Securities & Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended January 2, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 1-7724
SNAP-ON INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 39-0622040
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10801 Corporate Drive, Pleasant Prairie, Wisconsin 53158-1603
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (414) 656-5200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
- ------------------- -------------------------------------
Common stock, $1 par value New York Stock Exchange
Preferred stock purchase rights New York 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, 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 a definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the registrant
at February 23, 1999:
$1,909,184,462
Number of shares outstanding of each of the registrant's classes of common stock
at February 23, 1999:
Common stock, $1 par value, 65,591,328 shares
Documents incorporated by reference
Portions of the Corporation's Annual Report to Shareholders for the fiscal year
ended January 2, 1999, are incorporated by reference into Parts I, II and IV of
this report.
Portions of the Corporation's Proxy Statement, dated March 12, 1999, prepared
for the Annual Meeting of Shareholders scheduled for April 23, 1999, are
incorporated by reference into Part III of this report.
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TABLE OF CONTENTS
Page
PART I
Item 1. Business.........................................................3
Item 2. Description of Properties........................................9
Item 3. Legal Proceedings...............................................10
Item 4. Submission of Matters to a Vote of Security Holders.............10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters..........................................................11
Item 6. Selected Financial Data .........................................11
Item 7. Management Discussion and Analysis of Financial Condition
and Results of Operations .......................................11
Item 7A. Qualitative and Quantitative Disclosures About Market Risk.......11
Item 8. Financial Statements and Supplementary Data......................11
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ............................................11
PART III
Item 10. Directors and Executive Officers of the Registrant...............11
Item 11. Executive Compensation...........................................12
Item 12. Security Ownership of Certain Beneficial Owners and Management...12
Item 13. Certain Relationships and Related Transactions...................12
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..12
Auditor's Reports............................................................13
Signature Pages..............................................................14
Exhibit Index................................................................16
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PART I
Item I: Business
Snap-on Incorporated (the "Corporation" or "Snap-on") was incorporated under the
laws of the state of Wisconsin in 1920 and reincorporated under the laws of the
state of Delaware in 1930. Snap-on's mission is to create value by providing
innovative solutions to transportation service and industrial customers
worldwide. Snap-on is a leading global developer, manufacturer and distributor
of professional tools, equipment and related services marketed in more than 150
countries. Long known as a quality and performance leader in professional tools
and tool storage, Snap-on now offers a full range of capabilities in the
automotive service environment. The Corporation's largest geographic markets
include the United States, Australia, Brazil, Canada, France, Germany, Japan,
Mexico, the Netherlands, Spain and the United Kingdom. Customers include
professional technicians, independent automotive repair and body shops,
franchised service centers, specialty repair shops, automotive dealerships,
vehicle manufacturers, and industry and government. The originator of the dealer
van distribution channel, Snap-on also reaches its customers through company
direct and distributor channels where appropriate.
The Corporation's business segments are based on the organization structure that
is used by management for making operating and investment decisions and for
assessing performance. Based on this management approach, the Corporation has
five reportable segments: North America Transportation, North America Other,
Europe, International and Financial Services. The North America Transportation
segment consists of the Corporation's business operations serving the franchised
dealer channel in the United States and Canada. The North America Other segment
consists of the Corporation's business operations serving the direct sales and
distributor channels in the United States and Canada, as well as the
Corporation's exports from the United States. The Europe segment consists of the
Corporation's operations in Europe and Africa. The International segment
consists of the Corporation's operations in the Asia/Pacific region and Latin
America. These four segments derive revenues primarily from the sale of tools
and equipment and related services. The Financial Services segment provides
financing to technicians and shop owners, as well as to dealers. Additional
information about the Corporation's business segments, customers, domestic and
international operations and products and services is provided in Note 13 on
pages 37 and 38 of the Corporation's 1998 Annual Report, incorporated herein by
reference.
In 1998, the Corporation announced a simplification initiative ("Project
Simplify") which is a broad program of internal rationalizations, consolidations
and reorganizations. The goal is to make the Corporation's business operations
simpler and more effective. Additional information regarding Project Simplify
can be found on page 17, Management's Discussion and Analysis, and in Note 14 on
pages 38 and 39, of the Corporation's 1998 Annual Report, incorporated herein by
reference.
During 1998, the Corporation acquired full or partial ownership of five new
business operations and an additional interest in a business for an aggregate
cash purchase price of $79.5 million. Each of the acquisitions provides the
Corporation with a complementary product line, new customer relationships,
access to additional distribution and/or extended geographic reach. These
acquisitions were 100% interests in White Industries ("White"), Hein-Werner
Corporation ("Hein-Werner"), Nationwide International L.L.C. ("Nationwide"), and
G.S. S.r.l. ("G.S."); a 55% interest in Cartec GmbH ("Cartec"); and an
additional 10% interest in the Thompson Corporation's Mitchell Repair
Information business. Subsequent to the end of the year, the Corporation
announced that it had exercised its call option to purchase from its venture
partner, The Thompson Corporation, a further stake in their Mitchell Repair
Information business, which will result in Snap-on's owning 99% of Mitchell
Repair Information Company ("MRIC").
White manufactures equipment used to recover, recycle and recharge refrigerant
in vehicle air-conditioning systems. Hein-Werner is a leading manufacturer of
collision repair products in North America and Europe. Nationwide is a
franchisor of vehicle and service repair facilities. G.S. is an Italy-based
manufacturer and distributor of wheel service equipment. Cartec is a German
manufacturer of test and safety lane equipment. MRIC is a major provider of
print and electronic versions of vehicle mechanical and electrical repair
information and of shop management software to repair and service establishments
throughout North America.
Products and Services
The Corporation derives income from the manufacture, marketing and distribution
of its products and related services, and the financing of certain of its
products. The Corporation's four reportable manufacturing, marketing and
distribution
3
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segments offer a broad line of products and complementary services which can be
divided into two groups: tools and equipment. The following table shows the
approximate percentage of consolidated sales for each of these product groups in
each of the past three years.
Product Group % of Sales
1998 1997 1996
Tools 52% 55% 58%
Equipment 48% 45% 42%
---- ----- -----
100% 100% 100%
The tools product group includes hand tools, power tools and tool storage
products. Hand tools include wrenches, screwdrivers, sockets, pliers, ratchets
and other similar products, and instruments developed for medical applications
and for the manufacture and servicing of electronic equipment. Power tools
include pneumatic (air), cord-free (battery) and corded (electric) tools such as
impact wrenches, ratchets, chisels, drills, sanders, polishers and similar
products. Tool storage units include tool chests, roll cabinets and other
similar products for automotive, industrial, aerospace and other storage
applications. The majority of products are manufactured by Snap-on; to complete
the product line, some items are purchased from external manufacturers.
The equipment product group includes hardware and software solutions for the
diagnosis and service of automotive and industrial equipment. Products include
engine and emissions analyzers, air conditioning service equipment, brake
service equipment, wheel balancing and alignment equipment, transmission
troubleshooting equipment, vehicle safety testing equipment, battery chargers,
lifts and hoists, diagnostics equipment and collision repair equipment. Also
included are service and repair information products, on-line diagnostics
services, management systems, point of sale systems, integrated systems for
automotive repair shops, and purchasing facilitation services. In the United
States, the Corporation supports the sale of its diagnostics and shop equipment
by offering training programs to technician customers. These programs offer
certification in both specific automotive technologies and in the application of
specific diagnostics equipment developed and marketed by the Corporation.
Tools and equipment are marketed under a number of brand names and trademarks,
many of which are well known in the automotive and industrial markets served.
Some of the major trade names and trademarks and the products and services with
which they are associated include the following:
Trade Names/Trademarks Products and Services
Snap-on Hand tools, power tools, tool storage units, and
certain equipment
Blue Point Hand tools, power tools, tool storage units
J.H. Williams (Williams Hand tools
A.T.I. Tools (ATI) Tools and equipment for aerospace and industrial
applications
Sioux Tools (Sioux) Power tools
Sun Electric (Sun) Diagnostics and service equipment
Balco Engine diagnostics and wheel balancers
White Equipment to recover, recycle and recharge
refrigerant in vehicle air-conditioning systems
John Bean Under-car and other service equipment
Wheeltronic Hoists and lifts for vehicle service shops
Hofmann Wheel balancers, lifts, tire changers and
aligners
G.S. Wheel service equipment
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Brewco Frame straightening equipment, vehicle measuring
systems, paint booths and other collision repair
equipment
Hein-Werner Collision repair products
Mitchell Repair and service information and shop
management systems
The Financial Services segment offers credit programs that facilitate the sale
of many of the Corporation's products and services. Through a contractual
arrangement, extended credit is offered to technicians to enable them to
purchase tools and equipment that can be used to generate income while they pay
for the products over time. Financing, in a lease format, is also offered to
shop owners, both independent and national chains, who purchase equipment items,
which typically are higher price point products than tools. The duration of
lease contracts is often two to three times that of extended credit contracts.
The Corporation's financing activities have been conducted primarily through its
Snap-on Credit Corporation (the "Credit Corp") subsidiary. The Credit Corp is
responsible for certain credit and non-credit services used to support sales and
to provide dealer financing options. Currently, the majority of its revenues are
derived from the automotive service industry in North America.
Credit Corp also makes available financing to new dealers, whereby a 10-year
loan is originated to enable the dealer to fund the purchase of the franchise
and the related working capital needs, particularly inventory and customer
receivables.
On January 3, 1999, the Corporation established a joint venture with Newcourt
Financial USA Inc. ("Newcourt") to provide financial services to the
Corporation's global dealer and customer network. Such services will be provided
through a limited liability company know as Snap-on Credit LLC (the "LLC"),
which is 50% owned by the Corporation and 50% owned by Newcourt. As a result of
the establishment of the joint venture, the Corporation effectively outsourced
to the LLC the credit function that the Credit Corp previously managed.
Additional information about the LLC is provided in Note 15 on page 39 of the
Corporation's 1998 Annual Report, incorporated herein by reference.
Market Sectors Served
The Corporation markets and distributes its products and related services
primarily to professional users around the world in two market sectors: the
vehicle service and repair sector, and the industrial sector
Vehicle Service and Repair Sector
The vehicle service and repair sector has three main customer groups:
professional technicians, primarily in the vehicle service industry, who
purchase tools and equipment for themselves; service and repair shop owners and
managers -- including independent shops, national chains and automotive
dealerships -- who purchase equipment for use by multiple technicians within a
service or repair facility; and vehicle manufacturers.
The Corporation provides innovative tool and equipment solutions, as well as
technical sales support and training, to meet technicians' evolving needs.
Snap-on's dealer van distribution system offers technicians the convenience of
purchasing quality tools with minimal disruption of their work routine. The
Corporation also serves owners and managers of shops where technicians work with
tools, diagnostics equipment, repair and service information, and shop
management products. Snap-on provides vehicle manufacturers products and
services including tools, facilitation services for the purchase and
distribution of equipment, and consulting services.
Major challenges for the Corporation and the vehicle service and repair industry
include the increasing rate of technological change within motor vehicles, and
the evolution in the conduct of business by both suppliers and customers that is
necessitated by such change.
5
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Industrial Sector
The Corporation markets its products to a wide variety of industrial customers,
including industrial maintenance and repair facilities; manufacturing and
assembly operations; industrial distributors; government facilities; schools;
and original equipment manufacturers ("OEMs") who require instrumentation or
service tools and equipment for their products.
Major challenges in the industrial market include a highly competitive,
cost-conscious environment, and a trend toward customers making all of their
tool purchases through one integrated supplier. The Corporation believes it is
currently a meaningful participant in the market for industrial tools and
equipment.
Distribution Channels
The Corporation serves customers primarily through three channels of
distribution: dealer/tech reps, company direct sales, and distributors. The
following discussion represents the Corporation's general approach in each
channel, and is not intended to be all-inclusive.
Dealer/Tech Rep Organization
In the United States, the majority of sales to the automotive repair industry
are conducted through the Corporation's dealer/tech rep network; the market
served by this network centers on professional technicians and shop owners.
Snap-on's mobile dealer van system covers automotive technicians and independent
shop owners, calling weekly at the customer's place of business. Dealers' sales
are concentrated in hand and power tools and some small equipment, which can
easily be transported in a van and demonstrated during a brief sales call, as
well as in tool storage units. Dealers purchase the Corporation's products at a
discount from suggested retail prices and resell them at prices of the dealer's
choosing. Although some dealers have sales areas defined by other methods, most
U.S. dealers are provided a list of places of business which serves as the basis
of the dealer's sales route.
The dealer sales force is supported by the Snap-on/Sun Tech Systems employee
sales force ("Tech Specialists"), who work with dealers in the demonstration and
sale of diagnostics equipment and also sell higher-end diagnostics and shop
equipment on their own. Tech Specialists are compensated primarily on the basis
of commission; dealers receive a commission for referring business to Tech
Specialists.
Most products sold through the dealer/tech rep organization are sold under the
Snap-on or Sun brand names.
Since 1991, all new U.S. dealers, and a majority of existing U.S. dealers, have
been enrolled as franchisees of the Corporation. The Corporation currently
charges initial and ongoing monthly license fees, which do not add materially to
the Corporation's revenues. The Corporation makes it possible for prospective
dealer candidates to work as employee sales representatives, at salary plus
commission, for up to one year prior to making an investment in a franchise. In
addition, through Snap-on Financial Services, Inc. and its subsidiary, the
Credit Corp, the Corporation provides financial assistance for newly converted
franchised dealers and other new franchise dealers, which could include
financing for initial license fees, inventory, revolving accounts receivable
acquisition, equipment, fixtures, other expenses and an initial checking account
deposit. At year-end 1998, approximately 89 percent of all U.S. dealers were
enrolled as franchisees.
The Corporation services and supports its dealers with an extensive field
organization of branch offices and service and distribution centers. The
Corporation also provides sales training, customer and dealer financial
assistance, and marketing and product promotion programs to help maximize dealer
sales. A National Dealer Advisory Council, composed of and elected by dealers,
assists the Corporation in identifying and implementing enhancements to the
franchise program.
The Corporation has replicated its dealer van method of distribution in certain
countries, including Australia, Canada, Germany, Mexico, the Netherlands, Japan
and the United Kingdom. In these markets, as in the United States, purchase
decisions are generally made by professional technicians. The Corporation
markets products in certain other countries through its subsidiary, Snap-on
Tools International, Ltd., which sells to foreign distributors under license or
contract with the Corporation.
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Company Direct Sales
In the United States, a growing proportion of sales of Snap-on and Sun equipment
are made by a direct sales force that has responsibility for national accounts.
As the automotive service and repair industry consolidates, with more business
conducted by national chains, automotive dealerships and franchised service
centers, these larger organizations can be serviced most effectively by sales
people who can demonstrate and sell the full line of products and services. The
Corporation also sells its products and services directly to vehicle
manufacturers.
Tools and equipment are marketed to industrial and governmental customers and
for the medical profession in the United States through industrial sales
representatives, who are employees, and independent industrial distributors. The
sales representatives focus on industrial customers whose main purchase criteria
are quality and service, as well as on certain OEM accounts. At the end of 1998,
the Corporation had industrial sales representatives in the United States,
Canada, Australia, Japan, Mexico, Puerto Rico, and some European countries, with
the United States representing the majority of the Corporation's total
industrial sales.
Tools and equipment for the U.S. industrial and government markets are sold
through a direct sales force as well as through industrial distributors. In most
markets outside the United States, industrial sales are conducted through
distributors.
Distributors
Sales of certain tools and equipment are made through automotive and industrial
distributors, who purchase the items from Snap-on and resell them to the end
users. Products sold through distributors in North America, Europe and select
other parts of the world include under-car and other service equipment. These
products are sold under brands including John Bean, Hofmann, Irimo, Palmero and
Acesa, and are differentiated from those sold through the dealer/tech rep and
direct sales channels. Sun brand equipment is marketed through distributors in
South America and Asia, and through both a direct sales force and distributors
in Europe.
Competition
The Corporation competes on the basis of its product quality, service, brand
awareness and technological innovation. While no one company competes with the
Corporation across all of its product lines and distribution channels, various
companies compete in one or more product categories and/or distribution
channels.
The Corporation believes that it is a leading manufacturer and distributor of
its products for the customers it serves in the vehicle service industry, and
that it offers the broadest line of products to the vehicle service industry.
The major competitors selling to professional technicians in the vehicle service
and repair sector through the mobile van channel include MAC Tools (The Stanley
Works) and Matco (Danaher Corporation). The Corporation also competes with
companies that sell through non-mobile van distributors; these competitors
include The Stanley Works, Sears, Roebuck and Co., and Strafor Facom. In the
industrial sector, major competitors include Armstrong (Danaher Corporation),
Cooper Industries, Inc. and Proto (The Stanley Works). The major competitors
selling diagnostics and shop equipment to shop owners in the vehicle service and
repair sector include SPX Corporation, Corghi S.p.A., Pentair, Inc. and Hunter
Engineering.
Raw Material & Purchased Product
The Corporation's supply of raw materials (including primarily various grades of
steel bars and sheets) and purchased components are readily available from
numerous suppliers.
The majority of 1998 consolidated net sales consisted of products manufactured
by the Corporation. The remainder was purchased from outside suppliers. No
single supplier's products accounted for a material portion of 1998 consolidated
net sales.
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Patents and Trademarks
The Corporation vigorously pursues and relies on patent protection to protect
its inventions and its position in its markets. As of January 2, 1999, the
Corporation and its subsidiaries held over 1,000 patents worldwide, with more
than 600 pending patent applications. No sales relating to any single patent
represent a material portion of the Corporation's revenues in 1998.
Examples of products that have features or designs that benefit from patent
protection include engine analyzers, serrated jaw open-end wrenches, wheel
alignment systems, wheel balancers, sealed ratchets, electronic torque wrenches,
ratcheting screwdrivers, emissions sensing devices and air conditioning
equipment.
Much of the technology used in the manufacturing of automotive tools and
equipment is in the public domain. The Corporation relies primarily on trade
secret protection to protect proprietary processes used in manufacturing.
Methods and processes are patented when appropriate.
Trademarks used by the Corporation are of continuing importance to the
Corporation in the marketplace. Trademarks have been registered in the United
States and 78 other countries, and additional applications for trademark
registrations are pending. The Corporation rigorously polices proper use of its
trademarks.
The Corporation's right to manufacture and sell certain products is dependent
upon licenses from others. These products do not represent a material portion of
the Corporation's sales.
Working Capital
Because most of the Corporation's business is not seasonal, and its inventory
needs are relatively constant, no unusual working capital needs arise during the
year.
The Corporation's use of working capital to extend credit to its dealers and to
purchase installment credit receivables from dealers is discussed in
"Management's Discussion and Analysis of Results of Operations and Financial
Condition," which is found on pages 17 to 23 of the Corporation's 1998 Annual
Report and is incorporated herein by reference.
The Corporation does not depend on any single customer, small group of customers
or government for any material part of its sales, and has no significant backlog
of orders.
Environment
The Corporation complies with applicable environmental control requirements in
its operations. Compliance has not had, and the Corporation does not for the
foreseeable future expect it to have, a material effect upon the Corporation's
capital expenditures, earnings or competitive position.
Employees
At the end of 1998, the Corporation employed approximately 12,000 people, of
whom approximately 38 percent are engaged in manufacturing activities.
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Item 2: Description of Properties
The Corporation maintains both leased and owned manufacturing, warehouse,
distribution and office facilities throughout the world. The Corporation
believes that its facilities are well maintained and have a capacity adequate to
meet the Corporation's present and foreseeable future demand. The Corporation's
U.S. facilities occupy approximately 4.6 million square feet, of which
approximately 75 percent is owned. The Corporation's facilities outside the U.S.
contain approximately 2.6 million square feet, of which approximately 52 percent
is owned.
The Corporation's principal manufacturing locations and distribution centers are
as follows:
Location Type of property Owned/Leased
- -------- ---------------- ------------
Conway, Arkansas Manufacturing Owned
City of Industry, California Manufacturing Leased
Escondido, California Manufacturing Owned
San Jose, California Manufacturing Leased
Columbus, Georgia Manufacturing Owned
Crystal Lake, Illinois Distribution and manufacturing Owned
Mt. Carmel, Illinois Manufacturing Owned
Ottawa, Illinois Distribution Owned
Algona, Iowa Manufacturing Owned
Sioux City, Iowa Manufacturing Owned
Natick, Massachusetts Manufacturing Owned
Olive Branch, Mississippi Distribution Leased and owned
Carson City, Nevada Distribution Leased and owned
Robesonia, Pennsylvania Distribution Owned
Johnson City, Tennessee Manufacturing Owned
Elizabethton, Tennessee Manufacturing Owned
Baraboo, Wisconsin Manufacturing Leased
East Troy, Wisconsin Manufacturing Owned
Elkhorn, Wisconsin Manufacturing Owned
Kenosha, Wisconsin Manufacturing Owned
Milwaukee, Wisconsin Manufacturing Owned
Sydney, Australia Distribution Leased
Barbara D'oeste, Brazil Manufacturing Owned
Calgary, Canada Distribution Leased
Mississagua, Canada Manufacturing Leased
Newmarket, Canada Distribution and manufacturing Owned
Kettering, England Distribution Owned
King's Lynn, England Distribution and manufacturing Owned
Altmittweida, Germany Distribution Owned
Pfungstadt, Germany Manufacturing Leased
Unterneukirchen, Germany Manufacturing Leased
Sopron, Hungary Manufacturing Owned
Shannon, Ireland Manufacturing Leased
Corregio, Italy Manufacturing Owned
Tokyo, Japan Distribution Leased
Amsterdam, the Netherlands Distribution Owned
Irun, Spain Manufacturing Owned
Soria, Spain Manufacturing Owned
Urretxu, Spain Manufacturing Owned
Vitoria, Spain Distribution and manufacturing Owned
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Item 3: Legal Proceedings
The Corporation intervened in litigation commenced by Tejas Testing Technology
One, L.C. and Tejas Testing Technology Two, L.C. (the "Tejas Companies"), and is
involved in a suit with SPX Corporation, as described in Note 12 to the
Financial Statements of the Corporation on pages 36 and 37 of its 1998 Annual
Report, which is incorporated herein by reference.
Item 4: Submission of Matters to a Vote of Security Holders
There was no matter submitted to a vote of the shareholders during the fourth
quarter of the fiscal year ending January 2, 1999.
Executive Officers of the Registrant
The executive officers of the Corporation, their ages as of January 2, 1999, and
their current titles and positions held during the last five years are listed
below.
Robert A. Cornog (58) - Chairman, President and Chief Executive Officer
since July 1991. A Director since 1982.
Branko M. Beronja (64) - Executive Vice President since October 1998. Senior
Vice President - Diagnostics from February 1998 to October 1998. Senior Vice
President - Diagnostics, North America from April 1996 to February 1998.
President - North American Operations from April 1994 to April 1996, and Vice
President - Sales, North America from August 1989 to April 1994. A Director
since January 1997.
Frederick D. Hay (54) - Senior Vice President - Operations since October 1998.
Senior Vice President - Transportation from February 1996 to October 1998. Prior
to joining Snap-on, he was President of the Interior Systems and Components
Division of UT Automotive, a business unit of United Technologies Corporation,
from December 1989 to January 1996.
Donald S. Huml (52) - Senior Vice President - Finance and Chief Financial
Officer since August 1994. Prior to joining Snap-on, he was Vice President and
Chief Financial Officer of Saint-Gobain Corporation from December 1990 to August
1994.
Michael F. Montemurro (50) - Senior Vice President - Transportation since
October 1998. Senior Vice President - Financial Services and Administration from
August 1994 to October 1998. Senior Vice President - Financial Services,
Administration and Chief Financial Officer from April 1994 to August 1994.
Senior Vice President - Finance and Chief Financial Officer from March 1990 to
April 1994.
Neil T. Smith (44) - Controller since November 1997. Financial Controller from
June 1997 to November 1997. Director of Financial Analysis and Planning from
December 1994 to May 1997. Prior to joining Snap-on, he was Director of Finance
for the Nielsen Marketing Research Division of Dun and Bradstreet Corporation
from January 1991 to December 1994.
Susan F. Marrinan (50) - Vice President, Secretary and General Counsel since
January 1992.
There is no family relationship among the executive officers and there has been
no involvement in legal proceedings during the past five years that would be
material to the evaluation of the ability or integrity of any of the executive
officers. Executive officers may be elected by the board of directors or
appointed by the Chief Executive Officer at the regular meeting of the board of
directors which follows the Annual Shareholders' Meeting, held on the fourth
Friday of April each year, and at such other times as new positions are created
or vacancies must be filled.
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PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
On June 26, 1998, the Corporation's board of directors authorized the repurchase
of up to $100.0 million of the Corporation's common stock. On June 27, 1997, the
Corporation's board of directors authorized the repurchase of $100.0 million of
the Corporation's common stock over a two-year period. At the end of 1998, the
1997 authorization essentially had been exhausted, and all of the 1998
authorization remained available. In 1996, the Corporation's board of directors
approved an ongoing authorization to repurchase stock in an amount equivalent to
that necessary to prevent dilution created by shares issued for stock options,
employee and dealer stock purchase plans, and other corporate purposes. In 1998,
the Corporation repurchased 2,279,400 shares of its common stock at an average
price of $39.64.
At January 2, 1999, the Corporation had 65,668,945 shares of common stock
outstanding. This consists of 58,744,926 shares which are considered outstanding
for purposes of computing earnings per share and an additional 6,924,019 shares
held in a Grantor Stock Trust which are considered outstanding for voting
purposes only.
Subsequent to the end of the year, at its January 1999 meeting, the board of
directors authorized the repurchase of up to an additional $50.0 million of the
Corporation's common stock.
Additional information required by Item 5 is contained on in the Six-year Data
and Investor Information on pages 41 and 45 of the Corporation's 1998 Annual
Report and is incorporated herein by reference.
Item 6: Selected Financial Data
The information required by Item 6 is contained in the Quarterly Information and
Six-year Data on pages 40 and 41 of the Corporation's 1998 Annual Report and is
incorporated herein by reference.
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information required by Item 7 is contained on pages 17 to 23 of the
Corporation's 1998 Annual Report and is incorporated herein by reference.
Item 7A: Qualitative and Quantitative Disclosures About Market Risk
The information required by Item 7A is contained on pages 22 and 32 of the
Corporation's 1998 Annual Report and is incorporated herein by reference.
Item 8: Financial Statements and Supplementary Data
The information required by Item 8 is contained on pages 24 to 39 of the
Corporation's 1998 Annual Report and is incorporated herein by reference.
Item 9: Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10: Directors and Executive Officers of the Registrant
The identification of the Corporation's directors as required by Item 10 is
contained in the Corporation's Proxy Statement, dated March 12, 1999, and is
incorporated herein by reference to said Proxy Statement. With respect to
information about the Corporation's executive officers, see caption "Executive
Officers of the Registrant" at the end of Part I of this report.
The disclosure concerning Section 16(a) filing compliance pursuant to Item 405
of Regulation S-K is contained on page 19 of the Corporation's Proxy Statement,
dated March 12, 1999, and is incorporated herein by reference to said Proxy
Statement.
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Item 11: Executive Compensation
The information required by Item 11 is contained on pages 15 to 18 of the
Corporation's Proxy Statement, dated March 12, 1999, and is incorporated herein
by reference.
Item 12: Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is contained on pages 8 to 9 of the
Corporation's Proxy Statement, dated March 12, 1999, 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
Item 14(A): Document List
1. List of Financial Statements
The following consolidated financial statements of Snap-on Incorporated, and the
Auditors' Report thereon, each included in the 1998 Annual Report of the
Corporation to its shareholders for the year ended January 2, 1999, are
incorporated by reference in Item 8 of this report:
Consolidated Balance Sheets as of January 2, 1999 and January 3, 1998.
Consolidated Statements of Earnings for the years ended January 2, 1999, January
3, 1998 and December 28, 1996.
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the
years ended January 2, 1999, January 3, 1998 and December 28, 1996.
Consolidated Statements of Cash Flows for the years ended January 2, 1999,
January 3, 1998 and December 28, 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedule
The following consolidated financial statement schedule of Snap-on Incorporated
is included in Item 14(d) as a separate section of this report.
