<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
THE STANDARD PRODUCTS COMPANY
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
THE STANDARD PRODUCTS COMPANY
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2
<TABLE>
<S> <C> <C>
PROXY STATEMENT
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION
AND ANALYSIS
1998 CONSOLIDATED
THE STANDARD PRODUCTS COMPANY FINANCIAL STATEMENTS
AND NOTES
</TABLE>
THE STANDARD PRODUCTS COMPANY LOGO
- --------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
------------------
Notice is hereby given that the annual meeting of shareholders of The
Standard Products Company, an Ohio corporation (the "Company"), will be held at
the Company's Reid Division offices located at 2130 West 110th Street,
Cleveland, Ohio 44102, on Tuesday, October 20, 1998, at 9:00 a.m., Cleveland
time, for the following purposes:
1. To receive reports at the meeting. No action constituting approval
or disapproval of the matters referred to in said reports is contemplated.
2. To elect five directors, each to serve for a term of three years.
3. To transact such other business as may properly come before the
meeting.
Only shareholders of record at the close of business on September 8, 1998,
will be entitled to notice of and to vote at said meeting or any adjournment
thereof. Shareholders are urged to complete, date and sign the enclosed proxy
and return it in the enclosed envelope.
By order of the Board of Directors,
Richard N. Jacobson
RICHARD N. JACOBSON
General Counsel and Secretary
Dated: September 15, 1998
<PAGE> 3
THE STANDARD PRODUCTS COMPANY
PROXY STATEMENT
------------------
This proxy statement is furnished in connection with the solicitation of
proxies to be used at the annual meeting of shareholders of The Standard
Products Company, an Ohio corporation (the "Company"), to be held at the
Company's Reid Division offices located at 2130 West 110th Street, Cleveland,
Ohio 44102, on Tuesday, October 20, 1998, at 9:00 a.m., Cleveland time. This
proxy statement and the accompanying notice and proxy will first be sent to
shareholders by mail on or about September 15, 1998.
Annual Report. A copy of the Company's Summary Annual Report to
Shareholders for the fiscal year ended June 30, 1998, is enclosed with this
proxy statement. The Company's audited consolidated financial statements and
certain other financial information for its fiscal year ended June 30, 1998, are
included as pages F-1 to F-27, inclusive, annexed to this proxy statement.
Solicitation and Revocation of Proxies. This solicitation of proxies is
made by and on behalf of the Board of Directors. The cost of the solicitation of
proxies will be borne by the Company. The Company has retained Georgeson &
Company, at an estimated cost of $8,500 plus reimbursement of expenses, to
assist in the solicitation of proxies from brokers, nominees, institutions and
individuals. In addition to solicitation of proxies by mail, Georgeson & Company
and regular employees of the Company may solicit proxies by telephone or
facsimile.
If the enclosed proxy is returned, the shares represented thereby will be
voted in accordance with any specifications made therein by the shareholder. In
the absence of any such specifications, they will be voted to elect the
directors set forth under "Election of Directors" below. A shareholder's
presence alone at the meeting will not operate to revoke his or her proxy. The
proxy is revocable by a shareholder at any time insofar as it has not been
exercised by executing and delivering a later-dated proxy or by giving notice to
the Company in writing at its corporate headquarters at 2401 South Gulley Road,
Dearborn, Michigan 48124, Attn: Corporate Secretary or in open meeting.
Outstanding Shares. The close of business on September 8, 1998, has been
fixed as the record date for the determination of shareholders entitled to
notice of and to vote at the meeting. On such date, the Company's voting
securities outstanding consisted of 16,469,692 Common Shares, $1 par value, each
of which is entitled to one vote at the meeting.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information with respect to persons
known to management to be the beneficial owners as of June 30, 1998, of more
than five percent of the Company's Common Shares:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------------------------------ -------------------- --------
<S> <C> <C>
James S. Reid, Jr.(1)....................................... 1,296,494(2) 7.9%
2401 South Gulley Road
Dearborn, MI 48124
National City Corp.(3)...................................... 980,756 6.0%
1900 East Ninth Street
Cleveland, OH 44114
</TABLE>
- -------------------------
(1) Mr. Reid is Chairman of the Board of Directors of the Company.
(2) Comprised of 817,554 shares owned by Mr. Reid; 139,196 shares owned by his
wife, Donna S. Reid; 2,400 shares which Mr. Reid has the right to acquire
pursuant to stock options currently exercisable or
1
<PAGE> 4
exercisable within 60 days; 71,987 shares held by a life trust in which Mr.
Reid has a remainder interest; 1,817 shares held for his account under the
Company's Employee Stock Purchase Plan and 14,709 shares held for his
account under the Company's Individual Retirement and Investment Trust Plan;
and 249,431 shares held by The Standard Products Foundation, of which Mr.
Reid is President and a trustee. The number of shares shown above does not
include shares owned by Mr. Reid's children or grandchildren, and 205,157
shares held by a trust as to which Mr. Reid is an income beneficiary and
John D. Drinko, a member of the Board of Directors, is trust advisor, which
shares are included in the number of shares reported by Mr. Drinko.
(3) The information contained herein is based upon a Schedule 13G filing made by
National City Corp. ("NCC") for the period ended December 31, 1997.
According to its Schedule 13G filing, NCC has sole dispositive power over
2,300 shares, shared dispositive power over 440,030 shares, and sole voting
power over all 980,756 shares held by it. The shares reported by NCC include
321,418 shares reported by Mr. Reid (see footnote 2 above); 325,709 shares
reported by John D. Drinko (see footnote 2 to "Security Ownership of
Directors and Executive Officers" below), with respect to all of which
shares NCC's 13G filing states that it has shared dispositive power; 80,700
shares reported by Mr. Sigel (see footnote 3 to "Security Ownership of
Directors and Executive Officers" below), with respect to all of which
shares NCC's 13G filing states that it has shared dispositive power; and
3,000 shares reported by Mr. Myers (see footnote 7 to "Security Ownership of
Directors and Executive Officers" below).
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
beneficial ownership of Common Shares of the Company as of June 30, 1998, by (a)
the Company's directors (including nominees for director); (b) the persons who
served as the Company's Chief Executive Officer during fiscal 1998 and the other
four most highly compensated executive officers named in the Summary
Compensation Table; and (c) the Company's executive officers and directors as a
group. Except as otherwise described in the notes below or in footnotes 2 and 3
to "Security Ownership of Certain Beneficial Owners" above, the following
beneficial owners have sole voting power and sole dispositive power with respect
to all Common Shares set forth opposite their names.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
------------------------ ------------------ --------
<S> <C> <C>
James S. Reid, Jr........................................... 1,296,494(1) 7.9%
John D. Drinko.............................................. 772,052(2) 4.7%
John D. Sigel............................................... 305,980(3) 1.9%
Leigh H. Perkins............................................ 270,872(4) 1.6%
Theodore K. Zampetis........................................ 148,666(5) (6)
Malcolm R. Myers............................................ 87,125(7) (6)
Ronald L. Roudebush......................................... 62,283(8) (6)
Curtis E. Moll.............................................. 52,185(9) (6)
Alan E. Riedel.............................................. 25,012 (6)
W. Hayden Thompson.......................................... 20,000 (6)
John Doddridge.............................................. 10,000 (6)
Edward B. Brandon........................................... 6,825(10) (6)
Alfred M. Rankin, Jr........................................ 2,500 (6)
James C. Baillie............................................ 2,000 (6)
James F. Keys............................................... 49,704(11) (6)
Stephan J. Mack............................................. 26,480(12) (6)
Donald R. Sheley, Jr........................................ 16,589(13) (6)
All Executive Officers and Directors as a Group............. 3,230,244 19.6%
</TABLE>
- -------------------------
(1) A description of the Common Shares beneficially owned by Mr. Reid is set
forth in Note 2 under "Security Ownership of Certain Beneficial Owners"
above.
2
<PAGE> 5
(2) Comprised of 46,920 shares owned by Mr. Drinko; 22,680 shares held in an
individual retirement account of which Mr. Drinko is the beneficiary;
38,933 shares owned by his wife, Elizabeth G. Drinko; 155,076 shares owned
by a corporation of which Mr. Drinko is a shareholder, officer and
director; 54,218 shares owned by a charitable foundation established by Mr.
Drinko and his wife; 205,157 shares held by a trust as to which Mr. Drinko
is a trust advisor and of which Mr. Reid is an income beneficiary; 124,062
shares owned by a foundation of which Mr. Drinko is President and a
trustee; and 125,006 shares held by a charitable lead trust of which Mr.
Drinko is a co-trustee. The number of shares shown in the table above does
not include 77,700 shares held by a charitable lead trust in which Mr.
