SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Mark one
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Fiscal year ended January 3, 1999 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-302
ARVIN INDUSTRIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
Indiana 35-0550190
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Noblitt Plaza, Box 3000
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Columbus, IN 47202-3000
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(Address of principal executive offices) (Zip Code)
812-379-3000
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(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b)of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Shares par value $2.50 (voting), New York Stock Exchange
together with Preferred Share Purchase Rights Chicago Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
Registrant was $827,631,304 as of February 22, 1999. For purposes of the
foregoing calculation only, included as affiliate-owned shares are those owned
by the Registrant's directors and officers. Such inclusion (is not intended and)
should not be construed as an admission that such persons are affiliates of the
Registrant for any other purpose.
As of February 1, 1999, the Registrant had outstanding 25,816,701 Common Shares
(including employee stock benefit trust shares and excluding treasury shares),
$2.50 par value.
Documents Incorporated by Reference
-----------------------------------
Portions of the registrant's definitive Proxy Statement, for the Annual Meeting
of Shareholders to be held April 15, 1999 and filed with the Securities and
Exchange Commission pursuant to Regulation 14A, are incorporated by reference in
Part III of this Form 10-K.
1
<PAGE>
ARVIN INDUSTRIES, INC.
Index to Annual Report on Form 10-K
Fiscal Year Ended January 3, 1999
Page No.
Part I
Item 1 Business 3
Item 2 Properties 6
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 7
Executive Officers 8
Part II
Item 5 Market for Registrant's Common Equity and Related
Shareholder Matters 9
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7A Quantitative and Qualitative Disclosure about Market Risk 17
Item 8 Financial Statements and Supplementary Data 18
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 41
Part III
Item 10 Directors and Executive Officers of the Registrant 42
Item 11 Executive Compensation 42
Item 12 Security Ownership of Certain Beneficial Owners and
Management 42
Item 13 Certain Relationships and Related Transactions 42
Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 42
Other
Signatures 47
2
<PAGE>
Part I
Item 1. Business
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Arvin Industries, Inc. (which together with its consolidated subsidiaries is
referred to herein as "Arvin" or "the Company") is a focused international
manufacturer and supplier of automotive parts. The Company's primary
manufacturing locations are in the United States (U.S.), Europe, Canada, Brazil,
Mexico and South Africa. Arvin is a worldwide leader in automotive exhaust
systems and ride control products for the original equipment and replacement
markets. The Company's consolidated revenues were $2.5 billion in fiscal 1998.
Since its founding in 1919, Arvin has grown through internal development,
acquisitions and a number of joint ventures. In recent years, the Company's
strategy has been to strengthen Arvin's automotive parts businesses by achieving
a mix of sales to both original equipment manufacturers and replacement market
parts suppliers on a global basis. Recently, Arvin has implemented a series of
strategic initiatives to increase Arvin's global competitive position within the
automotive parts marketplace.
Arvin classifies its business based on the two primary markets it serves:
Automotive Original Equipment ("OE") and Automotive Replacement ("Replacement").
Business units whose primary focus is other than manufacturing automotive
products are classified as Other. In fiscal 1998, Arvin derived approximately 68
percent of its total revenues from the OE market and approximately 27 percent
from Replacement market sales, with the remaining 5 percent from Other products.
The Company's strategy, which is based on operational excellence, customer
satisfaction and globalization, is to strengthen its relationship with original
equipment manufacturers ("OEMs") by providing full-system and full-service
capabilities. Arvin is continuing its focus on previously established strategic
initiatives, which emphasize providing value to our OEM customers by working as
the system integrator for Arvin products.
The Company continues to pursue initiatives, which are increasing Arvin's global
competitive position in the automotive parts marketplace. Arvin is actively
pursuing new business investment opportunities, including OE investments in
developing markets, further development of the hot end of exhaust systems, and
investments in new Replacement market territories. In pursuit of these
objectives, Arvin acquired the Purolator Products automotive filter business
from Mark IV Industries, Inc. in February 1999. Purolator is a leading
independent manufacturer and distributor of automotive oil, air, and fuel
filters in North America for both the replacement and original equipment
markets. Arvin believes that adding the Purolator brand name to Arvin's own
brand names will create synergies among its brand name replacement products. In
January 1999, Arvin acquired certain assets and assumed certain liabilities from
WorldSource Coil Coating, Inc. This acquisition will significantly expand the
capabilities of Arvin's Roll Coater operations. During 1998, significant
investments were made to enhance the Company's position in the OE markets that
it serves. In December, Arvin entered into a cooperative agreement with Zeuna
Starker GmbH & Co., KG (Zeuna Starker), for the purchase of a 49 percent
interest in Zeuna Starker. Zeuna Starker is a premier exhaust systems supplier
headquartered in Augsburg, Germany. In November, Arvin formed a joint venture
with Kayaba Industry Co., Ltd. to meet the ride control product demands of North
American passenger car and light truck manufacturers. During 1998, the Company
also acquired the remainder of its previous joint ventures in Thailand and
Brazil, both of which serve the OE exhaust market. Arvin also acquired the
remainder of its OE ride control joint venture in Asti, Italy. The Company
expects to continue to make strategic investments that will expand its market
presence in its core markets.
3
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Automotive Original Equipment:
Principal products of the Automotive Original Equipment segment include exhaust
systems (mufflers, exhaust and tail pipes, catalytic converters, flex tubes and
tubular manifolds), ride control products (shock absorbers, struts, ministruts
and corner modules), gas lift supports, vacuum actuators, engine and steering
dampers, and power steering pumps and aluminum. Primary customers of the
Automotive Original Equipment segment include Ford, General Motors,
DaimlerChrysler, Toyota, Renault, Fiat, Mitsubishi, Isuzu and Volkswagen and
heavy duty truck manufacturers including Freightliner, Paccar, Volvo-GM, Renault
and IVECO. In the recreational ride control markets, customers include Polaris,
Bombardier, and Artic Cat.
A consolidating supply base in the OE market has been driven by a shift in
customer requirements and a change in the capabilities required to be a
successful, long term participant in the OE market. The OE market has narrowed
to fewer, larger suppliers who can supply OE customers with higher quality
products at a lower cost on a global basis. This trend has provided and should
continue to provide Arvin with the opportunity to gain market share. In addition
to the reduced number of OE suppliers, OE customers are interested in purchasing
full systems or modules from their suppliers and are outsourcing component
production and assembly to those suppliers. Arvin has successfully integrated
engineering, development and production operations to meet the needs of its OE
customers. Arvin provides exhaust products that include every component from the
manifold to the tail pipe. In ride control, the Company has expanded from shock
absorbers and struts to modules that include springs and mounting components.
Other important trends include the expansion by automakers into the emerging
markets of the world, as well as the impact of increased emissions control
regulations on the design of exhaust systems. The Company has significantly
enhanced its delivery capabilities geographically since the late 1980s through
both acquisitions and the formation of a number of joint ventures. Arvin
believes that its capital spending program has resulted in world-class
manufacturing operations, capable of delivering outstanding value and quality to
its customers.
Automotive Replacement:
Arvin believes that it is among the top two manufacturers of replacement exhaust
and ride control products in North America and Europe. Principal products of the
Automotive Replacement segment include mufflers, exhaust and tail pipes,
catalytic converters, shock absorbers, struts, clamps/hangers and accessories.
In 1999, as a result of the Purolator acquisition, Arvin will add automotive
oil, air, and fuel filters to its product offering.
Brand names for mufflers include Maremont, TIMAX, ANSA, and ROSI. Shock
absorbers are marketed under the Gabriel brand name. Products are also marketed
under private label to customers such as Pep Boys, Sears, CARQUEST, Firestone,
Les Schwab, Kwik-Fit, Autodistribution and Meineke.
Primary customers of the Automotive Replacement segment include retailers (e.g.,
Sears, Canadian Tire, Pep Boys and AutoZone), wholesale distributors (e.g.,
UAP-NAPA, Partco and General Parts, Inc.) and installers (e.g., Meineke and
Kwik-Fit).
The Company's replacement market operations compete with both OEMs and
independent suppliers in North America and Europe, and serve the market through
their own sales force as well as a network of manufacturers' representatives.
The Company's competitive position has been enhanced by rigorous attention to
lead time reduction and lowest cost product development. Continuous improvement
in the manufacturing processes has had a positive impact on order fill rates and
the cost and quality of the products manufactured. In addition, emerging markets
and the increasing demand for performance and sport utility vehicles have
created growth opportunities that Arvin is aggressively pursuing.
4
<PAGE>
Other:
Other includes Arvin's coil coating operations, which are managed by its Roll
Coater subsidiary. Coil coated steel and aluminum substrates are used in a
variety of manufacturing and building areas, including the appliance market,
garage and entry doors, interior building panels and roofs. Roll Coater has been
recognized as the world's largest pre-painted zincrometal coating supplier for
vehicle panels and interior components, and as an innovator in the use of
flexible coatings for valve covers and oil and transmission pans.
Roll Coater brings to its customers - the steel companies and end manufacturers
- - an economically viable and reliable option to in-house or outsourced spray
painting of their product. Stringent environmental regulations on paint and
solvent storage and disposal have significantly affected customers who had
in-house painting operations in the past.
In January 1999, the Company significantly added to Roll Coater's geographic
coverage, capacity, and customer service capabilities through the acquisition of
certain assets of WorldSource. The WorldSource coil coating line in Hawesville,
Kentucky will be added to Roll Coater's other three coil coating facilities in
Indiana and West Virginia.
B. Number of Employees
At February 7, 1999, the Company had 14,963 employees.
C. Competition and Customer Relationships
The Company's business segments operate in highly competitive markets. Customer
loyalty, developed through long-standing relationships, is a primary element of
competition as well as competitive product pricing and customized services
provided. Arvin's long-standing relationships with its principal customers have
been dependent upon the Company's ability to meet such customers' quantity and
quality requirements in a timely manner.
The loss of a principal customer or a significant decline in the requirements
for the Company's products (resulting, for example, from a prolonged strike
against the customer) could have a material adverse effect on the operating
results or financial condition of the Company. In 1998, the Company had sales to
two customers that exceeded 10% of its consolidated net sales (Ford Motor
Company - 19.2 percent and General Motors Corporation - 11.6 percent).
In the OE segment, the Company competes with vehicle manufacturers and
independent suppliers. The Company believes that it is the leading supplier
among five major competitors of cold-end exhaust systems and the leading
independent supplier of hot end exhaust systems in the North American and
European markets. The Company believes that it is one of the three largest
suppliers of OE ride control products in the world.
The Company also competes with vehicle manufacturers and independent suppliers
in the Replacement segment. The Company believes that it is second of four
primary suppliers of automotive replacement exhaust systems and second of four
primary suppliers of automotive replacement ride control products in the world.
The Company is the leader in the U.S. replacement market for gas-charged lift
supports.
The Company competes with other coil coaters and with internal paint systems.
The Company believes that it is the leading coil coater among its major
competitors in the U.S. The Company serves customers both in the form of
suppliers and manufacturers.
5
<PAGE>
D. Regulations
United States air pollutant and acoustical emissions are controlled by
government regulations that, coupled with mandated fuel economy improvements,
continue to affect Arvin. Over the near term, the Company does not anticipate
any regulatory changes that will materially impact the use of catalytic
converters in the United States.
European air pollutant emissions regulations continue to become more stringent
and are applicable throughout the European Union. Current legislation requires
catalytic converters to be fitted to all newly produced gasoline fueled
passenger cars. Reductions in the permissible levels of emissions were
introduced in 1996 in the "Stage 2" standards. Additional tightening of the
standards are planned for "Stage 3" in the year 2000. The Company believes that
the introduction of more stringent standards should have a positive impact on
the results of operations for the Company.
Arvin believes that its facilities either comply with applicable environmental
control regulations or that remedial action is being taken to bring such
facilities into compliance. While Arvin does not believe that continuing
compliance will have a material effect on its competitive or financial
condition, some additional capital expenditures and other expenses will be
required to maintain compliance with such regulations.
E. Patents
The Company owns a considerable number of patents and patent applications that
are, in its judgment, adequate for, but not essential to, the conduct of its
businesses.
F. Research and Development
Expenses for the development of new products and processes, including
significant improvements and refinements to existing products were $29.0, $25.3,
and $26.2 million for 1998, 1997, and 1996, respectively.
Item 2. Properties
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The Company has manufacturing facilities, distribution outlets, sales offices
and research centers located throughout the world. The Company believes that all
of its plants have been adequately maintained and are suitable for its current
needs through productive utilization of the facilities.
Automotive Original Equipment:
The Company has approximately 6.1 million square feet to conduct its business
activities related to the OE segment. The Company's original equipment
facilities are nearly fully utilized.
Manufacturing and warehousing facilities in the United States are located in
Indiana, Missouri, South Carolina, Alabama, and Tennessee. Manufacturing and
warehousing facilities in Alabama are leased, as is a warehouse in South
Carolina.
Principal manufacturing and warehousing facilities outside of the United States
are located in the United Kingdom, Spain, Italy, The Netherlands, and Canada.
The OE segment leases five of six facilities in the United Kingdom, nine of
eleven facilities in Spain, one of three facilities in Italy, two of four
facilities in The Netherlands, and one of two facilities in Canada. Additional
manufacturing and warehousing activities are conducted in Mexico, Brazil,
France, South Africa, and Thailand.
6
<PAGE>
Automotive Replacement:
The Company has approximately 5.0 million square feet of space to conduct its
Automotive Replacement business. The Company's Replacement facilities are nearly
fully utilized.
Manufacturing and warehousing facilities located in the United States are in
Tennessee, North Carolina, Oklahoma, Ohio, and Utah. The Replacement segment
leases the facility in Ohio, plus one of two facilities in Tennessee, one of two
facilities in North Carolina, one of two facilities in Oklahoma, and one of two
facilities in Utah.
Principal manufacturing and warehousing facilities located outside the United
States are in the United Kingdom, Italy and France. Other manufacturing and
warehousing activities are conducted in Canada, South Africa, and Finland. The
major distribution center in Blackpool, England is leased, as are other smaller
distribution centers in Canada.
The data listed above includes Arvin's recent acquisition of the Purolator
Products automotive filter business from Mark IV Industries, Inc. Purolator is a
leading independent manufacturer and distributor of automotive oil, air, and
fuel filters in North America.
Other:
The Company has approximately 1.1 million square feet of space to conduct its
Other business activities. The Company's Other facilities are nearly fully
utilized.
Principal manufacturing and warehousing facilities are located within the United
States in Indiana, Kentucky, and West Virginia. The facilities in Kentucky and
West Virginia are leased.
The data listed above includes Arvin's recent acquisition of certain assets of
WorldSource Coil Coating, Inc. The addition of WorldSource will increase Arvin's
coil coating capacity, geographic reach, and capabilities.
Item 3. Legal Proceedings
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See Footnote 8 to the Consolidated Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
No matters were submitted to a vote of Security Holders during the fourth
quarter of the 1998 fiscal year.
7
<PAGE>
<TABLE>
Executive Officers of the Registrant:
<CAPTION>
Date First
Elected to
Name Age Offices Held Exec. Office
- ------------------------------ -------- ------------------------------------------------------ -----------------
<S> <C> <C> <C>
Byron O. Pond 62 Chairman of the Board of Directors (1) 1990
V. William Hunt 54 President and Chief Executive Officer (1) 1980
Raymond P. Mack 58 Vice President-Human Resources 1993
Richard A. Smith 53 Vice President-Finance and Chief Financial Officer (1) 1990
Ronald R. Snyder 54 Vice President-General Counsel 1992
and Secretary
E. Leon Viars 59 Vice President 1995
David S. Hoyte 52 Vice President 1996
Wesley B. Vance 41 Vice President 1997
Larry D. Blair 55 Vice President 1996
<FN>
(1) Also a member of the Board of Directors
</FN>
</TABLE>
All terms of all officers of the Registrant run until their respective
successors are elected and qualified. All listed executive officers except
Mr. Hoyte have been employed by the Registrant or one of its subsidiaries for
the past five years. Mr. Hoyte joined Arvin as Chief Operations Improvement
Officer in October 1996. Mr. Hoyte was appointed President of the Arvin Ride and
Motion Control Products Group in December 1997. Previous to his Arvin
employment, Mr. Hoyte was Vice President, cost management for IBM. Prior to
IBM, Mr. Hoyte was Executive Vice President of Operations for the Frigidaire
Company.
8
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
- -----------------------------------------------------------------------------
Arvin's common shares are listed on the New York Stock Exchange and the Chicago
Stock Exchange. Set forth below are the dividends declared and the high and low
sales prices of the common shares for each quarter during the last two fiscal
years.
<TABLE>
Market Price Ranges and Quarterly Dividends Paid
(Prices and dividends on common shares)
<CAPTION>
1998 1997
------------------------------------------- ----------------------------------------
Market Price Market Price
-------------------------- --------------------------
Dividend High Low Dividend High Low
------------ --------- ------------ ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ .20 $ 40 $ 31 $ .19 $ 25 7/8 $ 21
Second Quarter .20 42 3/4 33 7/16 .19 28 3/4 21 7/8
Third Quarter .20 42 5/8 35 3/4 .19 39 26 1/4
Fourth Quarter .21 44 1/8 31 .20 41 5/8 31
</TABLE>
As of February 23, 1999, Arvin had 4,216 holders of record of its common shares.
Item 6. Selected Financial Data
- -------------------------------
<TABLE>
Five-Year Consolidated Financial Summary
(In millions, except per share amounts)
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Results*
Net sales $ 2,498.7 $ 2,349.0 $ 2,212.7 $ 1,966.4 $ 1,849.5
Interest expense 35.8 39.5 38.8 42.5 42.8
Earnings 78.4 65.0 47.1 17.9 24.6
Basic earnings per share 3.29 2.83 2.10 .80 1.11
Diluted earnings per share 3.23 2.78 2.03 .80 1.10
Dividends declared per common share .81 .77 .76 .76 .76
Average basic shares outstanding 23.8 23.0 22.4 22.3 22.2
Average diluted shares outstanding 24.2 23.4 24.6 22.4 22.4
Financial Position
Total assets $ 1,646.5 $ 1,447.1 $ 1,307.8 $ 1,218.6 $ 1,231.5
Short-term debt 10.1 55.6 52.6 41.6 25.1
Long-term debt 307.7 222.3 294.0 360.7 416.3
Capital securities 89.1 98.9 - - -
Shareholders' equity 563.7 485.2 437.4 395.1 396.3
Book value per common share 23.38 20.69 19.38 17.76 17.81
<FN>
*From continuing operations
</FN>
</TABLE>
9
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations
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Overview
1998 was another record year for Arvin. Net sales for 1998 increased by six
percent to $2.5 billion compared to the prior year's sales of $2.3 billion. This
improvement was achieved despite the negative impact of a moderately stronger
United States (U.S.) dollar on the translation of foreign sales. On a constant
dollar basis, sales increased seven percent. Top line growth was achieved as a
result of both recent acquisitions and strength in the original equipment
market.
Graphic Table - Bar-graph indicating annual sales for original equipment,
replacement, and Other segments, respectively, for the following years, in
millions:
1998 $1,693.0, $685.7, and $120.0
1997 $1,590.4, $643.4, and $115.2
1996 $1,507.1, $594.1, and $111.5
Earnings from continuing operations increased by 21 percent to $78.4 million
compared to the prior year's earnings from continuing operations of $65.0
million. These results represented a record $3.23 per diluted share in 1998
compared to $2.78 per diluted share in 1997.
<TABLE>
Results of Operations (in millions)
- ------------------------------------
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net Sales by Segment
Automotive Original Equipment $1,693.0 $1,590.4 $1,507.1
Automotive Replacement 685.7 643.4 594.1
Other 120.0 115.2 111.5
-------------- -------------- --------------
Total $2,498.7 $2,349.0 $2,212.7
============== ============== ==============
Operating Income by Segment
Automotive Original Equipment $ 93.8 $ 89.7 $ 83.0
Automotive Replacement 72.3 66.0 38.2
Other 4.6 15.6 14.7
============== ============== ==============
Total $ 170.7 $ 171.3 $ 135.9
============== ============== ==============
</TABLE>
Graphic Table - Bar-graph indicating annual operating income by segment for
original equipment, replacement, and Other, respectively, for the following
years, in millions:
1998 $93.8, $72.3, and $4.6
1997 $89.7, $66.0, and $15.6
1996 $83.0, $38.2, and $14.7
Automotive Original Equipment (OE), 1998 vs. 1997: Net sales in the OE segment
of $1,693.0 million increased by $102.6 million or six percent over strong sales
in 1997. The consolidation of Arvin Exhaust do Brasil Ltda., Arvin-Kayaba, LLC,
and Arvin Exhaust Thailand added $24.7 million in revenues. Conversely, the sale
of Autocomponents Suspension S.r.l. (Autocomponents) reduced revenues by $16.6
million. Market influences were mixed. In the U.S. and Canada, vehicle
production decreased one percent, while new car registrations in Western Europe
improved by seven percent as compared to 1997. Selective price concessions,
which averaged one percent of OE sales, were more than offset by volume gains of
$94.6 million. A strong U.S. dollar had a negative effect on the translation of
OE sales. On a constant dollar basis, OE sales grew eight percent. A favorable
product mix contributed $37.0 million.