Schedule II Valuation and Qualifying Accounts and Reserves. Page 18
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are inapplicable and,
therefore, have been omitted, or are included in the Corporation's 1998 Annual
Report in the Notes to Consolidated Financial Statements for the years ended
January 2, 1999, January 3, 1998 and December 28, 1996, which are incorporated
by reference in Item 8 of this report.
3. List of Exhibits
The exhibits filed with or incorporated by reference in this report are as
specified in the exhibit index. Page 16
Item 14(B): Reports on Form 8-K
During the fourth quarter of 1998, the Corporation reported on Form 8-K dated
October 22, 1998 its third quarter 1998 Analyst Bulletin.
Subsequent to year-end, the Corporation reported on Form 8-K dated January 19,
1999 that the Corporation and Newcourt Financial USA Inc. had established a
joint venture known as Snap-on Credit LLC, which will serve as the preferred
provider of financial services to the Corporation's global dealer and customer
network.
12
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
We have audited, in accordance with generally accepted auditing standards, the
financial statements included in Snap-on Incorporated's (the "Corporation")
Annual Report to Shareholders, incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 2, 1999. Our audit was made for
the purpose of forming an opinion on those statements taken as a whole. The
schedule listed on page 18 is the responsibility of the Corporation's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 2, 1999
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated February 2, 1999 included in the
Corporation's previously filed Registration Statement File Nos. 2-53663,
2-53578, 33-7471, 33-22417, 33-37924, 33-39660, 33-57898, 33-55607, 33-58939,
33-58943, 333-14769, 333-21277, 333-21285 and 333-41359. It should be noted that
we have not audited any financial statements of the Corporation subsequent to
January 2, 1999 or performed any audit procedures subsequent to the date of our
report.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 29, 1999
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Corporation has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SNAP-ON INCORPORATED
By: /s/ R. A. Cornog Date: March 26, 1999
R. A. Cornog, Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Corporation and in the
capacities as indicated.
/s/ R. A. Cornog Date: March 26, 1999
R. A. Cornog, Chairman of the Board of Directors,
President and Chief Executive Officer
/s/ D. S. Huml Date: March 26, 1999
D. S. Huml, Principal Financial Officer,
and Senior Vice President - Finance
/s/ N. T. Smith Date: March 26, 1999
N. T. Smith, Principal Accounting Officer,
and Controller
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the Corporation and in the
capacities as indicated.
By: /s/ B. M. Beronja Date: March 26, 1999
B. M. Beronja, Director
By: /s/ D. W. Brinckman Date: March 26, 1999
D. W. Brinckman, Director
By: /s/ B. S. Chelberg Date: March 26, 1999
B. S. Chelberg, Director
By: /s/ R. J. Decyk Date: March 26, 1999
R. J. Decyk, Director
By: /s/ L. A. Hadley Date: March 26, 1999
L. A. Hadley, Director
By: /s/ A. L. Kelly Date: March 26, 1999
A. L. Kelly, Director
By: /s/ G. W. Mead Date: March 26, 1999
G. W. Mead, Director
By: /s/ J. D. Michaels Date: March 26, 1999
J. D. Michaels, Director
By: /s/ E. H. Rensi Date: March 26, 1999
E. H. Rensi, Director
By: /s/ R. F. Teerlink Date: March 26, 1999
R. F. Teerlink, Director
15
<PAGE>
EXHIBIT INDEX
Item 14(c): Exhibits
- ---------------------
(3) (a) Restated Certificate of Incorporation of the Corporation as
amended through April 25, 1997 (incorporated by reference to
Exhibit (3)(a) to the Corporation's Annual Report on Form 10-K for
the fiscal year ended January 2, 1998 (Commission File No.
1-7724))
(b) Bylaws of the Corporation, effective as of January 26, 1996
(incorporated by reference to Exhibit (3)(b) to the Corporation's
Annual Report on Form 10-K for the fiscal year ended December 30,
1996 (Commission File No. 1-7724))
(4) (a) Rights Agreement between the Corporation and First Chicago Trust
Company of New York, effective as of August 22, 1997 (incorporated
by reference to the Corporation's Form 8-A12B dated October 17,
1997 (Commission File No. 1-7724))
The Corporation and its subsidiaries have no long-term debt agreement for
which the related outstanding debt exceeds 10% of consolidated total
assets as of January 2, 1999. Copies of debt instruments for which the
related debt is less than 10% of consolidated total assets will be
furnished to the Commission upon request.
(10) Material Contracts
(a) Amended and Restated Snap-on Incorporated 1986 Incentive Stock
Program (incorporated by reference to Exhibit (10)(a) to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 28, 1996 (Commission File No. 1-7724))*
(b) Form of Restated Senior Officer Agreement between the Corporation
and each of Robert A. Cornog, Branko M. Beronja, Frederick D. Hay,
Donald S. Huml and Michael F. Montemurro (incorporated by
reference to Exhibit (10)(b) to the Corporation's Annual Report on
Form 10-K for the fiscal year ended December 30, 1995 (Commission
File No. 1-7724))*
(c) Form of Restated Executive Agreement between the Corporation and
each of Alan T. Biland, Sharon M. Brady, Richard V. Caskey, Dan G.
Craighead, Dale F. Elliott, Nicholas L. Loffredo, Denis J.
Loverine, Susan F. Marrinan and Neil T. Smith (incorporated by
reference to Exhibit (10)(b) to the Corporation's Annual Report on
Form 10-K for the fiscal year ended December 30, 1995 (Commission
File No. 1-7724))*
(d) Deferred Compensation Waiver and Insurance Benefit Agreement
between the Corporation and Robert A. Cornog dated January 30,
1998.*
(e) Deferred Compensation Waiver and Insurance Benefit Agreement
between the Corporation and Branko M. Beronja dated December 21,
1998*
(f) Form of Indemnification Agreement between the Corporation and each
of the Directors, Frederick D. Hay, Donald S. Huml, Susan F.
Marrinan and Michael F. Montemurro effective October 24, 1997
(incorporated by reference to Exhibit (3)(a) to the Corporation's
Annual Report on Form 10-K for the fiscal year ended January 2,
1998 (Commission File No. 1-7724))*
(g) Amended and Restated Snap-on Incorporated Directors' 1993 Fee Plan
(incorporated by reference to Exhibit (10)(e) to the Corporation's
Annual Report on Form 10-K for the fiscal year ended December 28,
1996 (Commission File No. 1-7724))*
(h) Snap-on Incorporated Deferred Compensation Plan (incorporated by
reference to Exhibit (10)(f) to the Corporation's Annual Report on
Form 10-K for the fiscal year ended December 28, 1996 (Commission
File No. 1-7724))*
(i) Snap-on Incorporated Supplemental Retirement Plan for Officers
(incorporated by reference to Exhibit (10)(b) to the Corporation's
Annual Report on Form 10-K for the fiscal year ended December 30,
1995 (Commission File No. 1-7724))*
16
<PAGE>
EXHIBIT INDEX (continued)
(j) Benefit Trust Agreement between the Corporation and The Northern
Trust Company, effective as of July 2, 1998 (incorporated by
reference to the Corporation's Form 8-K dated July 2, 1998
(Commission File No. 1-7724))
(12) Computation of Ratio of Earnings to Fixed Charges
(13) Annual Report to Shareholders
(21) Subsidiaries of the Corporation
(23) Consent of Independent Public Accountants
(27) Fiscal 1998 Financial Data Schedule
* Denotes management contract or compensatory plan or arrangement
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Balance of
Balance at Subsidiary Balance at
Beginning at Time of Costs and End of
Description of Year Acquisition Expenses Deductions (1) Year
- ----------- ----------- ----------- ----------- -------------- ----
Allowance for
doubtful accounts
- -----------------
<S> <C> <C> <C> <C> <C>
Year ended
January 2, 1999 $20,644,676 $ 2,072,723 $24,983,781 $18,470,578 $29,230,602
Year ended
January 3, 1998 $16,902,581 $ 2,220,474 $21,039,748 $19,518,127 $20,644,676
Year ended
December 28, 1996 $14,650,458 $ 296,140 $13,611,414 $11,655,431 $16,902,581
(1) This amount represents write-offs of bad debts.
</TABLE>
18
EXHIBIT 10.d
DEFERRED COMPENSATION WAIVER
AND INSURANCE BENEFIT AGREEMENT
This Agreement is entered into this 30th day of January, 1998, by and
between SNAP-ON INCORPORATED, a Delaware corporation (the "Company"), and ROBERT
A. CORNOG (the "Executive").
WHEREAS, the Executive has a Cash Account under the Company's Deferred
Compensation Plan (the "Deferred Compensation Plan Balance"); and
WHEREAS, the Executive has previously deferred at least Seven Thousand
Seven Hundred Fifty Dollars ($7,750) per month for the period beginning on
February 27, 1998, and ending on December 31, 1998; and
WHEREAS, the Executive may earn a bonus for calendar year 1998 which would
be payable in 1999; and
WHEREAS, the Company is willing to establish the Split-Dollar Life
Insurance Agreement described in Section 3 of this Agreement ("Split-Dollar
Agreement"); and
WHEREAS, as of the date of this Agreement, the Executive and the Company
believe that the net Present Value of the Company's obligations under the
Split-Dollar Agreement are equivalent to the Present Value of the Executive's
waiver of rights under Section 1 of this Agreement.
NOW, THEREFORE, in consideration of the respective terms and conditions set
forth herein, the Company and the Executive hereby agree as follows:
1. Definitions.
a. Waived Deferred Compensation Plan Rights. The estimated payments to
the Executive attributable to the Executive's Waived Existing Balance (as
defined in Section 2.a), the Waived Salary Amounts (as defined in Section
2.b) and the Waived Bonus Amount (as defined in Section 2.c) calculated
based on the assumptions set forth in Exhibit B to this Agreement.
b. Change of Control. This term shall have the meaning given in it
Section 1.c. of the Senior Officer Agreement.
c. Committee. The Organization and Compensation Committee of the Board
of Directors of the Company.
d. Deferred Compensation Plan. The Snap-on Incorporated Deferred
Compensation Plan.
<PAGE>
e. Present Value. The Present Value of a payment shall be determined
based on the assumptions set forth in Exhibit B to this Agreement.
f. Senior Officer Agreement. The Restated Senior Officer Agreement
dated January 29, 1996, between the Company and the Executive
2. Executive's Waiver of Rights.
a. The Executive hereby waives any and all rights to receive One
Million Dollars ($1,000,000) of the Executive's Cash Account under the
Company's Deferred Compensation Plan as of the date of this agreement and
Three Hundred Thousand Dollars of the Executive's Cash Account under the
Company's Deferred Compensation Plan as of February 17, 1998 (the "Waived
Existing Balance").
b. The Executive hereby waives any and all rights to (i) Seven
Thousand Seven Hundred Fifty Dollars ($7,750) of his base salary per month
for the period beginning on February 27, 1998, and ending on December 31,
1998, which he has previously deferred and (ii) Seven Thousand Seven
Hundred Fifty Dollars ($7,750) of his base salary for the period beginning
on January 1, 1999, and ending on January 31, 1999 (the "Waived Salary
Amounts").
c. The Executive hereby waives any and all rights to Two Hundred Seven
Thousand Dollars ($207,000) of the bonus which would otherwise be payable
to the Executive in 1999 with respect to the Company's performance in 1998
(the "Waived Bonus Amount").
d. In the event that the Executive's employment by the Company (as
defined in the Executive's Senior Officer Agreement) is terminated for any
reason prior to the time(s) when the Executive would have otherwise earned
the right to receive some or all of the compensation waived under Sections
2.b or 2.c of this Agreement, the Executive hereby waives a portion of
other compensation otherwise payable to him equal to the Present Value of
the amount of compensation waived under Sections 2.b and 2.c of this
Agreement which the Executive did not earn the right to receive prior to
the termination of the Executive's employment, based on the assumptions set
forth in Exhibit B to this Agreement. This waiver shall first apply to any
compensation otherwise payable to the Executive pursuant to the Executive's
Senior Officer Agreement as a result of the Executive's termination, then
to any bonus which would otherwise be payable to the Executive, then to any
salary which would otherwise be payable to the Executive and then to any
amount which would otherwise be payable to the Executive pursuant to the
Company's Supplemental Retirement Plan for Officers.
3. Split-Dollar Agreement.
a. The Company and the Executive agree to enter into the Split-Dollar
Agreement attached as Exhibit A to this Agreement. The Company agrees to
pay the first ten (10) annual premium payments of Five Hundred Thirty-Three
Thousand Six
-2-
<PAGE>
Hundred Ten Dollars ($533,610) pursuant to Section 3 of the Split-Dollar
Agreement, subject to adjustment as provided in this Agreement.
b. In the event that the Executive does not earn the compensation
waived under Sections 2.b and 2.c of this Agreement and does not waive
sufficient compensation pursuant to Section 2.d of this Agreement to offset
such unearned compensation, the Company's obligation to make future premium
payments under Section 3 of the Split-Dollar Agreement shall be adjusted so
that the net Present Value of the Company's premium payments under Section
3 of the Split-Dollar Agreement (as recovered under Section 5 of the
Split-Dollar Agreement) plus the net Present Value of any death benefit
required to be paid under Section 4 of this Agreement, shall be equivalent
to the Present Value of the Executive's Waived Deferred Compensation Plan
Rights (as adjusted to reflect compensation actually waived) based on the
assumptions set forth in Exhibit B to this Agreement.
4. Payments Upon Death of Executive and Executive's Wife.
a. In the event of the death of the survivor of the Executive and
Virginia A. Cornog (the "Executive's wife") prior to the repayment to the
Company under Section 5 of the Split-Dollar Agreement, the Company will pay
to the beneficiary designated pursuant to Section 4.b or 4.c of this
Agreement the amount (if any) by which the Present Value of the Executive's
Waived Deferred Compensation Plan Rights exceeds the net Present Value of
the Company's premium payments under Section 3 of the Split-Dollar
Agreement (as recovered under Section 5 of the Split-Dollar Agreement).
These calculations shall be made based on the assumptions set forth in
Exhibit B to this Agreement. The death benefits based on the Waived
Deferred Compensation Plan Rights are shown in column 11 of Exhibit B to
this Agreement.
b. The Executive may designate a beneficiary or beneficiaries who,
upon the death of the survivor of the Executive and the Executive's wife
are to receive the amounts that are paid under Section 4.a of this
Agreement. All designations shall be in writing to the Company in such form
as it requires or accepts and signed by the Executive. The designation
shall be effective only if and when delivered to the Company during the
lifetime of the Executive. The Executive also may change his beneficiary or
beneficiaries by a signed, written instrument delivered to the Company. The
payment of amounts shall be in accordance with the last unrevoked written
designation of beneficiary that has been signed and delivered to the
Company.
c. In the event the Executive does not designate a beneficiary or if
for any reason such designation is ineffective, in whole or in part, for
any reason including the death of a beneficiary prior to the death of the
survivor of the Executive and the Executive's wife, any amount payable
under Section 4.a of this Agreement shall be paid to the estate of the
survivor of the Executive and the Executive's wife, and in such event, the
term "beneficiary" shall include such estate.
-3-
<PAGE>
5. Equivalence of Benefits.
The Company and the Executive agree that the net Present Value of the
Company's premium payment obligation under Section 3 of the Split-Dollar
Agreement (as recovered under Section 5 of the Split-Dollar Agreement) plus
the net Present Value of any death benefit required to be paid under
Section 4 of this Agreement are equivalent to the Present Value of the
Executive's Waived Deferred Compensation Plan Rights based on the
assumptions set forth in Exhibit B to this Agreement.
6. Funding Upon a Change of Control.
a. In the event that a Change of Control of the Company occurs, the
Company shall immediately transfer to an irrevocable grantor trust
established by the Company which is substantially identical to the trust
attached as Exhibit C to this Agreement and contains such other
supplemental provisions as are required by the trustee which are not
inconsistent with Exhibit C (the "Trust") an amount equal to (i) the
aggregate unpaid premiums required to be paid by the Company under Section
3 of this Agreement plus (ii) an additional amount equal to the death
benefit required to be paid under Section 4.a of this Agreement if the
survivor of the Executive and the Executive' wife dies in the year in which
the Company's final premium payment is due.
b. The Trust is an administrative and funding vehicle for the
Company's general assets contributed to the Trust for the purpose of
ultimately satisfying obligations under this Agreement. In the event that
the Company transfers assets to the Trust for the express purpose of
ultimately satisfying its obligations under this Agreement then, subject to
the terms of the Trust and limited by assets available and held by the
Trustees of the Trust for the purpose of funding the benefits provided by
this Agreement, payments may be made from such Trust in satisfaction of
Company's obligations hereunder. The transfer of assets by the Company to
the Trust for this purpose shall not increase, decrease or vary in any way
the rights and obligations of the parties to this Agreement, nor shall the
Executive, the Executive's wife or the owner of the insurance policy held
pursuant to the Split-Dollar Agreement have any ownership rights with
respect to such assets nor shall the assets be treated as a trust fund of
any kind for the benefit of any such person; provided that as and when any
such person is entitled to receive payments hereunder, such person may,
subject to the terms of the Trust and limited by the terms of this
Agreement, obtain such payments from the Trust. The Executive, the
Executive's wife or the owner of the insurance policy held pursuant to the
Split-Dollar Agreement may enforce and obtain satisfaction of such payment
rights against the assets held by the Trust for the purpose of satisfying
such obligations of the Company.
7. Successors and Binding Agreements.
a. The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or otherwise)
to all or substantially all
-4-
<PAGE>
of the business and/or assets of the Company expressly to assume and to
agree to perform this Agreement in the same manner and to the same extent
the Company would be required to perform if no succession had taken place.
This Agreement shall be binding upon and inure to the benefit of the
Company and any such successor, and such successor shall thereafter be
deemed the "Company" for purposes of this Agreement.
b. This Agreement shall inure to the benefit of and be enforceable by
the Executive's respective personal or legal representative, executor,
administrator, successor, heirs, distributees and/or legatees.
c. Neither the Company nor the Executive may assign, transfer or
delegate this Agreement or any rights or obligations hereunder except as
expressly provided in this Agreement.
8. Notices.
All communications provided for herein shall be in writing and shall be
deemed to have been duly given when delivered or five (5) business days
after having been mailed by United States registered or certified mail,
return receipt requested, postage prepaid, addressed to the Company (to the
attention of the Secretary of the Company) at its principal executive
office and to the Executive at his principal residence, or to such other
address as any party may have furnished to the other in writing in
accordance herewith, except that notices of a change of address shall be
effective only upon receipt.
9. Governing Law.
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Wisconsin without
giving effect to the principles of conflict of laws of such state, except
that Section 10 shall be construed in accordance with the Federal
Arbitration Act if arbitration is chosen as the method of resolution.
10. Settlement of Disputes; Arbitration.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled, at the election of the Executive, the
Executive's wife or the owner of the insurance policy held pursuant to the
Split-Dollar Agreement, either by arbitration in Chicago, Illinois in
accordance with the rules of the American Arbitration Association then in
effect or by litigation. Judgment may be entered on the arbitrator's award
in any court having jurisdiction.
11. Certain Limitations.
Nothing in this Agreement shall grant the Executive any right to remain an
executive, director or employee of the Company or of any its subsidiaries
for any period of time.
-5-
<PAGE>
12. Miscellaneous.
a. Expenses. All costs and expenses of administering this Agreement
shall be borne by the Company.
b. Action by the Company. Any action required or permitted to be taken
under this Agreement by the Company shall be by resolution of the Board of
Directors, by the duly authorized Committee of the Board of Directors, or
by a person or persons authorized by resolution of the Board of Directors
or the Committee.
IN WITNESS WHEREOF the parties have signed and sealed this Agreement as of
the date first above written.
In the presence of SNAP-ON INCORPORATED
/s/ By /s/Michael F. Monetmurro
- --------------------------- ------------------------
Its Senior Vice President
------------------------
/s/ /s/Robert A. Cornog
- --------------------------- -----------------------------
Robert A. Cornog
-6-
<PAGE>
EXHIBIT A
SNAP-ON INCORPORATED
SPLIT-DOLLAR INSURANCE AGREEMENT
1. This Agreement is entered into this 30th day of January, 1998, by and
between SNAP-ON INCORPORATED, a Delaware corporation, and the CORNOG 1998
INSURANCE TRUST.
2. Definitions.
(a) "Company" means Snap-on Incorporated, a Delaware corporation,
with offices in Kenosha, Wisconsin.
(b) "Insureds" means Robert A. Cornog and Virginia A. Cornog.
(c) "Insurer" means Northwestern Mutual Life.
(d) "Owner" means the Cornog 1998 Insurance Trust, who may or may not
be the same person as the Insureds.
(e) "Policy" means the policy or policies of insurance on the lives
of the Insureds issued by the Insurer and listed on Schedule "A" attached hereto
together with any supplementary contracts issued by the Insurer in conjunction
therewith
(f) "Policy Interest" means the interest of the Company in the
Policy. Policy Interest is an amount equal to the aggregate premiums paid by the
Company. The existence of the Company's Policy Interest shall be evidenced by
filing with the Insurer an assignment in substantially the form attached hereto
as Schedule "B."
3. Premium Payments.
(a) The Company agrees to pay up to the first ten (10) annual premium
payments of Five Hundred Thirty-Three Thousand Six Hundred Ten Dollars
($533,610) as they become due. The Owner shall be responsible for paying all
premium payments not paid by the Company.
(b) Policy dividends shall be applied to purchase paid-up additional
insurance protection.
4. Policy Ownership.
(a) Except as provided in subparagraph (b), the Owner shall be the
sole and exclusive owner of the Policy. This includes all the rights of "owner"
under the terms of the Policy except as otherwise provided in this Section 4,
including but not limited to the right to designate beneficiaries and select
settlement options.
<PAGE>
(b) Neither the Owner nor the Company shall have the right to obtain
a cash loan from the Insurer in accordance with the loan provisions of the
Policy.
(c) In exchange for the Company's payment of its premium contribution
under Section 3, the Owner shall assign to the Company the following limited
ownership rights in the Policy:
(1) The right to recover its Policy Interest from
the cash value of the Policy in the event of
the termination of this Agreement as provided
in Section 5.
(2) The right to recover its Policy Interest from
the proceeds of the Policy in the event of the
death of the survivor of the Insureds.
(d) To secure the Company's interest in the Policy the Owner shall
execute an Assignment of the Policy to the Company in substantially the form
attached hereto as Schedule B.
(e) It is agreed that benefits will be paid under the Policy by the
Insurer only by separate checks to the parties entitled thereto.
5. Termination of Plan.
(a) This Agreement may be terminated by the Owner by giving notice in
writing to the Company. In the event of termination of this Agreement the Owner
shall, at its election:
(1) Repay to the Company within 60 days of the date
of termination an amount equal to the Company's
Policy Interest. Or,
(2) Execute any and all instruments that may be
required to vest ownership of the Policy in the
Company; and the Company shall refund to Owner
that part of any payment by the Owner under
Section 3 for the premium payment period in
which termination occurred representing the
unexpired portion of that period. Thereafter,
Owner shall have no further interest in the
Policy.
(b) This Plan shall terminate on the sixteenth anniversary of the
issuance of the Policy.
6. The Insurer shall be bound only by the provisions of and endorsements
on the Policy, and any payments made or action taken by it in accordance
therewith shall fully
-2-
<PAGE>
discharge it from all claims, suits and demands of all persons whatsoever. It
shall in no way be bound by or be deemed to have notice of the provisions of
this Agreement.
7. The Company and the Owner may amend this Agreement. Such amendment
shall be in writing and signed by the Company and Owner.
8. This Agreement shall bind and inure to the benefit of the Company and
its successors and assigns; Owner and his/her heirs, executors, administrators
and assigns; and any Policy beneficiary.
IN WITNESS WHEREOF the parties have signed and sealed this Agreement on
the date first above written.
In the presence of SNAP-ON INCORPORATED
/s/
- ------------------------- By /s/Michael F. Montemurro
Its Senior Vice President
OWNER
Cornog 1998 Insurance Trust
/s/ /s/ Trustee
- ------------------------- -------------------------------------
/s/ /s/ Trustee
- ------------------------- -------------------------------------
-3-
<PAGE>
SCHEDULE A
LIFE INSURANCE
Initial Face Insureds' Initial
Policy Number Amount Economic Benefit
------------- ------ ----------------
14538602 $17,267,686 $4,183
<PAGE>
SCHEDULE B
COLLATERAL ASSIGNMENT FORM
SNAP-ON INCORPORATED SPLIT-DOLLAR INSURANCE PLAN
Insurer: Northwestern Mutual Life
Insureds: Robert A. Cornog and Virginia A. Cornog
Policy No. 14538602
FOR VALUE RECEIVED, THIS ASSIGNMENT is made by the undersigned Owner
effective this 30th day of January, 1998.
1. Definitions.
(a) "Assignee" means Snap-on Incorporated, a Delaware
corporation, of Kenosha, Wisconsin.
(b) "Insureds" means Robert A. Cornog and Virginia A. Cornog.
(c) "Insurer" means Northwestern Mutual Life.
(d) "Owner" means the Cornog 1998 Insurance Trust.
(e) "Policy" means the following policy or policies of insurance
issued by the Insurer on the lives of the Insureds, together with any
supplementary contracts issued in conjunction therewith:
Policy Number: 14538602 Face Amount: $17,267,686
(f) "Policy Interest" means the Assignee's "Policy Interest" as
set forth in the Split-Dollar Plan. The Insurer shall be entitled to rely on the
Assignee's certification of the amount of its Policy Interest.
(g) "Split-Dollar Plan" means that certain plan of even date
herewith, between the Owner and the Assignee. The Insurer is not bound by nor
deemed to have notice of the provisions of the Split-Dollar Plan.
2. Introduction. Under the Split-Dollar Plan, the Assignee has agreed
to assist the Owner in payment of premiums on the Policy. In consideration of
such premium payments by the Assignee, the Owner grants herein to the Assignee
certain limited interests in the Policy.
-3-
<PAGE>
3. Assignment. The Owner hereby assigns, transfers and sets over to
the Assignee, its successors and assigns, the following specific rights in the
Policy and subject to the following terms and conditions:
(a) The right to recover its Policy Interest from the cash value
of the Policy in the event of the Policy's surrender by the Owner.
(b) The right to recover its Policy Interest from the proceeds of
the Policy in the event of the death of the survivor of the Insureds.
4. Insurer. The Insurer is hereby authorized to recognize, and is
fully protected in recognizing:
(a) The claims of the Assignee to rights hereunder, without
investigating the reasons for such action by the Assignee, or the validity or
the amount of such claims.
(b) The Owner's request for surrender of the Policy with or
without the consent of the Assignee. Upon surrender, the Policy shall be
terminated and of no further force or effect.
5. Release of Assignment. Upon payment to the Assignee of its policy
interest, the Assignee shall execute a written release of this assignment.
IN WITNESS WHEREOF the Owner has executed this assignment on the date
first above written.