Drinko and Mr. Sigel are co-trustees; 78,125 shares owned by Cloyes Gear &
Products, Inc. of which Mr. Drinko and Mr. Myers are directors; 3,000
shares owned by a foundation of which Mr. Drinko and Mr. Myers are
trustees; and 29,752 shares owned by a foundation of which Mr. Drinko and
Mr. Perkins are trustees.
(3) Comprised of 17,888 shares owned by Mr. Sigel; 179,766 shares owned by his
wife, Sally C. Reid; 27,626 shares held in custodial accounts for Mr.
Sigel's minor children; and 80,700 shares owned by a charitable lead trust
of which Mr. Sigel and Mr. Drinko are co-trustees. In addition, Mr. Sigel
is a trustee of The Standard Products Foundation, which owns 249,431
shares, which shares are included in the number of shares reported by Mr.
Reid, and are not included in the number reported by Mr. Sigel. Mr. Sigel
is the son-in-law of Mr. Reid, Chairman of the Board of Directors of the
Company.
(4) Comprised of 125,473 shares owned by Mr. Perkins; 88,147 shares owned by
his wife, Romi Perkins, who has voting and dispositive power over such
shares; 29,752 shares owned by a foundation of which he and Mr. Drinko are
trustees; and 27,500 shares owned by a foundation of which Mr. Perkins is a
co-trustee, and over which shares Mr. Perkins has shared dispositive power.
(5) Comprised of 110,080 shares owned by Mr. Zampetis (which amount includes
30,727 restricted shares earned in fiscal 1996, 1997, and 1998 but subject
to forfeiture); 24,833 shares owned by his wife, Ann J. Zampetis; 806
shares held for his account under the Company's Employee Stock Purchase
Plan; 11,747 shares held for his account under the Company's Individual
Retirement and Investment Trust Plan; and 1,200 shares which Mr. Zampetis
has the right to acquire pursuant to stock options currently exercisable or
exercisable within 60 days.
(6) Represents less than one percent.
(7) Comprised of 6,000 shares owned by Mr. Myers; 78,125 shares owned by Cloyes
Gear & Products, Inc., in which shares Mr. Myers shares voting and
dispositive power; and 3,000 shares owned by a foundation of which Mr.
Myers and Mr. Drinko are trustees, and with respect to which Mr. Myers
shares voting and dispositive power.
(8) Comprised of 110 shares held for Mr. Roudebush's account under the
Company's Employee Stock Purchase Plan; 537 shares held for his account
under the Company's Individual Retirement and Investment Trust Plan; 11,636
restricted shares earned in fiscal 1998, but subject to forfeiture; and
50,000 shares which Mr. Roudebush has the right to acquire pursuant to
stock options currently exercisable or exercisable within 60 days.
(9) Comprised of 210 shares owned by his wife, Sara Moll; 45,725 shares owned
by the pension fund of MTD Products, Inc.; and 6,250 shares owned by a
charitable foundation of which he is a trustee.
(10) In addition, Mr. Brandon is a trustee of The Standard Products Foundation,
which owned 249,431 shares as of June 30, 1998, which shares are included
in the number of shares reported by Mr. Reid.
(11) Comprised of 36,466 shares owned by Mr. Keys (which amount includes 12,291
restricted shares earned in fiscal 1996, 1997, and 1998 but subject to
forfeiture); 2,458 shares held for Mr. Keys in his account under the
Company's Individual Retirement and Investment Trust Plan; and 10,780
shares which Mr. Keys has the right to acquire pursuant to stock options
currently exercisable or exercisable within 60 days.
(12) Comprised of 16,055 shares owned by Mr. Mack; 1,105 shares held for Mr.
Mack in his account under the Company's Individual Retirement and
Investment Trust Plan; and 9,320 shares which Mr. Mack has the right to
acquire pursuant to stock options currently exercisable or exercisable
within 60 days.
3
<PAGE> 6
(13) Comprised of 6,000 shares owned by Mr. Sheley; 484 shares held by Mr.
Sheley's account under the Company's Employee Stock Purchase Plan; 105
shares held for his account under the Company's Individual Retirement and
Investment Trust Plan; and 10,000 shares which Mr. Sheley has the right to
acquire pursuant to stock options currently exercisable or exercisable
within 60 days.
ELECTION OF DIRECTORS
In accordance with the Company's Amended Code of Regulations, the Board of
Directors has fixed the number of directors at fourteen, divided into two
classes of five and one class of four. The number of directors had been fixed at
thirteen until July 24, 1997, when the Board, acting under its authority as set
forth in the Company's Amended Code of Regulations, voted to increase the number
of directors to fourteen. At the Annual Meeting, the shares represented by
proxies, unless otherwise specified, will be voted for the election of the five
nominees hereinafter named, each to serve for a term of three years and until
his successor is duly elected and qualified.
The nominees for director are John Doddridge, Leigh H. Perkins, Alfred M.
Rankin, Jr., John D. Sigel, and W. Hayden Thompson, all of whom are presently
directors of the Company. Each of the nominees was most recently elected at the
1995 Annual Meeting of the Company's Shareholders. Proxies cannot be voted at
the Annual Meeting for a greater number of persons than the five persons
hereinafter named, although persons in addition to those nominees named herein
may be nominated by the shareholders at the meeting.
If for any reason any of the nominees is not a candidate (which is not
expected) when the election occurs, it is intended that proxies will be voted
for the election of a substitute nominee designated by management. The following
information is furnished with respect to each person nominated for election as a
director.
NOMINEES FOR ELECTION AT THE ANNUAL MEETING
<TABLE>
<CAPTION>
EXPIRATION
PERIOD OF TERM
OF SERVICE FOR WHICH
NAME AND AGE PRINCIPAL OCCUPATION AS DIRECTOR PROPOSED
------------ -------------------- ----------- ----------
<S> <C> <C> <C>
John Doddridge Chairman and Chief Executive Officer, Intermet 1995 to date 2001
58 Corporation (manufacturer of precision ductile
and gray iron castings for the automotive and
truck industries)
Leigh H. Perkins Chairman, The Orvis Company, Inc. (manufacturer 1969 to date 2001
70 and distributor of fishing tackle and sporting
goods)
Alfred M. Rankin, Chairman, President and Chief Executive Officer, 1989 to date 2001
Jr. NACCO Industries, Inc. (holding company with
56 operations in mining and manufacturing of small
electrical appliances, forklift trucks, and
related service parts)
John D. Sigel Partner, Hale and Dorr LLP, Boston, 1991 to date 2001
45 Massachusetts (law firm)
W. Hayden Thompson Chairman and Chief Executive Officer, Solarflo 1982 to date 2001
71 Corporation (manufacturer of gas and electric
heating equipment)
</TABLE>
4
<PAGE> 7
DIRECTORS WHOSE TERMS WILL CONTINUE AFTER THE ANNUAL MEETING
The following information is furnished with respect to each person
continuing as a director.
<TABLE>
<CAPTION>
PERIOD EXPIRATION
OF SERVICE OF CURRENT
NAME AND AGE PRINCIPAL OCCUPATION AS DIRECTOR TERM
------------ -------------------- ----------- ----------
<S> <C> <C> <C>
John D. Drinko Senior Partner, Baker & Hostetler LLP, 1957-1958 1999
77 Cleveland, Ohio (law firm) 1967-1968
1969 to date
Curtis E. Moll Chairman and Chief Executive Officer, MTD 1991 to date 1999
59 Products, Inc. (manufacturer of outdoor power
equipment and tools, dies and stampings for the
automotive industry)
Malcolm R. Myers Chairman, Cloyes Gear & Products, Inc. 1984 to date 1999
64 (manufacturer of automotive timing components)
Theodore K. Zampetis President and Chief Operating Officer of the 1991 to date 1999
53 Company
James C. Baillie Partner, Tory Tory DesLauriers & Binnington, 1994 to date 2000
60 Barristers & Solicitors, Toronto, Ontario,
Canada
Edward B. Brandon Retired Chairman, President and Chief Executive 1976 to date 2000
66 Officer, National City Corporation (bank
holding company)
James S. Reid, Jr. Chairman of the Company 1959 to date 2000
72
Alan E. Riedel Retired Vice Chairman, Cooper Industries, Inc. 1976 to date 2000
68 (worldwide diversified manufacturer of
electrical products, electric power equipment,
tools and hardware)
Ronald L. Roudebush Vice Chairman and Chief Executive Officer of 1997 to date 2000
51 the Company
</TABLE>
Each of the above directors and nominees for election as a director has had
the principal occupation indicated for at least five years, except Messrs.