10
<PAGE>
Graphic Table - Pie-graph indicating percentage of 1998 sales by segment from
Original Equipment, Replacement, and Other:
Original Equipment 68%
Replacement 27%
Other 5%
Operating income for the OE segment increased $4.1 million or five percent in
1998 as compared to 1997. Volume gains and a favorable product mix exceeded the
impact of selective price concessions by $4.6 million. Manufacturing processes
continued to improve through the implementation of Arvin's Total Quality
programs, increasing productivity by an estimated $7.2 million. Competitive wage
increases and separation costs reduced OE operating profit by $13.0 million.
Negotiated raw material price decreases were $6.4 million and reduced warranty
costs contributed $9.2 million. Research and development expenses increased $4.6
million. The effect of foreign currency translation reduced OE operating income
by approximately two percent and the net effect of acquisitions and dispositions
reduced OE operating profit by $3.5 million.
Comparison of the effect of changes in volume from period to period is subject
to a number of limitations, principally centered around what constitutes a unit
for volume measurement. The appropriate measure of a unit varies over time as
products develop, varies among the different countries in which the Company
operates, and varies within each operating unit of the Company. As a result,
there is a degree of imprecision and subjectivity in estimating the impact of
volume changes.
1997 vs. 1996: Sales in the OE segment of $1,590.4 million for 1997 were $83.3
million or six percent higher than OE sales for 1996. The inclusion of a full
year's results for Arvin Suspension Systems Italia (ASSI, formerly named Way
Assauto S.r.l.) contributed 50 percent of the increase. (ASSI was consolidated
in June 1996.) The January 1997 acquisition of a controlling interest in
Autocomponents contributed 29 percent of the increase. Sales benefited from
higher vehicle build rates in both the United States and Western Europe.
Selective price concessions, which averaged less than one percent of OE sales,
were more than offset by volume gains of $54.8 million. A strong U.S. dollar had
a negative effect on the translation of OE sales. On a constant dollar basis, OE
sales grew nine percent. A favorable product mix contributed $31.7 million.
The Company's 1997 OE operating income increased $6.7 million, or eight percent.
On a constant dollar basis and excluding the effect of the non-recurring net
gain on capital transactions, OE operating income increased $23.6 million, or 28
percent. Negotiated raw material price decreases were a significant driver of
the increase, contributing $22.2 million. Improved product mix and volume gains
contributed $24.9 million of the increase, while the impact of acquisitions
contributed $4.0 million. Selective price concessions coupled with increased
tooling costs reduced operating profit by $17.4 million. Labor inflation
outpaced productivity gains by $3.9 million. A number of smaller variances
account for the remainder of the fluctuation.
Automotive Replacement (Replacement), 1998 vs. 1997: Replacement sales increased
from $643.4 million to $685.7 million, a seven-percent increase. The inclusion
of a full year's results for Timax Exhaust Systems Holding B.V. (TESH)
contributed 60 percent of the increase. (TESH was consolidated in May 1997.)
Volume gains, excluding the effect of acquisitions, plus a favorable product mix
added $5.8 million to Replacement sales. The Company's ride control business was
strong worldwide, while its replacement exhaust sales in Europe had to offset a
weak market in North America that saw some price deterioration. Overall, price
increases averaged nearly two percent of Replacement sales.
11
<PAGE>
Operating units in the Replacement segment sell their product through a variety
of different customer channels including merchandisers, installers, and
wholesale distributors. As a result of period to period variations in this
channel mix, in addition to normal variations in product mix, the average price
of units sold may not correspond to price changes. As in the OE segment, there
is also a degree of imprecision and subjectivity in estimating the impact of
period to period volume changes, principally because of questions as to what
constitutes a unit for volume measurement. The appropriate measure of a unit
varies over time as products develop, varies among the different countries in
which the Company operates, and varies within each operating unit of the
Company.
Graphic Table - Pie-graph indicating percentage of 1998 operating income by
segment from Original Equipment, Replacement, and Other:
Original Equipment 55%
Replacement 42%
Other 3%
Operating income in the Replacement segment increased during 1998 by $6.3
million, or 10 percent. Favorable pricing actions contributed $12.8 million to
Replacement operating income, which was partially offset by labor inflation and
the costs of obtaining new business totaling $6.3 million.
1997 vs. 1996: Replacement sales increased eight percent to $643.4 million. The
Company's 1997 acquisition of a controlling interest in TESH added $49.2 million
to Replacement sales. Favorable pricing actions, plus a favorable product mix,
contributed a total of $23.7 million, which was offset by unfavorable currency
translation rates and a decline in the overall North American replacement
market.
Operating income in the Replacement segment increased $27.8 million during 1997.
Favorable pricing actions and productivity improvements accounted for 83 percent
of the increase. Volume reductions and labor inflation totaled $9.6 million, but
were more than offset by a number of small expense decreases.
Other, 1998 vs. 1997: Other sales increased from $115.2 million to $120.0
million, a four-percent increase. A favorable product mix contributed $8.5
million to Other sales, which was partially offset by reduced volume of $5.0
million. Price increases averaged one percent.
Other operating profit decreased by $11.0 million during 1998. Excluding
non-recurring items of a $5.0 million increase in current year reserves for
legal and environmental issues and a $3.4 million gain recorded in 1997 related
to the sale of certain capital assets, operating profit decreased $2.6 million.
Favorable pricing and a strong product mix, which contributed $4.6 million, were
more than offset by productivity losses related to the start-up of a new plant
facility.
1997 vs. 1996: Other sales increased during 1997 by $3.7 million, or three
percent. Volume gains contributed $6.6 million to Other sales, which was
partially offset by price reductions of $2.8 million.
Other operating income increased by $.9 million during 1997, a six-percent
increase. Excluding the non-recurring gain of $3.4 million for the 1997 sale of
certain capital assets, operating profit decreased $2.5 million. Volume gains
and lower raw material costs contributed $5.1 million, which was partially
offset by price reductions. Start-up costs related to expanding the Company's
capacity and geographic reach were the primary reason for the remainder of the
variance.
Corporate general and administrative expenses increased $5.3 and $1.4 million in
1998 and 1997, respectively. The increase in both years was primarily due to
personnel and professional service expenditures.
12
<PAGE>
Net gain on capital transactions for 1998 represents a $5.5 million gain for the
early redemption of the Company's investment in preferred stock received in
conjunction with the 1995 sale of Arvin's Schrader Automotive unit. During 1997,
the Company reported a $3.7 million gain on the sale of capital assets and a
write down of $1.5 million in the carrying value of a non-controlled venture in
the South American exhaust market. The $10.8 million gain reported in 1996
resulted from the Company's sale of its 31.4 percent equity interest in Fric Rot
S.A.I.C.
Interest expense: During 1998 interest expense decreased by nine percent as a
result of lower average borrowing rates on slightly higher average
interest-bearing liabilities. During 1997 interest expense increased
approximately two percent as a result of higher average borrowing rates on the
Company's outstanding interest-bearing liabilities.
Other expense, net decreased by $2.9 million in 1998. An increase in interest
income, plus net currency gains, contributed $2.9 million to the decrease in net
expense. Other expense was further reduced by a $1.9 million decrease in fees
related to discounted receivables and a non-recurring reserve of $1.8 million
that the Company booked in 1997 for an estimated future obligation under a
contractual agreement deemed to be completed. Other expense increased $3.6
million as a result of separation expenses, $3.0 million due to the write-off of
certain assets, and $1.1 million due to the repurchase of high-coupon debt and
capital securities. In addition to these items, there were a number of small
expense decreases and reclassifications.
Other expense, net increased $2.6 million in 1997. Reduced royalty and rent
income of $1.4 and $1.3 million, respectively, were offset by increased interest
income in 1997. Other expense was higher in 1997, in part due to a $3.0 million
increase in legal and environmental reserves. Conversely, other expense was
lower in 1997 due to a non-recurring reserve of $2.6 million in 1996 for future
lease commitments at abandoned or under-utilized properties. As previously
discussed, other expense during 1997 includes a $1.8 million contract reserve.
Tax expense: The Company's effective tax rate, prior to capital loss
carryforward utilizations, was 35.7, 36.2, and 37.0 percent in 1998, 1997, and
1996, respectively. The effective tax rate after the effect of capital loss
carryforward utilizations was 34.0, 34.9, and 30.7 percent in 1998, 1997, and
1996, respectively.
Equity earnings of affiliates was essentially flat for 1998 as compared to 1997
and for 1997 as compared to 1996. The net impact on comparative results of
affiliates consolidated during 1998 and 1997 was negligible. Equity earnings
from affiliates for 1997 includes an intangible asset write-off, a reduction in
profits of a U.S. OE affiliate, and the elimination of a tax valuation allowance
in the amounts of $3.2, $1.2 and $4.7 million, respectively.
Minority interest in net income of consolidated subsidiaries decreased $2.7
million in 1998 and increased $1.3 million in 1997. The 1998 decrease was due to
the acquisitions of Autocomponents and TESH in March 1998 and in May 1997,
respectively. Minority interest was also lower as a result of the formation of
Arvin-Kayaba; however, this decrease was offset by increased earnings from the
Company's 75 percent owned Spanish subsidiary, AP Amortiguadores, S.A. (APA).
The 1997 increase was primarily a result of the consolidation of Autocomponents
and increased earnings from APA.
Income from disposal of discontinued operations in 1997 represents a previously
deferred gain on the sale of Space Industries.
Liquidity and Capital Resources:
Arvin's operations provided strong cash flows in 1998, 1997, and 1996 primarily
as a result of the Company's higher net income and continued emphasis on high
asset utilization and working capital management. Key elements of the
Consolidated Statement of Cash Flows were:
13
<PAGE>
1998 1997 1996
---- ---- ----
Net Cash Provided by Operating Activities $ 164.4 $ 194.9 $ 158.9
Net Cash Used for Investing Activities (216.7) (116.6) (69.9)
Net Cash Provided by (Used for) Financing Activities 51.8 (7.2) (65.5)
Investing cash flows include purchases of property, plant and equipment in 1998,
1997, and 1996 of $123.2, $96.9, and $79.1 million, respectively. The Company
expects increased levels of capital expenditures in 1999 to support new business
requirements and process improvements. Investing cash flows for 1998 also
includes proceeds of $9.6 million from the redemption of the Company's
investment in preferred stock received in connection with the 1995 sale of
Schrader (see Note 4 to the Consolidated Financial Statements). During 1998,
investments totaling $85.6 million were made in several joint ventures,
including an additional investment in the Company's Arvin Exhaust Germany
affiliate and a new investment in Zeuna Starker (see Note 3 to the Consolidated
Financial Statements). Arvin also acquired several business operations during
1998, with cash payments totaling $29.3 million, net of cash acquired (see Note
2 to the Consolidated Financial Statements). Finally, investing cash flows
include cash proceeds of $6.9 million from the sale of Autocomponents, net of
cash sold (see Note 2 to the Consolidated Financial Statements).
During the first quarter of 1999, Arvin acquired the Purolator Products
automotive filter business from Mark IV Industries, Inc. The transaction value
of $276 million included the assumption of $6 million in debt. The transaction
was funded with a bridge facility provided by the co-lead agents on the
Company's revolving credit facility. Arvin expects permanent financing during
1999 to replace all or part of the bridge facility.
Financing cash flows include changes in the Company's debt structure, which are
more fully described in Note 6 to the Consolidated Financial Statements. The
proceeds from long-term borrowings reflect the issuance of $100 million 6 3/4
percent Notes due March 15, 2008. During 1998 the Company paid $54.2 million to
retire current maturities of long-term debt and $24.0 million to repurchase high
coupon debt and capital securities. Financing cash flows also include Arvin's
quarterly dividend to shareholders, which was increased five percent during 1998
from 20 cents to 21 cents per share. Based on the Company's projected cash flow
from operations and existing investments and financing credit facility
arrangements, management believes that, once the bridge facility is replaced,
sufficient liquidity is available to meet anticipated capital and dividend
requirements over the foreseeable future.
Graphic Table - Bar-graph indicating the components of capitalization for the
following years, in millions:
1998 1997 1996
---- ---- ----
Short-term debt and current maturities $ 10.1 $ 55.6 $ 52.6
Long-term debt 307.7 222.3 294.0
Capital securities (Note 6) 89.1 98.9 -
Minority interest 57.1 12.4 34.2
Shareholders' equity 563.7 485.2 437.4
-------- ------- -------
Total capitalization $1,027.7 $874.4 $818.2
======== ======= =======
Financial Instruments and Risk Management: The Company uses financial
derivatives to manage its interest rate and global foreign exchange exposure.
Interest rate swaps and options are used principally to manage the Company's
floating rate exposure and to hedge anticipated debt issuance transactions.
Forward exchange contracts and cross-currency options serve primarily to protect
the functional currency value of non-functional currency positions and
anticipated transactions of the Company and its foreign subsidiaries. The
Company does not hold or issue derivative financial instruments for trading
purposes or use leveraged derivatives in its financial risk management program.
14
<PAGE>
Interest Rate Risk Management: Arvin relies significantly on long-term
fixed-rate debt in its capital structure. The Company uses interest rate swaps
to manage the fixed-rate to floating-rate balance of its interest sensitive
liabilities. The Company's outstanding interest-sensitive financial instruments
as of January 3, 1999, are reflected in Note 6 to the financial statements. In
addition to items included in the table presented in Note 6, Arvin also had $90
million par value of 9.5 percent Company-Obligated Mandatorily Redeemable
Preferred Capital Securities of Subsidiary Trust Holding Solely Subordinated
Debentures of the Company (Capital Securities) due 2027, callable in 2007, and
one interest rate swap agreement with a notional amount of $25 million
outstanding at year-end. Under the terms of the interest rate swap, Arvin
receives a fixed rate of 6.75 percent for three years and pays a LIBOR-based
floating rate which resets every six months. The swap agreement matures on April
25, 2000.
At January 3, 1999 the fair value of long-term debt, including that due within
one year, plus Capital Securities and swaps approximated $432.8 million. The
carrying value at that date was $406.9 million. The fair value was estimated
using quoted market prices and discounted cash flow analyses, based on the
Company's incremental borrowing rates for similar types of lending arrangements.
Changes in interest rates that may occur within the next 12 months will have a
minimal effect on future interest expense based upon Arvin's year-end borrowing
structure. If interest rates rise immediately by a 10 percent increment across
the entire yield curve, Arvin's interest expense will increase, and thus pre-tax
earnings will decrease, by less than $.1 million in 1999.
The Company may borrow up to $100 million under its multi-currency credit
facility agreement, which matures on August 27, 2002. No borrowings were
outstanding under this facility at year-end. If the facility fee were priced at
current market levels, the incremental cost to Arvin would be approximately 5
basis points annually on the total facility.
Foreign Exchange Risk Management: At year-end 1998, the Company had forward
foreign exchange contracts totaling $157.6 million outstanding to hedge certain
financial and operating transactions denominated in currencies other than
various functional currencies. The full amount of the forward contracts at
year-end 1998 hedged existing non-functional currency denominated assets and
liabilities. The market value of the contracts at year-end totaled $.3 million.
Over 80 percent of the contracts outstanding at year-end matured within one
month thereafter. The furthest maturity date is July 6, 1999. The Company
manages its exposure to foreign currency fluctuations for existing transactions
by limiting each operating unit's booked exposure to a specified level for each
non-functional currency. The following table lists the net positions of forward
contracts outstanding by currency with the Euro legacy currencies combined.
Currency Net Position in
Millions, local currency
----------------------------------- --------------------------------
Euro EUR (54.0)
Canadian Dollar CAD 42.9
Great Britain Pound GBP 21.1
U.S. Dollar USD (0.2)
Although the Company used forward contracts during 1998 to hedge anticipated
non-functional currency denominated transactions, there were none outstanding at
year-end. Arvin manages the foreign currency risk of anticipated transactions by
forecasting such cash flows at the operating entity level, compiling the total
Company exposure and entering into forward foreign exchange contracts to lessen
foreign exchange exposures deemed excessive.
15
<PAGE>
During 1998, the Company also used foreign exchange options to reduce the
Company's exposure to changes in exchange rates. These option contracts were
principally in the major European currencies, and were written for a term of
less than one year. There were no option contracts outstanding at year-end 1998.
Legal/Environmental Matters: The Company and its consolidated subsidiaries are
defending various environmental claims and legal actions that arise in the
normal course of business or from previously owned businesses. Such matters are
more fully described in Note 8 to the Consolidated Financial Statements. Arvin
expects that any sum it may be required to pay in excess of its recorded
reserves will not have a material adverse effect on its results of operations,
cash flows, or financial condition.
Year 2000: During 1997, Arvin named a task force and began actively working with
customers, suppliers, and employees on Arvin's plan to address both information
technology (IT) and non-IT related Year 2000 issues. Non-IT systems include, but
are not limited to, those systems that are not commonly thought of as IT
systems, such as manufacturing equipment, building access, telephone systems and
other miscellaneous systems. Except for one location where new systems are being
implemented, the Company has essentially completed the remediation, testing and
implementation phase of the Year 2000 project as of the end of 1998 for both IT
and non-IT systems. These phases represent 90 percent of Arvin's Year 2000
project and involved taking an inventory of all potentially affected systems,
identifying potential Year 2000 issues, fixing or replacing such problems, and
testing the changes made. The final 10 percent of the Year 2000 project,
auditing, is scheduled for completion during 1999. This phase will consist of
Arvin conducting self-assessment reviews, performing comprehensive tests of the
IT systems in a Year 2000 simulated environment, reviewing the results of such
testing, and putting in place any necessary contingency plans. Given the
progress on this project, the Company plans to assess the need for a formal
contingency plan in June 1999 and will analyze what the worst case scenario
would be if the Company's Year 2000 project were not completed as scheduled at
that time.
The Company has developed a Year 2000 process for dealing with its key
suppliers. The process generally involves the following steps: (1) initial
supplier survey, (2) risk assessment, and (3) auditing critical suppliers. The
first two steps are essentially complete and the audits are expected to be
completed by the end of the first half of 1999. Contingent plans for
non-compliant suppliers will be developed as the audits are completed. These
activities provide a means of managing risk, but cannot eliminate the potential
for disruption due to third party failure. The Company continues to work with
major customers on ensuring that its electronic exchanges of data will continue
to work.
Expenses of the Year 2000 project are expensed as incurred. To date,
approximately three million dollars has been expensed for this project. The
Company expects that an additional one million dollars will be expensed during
1999 to complete this project. Capital expenditures are generally replacing
fully depreciated assets and have not had a material effect on the Company's
results of operations, cash flows, or financial condition and are not expected
to in the future.
European Union Conversion to the Euro: The Euro was introduced in eleven
participating EMU member countries in January 1999 and a fixed conversion rate
was established between the legacy currencies and the Euro. The legacy
currencies will continue to be used as legal tender through January 1, 2002.
During 1998, Arvin created a working group and began actively working to address
the Euro conversion by contacting customers and suppliers and assessing internal
systems to accomplish conversion requirements. Effective January 1999, all Arvin
European locations in the participating countries are Euro capable. Full
conversion to use the Euro as the functional currency in the affected Arvin
locations has been or will be phased-in between January 1999 and January 2002.
16
<PAGE>
The Company is addressing the strategic, as well as the competitive and
operational implications of the Euro's introduction, such as increased
cross-border price transparency, marketing strategy, currency exchange risk and
material contracts as a part of its review. The Company has developed a process
for dealing with its key customers and has, as required, updated IT to handle
accounting for the Euro. The costs associated with the conversion to the Euro
are expected to approximate $.5 million, of which approximately $.2 million has
already been spent. The Company does not expect that the potential risks related
to conversion will have a material impact on earnings.
Impact of New Accounting Standards: In March 1998, the American Institute of
Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which establishes new accounting and reporting standards for the
costs of computer software developed or obtained for internal use. This
statement will be applied prospectively and is effective for financial
statements for fiscal years beginning after December 15, 1998. The impact of
this new standard is not expected to have a significant effect on Arvin's
financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which requires costs of start-up activities to be expensed as
incurred. This statement is effective for financial statements for fiscal years
beginning after December 15, 1998. The statement requires capitalized costs
related to start-up activities to be expensed as a cumulative effect of a change
in accounting principle when the statement is adopted. Arvin adopted the
provisions of SOP 98-5 at the beginning of fiscal 1999. In conjunction with the
adoption of SOP 98-5, the Company wrote off $.8 million of previously
capitalized costs related to start-up activities.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The statement is effective for fiscal years beginning
after June 15, 1999. The Company plans to adopt this statement at the beginning
of fiscal 2000. This statement is not expected to have a material impact on the
Company's results of operations.