Cornog 1998 Insurance Trust
Trustee
- ------------------------ --------------------------------------------
Trustee
- ------------------------ --------------------------------------------
<PAGE>
EXHIBIT B
<TABLE>
SNAP-ON INCORPORATED
CALCULATION OF NET PRESENT VALUE OF CORPORATE CASH FLOWS
January, 1998
<CAPTION>
- --------------------------------------------------------------------------------------------------
Corporate Cost of Deferral Program
-----------------------------------------------------------------------------
(1) (2) (3) (4) (5) (6)
63%(3) 63%(2) NPV Sum (4)
+NPV(3)
Annual Payment
------------------------
Net A/T
Deferred End of Year Death Net
Compen- Account Net Benefit Present
Yr. Age sation Balance Gross A/T Payable Value
------- ------- ------------ ------------- ------------ ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1,300,000
58 300,000 1,732,740 0 0 1,091,626 1,051,865
59 0 1,888,686 0 0 1,189,872 1,104,773
1 60 0 2,058,668 0 0 1,296,961 1,160,342
1 61 0 2,243,948 0 0 1,413,687 1,218,705
5 62 0 2,096,251 320,782 202,093 1,320,638 1,271,242
5 63 0 1,935,262 320,782 202,093 1,219,215 1,317,977
7 64 0 1,759,783 320,782 202,093 1,108,663 1,358,926
8 65 0 1,568,511 320,782 202,093 988,162 1,394,095
9 66 0 1,360,025 320,782 202,093 856,816 1,423,479
10 67 0 1,132,775 320,782 202,093 713,648 1,447,062
11 68 0 885,073 320,782 202,093 557,596 1,464,816
12 69 0 615,077 320,782 202,093 387,499 1,476,705
13 70 0 320,782 320,782 202,093 202,093 1,482,680
14 71 0 0 320,782 202,093 0 1,482,680
15 72 0 0 0 0 0 1,482,680
73 0 0 0 0 0 1,482,680
------------ -----------
1,600,000 0 2,202,925
============ ===========
<CAPTION>
- ----------------------------------------------------------------------------------------
Corporate Cost of Waiver Program Survivor Benefit
------------------------------------- ------------------------
(7) (8) (9) (10) (11)
Sum(7) NPV Sum (7) (6)-(9) (10)/63%
+NPV(8)
Net A/T
Premium Corp. Value
Scheduled Recovery Net In Excess of Lump
Premium At Present Waived Sum
Yr. Age Outlay Death Value Compensation Payable
------- ------- ------------ ------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
58 533,610 (533,610) 19,436 1,032,430 1,638,777
59 533,610 (1,067,220) 56,892 1,047,881 1,663,304
1 60 533,610 (1,600,830) 111,029 1,049,313 1,665,576
1 61 533,610 (2,134,440) 180,583 1,038,123 1,647,814
5 62 533,610 (2,668,050) 264,358 1,006,883 1,598,228
5 63 533,610 (3,201,660) 361,227 956,749 1,518,650
7 64 533,610 (3,735,270) 470,125 888,801 1,410,796
8 65 533,610 (4,268,879) 590,046 804,049 1,276,269
9 66 533,610 (4,802,489) 720,044 703,435 1,116,564
10 67 533,610 (5,336,099) 859,224 587,837 933,075
11 68 0 (5,336,099) 993,336 471,481 748,382
12 69 0 (5,336,099) 1,122,562 354,143 562,132
13 70 0 (5,336,099) 1,247,082 235,598 373,966
14 71 0 (5,336,099) 1,367,066 115,614 183,514
15 72 0 (5,336,099) 1,482,680 0 0
73 (5,336,099) 0 1,482,680 0 0
- ---------------------------------------------------------------------------------------------
Assumptions
Additional
Deferral 300,000
Initial Tax Rate 37%
Deferral 1,300,000 Interest Crediting Rate 9%
Years to Waive 1 NPV Interest Rate 6%
Years to Defer 4 Year to Roll-Out (End of
Year) 15
- --------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
EXHIBIT C
SNAP-ON INCORPORATED INSURANCE BENEFIT TRUST
(Established pursuant to the Deferred Compensation Waiver and
Insurance Benefit Agreement dated January 30, 1998, between
Snap-on Incorporated and Robert A. Cornog)
(a) This Agreement made this ______ day of December, 1998, by and between
SNAP-ON INCORPORATED, a Delaware Corporation (the "Company") and THE NORTHERN
TRUST COMPANY ("Trustee");
(b) WHEREAS, Company has entered into a Deferred Compensation Waiver And
Insurance Benefit Agreement with Robert A. Cornog dated January 30, 1998 (the
"Plan").
(c) WHEREAS, Company has incurred liability under the terms of such Plan.
(d) WHEREAS, Company wishes to establish a trust (hereinafter called
"Trust") and to contribute to the Trust assets that shall be held therein,
subject to the claims of Company's Insolvency, as herein defined, until used to
pay insurance premiums as required by Section 3 of the Plan or used to pay a
death benefit as required by Section 4 of the Plan;
(e) WHEREAS, all payments made pursuant to the Plan are made to or for
the benefit of Robert A. Cornog, Virginia A. Cornog, the Robert A. Cornog 1998
Insurance Trust, the beneficiary designated by Robert A. Cornog pursuant to
Section 4 of the Plan or the estate of the survivor of Robert A. Cornog and
Virginia A. Cornog (the "Plan Beneficiaries");
(f) WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plan
as an unfunded plan for purposes of Title I of the Employee Retirement Income
Security Act of 1974;
(g) WHEREAS, it is the intention of Company to make contributions to the
Trust to provide itself with a source of funds to assist it in the meeting of
its liabilities under the Plan;
NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment of Trust.
(a) Company hereby deposits with Trustee in trust One Hundred Dollars
($100.00) which shall become the principal of the Trust to be held, administered
and disposed of by the Trustee as provided in this Trust Agreement.
(b) The Trust hereby established is revocable by Company; it shall become
irrevocable upon a Change of Control, as defined herein.
<PAGE>
(c) The Trust is intended to be a grantor trust, of which Company is the
grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) Company shall have the right at any time, and from time to time in
its sole discretion, to substitute assets of equal fair market value for any
asset held by the Trust. This right is exercisable by Company in a nonfiduciary
capacity without the approval or consent of any person in a fiduciary capacity.
(e) The principal of the Trust, and any earnings thereon, shall be held
separate and apart from other funds of Company and shall be used exclusively for
the uses and purposes of the Plan and general creditors as herein set forth.
(f) No Plan Beneficiary shall have any preferred claim on, or any
beneficial ownership interest in, any asset of the Trust. Any rights created
under the Plan and this Trust Agreement shall be mere unsecured contractual
rights of the Plan Beneficiaries against Company. Any assets held by the Trust
will be subject to the claims of Company's general creditors under federal and
state law in the event of Insolvency, as defined in Section 3(a) herein.
(g) Upon a Change of Control, Company shall immediately make an
irrevocable contribution to the Trust as required by Section 5 of the Plan. The
Trustee shall have no duty to enforce any funding obligations of the Company and
the duties of the Trustee shall be governed solely by the terms of this Trust
Agreement.
Section 2. Payments Under the Plan.
(a) Upon a Change of Control, Company shall deliver to Trustee a schedule
(the "Payment Schedule") that directs the Trustee regarding the amounts payable
under the Plan, the form in which such amounts are to be paid, and the dates on
which such amounts are payable. Except as otherwise provided herein, the Trustee
shall make payments in accordance with such Payment Schedule. The Company shall
have the sole responsibility for all tax withholding, related filings and
reports. The Trustee shall withhold for taxes such amounts from distributions as
the Company directs and shall follow the instructions of the Company with
respect to the remission of such withheld amounts to the appropriate
governmental authorities.
(b) Company may make payments directly as they become due under the terms
of the Plan. Company shall notify Trustee of its decision to make payments
directly prior to the time amounts are payable under the Plan. In addition, if
the principal of the Trust, and any earnings thereon, are not sufficient to make
payments in accordance with the terms of the Plan, Company shall make the
balance of each such payment as it falls due. Trustee shall notify Company where
principal and earnings are not sufficient.
(c) The entitlement of Plan Beneficiaries to benefits under the Plan
shall be determined under the Plan, and any claim for such benefits shall be
considered and reviewed under the procedure set out in the Plan.
-2-
<PAGE>
Section 3. Trustee Responsibility Regarding Payments When Company is
Insolvent.
(a) Trustee shall cease payments under the Plan if the Company is
Insolvent. Company shall be considered "Insolvent" for purposes of this Trust
Agreement if (i) Company is unable to pay its debts as they become due, or (ii)
Company is subject to a pending proceeding as a debtor under the United States
Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Sections 1(e) and 1(f) hereof, the principal and income of the Trust shall be
subject to claims of general creditors of Company under federal and state law as
set forth below.
(1) The Board of Directors and the Chief Executive Officer of
Company shall have the duty to inform Trustee in writing of Company's
Insolvency. If a person claiming to be a creditor of Company alleges in
writing to Trustee that Company has become Insolvent, Trustee shall
determine whether Company is Insolvent and, pending such determination,
Trustee shall discontinue payment of benefits under the Plan.
(2) Unless Trustee has actual knowledge of Company's Insolvency,
or has received notice from Company or a person claiming to be a creditor
alleging that Company is Insolvent, Trustee shall have no duty to inquire
whether Company is Insolvent. Trustee may in all events rely on such
evidence concerning Company's solvency as may be furnished to Trustee and
that provides Trustee with a reasonable basis for making a determination
concerning Company's solvency. In no event shall "actual knowledge" be
deemed to include knowledge of Company's credit status held by banking
officers or banking employees of The Northern Trust Company which has not
been communicated to the Trust Department of Trustee. The Trustee may
appoint an independent accounting, consulting or law firm to make any
determination of solvency required by Trustee under this Section 3. In
such event, Trustee may conclusively rely upon the determination by such
firm and shall be responsible only for the prudent selection of such
firm.
(3) If at any time Trustee has determined that Company is
Insolvent, Trustee shall discontinue payments under the Plan and shall
hold the assets of the Trust for the benefit of Company's general
creditors. Nothing in this Trust Agreement shall in any way diminish any
rights as general creditors of Company with respect to benefits due under
the Plan or otherwise.
(4) Trustee shall resume the payments under the Plan in accordance
with Section 2 of this Trust Agreement only after Trustee has determined
that Company is not Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if Trustee discontinues
the payments from the Trust pursuant to Section 3(b) hereof and subsequently
resumes such payments, the first payment following such discontinuance shall
include the aggregate amount of all payments due under the terms of the Plan for
the period of such discontinuance, less the aggregate amount of any payments
made by Company in lieu of the payments provided for
-3-
<PAGE>
hereunder during any such period of discontinuance, all in accordance with the
Payment Schedule. The Payment Schedule may only be modified by the Company with
the written consent of all Plan Beneficiaries as necessary to comply with the
provisions of this paragraph. The Company shall be responsible for securing the
written consent of all Plan Beneficiaries and providing such consents to the
Trustee.
Section 4. Payments to Company.
Except as provided in Section 3 hereof, after the Trust has become
irrevocable, Company shall have no right or power to direct Trustee to return to
Company or to divert to others any of the Trust assets before all payments of
benefits have been made pursuant to the terms of the Plan. The Trustee shall be
entitled to rely on the written representations of the Company and all Plan
Beneficiaries that all such payments have been made. The Company shall be
responsible for securing the written representations of all Plan Beneficiaries
and providing such representations to the Trustee.
Section 5. Disposition of Income.
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
Section 6. Accounting by Trustee.
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between
Company and Trustee, which records may be audited annually (or at such other
times as agreed by the Company and the Trustee) by the Company or anyone named
by the Company. Within thirty (30) days following the close of each calendar
year and within thirty (30) days after the resignation of Trustee, Trustee shall
deliver to Company a written account of its administration of the Trust during
such year or during the period from the close of the last preceding year to the
date of such resignation, setting forth all investments, receipts, disbursements
and other transactions effected by it, including a description of all securities
and investments purchased and sold with the cost or net proceeds of such
purchases or sales (accrued interest paid or receivable being shown separately),
and showing all cash, securities and other property held in the Trust at the end
of such year or as of the date of such resignation, as the case may be. In the
absence of the filing in writing with the Trustee by the Company of exceptions
or objections to any such account within ninety (90) days, the Company shall be
deemed to have approved such account; in such case, or upon the written approval
by the Company of any such account, the Trustee shall be released, relieved and
discharged with respect to all matters and things set forth in such account as
though such account had been settled by the decree of a court of competent
jurisdiction. The Trustee may conclusively rely on determinations of the Company
of valuations for assets of the Trust for which the Trustee deems there to be no
readily determinable fair market value and on the determination of the issuer of
any insurance contracts with respect to the fair market value of such insurance
contracts.
-4-
<PAGE>
Section 7. Responsibility of Trustee.
(a) Trustee shall act with the care, skill, prudence, and diligence under
the circumstances then prevailing that a prudent person acting in like capacity
and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims; provided, however, that Trustee shall incur
no liability to any person for any action taken pursuant to a direction, request
or approval given by Company which is contemplated by, and in conformity with,
the terms of this Trust and is given in writing by Company. In the event of a
dispute between Company and a party, Trustee may apply to a court of competent
jurisdiction to resolve the dispute.
(b) If Trustee undertakes or defends any litigation arising in connection
with this Trust, Company agrees to indemnify Trustee against Trustee's costs,
expenses and liabilities (including, without limitation, attorneys' fees and
expenses) relating thereto and to be primarily liable for such payments. If
Company does not pay such costs, expenses and liabilities in a reasonably timely
manner, Trustee may obtain payment from the Trust.
(c) Trustee may consult with legal counsel (who may also be counsel for
Company generally) with respect to any of its duties or obligations hereunder.
(d) Trustee shall have, without exclusion, all powers conferred on
Trustees by applicable law, unless expressly provided otherwise herein.
(e) Notwithstanding any powers granted to Trustee pursuant to this Trust
Agreement or to applicable law, Trustee shall not have any power that could give
this Trust the objective of carrying on a business and dividing the gains
therefrom, within the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.
(f) To invest and reinvest part or all of the trust fund in any real or
personal property (including investments in any stocks, bonds, debentures,
mutual fund shares (including those for which the Trustee or its affiliate is
advisor), notes, commercial paper, treasury bills, options, commodities, futures
contracts, partnership interests, venture capital investments, any interest
bearing deposits held by any bank or similar financial institution, and any
other real or personal property) and to diversify such investments so as to
minimize the risk of large losses unless under the circumstances it is clearly
prudent not to do so; except that the Company may from time to time establish
investment guidelines and the trustee shall follow such investment guidelines.
(g) To retain in cash such amounts as the trustee considers advisable and
as are permitted by applicable law and to deposit any cash so retained in any
depository (including any bank acting as trustee) which the trustee may select.
(h) To manage, sell, insure and otherwise deal with all real and personal
property held by the trustee on such terms and conditions as the trustee shall
decide.
-5-
<PAGE>
(i) To vote stock and other voting securities personally or by proxy (and
to delegate the trustee's powers and discretions with respect to such stock or
other voting securities to such proxy), to exercise subscription, conversion and
other rights and options (and make payments from the trust fund in connection
therewith), to take any action and to abstain from taking any action with
respect to any reorganization, consolidation, merger, dissolution,
recapitalization, refinancing and any other program or change affecting any
property constituting a part of the trust fund (and in connection therewith to
delegate the trustee's discretionary powers and to pay assessments,
subscriptions and other charges from the trust fund), to hold or register any
property from time to time in the trustee's name or in the name of a nominee or
to hold it unregistered or in such form that title shall pass by delivery and,
with the approval of the Company, to borrow from anyone, including any bank
acting as trustee, to the extent permitted by law, such amounts from time to
time as the trustee considers desirable to carry out this trust (and to mortgage
or pledge all or part of the trust fund as security).
(j) To make payments from the trust fund of amounts that have become
payable under the Plan pursuant to Section 2 to the extent not already paid by
the Company or that are required to be made to the creditors of the Company
pursuant to Section 3.
(k) To employ counsel and to begin, maintain or defend any litigation
necessary in connection with the administration of this trust except that,
unless otherwise required by law, the trustee shall not be obliged or required
to do so unless indemnified to the trustee's satisfaction.
(l) To withhold, if the trustee considers it advisable, all or any part
of any payment required to be made hereunder as may be necessary and proper to
protect the trustee or the trust fund against any liability or claim on account
of any estate, inheritance, income or other tax or assessment attributable to
any amount payable hereunder, and to discharge any such liability with any part
or all of such payment so withheld, provided that at least ten days prior to
discharging any such liability with any amount so withheld the trustee shall
notify the Company in writing of the trustee's intent to do so.
(m) The Company (which has the authority to do so under the laws of its
state of incorporation) shall indemnify the Trustee and defend it and hold it
harmless from and against any and all liabilities, losses, claims, suits or
expenses (including attorneys' fees), of whatsoever kind and nature which may be
imposed upon, asserted against or incurred by the Trustee at any time by reason
of its provision of services under this Trust Agreement, its status as Trustee,
or by reason of any act or failure to act under this Trust Agreement, or any
action taken in accordance with any directions which conform with the terms of
this Trust Agreement, or acts omitted due to absence of such directions, from
the Company, except to the extent, such liability, loss, claim, suit or expense
arises directly from the Trustee's negligence or willful misconduct in the
performance of responsibilities specifically allocated to it under this Trust
Agreement. This paragraph shall survive the termination of the Trust Agreement.
-6-
<PAGE>
(n) To furnish the Company with such information in the trustee's
possession as the Company may need for tax or other purposes.
(o) To employ agents, attorneys, accountants, actuaries and other persons
(who also may be employed by the Company, the Company or others), to delegate
discretionary powers to such persons and to reasonably rely upon information and
advice furnished by such persons; provided that each such delegation and the
acceptance thereof by each such person shall be in writing; and provided further
that the trustee may not delegate its responsibilities as to the management or
control of the assets of the trust fund.
(p) To perform all other acts which in the trustee's judgment are
appropriate for the proper management, investment and distribution of the trust
fund.
(q) The trustee may invest any part or all of the trust assets for which
it has investment responsibility in any common, collective or commingled trust
fund or pooled investment fund that is maintained by a bank or trust company
(including a bank or trust company acting as trustee) provided such investments
are consistent with applicable investment requirements and guidelines. To the
extent that any trust assets are invested in any such fund, the provisions of
the documents under which such common, collective or commingled trust fund or
pooled investment fund are maintained shall govern any investments therein.
Section 8. Compensation and Expenses of Trustee.
Company shall pay all administrative and Trustee's fees and expenses. If
not so paid, the fees and expenses shall be paid from the Trust.
Section 9. Resignation of Trustee.
(a) Trustee may resign at any time by written notice to Company, which
shall be effective thirty (30) days after receipt of such notice unless Company
and Trustee agree otherwise.
(b) The Trustee may not be removed by Company.
(c) Upon resignation of Trustee and appointment of a successor Trustee,
all assets shall subsequently be transferred to the successor Trustee. The
transfer shall be completed within thirty (30) days after receipt of notice of
resignation or transfer, unless Company extends the time limit. The Company's
consent to the extension of time for the transfer of trust assets shall not be
unreasonably withheld.
(d) If Trustee resigns, a successor shall be appointed, in accordance
with Section 10(a) hereof, by the effective date of the resignation under
Section 9(a). If no such appointment has been made, Trustee may apply to a court
of competent jurisdiction for appointment of a successor or for instructions.
All expenses of Trustee in connection with the proceeding shall be allowed as
administrative expenses of the Trust.
-7-
<PAGE>
Section 10. Appointment of Successor.
(a) If Trustee resigns a successor Trustee shall be appointed by the
written consent of the Company and all Plan Beneficiaries. The Company shall be
responsible for securing the written consent of all Plan Beneficiaries and
providing such consents to the former Trustee and the new Trustee. Any third
party such as a bank trust department or other party that may be granted
corporate trustee powers under state law may be appointed successor Trustee. The
appointment of a successor Trustee shall be effective when accepted in writing
by the new Trustee. The new Trustee shall have all the rights and powers of the
former Trustee, including ownership rights in Trust assets. The former Trustee
shall execute any instrument necessary or reasonably requested by the successor
Trustee to evidence the transfer.
(b) The successor Trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing Trust assets, subject to
Sections 6 and 7 hereof. The successor Trustee shall not be responsible for and
Company shall indemnify and defend the successor Trustee from any claim or
liability resulting from any action or inaction of any prior Trustee or from any
other past event, or any condition existing at the time it becomes successor
Trustee.
Section 11. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument executed
by Trustee and the Company. Notwithstanding the foregoing, no such amendment
shall conflict with the terms of the Plan or shall make the Trust revocable
after it has become irrevocable in accordance with Section 1(b) hereof. The
Trustee be shall entitled to rely upon the written determination and
representation of the Company and all Plan Beneficiaries that such amendment
does not conflict with the terms of the Plan. The Company shall be responsible
for securing the written determination of all Plan Beneficiaries and providing
such determinations to the Trustee.
(b) The Trust shall not terminate until the date on which no one is
entitled to payments pursuant to the terms of the Plan unless sooner revoked in
accordance with Section 1(b) hereof. Upon termination of the Trust any assets
remaining in the Trust shall be returned to Company. The Trustee shall be
entitled to rely upon the written determination and representation of the
Company and the Plan Beneficiaries as to such non-entitlement. The Company shall
be responsible for securing the written determination of all Plan Beneficiaries
and providing such determinations to the Trustee.
(c) Upon written approval of all Plan Beneficiaries the Company may
terminate this Trust prior to the time all benefit payments under the Plan have
been made. All assets in the Trust at termination shall be returned to Company.
-8-
<PAGE>
Section 12. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Amounts payable under this Trust Agreement may not be anticipated,
assigned (either at law or in equity), alienated, pledged, encumbered or
subjected to attachment, garnishment, levy, execution or other legal or
equitable process.
(c) This Trust Agreement shall be governed by and construed in accordance
with the laws of Wisconsin.
(d) For purposes of this Trust, Change of Control shall have the meaning
given it in Section 1.c. of the Restated Senior Officer Agreement between the
Company and Robert A. Cornog dated January 29, 1996. The Company shall
immediately notify the Trustee of any Change of Control. The Trustee may
conclusively rely upon such notice and shall have no duty to determine whether a
Change of Control has occurred.
(e) Where written approval, consent, determination or other communication
is required of or by the Plan Beneficiaries under any provision of this Trust
Agreement, the Company shall certify to the Trustee that the responding Plan
Beneficiaries are all of the Plan Beneficiaries under the terms of the Plan and
this Trust Agreement at that time, and the Trustee may rely on such
certification.
Section 13. Effective Date.
The effective date of this Trust Agreement shall be the date written
above.
In the presence of SNAP-ON INCORPORATED
______________________________ By ______________________________
______________________________ Its ______________________________
THE NORTHERN TRUST COMPANY, Trustee
By ______________________________
Its ______________________________
-9-
EXHIBIT 10.e
DEFERRED COMPENSATION WAIVER
AND INSURANCE BENEFIT AGREEMENT
This Agreement is entered into this 21st day of December, 1998, by and
between SNAP-ON INCORPORATED, a Delaware corporation (the "Company"), and BRANKO
M. BERONJA (the "Executive").
WHEREAS, the Executive has a Cash Account under the Company's Deferred
Compensation Plan (the "Deferred Compensation Plan Balance"); and
WHEREAS, the Company is willing to establish the Split-Dollar Life
Insurance Agreement described in Section 3 of this Agreement ("Split-Dollar
Agreement"); and
WHEREAS, as of the date of this Agreement, the Executive and the Company
believe that the net Present Value of the Company's obligations under the
Split-Dollar Agreement are equivalent to the Present Value of the Executive's
waiver of rights under Section 2 of this Agreement.
NOW, THEREFORE, in consideration of the respective terms and conditions
set forth herein, the Company and the Executive hereby agree as follows:
1. Definitions.
a. Waived Deferred Compensation Plan Rights. The estimated
payments to the Executive attributable to the Executive's Waived Existing
Balance (as defined in Section 2.a) calculated based on the assumptions
set forth in Exhibit B to this Agreement.
b. Change of Control. This term shall have the meaning given in it
Section 1.c. of the Senior Officer Agreement.
c. Committee. The Organization and Compensation Committee of the
Board of Directors of the Company.
d. Deferred Compensation Plan. The Snap-on Incorporated Deferred
Compensation Plan.
e. Present Value. The Present Value of a payment shall be
determined based on the assumptions set forth in Exhibit B to this
Agreement.
f. Senior Officer Agreement. The Restated Senior Officer Agreement
dated January 29, 1996, between the Company and the Executive
<PAGE>
2. Executive's Waiver of Rights.
The Executive hereby waives any and all rights to receive One Hundred
Fifty Thousand Dollars ($150,000) of the Executive's Cash Account under
the Company's Deferred Compensation Plan as of the date of this agreement
(the "Waived Existing Balance").
3. Split-Dollar Agreement.
The Company agrees to enter into the Split-Dollar Agreement attached as
Exhibit A to this Agreement. The Company agrees to pay the first ten (10)
annual premium payments of Forty-One Thousand Three Hundred Seventy-Seven
Dollars ($41,377.00) pursuant to Section 3 of the Split-Dollar Agreement.
4. Payments Upon Death of Executive and Executive's Wife.
a. In the event of the death of the survivor of the Executive and
Joanne M. Beronja (the "Executive's wife") prior to the repayment to the
Company under Section 5 of the Split-Dollar Agreement, the Company will
pay to the beneficiary designated pursuant to Section 4.b or 4.c of this
Agreement the amount (if any) by which the Present Value of the
Executive's Waived Deferred Compensation Plan Rights exceeds the net
Present Value of the Company's premium payments under Section 3 of the
Split-Dollar Agreement (as recovered under Section 5 of the Split-Dollar
Agreement). These calculations shall be made based on the assumptions set
forth in Exhibit B to this Agreement. The death benefits based on the
Waived Deferred Compensation Plan Rights are shown in column 11 of
Exhibit B to this Agreement.
b. The Executive may designate a beneficiary or beneficiaries who,
upon the death of the survivor of the Executive and the Executive's wife
are to receive the amounts that are paid under Section 4.a of this
Agreement. All designations shall be in writing to the Company in such
form as it requires or accepts and signed by the Executive. The
designation shall be effective only if and when delivered to the Company
during the lifetime of the Executive. The Executive also may change his
beneficiary or beneficiaries by a signed, written instrument delivered to
the Company. The payment of amounts shall be in accordance with the last
unrevoked written designation of beneficiary that has been signed and
delivered to the Company.
c. In the event the Executive does not designate a beneficiary or
if for any reason such designation is ineffective, in whole or in part,
for any reason including the death of a beneficiary prior to the death of
the survivor of the Executive and the Executive's wife, any amount
payable under Section 4.a of this Agreement shall be paid to the estate
of the survivor of the Executive and the Executive's wife, and in such
event, the term "beneficiary" shall include such estate
-2-
<PAGE>
5. Equivalence of Benefits.
The Company and the Executive agree that the net Present Value of the
Company's premium payment obligation under Section 3 of the Split-Dollar
Agreement (as recovered under Section 5 of the Split-Dollar Agreement)
plus the net Present Value of any death benefit required to be paid under
Section 4 of this Agreement are equivalent to the Present Value of the
Executive's Waived Deferred Compensation Plan Rights based on the
assumptions set forth in Exhibit B to this Agreement.
6. Funding Upon a Change of Control.
a. In the event that a Change of Control of the Company occurs,
the Company shall immediately transfer to an irrevocable grantor trust
established by the Company which is substantially identical to the trust
attached as Exhibit C to this Agreement and contains such other
supplemental provisions as are required by the trustee which are not
inconsistent with Exhibit C (the "Trust") an amount equal to (i) the
aggregate unpaid premiums required to be paid by the Company under
Section 3 of this Agreement plus (ii) an additional amount equal to the
death benefit required to be paid under Section 4.a of this Agreement if
the survivor of the Executive and the Executive's wife dies in the year
in which the Company's final premium payment is due.
b. The Trust is an administrative and funding vehicle for the
Company's general assets contributed to the Trust for the purpose of
ultimately satisfying obligations under this Agreement. In the event that
the Company transfers assets to the Trust for the express purpose of
ultimately satisfying its obligations under this Agreement then, subject
to the terms of the Trust and limited by assets available and held by the
Trustees of the Trust for the purpose of funding the benefits provided by
this Agreement, payments may be made from such Trust in satisfaction of
Company's obligations hereunder. The transfer of assets by the Company to
the Trust for this purpose shall not increase, decrease or vary in any
way the rights and obligations of the parties to this Agreement, nor
shall the Executive, the Executive's wife or the owner of the insurance
policy held pursuant to the Split-Dollar Agreement have any ownership
rights with respect to such assets nor shall the assets be treated as a
trust fund of any kind for the benefit of any such person; provided that
as and when any such person is entitled to receive payments hereunder,
such person may, subject to the terms of the Trust and limited by the
terms of this Agreement, obtain such payments from the Trust. The
Executive, the Executive's wife or the owner of the insurance policy held
pursuant to the Split-Dollar Agreement may enforce and obtain
satisfaction of such payment rights against the assets held by the Trust
for the purpose of satisfying such obligations of the Company.
7. Successors and Binding Agreements.
a. The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or
otherwise) to all or substantially all
-3-
<PAGE>
of the business and/or assets of the Company expressly to assume and to
agree to perform this Agreement in the same manner and to the same extent
the Company would be required to perform if no succession had taken
place. This Agreement shall be binding upon and inure to the benefit of
the Company and any such successor, and such successor shall thereafter
be deemed the "Company" for purposes of this Agreement.
b. This Agreement shall inure to the benefit of and be enforceable
by the Executive's respective personal or legal representative, executor,
administrator, successor, heirs, distributees and/or legatees.
c. Neither the Company nor the Executive may assign, transfer or
delegate this Agreement or any rights or obligations hereunder except as
expressly provided in this Agreement.