Doddridge, Rankin, Brandon, and Roudebush. Mr. Doddridge served as Vice Chairman
and Chief Executive Officer of Magna International, Inc., from November 1992 to
November 1994. Mr. Rankin was elected Chairman of NACCO Industries, Inc., in May
1994, in addition to his position as President and Chief Executive Officer.
Prior to that date, he served solely as President and Chief Executive Officer.
Mr. Brandon served as Chairman, President, and Chief Executive Officer of
National City Corporation until his retirement on September 30, 1995. Mr.
Roudebush was part owner and an officer of Milford Dodge, Inc., Milford, Ohio,
an auto dealership, from August 1995 through May 1997. Prior to that, he had
been employed from 1991 through November 1994 as President, Rockwell Automotive,
the operating unit of Rockwell International Corporation which included all of
Rockwell's worldwide automotive businesses.
Mr. Brandon is a director of National City Corporation and RPM, Inc. Mr.
Doddridge is a director of Detroit Diesel Corporation. Mr. Moll is a director of
Shiloh Industries, Inc. and Sherwin-Williams Company. Mr. Rankin is a director
of The B.F.Goodrich Company and The Vanguard Group. Mr. Riedel is a director of
Belden Inc., Arkwright Mutual Insurance Inc. and Chairman of Gardner Denver,
Inc. Mr. Roudebush is a director of Simpson Industries, Inc. Mr. Zampetis is a
director of Shiloh Industries, Inc.
During the fiscal year ended June 30, 1998, the Board of Directors held
seven meetings and appointed an Audit Committee, a Finance Committee and a
Compensation Committee. The Board of Directors does not have a Nominating
Committee. With the exception of Messrs. Baillie, Doddridge, Myers and Sigel,
each member of the Board of Directors attended at least 75% of the meetings of
the Board of Directors and of the committees on which he served.
5
<PAGE> 8
The Audit Committee of the Board of Directors of the Company (the "Audit
Committee"), of which Mr. Brandon is Chairman and Messrs. Baillie, Doddridge,
Moll, Myers, Rankin, Sigel and Thompson are members, held three meetings and
consulted informally on other occasions during the last fiscal year. The Audit
Committee recommends annually to the Board of Directors the independent public
accountants for the Company, reviews with the independent public accountants the
arrangements for and scope of the audits to be conducted by them and the results
of those audits, and reviews various financial and accounting matters affecting
the Company.
The Compensation Committee of the Board of Directors of the Company (the
"Compensation Committee"), of which Mr. Riedel is Chairman and Messrs. Brandon,
Moll, Myers, and Perkins are members, held four meetings and consulted
informally on other occasions during the last fiscal year. The Compensation
Committee periodically reviews and determines the compensation, including fringe
benefits and incentive compensation, of officers and management personnel of the
Company and administers the Company's restricted stock and stock option plans.
The Compensation Committee also determines the officers and key employees of the
Company who participate in those plans and the stock options and restricted
stock awards to be granted. In addition, the Committee established stock
ownership guidelines for executive officers and directors of the Company.
The Finance Committee, of which Mr. Drinko is Chairman, Mr. Thompson is
Vice Chairman, and Messrs. Perkins, Reid, Riedel, Roudebush, and Zampetis are
members, held four meetings and consulted informally during the last fiscal
year. The Finance Committee administers the investments of the Company's
retirement funds and renders advice and counsel to management on financial
matters affecting the Company.
Director's Compensation. Each director who is not an officer of the Company
or a subsidiary of the Company is compensated at the rate of $23,000 per year.
Each director also receives $1,000 for attendance at each meeting of the Board
of Directors and for each meeting of any committee not held in conjunction with
a meeting of the Board of Directors. Committee Chairmen receive an additional
$1,000 per year. In addition, Mr. Riedel, Chairman of the Compensation
Committee, was paid $25,000 for his services as Chairman of the Compensation
Committee in leading the search for a chief executive officer to succeed Mr.
Reid. This search culminated in Mr. Roudebush's hiring.
In June 1998, the Compensation Committee established share ownership
guidelines for directors pursuant to which all current and future directors of
the Company will be expected to own Common Shares of the Company equal in value
to at least four times the base retainer (currently $23,000) payable annually to
such directors.
6
<PAGE> 9
EXECUTIVE COMPENSATION
The following information is set forth with respect to both persons who
served as the Company's Chief Executive Officer during fiscal year 1998, and the
Company's four other most highly compensated executive officers for fiscal year
1998.
I. SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- -----------------------
AWARDS
-----------------------
RESTRICTED
OTHER ANNUAL STOCK STOCK ALL OTHER
NAME AND FISCAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) ($) (#) ($)(3)
------------------ ------ ------ ------ ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
James S. Reid, Jr. 1998 $217,203 $279,273 -- $317,188(5) -- $210,341
Chairman(4) 1997 600,000 300,000 -- -- -- 3,454
1996 600,000 158,190 -- (6) -- 3,594
Ronald L. Roudebush 1998 500,000 232,727 -- (8) 200,000 11,566
Vice Chairman and Chief 1997 -- -- -- -- -- --
Executive Officer(7) 1996 -- -- -- -- -- --
Theodore K. Zampetis 1998 440,000 204,800 -- (9) -- 3,480
President and Chief 1997 440,000 220,000 -- -- -- 3,454
Operating Officer 1996 410,000 108,096 -- -- 50,000 3,594
James F. Keys 1998 313,500 145,920 -- (10) 3,000 3,120
Executive Vice 1997 289,750 144,875 -- -- 5,000 3,094
President -- International 1996 241,074 63,559 -- -- 15,000 3,734
Stephan J. Mack 1998 243,980 122,944 -- -- 3,000 7,659
President, Holm Industries,
Inc. 1997 236,256 94,502 -- -- 4,000 3,115
1996 231,075 90,750 -- -- 4,000 130
Donald R. Sheley, Jr. 1998 248,775 115,794 -- -- 6,000 8,636
Vice President -- Finance 1997 238,125 119,063 -- -- 10,000 360
And Chief Financial
Officer(11) 1996 215,625 56,849 -- -- 10,000 240
</TABLE>
- -------------------------
(1) Amounts shown represent bonuses earned pursuant to the Company's Officers
Incentive Compensation Plan.
(2) Total perquisites and other personal benefits for each of the named
executive officers do not exceed the threshold amounts specified in the
regulations promulgated by the Securities and Exchange Commission.
(3) Amounts shown include the Company's contributions on behalf of Messrs. Reid
and Roudebush and each other named executive officer under the Individual
Retirement and Investment Trust Plan, in the following amounts for fiscal
1998: Mr. Roudebush, $6,563; and each other named executive officer,
including Mr. Reid, $3,120. Amounts shown also include the Company's
contributions on behalf of Messrs. Roudebush, Reid, Zampetis, and Sheley
under the Employee Stock Purchase Plan in the following amounts for fiscal
1998: Mr. Roudebush, $315, and Messrs. Reid, Zampetis, and Sheley, $360.
Amounts shown also include the Company's contributions on behalf of Messrs.
Roudebush, Reid, Mack, and Sheley under the Supplemental 401(k) Plan in the
following amounts: Mr. Roudebush, $4,688; Mr. Reid, $8,923; Mr. Mack,
$4,539; and Mr. Sheley, $5,156. The Supplemental 401(k) Plan first became
effective on January 1, 1998. The amount shown for Mr. Reid includes
payments totaling $197,938 made to him under the Company's Supplemental
Salaried Employees' Pension Plan. For a description of that plan, see
"Pension Plan and Supplemental Plans" on page 11 of this proxy statement.
Payments to Mr. Reid under that plan commenced on September 1, 1997,
pursuant to the terms of a letter agreement between Mr. Reid and the
Company. For a description of the terms of that agreement, see "Certain
Employment Agreements" on page 10 of this proxy statement.
(4) Mr. Reid served as Chief Executive Officer of the Company until July 24,
1997. His compensation after that date is governed by a letter agreement,
the terms of which are described under "Certain Employment Agreements" on
page 10 of this proxy statement. The amounts shown herein do not
7
<PAGE> 10
include retirement benefits paid to Mr. Reid under the Company's Salaried
Employees' Pension Plan. See "Pension Plan and Supplemental Plans" on page
11 of this proxy statement for a description of how benefits are calculated
under that plan.
(5) Mr. Reid was awarded 12,500 restricted Common Shares, effective July 1,
1997. Under the terms of the award, all of the shares were considered
earned on the effective date of the award. The shares are subject to
forfeiture until the earlier of July 1, 1999 or the date on which Mr. Reid
retires from his position as Chairman of the Board of the Company. In the
event of Mr. Reid's death, all awarded Common Shares will vest in his
designated beneficiary. Based on the last reported sale price of the
Company's Common Shares on the New York Stock Exchange on June 30, 1998,
the Common Shares earned under the 1997 award had a fair market value of
$351,563.