Forward-Looking Statements:
Certain information and statements included or implied are forward looking and
involve certain risks and uncertainties that could cause actual results to
differ materially from those expressed or implied by these statements. These
forward-looking statements are identified by their use of terms and phrases such
as "expected," "expect," "should," plans," "estimated earnings," "anticipate,"
and "believe." Information about potential factors identified by the Company,
which would affect the actual financial results, are filed herewith as Exhibit
99.
Item 7A. Quantitative and Qualitative disclosures about Market Risk
- --------------------------------------------------------------------
See "Financial Instruments and Risk Management" under the Liquidity and Capital
Resources section of Item 7.
17
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Page No.
Index to Consolidated Financial Statements
Consolidated Financial Statements:
Consolidated Statement of Operations for each of the three
years in the period ended January 3, 1999 19
Consolidated Statement of Financial Condition at
January 3, 1999 and December 28, 1997 20
Consolidated Statement of Shareholders' Equity for each
of the three years in the period ended January 3, 1999 21
Consolidated Statement of Cash Flows for each of the
three years in the period ended January 3, 1999 22
Notes to Consolidated Financial Statements 23
Report of Independent Accountants 39
Financial Statement Schedule:
For each of the three years in the period ended January 3, 1999
II Valuation and Qualifying Accounts 40
Supplementary Data:
Selected Quarterly Financial Data 41
Financial statements of unconsolidated affiliates have been omitted because the
registrant's proportionate share of the income from continuing operations before
income taxes is less than 20 percent of the respective consolidated amount, and
of the investment in and advances to each such company is less than 20 percent
of consolidated total assets.
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions, are not applicable or the required information is shown in
the financial statements or the notes thereto.
18
<PAGE>
<TABLE>
Arvin Industries, Inc.
Consolidated Statement of Operations
(Dollars in millions, except per share amounts)
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 2,498.7 $ 2,349.0 $ 2,212.7
Costs and Expenses:
Cost of goods sold 2,128.5 2,014.9 1,940.2
Selling, operating general and administrative 191.5 165.6 151.1
Corporate general and administrative 24.3 19.0 17.6
Net gain on capital transactions (5.5) (2.2) (10.8)
Interest expense 35.8 39.5 38.8
Other expense, net 11.4 14.3 11.7
- -------------------------------------------------------------------------------------------------------------------------------
2,386.0 2,251.1 2,148.6
- -------------------------------------------------------------------------------------------------------------------------------
Earnings from Continuing
Operations Before Income Taxes 112.7 97.9 64.1
Income taxes (38.3) (34.2) (19.7)
Minority interest in net income
of consolidated subsidiaries (1.1) (3.8) (2.5)
Equity earnings of affiliates 5.1 5.1 5.2
- -------------------------------------------------------------------------------------------------------------------------------
Earnings from Continuing Operations 78.4 65.0 47.1
- -------------------------------------------------------------------------------------------------------------------------------
Income from disposal of discontinued operations, net of
income tax expense of $0 in 1997 - 1.6 -
- -------------------------------------------------------------------------------------------------------------------------------
Net Earnings $ 78.4 $ 66.6 $ 47.1
===============================================================================================================================
Earnings per Common Share
Basic:
Continuing operations $ 3.29 $ 2.83 $ 2.10
Discontinued operations - .07 -
- -------------------------------------------------------------------------------------------------------------------------------
Total - Basic $ 3.29 $ 2.90 $ 2.10
===============================================================================================================================
Diluted:
Continuing operations $ 3.23 $ 2.78 $ 2.03
Discontinued operations - .07 -
- -------------------------------------------------------------------------------------------------------------------------------
Total - Diluted $ 3.23 $ 2.85 $ 2.03
===============================================================================================================================
Average Common Shares Outstanding (000's)
Basic 23,835 22,970 22,385
Diluted 24,249 23,382 24,615
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
Arvin Industries, Inc.
Consolidated Statement of Financial Condition
(Dollars in millions, except per share amounts)
<CAPTION>
Year Ended
1/3/99 12/28/97
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Current Assets:
Cash and cash equivalents $ 107.0 $ 108.9
Receivables, net of allowances of $8.1 and $5.6, respectively 319.0 354.6
Inventories 151.3 124.5
Current income tax benefit 36.2 30.9
Other current assets 67.5 50.5
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 681.0 669.4
- -----------------------------------------------------------------------------------------------------------------------
Non-Current Assets:
Property, plant and equipment:
Land and buildings 226.3 203.0
Machinery and equipment 974.7 876.6
Construction in progress 88.8 53.9
- -----------------------------------------------------------------------------------------------------------------------
1,289.8 1,133.5
Less accumulated depreciation 704.0 632.1
- -----------------------------------------------------------------------------------------------------------------------
585.8 501.4
Goodwill, net of accumulated amortization of $42.5 and $36.5, respectively 170.2 165.9
Investment in affiliates 148.2 53.9
Other assets 61.3 56.5
- -----------------------------------------------------------------------------------------------------------------------
Total non-current assets 965.5 777.7
- -----------------------------------------------------------------------------------------------------------------------
$ 1,646.5 $ 1,447.1
=======================================================================================================================
Liabilities and Shareholders' Equity:
Current Liabilities:
Short-term debt $ 10.1 $ 55.6
Accounts payable 337.9 303.3
Employee-related costs 63.3 57.6
Accrued expenses 105.6 104.7
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 516.9 521.2
- -----------------------------------------------------------------------------------------------------------------------
Long-term employee benefits 70.4 66.7
Other long-term liabilities 41.6 40.4
Long-term debt 307.7 222.3
Minority interest 57.1 12.4
Company-obligated mandatorily redeemable preferred capital securities
of subsidiary trust holding solely subordinated debentures of the Company 89.1 98.9
Commitments and contingencies (Note 8)
Shareholders' Equity:
Capital Stock:
Preferred shares (no par value, authorized 8,978,058;
none issued and outstanding) - -
Common shares ($2.50 par value, authorized 50,000,000;
issued 27,525,203 in 1998 and 26,225,567 in 1997) 68.8 65.6
Capital in excess of par value 305.2 248.8
Retained earnings 334.3 275.1
Cumulative translation adjustment (41.3) (41.8)
Employee stock benefit trust (64.7) (25.6)
Common shares held in treasury (38.6) (36.9)
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 563.7 485.2
- -----------------------------------------------------------------------------------------------------------------------
$ 1,646.5 $ 1,447.1
=======================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
20
<PAGE>
<TABLE>
Arvin Industries, Inc.
Consolidated Statement of Shareholders' Equity
(Dollars in millions, except per share amounts)
<CAPTION>
Year Ended
---------------------------------------------------------------------------------------
1/3/99 12/28/97 12/29/96
---------------------------- --------------------------- ----------------------------
Other Other Other
Comprehensive Comprehensive Comprehensive
Shares Amount Income Shares Amount Income Shares Amount Income
- -------------------------------------- ------------ ---------------------------- ---------------------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Shares:
Beginning balance 26,225,567 $ 65.6 26,149,217 $ 65.4 24,228,602 $ 60.6
Shares issued to employee stock
benefit trust 1,300,000 3.2 - - 1,800,000 4.5
Exercise of stock options - - 4,700 - 56,900 .1
Incentive compensation paid in stock - - 71,650 .2 - -
Conversion of 7.5% convertible
subordinated debentures - - - - 63,715 .2
Other adjustments (364) - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance 27,525,203 68.8 26,225,567 65.6 26,149,217 65.4
- ---------------------------------------------------------------------------------------------------------------------------------
Capital in Excess of Par Value:
Beginning balance 248.8 247.3 207.4
Shares issued to employee stock
benefit trust 51.7 - 37.7
Exercise of stock options 2.6 .3 .9
Shares issued to employee benefit plan 1.1 (.1) (.3)
Incentive compensation paid in stock .6 1.3 -
Shares contributed to charitable
foundation .4 - (.1)
Conversion of 7.5% convertible
subordinated debentures - - 1.7
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance 305.2 248.8 247.3
- ---------------------------------------------------------------------------------------------------------------------------------
Retained Earnings:
Beginning balance 275.1 226.2 196.2
Net earnings 78.4 $78.4 66.6 $66.6 47.1 $47.1
Cash dividends ($.81 per share in 1998,
$.77 per share in 1997 and $.76 per
share in 1996) (19.2) (17.7) (17.1)
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance 334.3 275.1 226.2
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative Translation Adjustment:
Beginning balance (41.8) (19.9) (24.6)
Translation adjustments during the year .5 .5 (21.9) (21.9) 4.7 4.7
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance (41.3) (41.8) (19.9)
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $78.9 $44.7 $51.8
======= ====== =======
Employee Stock Benefit Trust:
Beginning balance (1,098,954) (25.6) (1,800,000) (42.2) - -
Establishment of trust - - - - (1,800,000) (42.2)
Additional issuance to trust (1,300,000) (55.0) - - - -
Exercise of stock options 575,946 13.5 634,935 14.9 - -
Shares contributed to employee
benefit plan 70,786 1.7 66,111 1.7 - -
Incentive compensation paid in stock 38,725 .7 - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance (1,713,497) (64.7) (1,098,954) (25.6) (1,800,000) (42.2)
- ---------------------------------------------------------------------------------------------------------------------------------
Common Shares in Treasury:
Beginning balance (1,671,579) (36.9) (1,776,737) (39.4) (1,977,366) (44.5)
Stock exchanged for stock options
exercised (52,878) (2.4) (30,410) (1.0) (7,161) (.2)
Shares contributed to employee
benefit plan 4,268 .1 135,568 3.5 160,650 4.1
Shares contributed to charitable
foundation 24,575 .6 - - 47,140 1.2
Shares acquired (5,000) - - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Ending balance (1,700,614) (38.6) (1,671,579) (36.9) (1,776,737) (39.4)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $563.7 $ 485.2 $ 437.4
=================================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
21
<PAGE>
<TABLE>
Arvin Industries, Inc.
Consolidated Statement of Cash Flows
(Dollars in millions)
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net earnings $ 78.4 $ 66.6 $ 47.1
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 84.8 79.1 73.9
Amortization 6.1 6.5 5.8
Minority interest 1.1 3.8 2.5
Gain on investment (5.5) - -
Other (1.3) 5.9 7.4
Changes in operating assets and liabilities:
Receivables (3.7) (16.3) (8.4)
Inventories and other current assets (37.0) (.7) .7
Accounts payable 36.6 35.1 20.9
Other accrued expenses .7 16.7 .5
Income taxes payable and deferred taxes 4.2 (1.8) 8.5
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 164.4 194.9 158.9
- ----------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchase of property, plant and equipment (123.2) (96.9) (79.1)
Proceeds from sale of property, plant and equipment 5.3 3.1 5.4
Proceeds from redemption of investment 9.6 - -
Investments in affiliates (85.6) (11.1) (8.5)
Business acquisitions, net of cash acquired (29.3) (19.5) (8.0)
Cash proceeds from sale of businesses, net
of cash balances of businesses sold 6.9 3.7 19.3
Other (.4) 4.1 1.0
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash Used for Investing Activities (216.7) (116.6) (69.9)
- ----------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Change in short-term debt, net 6.5 (45.7) 17.7
Proceeds from long-term financings 101.2 101.8 3.2
Principal payments on long-term financings (78.2) (38.0) (87.4)
Change in discounted receivables 33.9 (17.3) 14.7
Dividends paid (24.1) (17.3) (12.9)
Other 12.5 9.3 (.8)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used for) Financing Activities 51.8 (7.2) (65.5)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents:
Effect of exchange rate changes on cash (1.4) (1.6) .7
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) (1.9) 69.5 24.2
Beginning of the year 108.9 39.4 15.2
- ----------------------------------------------------------------------------------------------------------------------------------
End of the year $ 107.0 $ 108.9 $ 39.4
==================================================================================================================================
<FN>
Income tax payments totaled $35.5 in 1998, $44.0 in 1997, and $13.6 in 1996.
Interest payments totaled $42.6 in 1998, $33.1 in 1997, and $40.8 in 1996.
See notes to consolidated financial statements.
</FN>
</TABLE>
22
<PAGE>
Arvin Industries, Inc.
Notes to Consolidated Financial Statements
(Dollar amounts in millions unless noted otherwise)
Note 1 - Significant Accounting Policies:
Principles of Consolidation: The consolidated financial statements include the
accounts of Arvin Industries, Inc. and its majority-owned and controlled
subsidiaries. Affiliated companies (20 to 50 percent owned) are generally
accounted for on the equity method.
Use of Estimates: The financial statements and related notes have been prepared
in conformity with generally accepted accounting principles and include some
amounts and disclosures which are estimates based on currently available
information and management's judgment of current facts and circumstances.
Cash Equivalents: The Company considers all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents.
Inventories: Substantially all inventories located in the United States (U.S.)
are valued under the last-in, first-out (LIFO) cost method. The remaining
inventories are valued primarily on a first-in, first-out (FIFO) basis. It is
impractical to classify LIFO inventories into the finished goods, work in
process, and raw material components since, in determining the overall index,
the Company uses the method of pooling by individual inventory components.
At year-end 1998 and 1997, $61.0 and $55.4 million of total inventories were
stated on the LIFO method. The current costs of these inventories exceeded their
LIFO value by $5.5 and $5.0 million at year-end 1998 and 1997, respectively.
Property, Plant and Equipment and Depreciation: Property, plant and equipment
are stated at cost less accumulated depreciation. Depreciation is recorded using
the straight-line method over the estimated useful lives of the assets. The
estimated service life used to compute depreciation is generally 20 to 40 years
for buildings and 7 to 12 years for machinery, equipment and fixtures.
Maintenance and repair costs are expensed as incurred.
Goodwill: Goodwill represents the excess of cost over the net asset value of
assets acquired and is generally amortized using the straight-line method over
40 years. The Company assesses the recoverability of its goodwill whenever
adverse events or changes in circumstances or business climate indicate that
expected future cash flows (undiscounted and without interest charges) for
individual business units may not be sufficient to support recorded goodwill. If
undiscounted cash flows are not sufficient to support the recorded asset, an
impairment is recognized to reduce the carrying value of the goodwill based on
the expected discounted cash flows of the business unit. Expected cash flows are
discounted at a rate commensurate with the risk involved.
Foreign Currency: The Company uses the local currency as the functional currency
for all of its consolidated operating subsidiaries outside of the U.S., except
for those operating in hyperinflationary economies. Results are translated into
U.S. dollars using monthly average exchange rates, while assets and liabilities
are translated into U.S. dollars using year-end exchange rates. The resulting
translation adjustments are recorded in a separate component of shareholders'
equity.
23
<PAGE>
Research and Development Costs: Expenditures relating to the development of new
products and processes, including significant improvements and refinements to
existing products, are expensed as incurred. The amounts charged against
earnings in 1998, 1997, and 1996 were $29.0, $25.3 and $26.2 million,
respectively.
Earnings Per Share: Basic earnings per share are based on the weighted-average
number of common shares outstanding during the year. Diluted earnings per share
are based on the weighted-average number of common and common equivalent shares
(principally stock option related) outstanding during the year.
<TABLE>
The following illustrates the reconciliation of the numerators and denominators
of the basic and diluted EPS computations for continuing operations.
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Income Shares Income Shares Income Shares
------ ------ ------ ------ ------ ------
Basic EPS $78.4 23,835 $65.0 22,970 $47.1 22,385
Effect of Dilutive Securities:
Options - 414 - 412 - 131
7.5% convertible debentures - - - - 2.9 2,099
=========== ============ ============ =========== ============ ===========
Diluted EPS $78.4 24,249 $65.0 23,382 $50.0 24,615
=========== ============ ============ =========== ============ ===========
</TABLE>
Reclassifications: Certain amounts in the accompanying financial statements and
notes thereto have been reclassified to conform to the current year
presentation.
Fiscal Year: Arvin's fiscal year ends on the Sunday nearest to December 31.
Fiscal 1998 consisted of 53 weeks.
Note 2 - Acquisitions, Divestitures and Discontinued Operations:
In November 1998 Arvin formed a joint venture with Kayaba Industry Co., Ltd., of
Tokyo, Japan to meet the ride control product demands of North American
passenger car and light truck manufacturers. The joint venture, Arvin-Kayaba,
LLC (A-K), includes Kayaba's operation in Franklin, Indiana and the Arvin Ride
Control U.S. operation in Pulaski, Tennessee. Arvin contributed $50.1 million in
net assets from its Pulaski operation to acquire 50.1 percent ownership in A-K.
There was no gain or loss recorded as a result of this business combination. The
results of A-K's operations have been included in the consolidated financial
statements since the date of acquisition.
Also in November 1998, Arvin purchased the remaining 60 percent ownership
interest of its Thailand-based joint venture, Able-Arvin Company Limited, for
$3.9 million. Able-Arvin, renamed Arvin Exhaust Thailand, is located in Rayong,
Thailand where it manufactures and sells exhaust assemblies. This acquisition
was accounted for under the purchase method and the results of Arvin Exhaust
Thailand have been included in the consolidated financial statements since the
date of acquisition.
In July 1998 Arvin entered into a stock purchase agreement to acquire the
remaining 60 percent of COFAP-Arvin Sistemas de Exaustao Ltda. for a purchase
price of $16.4 million. COFAP-Arvin, renamed Arvin Exhaust do Brasil Ltda., is
located in Minas Gerais, Brazil, where it manufactures original equipment
exhaust products. Goodwill resulting from this transaction is being amortized
using the straight-line method over a 40-year period. This acquisition was
accounted for under the purchase method and the results of Arvin Exhaust do
Brasil have been included in the consolidated financial statements since the
date of acquisition.
24
<PAGE>
Also in July 1998, Arvin sold its shares in Autocomponents Suspension S.r.l.
(Autocomponents), an original equipment ride control manufacturing facility in
Melfi, Italy, for $11.6 million. No gain or loss resulted from this transaction.
Arvin increased its 49.9 percent share in Autocomponents to 54.9 percent in
January 1997 for $1.8 million. The remaining interest was purchased in March
1998 for $4.9 million.
In March 1998 Arvin purchased the remaining 45.1 percent ownership interest in
Way Assauto S.r.l. for $3.8 million. Way Assauto, renamed Arvin Suspension
Systems Italia (ASSI), is located in Asti, Italy, and it manufactures ride
control products primarily for the original equipment market. Arvin had
increased its ownership of ASSI from 49.9 percent to 54.9 percent in June 1996
for $8.0 million.
During the third quarter of 1997, Arvin reported $1.6 million of income from the
disposal of discontinued operations. This income represented a deferred gain on
the sale of Space Industries International, Inc. (SII). Arvin sold its ownership
interest in SII in September 1995.
In May 1997 Arvin exercised its option to purchase the remaining 50 percent of
Timax Exhaust Systems Holding B.V. (TESH) for a total purchase price of $28.3
million, which included a cash payment of $20.9 million. TESH, now known as
Arvin Replacement Products - European Exhaust, serves the replacement exhaust
markets from facilities in Italy, France, and the United Kingdom.
Note 3 - Investments in Affiliates:
In December 1998 Arvin entered into a cooperative agreement with Zeuna Starker
GmbH & Co. KG (Zeuna Starker), whereby Arvin purchased a 49 percent interest in
Zeuna Starker. Zeuna Starker is a premier exhaust systems supplier headquartered
in Augsburg, Germany. It has manufacturing facilities in Germany, South Africa,
Italy, Hungary, and the United States. The investment in Zeuna Starker is being
accounted for by the equity method and goodwill resulting from this transaction
is being amortized using the straight-line method over a 40-year period.
Earnings of Zeuna Starker, net of goodwill amortization, had no effect on
Arvin's 1998 income.
In September 1998, the Company invested an additional $13.8 million in its
50-percent owned Arvin Exhaust Germany affiliate.
During 1998, the Company also made several small investments in other existing
affiliates totaling $4.3 million. There was no change in the Company's ownership
percentage in any affiliate as a result of these additional investments.
The Company has investments in affiliates that are accounted for on the equity
method. The affiliates are engaged in the manufacture and sale of automotive
exhaust and ride control products. Equity affiliates include Arvin Sango Inc.
(50%), Arvin Exhaust GmbH (50%), Zeuna Starker (49%), Gabriel de Venezuela
(42%), Gabriel Mexico S.A. (40%), and Kayaba Arvin, S.A. (40%). Equity earnings
from affiliates for 1997 includes an intangible asset write-off and the
elimination of a tax valuation allowance in the amounts of $3.2 and $4.7
million, respectively.
The Company's total investment in affiliates includes the unamortized excess of
the Company's investment over its equity in the affiliates' net assets. This
excess was approximately $47 million at January 3, 1999, and is being amortized
on a straight-line basis over estimated economic lives of up to 40 years. In
1998, 1997, and 1996, the Company received dividends from affiliates of $3.6,
$2.2, and $3.4 million, respectively.
25
<PAGE>
<TABLE>
Summarized financial information of affiliates is presented below. The change in
summarized financial information for year-end 1998 is primarily attributable to
the consolidation of Arvin Exhaust do Brasil in July and the addition of Zeuna
Starker at the end of the year.