8. Notices.
All communications provided for herein shall be in writing and shall be
deemed to have been duly given when delivered or five (5) business days
after having been mailed by United States registered or certified mail,
return receipt requested, postage prepaid, addressed to the Company (to
the attention of the Secretary of the Company) at its principal executive
office and to the Executive at his principal residence, or to such other
address as any party may have furnished to the other in writing in
accordance herewith, except that notices of a change of address shall be
effective only upon receipt.
9. Governing Law.
The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Wisconsin without
giving effect to the principles of conflict of laws of such state, except
that Section 10 shall be construed in accordance with the Federal
Arbitration Act if arbitration is chosen as the method of resolution.
10. Settlement of Disputes; Arbitration.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled, at the election of the Executive, the
Executive's wife or the owner of the insurance policy held pursuant to
the Split-Dollar Agreement, either by arbitration in Chicago, Illinois in
accordance with the rules of the American Arbitration Association then in
effect or by litigation. Judgment may be entered on the arbitrator's
award in any court having jurisdiction.
11. Certain Limitations.
Nothing in this Agreement shall grant the Executive any right to remain
an executive, director or employee of the Company or of any its
subsidiaries for any period of time.
-4-
<PAGE>
12. Miscellaneous.
a. Expenses. All costs and expenses of administering this
Agreement shall be borne by the Company.
b. Action by the Company. Any action required or permitted to be
taken under this Agreement by the Company shall be by resolution of the
Board of Directors, by the duly authorized Committee of the Board of
Directors, or by a person or persons authorized by resolution of the
Board of Directors or the Committee.
IN WITNESS WHEREOF the parties have signed and sealed this Agreement as
of the date first above written.
In the presence of SNAP-ON INCORPORATED
/s/Shelly Lange By /s/Michael F. Montemurro
- -------------------------------- --------------------------------
Its Senior Vice President
--------------------------------
/s/Shelly Lange /s/Branko M. Beronja
- -------------------------------- --------------------------------
Branko M. Beronja
-5-
<PAGE>
EXHIBIT A
SNAP-ON INCORPORATED
SPLIT-DOLLAR INSURANCE AGREEMENT
1. This Agreement is entered into this 21st day of December, 1998, by
and between SNAP-ON INCORPORATED, a Delaware corporation, and the BRANKO AND
JOANNE BERONJA 1998 INSURANCE TRUST.
2. Definitions.
(a) "Company" means Snap-on Incorporated, a Delaware corporation,
with offices in Kenosha, Wisconsin.
(b) "Insureds" means Branko M. and Joanne M. Beronja.
(c) "Insurer" means Northwestern Mutual Life.
(d) "Owner" means the Branko and Joanne Beronja 1998 Insurance Trust,
who may or may not be the same person as the Insureds.
(e) "Policy" means the policy or policies of insurance on the lives
of the Insureds issued by the Insurer and listed on Schedule "A" attached hereto
together with any supplementary contracts issued by the Insurer in conjunction
therewith
(f) "Policy Interest" means the interest of the Company in the
Policy. Policy Interest is an amount equal to the aggregate premiums paid by the
Company. The existence of the Company's Policy Interest shall be evidenced by
filing with the Insurer an assignment in substantially the form attached hereto
as Schedule "B."
3. Premium Payments.
(a) The Company agrees to pay up to the first ten (10) annual premium
payments of Forty-one Thousand Three Hundred Seventy-seven Dollars ($41,377) as
they become due. The Owner shall be responsible for paying all premium payments
not paid by the Company.
(b) Policy dividends shall be applied to purchase paid-up additional
insurance protection.
4. Policy Ownership.
(a) Except as provided in subparagraph (b), the Owner shall be the
sole and exclusive owner of the Policy. This includes all the rights of "owner"
under the terms of the Policy except as otherwise provided in this Section 4,
including but not limited to the right to designate beneficiaries and select
settlement options.
(b) Neither the Owner nor the Company shall have the right to obtain
a cash loan from the Insurer in accordance with the loan provisions of the
Policy.
<PAGE>
(c) In exchange for the Company's payment of its premium contribution
under Section 3, the Owner shall assign to the Company the following limited
ownership rights in the Policy:
(1) The right to recover its Policy Interest from the cash
value of the Policy in the event of the termination of
this Agreement as provided in Section 5.
(2) The right to recover its Policy Interest from the proceeds
of the Policy in the event of the death of the survivor of
the Insureds.
(d) To secure the Company's interest in the Policy the Owner shall
execute an Assignment of the Policy to the Company in substantially the form
attached hereto as Schedule B.
(e) It is agreed that benefits will be paid under the Policy by the
Insurer only by separate checks to the parties entitled thereto.
5. Termination of Plan.
(a) This Agreement may be terminated by the Owner by giving notice in
writing to the Company. In the event of termination of this Agreement the Owner
shall, at its election:
(1) Repay to the Company within 60 days of the date of
termination an amount equal to the Company's Policy
Interest. Or,
(2) Execute any and all instruments that may be required to
vest ownership of the Policy in the Company; and the
Company shall refund to Owner that part of any payment by
the Owner under Section 3 for the premium payment period
in which termination occurred representing the unexpired
portion of that period. Thereafter, Owner shall have no
further interest in the Policy.
(b) This Plan shall terminate on the sixteenth anniversary of the
issuance of the Policy.
6. The Insurer shall be bound only by the provisions of and endorsements
on the Policy, and any payments made or action taken by it in accordance
therewith shall fully discharge it from all claims, suits and demands of all
persons whatsoever. It shall in no way be bound by or be deemed to have notice
of the provisions of this Agreement.
7. The Company and the Owner may amend this Agreement. Such amendment
shall be in writing and signed by the Company and Owner.
-2-
<PAGE>
8. This Agreement shall bind and inure to the benefit of the Company and
its successors and assigns; Owner and his/her heirs, executors, administrators
and assigns; and any Policy beneficiary.
IN WITNESS WHEREOF the parties have signed and sealed this Agreement on
the date first above written.
In the presence of SNAP-ON INCORPORATED
/s/Shelly Lange By /s/Michael F. Montemurro
Its Senior Vice President
OWNER
BRANKO AND JOANNE BERONJA 1998
INSURANCE TRUST
/s/D.B. Bixby /s/Gregory P. Beronja
Gregory P. Beronja, Trustee
/s/
-3-
<PAGE>
SCHEDULE A
LIFE INSURANCE
Initial Face Insureds' Initial
Policy Number Amount Economic Benefit
------------- ------ ----------------
14888630 $1,239,913 $948
<PAGE>
SCHEDULE B
COLLATERAL ASSIGNMENT FORM
SNAP-ON INCORPORATED SPLIT-DOLLAR INSURANCE PLAN
Insurer: Northwestern Mutual Life
Insureds: Branko M. and Joanne M. Beronja
Policy No. 14888630
FOR VALUE RECEIVED, THIS ASSIGNMENT is made by the undersigned Owner
effective this 21st day of December, 1998.
1. Definitions.
(a) "Assignee" means Snap-on Incorporated, a Delaware corporation, of
Kenosha, Wisconsin.
(b) "Insureds" means Branko M. and Joanne M. Beronja.
(c) "Insurer" means Northwestern Mutual Life.
(d) "Owner" means the Branko and Joanne Beronja 1998 Insurance Trust.
(e) "Policy" means the following policy or policies of insurance
issued by the Insurer on the lives of the Insureds, together with any
supplementary contracts issued in conjunction therewith:
Policy Number: 14888630 Face Amount: $1,239,913
(f) "Policy Interest" means the Assignee's "Policy Interest" as set
forth in the Split-Dollar Plan. The Insurer shall be entitled to rely on the
Assignee's certification of the amount of its Policy Interest.
(g) "Split-Dollar Plan" means that certain plan of even date
herewith, between the Owner and the Assignee. The Insurer is not bound by nor
deemed to have notice of the provisions of the Split-Dollar Plan.
<PAGE>
2. Introduction. Under the Split-Dollar Plan, the Assignee has agreed to
assist the Owner in payment of premiums on the Policy. In consideration of such
premium payments by the Assignee, the Owner grants herein to the Assignee
certain limited interests in the Policy.
3. Assignment. The Owner hereby assigns, transfers and sets over to the
Assignee, its successors and assigns, the following specific rights in the
Policy and subject to the following terms and conditions:
(a) The right to recover its Policy Interest from the cash value of
the Policy in the event of the Policy's surrender by the Owner.
(b) The right to recover its Policy Interest from the proceeds of the
Policy in the event of the death of the survivor of the Insureds.
4. Insurer. The Insurer is hereby authorized to recognize, and is fully
protected in recognizing:
(a) The claims of the Assignee to rights hereunder, without
investigating the reasons for such action by the Assignee, or the validity or
the amount of such claims.
(b) The Owner's request for surrender of the Policy with or without
the consent of the Assignee. Upon surrender, the Policy shall be terminated and
of no further force or effect.
5. Release of Assignment. Upon payment to the Assignee of its policy
interest, the Assignee shall execute a written release of this assignment.
IN WITNESS WHEREOF the Owner has executed this assignment on the date
first above written.
BRANKO AND JOANNE BERONJA 1998
INSURANCE TRUST
/s/D.B. Bixby /s/Gregory P. Beronja
Gregory P. Beronja, Trustee
/s/
-2-
<PAGE>
EXHIBIT B
<TABLE>
SNAP-ON INCORPORATED
SUMMARY OF EXECUTIVE CASH FLOWS AND DEATH BENEFITS
March, 1999
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Deferral Program
-----------------------------------------------------------------------------------------------------------
Defer Compensation Payment to Executive
--------------------------------------- -----------------------------------------------------------
(1) (2) (3) (4) (5) (6) (7)
60%(4) Cum(5) 60%(3)+(6)
Cumulative
Annual Accum. Remaining Net Benefit Death
Yr. Age Deferral Benefit Liability Gross A/T At Interest Benefit
------- ------- ------------ ----------- ------------- --------- --------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 64 150,000 150,000 140,127 21,443 12,866 13,561 97,637
2 65 0 129,365 21,443 12,866 27,854 105,473
3 66 0 117,635 21,443 12,866 42,918 113,499
4 67 0 104,849 21,443 12,866 58,796 121,706
5 68 0 90,913 21,443 12,866 75,532 130,080
6 69 0 75,722 21,443 12,866 93,172 138,605
7 70 0 59,164 21,443 12,866 111,763 147,262
8 71 0 41,116 21,443 12,866 131,359 156,029
9 72 0 21,443 21,443 12,866 152,013 164,879
10 73 0 0 21,443 12,866 173,783 173,783
11 74 0 0 0 0 183,167 183,167
12 75 0 0 0 0 193,058 193,058
13 76 0 0 0 0 203,483 203,483
14 77 0 0 0 0 214,471 241,471
15 78 0 0 0 0 226,053 226,053
16 79 0 0 0 0 238,259 238,259
17 80 0 0 0 0 251,125 251,125
18 81 0 0 0 0 264,686 264,686
19 82 0 0 0 0 278,979 278,979
20 83 0 0 0 0 294,044 294,044
21 84 0 0 0 0 309,923 309,923
22 85 0 0 0 0 326,658 326,658
---------- ----------
--------------
150,000 0 214,431 128,659
============== ========== ==========
<CAPTION>
- -----------------------------------------------------------------------------------------
Waiver Program
--------------------------------------------
Second to Die Life Policy
--------------------------------------------
(8) (9) (10) (11)
45%(7) 40%(9)
Annual Income
Net to Gift to Tax Death
Yr. Age Heirs Trust Payable Benefits
------- ------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1 64 43,937 948 379 1,198,536
2 65 47,463 1,133 453 1,204,700
3 66 51,075 1,343 537 1,208,620
4 67 54,768 1,585 634 1,210,415
5 68 58,536 1,875 750 1,210,206
6 69 62,372 2,223 889 1,208,105
7 70 66,268 2,625 1,050 1,204,222
8 71 70,213 3,093 1,237 1,198,665
9 72 74,196 3,635 1,454 1,191,530
10 73 78,202 4,270 1,708 1,182,909
11 74 82,425 4,898 1,959 1,146,957
12 75 86,876 5,618 2,247 1,112,445
13 76 91,567 6,455 2,582 1,079,270
14 77 96,512 7,405 2,962 1,047,337
15 78 101,724 8,488 3,395 1,016,559
16 79 107,217 0 0 818,970
17 80 113,006 0 0 790,003
18 81 119,109 0 0 761,712
19 82 125,541 0 0 734,043
20 83 132,320 0 0 706,946
21 84 139,465 0 0 680,371
22 85 146,996 0 0 654,270
--------- --------
55,590 22,236
========= ========
- ------------------------------------------------------------------------------------------------------------------------------------
Assumptions
Initial Deferral 150,000 Interest Crediting Rate 9%
Tax Rate - Individual 40% Years to Defer 1
Tax Rate - Corporate 37% Year to Roll-Out 15
Estate Tax Rate 55%
- ---------------------------------------------------- ------------------------ ----------- -------- ---------------------------------
</TABLE>
<PAGE>
EXHIBIT C
SNAP-ON INCORPORATED INSURANCE BENEFIT TRUST
(Established pursuant to the Deferred Compensation Waiver and
Insurance Benefit Agreement dated December 21, 1998, between
Snap-on Incorporated and Branko M. Beronja)
(a) This Agreement made this ______ day of ___________, 1999, by and
between SNAP-ON INCORPORATED, a Delaware Corporation (the "Company") and THE
NORTHERN TRUST COMPANY ("Trustee");
(b) WHEREAS, Company has entered into a Deferred Compensation Waiver And
Insurance Benefit Agreement with Branko M. Beronja dated December 21, 1998 (the
"Plan").
(c) WHEREAS, Company has incurred liability under the terms of such Plan.
(d) WHEREAS, Company wishes to establish a trust (hereinafter called
"Trust") and to contribute to the Trust assets that shall be held therein,
subject to the claims of Company's Insolvency, as herein defined, until used to
pay insurance premiums as required by Section 3 of the Plan or used to pay a
death benefit as required by Section 4 of the Plan;
(e) WHEREAS, all payments made pursuant to the Plan are made to or for
the benefit of Branko M. Beronja, Joanne M. Beronja, the Branko and Joanne
Beronja 1998 Insurance Trust, the beneficiary designated by Branko M. Beronja
pursuant to Section 4 of the Plan or the estate of the survivor of Branko M.
Beronja and Joanne M. Beronja (the "Plan Beneficiaries");
(f) WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plan
as an unfunded plan for purposes of Title I of the Employee Retirement Income
Security Act of 1974;
(g) WHEREAS, it is the intention of Company to make contributions to the
Trust to provide itself with a source of funds to assist it in the meeting of
its liabilities under the Plan;
NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment of Trust.
(a) Company hereby deposits with Trustee in trust One Hundred Dollars
($100.00) which shall become the principal of the Trust to be held, administered
and disposed of by the Trustee as provided in this Trust Agreement.
<PAGE>
(b) The Trust hereby established is revocable by Company; it shall become
irrevocable upon a Change of Control, as defined herein.
(c) The Trust is intended to be a grantor trust, of which Company is the
grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) Company shall have the right at any time, and from time to time in
its sole discretion, to substitute assets of equal fair market value for any
asset held by the Trust. This right is exercisable by Company in a nonfiduciary
capacity without the approval or consent of any person in a fiduciary capacity.
(e) The principal of the Trust, and any earnings thereon, shall be held
separate and apart from other funds of Company and shall be used exclusively for
the uses and purposes of the Plan and general creditors as herein set forth.
(f) No Plan Beneficiary shall have any preferred claim on, or any
beneficial ownership interest in, any asset of the Trust. Any rights created
under the Plan and this Trust Agreement shall be mere unsecured contractual
rights of the Plan Beneficiaries against Company. Any assets held by the Trust
will be subject to the claims of Company's general creditors under federal and
state law in the event of Insolvency, as defined in Section 3(a) herein.
(g) Upon a Change of Control, Company shall immediately make an
irrevocable contribution to the Trust as required by Section 5 of the Plan. The
Trustee shall have no duty to enforce any funding obligations of the Company and
the duties of the Trustee shall be governed solely by the terms of this Trust
Agreement.
Section 2. Payments Under the Plan.
(a) Upon a Change of Control, Company shall deliver to Trustee a schedule
(the "Payment Schedule") that directs the Trustee regarding the amounts payable
under the Plan, the form in which such amounts are to be paid, and the dates on
which such amounts are payable. Except as otherwise provided herein, the Trustee
shall make payments in accordance with such Payment Schedule. The Company shall
have the sole responsibility for all tax withholding, related filings and
reports. The Trustee shall withhold for taxes such amounts from distributions as
the Company directs and shall follow the instructions of the Company with
respect to the remission of such withheld amounts to the appropriate
governmental authorities.
(b) Company may make payments directly as they become due under the terms
of the Plan. Company shall notify Trustee of its decision to make payments
directly prior to the time amounts are payable under the Plan. In addition, if
the principal of the Trust, and any earnings thereon, are not sufficient to make
payments in accordance with the terms of the Plan, Company shall make the
balance of each such payment as it falls due. Trustee shall notify Company where
principal and earnings are not sufficient.
-2-
<PAGE>
(c) The entitlement of Plan Beneficiaries to benefits under the Plan
shall be determined under the Plan, and any claim for such benefits shall be
considered and reviewed under the procedure set out in the Plan.
Section 3. Trustee Responsibility Regarding Payments When Company is
Insolvent.
(a) Trustee shall cease payments under the Plan if the Company is
Insolvent. Company shall be considered "Insolvent" for purposes of this Trust
Agreement if (i) Company is unable to pay its debts as they become due, or (ii)
Company is subject to a pending proceeding as a debtor under the United States
Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Sections 1(e) and 1(f) hereof, the principal and income of the Trust shall be
subject to claims of general creditors of Company under federal and state law as
set forth below.
(1) The Board of Directors and the Chief Executive Officer of
Company shall have the duty to inform Trustee in writing of Company's
Insolvency. If a person claiming to be a creditor of Company alleges in
writing to Trustee that Company has become Insolvent, Trustee shall
determine whether Company is Insolvent and, pending such determination,
Trustee shall discontinue payment of benefits under the Plan.
(2) Unless Trustee has actual knowledge of Company's Insolvency,
or has received notice from Company or a person claiming to be a creditor
alleging that Company is Insolvent, Trustee shall have no duty to inquire
whether Company is Insolvent. Trustee may in all events rely on such
evidence concerning Company's solvency as may be furnished to Trustee and
that provides Trustee with a reasonable basis for making a determination
concerning Company's solvency. In no event shall "actual knowledge" be
deemed to include knowledge of Company's credit status held by banking
officers or banking employees of The Northern Trust Company which has not
been communicated to the Trust Department of Trustee. The Trustee may
appoint an independent accounting, consulting or law firm to make any
determination of solvency required by Trustee under this Section 3. In
such event, Trustee may conclusively rely upon the determination by such
firm and shall be responsible only for the prudent selection of such
firm.
(3) If at any time Trustee has determined that Company is
Insolvent, Trustee shall discontinue payments under the Plan and shall
hold the assets of the Trust for the benefit of Company's general
creditors. Nothing in this Trust Agreement shall in any way diminish any
rights as general creditors of Company with respect to benefits due under
the Plan or otherwise.
(4) Trustee shall resume the payments under the Plan in accordance
with Section 2 of this Trust Agreement only after Trustee has determined
that Company is not Insolvent (or is no longer Insolvent).
-3-
<PAGE>
(c) Provided that there are sufficient assets, if Trustee discontinues
the payments from the Trust pursuant to Section 3(b) hereof and subsequently
resumes such payments, the first payment following such discontinuance shall
include the aggregate amount of all payments due under the terms of the Plan for
the period of such discontinuance, less the aggregate amount of any payments
made by Company in lieu of the payments provided for hereunder during any such
period of discontinuance, all in accordance with the Payment Schedule. The
Payment Schedule may only be modified by the Company with the written consent of
all Plan Beneficiaries as necessary to comply with the provisions of this
paragraph. The Company shall be responsible for securing the written consent of
all Plan Beneficiaries and providing such consents to the Trustee.
Section 4. Payments to Company.
Except as provided in Section 3 hereof, after the Trust has become
irrevocable, Company shall have no right or power to direct Trustee to return to
Company or to divert to others any of the Trust assets before all payments of
benefits have been made pursuant to the terms of the Plan. The Trustee shall be
entitled to rely on the written representations of the Company and all Plan
Beneficiaries that all such payments have been made. The Company shall be
responsible for securing the written representations of all Plan Beneficiaries
and providing such representations to the Trustee.
Section 5. Disposition of Income.
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
Section 6. Accounting by Trustee.
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between
Company and Trustee, which records may be audited annually (or at such other
times as agreed by the Company and the Trustee) by the Company or anyone named
by the Company. Within thirty (30) days following the close of each calendar
year and within thirty (30) days after the resignation of Trustee, Trustee shall
deliver to Company a written account of its administration of the Trust during
such year or during the period from the close of the last preceding year to the
date of such resignation, setting forth all investments, receipts, disbursements
and other transactions effected by it, including a description of all securities
and investments purchased and sold with the cost or net proceeds of such
purchases or sales (accrued interest paid or receivable being shown separately),
and showing all cash, securities and other property held in the Trust at the end
of such year or as of the date of such resignation, as the case may be. In the
absence of the filing in writing with the Trustee by the Company of exceptions
or objections to any such account within ninety (90) days, the Company shall be
deemed to have approved such account; in such case, or upon the written approval
by the Company of any such account, the Trustee shall be released, relieved and
discharged with respect to all matters and things set forth in such account as
though such account had been settled by the decree of a court of competent
-4-
<PAGE>
jurisdiction. The Trustee may conclusively rely on determinations of the Company
of valuations for assets of the Trust for which the Trustee deems there to be no
readily determinable fair market value and on the determination of the issuer of
any insurance contracts with respect to the fair market value of such insurance
contracts.
Section 7. Responsibility of Trustee.
(a) Trustee shall act with the care, skill, prudence, and diligence under
the circumstances then prevailing that a prudent person acting in like capacity
and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims; provided, however, that Trustee shall incur
no liability to any person for any action taken pursuant to a direction, request
or approval given by Company which is contemplated by, and in conformity with,
the terms of this Trust and is given in writing by Company. In the event of a
dispute between Company and a party, Trustee may apply to a court of competent
jurisdiction to resolve the dispute.
(b) If Trustee undertakes or defends any litigation arising in connection
with this Trust, Company agrees to indemnify Trustee against Trustee's costs,
expenses and liabilities (including, without limitation, attorneys' fees and
expenses) relating thereto and to be primarily liable for such payments. If
Company does not pay such costs, expenses and liabilities in a reasonably timely
manner, Trustee may obtain payment from the Trust.
(c) Trustee may consult with legal counsel (who may also be counsel for
Company generally) with respect to any of its duties or obligations hereunder.
(d) Trustee shall have, without exclusion, all powers conferred on
Trustees by applicable law, unless expressly provided otherwise herein.
(e) Notwithstanding any powers granted to Trustee pursuant to this Trust
Agreement or to applicable law, Trustee shall not have any power that could give
this Trust the objective of carrying on a business and dividing the gains
therefrom, within the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.
(f) To invest and reinvest part or all of the trust fund in any real or
personal property (including investments in any stocks, bonds, debentures,
mutual fund shares (including those for which the Trustee or its affiliate is
advisor), notes, commercial paper, treasury bills, options, commodities, futures
contracts, partnership interests, venture capital investments, any interest
bearing deposits held by any bank or similar financial institution, and any
other real or personal property) and to diversify such investments so as to
minimize the risk of large losses unless under the circumstances it is clearly
prudent not to do so; except that the Company may from time to time establish
investment guidelines and the trustee shall follow such investment guidelines.
(g) To retain in cash such amounts as the trustee considers advisable and
as are permitted by applicable law and to deposit any cash so retained in any
depository (including any bank acting as trustee) which the trustee may select.
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<PAGE>
(h) To manage, sell, insure and otherwise deal with all real and personal
property held by the trustee on such terms and conditions as the trustee shall
decide.
(i) To vote stock and other voting securities personally or by proxy (and
to delegate the trustee's powers and discretions with respect to such stock or
other voting securities to such proxy), to exercise subscription, conversion and
other rights and options (and make payments from the trust fund in connection
therewith), to take any action and to abstain from taking any action with
respect to any reorganization, consolidation, merger, dissolution,
recapitalization, refinancing and any other program or change affecting any
property constituting a part of the trust fund (and in connection therewith to
delegate the trustee's discretionary powers and to pay assessments,
subscriptions and other charges from the trust fund), to hold or register any
property from time to time in the trustee's name or in the name of a nominee or
to hold it unregistered or in such form that title shall pass by delivery and,
with the approval of the Company, to borrow from anyone, including any bank
acting as trustee, to the extent permitted by law, such amounts from time to
time as the trustee considers desirable to carry out this trust (and to mortgage
or pledge all or part of the trust fund as security).
(j) To make payments from the trust fund of amounts that have become
payable under the Plan pursuant to Section 2 to the extent not already paid by
the Company or that are required to be made to the creditors of the Company
pursuant to Section 3.
(k) To employ counsel and to begin, maintain or defend any litigation
necessary in connection with the administration of this trust except that,
unless otherwise required by law, the trustee shall not be obliged or required
to do so unless indemnified to the trustee's satisfaction.
(l) To withhold, if the trustee considers it advisable, all or any part
of any payment required to be made hereunder as may be necessary and proper to
protect the trustee or the trust fund against any liability or claim on account
of any estate, inheritance, income or other tax or assessment attributable to
any amount payable hereunder, and to discharge any such liability with any part
or all of such payment so withheld, provided that at least ten days prior to
discharging any such liability with any amount so withheld the trustee shall
notify the Company in writing of the trustee's intent to do so.
(m) The Company (which has the authority to do so under the laws of its
state of incorporation) shall indemnify the Trustee and defend it and hold it
harmless from and against any and all liabilities, losses, claims, suits or
expenses (including attorneys' fees), of whatsoever kind and nature which may be
imposed upon, asserted against or incurred by the Trustee at any time by reason
of its provision of services under this Trust Agreement, its status as Trustee,
or by reason of any act or failure to act under this Trust Agreement, or any
action taken in accordance with any directions which conform with the terms of
this Trust Agreement, or acts omitted due to absence of such directions, from
the Company, except to the extent, such liability, loss, claim, suit or expense
arises directly from the Trustee's negligence or willful misconduct in the
performance of responsibilities specifically allocated to
-6-
<PAGE>
it under this Trust Agreement. This paragraph shall survive the termination of
the Trust Agreement.
(n) To furnish the Company with such information in the trustee's
possession as the Company may need for tax or other purposes.
(o) To employ agents, attorneys, accountants, actuaries and other persons
(who also may be employed by the Company, the Company or others), to delegate
discretionary powers to such persons and to reasonably rely upon information and
advice furnished by such persons; provided that each such delegation and the
acceptance thereof by each such person shall be in writing; and provided further
that the trustee may not delegate its responsibilities as to the management or
control of the assets of the trust fund.
(p) To perform all other acts which in the trustee's judgment are
appropriate for the proper management, investment and distribution of the trust
fund.
(q) The trustee may invest any part or all of the trust assets for which
it has investment responsibility in any common, collective or commingled trust
fund or pooled investment fund that is maintained by a bank or trust company
(including a bank or trust company acting as trustee) provided such investments
are consistent with applicable investment requirements and guidelines. To the
extent that any trust assets are invested in any such fund, the provisions of
the documents under which such common, collective or commingled trust fund or
pooled investment fund are maintained shall govern any investments therein.
Section 8. Compensation and Expenses of Trustee.
Company shall pay all administrative and Trustee's fees and expenses. If
not so paid, the fees and expenses shall be paid from the Trust.
Section 9. Resignation of Trustee.
(a) Trustee may resign at any time by written notice to Company, which
shall be effective thirty (30) days after receipt of such notice unless Company
and Trustee agree otherwise.
(b) The Trustee may not be removed by Company.
(c) Upon resignation of Trustee and appointment of a successor Trustee,
all assets shall subsequently be transferred to the successor Trustee. The
transfer shall be completed within thirty (30) days after receipt of notice of
resignation or transfer, unless Company extends the time limit. The Company's
consent to the extension of time for the transfer of trust assets shall not be
unreasonably withheld.