(6) Mr. Reid was awarded 62,500 restricted Common Shares (adjusted to reflect a
5-for-4 stock split of the Company's Common Shares effected in the form of
a stock dividend paid on June 3, 1993, to shareholders of record on May 20,
1993) in fiscal 1992. Under the terms of the award, up to 12,500 of the
awarded Common Shares could be earned in each of five consecutive fiscal
years beginning in fiscal 1992, based on the percentage of bonus earned
during such fiscal year. Awarded Common Shares earned by Mr. Reid are
subject to forfeiture until the end of the second fiscal year following the
fiscal year in which such awarded Common Shares are earned. Mr. Reid earned
6,591 of the awarded Common Shares in fiscal year 1996, which vested on
June 30, 1998. Based on the last reported sale price of the Company's
Common Shares on the New York Stock Exchange on June 30, 1998, the total
Common Shares earned during the past three years under the 1992 award had a
fair market value of $185,372. Including the shares earned under the 1997
award (see footnote 5 above), the total value of all restricted Common
Shares earned by Mr. Reid during the past three fiscal years was $536,934.
No more shares can be earned by Mr. Reid under either award. Dividends are
paid only with respect to the awarded Common Shares which have been earned.
(7) Mr. Roudebush commenced employment with the Company on July 1, 1997, and
became its Chief Executive Officer on July 24, 1997.
(8) Mr. Roudebush was awarded 50,000 restricted Common Shares upon joining the
Company. Under the terms of the award, up to 12,500 of the awarded Common
Shares could have been earned in fiscal year 1998, based upon the
percentage of bonus earned in that fiscal year. Pursuant to an amendment to
Mr. Roudebush's restricted stock agreement effective beginning in fiscal
year 1999 made in connection with changes to the Company's Officers
Incentive Compensation Plan, up to 18,750 of the awarded Common Shares can
be earned in each of fiscal years 1999, 2000, and 2001, based upon the
percentage of bonus earned during each such fiscal year, but in no event
can the aggregate number of shares earned over that three-year period
exceed 37,500. Awarded Common Shares earned by Mr. Roudebush are subject to
forfeiture until the end of the third fiscal year following the fiscal year
in which such awarded Common Shares are earned, except that in the event of
a "change in control" of the Company, as defined in the restricted stock
plan pursuant to which the restricted Common Shares were awarded to Mr.
Roudebush, all restricted Common Shares awarded to Mr. Roudebush will
immediately vest. In the event of Mr. Roudebush's death, all earned but
unvested awarded Common Shares and one-half of awarded but unearned Common
Shares will vest in his designated beneficiary. Mr. Roudebush earned 11,636
of the awarded Common Shares in fiscal year 1998. Those shares will vest on
June 30, 2001. Based on the last reported sale price of the Company's
Common Shares on the New York Stock Exchange on June 30, 1998, the Common
Shares earned by Mr. Roudebush had a fair market value of $327,263.
Dividends are paid only with respect to the awarded Common Shares which
have been earned.
(9) Mr. Zampetis was awarded 125,000 restricted Common Shares (adjusted to
reflect a 5-for-4 stock split of the Company's Common Shares effected in
the form of a stock dividend paid on June 3, 1993 to shareholders of record
on May 20, 1993) in fiscal 1992. Under the terms of the award, up to 12,500
of the awarded Common Shares may be earned in each of ten consecutive
fiscal years beginning in fiscal 1992, based on the percentage of bonus
earned during such fiscal year. Pursuant to an amendment to Mr. Zampetis'
restricted stock agreement effective beginning in fiscal year 1999 made in
connection with the changes to the Company's Officers Incentive
Compensation Plan, Mr. Zampetis can earn up to 18,750 of the awarded Common
Shares in each of fiscal years 1999, 2000, and 2001, based upon the
percentage of bonus earned during each such fiscal year, but in no event
can the aggregate number of shares earned over that three-year period
exceed 37,500. Awarded Common Shares earned by Mr. Zampetis are subject to
forfeiture until the end of the third fiscal year following the fiscal year
in
8
<PAGE> 11
which such awarded Common Shares are earned, except that if his employment
is terminated by the Company without "cause" or if he terminates his
employment for "good reason," as defined in his employment agreement (see
"Certain Employment Agreements" on page 10 of this Proxy Statement) or if
his employment is not continued beyond August 31, 1999, all Common Shares
then earned by him which are subject to forfeiture will become immediately
vested. In addition, he will continue to be eligible to earn additional
Common Shares, which will not be subject to forfeiture, during any period
when his base salary is continued after his employment ends. Mr. Zampetis
earned 6,591 of the awarded Common Shares in fiscal year 1996, 12,500 in
fiscal year 1997, and 11,636 in fiscal year 1998. 6,000 shares earned by
Mr. Zampetis in fiscal year 1995 vested on June 30, 1998. The shares earned
in fiscal years 1996, 1997, and 1998 will vest on the last day of fiscal
years 1999, 2000, and 2001, respectively. In the event of Mr. Zampetis'
death, all earned but unvested awarded Common Shares and one-half of
awarded but unearned Common Shares will vest in his designated beneficiary.
Based on the last reported sale price of the Company's Common Shares on the
New York Stock Exchange on June 30, 1998, the total Common Shares earned
during the past three years under the 1992 award had a fair market value of
$864,197. Dividends are paid only with respect to the awarded Common Shares
which have been earned.
(10) Mr. Keys was awarded 50,000 restricted Common Shares in fiscal 1995. Under
the terms of the award, up to 5,000 of the awarded Common Shares may be
earned in each of ten consecutive fiscal years beginning in fiscal 1995,
based on the percentage of bonus earned during such fiscal year. Pursuant
to an amendment to Mr. Keys' restricted stock agreement beginning in fiscal
year 1999 authorized in connection with changes to the Company's Officers
Incentive Compensation Plan, which amendment will become effective upon
signature, Mr. Keys can earn up to 7,500 of the awarded Common Shares in
each of fiscal years 1999 through 2004, based upon the percentage of bonus
earned during each such fiscal year, but in no event can the aggregate
number of shares earned over that six-year period exceed 30,000. Awarded
Common Shares earned by Mr. Keys are subject to forfeiture until the end of
the third fiscal year following the fiscal year in which such awarded
Common Shares are earned. Mr. Keys earned 2,637 of the awarded Common
Shares in fiscal year 1996, 5,000 in fiscal year 1997, and 4,654 in fiscal
year 1998. These shares will vest on the last day of fiscal years 1999,
2000, and 2001, respectively. In the event of Mr. Keys' death, all earned
but unvested awarded Common Shares and one-half of awarded but unearned
Common Shares will vest in his designated beneficiary. Based on the last
reported sale price of the Company's Common Shares on the New York Stock
Exchange on June 30, 1998, the total Common Shares earned during the past
three years under the 1995 award had a fair market value of $345,684.
Dividends are paid only with respect to the awarded Common Shares which
have been earned.
(11) Mr. Sheley commenced employment with the Company on July 17, 1995.
II. OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------- POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENTAGE OF ANNUAL RATES OF
TOTAL OPTIONS STOCK
GRANTED TO PRICE APPRECIATION
OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM(3)
GRANTED IN FISCAL PRICE EXPIRATION ------------------------
NAME #(1) YEAR(2) ($/SHARE) DATE 5%($) 10%($)
---- ------- ------------- --------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
James S. Reid, Jr.......... -- -- -- -- -- --
Ronald L. Roudebush........ 200,000 58.38 25.25 July 2007 $2,713,327 $6,662,783
Theodore K. Zampetis....... -- -- -- -- -- --
James F. Keys.............. 3,000 0.88 29.00 June 2008 54,714 138,656
Stephan J. Mack............ 3,000 0.88 29.00 June 2008 54,714 138,656
Donald R. Sheley, Jr....... 6,000 1.75 29.00 June 2008 109,428 277,311
</TABLE>
- -------------------------
(1) Except for the option granted to Mr. Roudebush, options granted to the
executive officers in the above table are not exercisable for the one-year
period from the date of grant. 40% of the grant becomes exercisable one year
after the date of the grant, an additional 40% becomes exercisable two years
after the date of the grant, and the remaining 20% becomes exercisable three
years after the date of the grant. The
9
<PAGE> 12
option granted to Mr. Roudebush becomes exercisable in four equal
installments, occurring one, two, three, and four years after the date of
the grant. No more than 40% of Mr. Roudebush's total option can be exercised
in any one fiscal year.