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Condensed Statement of Operations:
Net sales $ 362.4 $ 360.5 $ 408.7
Gross profit 41.1 57.8 82.8
Net earnings 11.2 14.3 10.9
Condensed Statement of Financial Condition:
Current assets $ 218.6 $ 137.1 $ 107.5
Non-current assets 220.7 114.0 180.6
========== ========== ===========
$ 439.3 $ 251.1 $ 288.1
========== ========== ===========
Current liabilities $ 168.0 $ 76.0 $ 71.9
Non-current liabilities 57.6 53.1 107.1
Shareholders' equity 213.7 122.0 109.1
========== ========== ===========
$ 439.3 $ 251.1 $ 288.1
========== ========== ===========
</TABLE>
NOTE 4 - NET GAIN ON CAPITAL TRANSACTIONS:
During the second quarter of 1998, the Company reported a gain of $5.5 million
relating to the early redemption of its investment in preferred stock received
in conjunction with Arvin's 1995 sale of its Schrader Automotive unit. The
preferred shares and accrued dividends had been recorded on the books of Arvin,
discounted at a risk-adjusted rate of return. No tax expense was recorded on
this gain due to available capital loss carryforwards.
During 1997, the Company reported a $3.7 million gain on the sale of capital
assets and a write-down of $1.5 million in the carrying value of a
non-controlled venture in the South American exhaust market.
During 1996, the Company reported a $10.8 million gain from the sale of its 31.4
percent equity interest in Fric Rot S.A.I.C.
Note 5 - Concentrations of Risk:
Financial instruments that potentially expose Arvin to concentrations of credit
risk consist primarily of trade accounts receivable. The Company's customer base
includes most significant automotive manufacturers and a large number of
well-known jobbers, distributors, and installers of automotive replacement parts
in North America and Europe. Arvin generally does not require collateral and the
majority of its trade receivables are unsecured. Although the Company is
directly affected by the financial well being of the automotive industry,
management does not believe significant credit risk existed at January 3, 1999.
The Company relies on several key vendors to supply its primary raw material
needs for each of its markets. Although there are a limited number of
manufacturers in each market capable of supplying these needs, the Company
believes that other suppliers could provide for Arvin's needs on comparable
terms. Abrupt changes in the supply flow could, however, cause a delay in
manufacturing and a possible inability to meet sales commitments on schedule or
a possible loss of sales, which would affect operating results adversely.
26
<PAGE>
Note 6 - Borrowings:
At fiscal year-end, long-term debt consisted of:
1998 1997
---- ----
9.8% - 9.98% medium-term notes due 1998 $ - $ 45.0
10% medium-term notes due 2000 36.0 49.8
6-7/8% notes due 2001 75.0 75.0
7.94% notes due 2005 50.0 50.0
6 3/4% notes due 2008 100.0 -
10-3/8% Euro-Sterling Notes due 2018 32.5 38.0
Other 24.3 17.7
Less: Current maturities (10.1) (53.2)
-------------- ------------
$ 307.7 $ 222.3
============== ============
Maturities of long-term debt for fiscal 1999 through 2003 are $10.1, $47.0,
$95.0, $8.1 and $6.7 million, respectively.
The Company may borrow up to $100 million under its multi-currency credit
facility agreement, which matures on August 27, 2002. In addition, Arvin has
uncommitted credit facilities totaling $206.9 million with various domestic and
foreign banks, as well as the ability to sell undivided interests in a defined
pool of up to $75.0 million of trade receivables on a revolving basis.
The weighted-average interest rate on short-term borrowings at December 28, 1997
was 7.9 percent.
Graphic Table - Bar-graph indicating total debt, including capital securities,
for the following years, in millions:
1998 $407.7
1997 $376.8
1996 $346.6
Included in "other" debt listed above is an $11.9 million promissory note that
Arvin issued in December 1998 in conjunction with its investment in Zeuna
Starker. The note is payable as a lump sum, plus accrued interest at 4.0
percent, on January 1, 2001.
In March 1998 Arvin issued $100 million 6 3/4 percent notes due March 15, 2008.
The proceeds were used to repay debt maturing during 1998 totaling $45 million
and for general corporate purposes.
In January 1997 Arvin Capital I, a wholly owned subsidiary trust of Arvin,
issued $100 million 9.5 percent Company-Obligated Mandatorily Redeemable
Preferred Capital Securities of Subsidiary Trust Holding Solely Subordinated
Debentures of the Company ("Capital Securities") due February 1, 2027, callable
in 10 years. The Capital Securities were issued at a discount of $1.1 million,
which is amortized over 30 years. The proceeds of the Capital Securities were
invested entirely in 9.5 percent junior subordinated debentures of Arvin, which
are the sole assets of the subsidiary trust. Arvin fully and unconditionally
guarantees the subsidiary trust's obligations under the Capital Securities.
During 1998 Arvin repurchased $24.0 million of high coupon debt at par value,
plus a weighted-average premium of 10.7 percent. The repurchases were funded
with cash on hand.
27
<PAGE>
Note 7 - Financial Instruments and Risk Management:
The Company uses financial derivatives to manage its global foreign exchange and
interest rate exposure. Forward exchange contracts and cross-currency options
serve primarily to protect the functional currency value of non-functional
currency positions and anticipated transactions of the Company and its foreign
subsidiaries. Interest rate swaps and options are used principally to manage the
Company's floating rate exposure and to hedge anticipated debt issuance
transactions. Arvin uses the designation method to qualify foreign currency and
interest rate derivative transactions for hedge accounting treatment. The
Company does not hold or issue derivative financial instruments for trading
purposes or use leveraged derivatives in its financial risk management program.
Gains and losses on foreign currency hedges of existing assets and liabilities
are included in the carrying amounts of those assets and liabilities and are
recognized in income on a current basis, while gains and losses on anticipated
debt issuance transactions are deferred and amortized as an adjustment to
interest expense. Gains and losses on derivative transactions affecting
anticipated foreign currency cash flows are also recognized in income on a
current basis. Gains and losses on interest rate swap and option agreements,
which qualify as hedges of existing liabilities, are deferred and are recognized
as an adjustment to interest expense as realized over the lives of the
agreements.
The notional amounts of interest rate swaps serve as the basis for the cash
flows from the swaps, but do not represent the Company's exposure through its
use of these instruments. The Company is exposed to credit losses in the event
of nonperformance (which is not anticipated) by the counterparties to the
agreements. Forward agreements are subject to the creditworthiness of the
counterparties, which are principally large banks.
Interest Rate Risk Management: The Company had one interest rate swap agreement
outstanding at January 3, 1999, with a notional amount of $25 million. Under the
terms of the interest rate swap, Arvin receives a fixed rate of 6.75 percent for
three years and pays a LIBOR-based floating rate which resets every six months.
The swap agreement effectively changes long-term debt of the Company from a
fixed rate to a floating rate of interest.
Foreign Exchange Risk Management: At year-end 1998 and 1997, the Company had
forward exchange contracts totaling $157.6 and $184.7 million, respectively, to
hedge certain financial and operating transactions denominated in currencies
other than various functional currencies. The full amount of the forward
contracts at year-end 1998 and 1997 hedged existing non-functional currency
denominated assets and liabilities. Although the Company used forward contracts
during 1998 and 1997 to hedge anticipated non-functional currency denominated
transactions, there were none outstanding at either year-end. The forward
exchange contracts are principally in the major European and North American
currencies, and are usually for a term not exceeding one year.
During 1998 and in prior years, the Company also used foreign exchange options
to reduce the Company's exposure to changes in exchange rates. These option
contracts were principally in the major European currencies, and were written
for a term of less than one year. There were no option contracts outstanding at
year-end 1998 or 1997.
Fair Value of Financial Instruments: At January 3, 1999 the fair value of
long-term debt and capital securities, including that due within one year,
approximated $433.6 million. The carrying value at that date was $406.9 million.
At year-end 1997 the fair and carrying values of debt were $410.1 and $374.4
million, respectively. The fair value of debt was estimated for both years using
quoted market prices and discounted cash flow analyses, based on the Company's
incremental borrowing rates for similar types of lending arrangements.
28
<PAGE>
The fair value and accrued liability of financial derivatives at year-end 1998
and 1997 were not material. Fair value of interest rate and foreign exchange
contracts generally reflects the estimated amounts the Company would have
received (paid) had the contract been terminated on the reporting date.
Note 8 - Commitments and Contingencies:
The Company and its consolidated subsidiaries are defending various
environmental claims and legal actions that arise in the normal course of
business or from previously owned businesses. Where reasonable estimates of
environmental liabilities are possible, Arvin has provided for the undiscounted
costs of study, cleanup, remediation, and certain other costs, taking into
account, as applicable, available information regarding site conditions,
potential cleanup methods and the extent to which other parties can be expected
to bear those costs. Management regularly reviews pending environmental and
legal proceedings with its legal counsel and adjusts its accruals to reflect the
current best estimate of its exposure. Where no best estimate is determinable,
the Company has accrued for the minimum amount of the most probable range of its
liability. Given the inherent uncertainties in evaluating legal and
environmental exposures, actual costs to be incurred in future periods may vary
from the currently recorded estimates. At year-end 1998 and 1997, respectively,
the Company had accrued $18.5 and $15.2 million for environmental remediation
costs and $10.7 and $7.9 million for its estimated liability related to pending
legal matters. Arvin expects that any sum it may be required to pay in
connection with legal and environmental matters in excess of the amounts
recorded will not have a material adverse effect on its results of operations,
cash flows or financial condition.
Certain of Arvin's manufacturing plants, warehouses and offices are leased
facilities. The Company also leases manufacturing and office equipment. Future
minimum lease payments on operating leases are $13.7 million in 1999, $12.0
million in 2000, $10.1 million in 2001, $8.3 million in 2002, $5.2 million in
2003 and $17.0 million thereafter. Net rental expense under these leases in
1998, 1997 and 1996 was $18.6, $16.8 and $15.5 million, respectively.
Note 9 - Income Taxes:
Earnings from continuing operations before income taxes were as follows:
1998 1997 1996
---- ---- ----
United States $ 46.5 $ 31.2 $ 23.8
International 66.2 66.7 40.3
=========== ========== ==========
$ 112.7 $ 97.9 $ 64.1
=========== ========== ==========
The provision for income taxes was as follows:
1998 1997 1996
---- ---- ----
Current tax expense:
Federal $ 11.9 $ 8.6 $ 6.9
State 4.7 3.0 2.3
International 22.6 22.5 15.8
Deferred tax expense:
Federal (1.8) .2 (3.0)
State (.4) --- (1.8)
International 1.3 (.1) (.5)
------------ ---------- ----------
Continuing operations provision $ 38.3 $ 34.2 $ 19.7
============ ========== ==========
29
<PAGE>
The provision for income taxes was different from the U.S. federal statutory
rate applied to earnings from continuing operations before income taxes, and is
reconciled as follows:
1998 1997 1996
---- ---- ----
Statutory rate 35.0% 35.0% 35.0%
State and local income taxes, net 2.5 2.0 1.0
International tax rate difference (.7) (1.6) (1.1)
Amortization of goodwill 1.7 1.8 2.8
Foreign tax credit utilization, net (.1) (.5) (.4)
Other items, net (2.7) (.5) (.3)
------------ ----------- --------
Subtotal 35.7 36.2 37.0
Capital loss carryforward utilization (1.7) (1.3) (6.3)
------------ ----------- --------
Effective tax rate 34.0% 34.9% 30.7%
============ =========== ========
Deferred tax assets (liabilities) are comprised of the following at fiscal
year-end:
1998 1997
---- ----
Gross deferred tax assets:
Accrued employee benefits $ 28.0 $ 25.0
Inventory, receivables, and other reserves 28.9 19.3
Environmental and legal reserves 9.9 8.7
Other 13.1 12.3
Net losses and tax credit carryforwards 25.3 28.3
Valuation allowance for deferred tax assets (10.3) (13.0)
----------- -----------
Deferred tax assets, net of
valuation allowance 94.9 80.6
----------- -----------
Gross deferred tax liabilities:
Depreciation (44.0) (34.5)
Pension ( .4) ( .6)
----------- -----------
Gross deferred tax liabilities (44.4) (35.1)
----------- -----------
Net deferred tax assets $ 50.5 $ 45.5
=========== ===========
Net operating loss, capital loss, and tax credit carryforwards available in
various tax jurisdictions at January 3, 1999 expire in the tax-effected amounts
of $3.1, $6.3, $4.7, $1.4, $4.8 and $4.8 million for the years 1999 through 2003
and beyond, respectively.
Graphic Table - Bar-graph indicating the effective tax (1) rate for the
following years:
1998 35.7%
1997 36.2%
1996 37.0%
(1) Effective tax rate prior to capital loss carryforward utilization.
30
<PAGE>
Realization of deferred tax assets is dependent upon taxable income within the
carryback and carryforward periods available under the tax laws. Although
realization of deferred tax assets in excess of deferred tax liabilities is not
certain, management has concluded that it is more likely than not that Arvin
will realize the full benefit of U.S. deferred tax assets, except for
approximately $2.4 million of capital loss carryforward. While in the aggregate,
Arvin's non-U.S. subsidiaries have generated cumulative taxable income over the
last three years, certain non-U.S. subsidiaries are in net operating loss
carryforward positions. There is currently insufficient evidence to substantiate
recognition of net deferred tax assets in the financial statements for certain
of those non-U.S. subsidiaries in a net operating loss carryforward position.
Accordingly, a valuation allowance of $7.9 million has been recorded. It is
reasonably possible that sufficient positive evidence could be generated in the
near term at one or more of these non-U.S. subsidiaries to support a reduction
in the valuation allowance. Increases in the valuation allowance at the
Company's non-U.S. subsidiaries were $1.2, $5.8, and $2.0 million and reductions
of valuation allowances were $3.1, $4.3, and $4.0 million for 1998, 1997, and
1996, respectively.
At year-end 1997, consolidated retained earnings included undistributed earnings
of non-U.S. subsidiaries of approximately $226.2 million. These earnings are
permanently invested and are not considered available for distribution to the
parent company or will be remitted substantially free of additional U.S. income
taxes. Accordingly, no provision has been made for income taxes that may be
payable upon remittance of such earnings.
Note 10 - Pension and other postretirement Plans:
Substantially all of Arvin's employees in the U.S. are covered by
non-contributory trusteed pension plans. Employees of certain of the Company's
international operations are covered by either contributory or non-contributory
trusteed pension plans. Benefits are based on, in the case of certain plans,
final average salary and years of service and, in the case of other plans, a
fixed amount for each year of service. Net periodic pension costs are determined
using the Projected Unit Credit Cost method. Arvin's funding policy provides
that annual contributions to the pension trusts will be at least equal to the
minimum amounts required by ERISA in the U.S. and actuarial recommendations or
statutory requirements in other countries.
The Company provides certain retiree health care benefits covering a majority of
U.S. salaried employees. Employees are generally eligible for benefits upon
retirement and completion of a specified number of years of credited service.
The plans are contributory based on years of service, with contributions
adjusted annually. Arvin generally does not pre-fund these benefits and has the
right to modify or terminate these plans in the future.
Certain of Arvin's non-U.S. subsidiaries provide limited non-pension benefits to
retirees in addition to government sponsored programs. The cost of these
programs is not significant to the Company. Most retirees outside the United
States are covered by government sponsored and administered programs.
31
<PAGE>
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------- ----------------------
1998 1997 1998 1997
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 348.9 $ 311.5 $ 37.7 $ 35.9
Service cost 10.6 9.4 .8 .9
Employee contributions .8 1.0 - -
Interest cost 25.5 23.2 2.6 2.6
Amendments 19.7 3.8 - -
Actuarial (gain)/loss 29.1 13.7 (1.0) .1
Benefits paid (14.8) (14.0) (1.8) (1.8)
Foreign currency exchange rate changes (1.1) .3 - -
---------- --------- ---------- ----------
Benefit obligation at end of year $ 418.7 $ 348.9 $ 38.3 $ 37.7
---------- --------- ---------- ----------
Change in plan assets
Fair value of plan assets at beginning of year $ 383.6 $ 325.2 $ - $ -
Actual return on plan assets 53.6 66.5 - -
Employer contributions 4.1 4.8 1.8 1.8
Employee contributions .8 1.0 - -
Benefits and expenses paid (15.2) (14.3) (1.8) (1.8)
Foreign currency exchange rate changes (1.1) .4 - -
---------- --------- ---------- ----------
Fair value of plan assets at end of year $ 425.8 $ 383.6 $ - $ -
---------- --------- ---------- ----------
</TABLE>
The Company's pension obligations for its United States plans were projected to,
and the assets were valued as of the end of 1998 and 1997. The plan assets,
comprised almost entirely of high grade stocks and bonds, included 1.3 and 1.4
million shares of Arvin common stock at year-end 1998 and 1997, respectively.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------- ----------------------
1998 1997 1998 1997
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Reconciliation of funded status
Funded status $ 7.1 $ 34.7 $ (38.3) $ (37.7)
Unrecognized net asset (5.5) (6.9) - -
Unrecognized net gain (32.9) (38.0) (9.8) (9.2)
Unrecognized prior service cost 31.3 13.8 - -
---------- --------- ---------- ----------
Net amount recognized $ - $ 3.6 $ (48.1) $ (46.9)
---------- --------- ---------- ----------
Amounts recognized in the statement of financial position consist of:
Prepaid benefit cost $ 6.6 $ 7.3 $ - $ -
Accrued benefit liability (8.5) (4.4) (48.1) (46.9)
Intangible asset 1.9 .7 - -
---------- --------- ---------- ----------
Net amount recognized $ - $ 3.6 $ (48.1) $ (46.9)
---------- --------- ---------- ----------
</TABLE>
32
<PAGE>
<TABLE>
Assumptions used in determining the projected benefit obligation for the
domestic and international plans are as follows:
<CAPTION>
Pension Benefits Other Benefits
-------------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
United States plans
Discount rate for obligations 6.75% 7.00% 7.25% 6.75% 7.00% 7.00%
Expected return on plan assets 9.50% 9.00% 9.00% N/A N/A N/A
Average salary increases 4.75% 4.75% 4.75% N/A N/A N/A
International plans
Discount rate for obligations 5.50% 7.00% 8.00% N/A N/A N/A
Expected return on plan assets 9.00% 9.00% 9.00% N/A N/A N/A
Average salary increases 4.00% 5.00% 6.00% N/A N/A N/A
</TABLE>
For measurement purposes, a seven-percent annual rate of increase in per capita
cost of covered health care benefits was assumed for 1999. The rate was assumed
to decrease one percent each year to five percent for 2001 and remain at that
level thereafter.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------ ------------------------------
1998 1997 1996 1998 1997 1996
--------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 10.6 $ 9.4 $ 9.3 $ .8 $ .9 $ 1.0
Interest cost 25.5 23.2 20.8 2.6 2.6 2.4
Expected return on plan assets (31.6) (28.0) (26.3) - - -
Amortization of transition (asset) (1.3) (1.4) (1.3) - - -
Amortization of prior service cost 3.4 1.9 1.7 - - -
Recognized actuarial (gain) or loss .1 - - (.4) (.4) (.4)
--------- -------- -------- --------- --------- --------
Net periodic benefit cost $ 6.7 $ 5.1 $ 4.2 $ 3.0 $ 3.1 $ 3.0
--------- -------- -------- --------- --------- --------
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair value
of assets for the pension plan with accumulated benefit obligations in excess of
plan assets were $11.9, $7.4, and $0 million as of year-end 1998, and $5.9,
$4.3, and $0 million as of year-end 1997.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point increase in assumed
health care cost trend rates would have increased the aggregate of service and
interest cost for 1998 by $.7 million. The effect of this change on the
accumulated postretirement benefit obligation at year-end 1998 would be an
increase of $6.1 million. A one-percentage-point decrease in assumed health care
cost trend rates would have decreased the aggregate of service and interest cost
for 1998 by $.4 million. The effect of this change on the accumulated
postretirement benefit obligation at year-end 1998 would be a decrease of $4.1
million.
Note 11 - Employee Stock Plans:
The Company has options outstanding under three stock-based compensation plans:
the 1988 Stock Benefit Plan, the 1998 Stock Benefit Plan, and the Employee Stock
Benefit Plan. Employee grant awards under these stock benefit plans may include
incentive and non-statutory stock options, stock appreciation rights, restricted
shares and performance shares or units. The exercise price of each option is not
less than the fair market value of Arvin's common stock on the date of the
grant. At January 3, 1999, there were 2,014,421 options available for grant.