(d) If Trustee resigns, a successor shall be appointed, in accordance
with Section 10(a) hereof, by the effective date of the resignation under
Section 9(a). If no such appointment has been made, Trustee may apply to a court
of competent jurisdiction for
-7-
<PAGE>
appointment of a successor or for instructions. All expenses of Trustee in
connection with the proceeding shall be allowed as administrative expenses of
the Trust.
Section 10. Appointment of Successor.
(a) If Trustee resigns a successor Trustee shall be appointed by the
written consent of the Company and all Plan Beneficiaries. The Company shall be
responsible for securing the written consent of all Plan Beneficiaries and
providing such consents to the former Trustee and the new Trustee. Any third
party such as a bank trust department or other party that may be granted
corporate trustee powers under state law may be appointed successor Trustee. The
appointment of a successor Trustee shall be effective when accepted in writing
by the new Trustee. The new Trustee shall have all the rights and powers of the
former Trustee, including ownership rights in Trust assets. The former Trustee
shall execute any instrument necessary or reasonably requested by the successor
Trustee to evidence the transfer.
(b) The successor Trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing Trust assets, subject to
Sections 6 and 7 hereof. The successor Trustee shall not be responsible for and
Company shall indemnify and defend the successor Trustee from any claim or
liability resulting from any action or inaction of any prior Trustee or from any
other past event, or any condition existing at the time it becomes successor
Trustee.
Section 11. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument executed
by Trustee and the Company. Notwithstanding the foregoing, no such amendment
shall conflict with the terms of the Plan or shall make the Trust revocable
after it has become irrevocable in accordance with Section 1(b) hereof. The
Trustee be shall entitled to rely upon the written determination and
representation of the Company and all Plan Beneficiaries that such amendment
does not conflict with the terms of the Plan. The Company shall be responsible
for securing the written determination of all Plan Beneficiaries and providing
such determinations to the Trustee.
(b) The Trust shall not terminate until the date on which no one is
entitled to payments pursuant to the terms of the Plan unless sooner revoked in
accordance with Section 1(b) hereof. Upon termination of the Trust any assets
remaining in the Trust shall be returned to Company. The Trustee shall be
entitled to rely upon the written determination and representation of the
Company and the Plan Beneficiaries as to such non-entitlement. The Company shall
be responsible for securing the written determination of all Plan Beneficiaries
and providing such determinations to the Trustee.
(c) Upon written approval of all Plan Beneficiaries the Company may
terminate this Trust prior to the time all benefit payments under the Plan have
been made. All assets in the Trust at termination shall be returned to Company.
-8-
<PAGE>
Section 12. Miscellaneous.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Amounts payable under this Trust Agreement may not be anticipated,
assigned (either at law or in equity), alienated, pledged, encumbered or
subjected to attachment, garnishment, levy, execution or other legal or
equitable process.
(c) This Trust Agreement shall be governed by and construed in accordance
with the laws of Wisconsin.
(d) For purposes of this Trust, Change of Control shall have the meaning
given it in Section 1.c. of the Restated Senior Officer Agreement between the
Company and Branko M. Beronja dated January 29, 1996. The Company shall
immediately notify the Trustee of any Change of Control. The Trustee may
conclusively rely upon such notice and shall have no duty to determine whether a
Change of Control has occurred.
(e) Where written approval, consent, determination or other communication
is required of or by the Plan Beneficiaries under any provision of this Trust
Agreement, the Company shall certify to the Trustee that the responding Plan
Beneficiaries are all of the Plan Beneficiaries under the terms of the Plan and
this Trust Agreement at that time, and the Trustee may rely on such
certification.
Section 13. Effective Date.
The effective date of this Trust Agreement shall be the date written
above.
In the presence of SNAP-ON INCORPORATED
By
- -------------------------- --------------------------
Its
- -------------------------- --------------------------
THE NORTHERN TRUST COMPANY, Trustee
By
--------------------------
Its
--------------------------
Exhibit (12)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(amounts in thousands)
1998 1997 1996
---- ---- ----
Net Earnings (Loss) (4,779) 150,366 131,451
Add (Deduct):
Income taxes 15,619 88,310 77,202
Minority interest in earnings of
consolidated subsidiaries 4,228 4,461 -
--------- --------- --------
Net Earnings as Defined 15,068 243,137 208,653
Fixed Charges:
Interest on debt 21,254 17,654 12,649
Interest element of rentals 3,595 3,630 3,276
--------- --------- --------
Total Fixed Charges 24,849 21,284 15,925
Total Adjusted Earnings Available for
For Payment of Fixed Charges 39,917 264,421 224,578
--------- --------- --------
Ratio of Earnings to Fixed Charges 1.6 12.4 14.1
========= ========= ========
For purpose of computing this ratio, "earnings" consist of (a) income from
continuing operations before income taxes (adjusted for minority interest) and
(b) "fixed charges" consist of interest on debt and the estimated interest
portion of rents.
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results of Operations
All analyses for 1998 include the effects of restructuring and other
non-recurring charges and inventory adjustments ("1998 charges"), unless
otherwise indicated.
The Corporation manufactures, markets and distributes tools, equipment and
related services for automotive and industrial service customers around the
world using multiple brands sold through multiple channels of distribution. In
some instances, it also finances the purchase of those products.
Restructuring and other charges: In the third quarter of 1998, the Corporation
recorded restructuring and other non-recurring charges related to its Project
Simplify initiative, a broad program of internal rationalizations,
consolidations and reorganizations intended to make the Corporation's business
operations simpler and more effective. Of an expected total charge of
approximately $185 million to be recorded through the first quarter of 2000,
$133.1 million in pre-tax charges were taken in the third quarter of 1998 and
$16.8 million were taken in the 1998 fourth quarter. Of the total $149.9 million
in pre-tax charges recorded in 1998 ($107.6 million or $1.82 per share after
taxes), $75.6 million is restructuring charges and $74.3 million represents
other non-recurring charges. The Corporation expects that approximately 50% of
the total charges will be non-cash, with the remaining 50% requiring cash
outflows.
The $75.6 million of restructuring charges includes severance, non-cancelable
lease agreements on facilities to be closed and other exit costs associated with
the simplification initiative in the amount of $23.1 million. The Corporation
has adjusted property, plant and equipment and other assets to net realizable
value through an additional $6.3 million restructuring charge. As part of the
restructuring efforts, the Corporation also has written off impaired goodwill
and other intangible assets of certain discontinued business units and incurred
a charge of $36.5 million. This amount relates to the write-down of remaining
intangible balances recorded at the time those business units were acquired. As
part of the elimination of these business units and their product lines, the
Corporation has recorded a reserve in the amount of $9.7 million to provide
additional warranty support, at no cost, for products already sold. The warranty
charge has been included in Cost of Goods Sold - Discontinued Products, while
all other restructuring charges recorded to date have been included in
Restructuring and Other Non-recurring Charges on the accompanying Consolidated
Statements of Earnings.
The other non-recurring charges of $74.3 million include $50.9 million to
re-value discontinued stock keeping units ("SKUs") of inventory, costs to
conclude certain non-recurring legal matters in the amount of $18.7 million and
other transitional costs in the amount of $4.7 million. The reduction of SKUs is
an effort to reduce transaction costs and working capital intensity of the
Corporation's product offering and refocus on high-volume growth products. The
non-recurring charge related to the reduction of SKUs has been included as part
of Cost of Goods Sold - Discontinued Products, while the other non-recurring
charges recorded to date have been included in Restructuring and Other
Non-recurring Charges on the accompanying Consolidated Statements of Earnings.
The composition of the restructuring reserves is presented in Note 14.
Shown in the table below is a breakdown of the restructuring and other
non-recurring charges by segment:
(Amounts in thousands) Restructuring Non-recurring Total
North America Transportation $ 9,661 $13,576 $ 23,237
North America Other 51,810 51,046 102,856
Europe 7,900 4,789 12,689
International 2,836 4,841 7,677
Financial Services 3,400 4 3,404
------- ------- --------
Total $75,607 $74,256 $149,863
======= ======= ========
The actions of Project Simplify are expected to lead to the closing of six
manufacturing facilities, seven warehouses and 47 small offices in North America
and Europe; the elimination of more than 1,100 positions; the elimination of
nearly 12,000 SKUs; and the consolidation of certain business units. By the end
of 1998, 509 positions were eliminated, including 100 of the 150 field manager
positions identified for elimination. Of those field managers, approximately 50
are converting to franchised dealers. In addition, eight facilities were closed,
the SKU-reduction activities were on schedule and the European operations had
begun their staff reductions and facilities closures.
The Corporation expects to realize annual cost savings of approximately $60
million from the initiative. On an annual run-rate basis, the Corporation
expects to achieve half of these savings in 1999, with the full amount achieved
in 2000.
The decision to restructure was based on the complexity that had developed
within the organization during the decade. In the early 1990s, management
determined that the increased computerization of the systems contained in motor
vehicles could result in broad changes in the approach to servicing and
repairing such vehicles. Over time, the diagnosing of vehicle problems has grown
much more complicated and requires a broader array of tools and equipment than
was necessary in the past. In addition, the continuing growth in the global
vehicle population resulted in opportunities for companies to expand worldwide.
Since 1992, the Corporation has made 21 acquisitions and has grown from
primarily a single-product, single-channel company to an organization serving
multiple customers with multiple capabilities through multiple channels. It is
also operating in more regions of the world.
The complexity created by this growth added costs, slowed decision making, and
diffused responsibility and accountability. The organizational structure
contained too many individual business units with overlapping functional
disciplines. Each had its own product, brand and channel identity.
In order to combine businesses into larger, more integrated units, with
operating responsibility assigned by brands and channels, and to implement a
shared-function format in areas such as engineering, research, manufacturing,
finance and administration, a more sophisticated computer system was required.
The anticipated completion of the implementation of the Corporation's new
enterprise-wide computer system in 1998 enabled the Corporation to begin to
execute its plans to simplify its operations.
[17 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Management's Discussion and Analysis (continued)
Fourth Quarter Results: Net earnings in the 1998 fourth quarter were $12.6
million, a decrease of 69.9% from the same period of 1997, because of the
remaining difficulties related to the process issues connected with
implementation of the Corporation's new computer system, and the 1998 charges.
Reported earnings per share - diluted were $.21. On a pre-tax basis,
restructuring and transition costs related to Project Simplify totaled $6.8
million ($.09 per share after tax) in the quarter. In addition, a portion of the
charge taken in the third quarter for the reduction of SKUs included an
estimated $10 million ($.10 per share after tax) LIFO benefit. The benefit was
not realized and was reversed in the fourth quarter. Cost of goods sold in the
quarter included a $14.1 million ($.15 per share after tax) reduction in
inventory discussed in the "Cost and Profit Margins" section. Earnings in the
fourth quarter of 1998 included a $3.1 million gain on the sale of a European
facility, gains related to the sale of installment receivables and pension
curtailment benefits related to the Corporation's restructuring initiatives.
Overview: Net sales in 1998 increased 6.0%. Sales from acquisitions and growth
in the North America Transportation segment were primarily responsible for the
increase. The translation of foreign-currency-denominated results into U.S.
dollars negatively affected sales by approximately one percentage point.
Excluding the results of acquisitions completed in 1998, sales declined
approximately 1%. The unanticipated difficulties encountered in the
implementation of the Corporation's new computer system, continued weakness in
the economies in the Asia/Pacific region and difficult comparisons against 1997,
which contained an unusually high level of emissions-testing equipment sales and
was a 53-week year, affected sales. In 1997, net sales rose 12.6%, with
increases recorded in all segments. Sales excluding acquisitions advanced
approximately 7% in 1997.
In 1998, the Corporation reported a net loss of $4.8 million, following an
increase in earnings of 14.4% in 1997. The reported loss per share in 1998 was
$.08, after 1997's earnings per share grew 14.4% and 14.6% for basic and diluted
earnings, respectively. The loss in 1998 was related to several factors:
restructuring and other non-recurring charges of $149.9 million ($1.82 per share
after tax) in connection with the implementation of the Corporation's Project
Simplify initiative; costs and lost sales associated with the unanticipated
difficulty of aligning internal processes with the Corporation's new
enterprise-wide computer system; and costs related to the organizational
complexity that developed as the Corporation made numerous acquisitions over the
last six years. Excluding the 1998 charges, earnings per share - basic and
earnings per share - diluted were $1.89 and $1.87, respectively. The increase in
net earnings and earnings per share in 1997 was the result of higher sales and
improvement in operating expenses as a percent of sales.
(Amounts in thousands,
except per share data) 1998 1997 1996
Sales $1,772,637 $1,672,215 $1,485,279
Net earnings (loss) (4,779) 150,366 131,451
Earnings (loss) per common
share - basic $ (.08) $ 2.47 $ 2.16
Earnings (loss) per common
share - diluted $ (.08) $ 2.44 $ 2.13
The 1998 and 1996 years contained 52 weeks; 1997 was a 53-week year.
Cost and profit margins: The gross profit margin was 43.1% in 1998 and 50.5% in
both 1997 and 1996. The decline in 1998's gross margin was due to a change in
business mix resulting from several acquisitions, and a less favorable sales mix
and additional costs related to the difficulties in shipping hand tools as the
Corporation resolved process issues in connection with the implementation of its
new computer system. In the fourth quarter of 1998, cost of goods sold also
included a $14.1 million reduction in inventory related to the conversion to the
new enterprise- wide computer system. The new system provides for much improved
visibility at an item level on field inventory.
Total operating expenses as a percent of net sales increased to 39.8% in 1998
after successive decreases in 1997 and 1996. The 1997 and 1996 percentages were
38.9% and 40.0%, respectively. The 1998 performance was affected by the process
difficulties encountered in implementing the Corporation's new computer system.
Costs for additional labor and freight, and lower productivity were primarily
responsible for the results. In 1997 and 1996, improvements in processes and in
productivity, and a change in business mix contributed to the declines in both
years. Total operating expenses in 1998 were $55.6 million higher than in 1997,
compared with increases of $55.7 million in 1997 and $56.5 million in 1996.
Acquisitions contributed to the increases in all years.
[Three bar graphs follow this text. The first is titled "Research &
Development." It shows the dollars spent on research and development by the
Corporation (in millions) in each of fiscal years 1994 through 1998, as follows:
94 - $31
95 - $34
96 - $42
97 - $47
98 - $49
The second graph is titled "Operating Expenses as a Percent of Net Sales." It
shows the Corporation's operating expenses as a percent of its net sales for
each of fiscal years 1994 through 1998, as follows:
94 - 42.7%
95 - 41.6%
96 - 40.0%
97 - 38.9%
98 - 39.8%
The third graph is titled "Margin Analysis." It shows, side-by-side in a
horizontal presentation for each fiscal year, the Corporation's net sales (in
millions of dollars), gross profit margin and operating income margin for each
of fiscal years 1994 through 1998, as follows:
NET SALES GROSS PROFIT MARGIN OPERATING INCOME MARGIN
94 - $ 1,194 51.0% 13.3%
95 - $ 1,292 51.3% 14.6%
96 - $ 1,485 50.5% 14.8%
97 - $ 1,672 50.5% 15.9%
98 - $ 1,773 43.1% 1.9%]
[18 Snap-on Incorporated 1998 Annual Report]
<PAGE>
The operating income margin declined to 1.9% in 1998 because of the lower gross
margin and the higher operating expense margin. In 1997, the operating margin
increased to 15.9% from 14.8% in 1996 because of a reduction in operating
expenses as a percent of sales.
Segment Results: The Corporation has adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The following review reflects the new segment structure
and does not include the allocation by reportable segment of the restructuring
and other non-recurring charges. See Note 13 for additional information,
including a description of the segments.
(Amounts in thousands) 1998 1997 1996
Sales
North America Transportation $ 845,828 $ 836,032 $ 786,609
North America Other 457,255 468,692 341,194
Europe 393,460 279,684 271,957
International 76,094 87,807 85,519
---------- ---------- ----------
Total $1,772,637 $1,672,215 $1,485,279
========== ========== ==========
Operating income
North America Transportation $ 34,176 $ 70,205 $ 48,592
North America Other 70,909 98,143 84,764
Europe 3,205 16,539 11,800
International 9,775 8,759 11,101
Financial Services 65,933 71,891 64,269
Restructuring and other
non-recurring charges (149,863) - -
---------- ---------- ----------
Operating income $ 34,135 $ 265,537 $ 220,526
========== ========== ==========
Net sales in North America Transportation in 1998 increased 1.2%. New products,
including "soft-grip" screwdrivers, battery testers and software upgrades, and
continued strength in the U.S. dealer channel offset difficult comparisons
against 1997, which benefited from above-average sales of emissions-testing
equipment through the channel and from an additional week in the reporting year.
The difficulty in shipping tools during 1998 because of process issues related
to the Corporation's computer conversion constrained sales growth. Operating
income declined 51.3% because of the increased costs incurred to operate during
the computer conversion. These costs included additional labor and freight, and
lower productivity. In 1997, net sales in North America Transportation rose
6.3%. Several large emissions programs, improved sales productivity in the
dealer organization, the introduction of new products, an additional accounting
week, and price increases all contributed to the 1997 growth. Operating income
increased 44.5% because of growth in sales, and improvements in expense control
and productivity.
Net sales in North America Other declined 2.4% in 1998, as the Corporation
experienced difficult comparisons against 1997, when a significant amount of
emissions-testing equipment was sold to distributors and national accounts. In
addition, sales were constrained by difficulties in shipping tools to industrial
customers because of the computer conversion. Acquisitions and new products,
such as a line of palm sanders, additional cordless power tools and new shop
management software, offset part of the decline. Operating income decreased
27.7% in 1998. Lower total sales and the higher expense structure and increased
operating complexity resulting from acquisitions in this segment affected
profitability. In 1997, North America Other net sales increased 37.4%, with high
levels of emissions-testing equipment sales; new products; growth in the
Equipment Solutions equipment facilitation and distribution business;
acquisitions; and an additional accounting week all contributing to the growth.
Operating income in 1997 increased 15.8% on higher sales. Operating income
growth was lower than sales growth because of changes in the product and
business mix. Sales excluding acquisitions in 1998 were approximately 4% lower,
following an increase of approximately 19% in 1997.
Net sales in Europe rose 40.7% in 1998. Acquisitions were responsible for the
increase. Higher tool sales were offset by lower equipment sales because of
significantly reduced exports to the Asia/Pacific and Eastern Europe regions.
The translation of foreign currencies into U.S. dollars negatively affected
sales. Operating income declined 80.6%, as lower than expected performance by
several acquisitions, changes in the business and product mix, and the
short-term effects of the Corporation's restructuring activities negatively
affected results. In 1997, Europe net sales rose 2.8%. Sales of both tools and
equipment increased, while currency translation rates and a sluggish economy in
many of the countries in the segment slowed the growth rate. Acquisitions also
contributed to sales in 1997. Operating income in 1997 increased 40.2% because
of strong growth in tools and the impact of expense reduction activities.
Excluding acquisitions and the translation effects of foreign currency, 1998
sales rose approximately 1%, while 1997 sales increased approximately 4%.
Net sales in the International segment decreased 13.3% in 1998, following an
increase of 2.7% in 1997. Sales in 1998 were negatively affected by the
translation of foreign currencies into the U.S. dollar. The continuing weakness
in the economies of the Asia/Pacific region slowed tools sales growth, while
equipment sales declined. Operating income increased 11.6% because of the
reduced allocation of shared service expenses. Excluding the allocation,
operating income was approximately even with 1997. The 1997 sales advanced
despite difficulties presented by many of the economies in the Asia/Pacific
region. Both tool and equipment sales in the segment rose for the year.
Operating income decreased 21.1% as a less favorable product mix and higher
expenses in the region affected results. Excluding the effects of foreign
currency translation rates, sales decreased approximately 2% in 1998 and
increased approximately 11% in 1997.
The Corporation uses its financing programs to facilitate sales. In 1998, net
finance income (defined as income from the Corporation's financing programs net
of administrative costs, but without any allocation of interest expense)
decreased 8.3% to $65.9 million, from $71.9 million in 1997. Net finance income
in 1997 increased 11.9% from $64.3 million in 1996. The decrease in net finance
income in 1998 was because of the increased securitization of installment
receivables, which is discussed in further detail in the following paragraph.
The higher net finance income in 1997 was the result of increases in extended
credit receivables and benefits from programs to control related costs.
[19 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Management's Discussion and Analysis (continued)
The Corporation seeks to reduce the asset intensity of its balance sheet, which
is the result of its financing activities. During the second quarter of 1998,
the Corporation sold $48.5 million in extended credit receivables. In 1997, the
Corporation sold $25.0 million in each of the first three quarters, and $50.0
million in the fourth quarter, of its extended credit receivables. The effect of
the asset securitizations is a decline in net finance income offset by an
equivalent decline in interest expense. During 1998, the Corporation also sold
an aggregate of $29.4 million of dealer finance receivables in the third and
fourth quarters. In the fourth quarter of 1997, the Corporation sold $73.7
million of net lease receivables. In both years, the proceeds were used to pay
down short-term debt and for working capital and general corporate purposes.
Subsequent to the end of 1998, the Corporation and Newcourt Financial USA Inc.
("Newcourt") formed a new joint venture entity, Snap-on Credit LLC ("the LLC"),
on January 3, 1999. The LLC will be the preferred provider of financial services
to the Corporation's global dealer and customer network. It combines the
operations and commitments of the Corporation's captive finance program with
Newcourt's expertise in providing tailored, flexible financing solutions to
industry leaders. The operations were established initially in the United States
and will be expanded globally later in 1999. The joint venture has an initial
term of five years, with an option for the Corporation to extend it for an
additional five years.
As part of the transition, the Corporation reversed the securitization of its
previously securitized installment receivables and sold them to Newcourt. In
addition, a new $79.2 million of on-balance-sheet installment receivables and
the remaining $17.6 million of related long-term assets were eliminated. The
Corporation received cash proceeds of $141.1 million from these transactions,
resulting in a pre-tax gain of approximately $44 million. Newcourt has the right
to put back to the Corporation the unpaid portion of the extended credit
customer accounts receivable portfolio based on the same pricing formula. As a
result, this gain will be recognized over a two-year period.
Participation in the LLC will enable the Corporation to expand its financial
services product offerings, customer base and geographic reach. The effect of
the transaction on the Corporation's financial statements includes a reduction
in assets on its balance sheet and lower reported finance income, offset by
income from growth in financings, from recognition of the deferred gain on the
sale of receivables and from the application of the cash proceeds, and by a
reduction in credit loss expense. The Corporation expects the transaction, at a
minimum, to be neutral to earnings per share in 1999. On an economic basis, the
Corporation expects its return on net assets and economic profit to be higher
under the new structure.
During the year, the Corporation increased prices by varying degrees in many of
its product groups. Promotional activities negated the effects of the 1998
increases, and reduced the revenue realization in 1997 to approximately 1%.
Other income and expenses: Interest expense for 1998 was $21.3 million, compared
with $17.7 million in 1997 and $12.6 million in 1996. The 1998 and 1997
increases were due to higher average levels of debt outstanding. The decline in
other expense in 1998 is attributable to a $7.5 million gain on the sale of a
European manufacturing facility and lower foreign currency transaction losses.
The increase in other expense in 1997 was primarily because of the deduction of
minority interest income in connection with the Corporation's 50% ownership of
Mitchell Repair Information Company, LLC ("MRIC") and an increase in the loss
from foreign currency transactions.
(Amounts in thousands) 1998 1997 1996
Interest expense $(21,254) $(17,654) $(12,649)
Interest income 1,169 1,163 2,134
Other expense (3,210) (10,370) (1,358)
--------- --------- ---------
Total other expense $(23,295) $(26,861) $(11,873)
========= ========= =========
Income taxes: The Corporation's effective tax rate in 1998, excluding
restructuring and other non-recurring charges, was 36.0%, compared with 37.0% in
1997 and 1996. The decrease in the tax rate was due to the implementation of
several programs that increased the Corporation's tax efficiency. The reported
effective tax rate for 1998 was 144.1%. For additional information about the
Corporation's tax position and activities, see Note 6.
Foreign currency: The Corporation operates in a number of countries and, as a
result, is exposed to changes in exchange rates. Most of these exposures are
managed on a consolidated basis to take advantage of natural offsets through
netting. To the extent that the net exposures are hedged, forward contracts are
used. Refer to Note 7 for a discussion of the Corporation's accounting policies
for the use of derivative instruments.
In 1998, the Corporation adopted SFAS No. 130, "Reporting Comprehensive Income";
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information"; and SFAS No. 132, "Employers' Disclosures about Pension and Other
Postretirement Benefits." The adoption of these standards had no material impact
on the consolidated financial statements. The Corporation intends to adopt SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," in 2000
and is currently evaluating the impact of this statement.
[Two bar graphs follow this text. The first is titled "Return on Net Assets
Employed Before Interest and Taxes." It shows the percentages of the
Corporation's return on net assets employed before interest and taxes for each
of fiscal years 1994 through 1998, as follows:
94 - 18.7%
95 - 21.1%
96 - 24.4%
97 - 25.1%
98 - 16.5%*
* Excludes 1998 charges.
The second graph is titled "Sales per Employee." It shows the Corporation's
sales per employee (in thousands of dollars) for each of fiscal years 1994
through 1998, as follows:
94 - $129
95 - $137
96 - $142
97 - $149
98 - $153]
<PAGE>
Financial Condition
Overview: At the end of 1998, the ratio of total debt to total capital increased
to 30.8% from 16.4% at year-end 1997. The higher debt ratio in 1998 was the
result of acquisitions, share repurchases and increased working capital
requirements during the year.
Liquidity: The Corporation's working capital in 1998 decreased by $47.4 million
following a decrease of $6.8 million in 1997. The sale of installment
receivables during both 1998 and 1997 more than offset the negative effects of
several other components of working capital, primarily inventories, and of
acquisitions. The ratio of current assets to current liabilities was 2.4 to 1 at
the end of 1998, compared with 2.9 to 1 at the end of 1997. Cash and cash
equivalents were $15.0 million at the end of 1998, a decrease of $10.7 million
from year-end 1997's $25.7 million.
Accounts receivable increased $15.1 million to $554.7 million at the end of
1998. The increase was the result of acquisitions partially offset by the
installment receivables securitization program discussed previously and in Note
4. Exclusive of the asset securitizations effected in 1998, receivables
increased by $14.2 million primarily due to acquisitions. At the end of 1998,
installment receivables represented approximately 29% of the Corporation's total
accounts receivable. The majority of accounts receivable at year-end 1998
included those from dealers, industrial customers and governments. Total
write-offs for bad debts represented 2.1% of average accounts receivable in
1998, an increase from 2.0% in 1997, reflecting a slightly more difficult
environment for credit collections. Trends, however, did improve in the second
half of 1998. The Corporation's ratio remains significantly below that of the
credit industry.
Inventories increased by $2.2 million to $375.4 million at the end of 1998
primarily because of acquisitions. Excluding acquisitions and including 1998
charges, inventories were $19.8 million lower at the close of 1998 than the
$373.2 million reported at year-end 1997.
(Amounts in thousands) 1998 1997
Current assets $1,079,832 $1,021,709
Current liabilities 458,053 352,530
- ---------------------------------------------------------------------
Working capital $ 621,779 $ 669,179
Current ratio 2.4 to 1 2.9 to 1
- ---------------------------------------------------------------------
Short-term debt at the end of 1998 was $93.1 million, an increase over the $24.0
million at the 1997 year end. Current maturities of long-term debt at the end of
1998 and 1997 were $2.2 million and $0.4 million, respectively. In addition, at
year-end 1998, the Corporation had $100.0 million in short-term commercial notes
payable outstanding that were classified as long-term, since it is the
Corporation's intent, and it has the ability, to refinance this debt on a
long-term basis, supported by its $100.0 million revolving credit facility. The
Corporation has on file a $300.0 million shelf registration that allows the
Corporation to issue from time to time up to $300.0 million of unsecured
indebtedness. Of this amount, $100.0 million aggregate principal amount of its
notes has been issued to the public.
