so to be converted, into fully paid and non-assessable Common
Shares of the Corporation at the initial rate of one and one-half
(1-1/2) Common Shares for each share of the Series A Preferred Stock
so surrendered for conversion. The right to convert shares of the
Series A Preferred Stock shall terminate with respect to shares called
for redemption on the third business day prior to the date fixed for
redemption. Upon conversion, no payment or adjustment shall be made
for dividends on the shares of the Series A Preferred Stock so
converted.
(b) The number of Common Shares and the number of shares of other classes
of the Corporation, if any, into which each share of the Series A
Preferred Stock is convertible shall be subject to adjustment from
time to time only as follows:
(i) In case the Corporation shall (A) establish a record date for the
determination of the holders of its Common Shares who are
entitled to receive a dividend declared payable in Common Shares
of the Corporation, (B) subdivide its Common Shares, (C) combine
its outstanding Common Shares into a smaller number of shares or
(D) issue by reclassification of its Common Shares any shares of
the Corporation, the holder of each share of the Series A
Preferred Stock shall thereafter be entitled to receive upon the
conversion of such share the number of shares of the Corporation
which he would have owned or have been entitled to receive after
the happening of any of the events described above had such share
of the Series A Preferred Stock been converted immediately prior
to the happening of such event, such adjustment to become
effective immediately after the opening of business on the day
following such record date or the day upon which such
subdivision, combination or reclassification becomes effective.
(ii) In case of any consolidation or merger of the Corporation with or
into another corporation, or in case of any sale or conveyance to
another corporation of all or substantially all the property of
the Corporation, the holder of each share of the Series A
Preferred Stock then outstanding shall have the right thereafter,
so long as his conversion right
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hereunder shall exist, to convert such share into the kind and
amount of shares of stock or other securities or property
receivable upon such consolidation, merger, sale or conveyance by
a holder of the number of Common Shares of the Corporation into
which such share might have been converted immediately prior to
such consolidation, merger, sale or conveyance, and shall have no
other conversion rights under these provisions; in any such
event, effective provision shall be made, in the articles or
certificate of incorporation of the resulting or surviving
corporation or otherwise, so that the provisions set forth herein
for the protection of the conversion rights of the shares of the
Series A Preferred Stock shall thereafter be applicable, as
nearly as reasonably may be, to any such other shares of stock,
other securities or property deliverable upon conversion of the
shares of the Series A Preferred Stock remaining outstanding, and
any such resulting or surviving corporation shall expressly
assume the obligation to deliver, upon the exercise of the
conversion privilege, such shares, securities or property as the
holders of the shares of the Series A Preferred Stock remaining
outstanding shall be entitled to receive pursuant to the
provisions hereof, and to make provision for the protection of
the conversion right as above provided.
(iii) No fractional Common Share shall be issued upon any conversion
but, in lieu thereof, there shall be paid to the holder of the
shares of the Series A Preferred Stock surrendered for conversion
as soon as practicable after the date such shares are surrendered
for conversion an amount in cash equal to the same fraction of
the market value of a full Common Share, unless the Board of
Directors of the Corporation shall determine to adjust fractional
shares by the issue of fractional scrip certificates or in some
other manner. For such purpose, the market value of a Common
Share shall be the last sales price of 100 shares or more on the
day immediately preceding the date upon which such shares are
surrendered for conversion, or, in case no such sale takes place
on such day, the average of the closing bid and asked prices on
such day, in either case as officially quoted by the New York
Stock Exchange.
(iv) No adjustment in the number of Common Shares into which each
share of the Series A Preferred Stock is convertible shall be
required unless such adjustment would require an increase or
decrease of at least 1/100th of a share in the number of Common
Shares into which such share is then convertible; provided,
however, that any adjustments which by reason of this clause (iv)
are not required to be made shall be carried forward and taken
into account in any subsequent adjustment.