Options granted generally vest one year from grant date and expire ten years
from the grant date. Summarized stock option activity was as follows:
33
<PAGE>
1998 1997 1996
---- ---- ----
Options outstanding at
beginning of year 2,059,333 2,446,259 2,271,050
Granted 562,771 456,859 401,609
Exercised (575,946) (639,635) (56,900)
Expired (25,400) (204,150) (169,500)
--------------- ---------------- ----------------
Outstanding at year-end 2,020,758 2,059,333 2,446,259
=============== ================ ================
Exercisable at year-end 1,469,737 1,564,474 1,944,650
=============== ================ ================
Weighted average option prices per share
At beginning of year $25.62 $24.07 $25.07
Granted 38.88 30.94 20.49
Exercised 22.96 22.01 17.37
Expired 29.01 30.28 31.07
Outstanding at year-end 30.03 25.62 24.07
Exercisable at year-end $26.72 $23.70 $24.17
The weighted-average fair value of options granted was $9.87, $6.90 and $4.73
per share in 1998, 1997, and 1996, respectively. The fair value of each option
was estimated on the date of the grant using the Black-Scholes option pricing
model and the following weighted average assumptions for grants in 1998, 1997,
and 1996, respectively: dividend yield of 2.1, 2.6 and 3.7 percent; expected
volatility of 30.0, 30.0 and 27.8 percent; risk-free interest rates of 5.5, 6.0
and 6.4 percent; and expected lives of 3.0, 3.0 and 4.4 years.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, no compensation
expense was recorded for stock options. If the Company had used a fair-value
method of accounting for stock-based compensation cost, reported net income
would have been $75.4, $65.1, and $45.3 million in 1998, 1997, and 1996,
respectively. Basic earnings per share would have been $3.16, $2.83, and $2.02
and diluted earnings per share would have been $3.11, $2.78, and $1.96 for 1998,
1997, and 1996, respectively. Compensation cost for performance share plans,
which is included in the consolidated statement of operations, was not material.
<TABLE>
The following table reflects information about stock options outstanding at
January 3, 1999:
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- ------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (in years) Price Exercisable Price
- ----------------------- ------------------ ----------------- ----------------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
$14.00 - $28.99 755,543 5.28 $22.35 755,543 $22.35
$29.00 - $37.99 808,944 7.38 32.09 654,944 30.71
$38.00 - $41.99 456,271 8.89 39.13 59,250 38.39
</TABLE>
Employee Stock Benefit Trust (the Trust): In December 1996 Arvin established the
Trust to satisfy future obligations arising under existing benefit plans,
including stock plans, 401(k) plans, and other employee benefit plans as
designated by the Company and to promote employee ownership in Arvin. The Trust
utilized $15.9 and $16.6 million of the Company's common stock to satisfy those
obligations in 1998 and 1997, respectively.
34
<PAGE>
NOTE 12 - Shareholders' Rights Plan:
Arvin enacted a preferred share purchase rights plan pursuant to a Rights
Agreement dated May 29, 1986 ("the Rights Plan.") The Rights Plan has been
amended twice since 1986 and in 1996 the term of the Rights Plan was extended to
June 13, 2006.
Under the Rights Plan, one preferred share purchase right ("Right") trades with
each share of the Company's common stock. Each Right entitles its holder, until
the earlier of June 13, 2006 or the redemption of the Rights, to purchase from
the Company one one-hundredth of a share of Arvin's Series C Junior
Participating Preferred Stock (the "Preferred Stock") at an exercise price of
$90 per one one-hundredth share, subject to adjustment. The Rights are
redeemable by the Board of Directors at $.10 per Right at any time prior to the
acquisition by a person or group of beneficial ownership of 20 percent or more
of the Company's common stock. The right to exercise the Rights terminates at
the time the Board elects to redeem them. At no time do the Rights have any
voting rights.
The Rights are not exercisable or transferable apart from the Company's common
stock until the earlier of (i) ten days following a public announcement that a
person or group has acquired beneficial ownership of 20 percent or more of the
outstanding common stock or (ii) ten business days after commencement, or
announcement of an intention to make a tender offer or exchange offer, which
would result in a person or group beneficially owning 20 percent or more of the
outstanding common stock. When exercisable, the holder of the Right (other than
the person or group acquiring or attempting to acquire beneficial ownership of
20 percent or more of the Company's common stock) has the right to purchase, at
the current exercise price of the Right, a number of shares of the Company's
common stock having a market value equal to twice the current exercise price of
the Right. If 20 percent or more (but less than 50 percent) of the common stock
is acquired by a person or group, the Board of Directors may exchange each Right
for one share of common stock.
The Rights have certain anti-takeover effects and may cause substantial dilution
to a person or group that attempts to acquire the Company on terms not approved
by the Board. The 20-percent acquisition threshold can be reduced to 10 percent
by the Board.
Note 13 - Business Segments:
The Company adopted Statement of Financial Accounting Standards No. 131 (SFAS
131), "Disclosures about Segments of an Enterprise and Related Information," at
the beginning of fiscal 1998. Following the provisions of SFAS 131, Arvin is
reporting segment sales and operating income in the same format reviewed by the
Company's management (the "management approach"). Arvin has two reportable
segments: Automotive Original Equipment (OE) and Automotive Replacement
(Replacement). The OE segment is comprised of those business units that deal
primarily with Original Equipment Manufacturers (OEM's). Business units in the
OE segment also provide the OEM's with replacement parts, either as dealer
service parts or as part of manufacturers' recall or warranty programs, which
typically account for a small percent of OE segment sales. The Replacement
segment is comprised of those business units that deal primarily with
Replacement customers, including wholesale distributors, retailers, and
installers. Sales and operating income from business units whose primary focus
is other than the manufacturing of automotive products are reported as Other.
Operating income, reported under the management approach, includes the gains and
losses reported by the Company's equity affiliates.
35
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net Sales:
Automotive Original Equipment $ 1,693.0 $ 1,590.4 $ 1,507.1
Automotive Replacement 685.7 643.4 594.1
Other 120.0 115.2 111.5
------------ ------------ ------------
Net sales $ 2,498.7 $ 2,349.0 $ 2,212.7
============ ============ ============
Operating Income:
Automotive Original Equipment $ 93.8 $ 89.7 $ 83.0
Automotive Replacement 72.3 66.0 38.2
Other 4.6 15.6 14.7
------------ ------------ ------------
Operating income 170.7 171.3 135.9
Less: Equity income of affiliates (5.1) (5.1) (5.2)
Interest expense (35.8) (39.5) (38.8)
Corporate general and administrative (24.3) (19.0) (17.6)
Gain on investment 5.5 - -
Other non-operating income/(expense) 1.7 (9.8) (10.2)
------------ ------------ ------------
Earnings before income taxes $ 112.7 $ 97.9 $ 64.1
============ ============ ============
Segment assets:
Automotive Original Equipment $ 1,071.6 $ 865.3 $ 840.8
Automotive Replacement 383.8 372.0 341.0
Other 53.5 55.4 54.4
------------ ------------ ------------
Total segment assets 1,508.9 1,292.7 1,236.2
General Corporate (1) 137.6 154.4 71.6
------------ ------------ ------------
Total assets $ 1,646.5 $ 1,447.1 $ 1,307.8
============ ============ ============
<FN>
(1) Consists primarily of cash and cash equivalents, tax assets, and corporate
assets.
</FN>
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Depreciation and amortization:
Automotive Original Equipment $ 61.6 $ 58.6 $ 55.7
Automotive Replacement 16.9 15.0 12.3
Other 5.9 5.8 5.4
General Corporate 6.5 6.2 6.3
------------ ------------ ------------
Total depreciation and amortization $ 90.9 $ 85.6 $ 79.7
============ ============ ============
Equity in net income of investees:
Automotive Original Equipment $ 4.3 $ 3.7 $ 7.0
Automotive Replacement .8 1.4 (1.8)
------------ ------------ ------------
Total equity in net income of investees $ 5.1 $ 5.1 $ 5.2
============ ============ ============
Investment in equity method investees:
Automotive Original Equipment $ 142.4 $ 47.6 $ 45.7
Automotive Replacement 5.8 6.3 40.0
------------ ------------ ------------
Total investment in equity method investees $ 148.2 $ 53.9 $ 85.7
============ ============ ============
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Additions to long-lived assets (2):
Automotive Original Equipment $ 101.3 $ 79.2 $ 62.3
Automotive Replacement 16.3 12.6 11.0
Other 3.7 4.5 5.4
General Corporate 1.9 .6 .4
------------ ------------ ------------
Total additions to long-lived assets $ 123.2 $ 96.9 $ 79.1
============ ============ ============
<FN>
(2) Long-lived assets include property, plant, and equipment.
</FN>
</TABLE>
Graphic Table - Bar-graph indicating sales in the United States, Europe and
Other, respectively, for the following years, in millions:
1998 $1,374.7, $863.4 and $260.6
1997 $1,263.7, $844.6 and $240.7
1996 $1,233.1, $759.9 and $219.7
<TABLE>
Information on the Company's geographic areas is as follows:
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales:
United States $ 1,374.7 $ 1,263.7 $ 1,233.1
Europe 863.4 844.6 759.9
Other 260.6 240.7 219.7
------------- ------------- -------------
Total net sales $ 2,498.7 $ 2,349.0 $ 2,212.7
============ ============ =============
1998 1997 1996
---- ---- ----
Long-lived assets (2):
United States $ 342.6 $ 285.8 $ 282.7
Europe 188.7 189.2 160.2
Other 54.5 26.4 21.0
------------- ------------- -------------
Total long-lived assets $ 585.8 $ 501.4 $ 463.9
============ ============ =============
<FN>
(2) Long-lived assets include property, plant, and equipment.
</FN>
</TABLE>
<TABLE>
Sales to three customers, primarily in the Automotive Original Equipment
segment, exceeded 10 percent of total net sales in 1998, 1997, or 1996. Sales to
those customers were as follows:
<CAPTION>
1998 1997 1996
--------------------------- --------------------------- ----------------------------
% of % of % of
Amount Sales Amount Sales Amount Sales
<S> <C> <C> <C> <C> <C> <C>
Customer one $ 480.5 19.2% $ 432.1 18.4% $ 423.1 19.1%
Customer two 288.6 11.6% 295.8 12.6% 286.8 13.0%
Customer three 227.7 9.1% 217.9 9.3% 226.2 10.2%
========== ========== ========== ========== =========== ===========
$ 996.8 39.9% $ 945.8 40.3% $ 936.1 42.3%
========== ========== ========== ========== =========== ===========
</TABLE>
37
<PAGE>
Note 14 - Impact of new accounting standards:
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which establishes new
accounting and reporting standards for the costs of computer software developed
or obtained for internal use. This statement will be applied prospectively and
is effective for financial statements for fiscal years beginning after December
15, 1998. The impact of this new standard is not expected to have a significant
effect on Arvin's financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which requires costs of start-up activities to be expensed as
incurred. This statement is effective for financial statements for fiscal years
beginning after December 15, 1998. The statement requires capitalized costs
related to start-up activities to be expensed as a cumulative effect of a change
in accounting principle when the statement is adopted. Arvin adopted the
provisions of SOP 98-5 at the beginning of fiscal 1999. In conjunction with the
adoption of SOP 98-5, the Company wrote off $.8 million of previously
capitalized costs related to start-up activities.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The statement is effective for fiscal years beginning
after June 15, 1999. The Company plans to adopt this statement at the beginning
of fiscal 2000. This statement is not expected to have a material impact on the
Company's results of operations.
NOTE 15 - SUBSEQUENT EVENT:
During February 1999, Arvin acquired the Purolator Products automotive filter
business from Mark IV Industries, Inc. The transaction value of $276 million
included the assumption of $6 million in debt. The purchase price in excess of
net assets will be amortized over a period not to exceed 40 years. Purolator is
a leading independent manufacturer and distributor of automotive oil, air, and
fuel filters in North America for the replacement and original equipment
markets.
38
<PAGE>
Report of Independent Accountants
To the Shareholders and
Board of Directors of
Arvin Industries, Inc.
In our opinion, the consolidated statements listed in the accompanying index
present fairly, in all material respects, the financial position of Arvin
Industries, Inc. and its subsidiaries at January 3, 1999 and December 28, 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended January 3, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Indianapolis, Indiana
January 29, 1999, except as to
Note 15 which is as of February 26, 1999
39
<PAGE>
<TABLE>
Arvin Industries, Inc.
Schedule II
Valuation and Qualifying Accounts
(Dollars in millions)
<CAPTION>
Balance at Additions Charged to Deductions Balance at
Beginning Charged to Other from End of
Description of Year Income Accounts Reserves Year
----------- ------- ------ -------- -------- ----
<S> <C> <C> <C> <C> <C>
Year ended January 3, 1999
- --------------------------
Allowance for doubtful accounts $ 5.6 $ 2.4 $ .8 $ .7 $ 8.1
Accumulated amortization of
goodwill $ 36.5 $ 5.5 $ .5 (1) $ --- $ 42.5
Valuation allowance for deferred
tax assets $ 13.0 $ 1.2 (1) $ --- $ 3.9 $ 10.3
Year ended December 28, 1997
- ----------------------------
Allowance for doubtful accounts $ 6.7 $ .5 $ .8 (5)(1) $ 2.4 (2) $ 5.6
Accumulated amortization of
goodwill $ 32.3 $ 5.9 $ (1.7)(1) $ --- $ 36.5
Valuation allowance for deferred
tax assets $ 16.0 $ --- $ 5.7 (5)(1) $ 8.7 (4) $ 13.0
Year ended December 29, 1996
- ----------------------------
Allowance for doubtful accounts $ 4.2 $ 5.5 $ .1 (1) $ 3.1 (2) $ 6.7
Accumulated amortization of
goodwill $ 31.3 $ 5.1 $ 1.6 (1) $ 2.5 (3) $ 32.3
Valuation allowance for deferred
tax assets $ 21.8 $ 2.0 $ --- $ 7.8 (4) $ 16.0
<FN>
(1) Includes translation adjustment.
(2) Includes accounts charged off, net of recoveries and reclassification of
reserves.
(3) Includes reclassifications.
(4) Principally the utilization of capital loss carryforwards.
(5) Result of acquisitions.
</FN>
</TABLE>
40
<PAGE>
<TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in millions, except per share amounts)
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------------- -------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 593.4 $ 564.0 $ 643.3 $ 632.5 $ 573.8 $ 554.0 $ 688.2 $ 598.5
Gross profit 80.9 72.7 104.6 93.3 83.6 80.3 101.1 87.8
Earnings
Continuing operations 13.5 13.0 27.7 21.1 16.8 13.6 20.4 17.3
Net 13.5 13.0 27.7 21.1 16.8 15.2 20.4 17.3
Earnings per share
Basic
Continuing operations $ .57 $ .57 $ 1.16 $ .92 $ .70 $ .59 $ .85 $ .74
Net .57 .57 1.16 .92 .70 .66 .85 .74
Diluted
Continuing operations .56 .57 1.14 .91 .69 .58 .83 .72
Net .56 .57 1.14 .91 .69 .65 .83 .72
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
41
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
Information regarding Directors of the Registrant is contained in the definitive
proxy statement of the Registrant for the Annual Meeting of Shareholders to be
held April 15, 1999, under the captions "Election of Directors" and "Compliance
with Forms 3, 4 and 5 Reporting Requirements", and is incorporated herein by
reference.
Item 11. Executive Compensation
- -------------------------------
This information is contained in the definitive proxy statement of the
Registrant for the Annual Meeting of Shareholders to be held April 15, 1999
under the caption "Executive Compensation" (exclusive of the portion under the
subcaption "Report of the Human Resources Committee on Executive Compensation")
and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
This information is contained in the definitive proxy statement of the
Registrant for the Annual Meeting of Shareholders to be held April 15, 1999
under the captions "Certain Beneficial Owners" and "Election of Directors" and
is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
None
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- ------------------------------------------------------------------------
(a) (1) Financial Statements
The following financial statements are filed as part of this report. See Index
to Consolidated Financial Statements in Item 8.
Consolidated Statement of Operations for each of the
three years in the period ended January 3, 1999
Consolidated Statement of Financial Condition at
January 3, 1999 and December 28, 1997
Consolidated Statement of Shareholders' Equity for each of the three years
in the period ended January 3, 1999
Consolidated Statement of Cash Flows for each of the three years in the
period ended January 3, 1999
Notes to Consolidated Financial Statements
Report of Independent Accountants
42
<PAGE>
(a) (2) Financial Statement Schedule
Financial Statement Schedule:
For each of the three years in the period ended January 3, 1999 II Valuation
and Qualifying Accounts
The registrant's Consolidated Financial Statement schedules are included in Item
8 herein.
(a) (3) Exhibits
The exhibits filed as a part of this Annual Report on Form 10-K are:
Exhibit Incorporated Herein By
Number Exhibit Reference as Filed With
- ------ ------- -----------------------
3(A) Amended and Restated Articles of 1990 Form 10-K as Exhibit 3(A)
Incorporation and Amendments Thereto
3(B) Amended and Restated By-Laws Form 8-K dated May 10, 1996 as
Exhibit 3(ii)
Instruments defining the Rights of Security-Holders, including Indentures:
Pursuant to Item 601 (b)(4)(iii)(A) of Regulation S-K, the registrant is not
filing certain documents because the total amount of debt securities authorized
under each such document does not exceed 10 percent of the total assets of the
registrant and its subsidiaries on a consolidated basis. The registrant agrees
to furnish a copy of each such document to the Commission upon request.
4(A) Indenture dated as of March 1, 1987 Registration Statement relating to
$200 million aggregate No.33-10941 as Exhibit 4 principal amount debt
securities
4(B) Indenture dated July 3, 1990 Registration Statement relating to Debt
Securities of No.33-34818 as Exhibit 4(a) Arvin Overseas Finance B.V.,
unconditionally guaranteed by Arvin Industries, Inc.
4(C) Indenture dated July 3, 1990 Registration Statement
relating to Senior Debt No.33-53087 as Exhibit 4-4
Securities.
4(D) Rights Agreement, as amended Form 8-K dated May 10, 1996
Form 8-K dated June 16, 1986
Form 8-K dated February 28, 1989
Form 10-Q for the third quarter
ended 10-2-94 as Exhibit 4
4(E) Amended and Restated Form 8-K dated February 10, 1997 Declaration of
Trust dated as of as Exhibit 4.3 January 28, 1997 relating to 9.5
percent Capital Securities of Arvin Capital I, guaranteed by Arvin
Industries, Inc.
4(F) Indenture dated as of Registration Statement January 28, 1997 relating
to 9.5 No. 333-18521 as Exhibit 4.4 percent Junior Subordinated
Deferrable Interest Debentures due 2027, held by Arvin Capital I
43
<PAGE>
4(G) First Supplemental Indenture dated Form 8-K dated February 10, 1997 as
of January 28, 1997 relating as Exhibit 4.5 to 9.5 percent Junior
Subordinated Deferrable Interest Debentures due 2027, held by Arvin
Capital I
4(H) Capital Securities Guarantee Registration Statement
Agreement dated as of No. 333-18521 as Exhibit 4.7
January 28, 1997 relating to the
9.5 percent Capital Securities of
Arvin Capital I, guaranteed by Arvin
Industries, Inc.
10(A)* 1998 Stock Benefit Plan filed herewith as Exhibit 10(A)
10(B)* Management Incentive Plans filed herewith as Exhibit 10(B)
10(C)* Employment Agreement with filed herewith as Exhibit 10(C)
V. William Hunt dated May 1, 1998
10(D)* Unfunded Deferred Compensation 1982 Form 10-K as Exhibit 10(D)
Plan for Directors
10(E)* 1988 Arvin Industries, Inc. Stock 1991 Form 10-K as Exhibit 10(E)
Benefit Plan
-Amendments Form 10-Q/A for the quarter ended
July 4, 1993 as Exhibit 10(E)
10(F) Employee Stock Benefit Trust Form 8-K dated January 20, 1997
effective as of December 20, as Exhibit 99.1
1996 relating to The Arvin
Industries, Inc. Employee Stock
Benefit Trust
10(G) Common Stock Purchase Agreement Form 8-K dated January 20, 1997
dated December 20, 1996 relating to as Exhibit 99.2
The Arvin Industries, Inc. Employee
Stock Benefit Trust
10(H)* Deferred Compensation Plan, amended 1997 Form 10-K as Exhibit 10(H)
and restated effective January 1,
1997
10(I)* Form of Change of Control Agreement 1997 Form 10-K as Exhibit 10(I)
11 Computation of Earnings Per Share filed herewith as Exhibit 11
12 Computation of Ratios filed herewith as Exhibit 12
21 Subsidiaries of the Registrant filed herewith as Exhibit 21
23 Consent of Independent Accountants filed herewith as Exhibit 23
27 Financial Data Schedule filed herewith as Exhibit 27
99 Forward-Looking Statements filed herewith as Exhibit 99
* This exhibit is a management contract or compensatory plan or arrangement.
44
<PAGE>
(b) Reports on Form 8-K
None.
45
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused the report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Arvin Industries, Inc.
by: /s/ Richard A. Smith
--------------------------------------------
Richard A. Smith
Vice President-Finance & Chief
Financial Officer
by: /s/ William M. Lowe, Jr.
--------------------------------------------
William M. Lowe, Jr.