These sources of borrowing, coupled with cash from operations, are sufficient to
support working capital requirements, finance capital expenditures, make
acquisitions, repurchase common stock and pay dividends. The Corporation's high
credit rating over the years has ensured that external funds are available at a
reasonable cost. At the end of 1998, the Corporation's long-term debt was rated
Aa3 and AA- by Moody's Investor Service and Standard & Poor's, respectively. The
Corporation believes the strength of its balance sheet provides the financial
flexibility to respond to both internal growth opportunities and those existing
through acquisition.
[Two bar graphs follow this text. The first is titled "Total Debt to Total
Capital." It shows the percentages of the Corporation's total debt to total
capital for each of fiscal years 1994 through 1998, as follows:
94 - 13.5%
95 - 18.5%
96 - 17.3%
97 - 16.4%
98 - 30.8%
The second graph is titled "Capital Expenditures." It shows the Corporation's
capital expenditures (in millions of dollars) for each of fiscal years 1994
through 1998, as follows:
94 - $42
95 - $32
96 - $52
97 - $55
98 - $47]
Capital expenditures/Depreciation and amortization: Capital expenditures for
1998 were $46.8 million, a decrease of $8.6 million from the $55.4 million
recorded in 1997. Investments for the year included the upgrade and integration
of the Corporation's computer systems, and the normal addition, replacement and
upgrade of manufacturing and distribution facilities and equipment. The
Corporation anticipates that capital expenditures in 1999 will total $40 million
to $45 million.
Depreciation for 1998 was $34.8 million, up $5.1 million from 1997's $29.7
million. The growth was driven by increased capital spending in 1997 and by
acquisitions. Amortization expense in 1998 was $10.2 million, an increase of
$1.5 million from 1997's $8.7 million. Acquisitions accounted for the higher
expense.
(Amounts in thousands) 1998 1997
Capital expenditures $46,779 $55,442
Depreciation 34,801 29,724
Amortization 10,184 8,653
Dividends: At its June 1998 meeting, the board of directors declared a 4.8%
increase in the quarterly dividend on the Corporation's common stock, raising
the annual dividend rate to $.88 per share. The Corporation has paid consecutive
quarterly dividends since 1939.
1998 1997
Cash dividends paid (in thousands) $50,977 $49,888
Cash dividends per common share $ .86 $ .82
Cash dividends as a % of net income N/M 33.2%
N/M = not meaningful.
[21 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Management's Discussion and Anaylsis (continued)
Stock repurchase program: At its June 1998 meeting, the board of directors
authorized the repurchase of up to $100.0 million of the Corporation's common
stock; this action followed the board's authorization for repurchase of $100.0
million of common stock in 1997. At the end of 1998, the 1997 authorization
essentially had been exhausted, and all of the 1998 authorization remained
available. In addition, an authorization by the board of directors is currently
in effect to repurchase common shares of the Corporation in an amount equivalent
to the number of shares issued in connection with the exercise of options,
employee and dealer stock purchase programs, and other similar issuances. The
intent of this authorization is to prevent dilution of shareholders' interests
arising from such issuances. In 1998, the Corporation repurchased 2,279,400
shares of its common stock; 986,333 shares were repurchased in 1997. Since 1995,
the Corporation has repurchased 8,077,283 shares.
Subsequent to the end of the year, at its January 1999 meeting, the board of
directors authorized the repurchase of up to an additional $50.0 million of the
Corporation's common stock.
Other Matters
Acquisitions: During 1998, the Corporation acquired full or partial ownership of
five new business operations and an additional interest in a business for an
aggregate cash purchase price of $79.5 million. Each of the acquisitions
provides the Corporation with a complementary product line, new customer
relationships, access to additional distribution and/or extended geographic
reach. These acquisitions were 100% interests in White Industries ("White"),
Hein-Werner Corporation ("Hein-Werner"), Nationwide International L.L.C.
("Nationwide"), and G.S. S.r.l. ("G.S."); a 55% interest in Cartec GmbH
("Cartec"); and an additional 10% interest in MRIC. Subsequent to the end of the
year, the Corporation announced that it had exercised its call option to
purchase from its venture partner, The Thomson Corporation, a further stake in
MRIC. The purchase will result in Snap-on's owning 99% of MRIC. The transaction
is expected to be modestly accretive in 1999.
White manufactures equipment used to recover, recycle and recharge refrigerant
in vehicle air-conditioning systems. Hein-Werner is a leading manufacturer of
collision repair products in North America and Europe. Nationwide is a
franchisor of vehicle service and repair facilities. G.S. is an Italy-based
manufacturer and distributor of wheel service equipment. Cartec is a German
manufacturer of test and safety lane equipment. MRIC is a major provider of
print and electronic versions of vehicle mechanical and electrical system repair
information and of shop management software to repair and service establishments
throughout North America.
Year 2000 Compliance: The Corporation is engaged in a comprehensive project
involving its products, information systems, embedded systems and third-party
systems. The objective of this project is to identify, develop, implement and
test any modifications that are required so that these systems will achieve a
Year 2000 date conversion with no disruption to the Corporation's business
operations. A committee has been established and given the responsibility for
achieving this objective.
For the Corporation's information systems, the committee has substantially
completed the first two phases of this project, identification and development,
and is proceeding with the implementation and testing phases of the required
modifications. In North America, the implementation of the Baan enterprise-wide
system, which is Year 2000 compliant, has been completed. In Europe, the
Corporation has begun to upgrade or replace all mission critical systems. These
projects are expected to be completed by the end of the second quarter of 1999,
and no significant issues have been identified.
For third-party systems, the committee has communicated with suppliers, dealers,
financial institutions and others with whom the Corporation does business, and
has received responses from more than 90% of those contacted that they either
are or plan on a timely basis to be Year 2000 compliant. For the Corporation's
currently manufactured products, the committee has worked with most business
units in the testing of their products for compliance and in most cases has
found no indication that these products create date-related issues when used in
customary applications. It is expected that any remaining issues will be
compliant by December 1999. The committee also has been working with its
third-party vendors to test and resolve issues regarding embedded systems. Based
on testing completed to date, no significant issues have been identified.
The Corporation is currently conducting risk assessments of embedded systems at
its facilities and manufacturing plants in North America and Europe. This
assessment is more than 80% complete in North America and is 50% complete in
Europe. These assessments are expected to be completed during the second quarter
of 1999. No significant issues have been identified.
The Corporation has begun, but not yet completed, a comprehensive analysis of
the costs and operational problems that may occur if the Corporation or third
parties fail to achieve Year 2000 compliance on a timely basis. The Corporation
is also in the process of establishing a contingency plan in order to deal with
the most reasonably likely worst-case scenario, although such scenario has not
yet been identified. The Corporation expects to have the analysis complete and a
contingency plan in place by the end of the third quarter of 1999.
The Corporation expects to be fully Year 2000 compliant by the end of the fourth
quarter of 1999. The Corporation has implemented, over the last five years, its
enterprise-wide computer system in North America, which is already Year 2000
compliant. The costs for the remaining compliance activities, which are
primarily outside North America, approximate between $5 million and $7 million
through December 1999. Through the end of 1998, the Corporation has spent $1.6
million on these Year 2000 issues, with funding being provided by cash flows
from operations. None of the Corporation's other information technology projects
have been delayed as a result of these issues.
Value at Risk: The Corporation uses derivative instruments to manage
well-defined interest rate and foreign currency exposures and to limit the
impact of interest rate and foreign currency rate changes on earnings and cash
flows. The Corporation does not use derivative instruments for trading purposes.
[22 Snap-on Incorporated 1998 Annual Report]
<PAGE>
The Corporation utilizes a "Value-at-Risk" ("VAR") model to determine the
potential one-day loss in the fair value of its interest rate and foreign
exchange sensitive financial instruments from adverse changes in market factors.
The VAR model estimates were made assuming normal market conditions and a 95%
confidence level. The Corporation's computations are based on the
interrelationships among movements in various currencies and interest rates
(variance/co-variance technique). These interrelationships were determined by
observing interest rate and foreign currency market changes over the preceding
quarter.
The Corporation has operations in a number of countries and has intercompany
transactions among them and, as a result, is exposed to changes in foreign
currency exchange rates. The Corporation manages most of these exposures on a
consolidated basis, which allows netting certain exposures to take advantage of
any natural offsets. To the extent the net exposures are hedged, forward
contracts are used. The Corporation also enters into interest rate swap
agreements to manage interest costs and risks associated with changing interest
rates.
The estimated maximum potential one-day loss in fair value, calculated using the
VAR model, at January 2, 1999, was $833,000 on interest rate sensitive financial
instruments and $626,000 on foreign currency sensitive financial instruments.
The VAR model is a risk tool and does not purport to represent actual losses in
fair value that will be incurred by the Corporation, nor does it consider the
potential effect of favorable changes in market factors.
Euro Conversion: On January 1, 1999, certain member countries of the European
Union established fixed conversion rates between their existing currencies
("legacy currencies") and one common currency - the euro. The euro trades on
currency exchanges and may be used in business transactions. Beginning in
January 2002, the new euro-denominated bills and coins will be used, and legacy
currencies will be withdrawn from circulation. The Corporation's operating
subsidiaries affected by the euro conversion are developing plans to address the
systems and business issues affected by the euro currency conversion. These
issues include, among others, (i) the need to adapt computer and other business
systems and equipment to accommodate euro-denominated transactions, and (ii) the
competitive impact of cross-border price transparency, which may affect pricing
strategies. The Corporation does not expect this conversion to have a material
impact on its financial condition or results of operations.
Outlook: Subsequent to the end of 1998, the Corporation stated that it believed
that the lower half of the range of published analyst estimates for diluted
earnings per share for 1999, which at that date ranged from $2.60 per share to
$2.95 per share, was more appropriate at that time, as the Corporation takes a
more conservative approach due to the economic uncertainty in some regions of
the world. The Corporation also said it currently anticipated first quarter 1999
earnings to be approximately even with last year's first quarter. The
Corporation's comments about earnings exclude the effects of the remaining
anticipated non-recurring charges related to its Project Simplify initiative.
"Safe Harbor": Statements in this document that are not historical facts,
including statements (i) that include the words "believes," "expects,"
"anticipates," or "estimates" or words of similar importance with reference to
the Corporation or management; (ii) specifically identified as forward-looking;
or (iii) describing the Corporation's or management's future plans, objectives
or goals, are forward-looking statements. The Corporation or its representatives
may also make similar forward-looking statements from time to time orally or in
writing. The Corporation cautions the reader that these statements are subject
to risks, uncertainties and other factors that could cause (and in some cases
have caused) actual results to differ materially from those described in any
such statement. Some of those factors are discussed below, as well as elsewhere
in this document, and in the Corporation's Securities and Exchange Commission
filings. These factors may not constitute all factors that could cause actual
results to differ materially from those discussed in any forward-looking
statement. The Corporation's ability to meet its performance objectives and to
achieve results that may be described in any forward-looking statement is
dependent upon both macro-environmental factors and factors related specifically
to the Corporation or the industries in which it participates. These include,
but are not limited to, the following: the Corporation's ability to withstand
external negative factors, including changes in trade, monetary and fiscal
policies, laws and regulations, or other activities of governments or their
agencies; significant changes in the current competitive environment; general
economic weakness; inflation; currency exchange fluctuations or the material
worsening of the economic or political situation in Asia or other parts of the
world; the degree of the Corporation's success in executing its multiple
brands/multiple channels strategy on a global basis and in integrating its
acquisitions; the maintenance of the positive relationship between the
Corporation and its franchisees that currently exists; the timing or speed with
which the Corporation can implement the Project Simplify initiatives and the
rollout of Snap-on Credit LLC without unanticipated complications; the
continuation of good relations with the Corporation's employees; the
Corporation's ability to manufacture, distribute and/or record the sale of
products during any computer systems-related changes or upgrades; and the
ability to grow through successful identification, negotiation and integration
of new acquisitions, joint ventures or strategic alliances.
The Corporation operates in a continually changing business environment, and new
factors emerge from time to time. The Corporation cannot predict such factors,
nor can it assess the impact, if any, of such factors on the Corporation or its
results. Accordingly, forward-looking statements should not be relied upon as a
prediction of actual results. The Corporation disclaims any responsibility to
update any forward-looking statement provided in this document.
[23 Snap-on Incorporated 1998 Annual Report]
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Earnings
(Amounts in thousands except share data) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,772,637 $1,672,215 $1,485,279
Cost of goods sold 948,761 828,387 734,495
Cost of goods sold - discontinued products 60,562 - -
- ----------------------------------------------------------------------------------------------
Gross profit 763,314 843,828 750,784
Operating expenses 705,811 650,182 594,527
- ----------------------------------------------------------------------------------------------
Operating profit 57,503 193,646 156,257
Net finance income 65,933 71,891 64,269
Restructuring and other non-recurring charges (89,301) - -
- ----------------------------------------------------------------------------------------------
Operating income 34,135 265,537 220,526
Interest expense (21,254) (17,654) (12,649
Other income (expense) - net (2,041) (9,207) 776
- ----------------------------------------------------------------------------------------------
Earnings before income taxes 10,840 238,676 208,653
Income taxes 15,619 88,310 77,202
- ----------------------------------------------------------------------------------------------
Net earnings (loss) $ (4,779) $ 150,366 $ 131,451
==============================================================================================
Earnings (loss) per weighted average
common share - basic $ (.08) $ 2.47 $ 2.16
- ----------------------------------------------------------------------------------------------
Earnings (loss) per weighted average
common share - diluted $ (.08) $ 2.44 $ 2.13
- ----------------------------------------------------------------------------------------------
Weighted average common shares
outstanding - basic 59,219,564 60,845,467 60,967,865
Common stock equivalents - 840,841 624,947
- ----------------------------------------------------------------------------------------------
Weighted average common shares
outstanding - diluted 59,219,564 61,686,308 61,592,812
- ----------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of these statements.
</TABLE>
[24 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Consolidated Balance Sheets
(Amounts in thousands except share data) Jan. 2, 1999 Jan. 3, 1998
- --------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 15,041 $ 25,679
Accounts receivable, less allowance for
doubtful accounts of $29.2 million in 1998
and $20.6 million in 1997 554,703 539,589
Inventories 375,436 373,155
Prepaid expenses and other assets 134,652 83,286
- --------------------------------------------------------------------------------
Total current assets 1,079,832 1,021,709
Property and equipment - net 272,030 265,765
Deferred income tax benefits 60,139 55,699
Intangible and other assets 262,919 298,184
- --------------------------------------------------------------------------------
Total assets $1,674,920 $1,641,357
================================================================================
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 89,442 $ 91,553
Notes payable and current maturities
of long-term debt 93,117 23,951
Accrued compensation 42,105 43,712
Dealer deposits 42,421 43,848
Deferred subscription revenue 34,793 29,265
Accrued restructuring reserves 26,165 -
Other accrued liabilities 130,010 120,201
- --------------------------------------------------------------------------------
Total current liabilities 458,053 352,530
Long-term debt 246,644 151,016
Deferred income taxes 9,587 11,824
Retiree health care benefits 89,124 86,936
Pension and other long-term liabilities 109,245 146,914
- --------------------------------------------------------------------------------
Total liabilities 912,653 749,220
Shareholders' equity
Preferred stock - authorized 15,000,000
shares of $1 par value; none outstanding - -
Common stock - authorized 250,000,000
shares of $1 par value; issued 66,685,169
and 66,472,127 shares 66,685 66,472
Additional paid-in capital 117,384 82,758
Retained earnings 883,207 938,963
Accumulated other comprehensive income (loss) (30,231) (30,385)
Grantor stock trust at fair market value -
6,924,019 and 0 shares (241,042) -
Treasury stock at cost - 1,016,224 and
5,956,313 shares (33,736) (165,671)
- --------------------------------------------------------------------------------
Total shareholders' equity 762,267 892,137
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,674,920 $1,641,357
================================================================================
The accompanying Notes are an integral part of these statements.
[25 Snap-on Incorporated 1998 Annual Report]
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Accumulated Total
Additional Other Grantor Share-
Common Paid-in Retained Comprehensive Stock Treasury holders'
(Amounts in thousands Except share data) Stock Capital Earnings Income(Loss) Trust Stock Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 30, 1995 $43,571 $74,250 $753,356 $(10,758) $ - $(109,687) $750,732
Comprehensive income:
Net earnings for 1996 131,451
Foreign currency translation (3,172)
Total comprehensive income 128,279
Cash dividends - $.76 per share (46,323) (46,323)
Three-for-two stock split net
of fractional shares (common
21,969,677, treasury 1,523,600) 21,971 (21,971) -
Issuance of 20,216 shares under
dividend reinvestment plan 20 760 780
Issuance of 410,661 shares under
stock purchase and option plans 410 12,436 12,846
Purchase of 615,750 shares for treasury (19,184) (19,184)
Tax benefit from certain
stock options and other items 1,031 1,031
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 1996 65,972 66,506 838,484 (13,930) - (128,871) 828,161
Comprehensive income:
Net earnings for 1997 150,366
Foreign currency translation (16,455)
Total comprehensive income 133,911
Cash dividends - $.82 per share (49,887) (49,887)
Issuance of 19,764 shares under
dividend reinvestment plan 20 804 824
Issuance of 480,446 shares under stock
purchase and option plans 480 10,940 11,420
Purchase of 986,333 shares for treasury (42,324) (42,324)
Reissuance of 216,570 shares from treasury 2,380 5,524 7,904
Tax benefit from certain
stock options and other items 2,128 2,128
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at January 3, 1998 66,472 82,758 938,963 (30,385) - (165,671) 892,137
Comprehensive income:
Net loss for 1998 (4,779)
Foreign currency translation 2,694
Minimum pension liability (2,540)
Total comprehensive income (loss) (4,625)
Cash dividends - $.86 per share (50,977) (50,977)
Issuance of 33,620 shares under
dividend reinvestment plan 34 839 873
Issuance of 179,422 shares under stock
purchase and option plans 179 6,055 6,234
Issuance of 175,981 shares from
grantor stock trust under stock
purchase and option plans 3,774 3,774
Purchase of 2,279,400 shares for treasury (90,357) (90,357)
Reissuance of 119,489 shares from treasury 336 3,683 4,019
Establishment of grantor stock trust
with 7,100,000 shares 36,547 (255,156) 218,609 -
Tax benefit from certain stock
options and other items 1,189 1,189
Adjustment of grantor stock trust
to fair market value (10,340) 10,340 -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at January 2, 1999 $66,685 $117,384 $883,207 $(30,231) $(241,042) $(33,736) $762,267
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of these statements.
</TABLE>
[26 Snap-on Incorporated 1998 Annual Report]
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Amounts in thousands) 1998 1997 1996
Operating activities
<S> <C> <C> <C>
Net earnings (loss) $ (4,779) $150,366 $131,451
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation 34,801 29,724 26,644
Amortization of intangibles 10,184 8,653 5,235
Deferred income tax provision 13,125 11,814 8,398
(Gain) loss on sale of assets (7,312) 114 (876)
Charges due to restructuring and other non-recurring charges 107,628 - -
Changes in operating assets and liabilities,
net of effects of acquisitions:
(Increase) decrease in receivables 11,789 133,171 (29,591)
(Increase) in inventories (28,937) (87,502) (10,543)
(Increase) decrease in prepaid and other assets 35,775 (21,188) (59,524)
Increase (decrease) in accounts payable (13,400) (16,562) 12,069
Increase (decrease) in accruals and other liabilities (83,843) (13,696) 53,137
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 75,031 194,894 136,400
Investing activities
Capital expenditures (46,779) (55,442) (52,333)
Acquisitions of businesses (79,543) (62,947) (38,553)
Disposal of property and equipment 16,680 2,159 3,317
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (109,642) (116,230) (87,569)
Financing activities
Payment of long-term debt (3,543) (7,802) (9,902)
Increase in long-term debt 48,221 - 3,205
Increase in short-term borrowings - net 104,165 10,579 7,888
Purchase of treasury stock - net (86,674) (36,800) (19,184)
Proceeds from stock purchase and option plans 12,405 16,752 14,656
Cash dividends paid (50,977) (49,888) (46,323)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 23,597 (67,159) (49,660)
Effect of exchange rate changes on cash 376 (1,176) (32)
Increase (decrease) in cash and cash equivalents (10,638) 10,329 (861)
Cash and cash equivalents at beginning of year 25,679 15,350 16,211
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 15,041 $ 25,679 $ 15,350
- ------------------------------------------------------------------------------------------------------------------
The accompanying Notes are an integral part of these statements.
</TABLE>
[27 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Notes to Consolidated Financial Statements
Note 1 - Summary of Accounting Policies
A summary of significant accounting policies applied in the preparation of the
accompanying consolidated financial statements follows:
a. Nature of operations: The Corporation is a leading global developer,
manufacturer and distributor of hand tools, power tools, tool storage products,
shop equipment, under-hood diagnostics equipment, under-car equipment, emissions
and safety equipment, collision repair equipment, vehicle service information
and business management systems and services. The Corporation's customers
include professional automotive technicians, shop owners, franchised service
centers, national accounts, original equipment manufacturers, and industrial
tool and equipment users worldwide.
b. Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
c. Principles of consolidation: The consolidated financial statements include
the accounts of the Corporation and its subsidiaries, all of which are wholly
owned with the exception of Mitchell Repair Information Company, LLC ("MRIC"),
Edge Diagnostic Systems, Texo S.r.l., Cartech GmbH, and Snap-on Tools/PST Africa
(Pty) Ltd. Significant intercompany accounts and transactions have been
eliminated.
d. Accounting period: The Corporation's accounting period ends on the Saturday
nearest December 31. The 1998, 1997 and 1996 years ended on January 2, 1999,
January 3, 1998, and December 28, 1996. The 1998 and 1996 years contained 52
weeks; 1997 was a 53-week year.
e. Cash equivalents: The Corporation considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. Cash
equivalents are stated at cost, which approximates market value.
f. Inventories: Inventories, consisting of manufactured products and merchandise
for resale, are stated at the lower of cost or market. Manufactured products
include the costs of materials, labor and manufacturing overhead. Inventories
accounted for using the last-in, first-out (LIFO) method approximated 60% and
65% of total inventory as of year-end 1998 and 1997. Remaining inventories are
generally determined using the first-in, first-out (FIFO) cost method. For
detailed inventory information, refer to Note 2.
g. Property and equipment: Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
provided on a straight-line basis over estimated useful lives. Accelerated
depreciation methods are used for income tax purposes. Capitalized software
included in property and equipment reflects costs related to internally
developed or purchased software for internal use that are capitalized and
amortized on a straight-line basis over periods not exceeding seven years. For
detailed property and equipment information, refer to Note 3.
h. Intangibles: During 1998, the Corporation acquired full or partial ownership
of five new business operations and an additional interest in a business for an
aggregate cash purchase price of $79.5 million. During 1997, the Corporation
acquired full or partial ownership of six new business operations with an
aggregate cash purchase price of $62.9 million. Pro forma results of operations
are not presented, as the effect of these acquisitions is not material. Goodwill
arising from business acquisitions is included in Intangible and Other Assets in
the accompanying Consolidated Balance Sheets and is being amortized principally
over 20 years on a straight-line basis. The Corporation continually evaluates
the existence of goodwill impairment on the basis of whether the goodwill is
fully recoverable from projected, undiscounted net cash flows of the related
business unit. Should an impairment be identified, the loss would be measured as
the difference between the current fair value of the asset and the carrying
value. For information on goodwill impairment during 1998, refer to Note 14.
In the first quarter of 1997, the Corporation acquired a 50% interest in The
Thomson Corporation's Mitchell Repair Information business at a purchase price
of $40.2 million. In the first quarter of 1998, the Corporation acquired an
additional 10% interest in MRIC at a purchase price of $10.1 million. Subsequent
to year-end 1998, the Corporation announced its exercise of its call option to
purchase an additional 39% interest in MRIC, which will result in the
Corporation's owning 99% of MRIC. The Corporation is obligated to purchase the
remainder of MRIC within the next three years.
Goodwill, net of accumulated amortization, was $131.5 million and $121.3 million
at the end of 1998 and 1997. Goodwill amortization was $8.5 million, $6.9
million and $4.8 million for 1998, 1997 and 1996. Accumulated amortization of
goodwill was $27.6 million and $25.0 million at the end of 1998 and 1997.
i. Research and engineering: Research and engineering costs are charged to
expense in the year incurred. For 1998, 1997 and 1996, these costs were $48.6
million, $46.5 million and $42.4 million.
j. Income taxes: Deferred income taxes are provided for temporary differences
arising from differences in bases of assets and liabilities for tax and
financial reporting purposes. Deferred income taxes are recorded on temporary
differences at the tax rate expected to be in effect when the temporary
differences reverse. For detailed tax information, refer to Note 6.
[28 Snap-on Incorporated 1998 Annual Report]
<PAGE>
k. Foreign currency translation: The financial statements of the Corporation's
foreign subsidiaries are translated into U.S. dollars in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation." Net assets of certain foreign subsidiaries are translated at
current rates of exchange, and income and expense items are translated at the
average exchange rate for the year. The resulting translation adjustments are
recorded directly into a separate component of shareholders' equity. Certain
other translation adjustments and transaction gains and losses are reported in
net income and were not material in any year.
l. Revenue recognition: The Corporation recognizes revenues at the time that
products are shipped or the time that services are performed. Franchise fee
revenue is recognized as the fees are earned. Revenue from franchise fees was
not material in any year. Subscription revenue is recognized over the life of
the subscription. The total amount of subscription revenue was not material in
any year.
m. Net finance income: Net finance income consists of installment contract
income, dealer start-up loan receivable income, gains on the sale of receivables
and lease income, net of related administrative expenses.
n. Advertising and promotion expense: Production costs of future media
advertising are deferred until the advertising occurs. All other advertising and
promotion costs are generally expensed when incurred.
o. Warranty expense policy: The Corporation provides product warranties for
specific product lines and accrues for estimated future warranty costs in the
period in which the sale was recorded.
p. Accounting standards: In 1998, the Corporation adopted SFAS No. 130,
"Reporting Comprehensive Income"; SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information"; and SFAS No. 132, "Employers'
Disclosures about Pension and Other Postretirement Benefits." The adoption of
these standards had no material impact on the consolidated financial statements.
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which the
Corporation is required to adopt no later than January 1, 2000. The Corporation
is currently evaluating the impact of this statement.
q. Reclassified prior-year amounts: Certain prior-year amounts have been
reclassified to conform with current-year presentation.
r. Per share data: Basic earnings per share calculations were computed by
dividing net earnings by the corresponding weighted average number of common
shares outstanding for the period. The dilutive effect of the potential exercise
of outstanding options to purchase common shares is calculated using the
treasury stock method. Diluted earnings per share is the same as presented for
basic earnings per share in periods where the effect is antidilutive (that is,
the calculation results in increased earnings per share or reduces net loss per
share). The dilutive effect of stock options as of January 2, 1999, was 576,000
shares. These shares, however, are not included in the 1998 calculations due to
their antidilutive nature. In June of 1996, the board of directors approved a
three-for-two split of the Corporation's common stock, which was distributed on
September 10, 1996, to shareholders of record on August 20, 1996. All prior-year
per share and weighted average share information has been retroactively
restated.
Note 2 - Inventories
The components of the Corporation's inventory were as follows:
(Amounts in thousands) 1998 1997
Finished stock $ 359,358 $366,324
Work in process 38,357 42,384
Raw materials 74,192 66,008
Excess of current cost over LIFO cost (96,471) (101,561)
- --------------------------------------------------------------------
Total inventory $ 375,436 $373,155
====================================================================
Note 3 - Property and Equipment
The Corporation's property and equipment values, which are carried at cost, were
as follows:
(Amounts in thousands) 1998 1997
Land $ 19,572 $ 23,980
Buildings and improvements 175,385 163,596
Machinery and equipment 388,862 341,875
- --------------------------------------------------------------------
583,819 529,451
Less: accumulated depreciation (311,789) (263,686)
- --------------------------------------------------------------------
Property and equipment - net $ 272,030 $ 265,765
====================================================================
The estimated service lives of property and equipment are principally as
follows:
Buildings and improvements 3 to 50 years
Machinery and equipment 2 to 15 years
Computer software 2 to 7 years
Transportation vehicles 2 to 6 years
Note 4 - Receivables
Accounts receivable include installment receivable amounts that are due beyond
one year from balance sheet dates. These amounts were approximately $16.5
million and $15.6 million at the end of 1998 and 1997. Gross installment
receivables amounted to $176.9 million and $174.0 million at the end of 1998 and
1997. Of these amounts, $16.8 million and $14.6 million represented unearned
finance charges at the end of 1998 and 1997.