(2) Based on 342,550 options granted to all employees during the fiscal year.
(3) These amounts are based on hypothetical appreciation rates of 5% and 10% and
are not intended to forecast the actual future appreciation of the price of
the Company's Common Shares. No gain to optionees is possible without an
actual increase in the price of the Company's Common Shares, which increase
will benefit all of the Company's shareholders. All calculations except the
one for Mr. Roudebush are based on a ten-year option period, and upon the
assumption that each option grant will be exercised at the end of the
ten-year term. The option for Mr. Roudebush is based on a ten-year option
period, and upon the assumption that 40% of his option grant will be
exercised at the end of the eighth and ninth years after the date of the
grant, and the remaining 20% will be exercised at the end of the ten-year
term.
III. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL FISCAL
YEAR-END(#) YEAR-END($)
SHARES VALUE -------------- ----------------
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE
---- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Ronald L. Roudebush................ -- -- 0/200,000 0/$575,000
James S. Reid, Jr.................. -- -- 2,400/ 0 0/ 0
Theodore K. Zampetis............... 20,000 $132,500 1,200/ 30,000 0/ 138,750
James F. Keys...................... -- -- 10,780/ 12,620 $44,508/ 39,243
Stephan J. Mack.................... -- -- 9,320/ 5,400 40,100/ 6,900
Donald R. Sheley, Jr. ............. 4,000 26,750 10,000/ 12,000 35,500/ 29,250
</TABLE>
CERTAIN EMPLOYMENT AGREEMENTS
The Company entered into a letter agreement with James S. Reid, Jr., dated
July 24, 1997, with respect to Mr. Reid's continuing employment arrangements.
The letter confirmed that Mr. Reid would resign his position as Chief Executive
Officer of the Company, effective July 24, 1997, but will remain as Chairman of
the Board. The letter provides that effective September 1, 1997, Mr. Reid's
annual salary will be $200,000 per year. That rate of compensation will continue
until the Company's Annual Meeting of Shareholders in October 1999, when it is
anticipated that Mr. Reid will resign from his position as Chairman of the
Board. In addition to receiving his pension under the Company's Salaried
Employees' Retirement Plan (under federal law, payment of his pension commenced
on April 1, 1997, after he reached age 70 1/2), he began receiving payments on
September 1, 1997, from the Company's Supplemental Salaried Employees' Pension
Plan. Mr. Reid also continues to participate in all other executive and employee
benefit plans of the Company. For purposes of calculating Mr. Reid's annual
bonus under the Company's Officers Incentive Compensation Plan, his pension and
supplemental pension payments will be considered part of his base salary.
Ronald L. Roudebush became employed by the Company on July 1, 1997, and was
elected by the Board of Directors as a member of the Board and Vice Chairman and
Chief Executive Officer, effective July 24, 1997. He has entered into a two-year
"evergreen" employment agreement with the Company, expiring on June 30, 2007.
Under the agreement, Mr. Roudebush received an initial base salary of $500,000
per year, and became entitled to participate in all executive and employee
benefit plans of the Company, including the Officers Incentive Compensation
Plan. In the event of his termination without "cause," or upon his resignation
for "good reason" or within six months after a "change in control," Mr.
Roudebush will be entitled to a lump sum equal to two years of base salary and
bonus payments, and a continuation of benefits during the two-year period. Upon
a change in control of the Company, all nonvested stock options granted to Mr.
Roudebush in fiscal 1998 will immediately become vested and to the extent not
then exercisable, will become exercisable
10
<PAGE> 13
upon his termination or, in certain cases, resignation. See also footnote 8
under "Executive Compensation -- Summary Compensation Table" regarding the award
of restricted stock made to Mr. Roudebush under his agreement. Mr. Roudebush has
also executed a non-compete agreement with the Company.
The Company also entered into an employment agreement with Theodore K.
Zampetis on September 1, 1997, pursuant to which he will continue to serve as
President and Chief Operating Officer. The agreement provides an incentive for
Mr. Zampetis to remain in his present position at least through August 31, 1999,
by providing for his base salary to continue after August 31, 1999 for one month
for each year of service if he serves through that date and then elects not to
continue his employment. Mr. Zampetis had 25 years of service as of June 30,
1998. He will also be entitled to the same salary continuation if, prior to
August 31, 1999, his employment is terminated without "cause," or if he resigns
his employment for "good reason" or within six months after a "change in
control". In addition, he will receive pension service credit for the same
period his base salary continues. See also footnote 9 under "Executive
Compensation -- Summary Compensation Table" regarding amendments to the
restricted stock agreement entered into between the Company and Mr. Zampetis
with respect to the award of restricted stock made to him in fiscal 1992.
If Mr. Zampetis and the Company agree to continue his employment after
August 31, 1999, the employment term will convert to a three-year "evergreen"
arrangement, under which he will be entitled to a continuation of his base
salary and the benefits described in the previous paragraph for a three-year
period following the occurrence of any of the events described in the previous
paragraph. In no event will payments under his agreement continue beyond his
65th birthday. Mr. Zampetis has also signed a non-compete agreement.
PENSION PLAN AND SUPPLEMENTAL PLANS
Salaried employees of the Company with one year of full-time service are
eligible to participate in The Standard Products Company Salaried Employees'
Pension Plan (the "Pension Plan") and The Standard Products Company Supplemental
Salaried Employees' Pension Plan (the "Supplemental Plan").
The Pension Plan provides for normal retirement benefits based on the
highest average monthly compensation for 60 consecutive months within the last
120 months prior to retirement (final average compensation). The basic formula
is 1 1/15% times final average compensation (up to but not exceeding Social
Security-covered compensation), plus 1 2/3% of the amount (if any) of final
average compensation in excess of Social Security-covered compensation, all
multiplied by the participant's years of pension service under the Plan (up to a
maximum of 30 years). Employees who were hired prior to July 1, 1976, may have
their normal retirement benefit calculated under an alternative formula as
follows: final average compensation multiplied by a percentage equal to the sum
of (i) 21.25%, plus (ii) 0.75% for each year of pension service up to a maximum
of 25 years (that is, a maximum of 40%). In addition, the Plan provides that the
minimum normal retirement benefit shall in all events be no less than $13
multiplied by a participant's years of pension service. Certain of these benefit
formulas were adopted effective July 1, 1989, to comply with the Tax Reform Act
of 1986. Notwithstanding any new benefit formulas, each participant is entitled
to a benefit no less than his or her accrued benefit as of June 30, 1989.
Participants may elect that retirement benefits be paid in the form of a life
annuity, a ten-year or five-year sum certain annuity, or various joint and
surviving spouse options; the Plan's normal retirement benefit amount is payable
monthly, based on a single-life annuity with five years certain.
Compensation covered under the Pension Plan includes (i) base salary, (ii)
bonuses, (iii) payments for overtime, (iv) salary deferred under the Company's
Individual Retirement and Investment Trust Plan, and (v) the taxable value of
restricted Common Shares that vest in a particular year. Extraordinary payments,
Company contributions to the Company's Individual Retirement and Investment
Trust Plan, and salary deferred under the Supplemental 401(k) and Salary and
Bonus Deferral Plans are not included in compensation. Additionally, the
collective value of the taxable amount of vested restricted Common Shares and
bonuses received in any plan year in excess of 50% of base salary in that plan
year is not included in compensation.
The Supplemental Plan is a nonqualified plan which provides a supplemental
benefit for eligible salaried employees under terms and conditions similar to
those under the Pension Plan. The supplemental benefit is
11
<PAGE> 14
equal to the excess of (i) the benefit that would have been payable to the
employee under the Pension Plan without regard to certain compensation, annual
retirement income and benefit limitations imposed by federal law over (ii) the
benefit payable to the employee under the Pension Plan.
The table below shows estimated annual benefits payable (assuming payments
made in the normal retirement form, and not under any of the various survivor
forms of benefit payments) under the Pension Plan and the Supplemental Plan to
any salaried employee upon retirement in the 1998 plan year at age 65 after
selected periods of service.