(v) Whenever any adjustment is required in the Common Shares into
which each share of the Series A Preferred Stock is convertible,
the Corporation shall forthwith (A) file with the transfer agent
or transfer agents for the shares of the Series A Preferred Stock
a statement describing in reasonable detail the adjustment and
the method of calculation used and (B) shall instruct the said
transfer agent or agents to exhibit the same from time to time to
any holder of Series A Preferred Stock desiring an inspection
thereof.
(c) The Corporation shall at all times reserve and keep available out
of its authorized but unissued Common Shares the full number of
shares into which all shares of the Series A Preferred Stock from
time to time outstanding are convertible, but Common Shares held
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in the treasury of the Corporation may be delivered upon any
conversion of shares of the Series A Preferred Stock in the
Corporation's discretion.
(d) The Corporation will pay any and all issue and other taxes that may be
payable in respect of any issue or delivery of Common Shares on
conversion of shares of the Series A Preferred Stock pursuant hereto.
The Corporation shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issue and
delivery of shares in a name other than that in which the shares of
the Series A Preferred Stock so converted were registered and no such
issue or delivery shall be made unless and until the person requesting
such issue has paid to the Corporation the amount of any such tax or
has established, to the satisfaction of the Corporation, that such tax
has been paid.
(e) In the event the Corporation shall offer securities of the Corporation
or of any other corporation to the holders of its Common Shares, the
Corporation shall make the same offer to the holders of shares of the
Series A Preferred Stock, giving to each such holder the right to
purchase at the offer price the amount of such securities which such
holder would have been entitled to purchase had he converted each
share of the Series A Preferred Stock held by him immediately prior to
the taking of a record of the holders of Common Shares for the purpose
of entitling them to receive such offer, such offer to the holders of
shares of the Series A Preferred Stock to be made to those holders who
are such of record on the books of the Corporation on the same date as
is used for the taking of a record of the holders of Common Shares for
such offer.
(f) Upon conversion of Series A Preferred Stock, the stated capital of the
Common Shares issued upon such conversion shall be the aggregate par
value thereof, and the stated capital of the Corporation shall be
correspondingly increased or reduced to reflect the difference between
the stated capital of the Series A Preferred Stock so converted and
the stated capital of the Common Shares issued upon conversion.
Paragraph 1(b). EXPRESS TERMS OF THE CUMULATIVE REDEEMABLE PREFERRED STOCK.
There is hereby established a series of Serial Preferred Stock to which the
following provisions shall be applicable:
Section l. DESIGNATION OF SERIES. The series shall be designated
"Cumulative Redeemable Serial Preferred Stock" (hereinafter sometimes called
this "Series" or the "Cumulative Redeemable Preferred Shares").
Section 2. NUMBER OF SHARES. The number of shares of this Series shall be
1,000,000.
Section 3. DIVIDENDS.
(a) The holders of record of Cumulative Redeemable Preferred Shares shall
be entitled to receive, when and as declared by the Board of Directors
in accordance with the terms hereof, out of funds legally available
for the purpose, cumulative quarterly dividends payable in cash on the
first day of January, April, July and October in each year (each such
date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the
first issuance of a Cumulative Redeemable Preferred Share in an amount
per share (rounded to the nearest cent) equal to the lesser of (i)
$500 per share or (ii) subject to the provision for adjustment
hereinafter set forth, 100 times the aggregate per share amount of all
cash dividends, and 100 times the aggregate per share amount (payable
in cash) of all non-cash dividends or other distributions
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<PAGE> 10
(other than a dividend payable in Common Shares, or a subdivision of
the outstanding Common Shares (by reclassification or otherwise)),
declared on the Common Shares since the immediately preceding
Quarterly Dividend Payment Date, or, with respect to the first
Quarterly Dividend Payment Date, since the first issuance of any
Cumulative Redeemable Preferred Share or fraction of a Cumulative
Redeemable Preferred Share. In the event the Corporation shall at any
time declare or pay any dividend on the Common Shares payable in
Common Shares, or effect a subdivision or combination or consolidation
of the outstanding Common Shares (by reclassification or otherwise
than by payment of a dividend in Common Shares) into a greater or
lesser number of Common Shares, then in each such case the amount to
which holders of Cumulative Redeemable Preferred Shares were entitled
immediately prior to such event under clause (ii) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of Common Shares outstanding
immediately after such event and the denominator of which is the
number of Common Shares that were outstanding immediately prior to
such event.