[29 Snap-on Incorporated 1998 Annual Report]
<PAGE>
In 1997, the Corporation created CreditCorp SPC, LLC ("CreditCorp"), a
bankruptcy-remote, special-purpose entity, the sole purpose of which is to sell
to various financial institutions dealer loan receivables, extended credit
customer accounts receivable and equipment lease receivables. These receivables
are secured by the underlying inventory, tools or equipment financed. CreditCorp
is a separate corporate entity with its own separate creditors that will be
entitled to be satisfied out of its assets prior to the distribution of any
value to its shareholders.
CreditCorp has an agreement with a third-party financial institution to sell, on
an ongoing basis and with full recourse to the Corporation, up to $70.0 million
of secured dealer loan receivables in the United States and up to Cdn$10.0
million of secured dealer loan receivables in Canada. These receivables are
created through the financing of franchised dealer operations.
During 1998 and 1997, the Corporation sold the U.S. equivalent of $29.4 million
and $31.5 million of these receivables to the third-party financial institution.
During December 1998, the U.S. dealer finance loan receivables outstanding of
$68.3 million were repurchased from the third-party financial institution and,
along with other dealer finance receivables, were sold to Newcourt Financial USA
Inc. ("Newcourt").
CreditCorp has also entered into a facility that provides for the sale, with
limited recourse, of an undivided interest in a pool of secured extended credit
customer accounts receivable to a third-party financial institution. At the end
of 1998 and 1997, $337.0 million and $300.0 million of interest-bearing
installment receivables were sold under this facility on a revolving basis. The
agreement for revolving purchases terminates in January 1999.
In December 1997, CreditCorp sold, with limited recourse, $73.7 million of
equipment lease receivables to a third-party financial institution. At the end
of 1998, $35.8 million of equipment lease receivables remained outstanding.
Generally, the recourse provisions for the above securitizations as they existed
at year end require the Corporation to provide for the deficiency, if any, that
results from the repossession and subsequent sale of collateral in a default
situation. The Corporation maintains credit reserves pursuant to these recourse
provisions that are based on the Corporation's best estimates of probable losses
under such provisions. The reserves were not material as of January 2, 1999, and
January 3, 1998. The Corporation does not receive collateral from any party to
the securitizations, nor does it have any risk of counterparty non-performance.
In December 1996, the Corporation made the determination to sell equipment lease
receivable originations to a third-party financial institution on an ongoing
basis. During 1998 and 1997, the Corporation sold, with no recourse, $54.1
million and $50.9 million of these lease receivables. The Corporation also sold
lease receivables with limited recourse of $27.6 million and $13.0 million in
1998 and 1997.
All transactions are reflected as sales of accounts receivable in the
accompanying Consolidated Balance Sheets and as increases to operating cash
flows in the accompanying Consolidated Statements of Cash Flows. The gains on
these sales are included in net finance income on the accompanying Consolidated
Statements of Earnings.
Subsequent to year end, CreditCorp repurchased and then sold to Newcourt the
entire pool of $337.0 million of interest-bearing installment receivables and
the outstanding $35.8 million of equipment lease receivables. In addition,
subsequent to year end, CreditCorp sold to Newcourt certain equipment lease
receivables and dealer loan receivables that were held by the Corporation at
year end. For more information, see Note 15.
Note 5 - Short-term and Long-term Debt
Notes payable to banks under bank lines of credit totaled $34.9 million and
$23.6 million at the end of 1998 and 1997.
Commercial notes payable totaled $156.0 million and $51.0 million at the end of
1998 and 1997. The first $100.0 million of commercial paper outstanding is
classified as long-term debt, since it is the Corporation's intent and it has
the ability (supported by a $100.0 million long-term revolving credit facility)
to refinance the debt on a long-term basis. Commercial paper outstanding in
excess of $100.0 million is considered short-term debt, as it is supported by a
$75.0 million short-term revolving credit facility.
For both the long-term and short-term revolving credit facilities, the
Corporation must maintain a specific level of consolidated tangible net worth
and meet certain leverage and subsidiary indebtedness ratios. In addition,
certain capital transactions are restricted. At the end of 1998, the Corporation
was in compliance with all covenants of both commitments. The long-term
commitment terminates on September 5, 2002, and the short-term commitment
terminates on March 22, 1999. At the end of 1998 and 1997, there were no
borrowings under either revolving credit commitment.
Maximum short-term debt outstanding at the end of any month was $237.5 million
in 1998 and $177.4 million in 1997. The average short-term debt outstanding was
$165.2 million in 1998 and $117.6 million in 1997. The weighted average interest
rates on short-term debt were 5.6% in 1998 and 5.5% in 1997. The weighted
average interest rates on long-term and short-term debt outstanding at January
2, 1999, and January 3, 1998, were 6.4% and 6.3%.
The Corporation's long-term debt consisted of the following:
(Amounts in thousands) 1998 1997
Senior unsecured indebtedness $100,000 $100,000
Borrowings supported by a
revolving credit commitment 100,000 51,000
Canadian long-term debt 39,210 -
Other long-term debt 9,679 368
- ----------------------------------------------------------------
248,889 151,368
Less: current maturities (2,245) (352)
- ----------------------------------------------------------------
Total long-term debt $246,644 $151,016
================================================================
[30 Snap-on Incorporated 1998 Annual Report]
<PAGE>
The annual maturities of the Corporation's long-term debt due in the next five
years are $2.2 million in 1999, $2.2 million in 2000, $1.5 million in 2001,
$102.1 million in 2002, and $39.5 million in 2003.
In September 1994, the Corporation filed a registration statement with the
Securities and Exchange Commission that allows the Corporation to issue from
time to time up to $300.0 million of unsecured indebtedness. In October 1995,
the Corporation issued $100.0 million of its notes to the public. The notes
require payment of interest on a semiannual basis at a rate of 6.625% and mature
in their entirety on October 1, 2005. The proceeds of this issuance were used to
repay a portion of the Corporation's outstanding commercial paper and for
working capital and general corporate purposes.
At the end of 1998, the Corporation has a Cdn$60.0 million (equivalent of U.S.
$39.2 million) five-year floating rate loan outstanding. The loan requires
payment of interest quarterly based on the Canadian Bankers Acceptance Rate plus
17.5 basis points. The loan matures in its entirety on June 5, 2003.
Interest payments on debt and on other interest-bearing obligations approximated
$20.9 million, $17.5 million and $13.2 million for 1998, 1997 and 1996.
Note 6 - Income Taxes
Earnings before income taxes consisted of the following:
(Amounts in thousands) 1998 1997 1996
- ---------------------------------------------------------------------
U.S. $(12,128) $210,966 $172,553
Foreign 22,968 27,710 36,100
- ---------------------------------------------------------------------
Total $ 10,840 $238,676 $208,653
=====================================================================
The provision for income taxes consisted of the following:
(Amounts in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Current:
Federal $31,516 $60,551 $55,949
Foreign 8,078 7,555 13,803
State 3,701 8,390 8,997
- --------------------------------------------------------------------------------
Total current 43,295 76,496 78,749
Deferred:
Federal (25,067) 8,493 (615)
Foreign 769 1,865 (428)
State (3,378) 1,456 (504)
- --------------------------------------------------------------------------------
Total deferred (27,676) 11,814 (1,547)
- --------------------------------------------------------------------------------
Total income tax provision $15,619 $88,310 $77,202
================================================================================
A reconciliation of the Corporation's effective income tax rate to the statutory
federal tax rate follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) in tax rate
resulting from:
State income taxes, net of
federal benefit 3.0 2.8 2.4
Foreign sales corporation tax benefit (1.7) (1.2) (1.5)
Restructuring and other
non-recurring charges 108.1 - -
Other (0.3) 0.4 1.1
- --------------------------------------------------------------------------------
Effective tax rate 144.1% 37.0% 37.0%
================================================================================
Temporary differences that give rise to the net deferred tax benefit are as
follows:
(Amounts in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Current deferred income tax benefits:
Inventories $21,309 $18,294 $14,599
Accruals and reserves not
currently deductible 24,702 26,820 36,372
Restructuring and other
non-recurring accruals 23,379 - -
Other (2,551) (491) 56
- --------------------------------------------------------------------------------
Total current (included in
prepaid expenses) 66,839 44,623 51,027
Long-term deferred income tax benefits:
Employee benefits 61,870 61,017 57,299
Net operating losses 38,300 23,277 23,585
Depreciation (21,721) (22,363) (13,409)
Restructuring and other
non-recurring accruals 2,638 - -
Other (1,163) (3,398) (6,528)
Valuation allowance (29,372) (14,658) (12,561)
- --------------------------------------------------------------------------------
Total long-term 50,552 43,875 48,386
- --------------------------------------------------------------------------------
Net deferred income
tax benefit $117,391 $ 88,498 $ 99,413
================================================================================
At January 2, 1999, the Corporation had tax net operating loss carryforwards
("NOLs") totaling $103.6 million as follows:
(Amounts in millions) U.S. Foreign Total
Year of expiration:
1999 - 2002 $ - $ 8.7 $ 8.7
2003 - 2006 33.2 5.3 38.5
2007 - 2011 4.9 1.8 6.7
Indefinite - 49.7 49.7
- --------------------------------------------------------------------------------
$ 38.1 $ 65.5 $ 103.6
================================================================================
[31 Snap-on Incorporated 1998 Annual Report]
<PAGE>
In accordance with current accounting standards, a valuation allowance totaling
$29.4 million, $14.7 million and $12.6 million in 1998, 1997 and 1996 has been
established for deferred income tax benefits related to certain subsidiary loss
carryforwards that may not be realized. Included in this valuation allowance is
$6.7 million that relates to the deferred tax assets recorded from acquisitions.
Any tax benefits subsequently recognized for these deferred tax assets will be
allocated to goodwill.
Realization of the net deferred tax assets is dependent on generating sufficient
taxable income prior to their expiration. Although realization is not assured,
management believes it is more likely than not that the net deferred tax asset
will be realized. The amount of the net deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
The undistributed earnings of all subsidiaries were $121.7 million, $117.0
million and $120.3 million at the end of 1998, 1997 and 1996. The Corporation
does not expect that additional income taxes will be incurred on future
distributions of such earnings and, accordingly, no deferred income taxes have
been provided for the distribution of these earnings to the parent company.
The Corporation made income tax payments of $66.2 million, $76.0 million and
$69.7 million in 1998, 1997 and 1996.
Note 7 - Financial Instruments
The Corporation uses derivative instruments to manage well-defined interest rate
and foreign currency exposures. The Corporation does not use derivative
instruments for trading purposes. The criteria used to determine if hedge
accounting treatment is appropriate are (i) the designation of the hedge to an
underlying exposure, (ii) whether or not overall risk is being reduced and (iii)
if there is a correlation between the value of the derivative instrument and the
underlying obligation.
Foreign Currency Derivative Instruments: The Corporation has operations in a
number of countries and has intercompany transactions among them, and, as a
result, is exposed to changes in foreign currency exchange rates. The
Corporation manages most of these exposures on a consolidated basis, which
allows netting certain exposures to take advantage of any natural offsets. To
the extent the net exposures are hedged, forward contracts are used. Gains
and/or losses on these foreign currency hedges are included in income in the
period in which the exchange rates change. Gains and/or losses have not been
material to the consolidated financial statements.
At January 2, 1999, the Corporation had outstanding foreign exchange forward
contracts in Australian dollars, British pounds, Canadian dollars, Dutch
guilders, French francs, German marks, Irish punts, Italian lira, Singapore
dollars and Spanish pesetas totaling $113.9 million. At January 3, 1998, the
Corporation had outstanding foreign exchange forward contracts totaling $79.8
million.
Interest Rate Swap Agreements: The Corporation enters into interest rate swap
agreements to manage interest costs and risks associated with changing interest
rates. The differentials paid or received on interest rate agreements are
accrued and recognized as adjustments to interest expense. Gains and losses
realized upon settlement of these agreements are deferred and amortized to
interest expense over a period relevant to the agreement if the underlying
hedged instrument remains outstanding, or immediately if the underlying hedged
instrument is settled.
The Corporation has interest rate swap agreements in place to pay fixed interest
rates in exchange for floating interest rate payments. At January 2, 1999, and
January 3, 1998, the notional principal amount outstanding of these agreements
was $167.0 million and $32.1 million.
Credit Concentrations: The Corporation is exposed to credit losses in the event
of non-performance by the counterparties to its interest rate swap and foreign
exchange contracts. The Corporation does not anticipate non-performance by the
counterparties. The Corporation does not obtain collateral or other security to
support financial instruments subject to credit risk but monitors the credit
standing of the counterparties and enters into agreements only with financial
institution counterparties with a credit rating of A- or better.
While the Corporation sells primarily to professional technicians and shop
owners, the Corporation's accounts receivable do not represent significant
concentrations of credit risk because of the diversified portfolio of individual
customers and geographic areas.
Fair Value of Financial Instruments: Statement of Financial Accounting Standards
No. 107, "Disclosure about Fair Value of Financial Instruments," requires the
Corporation to disclose the fair value of financial instruments for both on- and
off-balance sheet assets and liabilities for which it is practicable to estimate
that value. The following methods and assumptions were used in estimating the
fair value for financial instruments:
Installment contracts: A discounted cash flow analysis was performed over
the average life of a contract using a discount rate currently available to
the Corporation adjusted for credit quality, cost and profit factors. As of
January 2, 1999, and January 3, 1998, the fair value was approximately
$168.9 million and $168.2 million versus a book value of $159.6 million and
$159.4 million.
Interest rate swap agreements: The fair value of the agreements was based on
a quote from the financial institution with which the Corporation executed
the transactions. As of January 2, 1999, and January 3, 1998, the cost to
terminate the agreements was $6.1 million and $1.0 million.
All other financial instruments: The carrying amounts approximate fair value
based on quoted market prices or discounted cash flow analysis for cash
equivalents, debt, forward exchange contracts and other financial
instruments.
[32 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Note 8 - Pension Plans
The Corporation has several non-contributory pension plans covering most
employees, including certain employees in foreign countries, as well as a
contributory plan covering certain salaried employees in Canada. Retirement
benefits are generally provided based on employees' years of service and average
earnings or stated amounts for years of service. Normal retirement age is 65,
with provisions for earlier retirement. The Corporation recognizes retirement
plan expenses in accordance with Statement of Financial Accounting Standards No.
87, "Employers' Accounting for Pensions," and contributes amounts to the plans,
with most using the actuarially computed entry age normal cost method, which
includes, in certain defined retirement benefit plans, amortization of past
service cost over a maximum of 30 years.
The status of the Corporation's North American pension plans was as follows:
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------------
Change in projected benefit obligation
Benefit obligation at beginning of year $ 405,666 $364,353
Service cost 15,865 14,630
Interest cost 29,653 28,047
Plan amendments 1,159 216
Benefits paid (19,264) (16,570)
Plan participant contributions 461 437
Curtailment gain (2,731) -
Actuarial loss 61,267 14,553
- --------------------------------------------------------------------------
Benefit obligation at end of year 492,076 405,666
- --------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year 467,835 395,997
Actual return on plan assets 48,212 84,155
Contributions by employer 6,718 3,816
Contributions by plan participants 461 437
Benefits paid (19,264) (16,570)
- --------------------------------------------------------------------------
Fair value of plan assets at end of year 503,962 467,835
- --------------------------------------------------------------------------
Funded status 11,886 62,169
Unrecognized net assets at year-end (4,757) (6,697)
Unrecognized net gain from
experience different than assumed (76,530) (123,881)
Unrecognized prior service cost 9,272 9,173
- --------------------------------------------------------------------------
Net amount recognized $(60,129) $(59,236)
==========================================================================
(Amounts in thousands) 1998 1997
- --------------------------------------------------------------------------
Amounts recognized in the statement
of financial position consist of:
Prepaid benefit cost $ 16,383 $ 10,491
Accrued benefit liability (79,532) (70,280)
Intangible asset 480 553
Additional minimum liability 2,540 -
- --------------------------------------------------------------------------
Net amount recognized $ (60,129) $(59,236)
==========================================================================
The Corporation's net pension expense included the following components:
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Service cost - benefits
earned during year $15,865 $14,630 $13,191
Interest cost on projected benefits 29,653 28,047 25,657
Less: actual return on plan assets (39,551) (76,768) (40,788)
Curtailment gain (2,731) - -
Net amortization and deferral:
Actual return on plan assets in
excess of projected return 5,532 46,641 14,226
Amortization of net
assets at transition (1,268) (1,193) (1,084)
Other 1,096 1,170 865
- -----------------------------------------------------------------------------
Net pension expense $ 8,596 $12,527 $12,067
=============================================================================
Related to the Corporation's restructuring initiatives, the Corporation's
actuaries have estimated future pension curtailment gains to be $10 million. The
Corporation will recognize these gains as the initiatives are completed.
<PAGE>
The assumptions used in determining pension costs and the projected benefit
obligation were:
1998 1997
-------------------------------------------
U.S. Canada U.S. Canada
- ----------------------------------------------------------------------------
Discount rate 7.0% 8.5% 7.5% 8.5%
Expected long-term rate
of return on plan assets 9.0% 8.5% 9.0% 8.5%
Expected rate of
increase in future
compensation levels 5.0% 7.0% 5.0% 7.0%
- ----------------------------------------------------------------------------
Plan assets are stated at market value and primarily consist of corporate
equities and various debt securities.
The pension liability for 1998 consists of a current liability of $4.5 million
and a long-term liability of $55.6 million. The long-term liability represents
pension obligations that are not expected to be funded during the next 12
months.
The Corporation has pension plans in which the projected benefit obligation
exceeds the fair value of plan assets. At the end of 1998, the Corporation had
three such plans with an aggregate projected benefit obligation of $49.4 million
and an aggregate fair value of plan assets of $32.0 million. At the end of 1997,
the Corporation had two such plans with an aggregate projected benefit
obligation of $13.6 million and no plan assets.
Note 9 - Retiree Health Care
The Corporation provides certain health care benefits for most retired U.S.
employees. The majority of the Corporation's U.S. employees become eligible for
those benefits if they reach early retirement age while working for the
Corporation; however, the age and service requirements for eligibility under the
plans have been increased for certain employees hired on and after specified
dates since 1992. Generally, most plans pay stated percentages of
[33 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Notes to Consolidated Financial Statements (continued)
covered expenses after a deductible is met. There are several plan designs, with
more recent retirees being covered under a comprehensive major medical plan. In
determining benefits, the plans take into consideration payments by Medicare and
other coverages.
For employees retiring under the comprehensive major medical plans,
contributions are required, and these plans contain provisions allowing for
benefit and coverage changes. The plans require retirees to contribute either
the full cost of the coverage or amounts estimated to exceed a capped per
retiree annual cost commitment by the Corporation. Most employees hired since
1994 are required to pay the full cost. The Corporation does not fund the
retiree health care plans.
The Corporation recognizes postretirement health care expense in accordance with
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions."
The components of the expense for postretirement health care benefits are as
follows:
(Amounts in thousands) 1998 1997 1996
- ---------------------------------------------------------------------------
Net periodic cost
Service cost - benefits attributed
to service during the period $ 1,966 $ 1,945 $ 2,012
Interest cost on accumulated
postretirement benefit obligation 5,494 5,467 5,273
Curtailment gain (403) - -
Amortization of unrecognized
net gain (572) (527) (487)
- ---------------------------------------------------------------------------
Net postretirement health
care expense $ 6,485 $ 6,885 $ 6,798
===========================================================================
The status of the Corporation's U.S. postretirement plans was
as follows:
(Amounts in thousands) 1998 1997
- -----------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $ 77,780 $ 73,015
Service cost 1,966 1,945
Interest cost 5,494 5,467
Plan participants' contributions 656 543
Benefits paid (4,378) (4,690)
Curtailment gain (403) -
Actuarial loss 2,436 1,500
- -----------------------------------------------------------------------
Benefit obligation at end of year 83,551 77,780
- -----------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year - -
Plan participants' contributions 656 543
Contributions by employer 3,722 4,147
Benefits paid (4,378) ( 4,690)
- -----------------------------------------------------------------------
Fair value of plan assets at end of year - -
- -----------------------------------------------------------------------
Funded status (83,551) (77,780)
Unrecognized actuarial gain (10,032) (13,040)
- -----------------------------------------------------------------------
Postretirement liability $ (93,583) $ (90,820)
=======================================================================
The accumulated postretirement benefit obligation at the end of 1998 consists of
a current liability of $4.5 million and a long-term liability of $89.1 million.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% at the end of 1998 and 7.5% at the
end of 1997.
The actuarial calculation assumes a health care trend rate of 7.5% in 1998 for
benefits paid on pre-Medicare retirees, decreasing gradually to 4.0% in the year
2007 and thereafter. For benefits paid on Medicare-eligible retirees, a health
care trend rate of 7.3% was assumed in 1998, decreasing to 4.0% in the year 2007
and thereafter.
As of January 2, 1999, a one percentage point increase or decrease in the health
care cost trend rate for future years would not materially affect the
accumulated postretirement benefit obligation or the service cost and interest
cost components.
Related to the Corporation's restructuring initiatives, the Corporation's
actuaries have estimated future postretirement curtailment gains to be $2
million. The Corporation will recognize these gains as the initiatives are
completed.
Note 10 - Stock Option and Purchase Plans
On June 28, 1996, the board of directors approved a three-for-two stock split of
the Corporation's common stock. Distribution of shares in connection with the
stock split was made on September 10, 1996. All share-related amounts in these
financial statements reflect that split.
The Corporation has a stock option plan for directors, officers and key
employees, with expiration dates on the options ranging from 1999 to 2008. The
plan provides that options be granted at exercise prices equal to market value
on the date the option is granted.
The Corporation offers shareholders a convenient way to increase their
investment in the Corporation through a no-commission dividend reinvestment and
stock purchase plan. Participating shareholders may invest the cash dividends
from all or a portion of their common stock to buy additional shares. The
program also permits new investors and current shareholders to invest cash for
additional shares that are purchased for them each month. For 1998, 1997 and
1996, shares issued under the dividend reinvestment and stock purchase plan
totaled 33,620, 19,764 and 24,283. At January 2, 1999, 1,945,470 shares were
available for purchase under this plan.
Employees of the Corporation are eligible to participate in an employee stock
ownership plan. The purchase price of the common stock is the lesser of the mean
of the high and low price of the stock on the beginning date (May 15) or ending
date (May 14) of each plan year. The board of directors may terminate this plan
at any time. For 1998, 1997 and 1996, shares issued under the employee stock
ownership plan totaled 81,114, 120,978 and 131,432. At January 2, 1999, shares
totaling 709,491 were reserved for issuance to employees under this plan, and
the Corporation held contributions of approximately $1.5 million for the
purchase of common stock.
[34 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Franchised dealers are eligible to participate in a dealer stock ownership plan.
The purchase price of the common stock is the lesser of the mean of the high and
low price of the stock on the beginning date (May 15) or ending date (May 14) of
each plan year. The board of directors may terminate this plan at any time. For
1998, 1997 and 1996, shares issued under the dealer stock ownership plan totaled
117,825, 133,679 and 117,902. At January 2, 1999, 513,159 shares were reserved
for issuance to franchised dealers under this plan, and the Corporation held
contributions of approximately $1.9 million for the purchase of common stock.
Non-employee directors receive a mandatory minimum of 50% and an elective
maximum of up to 100% of their fees and retainer in shares of the Corporation's
stock. Directors may elect to defer receipt of all or part of these shares. For
1998, 1997 and 1996, shares issued under the Directors' Fee Plan totaled 5,060,
3,008 and 3,140. Additionally, receipt of 3,951, 3,226 and 6,327 shares was
deferred in 1998, 1997 and 1996. At January 2, 1999, 259,085 shares were
reserved for issuance to directors under this plan.
The Corporation adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," effective January 1996. As
permitted, the Corporation continued its current method of accounting for
stock-based compensation plans in accordance with Accounting Principles Board
Opinion No. 25.
In accordance with SFAS No. 123, the fair value of each option grant was
estimated as of the date of grant using an option pricing model. The Corporation
used the following weighted average assumptions, under the Black-Scholes option
pricing model, for options granted in 1998, 1997 and 1996, respectively:
expected volatility of 21.2%, 17.9% and 21.6%; risk-free interest rates of 5.5%,
6.4% and 5.7%; dividend yield of 2.5%, 2.8% and 3.1%; and expected option lives
of 5.8 years, 5.8 years and 6.9 years. If the Corporation had elected to
recognize compensation cost for stock-based compensation consistent with the
methodology prescribed by SFAS No. 123, net earnings and net earnings per share
for 1998, 1997 and 1996, would have changed to the following pro forma amounts:
(Amounts in thousands except per share data) 1998 1997 1996
- -----------------------------------------------------------------------------
Net earnings (loss):
As reported $(4,779) $150,366 $131,451
Pro forma (7,896) 148,354 130,595
Earnings (loss) per share - diluted:
As reported $ (.08) $ 2.44 $ 2.13
Pro forma (.13) 2.41 2.12
- -----------------------------------------------------------------------------
Stock option activity was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 2,114,228 $25.37 2,007,423 $21.90 2,498,742 $21.54
Granted 585,950 39.77 480,125 37.13 72,000 30.52
Exercised (280,020) 21.84 (364,802) 21.64 (370,146) 20.78
Canceled (22,022) 34.74 (8,518) 31.24 (193,173) 22.56
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of period 2,398,136 $29.21 2,114,228 $25.37 2,007,423 $21.90
===================================================================================================================================
Exercisable at end of period 1,641,296 $24.71 1,663,253 $22.18 1,792,859 $21.88
Available for grant at end of period 2,507,818 3,071,746 3,543,353
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
As calculated using the Black-Scholes option pricing model, the weighted average
fair value of options granted during the years ended January 2, 1999, January 3,
1998, and December 28, 1996, were $8.92, $7.86 and $6.99. The following table
summarizes information about stock options outstanding as of January 2, 1999:
<TABLE>
<CAPTION>
1998 Options Outstanding 1998 Options Exercisable
- ----------------------------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$19 to $25 1,274,222 4.1 $ 21.48 1,274,222 $ 21.48
$25 to $31 60,789 6.5 29.47 60,789 29.47
$31 to $38 495,675 8.0 36.79 282,285 36.65
$38 to $46 567,450 9.0 39.94 24,000 43.69
- ----------------------------------------------------------------------------------------------------------------------------
Totals 2,398,136 6.2 $ 29.21 1,641,296 $ 24.71
============================================================================================================================
</TABLE>
[35 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Notes to Consolidated Financial Statements (continued)
Note 11 - Capital Stock
In 1996, the Corporation's board of directors approved an ongoing authorization
to repurchase stock in an amount equivalent to that necessary to prevent
dilution created by shares issued for stock options, employee and dealer stock
purchase plans, and other corporate purposes. On June 27, 1997, the
Corporation's board of directors authorized the repurchase of $100.0 million of
the Corporation's common stock over a two-year period. On June 26, 1998, the
Corporation's board of directors authorized an additional share repurchase
program aggregating $100.0 million of the Corporation's common stock. In 1998,
the Corporation repurchased 2,279,400 shares of its common stock at an average
price of $39.64. In 1997, the Corporation repurchased 986,333 shares of its
common stock at an average price of $42.91. Subsequent to year-end 1998, the
Corporation's board of directors authorized an additional share repurchase
program of $50.0 million.
The board of directors declared on August 22, 1997, a dividend distribution of
one preferred stock purchase right for each share of the Corporation's
outstanding common stock. The rights are exercisable only if a person or group
acquires 15% or more of the Corporation's common stock ("Acquiring Person") or
publicly announces a tender offer to become an Acquiring Person. Each right may
then be exercised to purchase one one-hundred-and- fiftieth of a share of Series
A Junior Preferred Stock for $190, but if a person or group becomes an Acquiring
Person, then each right entitles the holder (other than an Acquiring Person) to
acquire common stock of the Corporation having a market value equivalent to two
times the current purchase price. If the Corporation is acquired in a merger or
other business combination not approved by the board of directors, then each
holder of a right will be entitled to purchase common stock of the surviving
company having a market value equivalent to two times the current purchase
price. The effect of the rights is to cause ownership dilution to a person or
group attempting to acquire the Corporation without approval of the
Corporation's board of directors. The rights expire on November 3, 2007, and may
be redeemed by the Corporation at a price of $.01 per right under certain
circumstances.