Vice-President-Financial Operations
(Chief Accounting Officer)
Date: March 4, 1999
46
<PAGE>
The signatures that follow constitute a majority of the Board of Directors of
the Registrant.
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 in
the capacities and on the dates indicated.
/s/ Byron O. Pond March 4, 1999
- ----------------------------------------- -------------------------
Byron O. Pond
Chairman of the Board of Directors
/s/ V. William Hunt March 4, 1999
- ----------------------------------------- ---------------------------
V. William Hunt
President, Chief Executive Officer and Director
/s/ Richard A. Smith March 4, 1999
- ----------------------------------------- ---------------------------
Richard A. Smith
Vice President-Finance, Chief Financial Officer
and Director
/s/ Joseph P. Allen March 4, 1999
- ----------------------------------------- ---------------------------
Joseph P. Allen
Director
/s/ Steven C. Beering March 4, 1999
- ----------------------------------------- ---------------------------
Steven C. Beering
Director
/s/ Joseph P. Flannery March 4, 1999
- ----------------------------------------- ---------------------------
Joseph P. Flannery
Director
/s/ William D. George, Jr. March 4, 1999
- ----------------------------------------- ---------------------------
William D. George, Jr.
Director
/s/ Ivan W. Gorr March 4, 1999
- ----------------------------------------- ---------------------------
Ivan W. Gorr
Director
/s/ Richard W. Hanselman March 4, 1999
- ----------------------------------------- ---------------------------
Richard W. Hanselman
Director
/s/ Don J. Kacek March 4, 1999
- ----------------------------------------- ---------------------------
Don J. Kacek
Director
/s/ Frederick R. Meyer March 4, 1999
- ----------------------------------------- ---------------------------
Frederick R. Meyer
Director
/s/ Arthur R. Velasquez March 4, 1999
- ----------------------------------------- ---------------------------
Arthur R. Velasquez
Director
47
Exhibit 10(A)
ARVIN INDUSTRIES, INC.
1998 STOCK BENEFIT PLAN
1. PURPOSE OF THE PLAN
This Plan is intended to benefit the Corporation and its subsidiaries by
providing compensation arrangements that may be used to attract, retain and
reward Officers and Nonemployee Directors of training, experience and
ability, to attract new Officers and Nonemployee Directors whose services are
considered valuable, and to provide such persons with a proprietary interest
in and a greater concern for the welfare of the Corporation and its
subsidiaries.
2. DEFINITIONS
Whenever used herein, the following words and phrases shall (for
purposes of this Plan and this Plan only) have the meanings stated unless a
different meaning is plainly required by the context:
(a) "Award" means a grant, pursuant to the Plan, of Options, SARs,
Performance Shares, Performance Units, Restricted Shares, or any
combination thereof.
(b) "Board" means the board of directors of the Corporation.
(c) "Cause" means (A) the willful and continued failure by a Participant
to substantially perform his duties with the Corporation or its
subsidiaries (other than any such failure resulting from his
Disability) after a written demand for substantial performance is
delivered to him by the Corporation that specifically identifies the
manner in which the Participant has not substantially performed his
duties, or (B) the willful engaging by the Participant in gross
misconduct materially and demonstrably injurious to the Corporation
or its subsidiaries. No act, or failure to act, on the Participant's
part shall be considered "willful" unless done, or omitted to be
done, by him not in good faith and without reasonable belief that
his action or omission was in the best interest of the Corporation
and its subsidiaries.
(d) "Change of Control," for purposes of the Plan, means:
(i) the acquisition by any individual, entity or group
(within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of
20% or more of either (A) the then outstanding Common Shares
of the Corporation (the "Outstanding Corporation Common
Shares") or (B) the combined voting power of the then
outstanding voting securities of the Corporation entitled to
vote
48
<PAGE>
generally in the election of directors (the "Outstanding
Corporation Voting Securities"); provided, however, that for
purposes of this subsection (i), the following acquisitions
shall not constitute a Change of Control: (w) any acquisition
directly from the Corporation, (x) any acquisition by the
Corporation, (y) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Corporation
or any corporation controlled by the Corporation or (z) any
acquisition by any corporation pursuant to a transaction which
complies with clauses (A), (B) and (C) of subsection (iii) of
this definition of Change of Control; or
(ii) individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the
Corporation's shareholders, was approved by a vote of at least
a majority of the directors comprising the Incumbent Board as
of the date hereof shall be considered as though such
individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or
removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a
Person other than the Board; or
(iii) consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the
assets of the Corporation (a "Business Combination"), in each
case, unless, following such Business Combination, (A) all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding
Corporation Common Shares and Outstanding Corporation Voting
Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 50% of,
respectively, the then outstanding Common Shares and the
combined voting power of the then outstanding voting
securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation,
a corporation which as a result of such transaction owns the
Corporation or all or substantially all of the Corporation's
assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership,
immediately prior to such Business Combination of the
Outstanding Corporation Common Shares and Outstanding
Corporation
49
<PAGE>
Voting Securities, as the case may be, (B) no person
(excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of
the Corporation or such corporation resulting from such
Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding
Common Shares of the corporation resulting from such Business
Combination or the combined voting power of the then
outstanding voting securities of such corporation except to
the extent that such ownership existed prior to the Business
Combination and (C) at least a majority of the members of the
board of directors of the corporation resulting from such
Business Combination were members of the Incumbent Board at
the time of the execution of the initial agreement, or of the
action of the Board, providing for such Business Combination;
or
(iv) approval by the shareholders of the Corporation of a complete
liquidation or dissolution of the Corporation.
(e) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(f) "Committee" means the Human Resources Committee of the Board or any
other committee designated by the Board.
(g) "Common Shares" means the Corporation's common shares, par value
$2.50 per share, together with one Right for each Common Share to
purchase one one-hundredth of a share of the Corporation's Series C
Junior Participating Preferred Shares, without par value, issuable
prior to the Distribution Date pursuant to the Rights Agreement.
(h) "Corporation" means Arvin Industries, Inc., an Indiana corporation.
(i) "Disability" means a physical or mental condition that renders a
Participant unable to perform his usual duties or any comparable
duties for the Corporation or its subsidiaries if, in the opinion of
a physician selected by the Corporation, such condition will
continue indefinitely or for a substantial period of time.
(j) "Distribution Date," for purposes of the Plan, shall have the
meaning given in the Rights Agreement.
(k) "Fair Market Value" means (i) if the Common Shares are listed on the
New York Stock Exchange, the closing price of the Common Shares on
the consolidated tape of the New York Stock Exchange on the relevant
date or the most recent date on which Common Shares traded on such
Exchange; and (ii) if the Common Shares are not listed on such
Exchange, such value as the Committee, in good faith, shall
determine. Notwithstanding any provision of the Plan to the
contrary,
50
<PAGE>
no determination made with respect to the Fair Market Value of
Common Shares subject to an ISO shall be inconsistent with Section
422A of the Code or regulations thereunder.
(l) "ISO" means an incentive stock option, within the meaning of Section
422A of the Code, granted under the Plan pursuant to Sections 5 and
6.
(m) "Limited Right" means a limited stock appreciation right
granted under the Plan pursuant to Section 7.
(n) "Nonemployee Directors" means any member of the Board who is not
employed by the Corporation or any one of its subsidiaries.
(o) "Non-tandem SAR" means an SAR not granted in connection with an
Option.
(p) "Officer" means any officer of the Corporation elected by the Board
who is employed on a full-time salaried basis.
(q) "Option" means an option, including an ISO, granted under the Plan
pursuant to Section 5.
(r) "Option Agreement" means a written agreement specifying the type of
Option granted, the price at which the Option shall be exercisable,
the duration of the Option, the number of Common Shares to which
the Option pertains and such other provisions as the Committee
shall determine.
(s) "Participant" means any Officer who has been selected by the
Committee to receive an Award.
(t) "Performance Share" means a performance share granted under the
Plan pursuant to Section 9.
(u) "Performance Unit" means a performance unit granted under the Plan
pursuant to Section 9.
(v) "Plan" means the Arvin Industries, Inc. 1998 Stock Benefit
Plan.
(w) "Restricted Share" means a restricted share granted under the Plan
pursuant to Section 8.
(x) "Restricted Share Agreement" means a written agreement governing
the issuance of a Restricted Share or Shares.
(y) "Retirement Age" means the age at which employment is terminated or
benefits are paid as a result of the attainment of the normal or
early retirement age as defined in the retirement plan sponsored by
the Corporation or one of its subsidiaries in which the Participant
is actively participating.
51
<PAGE>
(z) "Rights Agreement" means the Rights Agreement dated as of May 29,
1986, between the Corporation and Harris Trust and Savings Bank, as
amended by Amendments No. 1, 2 and 3 thereto, dated February 23,
1989, November 10, 1994 and May 10, 1996, respectively, as such
agreement may be further amended from time to time.
(aa) "SAR" means a stock appreciation right granted under the Plan
pursuant to Section 7.
(bb) "SAR Agreement" means a written agreement evidencing the terms and
conditions applicable to an SAR.
(cc) "Tandem SAR" means an SAR granted in connection with an
Option.
3. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee, which shall consist of
two or more directors who shall be appointed by the Board, all of whom shall
not be (or formerly have been) employees of the Corporation. The Committee
shall, within the limits and pursuant to the terms of the Plan, determine the
individuals to whom Awards are to be granted under the Plan, the number of
shares to be subject to each Award, the exercise price with respect to each
Option, the base price with respect to each SAR, the restrictions to be
imposed on Restricted Shares, the performance goals which must be met in
order to earn each Performance Share and each Performance Unit, and all other
terms and conditions of such Awards and the shares to be issued pursuant to
the Plan. The Committee is also authorized to interpret any provision of the
Plan, to adopt, amend and rescind rules, regulations, terms and agreements
relating to the Plan, Awards granted thereunder and the shares to be issued
pursuant thereto, and to make all other determinations and take all other
action that it deems necessary to advisable for the administration of the
Plan. The Committee is also authorized to provide and accept any notices
provided for hereunder. Action with respect to the Plan may be taken by a
majority of the members of the Committee then in office either at a meeting
called by any member of the Committee or by unanimous written consent.
4. SHARES SUBJECT TO THE PLAN
(a) COMMON SHARES AVAILABLE FOR DELIVERY. Subject to the Section 11 and
the following provisions of this Section 4, the maximum number of Common
Shares that may be subject to Awards (excluding Awards which are Tandem SARs)
shall be equal to the sum of (i) 1,200,000 Common Shares; (ii) any Common
Shares available for future awards under the 1988 Stock Benefit Plan (the
"1988 Plan") as of the Effective Date (as determined pursuant to Section 19);
and (iii) any Common Shares that are represented by awards granted under the
1998 Plan which are forfeited, expire or are cancelled without delivery of
Common Shares or which result in the forfeiture of Common Shares back to the
Corporation.
52
<PAGE>
In the event that, prior to the expiration date of the Plan, any Option
granted under the Plan expires unexercised or is terminated, surrendered or
cancelled (other than in connection with the exercise of an SAR) without
being exercised, in whole or in part, for any reason, any Non-tandem SAR
granted under the Plan expires unexercised or is terminated, surrendered or
cancelled without being exercised, in whole or in part, for any reason, any
Restricted Shares granted under the Plan are forfeited or reacquired by the
Corporation in connection with the restrictions imposed upon such Common
Shares pursuant to the Plan, or any Performance Share or Performance Unit
distributable as Common Shares is unearned, terminated, surrendered,
cancelled or forfeited, then the number of Common Shares theretofore subject
to such Option, SAR, Performance Share, or Performance Unit or constituting
such Restricted Shares, or the unexercised, terminated, surrendered,
forfeited, cancelled or reacquired portion thereof, shall be added to the
remaining number of Common Shares that may be made subject to Awards under
the Plan. If either the purchase price of Common Shares upon exercise of any
Option or the tax withholding requirement is satisfied by tendering or
withholding Common Shares or by tendering exercisable Options, only the
number of Common Shares issued net of the Common Shares tendered or withheld
shall be deemed delivered for purposes of determining the number of Common
Shares available for Awards under the Plan.
(b) OTHER PLAN LIMITS. Subject to Section 11, the following
additional maximums are imposed under the Plan:
(i) The maximum number of Common Shares that may be issued as ISOs
shall be 1,200,000 Common Shares.
(ii) The maximum number of Common Shares that may be covered
by Awards granted to any one Participant pursuant to
Section 5 (Options) shall be 200,000 Common Shares
during any calendar year.
(iii) The maximum number of Common Shares that may be covered
by Awards granted to any one Participant pursuant to
Section 8 (Restricted Share Awards) and Section 9
(Performance Shares and Performance Units) shall be
25,000 Common Shares during any calendar year.
5. OPTIONS
(a) Options may be granted to Participants at any time and from
time to time as shall be determined by the Committee. The
Committee shall have complete discretion in determining the
number of Common Shares subject to Options granted to each
Participant. The Committee may grant any type of Option to
purchase Common Shares that is permitted by law at the time
of the grant, including ISOs. Unless otherwise expressly
provided at the time of grant, Options granted under the
Plan will be nonqualified stock options.
53
<PAGE>
(b) Each Nonemployee Director shall be granted automatically an Option
(that is not an ISO) to purchase 1,000 Common Shares, on the day
following each annual meeting of the Board held on or after each
Annual Meeting of Shareholders. The per share exercise price of
each option to be paid by each Nonemployee Director shall be 100%
of the Fair Market Value of the Common Shares on the date an Option
is granted.
(c) Each Option shall be evidenced by an Option Agreement.
(d) Except as provided in Sections 6 and 11 below, the number of Common
Shares subject to Options to be granted to each Participant and the
price per share to be paid by each Participant upon exercise shall
be determined by the Committee at the time the Options are granted,
provided that such exercise price shall not be less than 100% of
the Fair Market Value of the Common Shares on the date an Option is
granted or the par value of the Common Shares, whichever is
greater.
(e) Except as provided in Section 6 and subject to earlier
termination as provided in subsections (f) and (g) hereof,
an Option granted under the Plan shall expire on the date
determined by the Committee at the time the Option is
granted, provided that such date shall not be more than ten
years from the date the Option is granted. The Committee
shall specify in the Option Agreement, at the time each
Option is granted, the time or times at which, and in what
proportions, the Option may be exercised prior to its
expiration or earlier termination. The Committee, in its
discretion, shall have the power to accelerate the
exercisability of any or all Options, or any part thereof,
granted under the Plan.
(f) Except as otherwise provided in this subsection (f), no
Option may be exercised by a Participant at any time unless
the Participant is then a salaried full-time employee of the
Corporation or one of its subsidiaries. The Options of any
Participant whose full-time salaried employment with the
Corporation and its subsidiaries is terminated by the
Corporation without Cause (except in connection with a
Disability) shall expire on the earlier of (i) three months
after such termination, or (ii) the date that such Options
expire in accordance with their terms. During such period,
the Options may be exercised by such Participant with
respect to the same number of shares and in the same manner
and to the same extent as if the Participant had continued
as a full-time salaried employee of the Corporation or one
of its subsidiaries during such period. In the event that a
Participant voluntarily terminates employment with the
Corporation and its subsidiaries (except in connection with
a Disability or after attainment of Retirement Age) or is
discharged by the Corporation or one of its subsidiaries for
Cause, any Option or Options held by the Participant under
the Plan and not previously exercised shall expire
54
<PAGE>
immediately upon such termination or discharge and may not be
exercised thereafter. The Options of any Participant whose
full-time salaried employment with the Corporation and its
subsidiaries is terminated in connection with attainment of
Retirement Age shall expire upon the earlier of five years after
such termination or the date such Options expire in accordance with
their terms. During such period, the Options may be exercised by
the Participant with respect to the same number of shares and in
the same manner and to the same extent as if the Participant had
continued as a full-time salaried employee of the Corporation or
one of its subsidiaries during such period. The Options of any
Participant whose full-time salaried employment with the
Corporation and its subsidiaries is terminated by Disability or
death shall expire upon the earlier of one year after such
Disability or death, or the date such Options expire in accordance
with their terms. During such period the Options may be exercised
by the Participant, or in the event of his death by a legatee or
legatees of the Options under the Participant's will or by his
executors, personal representatives or distributees, with respect
to the number of shares that the Participant could have purchased
on the date of his Disability or death, as the case may be.
(g) Except as otherwise provided in this subsection (g), no
Option may be exercised by a Nonemployee Director at any
time unless the Nonemployee Director is then a member of the
Board. The Options held by any Nonemployee Director under
the Plan and not previously exercised whose membership on
the Board is terminated for any reason other than death
shall expire immediately upon such termination and may not
be exercised thereafter. The Options of any Nonemployee
Director whose membership on the Board is terminated by
death shall expire upon the earlier of one year after such
death or the date such Options expire in accordance with
their terms. In the event of death, the Options may be
exercised by a legatee or legatees of the Options under the
Nonemployee Director's will or by his executors, personal
representatives or distributees.
(h) Options granted under the Plan shall be exercisable at such
times and be subject to such restrictions and conditions as
the Committee shall in each instance approve at the time the
Options are granted, which restrictions and conditions need
not be the same for all Participants; provided, however,
that ISOs shall comply with the applicable provisions of the
Code pertaining thereto. The Committee may specify a
minimum number of full shares that must be purchased by a
Participant or Nonemployee Director upon any exercise of an
Option granted to him under the Plan. Notwithstanding any
other restriction on exercisability approved by the
Committee, an Option granted under the Plan shall be fully
exercisable upon a Change of Control of the Corporation or
as of the Distribution Date.
55
<PAGE>
(i) The purchase price of Common Shares upon exercise of any
Option shall be paid in full either (i) in cash or (ii) in
Common Shares valued at their Fair Market Value on the day
before the date of exercise, (iii) by delivery of a
promissory note of the Participant, (iv) in cash by a
broker-dealer to whom the holder of the Option has submitted
an exercise notice consisting of a fully endorsed Option,
(v) by agreeing to surrender Options then exercisable by him
valued at the excess of the aggregate Fair Market Value of
the Common Shares subject to such Options on the date of
exercise over the aggregate option price of such Common
Shares, (vi) by directing the Corporation to withhold such
number of Common Shares otherwise issuable upon exercise of
such Option having an aggregate Fair Market Value on the
date of exercise equal to the exercise price of the Option,
or (vii) by any combination of (i), (ii), (iii), (iv), (v)
and (vi), if approved by the Committee in its discretion or
in the manner provided in the Option Agreement. Subject to
Section 15, the Corporation shall issue, in the name of the
Participant, certificates representing the total number of
Common Shares purchased pursuant to the exercise of any
Option in a timely manner after such exercise.
(j) At the time of grant of an Option, the Committee may impose
such restrictions on disposition of Common Shares acquired
upon the exercise of such Option as it deems appropriate,
which restrictions may, without limitation, include a right
in the Corporation to repurchase upon the occurrence of a
specified event or events, all or any of such shares at the
price not less than the exercise price paid by the
Participant or Nonemployee Director for those shares.
(k) Any Option granted under the Plan may be exercised by the
Participant or Nonemployee Director, by a legatee or
legatees of such Option under the Participant's or Nonemployee
Director's will, or by his executors, personal representatives or
distributees, by delivering to the Corporation at its principal
executive office (attention of its Secretary) written notice of the
number of Common Shares with respect to which the Option is being
exercised accompanied either by payment or instructions regarding
payment in accordance with subsection (i) above. The date of
exercise shall be the date the notice is received by the
Corporation, unless a later date is specified in such notice.
Notwithstanding the foregoing, if an exercise notice is received by
the Corporation within ten days following the Distribution Date,
such exercise shall be effective as of the day immediately
preceding the Distribution Date unless a later date is specified in
the notice.
(l) As of the effective date of a merger, consolidation or share
exchange involving the Corporation as a result of which Common
Shares are converted into the right to receive another security
and/or any other consideration, each Option
56
<PAGE>
shall automatically become an option to acquire the securities
and/or other consideration that a holder of the number of Common
Shares then subject to the Option would have become entitled to
receive as a result of such merger, consolidation or share
exchange. Such converted option shall be governed by the terms and
conditions applicable to the Option.
(m) The Committee may prescribe such other terms and conditions of the
Options granted under the Plan that are neither inconsistent with
nor prohibited by the Plan.
6. SPECIAL RULES RELATING TO ISOS
Notwithstanding anything in Section 5 to the contrary, ISOs shall be in
such form and upon such terms and conditions as the Committee shall from time
to time determine, subject to the following to the extent necessary to comply
with Section 422A of the Code:
(a) An ISO must be granted within ten years from the date the Plan is
adopted or the date the Plan is approved by the shareholders of the
Corporation, whichever is earlier;
(b) The aggregate Fair Market Value (determined at the time the ISOs
are granted) of the Common Shares with respect to which ISOs are
exercisable for the first time by a Participant during any calendar
year (under all plans of the Corporation and its subsidiaries)
shall not exceed $100,000; and
(c) Notwithstanding any other provision herein contained, no
Participant may receive an ISO under the Plan if such
Participant, at the time the ISO is granted, owns shares
possessing more than ten percent of the total combined
voting power of all classes of shares of the Corporation or
of its parent or subsidiary corporation (within the
contemplation of Section 425(d) of the Code); provided,
however, that such Participant shall be eligible to receive
a grant of an ISO if, at the time such ISO is granted, the
exercise price is at least 110% of the Fair Market Value of
Common Shares, and such ISO is not exercisable after the
expiration of five years from the date such ISO is granted.