(b) Dividends shall begin to accrue and be cumulative on outstanding
Cumulative Redeemable Preferred Shares from the Quarterly Dividend
Payment Date next preceding the date of issue of such Cumulative
Redeemable Preferred Shares, unless the date of issue of such shares
is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue
from the date of issue of such shares, or unless the date of issue is
a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Cumulative Redeemable
Preferred Shares entitled to receive a quarterly dividend and before
such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly
Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. No dividends shall be paid upon or declared and set apart
for any Cumulative Redeemable Preferred Shares for any dividend period
unless at the same time a dividend for the same dividend period,
ratably in proportion to the respective annual dividend rates fixed
therefor, shall be paid upon or declared and set apart for all Serial
Preferred Stock of all series then outstanding and entitled to receive
such dividend. The Board of Directors may fix a record date for the
determination of holders of Cumulative Redeemable Preferred Shares
entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be no more than 40 days prior to the
date fixed for the payment thereof.
Section 4. REDEMPTIONS. Subject to the provisions of Section 6(b)(iii) of
Paragraph l and in accordance with Section 4 of Paragraph l, the Cumulative
Redeemable Preferred Shares shall be redeemable from time to time at the option
of the Board of Directors of the Corporation, as a whole or in part, at any time
at a redemption price per share equal to one hundred times the then applicable
Purchase Price as defined in that certain Rights Agreement, dated as of February
7, 1999, between the Corporation and First Chicago Trust Company of New York
(the "Rights Agreement"), as the same may be from time to time amended in
accordance with its terms, which Purchase Price is $150.00 as of February 7,
1999, subject to adjustment from time to time as provided in the Rights
Agreement. Copies of the Rights Agreement are available from the Corporation
upon request. In case less than all of the outstanding Cumulative Redeemable
Preferred Shares are to be redeemed, the Corporation shall select by lot the
shares so to be redeemed in such manner as shall be prescribed by its Board of
Directors.
Section 5. LIQUIDATIONS.
(a) In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Corporation
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(hereinafter referred to as a "Liquidation"), no distribution shall be
made to the holders of shares of stock ranking junior (either as to
dividends or upon Liquidation) to the Cumulative Redeemable Preferred
Shares, unless, prior thereto, the holders of Cumulative Redeemable
Preferred Shares shall have received at least an amount per share
equal to one hundred times the then applicable Purchase Price as
defined in the Rights Agreement, as the same may be from time to time
amended in accordance with its terms (which Purchase Price is $150.00
as of February 7, 1999), subject to adjustment from time to time as
provided in the Rights Agreement, plus an amount equal to accrued and
unpaid dividends and distributions thereon, whether or not earned or
declared, to the date of such payment, provided that the holders of
shares Cumulative Redeemable Preferred Shares shall be entitled to
receive at least an aggregate amount per share, subject to the
provision for adjustment hereinafter set forth, equal to 100 times the
aggregate amount to be distributed per share to holders of Common
Shares (the "Cumulative Redeemable Preferred Shares Liquidation
Preference").
(b) In the event, however, that the net assets of the Corporation are not
sufficient to pay in full the amount of the Cumulative Redeemable
Preferred Shares Liquidation Preference and the liquidation
preferences of all other series of Serial Preferred Stock, if any,
which rank on a parity with the Cumulative Redeemable Preferred Shares
as to distribution of assets in Liquidation, all shares of this Series
and of such other series of Serial Preferred Stock shall share ratably
in the distribution of assets (or proceeds thereof) in Liquidation in
proportion to the full amounts to which they are respectively
entitled.