<TABLE>
<CAPTION>
AVERAGE ANNUAL ESTIMATED ANNUAL BENEFITS UPON RETIREMENT IN 1998 PLAN YEAR
SALARY USED WITH YEARS OF SERVICE INDICATED
TO DETERMINE --------------------------------------------------------------
BENEFITS 15 YEARS 20 YEARS 25 YEARS 30 YEARS AND OVER
- -------------- -------- -------- -------- -----------------
<S> <C> <C> <C> <C>
$125,000 ............................ $ 28,448 $ 37,931 $ 50,000 $ 56,897
150,000 ............................ 34,698 46,265 60,000 69,397
175,000 ............................ 40,948 54,598 70,000 81,897
200,000 ............................ 47,198 62,931 80,000 94,397
225,000 ............................ 53,448 71,265 90,000 106,897
250,000 ............................ 59,698 79,598 100,000 119,397
300,000 ............................ 72,198 96,265 120,331 144,397
350,000 ............................ 84,698 112,931 141,164 169,397
400,000 ............................ 97,198 129,598 161,997 194,397
450,000 ............................ 109,698 146,265 182,831 219,397
500,000 ............................ 122,198 162,931 203,664 244,397
550,000 ............................ 134,698 179,598 224,497 269,397
600,000 ............................ 147,198 196,265 245,331 294,397
650,000 ............................ 159,698 212,931 266,164 319,397
700,000 ............................ 172,198 229,598 286,997 344,397
750,000 ............................ 184,698 246,265 307,831 369,397
800,000 ............................ 197,198 262,931 328,664 394,397
850,000 ............................ 209,698 279,598 349,497 419,397
900,000 ............................ 222,198 296,265 370,331 444,397
</TABLE>
As of June 30, 1998, the credited years of service for retirement purposes
were as follows: Mr. Roudebush -- 1; Mr. Reid -- 42; Mr. Zampetis -- 25; Mr.
Keys -- 26; Mr. Mack -- 9; and Mr. Sheley -- 2.
Two non-qualified deferred compensation plans, the Supplemental 401(k) Plan
and the Salary and Bonus Deferral Plan, became effective on January 1, 1998.
Under the Supplemental 401(k) Plan, management and executive-level employees of
the Company, including the named executive officers, are permitted to defer
compensation that could have been deferred under the Company's 401(k) plan but
for the limitations placed on "highly-compensated" employees under the Internal
Revenue Code, and but for the dollar limit that can be contributed annually to
such a plan under Section 402(g) of the Internal Revenue Code. The Salary and
Bonus Deferral Plan permits additional amounts of compensation to be deferred by
the same individuals, regardless of any limitation placed on their ability to
contribute to the 401(k) plan.
Under both plans, compensation deferred by eligible participants will be
credited to an unfunded account established for each participant. No funds will
be set aside to satisfy the obligation owed under the plans. Amounts deferred
will be credited with interest at the Moody's Long-Term Baa Corporate Bond Index
rate, which approximates the Company's long-term borrowing rate. Participants
will receive payment of the amounts owed to them from the general assets of the
Company. Those amounts will generally not be payable until after the participant
terminates employment. In the event of a change in control of the Company, as
such term is defined in the plans, cash equal to the amounts credited to the
accounts of participants will be funded in a "rabbi trust," which will exist
solely to pay benefits to participants, except that such funds will be available
to creditors of the Company in the event of the insolvency of the Company.
12
<PAGE> 15
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Brandon, Moll, Myers, Perkins and Riedel are the members of the
Company's Compensation Committee. There are no Compensation Committee
interlocks.
Transactions with Management. Edward B. Brandon, a director of the Company,
is a director and the retired Chairman, President and Chief Executive Officer of
National City Corporation. The Company has a $225,000,000 revolving credit
agreement with National City Bank, Cleveland, Ohio ("National City"), a wholly
owned subsidiary of National City Corporation, and six other banks, until
September 30, 2002. National City has a 22.2% participation in such credit
agreement. The Company borrowed from National City during the 1998 fiscal year
on a short-term uncommitted line of credit at prevailing market rates.
John D. Drinko, a director of the Company, is senior advisor to the policy
committee of Baker & Hostetler LLP, which law firm acts as principal outside
counsel for the Company.
PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total return of a
hypothetical investment in the Company's Common Shares with the cumulative total
return of a hypothetical investment in each of the Standard & Poor's Composite
- -- 500 Index and the Dow Jones Auto Parts Index based on the respective market
price of each such investment at the end of each of the Company's fiscal years
shown below, assuming in each case an initial investment of $100 on July 1,
1993, and reinvestment of dividends.
<TABLE>
<CAPTION>
STANDARD
Measurement Period PRODUCTS INDUSTRY BROAD
(Fiscal Year Covered) CO. INDEX MARKET
<S> <C> <C> <C>
1993 100.00 100.00 100.00
1994 86.08 99.26 101.41
1995 65.86 109.58 127.85
1996 72.87 121.05 161.09
1997 81.52 147.65 216.99
1998 92.99 167.48 216.99
</TABLE>
COMPENSATION COMMITTEE REPORT
The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors, which has responsibility for
reviewing all aspects of the compensation program for the executive officers of
the Company. The Compensation Committee is comprised of the five directors
listed at the end of this report, none of whom is an employee of the Company.
13
<PAGE> 16
The Committee's primary objective with respect to executive compensation is
to establish programs which attract and retain key executives and align their
compensation with the financial and stock market performance of the Company and,
in the case of executives who are the heads of business units or subsidiaries of
the Company, with the financial performance of those business units or
subsidiaries. As such, the Committee has established management incentive
compensation programs to provide annual cash bonuses based upon the financial
performance of the Company, and where appropriate, its business units and
subsidiaries, relative to performance targets established by or under the
auspices of the Committee. In keeping with the Committee's belief that aligning
the interests of management with those of the shareholders through stock-based
incentives is important to the creation of shareholder value, the Committee has
also established stock option and restricted stock plans as an important part of
the Company's executive compensation program.
The primary components of the Company's executive compensation program are:
(i) base salaries, (ii) annual cash incentive opportunities, and (iii) long-term
incentive opportunities in the form of stock-based awards. Each of these
components is discussed below.
Base Salaries. Base salaries for each of the Company's executive officers
are generally reviewed every 12 to 14 months by the Committee. In deciding upon
the appropriate level of base salary, the Committee uses commercially available
compensation surveys to determine market pay levels for similar positions in
similarly sized automotive parts and selected general manufacturing companies.
The Committee's objective is to use such survey data to establish a midpoint for
each position that is at approximately the 50th percentile of base pay for such
position among such comparable companies, and to compensate each executive in an
amount that is within a range from approximately 20% above to approximately 20%
below the midpoint established for the position. The actual base salary within
the range will be based upon a variety of factors, including experience,
performance, skill level, and internal equity.
With respect to the $500,000 base salary established for Mr. Roudebush when
he joined the Company in July 1997, the Committee took into account Mr.
Roudebush's overall experience and responsibilities, as well as the compensation
paid to chief executive officers of comparable companies, as shown in relevant
survey data. The Committee also utilized the services of the executive search
consultant who assisted the Company in hiring Mr. Roudebush for guidance in
determining his appropriate level of compensation.
Annual Cash Incentives. All executive officers of the Company are eligible
to participate in the Officers Incentive Compensation Plan and receive annual
cash bonus awards based on a percentage of base salary. For fiscal year 1998,
the maximum bonus attainable for each executive officer was 50% of base salary.
Each year, the Compensation Committee sets a target goal for maximum bonus
awards based on the Company's earnings per Common Share. Actual bonus awards
paid are proportional to the percentage of the target goal actually attained.
The bonus target for fiscal year 1998 was $2.75 per Common Share. Had the target
been reached, the bonus paid to each executive officer would have been 50% of
base salary. Since earnings per Common Share for fiscal 1998 were $2.56, the
bonus award for fiscal 1998 to the executive officers of the Company, including
Mr. Roudebush, was equal to 46.55% of base salary. The bonus paid to executive
officers who are also the heads of subsidiaries of the Company is based upon the
financial performance of those subsidiaries versus budgeted financial
performance targets. In fiscal year 1998, the performance of the Company's two
domestic subsidiaries, Holm Industries, Inc., and Oliver Rubber Company, both of
which are headed by executive officers of the Company, exceeded the budgeted
performance targets, and bonuses equal to 50% of base salary were paid to those
executives.
For fiscal year 1999 and beyond, the Compensation Committee has changed the
Company's annual bonus plan for executives. Bonuses for all executive officers
who are not the heads of subsidiaries or separate business units of the Company
will continue to be based upon a targeted level of earnings per Common Share
established each year by the Committee, and will continue to equal 50% of base
salary if the earnings per Common Share target is exactly met. However, no bonus
will be payable unless the Company's actual earnings per Common Share reach at
least 50% of the targeted level. Previously, some bonus was payable so long as
the Company was profitable for the year. Any bonus payable if the earnings per
Common Share target is not reached will be a lower percentage of base salary
than was the case previously. A bonus equal to 25% of
14
<PAGE> 17
base salary will be payable if 50% of the earnings per Common Share target is
reached. That percentage increases by 1 1/2% for each percentage point increase
in earnings per Common Share relative to the target. If the earnings per Common
Share target is exceeded, however, the executive will be entitled to a bonus of
between 50% and 75% of base salary, depending upon the extent to which the
earnings per Common Share target is exceeded. The maximum bonus of 75% of base
salary will be paid if the Company's actual earnings per Common Share equals or
exceeds 116 2/3% of the earnings per Common Share target. The Committee believes
that this change will provide executives with a greater incentive to meet or
exceed the Company's earnings per share target. In addition, under the revisions
made to the bonus plans the Committee has specifically reserved the ability to
reduce an executive's bonus if it determines that specific performance factors
so warrant.