At the end of the second quarter of 1998, the Corporation created a Grantor
Stock Trust ("GST"). In conjunction with the formation of the GST, the
Corporation sold 7.1 million shares of treasury stock to the GST. The sale of
these shares had no net impact on shareholders' equity or on the Corporation's
Consolidated Statements of Earnings. The GST is a funding mechanism for certain
benefit programs and compensation arrangements, including the incentive stock
program and employee and franchised dealer stock purchase plans. The Northern
Trust Company, as trustee of the GST, will vote the common stock held by the GST
based on the directions of non-director employees holding vested options and
certain employees and dealer participants in those stock purchase plans, as set
forth in the GST agreement. The GST is recorded as Grantor Stock Trust at Fair
Market Value on the accompanying Consolidated Balance Sheets. Shares owned by
the GST are accounted for as a reduction to shareholders' equity until used in
connection with employee benefits. Each period, the shares owned by the GST are
valued at the closing market price, with corresponding changes in the GST
balance reflected in additional paid-in capital.
Note 12 - Commitments and Contingencies
The Corporation has entered into certain operating lease agreements on
facilities and computer equipment, which extend for varying amounts of time.
The Corporation's lease commitments require future payments as follows:
Year Ending (Amounts in thousands)
- -----------------------------------------------
1999 $24,331
2000 17,304
2001 10,425
2002 5,316
2003 4,252
2004 and thereafter 2,875
- -----------------------------------------------
Rent expenses for worldwide facilities and computer equipment were $22.7
million, $18.6 million and $18.0 million in 1998, 1997 and 1996.
Tejas Testing Technology One, L.C. and Tejas Testing Technology Two, L.C. (the
"Tejas Companies"), former subsidiaries of the Corporation, previously entered
into contracts with the Texas Natural Resources Conservation Commission
("TNRCC"), an agency of the State of Texas, to perform automotive emissions
testing services. The Corporation guaranteed payment (the "Guaranty") of the
Tejas Companies' obligations under a seven-year lease agreement in the amount of
approximately $98.8 million plus an interest factor, pursuant to which the Tejas
Companies leased the facilities necessary to perform the contracts. The Guaranty
was assigned to the lessor's lenders. The Tejas Companies agreed to indemnify
the Corporation for any payments it must make under the Guaranty.
The State of Texas subsequently terminated the emissions program described in
the contracts. The Tejas Companies filed for bankruptcy and commenced litigation
in state and federal court against the TNRCC and related entities. The
Corporation has recorded as assets the net amounts paid under the Guaranty,
which are expected to be received from the State of Texas pursuant to a
settlement agreement approved by the U.S. Bankruptcy Court. Under this
settlement agreement, the obligation under the Guaranty previously recorded as a
contingent liability in the amount of $38.5 million was satisfied, leaving an
expected receivable of $55.2 million. In 1998, the Corporation received $18.2
million, leaving a net receivable balance of $37.0 million as of January 2,
1999. This amount is included in Intangible
[36 Snap-on Incorporated 1998 Annual Report]
<PAGE>
and Other Assets on the accompanying Consolidated Balance Sheets. The
Corporation expects to receive further payments in an amount sufficient to
satisfy the balance of the net receivable by August 31, 2001, which payments are
subject to legislative appropriation. The Corporation believes that ultimate
recovery of the net receivable is probable.
In April 1996, the Corporation filed a complaint against SPX Corporation
alleging infringement of the Corporation's patents and asserting claims relating
to SPX's hiring of the former president of Sun Electric. SPX filed a
counterclaim, alleging infringe- ment of certain SPX patents. Upon the
Corporation's request for reexamination, the U.S. Patent and Trademark Office
initially rejected SPX's patents as invalid, but recently reconfirmed them.
Document and deposition discovery is proceeding. The Court has set a trial date
of April 5, 1999, for the non-patent claims. No trial date has yet been set for
the patent claims. The Corporation believes it has numerous meritorious defenses
to SPX's claims, including defenses of patent invalidity and non-infringement,
and intends to vigorously prosecute the claims it has raised. Neither the
complaint nor the counterclaim contains specific allegations of damages;
however, the parties' claims could involve multiple millions of dollars. It is
not possible at this time to assess the outcome of any of the claims.
The Corporation is involved in various legal matters, which are being defended
and handled in the ordinary course of business. Although it is not possible to
predict the outcome of these matters, management believes that the results will
not have a material impact on the Corporation's financial statements.
Note 13 - Segments
In 1998, the Corporation adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which changes the way the Corporation reports information about its operating
segments. The information for 1997 and 1996 has been restated from the prior
years' presentation in order to conform to the 1998 presentation.
The Corporation's segments are based on the organization structure that is used
by management for making operating and investment decisions and for assessing
performance. Based on this management approach, the Corporation has five
reportable segments: North America Transportation, North America Other, Europe,
International and Financial Services. The North America Transportation segment
consists of the Corporation's business operations serving the franchised dealer
channel in the United States and Canada. The North America Other segment
consists of the Corporation's business operations serving the direct sales and
distributor channels in the United States and Canada, as well as the
Corporation's exports from the United States. The Europe segment consists of the
Corporation's operations in Europe and Africa. The International segment
consists of the Corporation's operations in the Asia/Pacific region and Latin
America. These four segments derive revenues primarily from the sale of tools
and equipment. The Financial Services segment provides financing to technicians
and shop owners, as well as to dealers.
The accounting policies of the reportable segments are the same as those
described in Note 1. The Corporation evaluates the performance of its operating
segments based on operating income. The Corporation accounts for intersegment
sales and transfers based on established sales prices between the segments,
which represent cost plus an intercompany markup. The Corporation allocates
shared service expenses to those segments that utilize the services based on
their percentages of revenues from external sources. The Corporation has charged
license fees to its North America segments based on their percentages of certain
North America sales. Corporate expenses related to restructuring and other
non-recurring charges are not allocated to the reportable segments.
Neither the Corporation nor any of its segments depends on any single customer,
small group of customers or government for more than 10% of its sales.
<PAGE>
Financial data by segment is as follows:
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Revenues from external customers
North America Transportation $ 845,828 $ 836,032 $ 786,609
North America Other 457,255 468,692 341,194
Europe 393,460 279,684 271,957
International 76,094 87,807 85,519
- -----------------------------------------------------------------------------
Total from reportable segments $1,772,637 $1,672,215 $1,485,279
=============================================================================
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Intersegment revenues
North America Transportation $ 11 $ 71 $ 6
North America Other 285,157 317,962 221,625
Europe 8,932 3,539 764
International 37,280 27,937 25,812
- -----------------------------------------------------------------------------
Total from reportable segments 331,380 349,509 248,207
Elimination of
intersegment revenue (331,380) (349,509) (248,207)
- -----------------------------------------------------------------------------
Total consolidated
intersegment revenue $ - $ - $ -
=============================================================================
[37 Snap-on Incorporated 1998 Annual Report]
<PAGE>
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Operating income
North America Transportation $ 34,176 $ 70,205 $ 48,592
North America Other 70,909 98,143 84,764
Europe 3,205 16,539 11,800
International 9,775 8,759 11,101
Financial Services 65,933 71,891 64,269
- -----------------------------------------------------------------------------
Total from reportable segments 183,998 265,537 220,526
Corporate restructuring and
other non-recurring charge (149,863) - -
- -----------------------------------------------------------------------------
Consolidated operating income 34,135 265,537 220,526
Interest expense (21,254) (17,654) (12,649)
Other income (expense) - net (2,041) (9,207) 776
- -----------------------------------------------------------------------------
Total consolidated earnings
before taxes $ 10,840 $ 238,676 $ 208,653
=============================================================================
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Total assets
North America Transportation $ 517,334 $ 523,342 $ 436,101
North America Other 565,174 618,813 395,742
Europe 406,257 288,899 213,912
International 37,012 39,012 39,293
Financial Services 231,092 254,903 420,931
- -----------------------------------------------------------------------------
Total from reportable segments 1,756,869 1,724,969 1,505,979
Elimination of
intersegment receivables (145,065) (168,910) (121,112)
Unallocated corporate assets 63,116 85,298 135,921
- -----------------------------------------------------------------------------
Total consolidated net assets $1,674,920 $1,641,357 $1,520,788
=============================================================================
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Depreciation and amortization
North America Transportation $ 16,530 $ 11,824 $ 12,864
North America Other 18,161 18,884 11,781
Europe 8,453 5,391 5,609
International 1,314 1,973 1,434
Financial Services 527 305 191
- -----------------------------------------------------------------------------
Total from reportable segments $ 44,985 $ 38,377 $ 31,879
=============================================================================
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Capital expenditures
North America Transportation $ 7,155 $ 6,643 $ 5,704
North America Other 14,193 25,202 3,361
Europe 6,398 9,058 11,741
International 1,841 1,929 831
Financial Services 1,229 2,113 3
- -----------------------------------------------------------------------------
Total from reportable segments 30,816 44,945 21,640
Unallocated corporate
capital expenditures 15,963 10,497 30,693
- -----------------------------------------------------------------------------
Total consolidated
capital expenditures $ 46,779 $ 55,442 $ 52,333
=============================================================================
<PAGE>
(Amounts in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Geographic information
Revenues*
United States $1,239,970 $1,221,790 $1,051,587
All other countries 532,667 450,425 433,692
- -----------------------------------------------------------------------------
Total revenues $1,772,637 $1,672,215 $1,485,279
=============================================================================
Long-lived assets
United States $ 445,987 $ 491,514 $ 384,375
All other countries 88,962 72,435 63,676
- -----------------------------------------------------------------------------
Total long-lived assets $534,949 $ 563,949 $ 448,051
=============================================================================
*Revenues are attributed to countries based on the origin of the sale.
Products and services: The Corporation derives revenue from a broad line of
products and complementary services that can be divided into two groups: tools
and equipment. The following table shows the consolidated sales of these product
groups in the last three years:
1998 1997 1996
- ---------------------------------------------------------------------------
Tools $ 918,492 $ 918,238 $ 857,083
Equipment 854,145 753,977 628,196
- ---------------------------------------------------------------------------
Total $1,772,637 $1,672,215 $1,485,279
===========================================================================
Note 14 - Restructuring
In 1998, the Corporation announced a simplification initiative ("Project
Simplify"), which is a broad program of internal rationalizations,
consolidations and reorganizations. The goal is to make the Corporation's
business operations simpler and more effective. Project Simplify will result in
the closing of six manufacturing facilities, seven warehouses and 47 small
offices in North America and Europe; the elimination of 1,100 positions; the
discontinuance of 12,000 stock keeping units ("SKUs") of inventory; and the
consolidation of certain business units. Total charges for Project Simplify are
composed of restructuring charges, other non-recurring charges and related
transitional costs.
During 1998, the Corporation recorded pre-tax charges of $149.9 million. This
amount consists of $75.6 million of restructuring charges and $74.3 million of
other non-recurring charges.
[38 Snap-on Incorporated 1998 Annual Report]
<PAGE>
The composition of the Corporation's $75.6 million restructuring charges is as
follows:
<TABLE>
<CAPTION>
Original Write-down Restructuring
Restructuring Additions of Assets Reserves as of
(Amounts in thousands) Reserves to Reserves to Fair Value Cash Payments January 2, 1999
- ----------------------------------------------------------------------------------------------------------------------------------
Expenditures for
<S> <C> <C> <C> <C> <C>
severance and other exit costs $ 21,105 $1,969 $ - $ (6,569) $ 16,505
Loss on the write-down
of intangibles and goodwill 36,240 298 (36,538) - -
Charges for warranty provisions 9,660 - - - 9,660
Loss on the write-down of assets 5,978 357 (6,335) - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total restructuring reserves $ 72,983 $2,624 $ (42,873) $ (6,569) $ 26,165
==================================================================================================================================
</TABLE>
The Corporation has recorded restructuring charges of $15.5 million for
severance and of $7.6 million for non-cancelable lease agreements on facilities
to be closed and other exit costs associated with Project Simplify. Severance
costs provided for worldwide salaried and hourly employees relate to facility
closures, duplicate position eliminations and streamlining operations. As of
January 2, 1999, 509 employees have separated from the Corporation, and
severance payments of $4.4 million have been made. The Corporation has adjusted
property, plant and equipment and other assets to net realizable value through
an additional $6.3 million restructuring charge.
As part of the restructuring efforts, the Corporation has also written down
impaired goodwill and other intangible assets of certain discontinued business
units by $36.5 million. The majority of this write-down relates to Computer
Aided Services, Inc. and Edge Diagnostic Systems. No net realizable value was
assessed for these intangible assets due to the closure of these operations and
the discontinuance of their product lines. As part of the elimination of these
business units and their product lines, the Corporation has recorded a charge in
the amount of $9.7 million to provide additional warranty support, at no cost to
the customer, for products already sold. The warranty reserve has been included
in Cost of Goods Sold - Discontinued Products, while all remaining restructuring
charges have been included in Restructuring and Other Non-recurring Charges on
the accompanying Consolidated Statements of Earnings.
As part of Project Simplify, the Corporation has recorded other non-recurring
charges in the amount of $74.3 million. These charges include $50.9 million to
re-value discontinued SKUs of inventory, costs to resolve certain legal matters
in the amount of $18.7 million and other transitional costs in the amount of
$4.7 million. The reduction of SKUs is an effort to reduce the transaction costs
and working capital intensity of the Corporation's product offering, and refocus
on high-volume growth products. The charge for certain legal matters includes
legal costs to conclude these issues. The non-recurring charge related to the
reduction of SKUs has been included as part of Cost of Goods Sold - Discontinued
Products, while the remaining non-recurring charges have been included in
Restructuring and Other Non-recurring Charges on the accompanying Consolidated
Statements of Earnings.
Shown below is a breakdown of charges by segment; these charges have not been
allocated to reportable segments:
(Amounts in thousands) Restructuring Non-recurring Total
- -------------------------------------------------------------------------------
North America Transportation $ 9,661 $13,576 $ 23,237
North America Other 51,810 51,046 102,856
Europe 7,900 4,789 12,689
International 2,836 4,841 7,677
Financial Services 3,400 4 3,404
- -------------------------------------------------------------------------------
Total $75,607 $74,256 $149,863
================================================================================
Note 15 - Subsequent Events
On January 3, 1999, the Corporation established a joint venture with Newcourt
Financial USA Inc. ("Newcourt") to provide financial services to the
Corporation's global dealer and customer network through a limited liability
company known as Snap-on Credit LLC ("the LLC"). The entity is 50% owned by each
company. As a result of the establishment of the joint venture, the Corporation
effectively outsourced to the LLC its captive credit function. The captive
credit function was previously managed by the Corporation's wholly owned
subsidiary Snap-on Credit Corporation.
The LLC will be the preferred provider of financial services to the
Corporation's global dealer and customer network. The Corporation will receive
income from fees paid by the LLC. The fees will be based primarily upon the
volume of installment receivables originated by the LLC. Newcourt will provide
services and exper-tise to the LLC with a view to increasing originations by the
LLC. Newcourt will be paid a fee by the LLC for such services. The management
fee paid to Newcourt also will be based primarily on the volume of installment
receivables originated by the LLC. Newcourt will receive warehousing and
securitization fees from the LLC in connection with the purchased receivables.
On January 4, 1999, in a separate transaction, CreditCorp SPC, LLC sold to
Newcourt its entire portfolio of U.S. installment accounts receivable, including
existing extended credit customer accounts receivable, equipment lease
receivables and dealer loan receivables, for an aggregate sale price of $141.1
million, resulting in a pre-tax gain of approximately $44 million. Newcourt has
the right to put back to the Corporation the unpaid portion of the extended
credit customer accounts receivable portfolio based on the same pricing formula.
As a result, this gain will be recognized over a two-year period.
[39 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Quarterly Financial Information
Unaudited
(Amounts in thousands except per share data) 1998 1997 1996
- --------------------------------------------------------------------------------
Net sales
First quarter $ 426,429 $ 375,299 $ 344,364
Second quarter 442,176 409,231 384,554
Third quarter 427,272 391,162 347,202
Fourth quarter 476,760 496,523 409,159
- --------------------------------------------------------------------------------
$1,772,637 $1,672,215 $1,485,279
================================================================================
Gross profit
First quarter $ 211,545 $ 192,967 $ 173,829
Second quarter 204,690 207,667 194,129
Third quarter 151,526 199,294 176,478
Fourth quarter 195,553 243,900 206,348
- --------------------------------------------------------------------------------
$ 763,314 $ 843,828 $ 750,784
================================================================================
Net earnings (loss)
First quarter $ 33,926 $ 33,854 $ 29,650
Second quarter 22,661 38,971 34,528
Third quarter (73,997)** 35,514 30,765
Fourth quarter 12,631*** 42,027 36,508
- --------------------------------------------------------------------------------
$(4,779) $150,366 $131,451
================================================================================
Earnings (loss) per weighted
average common share - basic*
First quarter $ .57 $ .56 $ .49
Second quarter .38 .64 .56
Third quarter (1.24)** .58 .51
Fourth quarter .21*** .69 .60
- --------------------------------------------------------------------------------
$ (.08) $ 2.47 $ 2.16
================================================================================
Earnings (loss) per weighted
average common share - diluted*
First quarter $ .56 $ .55 $ .48
Second quarter .38 .63 .56
Third quarter (1.24)** .58 .50
Fourth quarter .21*** .68 .59
- --------------------------------------------------------------------------------
$ (.08) $ 2.44 $ 2.13
================================================================================
* Adjusted for the three-for-two stock split in 1996. Earnings per share are
calculated on a quarterly basis and, as such, the amounts may not total
calculated full-year earnings (loss) per share.
** Third quarter 1998 results include $133.1 million of pre-tax restructuring
and other non-recurring charges ($96.5 million after taxes). The aggregate
earnings per share impact of these items was $1.62 after taxes.
*** Fourth quarter 1998 results include $16.8 million of pre-tax restructuring
and other non-recurring charges ($11.2 million after taxes) and a $14.1 million
reduction in inventory ($9.0 million after taxes). The aggregate earnings per
share impact of these items was $.34 per diluted share and $.35 per basic share.
[Two bar graphs follow this text. The first is titled "Shareholders' Equity per
Share." It shows the shareholders' equity per share of the Corporation's common
stock (in dollars) for each of fiscal years 1994 through 1998, as follows:
94 - $11.91
95 - $12.35
96 - $13.62
97 - $14.74
98 - $12.98
The second graph is titled "Common Stock Price Range." It shows the price range
of the Corporation's common stock (in dollars) for each of fiscal years 1994
through 1998, as follows:
94 - $29.58 - 19.33
95 - $31.50 - 20.67
96 - $38.25 - 27.33
97 - $46.31 - 34.25
98 - $46.44 - 25.50
The information in both of the preceding two graphs is adjusted for the
two-for-one stock split in 1996.]
<PAGE>
Six-year Data
<TABLE>
<CAPTION>
Amounts in thousands except share data) 1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
Summary of operations
<S> <C> <C> <C> <C> <C> <C>
Net sales $1,772,637 $1,672,215 $1,485,279 $1,292,125 $1,194,296 $1,132,010
Gross profit 763,314 843,828 750,784 663,491 608,837 595,728
Operating expenses 705,811 650,182 594,527 538,021 510,361 509,910
Net finance income 65,933 71,891 64,269 63,174 60,458 61,115
Operating income 34,135 265,537 220,526 188,644 158,934 146,933
Interest expense 21,254 17,654 12,649 13,327 10,806 11,198
Other income (expense) - net (2,041) (9,207) 776 4,572 5,541 756
Pre-tax earnings 10,840 238,676 208,653 179,889 153,669 136,491
Income taxes 15,619 88,310 77,202 66,559 55,355 50,679
Net earnings (loss) (4,779) 150,366 131,451 113,330 98,314 85,812
- ------------------------------------------------------------------------------------------------------------------------
Financial position
Current assets $1,079,832 $1,021,709 $1,017,324 $ 946,689 $ 873,020 $ 854,598
Current liabilities 458,053 352,530 341,371 336,075 237,869 308,037
Working capital 621,779 669,179 675,953 610,614 635,151 546,561
Accounts receivable 554,703 539,589 651,739 610,064 568,378 539,949
Inventories 375,436 373,155 269,750 250,434 229,037 249,102
Property and equipment - net 272,030 265,765 245,294 220,067 209,142 224,810
Total assets 1,674,920 1,641,357 1,520,788 1,360,973 1,234,905 1,218,933
Long-term debt 246,644 151,016 149,804 143,763 108,980 99,683
Shareholders' equity 762,267 892,137 828,161 750,732 766,398 701,663
- ------------------------------------------------------------------------------------------------------------------------
Common share summary*
Net earnings (loss) per share - basic $ (.08) $ 2.47 $ 2.16 $ 1.84 $ 1.53 $ 1.34
Cash dividends paid per share .86 .82 .76 .72 .72 .72
Shareholders' equity per share 12.98 14.74 13.62 12.35 11.91 10.99
Weighted average
shares outstanding - basic 59,219,564 60,845,467 60,967,865 61,510,500 64,187,874 63,856,175
- ------------------------------------------------------------------------------------------------------------------------
Other financial statistics
Cash dividends paid $ 50,977 $ 49,888 $ 46,323 $ 44,113 $ 46,197 $ 45,942
Dividends paid as a percent
of net earnings N/M 33.2% 35.2% 38.9% 47.0% 53.5%
Capital expenditures 46,779 55,442 52,333 31,581 41,788 33,248
Depreciation and amortization 44,985 38,377 31,879 31,534 29,632 32,131
Current ratio 2.4 2.9 3.0 2.8 3.7 2.8
Percent of total debt to total capital 30.8% 16.4% 17.3% 18.5% 13.5% 19.3%
Effective tax rate 144.1% 37.0% 37.0% 37.0% 36.0% 37.1%
Operating income as a percent
of net sales 1.9% 15.9% 14.8% 14.6% 13.3% 13.0%
Net earnings (loss) as a percent
of net sales (0.3)% 9.0% 8.9% 8.8% 8.2% 7.6%
Return on average
shareholders' equity (0.6)% 17.5% 16.7% 14.9% 13.4% 12.6%
Shareholders of record 11,514 10,738 10,556 9,657 9,292 9,047
Common stock price range* 46.44-25.50 46.31-34.25 38.25-27.33 31.50-20.67 29.58-19.33 29.67-20.33
- ------------------------------------------------------------------------------------------------------------------------
*Adjusted for the three-for-two stock split in 1996.
1998 results include $149.9 million of pre-tax restructuring and other
non-recurring charges ($107.6 million after taxes) and a $14.1 million reduction
in inventory ($9.0 million after taxes). The aggregate earnings per share impact
of these items was $1.95 after taxes.
N/M = not meaningful.
</TABLE>
[41 Snap-on Incorporated 1998 Annual Report]
<PAGE>
Investor Information
Common Stock High/Low Prices
Quarter 1998 1997
- ---------------------------------------------------
First $46.22-$37.19 $42.38-$34.25
Second 46.44- 34.38 41.00- 35.25
Third 37.50- 25.50 44.88- 39.19
Fourth 36.00- 28.88 46.31- 41.50
- ---------------------------------------------------
Dividends Paid per Common Share
Quarter 1998 1997
- ---------------------------------------------------
First $.21 $.20
Second .21 .20
Third .22 .21
Fourth .22 .21
- ---------------------------------------------------
Total $.86 $.82
===================================================
Exchange Listing
Snap-on Incorporated's common stock is listed on the New York Stock Exchange
under the ticker symbol SNA.
Transfer Agent and Registrar
First Chicago Trust Company of New York
P. O. Box 2500
Jersey City, New Jersey 07303-2500
or
525 Washington Boulevard
Jersey City, New Jersey 07310
Shareholder Inquiries
Shareholders with questions may call the Transfer Agent, First Chicago Trust
Company of New York, toll-free at 1-800-446-2617 or e-mail at [email protected].
The deaf and hearing-impaired may call 201-222-4955.
Dividend Record and Pay Dates for 1999
Quarter Record Date Pay Date
- -----------------------------------------------------
First February 17 March 10
Second May 20 June 10
Third August 20 September 10
Fourth November 19 December 10
- -----------------------------------------------------
Dividend Reinvestment
and Direct Stock Purchase Plan
Investors may purchase stock directly from the company and increase their
investment through a no-commission dividend reinvestment and direct stock
purchase plan. For information write to:
First Chicago Trust Company of New York
Snap-on Dividend Reinvestment and Direct Stock Purchase Plan
P. O. Box 2598
Jersey City, New Jersey 07303-2598
Or call: 1-800-446-2617
Form 10-K and Other Financial Publications
These publications are available without charge. Contact the public relations
department at P. O. Box 1430, Kenosha, Wisconsin 53141-1430, call 414-656-4808
(recorded message), e-mail [email protected], or visit our web site.
Web Site
Snap-on's web site contains the most recent 10-Qs, 10-Ks, news releases,
quarterly reports, annual report financials, and information about Snap-on's
dividend reinvestment and direct stock purchase plan. Our address is
www.snapon.com.
Analyst Contact
Securities analysts and other investors seeking information about the
corporation should contact the investor relations department at 414-656-6488.
Independent Auditors
Arthur Andersen LLP
33 West Monroe Street
Chicago, Illinois 60603
312-580-0033
Annual Meeting
The Annual Meeting of Shareholders will be held at the Radisson Hotel &
Conference Center Kenosha, 11800 - 108th Street, Pleasant Prairie, Wisconsin, at
10 a.m. on Friday, April 23, 1999.
Exhibit (21)
SUBSIDIARIES OF THE CORPORATION
As of March 1, 1999
State or other jurisdiction
Name of organization
- ---------------------------------------- ----------------------------
Cartec GmbH Germany
CreditCorp SPC, LLC Wisconsin
G.S. S.r.l. Italy
Hein-Werner Corporation Wisconsin
Herramientas Eurotools, S.A. Spain
Hoffman Werkstatt-Technik GmbH Germany
IDMC, Inc. Wisconsin
IDSC Holdings, Inc. Wisconsin
Mitchell Repair Information Company, LLC Delaware
Nationwide International L.L.C. Australia
Nu-Tech Industries, Inc. Kentucky
Sioux Tools, Inc. Iowa
Snap-on Equipment Europe Ireland
Snap-on Equipment France, S.A. France
Snap-on Financial Services, Inc. Nevada
Snap-on Global Holdings, Inc. Delaware
Snap-on International Finance Company Ireland
Snap-on Technologies, Inc. Illinois
Snap-on Tools (Australia) Pty. Ltd. Australia
Snap-on Tools Company Wisconsin
Snap-on Tools International, Ltd. Virgin Islands
Snap-on Tools Japan, K.K. Japan
Snap-on Tools Limited United Kingdom
Snap-on Logistics Company Wisconsin
Snap-on Tools Manufacturing Company Wisconsin
Snap-on Tools of Canada Ltd. Canada
Sun Electric Deutschland GmbH Germany
Sun Electric do Brasil Brazil
Sun Electric Europe B.V. Netherlands
Sun Electric Nederland B.V. Netherlands
Sun Electric U.K. Limited England
Wheeltronic Ltd. Ontario
Exhibit 23
The Consent of the Independent Public Accountants of Snap-on Incorporated is
contained along with the Report of Independent Accountants on Financial
Statement Schedule on page 13 of this Form 10-K.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF SNAP-ON INCORPORATED AS OF AND FOR THE YEAR
ENDED JANUARY 2, 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-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JAN-02-1999
<CASH> 15,041
<SECURITIES> 0
<RECEIVABLES> 583,934
<ALLOWANCES> 29,231
<INVENTORY> 375,436
<CURRENT-ASSETS> 1,079,832
<PP&E> 583,819
<DEPRECIATION> 311,789
<TOTAL-ASSETS> 1,674,920
<CURRENT-LIABILITIES> 458,053
<BONDS> 246,644
0
0
<COMMON> 66,685
<OTHER-SE> 695,582
<TOTAL-LIABILITY-AND-EQUITY> 1,674,920
<SALES> 1,772,637
<TOTAL-REVENUES> 1,772,637
<CGS> 948,761
<TOTAL-COSTS> 1,009,323
<OTHER-EXPENSES> 705,811
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,254
<INCOME-PRETAX> 10,840
<INCOME-TAX> 15,619
<INCOME-CONTINUING> (4,779)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,779)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