(c) In the event the Corporation shall at any time declare or pay any
dividend on the Common Shares payable in Common Shares, or effect a
subdivision or combination or consolidation of the outstanding Common
Shares (by reclassification or otherwise than by payment of a dividend
in Common Shares) into a greater or lesser number of Common Shares,
then in each such case the amount to which holders of Cumulative
Redeemable Preferred Shares were entitled immediately prior to such
event pursuant to the proviso set forth in paragraph (a) above, shall
be adjusted by multiplying such amount by a fraction the numerator of
which is the number of Common Shares outstanding immediately after
such event and the denominator of which is the number of Common Shares
that were outstanding immediately prior to such event.
(d) The merger or consolidation of the Corporation into or with any other
corporation, or the merger of any other corporation into it, or the
sale, lease or conveyance of all or substantially all the property or
business of the Corporation, shall not be deemed to be a Liquidation
for the purposes of this Section 5.
Section 6. CONVERSIONS. The Cumulative Redeemable Preferred Shares shall
not be convertible into Common Shares.
Paragraph 2. EXPRESS TERMS OF THE COMMON SHARES
The Common Shares shall be subject to the express terms of the Serial
Preferred Stock and any series thereof. Each Common Share shall be equal to
every other Common Shares. The holders of Common Shares shall be entitled to one
vote for each share upon all matters presented to the shareholders. The holders
of Common Shares shall have no pre-emptive rights to purchase or have offered to
them for purchase any Common Shares which the Corporation may from time to time
issue and offer for sale for any purpose, and any such rights heretofore
existing are hereby terminated.
FIFTH: The Corporation by action of its Board of Directors may purchase any
issued shares of the Corporation to the extent not prohibited by law.
-78-
<PAGE> 12
SIXTH: Notwithstanding any provision of the Revised Code, as now or
hereafter in force, requiring for any purpose the vote, consent, waiver, or
release of the holders of a designated proportion (but less than all) of the
shares of the Corporation, such vote, consent, waiver, or release, unless
otherwise expressly provided by law, may be made or taken by the vote of the
holders of shares entitling them to exercise a majority of the voting power of
the Corporation.
SEVENTH: These Amended Articles of Incorporation supersede and take the
place of the existing Articles.
-79-
<PAGE> 1
EXHIBIT (12)
<TABLE>
<CAPTION>
STATEMENT RE: COMPUTATION OF RATIOS
(Dollars in thousands)
Year Ended December 31
----------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
RATIO OF EARNINGS TO FIXED
CHARGES
<S> <C> <C> <C> <C> <C>
Income before income taxes and
cumulative effect of accounting
change $147,537 $148,153 $153,421 $128,196 $101,255
Dividends received, net of equity
in earnings (loss) of
unconsolidated affiliates 887 1,605 9,961 (3,704) 1,213
Fixed charges 43,552 46,034 41,712 31,762 30,249
-------- -------- -------- -------- --------
Income before cumulative effect
of accounting change for
computation purposes $191,976 $195,792 $205,094 $156,254 $132,717
======== ======== ======== ======== ========
FIXED CHARGES
Interest expense, including interest
related to corporate owned life
insurance $ 33,313 $ 37,971 $ 34,963 $ 24,477 $ 22,582
Portion of rent expense representing
interest 7,518 6,819 6,288 6,903 7,303
Amortization of debt expense and
debt discount 2,721 1,244 461 382 364
-------- -------- -------- -------- --------
Total fixed charges $ 43,552 $ 46,034 $ 41,712 $ 31,762 $ 30,249
======== ======== ======== ======== ========
Ratio of Earnings to Fixed
Charges 4.4x 4.3x 4.9x 4.9x 4.4x
======== ======== ======== ======== ========
</TABLE>
For the purpose of computing the ratio of earnings to fixed charges, "earnings"
consist of income before income taxes and cumulative effect of accounting
change, plus fixed charges and dividends received, net of equity in earnings
(loss) of unconsolidated affiliates. Fixed charges consist of interest expense,
the portion of rent expense representing interest and amortization of debt
discount.