For executive officers who are also the heads of separate business units or
subsidiaries of the Company, 60% of the bonus will be attributable to the
performance of the Company, under the formula set out above, and 40% will be
based upon the performance of the business unit versus a budgeted performance
target established each year for that unit, using the same formula used to
determine the portion of bonus which is attributable to the Company's
performance. Payment for business unit performance which exceeds the targeted
level will be made only if the performance of the total Company equals or
exceeds the targeted level of earnings per share.
In setting the earnings per share target for a particular fiscal year, the
Committee reviews in detail management's budget for the year, and the components
and assumptions for the Company's business used in preparing the budget, and
establishes a target based upon the budget which provides a substantial
challenge to the Company's executive officers to improve the operating
performance of the Company, and thus enhance long-term shareholder value.
Long-Term Stock Incentives. The Company provides long-term stock incentives
to its executive officers and key employees through grants of options to
purchase the Company's Common Shares and, in the case of a select group of
senior executives, awards of restricted Common Shares. Plans providing for these
stock-based incentives have been approved by the Company's shareholders. The
decision as to who will be awarded restricted Common Shares, the number to be
awarded, and the terms of the awards is within the sole discretion of the
Committee. The awards made under the plans have generally provided for Common
Shares to be earned in annual installments over a period of years, with the
amount actually earned each year determined under the same percentage formula
used to determine the bonus paid for corporate performance under the Officers
Incentive Compensation Plan. The awards provide that shares earned under them
are subject to forfeiture if the executive receiving them does not remain
employed for some period of time (generally three years) after the shares are
earned. Awards under the plans have been made to Messrs. Reid, Roudebush,
Zampetis, Keys, and Gerard Mesnel, Executive Vice President -- Advanced
Technology Worldwide. A description of the awards made to Messrs. Reid,
Roudebush, Zampetis and Keys is set forth in "Executive Compensation -- Summary
Compensation Table" on page 7 of this proxy statement.
The Company's stock option plans permit the Committee, in its sole
discretion, to grant stock option awards to key management employees of the
Company, upon terms and conditions which provide an incentive for those
employees to remain employed by the Company and benefit from long-term increases
in the Company's stock price. Options are granted under the plan at exercise
prices at least equal to the fair market value of underlying Common Shares on
the date of grant, and generally become exercisable in installments over a
period of approximately three years. Under stock option grant guidelines adopted
by the Committee in June 1998, executives at particular job grade levels can
expect to be considered annually for the grant of a number of options which is
within a range established for each grade level. The amounts actually awarded to
a particular executive within the parameters of the guidelines will be based in
significant part on that executive's personal performance during the year. The
Committee retains discretion to grant more or fewer options to a particular
executive if it determines that doing so is appropriate. Stock options granted
during the last fiscal year to Mr. Roudebush and the other named executive
officers are set forth in "Table II -- Option Grants in Last Fiscal Year" on
page 9 of this proxy statement.
15
<PAGE> 18
Mr. Roudebush was granted an option to purchase 200,000 Common Shares and
was awarded 50,000 restricted Common Shares upon the commencement of his
employment with the Company. The Committee felt that a significant component of
Mr. Roudebush's compensation should be tied to improvements in the value of the
Company's Common Shares, since taking steps to substantially increase
shareholder value is a key measurement of Mr. Roudebush's performance. Coupled
with the stock ownership requirement applicable to Mr. Roudebush (see "Executive
Stock Ownership Requirements" below), the Committee believes that Mr. Roudebush
has a stake in the share performance of the Company which is sufficient to
closely align his interests with those of the Company's shareholders. Further
discussion regarding the terms of Mr. Roudebush's employment are set forth under
"Certain Employment Agreements" on page 10 of this proxy statement.
Executive Stock Ownership Guidelines. In June 1998, the Compensation
Committee adopted stock ownership guidelines applicable to all executive
officers of the Company. The Committee determined that members of senior
management who are in a position to affect shareholder value should accumulate
and retain a certain ownership interest in the Company's Common Shares. The
Committee believes that such a requirement will increase the focus of all
executives on the enhancement of shareholder value, and will provide them with a
direct interest in continuing improvements in the price of the Company's Common
Shares.
Under the guidelines, executives in the following positions will be
expected to own Common Shares in the following amounts:
<TABLE>
POSITION DOLLAR VALUE OWNED
- ------------------------------------------------------------ ---------------
<S> <C>
Chief Executive Officer..................................... 4 x Base Salary
Chief Operating Officer..................................... 3 x Base Salary
Vice Presidents (including Executive Vice Presidents and the
Presidents of Holm Industries, Inc., and Standard Products
Canada)................................................... 2 x Base Salary
Officers other than Vice Presidents......................... 1 x Base Salary
</TABLE>
All current executive officers are expected to meet the ownership
guidelines by July 1, 2003. All future executive officers will have five years
from the date on which they commence employment to meet them. While no absolute
requirement has been imposed as to what level of ownership executives shall be
expected to meet at particular points in time before they must satisfy the
requirements, the Committee will monitor the progress being made by each
executive from time to time, and will expect that demonstrable progress toward
meeting the guidelines will be made. The Committee may consider an executive's
personal financial circumstances in determining whether an executive has made a
reasonable effort to comply with the guidelines. Restricted Common Shares earned
under the Company's restricted stock plans and Common Shares held in the
Company's Individual Retirement and Investment Trust Plan will be included in
determining whether the ownership guidelines have been met by a particular
executive. Unexercised stock options will not be included.
Policy on Deductibility of Compensation. It is the Company's policy that
all compensation paid to its executive officers be deductible for federal income
tax purposes, and that the Company will take such steps with respect to
performance-based compensation plans as are necessary to ensure the
deductibility of all compensation under Section 162(m) of the Internal Revenue
Code.
Alan E. Riedel, Chairman
Edward B. Brandon
Curtis E. Moll
Malcolm R. Myers
Leigh H. Perkins
16
<PAGE> 19
SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
Any shareholder proposals meeting the requirements of Rule 14a-8
promulgated under the Securities Exchange Act of 1934 which are intended to be
presented at the Company's 1999 Annual Meeting of Shareholders must be received
by the Company at 2401 South Gulley Road, Dearborn, Michigan 48124, Attention:
Corporate Secretary, on or before May 19, 1999, for inclusion in the Company's
proxy statement and form of proxy relating to the 1999 Annual Meeting of
Shareholders. For those shareholder proposals which are not submitted in
accordance with Rule 14a-8 (i.e., a proposal to be submitted at the next Annual
Meeting of Shareholders but not submitted for inclusion in the Company's proxy
statement), the Company's management proxies may exercise their discretionary
voting authority, without any discussion of the proposal in the Company's proxy
materials, for any proposal which is received by the Company after August 2,
1999.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and owners of more than 10% of the Company's
Common Shares, to file with the Securities and Exchange Commission (the "SEC")
and the New York Stock Exchange initial reports of ownership and reports of
changes in ownership of Common Shares and other equity securities of the
Company. Executive officers, directors and owners of more than 10% of the Common
Shares are required by SEC regulations to furnish the Company with copies of all
forms they file pursuant to Section 16(a).
To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended June 30, 1998, all Section
16(a) filing requirements applicable to its executive officers, directors and
greater-than-10% beneficial owners have been met, except that Mr. Moll
inadvertently failed to file a Form 4 with respect to an acquisition of Common
Shares on May 2, 1995. A corrective Form 4 was filed for Mr. Moll in September
1998.
OTHER MATTERS
Copies of the Company's Annual Report on Form 10-K as submitted to the
Securities and Exchange Commission are available to shareholders without charge
upon written request. Please address your request to Mr. Donald R. Sheley, Jr.,
Vice President, Finance, at the Company's Corporate Headquarters, 2401 South
Gulley Road, Dearborn, Michigan 48124.
The Company has not selected its independent public accountants for the
current fiscal year. This selection will be made later in the year by the Board
of Directors. Representatives of Arthur Andersen LLP, which served as the
Company's independent public accountants during the fiscal year ended June 30,
1998, are expected to be present at the annual meeting with the opportunity to
make a statement if they so desire and to be available to respond to appropriate
questions.