7. SHARE APPRECIATION RIGHTS
(a) SARs may be granted to Participants at any time and from
time to time as shall be determined by the Committee. The
Committee may specify that an SAR granted under the Plan
shall be a Tandem SAR or a Non-tandem SAR. An SAR granted
to a Participant at the same time and covering the same
number of Common Shares as an Option shall be a Tandem SAR
unless the Committee specifies to the contrary. At the time
of grant of a Non-tandem SAR, the Committee shall specify
the base price of Common Shares to be used in connection
with the calculation described in subsection (c) below and
the number of Common Shares subject to the SAR. The base
57
<PAGE>
price of a Non-tandem SAR shall not be less than 100% of the Fair
Market Value of one Common Share on the date of grant. No Tandem
SAR may be granted to a Participant in connection with an ISO in a
manner that will disqualify the ISO under Section 422A of the Code
unless the Participant consents thereto.
(b) Each SAR shall be evidenced by an SAR Agreement.
(c) An SAR shall entitle the Participant to receive from the
Corporation the number of Common Shares having an aggregate Fair
Market Value equal to:
(i) In the case of a Tandem SAR, all, or if specified by
the Committee at the time of grant, some portion, of
the excess of the Fair Market Value of one Common Share
as of the date on which the SAR is exercised over the
Option price per share specified in such Option,
multiplied by the number of shares then subject to the
Option, or the portion thereof as to which the SAR is
being exercised; or
(ii) In the case of a Non-tandem SAR, all, or if specified by the
Committee at the time of grant, some portion or multiple, of
the excess of the Fair Market Value of one Common Share as of
the date on which the SAR is exercised over the base price
specified in such SAR, multiplied by the number of Common
Shares then subject to the SAR, or the portion thereof as to
which it is being exercised.
Cash shall be delivered in lieu of any fractional shares. The
Corporation shall be entitled to elect to settle any part or all of
its obligation arising out of the exercise of an SAR by the payment
of cash in lieu of all or part of the Common Shares it would
otherwise be obligated to deliver in an amount equal to the Fair
Market Value of such shares.
(d) A Tandem SAR shall be exercisable at the time and to the
extent, but only at such time and to such extent, that the
Option to which it relates is exercisable. Upon the
exercise of a Tandem SAR, the unexercised Option or portion
thereof, to which the exercised portion of the Tandem SAR is
related shall expire. The exercise of any Option shall
cause the expiration of the Tandem SAR related to such
Options, or portion thereof, that is exercised.
(e) (i) Non-tandem SARs granted under the Plan shall be
exercisable at such times and be subject to such
restrictions and conditions as the Committee shall in
each instance approve at the time the Non-tandem SARs
are granted, which restrictions and conditions need not
be the same for all Participants. The Committee may
specify a minimum number of full shares with respect to
which any exercise of a Non-tandem SAR must be made.
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<PAGE>
Notwithstanding any other restriction on exercisability
approved by the Committee, a Non-tandem SAR granted under the
Plan shall be fully exercisable upon a Change of Control of
the Corporation or as of the Distribution Date.
(ii) Subject to earlier termination as provided in the last
sentence of this paragraph (ii), a Non-tandem SAR granted
under the Plan shall expire on the date determined by the
Committee, provided that such date shall not be more than ten
years from the date the SAR is granted. The Committee shall
specify at the time each Non-tandem SAR is granted, the time
or times at which, and in what proportions, the Non-tandem SAR
may be exercised prior to its expiration or earlier
termination. The Committee, in its discretion, shall have the
power to accelerate the exercisability of any or all
Non-tandem SARs, or any part thereof, granted under the Plan.
Notwithstanding the foregoing, any Non-tandem SAR granted to a
Participant under the Plan shall expire following a
termination of his full-time salaried employment with the
Corporation and its subsidiaries in the same manner as an
Option held by such Participant would expire pursuant to the
provisions of subsection 5(e).
(f) Any SAR granted under the Plan may be exercised by the
Participant, by a legatee or legatees of such SAR under the
Participant's last will, or by his executors, personal
representatives or distributees, by delivering to the
Corporation at its principal executive office (attention of
its Secretary) written notice of the number of Common Shares
with respect to which the SAR is being exercised accompanied
by any related SAR Agreement and, in the case of a Tandem
SAR, by the related Option Agreement. The date of exercise
shall be the date the notice is received by the Corporation,
unless a later date is specified in such notice.
Notwithstanding the foregoing, if an exercise notice is
received by the Corporation within ten days following the
Distribution Date, such exercise shall be effective as of
the day immediately preceding the Distribution Date unless a
later date is specified in the notice.
(g) Subject to Section 15, the Corporation shall, in a timely
manner, (i) issue, in the name of the Participant,
certificates representing the total number of Common Shares
to which the Participant is entitled pursuant to subsection
(c) hereof, and (ii) if the Corporation elects to settle all
or part of its obligations arising out of the exercise of
the SAR in cash, deliver to the Participant an amount in
cash equal to the Fair Market Value of the Common Shares it
would otherwise be obligated to deliver.
(h) On or after the effective date of a merger, consolidation or share
exchange involving the Corporation as a result of
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<PAGE>
which Common Shares are converted into the right to receive another
security and/or any other consideration, each SAR shall, upon
exercise in accordance with its terms, entitle the Participant to
receive from the Corporation an amount of such security and/or
other consideration (in the proportions received by the holders of
Common Shares in the merger, consolidation or share exchange)
having an aggregate Fair Market Value equal to:
(i) In the case of a Tandem SAR, all, or if specified by
the Committee at the time of grant pursuant to
paragraph (c)(i) of this Section, some portion, of the
excess of the Fair Market Value (as of the date of
exercise) of the security and/or other consideration
(on a per share basis) received by the holders of
Common Shares in the merger, consolidation or share
exchange over the option price per share specified in
the related option multiplied by the number of shares
then subject to the option, or portion thereof as to
which the SAR is being exercised; or
(ii) In the case of a Non-tandem SAR, all, or if specified by the
Committee at the time of grant pursuant to paragraph (c)(ii)
of this Section, some portion or multiple, of the excess of
the Fair Market Value as of the date of exercise of the
security and/or other consideration (on a per share basis)
received by the holders of Common Shares in the merger,
consolidation or share exchange, over the base price specified
in such SAR multiplied by the number of shares then subject to
the SAR, or portion thereof, as to which it is being
exercised.
Cash shall be delivered in lieu of fractional securities and may be
delivered if elected by the Corporation.
(i) The Committee may specify that an SAR granted under the Plan shall
be a Limited Right. Limited Rights shall, in addition to or in lieu
of the provisions regarding exercisability described in subsection
(c) above (as specified by the Committee), be subject to one or
both of the following (as specified by the Committee):
(i) Limited Rights shall be exercisable within thirty days
after a Change of Control, and upon exercise shall
entitle the holder to receive from the Corporation a
cash payment equal to the number of Common Shares
subject to the related Option (in the case of a Tandem
SAR) or subject to the SAR (in the case of a Non-tandem
SAR) times the greater of (A) the excess of the Fair
Market Value of one Common Share as of the date on
which the Limited Right is exercised, over the Option
price per share (in the case of a Tandem SAR) or the
base price per share (in the case of a Non-tandem SAR),
or (B) the excess of the value (as determined by the
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Committee as in existence immediately prior to the Change of
Control) of the highest per share consideration received by
shareholders of the Corporation in connection with the Change
of Control over such per share price.
(ii) In the event of a dissolution or liquidation of the
Corporation, Limited Rights shall be exercisable for the
thirty days prior to the effective date of such dissolution or
liquidation, and, in the absence of exercise during such
period, shall be automatically exercised on the last business
day immediately prior to such effective date, unless both the
Committee and the Participant agree in writing that the
Limited Right shall not be exercised at that time. Upon
exercise of a Limited Right pursuant to this paragraph (ii),
the holder shall be entitled to receive from the Corporation a
cash payment equal to the number of Common Shares subject to
the related Option (in the case of a Tandem SAR) or subject to
the SAR (in the case of a Non-tandem SAR), multiplied by the
greater of (A) the excess of the Fair Market Value of one
Common Share as of the date on which the Limited Right is
exercised, over the Option price per share (in the case of a
Tandem SAR) or the base price per share (in the case of a
Non-tandem SAR), or (B) the excess of the value (as determined
by the Committee as in existence immediately prior to the
dissolution or liquidation) of the per share consideration
received by shareholders of the Corporation in connection with
the dissolution or liquidation over such per share price.
On or after the effective date of a merger, consolidation, or share
exchange involving the Corporation which does not constitute a
Change of Control, but which results in the holders of Common
Shares receiving another security and/or other consideration, the
cash payments contemplated by this subsection shall be computed
with reference to such security and/or other consideration in a
manner consistent with subsection (h) above. Except as provided in
subsection (c) of this Section and in this subsection (i), a
Limited Right shall be subject to the same terms and conditions as
other SARs.
(j) The Committee may prescribe such other terms and conditions of all
SARs granted under the Plan that are neither inconsistent with nor
prohibited by the Plan.
8. RESTRICTED SHARE AWARDS
The Committee may from time to time grant, or sell for such amount of
cash, Common Shares or such other consideration as the Committee deems
satisfactory (which amount may be less than Fair Market Value), Restricted
Shares under the Plan to such Participants
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and upon such terms and conditions as the Committee may determine at the time
of grant or sale, subject to the following:
(a) Restricted Shares issued under the Plan shall be governed by a
Restricted Share Agreement in such form as the Committee shall from
time to time determine.
(b) Subject to Section 15 hereof, the Corporation shall issue, in the
name of the Participant, certificates representing the total number
of Restricted Shares granted or sold to the Participant, in a
timely manner after such grant or sale.
(c) Subject to the provisions of subsection (d) hereof and the
restrictions set forth in the related Restricted Share
Agreement, the Participant acquiring Restricted Shares shall
thereupon be a shareholder with respect to all of the shares
represented by such certificate or certificates and shall
have the right of a shareholder with respect to such shares,
including the right to vote such shares and to receive
dividends and other distributions paid with respect to such
shares.
(d) Any Restricted Share granted to a Participant pursuant to
the Plan shall be forfeited and any Restricted Share sold to
a Participant pursuant to the Plan shall, at the
Corporation's option, be resold to the Corporation for an
amount equal to the value of the consideration paid therefor
and, upon such forfeiture or resale, such share shall revert
to the Corporation if the Participant's employment with the
Corporation and its subsidiaries terminates prior to a date
specified by the Committee at the time of grant or sale,
which date shall not be earlier than the first anniversary
of such grant or sale, unless such employment terminates (A)
after the Participant's attainment of Retirement Age, (B)
because of the Participant's Disability, (C) because of the
Participant's death, or (D) following a Change of Control
for any reason other than Cause. As of such specified date,
or, if earlier, the Participant's date of termination of
employment described in (A) through (D) of the preceding
sentence, the restrictions of this subsection (d) shall
lapse. The Corporation may exercise its right to require a
resale of a Restricted Share pursuant to this subsection by
notice to the Participant at any time within the thirty-day
period following his termination of employment with the
Corporation and its subsidiaries. A Participant who has
received such notice shall promptly surrender his Restricted
Shares and the Corporation shall make payment therefor
within ten days after such surrender. The Committee, in its
discretion, shall have the power to accelerate the date on
which the restrictions of this subsection (d) shall lapse
with respect to any or all Restricted Shares granted or sold
under the Plan that have been outstanding for at least one
year.
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(e) Except as set forth in subsection (f), Restricted Shares
issued pursuant to the Plan shall not be sold, assigned,
pledged or otherwise transferred, voluntarily or
involuntarily, by the holder thereof until the date the
restrictions of subsection (d) lapse. Each certificate
evidencing Restricted Shares issued under the Plan shall
bear a legend indicating that transferability of such shares
is restricted by and subject to the terms and conditions
imposed under the Plan.
(f) Notwithstanding anything contained herein to the contrary:
(i) Restricted Shares may be tendered in response to a
tender offer for or a request or invitation to tenders
of (both within the meaning of Section 14 of the
Securities Exchange Act of 1934, as in effect on
February 1, 1998) greater than 50% of the outstanding
Common Shares of the Corporation; provided the security
and/or other consideration received in exchange
therefor shall thereafter be subject to the
restrictions and conditions applicable to such
Restricted Shares until they lapse pursuant to the Plan
or the related Restricted Share Agreement and that the
tendering Participant agrees to any reasonable
provisions requested by the Corporation to assure that
any consideration received as a result of such tender
is subject to such restrictions and conditions and that
the consideration cannot be transferred in violation of
any such restrictions and conditions;
(ii) Restricted Shares may be surrendered in a merger,
consolidation or share exchange involving the Corporation
provided that the security and/or other consideration received
in exchange therefor shall thereafter be subject to the
restrictions and conditions applicable to such Restricted
Shares until they lapse pursuant to the Plan or the related
Restricted Share Agreement and that the surrendering
Participant agrees to any reasonable provisions requested by
the Corporation to assure that any consideration received as a
result of such surrender is subject to such restrictions and
conditions and that the consideration cannot be transferred in
violation of any such restrictions and conditions.
(g) The Committee may prescribe such other terms and conditions of the
Restricted Shares issued under the Plan that are neither
inconsistent with nor prohibited by the Plan including, without
limitation, terms providing for a lapse of the restrictions of
subsection (d) in installments.
(h) From and after the Distribution Date, each Rights Certificate
issued pursuant to the Rights Agreement for each Restricted Share
and all Series C Junior Participating Preferred Shares issued upon
exercise of the Rights
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evidenced by such Rights Certificate shall be subject to such
restrictions and conditions applicable to such Restricted Share
until they lapse pursuant to the Plan or the related Restricted
Share Agreement; provided, however, that the Participant holding
such Rights Certificate shall be entitled to surrender the Rights
Certificate pursuant to the terms of the Rights Agreement in
exchange for the Series C Junior Participating Preferred Shares
issuable in respect thereof.
9. PERFORMANCE SHARES AND PERFORMANCE UNITS
The Committee may from time to time grant Performance Shares or
Performance Units to such Participants and upon such terms and conditions as
the Committee shall determine, subject to the following:
(a) Each Performance Share shall represent one Common Share and
shall be earned upon the attainment of performance goals
established by the Committee at the time of grant. Each
Performance Unit shall represent the Fair Market Value of a
Common Share as of the date of such award and shall be
earned upon the attainment of performance goals established
by the Committee at the time of grant. The time period
during which the performance goals must be met shall be
determined by the Committee and shall be called a
"performance period." The Committee may provide that a
Participant will earn a specified portion of the Performance
Shares or Performance Units for a performance period in the
event that performance goals for such performance period are
partially attained.
(b) As of the last day of a performance period, Performance
Shares and Performance Units earned by a Participant for
such period shall be credited to an account (the "Account")
established and maintained for such Participant, and any
unearned Performance Shares or Performance Units shall be
forfeited. When the Corporation pays a cash dividend on
Common Shares, each Participant's Account shall also be
credited with the amount of any cash dividends that would
have been paid on the number of Common Shares equal to the
number of Performance Shares then credited to such Account.
The Committee may provide that Performance Units credited to
an Account shall be credited with earnings at a rate
determined by the Committee. The Account of any
Participant, which shall be the record of Performance Shares
earned by him under the Plan, dividends paid thereon,
Performance Units earned by him under the Plan and earnings
credited thereon, is solely for accounting purposes and
shall not require a segregation of any Corporation assets.
(c) The Committee may provide at the time of grant that any earned
Performance Share in Account of a Participant, the amount of cash
dividends credited with respect thereto, any Performance Units in
an Account of a Participant, and earnings credited with respect
thereto (as well as
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Performance Shares or Performance Shares or Performance Units for
performance periods then in progress) shall be forfeited if the
Participant's employment with the Corporation and its subsidiaries
terminates prior to a date specified by the Committee at the time
of grant, unless such employment terminates (i) because of death,
(ii) because of Disability, (iii) after attainment of Retirement
Age, or (iv) following a Change of Control for any reason other
than Cause. The Committee may provide that, with respect to a
termination described in (i) through (iv) of the prior sentence, a
participant shall earn all or a portion of the Performance Shares
or Performance Units granted to him for the performance period then
in progress.
(d) As of the earlier of (i) the date specified by the Committee
as referred to in subsection (c) above, or (ii) the date of
a termination of employment described in paragraphs (c)(i)
through (iv) above, a Participant, with respect to
Performance Shares, shall be entitled to receive from the
Corporation either a number of Common Shares equal to the
number of Performance Shares in his Account, or cash in an
amount equal to the number of Performance Shares in his
Account times the Fair Market Value of one Common Share on
such date, and with respect to Performance Units, shall be
entitled to receive from the Corporation either cash in an
amount equal to the number of Performance Units in his
Account, multiplied by the Fair Market Value of one Common
Share on such date, the number of Common Shares equal to the
number of Performance Units, multiplied by the Fair Market
Value of one Common Share on such Date, or a combination of
such Common Shares and cash, the product of which is divided
by the Fair Market Value of one Common Share on such date.
In connection with a distribution pursuant to the preceding
sentence, a Participant shall also be entitled to a cash
payment equal to the dividends in his Account relating to
the distributed Performance Shares and the earnings in his
Account relating to the distributed Performance Units.
Payment to a Participant of the amount set forth above shall
be made or commence within 90 days after the earlier of (i)
such specified date, or (ii) the date of termination
described in paragraphs (c)(i) through (iv) above. Payments
in cash may be made either in a lump sum or in equal annual
installments over a period not to exceed ten years. The
Committee shall have the sole discretion to determine the
form and method of payment under the Plan and the period
over which such payment shall be made. Notwithstanding the
foregoing, in the event that a Participant's employment with
the Corporation and its subsidiaries terminates following a
Change of Control of the Corporation for any reason other
than attainment of Retirement Age, death, Disability or
termination by the Corporation for Cause, payments with
respect to all Performance Shares and Performance Units in
his Account, including credits with respect to dividends on
Performance Shares or earnings on Performance Units, shall
be made in cash within ten days after such termination takes
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place. Except as provided in subsection (b), a Participant shall
not be entitled to receive any earnings on the value of his
Performance Shares or Performance Units with respect to the period
between his termination of employment and the receipt of payments
under the Plan.
10. ASSIGNMENT
Except as provided in subsection 8(e) and (f) or in connection with
unrestricted Common Shares issued pursuant to an Award, Awards granted under
the Plan and any rights and privileges pertaining thereto, may not be
transferred, assigned, pledged or hypothecated in any manner, by operation of
law or otherwise, other than by will or by the laws of descent and
distribution, and shall not be subject to execution, attachment or similar
process. In the event of the death of a Participant or a Nonemployee
Director, any distribution due under the Plan shall be made to the duly
appointed and qualified executor or other personal representative of the
Participant or the Nonemployee Director to be distributed in accordance with
the will or applicable intestacy law of the Participant or Nonemployee
Director; or in the event that there shall be no representative duly
appointed and qualified within six months after the date of death of such
deceased Participant or Nonemployee Director, then to such persons as, at the
date of his death, would be entitled to share in the distribution of such
deceased person's personal estate under the provisions of the applicable
statute then in force governing the descent of intestate property, in the
proportions specified in such statute.
11. ADJUSTMENTS
The number of shares available for issuance under the Plan, the number
of shares subject to Awards granted under the Plan, the number of Performance
Shares credited to a Participant's Account or applicable to performance
periods in progress, and the exercise price with respect to Options and base
price with respect to SARs granted under the Plan may be appropriately
adjusted as the Committee may determine for any increase or decrease in the
number of issued Common Shares resulting from a subdivision or consolidation
of shares whether through reorganization, recapitalization, share split,
reverse share split, share distribution or combination of shares, or the
payment of a share dividend or other increase or decrease in the number of
such shares outstanding effected without receipt of consideration by the
Corporation. Adjustments under this Section 11 shall be made according to the
sole discretion of the Committee, and the decision of the Committee as to the
timing, nature and amount of such adjustments shall be binding and
conclusive. If any such adjustment results in the computation of a number of
Common Shares that is not a whole number, such number shall be rounded down
to the next whole number.