-80-
<PAGE> 1
EXHIBIT (21)
AEROQUIP-VICKERS, INC.
SUBSIDIARIES OF THE REGISTRANT
The assets and business of all subsidiaries listed below are included in the
1998 consolidated financial statements of the Registrant. In addition to those
named, 5 U.S. and 19 non-U.S. consolidated subsidiaries and 4 affiliated
companies that are accounted for by the cost and/or equity methods are not
disclosed. The undisclosed subsidiaries and affiliated companies in the
aggregate do not constitute a significant subsidiary.
Incorporated or Percent of
Organized - Voting Securities
Company State or Country Owned
- ---------------------------------- ----------------- -----------------
Aeroquip-Vickers, Inc. Ohio Registrant
SUBSIDIARIES OF REGISTRANT
Aeroquip Corporation Michigan 100
Aeroquip International Inc. Delaware 100
Vickers, Incorporated Delaware 100
Vickers International Inc. Delaware 100
Aeroquip A.G. Switzerland 100
Aeroquip do Brasil, S.A. Brazil 99.5
Aeroquip Iberica S.A. Spain 100
Aeroquip Inoac Company Michigan 51
Aeroquip-Vickers International GmbH Germany 100
Aeroquip Ltd. Barbados 100
A-VIC Ltd. Barbados 100
Aeroquip-Vickers Export Trading Company Virgin Islands 100
Aeroquip-Vickers Inc. Canada 100
Aeroquip-Vickers Limited United Kingdom 100
Aeroquip-Vickers Pte. Ltd. Singapore 100
Aeroquip-Vickers Pty. Ltd. Australia 100
Aeroquip-Vickers S.A. France 100
Aeroquip-Vickers Sdn. Bhd. Malaysia 100
Aeroquip-Vickers S.p.A. Italy 100
Vickers do Brasil Ltda. Brazil 100
Vickers Systems Asia Pacific Pte. Ltd. Singapore 100
Vickers Systems International Ltd. India 51
Vickers Systems Limited Hong Kong 100
-81-
<PAGE> 1
EXHIBIT (23)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration
Statement No. 333-34663 on Form S-3 and Post-Effective Amendment No. 1 to
Registration Statement No. 333-1709 both dated August 29, 1997, and in the
related Prospectus dated September 19, 1997; Registration Statement No.
333-1709 on Form S-3 and Post-Effective Amendment No. 2 to Registration
Statement No. 33-9127 on Form S-3 both dated March 14, 1996, and in the
related Prospectus dated March 20, 1996; Post-Effective Amendment No. 2 to
Registration Statement No. 33-14682 on Form S-8 dated April 28, 1989;
Registration Statement No. 33-28638 on Form S-8 dated May 10, 1989;
Registration Statement No. 33-54059 on Form S-8 dated June 10, 1994;
Registration Statement No. 33-55399 on Form S-8 dated September 8, 1994;
Registration Statement No. 333-33047 on Form S-8 dated August 7, 1997;
Registration Statement No. 333-52039 on Form S-8 dated May 4, 1998;
Registration Statement No. 333-52041 on Form S-8 dated May 4, 1998; and
Registration Statement No. 333-52043 on Form S-8 dated May 4, 1998, of our
report dated January 27, 1999, with respect to the consolidated financial
statements and schedule included in this Annual Report (Form 10-K), for the
year ended December 31, 1998 of Aeroquip-Vickers, Inc.
/s/ ERNST & YOUNG LLP
Toledo, Ohio
March 23, 1999
-82-
<PAGE> 1
(EXHIBIT 24)
DIRECTORS OF
AEROQUIP-VICKERS, INC.