12. DISSOLUTION OR LIQUIDATION
Upon the dissolution or liquidation of the Corporation, each
Participant's and Nonemployee Director's rights with respect to Options and
SARs that have not been exercised, Restricted Shares that are subject to
forfeiture, and Performance Shares or Performance Units
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that are either unearned or not yet distributable, as of the date of the
occurrence of such event, shall terminate and be forfeited and neither the
Participant, the Nonemployee Director, nor their heirs, personal
representatives, successors or assigns shall have any future rights with
respect to any such Options, SARs, Restricted Shares, Performance Shares, or
Performance Units. Notwithstanding the foregoing, the Committee, in its
discretion exercised in a nondiscriminatory way, may (i) adjust the terms of
any Award to give the holder thereof the opportunity to participate in any
distribution on Common Shares related to the dissolution or liquidation, or
(ii) otherwise provide for a distribution to any holder of an Award affected
by the dissolution or liquidation; provided, however, that if the dissolution
or liquidation occurs after a Change of Control of the Corporation, the
Committee shall, (i) by such adjustment or distribution, provide that the
holder of each Award shall benefit in the same manner as if such Award had
been exercised or made unrestricted prior to the distributions on Common
Shares related to the dissolution or liquidation, or (ii) make a cash
distribution to such holder in an amount equal to the value of the Award
(including, in the case of a Performance Share and Performance Unit, the
Account related thereto).
13. GOVERNMENT REGULATIONS
Notwithstanding any of the provisions hereof, or of any Option, SAR,
Restricted Share, Performance Share, or Performance Unit granted hereunder,
the obligation of the Corporation to issue and deliver shares upon the
exercise of such Option or SAR or upon a distribution with respect to a
Performance Share or Performance Unit, or the obligation of the Corporation
to issue and deliver certificates evidencing Restricted Shares, shall be
subject to all applicable laws, rules and regulations and to such approvals
by any governmental agencies or national securities exchanges as may be
required, including, without limitation, the obligation of the Corporation to
have a registration statement or statement that complies with the provisions
of the Securities Act of 1933, as amended, in effect with respect to such
shares at the time of such issuance and delivery unless the Corporation
receives evidence satisfactory to it that such issuance and delivery, in
absence of such an effective registration statement or statements, would not
constitute a violation of the terms and provisions of such act.
14. TERMINATION AND AMENDMENT OF PLAN
The Board (or the Committee) may amend, alter or terminate the Plan,
provided that, subject to Section 11, no amendment, alteration or termination
shall be made which would materially and adversely affect the rights of any
Participant or Nonemployee Director under any Option, SAR, Performance Share,
or Performance Unit theretofore granted, or of any Participant who had
theretofore acquired Restricted Shares pursuant to the Plan, without such
Participant's or Nonemployee Director's consent, as the case may be.
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15. WITHHOLDING TAXES
Whenever the Corporation proposes or is required to issue or transfer
Common Shares to a Participant under the Plan, the Corporation shall have the
right to require the Participant to remit to the Corporation an amount
sufficient to satisfy all federal, state and local withholding tax
requirements prior to the delivery of any certificate or certificates for
such shares. If such certificates have been delivered prior to the time a
withholding obligation arises, the Corporation shall have the right to
require the Participant to remit to the Corporation an amount sufficient to
satisfy all federal, state or local withholding tax requirements at the time
such obligation arises and to withhold from other amounts payable to the
Participant, as compensation or otherwise, as necessary. Whenever payments
under the Plan are to be made to a Participant in cash, such payments shall
be net of any amounts sufficient to satisfy all federal, state and local
withholding tax requirements. The Corporation may, if approved by the
Committee in its discretion, in connection with an Award in the form of
Common Shares, allow a Participant to direct the Corporation to withhold a
portion of the Common Shares otherwise distributable or to transfer to the
Corporation a certain number of Common Shares (either subject to a Restricted
Share Award or previously owned) with a Fair Market Value at the date of
exercise equal to the amount required to be withheld, and make necessary cash
payments to appropriate taxing authorities to satisfy its withholding
obligation.
16. RIGHT TO TERMINATE EMPLOYMENT
Nothing in the Plan or any agreement entered into pursuant to the Plan
shall confer upon any Participant the right to continue in the employment of
the Corporation or its subsidiaries or affect any right that the Corporation
or its subsidiaries may have to terminate the employment of such Participant.
17. RIGHTS AS SHAREHOLDER
The recipient of any Award under the Plan shall have no rights as a
shareholder with respect thereto unless and until certificates for Common
Shares are issued to him.
18. LEAVES OF ABSENCE
The Committee shall be entitled to make such rules, regulations and
determinations as it deems appropriate under the Plan in respect of any leave
of absence taken by the recipient of any Award. Without limiting the
generality of the foregoing, the Committee shall be entitled to determine (i)
whether or not any such leaves of absence shall constitute a termination of
employment within the meaning of the Plan, and (ii) the impact, if any, of
any such leave of absence on awards under the Plan theretofore made to any
recipient who takes such leave of absence.
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19. EFFECTIVE DATE
The Plan shall become effective as of the date it is approved by the
holders of a majority of the Common Shares of the Corporation (voting as a
single class) present, or represented, and entitled to vote at the 1998
Annual Meeting of Shareholders of the Corporation. There shall be no Options,
SARs, Restricted Shares, Performance Shares, or Performance Units granted or
awarded under the Plan after 2008; provided, however, that all Options, SARs,
Restricted Shares, Performance Shares, and Performance Units granted or sold
under the Plan prior to such date shall remain in effect and subject to
adjustment and amendment as herein provided until they have been satisfied or
terminated in accordance with the Plan and the terms of their related
agreements.
20. GOVERNING LAW
The Plan, and all agreements hereunder, shall be construed in accordance
with and governed by the laws of the State of Indiana and, in the case of
ISOs, Section 422A of the Code.
21. INDEMNIFICATION
Each person who is or shall have been a member of the Committee or of
the Board shall be indemnified and held harmless by the Corporation against
and from any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by him in connection with or resulting from any claim,
action, suit, or proceeding to which he may be a party or in which he may be
involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by him in settlement thereof with
the Corporation's approval, or paid by him in satisfaction of any judgment in
any such action, suit or proceeding against him; provided, however, that he
shall give the Corporation an opportunity at its own expense, to handle and
defend the same before he undertakes to handle and defend it on his own
behalf. The foregoing right of indemnification shall not be exclusive of any
other rights of indemnification to which such persons may be entitled under
the Corporation's Articles of Incorporation or By-laws, as a matter of law,
or otherwise, or any power that the Corporation may have to indemnify them or
to hold them harmless.
22. SUCCESSORS
In the event of a sale of substantially all of the assets of the
Corporation, or a merger, consolidation or share exchange involving the
Corporation, all obligations of the Corporation under the Plan with respect
to awards granted hereunder shall be binding on the successor to the
Corporation in the transaction. Employment with such a successor shall be
considered employment with the Corporation for purposes of the Plan.
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23. NOTICES
Notices given pursuant to this Agreement shall be in writing and shall
be deemed received when personally delivered or five days after mailed by
United States registered or certified mail, return receipt requested,
addressee only, postage prepaid. Notice to the Corporation shall be directed
to:
Secretary
Arvin Industries, Inc.
One Noblitt Plaza
Box 3000
Columbus, Indiana 47202-3000
Notices to Participants and Nonemployee Directors shall be directed to
such person at the home address of such person on the records of the
Corporation. Notwithstanding the foregoing, if either party shall have
previously designated address by notice to the other party given in the
foregoing manner, then notices to such party shall be directed as designated
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Exhibit 10 (B)
Management Incentive Plans
For many years the Company has established annual incentive plans for its
executive officers and other key employees. These plans provide for the payment
to the eligible employees of additional cash compensation based on Company,
divisional or individual performance as measured against criteria established at
the beginning of the year. The executive officers of the Company were eligible
for incentive compensation payments under the "1998 Executive Incentive Plan"
which provided for payments based on earnings per share and the achievement of
certain financial and other business-related objectives established at the
beginning of the year.
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Exhibit 10 (C)
May 1, 1998
Board of Directors
Arvin Industries, Inc.
One Noblitt Plaza
Columbus, Indiana 47201
Gentlemen:
This letter will serve to set forth the agreement under which I shall continue
to be employed by Arvin Industries, Inc. (the "Company").
1. The Company shall employ me on a full-time basis, during an initial term
commencing May 1, 1998 to and including April 30, 2001, provided, however,
that said initial term shall be automatically extended for one additional
year on May 1 of each year commencing May 1, 1999, unless either party
hereto gives written notice of termination of such automatic extension at
least three (3) months prior to May 1, 1999, or as the case may be, any
subsequent May 1, in which event this Agreement shall terminate at the end
of the three-year term in effect at the time such notice is given, subject,
however to such earlier termination of this agreement as may occur pursuant
to paragraphs 4 and 5 hereof. Said initial term and automatic extensions
thereof are hereinafter referred to as the "employment period". During the
employment period, I shall serve as President and Chief Executive officer
of the Company or such other executive position(s) appropriate to my
training, qualifications and experience, as the Board of Directors shall
from time to time determine, and I shall devote my full time and attention
during usual business hours exclusively to the business of the Company
except during usual vacation periods. All services to be performed by me
hereunder shall be in Columbus, Indiana. It is also our understanding that
the Board of Directors will use its best efforts to insure that I shall be
a member of the Board of Directors during the employment period.
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Letter to Board of Directors
May 1, 1998
Page 2
2. During the employment period, the Company shall pay to me
compensation, notwithstanding the particular executive position held
by me, consisting of an annual salary of at least $600,000.00 plus
such additional compensation, in the form of bonus payments or
otherwise, as may be determined from time to time by the Board of
Directors. Any increases in annual salary approved by the Board of
Directors shall be added to the minimum annual salary provided for
herein. In the event this agreement is terminated as described in
Section Number 1 of this letter, bonus payments as well as base salary
would continue for the duration of the agreement. Bonus payments would
be the average annual bonus paid over the three years prior to the
year in which the agreement was terminated. In addition, I would have
the option of taking the total severance benefit, base salary and
bonus, as a lump sum. If the lump sum option is chosen, all company
benefits will end upon payment of said lump sum. If the salary and
bonus payments continue over the remaining term of the agreement, all
employee benefits continue, including existing stock options, as if I
were an active employee.
3. During the employment period, the Company shall reimburse me for
all expenses necessarily and reasonably incurred by me in connection
with the business of the Company. I shall be eligible to participate
in any profit sharing plan, incentive or bonus plan, deferred
compensation plan, annuity plan, pension plan or other retirement
plan, group life insurance or other insurance plan, medical expense
plan, stock option plan and any other benefit plan maintained and
offered by the Company to its executives.
4. In the event that during the employment period I am unable for a
continuous period of three months (or for such longer period, not to
exceed one year, as the Board of Directors in its sole discretion
shall determine) to perform my assigned duties for the Company because
of serious illness or other incapacity, then this Agreement shall
terminate and thereafter, I shall be entitled to the benefits of the
Company's then existing disability program.
5. In the event of my death, voluntary retirement or upon termination of
the employment period, whichever shall first occur, this Agreement
shall terminate. Other than as provided in paragraphs 4 and 5 hereof,
this Agreement is not terminable by either of the parties hereto.
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Letter to Board of Directors
May 1, 1998
Page 3
6. I shall not at any time during the employment period acquire a
financial interest in or participate in the operation or management of
business which is competitive with any activity of the Company or any
of its subsidiaries. Nothing contained herein, however, shall prohibit
me from purchasing for investment stock or other securities of any
corporation whose securities are listed upon any recognized securities
exchange or traded on the over-the-counter market or from making any
investment in a non-competing business or from becoming a director of
any corporation conducting a non-competing business.
7. In the event the Company shall at any time be merged or consolidated
into any other corporation, or if substantially all of the assets of
the Company are transferred to another Corporation, the provisions of
this Agreement shall be binding upon and inure to the benefit of the
successor corporation. This provision shall also apply in the event of
any subsequent merger, consolidation or transfer of assets.
8. My rights and benefits hereunder shall not be subject to voluntary or
involuntary assignment or transfer.
If this Agreement is acceptable, please sign where indicated and return an
executed counterpart to me.
Sincerely,
---------------------------
V. William Hunt
President and CEO
Agreed to and accepted for Arvin industries, Inc.
By: ______________________________
Byron O. Pond
Chairman of the Board
By: ______________________________
Dr. Steven C. Beering
Human Resources Committee
Arvin Board of Directors
74
<PAGE>
<TABLE>
Exhibit 11
Arvin Industries, Inc.
Computation of Earnings Per Share of Common Stock (Unaudited)
(amounts in millions except per share amounts)
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Basic Earnings Per Share
- ------------------------
Income from continuing operations $ 78.4 $ 65.0 $ 47.1
Income from discontinued operation, net of tax - 1.6 -
--------- --------- ---------
Net income to common stock $ 78.4 $ 66.6 $ 47.1
========= ========= =========
--------- --------- ---------
Average common shares outstanding 23.8 23.0 22.4
========= ========= =========
Earnings per average share of common stock
Continuing operations $ 3.29 $ 2.83 $ 2.10
Discontinued operations - .07 -
--------- --------- ---------
$ 3.29 $ 2.90 $ 2.10
========= ========= =========
Diluted Earnings Per Share:
- ---------------------------
Income from continuing operations $ 78.4 $ 65.0 $ 47.1
Income from discontinued operation, net of tax - 1.6 -
--------- --------- ---------
Net income 78.4 66.6 47.1
Add back 7.5% convertible debentures' after tax interest
expense (if dilutive) - - 2.9
---------- --------- ---------
Net income to common stock assuming full dilution $ 78.4 $ 66.6 $ 50.0
========= ========= =========
Average shares of common stock outstanding 23.8 23.0 22.4
Incremental common shares applicable to common stock options based on
the average market price during the period .4 .4 .2
Average common shares issuable assuming conversion of 7.5 %
convertible subordinated debentures (if dilutive) - - 2.1
--------- --------- ---------
Average common shares assuming maximum dilution 24.2 23.4 24.6
========= ========= =========
Earnings per average share assuming maximum dilution
Continuing operations $ 3.23 $ 2.78 $ 2.03
Discontinued operations - .07 -
--------- --------- ---------
$ 3.23 $ 2.85 $ 2.03
75
========= ========= =========
</TABLE>
<TABLE>
Exhibit 12
Computation of Ratio of Earnings to Fixed Charges (Unaudited)
<CAPTION>
(Dollars in millions) 1998 1997 1996 1995 1994
- ------------------------------------------ --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Profit before tax $ 112.7 $ 97.9 $ 64.1 $ 29.4 $ 38.8
Income (loss) of 50% owned
subsidiaries 3.6 2.9 1.3 (.8) .3
Dividends received from less
than 50% owned subsidiaries 2.3 1.2 2.7 2.6 1.6
Interest expense 38.4 42.6 45.4 44.9 44.9
25% of rent expense 4.6 4.1 3.9 3.9 3.2
--------- --------- ---------- ---------- ----------
Total fixed charges 43.0 46.7 49.3 48.8 48.1
Pre-tax earnings required to
cover preferred dividends - - - - -
========= ========= ========== ========== ==========
Total fixed charges and
preferred dividends 43.0 46.7 49.3 48.8 48.1
========= ========= ========== ========== ==========
Earnings before income taxes
and fixed charges $ 161.6 $ 148.7 $ 117.4 $ 80.0 $ 88.8
========= ========= ========== ========== ==========
Ratio of earnings to fixed
charges 3.7 3.2 2.4 1.6 1.8
Ratio of earnings to fixed
charges and preferred
dividends 3.7 3.2 2.4 1.6 1.8
<FN>
Note 1: For purposes of calculating the ratio of earnings to fixed
charges, "earnings" consist of earnings from continuing operations
before income taxes, adjusted for the portion of fixed charges
deducted from such earnings. "Fixed charges" consist of interest on
all indebtedness (including capital lease obligations, capital
securities and capitalized interest), amortization of debt expense
and the percentage of rental expense on operating leases deemed
representative of the interest factor.
Note 2: The ratios of earnings to fixed charges, before the
restructuring and special charges for 1995 and 1994 were 1.9 and
2.4, respectively.
</FN>
76
</TABLE>
Exhibit 21
Subsidiaries of Arvin Industries, Inc.
Set forth below are the names of certain subsidiaries, at least 50% owned,
directly or indirectly, of the Company included in the consolidated financial
statements of the Company and its subsidiaries in the Company's Annual Report on
Form 10-K for the year ended January 3, 1999. Certain subsidiaries, which when
considered in the aggregate would not constitute a significant subsidiary, are
omitted from the list below. <TABLE> <CAPTION>
State or Other Jurisdiction of
Company Name Incorporation
- ------------ -------------
<S> <C>
Maremont Corporation Delaware
Maremont Exhaust Products, Inc. Delaware
Gabriel Europe, Inc. Delaware
Gabriel Ride Control Products, Inc. Delaware
Arvin International Holdings, Inc. Delaware
Arvin-Kayaba, LLC Indiana
Arvin Technologies, Inc. Michigan
AVM, Inc. South Carolina
Arvin Automotive of Canada Canada
Arvin Ride Control Products, Inc. Canada
Arvin Finance Company of Canada Canada
Arvin Canada Holding, Ltd. Canada
Arvin-Exhaust B.V. The Netherlands
Arvin International Holland B.V. The Netherlands
Timax Exhaust Systems Holding B.V. The Netherlands
Arvin-Exhaust S.A. Spain
Arvin France S.A. France
Arvin Exhaust S.A. France
Arvin Exhaust GmbH Germany
Zeuna Starker GmbH & Co KG Germany
Arvin International U.K., Ltd. United Kingdom
Arvin Replacement Products, Ltd. United Kingdom
</TABLE>
77
Exhibit 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (333-53087) and in
the Registration Statements on Form S-8 (No. 333-35529, No. 333-35531, No.
333-27081, No. 333-16833, No. 33-50371, No. 33-21717 and No. 33-40438) of Arvin
Industries, Inc. of our report dated January 29, 1999, except as to Note 15
which is as of February 26, 1999 appearing on Page 38 of this Form 10-K.
PricewaterhouseCoopers LLP
Indianapolis, Indiana
March 1, 1999
78
Exhibit 99
FORWARD-LOOKING STATEMENTS
Information provided by Arvin from time to time, including statements in Arvin's
Annual Report on Form 10-K and in documents that are incorporated by reference
in the Annual Report on Form 10-K, may constitute forward-looking statements, as
that term is defined in the Securities Reform Act of 1995. These statements are
subject to risks and uncertainties. Forward-looking statements include
information concerning Arvin's anticipated financial performance, business
prospects, technological developments, Year 2000 plans and risks, new products,
research and development activities and similar matters, including the effect of
recent acquisitions. These forward-looking statements generally are accompanied
by words such as "believes," "anticipates," "expects," "estimates," "should,"
"planned," "outlook," "goal" and "on target" or similar expressions. You should
understand that forward-looking statements are not guarantees since there are
inherent difficulties in predicting future results. Actual results could differ
materially from those expressed or implied in the forward-looking statements.
Risks and uncertainties that may affect the operations, performance and results
of Arvin's business include the following:
(1) general economic and competitive conditions in the markets and countries in
which Arvin operates;
(2) strikes or other work stoppages affecting Arvin or its major customers or
suppliers;
(3) the level of consumer demand for new vehicles equipped with Arvin's
products;
(4) Arvin's ability to continue to control and reduce its costs of production;
(5) the level of consumer demand for Arvin's replacement products, which varies
based on such factors as the severity of winter weather and the age of
automobiles in Arvin's markets, as well as general economic conditions;
(6) the impact on demand for Arvin's replacement products of prior improvements
in original equipment product quality;
(7) Arvin's ability to integrate recently acquired businesses in a timely and
cost-effective manner;
(8) the effect of changes in the distribution channels for replacement
products;
(9) the effect of technological change;
(10) the risks inherent in international operations and joint ventures;
(11) the strength of the U.S. dollar against currencies of other countries where
Arvin operates; and
(12) changes in financial markets affecting Arvin's financial structure and its
cost of capital and borrowed money.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described in the forward-looking statement. Arvin does not intend to
update forward-looking statements.
79
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from Form 10-K for
the period ended January 3, 1999 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jan-3-1999
<PERIOD-START> Dec-28-1997
<PERIOD-END> Jan-3-1999
<CASH> 107,000
<SECURITIES> 0
<RECEIVABLES> 327,100
<ALLOWANCES> (8,100)
<INVENTORY> 151,300
<CURRENT-ASSETS> 681,000
<PP&E> 1,289,800
<DEPRECIATION> 704,000
<TOTAL-ASSETS> 1,646,500
<CURRENT-LIABILITIES> 516,900
<BONDS> 307,700
0
0
<COMMON> 68,800
<OTHER-SE> 494,900
<TOTAL-LIABILITY-AND-EQUITY> 1,646,500
<SALES> 2,498,700
<TOTAL-REVENUES> 2,498,700
<CGS> 2,128,500
<TOTAL-COSTS> 2,320,000
<OTHER-EXPENSES> 5,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,800
<INCOME-PRETAX> 112,700
<INCOME-TAX> 38,300
<INCOME-CONTINUING> 78,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 78,400
<EPS-PRIMARY> 3.29
<EPS-DILUTED> 3.23
</TABLE>