ANNUAL REPORT ON FORM 10-K
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned directors of
Aeroquip-Vickers, Inc., an Ohio corporation ("Aeroquip-Vickers"), do hereby
constitute and appoint Darryl F. Allen, James E. Kline and William R. Ammann,
and each of them, a true and lawful attorney in their name, place and stead, in
any and all capacities, to sign their names to Aeroquip-Vickers' Annual Report
on Form 10-K for the year ended December 31, 1998, and any and all amendments to
such Form 10-K, and to cause the same to be filed with the Securities and
Exchange Commission, granting unto said attorneys and each of them full power
and authority to do and perform any act and thing necessary and proper to be
done in the premises, as fully to all intents and purposes as the undersigned
could do if personally present, and the undersigned hereby ratify and confirm
all that said attorneys or any one of them shall lawfully do or cause to be done
by virtue hereof.
This Power of Attorney may be executed in multiple counterparts, each of
which shall be deemed an original with respect to the person executing it.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the
28th day of January, 1999.
/S/ PURDY CRAWFORD /S/ PAUL A. ORMOND
Purdy Crawford Paul A. Ormond
Director Director
/S/ VIRGIS W. COLBERT /S/ JOHN P. REILLY
Virgis W. Colbert John P. Reilly
Director Director
/S/ JOSEPH C. FARRELL /S/ WILLIAM R. TIMKEN, JR.
Joseph C. Farrell William R. Timken, Jr.
Director Director
/S/ DAVID R. GOODE
David R. Goode
Director
-83-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT
OF FINANCIAL POSITION AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 17,310
<SECURITIES> 0
<RECEIVABLES> 356,664
<ALLOWANCES> 14,839
<INVENTORY> 302,236
<CURRENT-ASSETS> 713,517
<PP&E> 1,119,557
<DEPRECIATION> 571,340
<TOTAL-ASSETS> 1,458,801
<CURRENT-LIABILITIES> 441,455
<BONDS> 278,343
0
0
<COMMON> 138,003
<OTHER-SE> 430,816
<TOTAL-LIABILITY-AND-EQUITY> 1,458,801
<SALES> 2,149,474
<TOTAL-REVENUES> 2,149,474
<CGS> 1,619,905
<TOTAL-COSTS> 1,619,905
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,013
<INCOME-PRETAX> 147,537
<INCOME-TAX> 47,200
<INCOME-CONTINUING> 100,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (3,283)
<NET-INCOME> 97,054
<EPS-PRIMARY> 3.46
<EPS-DILUTED> 3.44
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT
OF FINANCIAL POSITION AND THE CONDENSED STATEMENT OF INCOME AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-END> SEP-30-1998 JUN-30-1998 MAR-31-1998
<CASH> 24,488 27,806 27,889
<SECURITIES> 0 0 0
<RECEIVABLES> 365,187 393,264 400,441
<ALLOWANCES> 13,391 13,680 14,628
<INVENTORY> 306,498 304,650 303,217
<CURRENT-ASSETS> 729,868 761,932 763,965
<PP&E> 1,104,665 1,060,986 1,021,752
<DEPRECIATION> 563,840 542,628 530,430
<TOTAL-ASSETS> 1,478,693 1,485,959 1,455,283
<CURRENT-LIABILITIES> 468,392 484,417 497,651
<BONDS> 263,980 264,160 247,388
0 0 0
0 0 0
<COMMON> 139,913 141,082 140,830
<OTHER-SE> 438,892 427,854 398,083
<TOTAL-LIABILITY-AND-EQUITY> 1,478,693 1,485,959 1,455,283
<SALES> 1,630,343 1,121,369 547,055
<TOTAL-REVENUES> 1,630,343 1,121,369 547,055
<CGS> 1,210,715 825,562 402,823
<TOTAL-COSTS> 1,210,715 825,562 402,823
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 20,126 13,853 6,727
<INCOME-PRETAX> 136,645 101,514 45,873
<INCOME-TAX> 43,700 32,500 14,700
<INCOME-CONTINUING> 92,945 69,014 31,173
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> (3,283) (3,283) (3,283)
<NET-INCOME> 89,662 65,731 27,890
<EPS-PRIMARY> 3.18 2.33 .99
<EPS-DILUTED> 3.16 2.31 .98
</TABLE>