If the enclosed proxy is executed and returned to the Company, the persons
named in it will vote the shares represented by such proxy at the meeting. The
form of proxy permits specification of a vote for the election of directors as
set forth under "Election of Directors" above, the withholding of authority to
vote in the election of directors, or the withholding of authority to vote for
one or more specified nominees.
Where a choice has been specified in the proxy, the shares represented will
be voted in accordance with such specification. If no specification is made,
such shares will be voted at the meeting to elect directors as set forth under
"Election of Directors" above. Under Ohio law and the Company's Second Amended
and Restated Articles of Incorporation, as amended, broker non-votes and
abstaining votes will not be counted in favor of or against any nominee. If any
other matters shall properly come before the meeting, the persons
17
<PAGE> 20
named in the proxy will vote thereon in accordance with their judgment.
Management does not know of any other matters which will be presented for action
at the meeting.
By order of the Board of Directors,
Richard N. Jacobson
RICHARD N. JACOBSON
General Counsel and Secretary
Dated: September 15, 1998
18
<PAGE> 21
THE STANDARD PRODUCTS COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS,
SUPPORTING SCHEDULES AND SUPPLEMENTAL DATA
<TABLE>
<S> <C>
Selected Financial Data..................................... F-1
Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ F-2
Consolidated Financial Statements and Supplemental Data
Management's Responsibility for Financial Statements...... F-10
Report of Independent Public Accountants.................. F-10
Consolidated Statements of Income for the Years ended June
30, 1998, 1997 and 1996................................ F-11
Consolidated Balance Sheets, June 30, 1998 and 1997....... F-12
Consolidated Statements of Cash Flows for the Years ended
June 30, 1998, 1997 and 1996........................... F-13
Consolidated Statements of Shareholders' Equity for the
Years ended June 30, 1998, 1997 and 1996............... F-14
Notes to Consolidated Financial Statements................ F-15
</TABLE>
All schedules, other than Schedule II, are omitted since the information is
not required or is otherwise furnished.
Separate financial statements of the Registrant have been omitted since
restricted net assets of consolidated subsidiaries and unconsolidated investees
and the Company's share of the unconsolidated subsidiaries' equity is less than
25% of the Company's net assets at June 30, 1998.
<PAGE> 22
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT
Net Sales............................. $1,101,309 $1,108,268 $1,083,920 $995,926 $872,367
Gross Income.......................... 165,969 145,456 108,482 99,455 119,427
Selling, General & Administrative
Expenses............................ 78,025 68,559 69,616 60,121 57,787
Non-recurring Charge.................. -- 17,661 -- 8,832 4,424
Interest Expense...................... 12,389 12,914 14,944 14,085 9,982
Other (Income) Expense, net........... 7,033 (137) (4,602) (842) (2,981)
Income before Taxes on Income......... 68,522 46,459 28,524 17,259 50,215
Provision for Taxes on Income......... 25,078 18,929 13,947 (2,807) 17,183
Net Income............................ $ 43,444 $ 27,530 $ 14,577 $ 20,066 $ 33,032
PER SHARE
Net Income -- Basic................... $ 2.58 $ 1.64 $ .87 $ 1.20 $ 1.99
Net Income -- Diluted................. $ 2.56 $ 1.63 $ .87 $ 1.20 $ 1.97
Cash Dividends Declared............... $ .68 $ .68 $ .68 $ .68 $ .65
Book Value............................ $ 17.79 $ 15.96 $ 15.42 $ 15.56 $ 14.55
BALANCE SHEET
Property, Plant & Equipment........... $ 624,188 $ 583,614 $ 548,816 $489,534 $422,576
Accumulated Depreciation.............. 293,836 280,608 250,278 220,095 180,567
Total Assets.......................... 684,246 691,859 684,695 701,889 624,314
Working Capital....................... 24,078 46,565 53,455 127,498 87,922
Long-term Debt........................ 92,457 121,804 143,041 190,522 135,381
Shareholders' Equity.................. 300,172 268,357 258,765 260,495 242,677
Cash Dividends Declared............... $ 11,465 $ 11,579 $ 11,400 $ 11,445 $ 10,821
OTHER
Additions to Property, Plant &
Equipment, net...................... $ 77,335 $ 59,004 $ 79,684 $ 54,671 $ 59,120
Depreciation & Amortization........... 55,131 53,130 52,545 46,839 40,495
EBITDA................................ 136,042 112,503 96,013 78,183 100,692
Cash Flow from Operating Activities
less Dividends and Net Fixed Asset
Additions........................... $ 17,497 $ 9,462 $ 31,656 $(13,007) $(23,604)
Number of Employees................... 10,017 10,350 10,177 10,308 9,480
Shares Outstanding (Year-end)......... 16,878 16,810 16,785 16,736 16,674
Average Shares Outstanding -- Basic... 16,849 16,804 16,758 16,711 16,627
Average Shares
Outstanding -- Diluted.............. 16,975 16,856 16,780 16,748 16,808
Return on Sales....................... 3.9% 2.5% 1.3% 2.0% 3.8%
Return on Average Shareholders'
Equity.............................. 15.3% 10.4% 5.6% 8.0% 14.1%
</TABLE>
F-1
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(ALL AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
OVERVIEW
The Standard Products Company (the "Company") is recognized as one of the
world's leading suppliers of sealing, trim and vibration-control systems to
original equipment manufacturers ("OEMs") of passenger cars and light trucks.
The Company also maintains a leading position in providing sealing solutions for
the refrigeration industry. These operations comprise the Company's
Transportation Equipment Segment.
The Company's truck tire retreading business is reported as the Tread
Rubber Segment. This business also has a significant position in its industry.
Net income of the Company and its consolidated subsidiaries was $43,444 in
fiscal 1998, or $2.56 per common diluted share compared with $27,530, or $1.63
per common diluted share in fiscal 1997. Results in fiscal 1997 included a
non-recurring charge of $17,661, or $0.63 per share net of tax, for the closure
of manufacturing facilities in Lexington, Kentucky and Schenectady, New York.
The Company also incurred costs related to the closures of approximately $1,665,
or $0.06 per share net of tax, in the second half of fiscal 1997 which did not
qualify for immediate accrual.
The Company's Financial Statements and Notes to Financial Statements on
Pages F-10 through F-27, including the Report of Independent Public Accountants
(the "Consolidated Financial Statements"), should be read as an integral part of
this discussion and analysis.
TRANSPORTATION EQUIPMENT SEGMENT
Net sales by geographic location in this segment were:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
North America........ $663,952 $682,817 $687,009
Europe............... 228,563 234,504 241,617
South America........ 76,913 58,680 29,479
-------- -------- --------
Total........... $969,428 $976,001 $958,105
======== ======== ========
</TABLE>
SALES PERFORMANCE -- 1998 VERSUS 1997
Fiscal 1998 sales for the Transportation Equipment Segment were $969,428, a
decrease of $6,573, or 0.7% from the prior year.
North American automotive sales decreased $26,828 to $560,347 as volumes
were down approximately $14,000 and translation losses from a weakened Canadian
dollar diminished sales by an additional $8,300. The volume decrease was the
result of lower sales on several different platforms, as well as the impact of
the United Auto Workers ("UAW") strike against General Motors, which started
late in the fourth quarter of 1998. Lower sales resulted in part from reduced
unit volumes on certain platforms and from the effects of price concessions
granted to customers during the year. European automotive operations experienced
a sales decrease of $5,941, or 2.5% to $228,563, as a result of translation
losses on the weakened French franc, which totaled $13,900, and customer price
reductions of $5,100. These declines were partially offset by improved volumes
of $7,300 in the United Kingdom on the Opel Astra and certain Saab and Rover
models, and $3,100 in France on several new Volvo platforms. The Transportation
Segment's overall sales decrease was balanced by improvements at the Company's
Brazilian subsidiary, where sales increased $18,233, or 31.1% to $76,913. This
increase is primarily attributable to volume gains on the Fiat Palio platform.
High interest rates in Brazil did not affect sales in fiscal 1998, both because
the subsidiary was able to export a portion of its production to Fiat in Poland
and other countries, and because Fiat did not significantly reduce production
due to slowing automotive sales in Brazil until after the end of fiscal 1998.
Sales at the Company's Holm Industries subsidiary were 7.9% higher than the same
period last year, primarily due to higher volumes from existing customers.
SALES PERFORMANCE -- 1997 VERSUS 1996
Fiscal 1997 sales for the Transportation Equipment Segment were $976,001,
an increase of $17,896, or 1.9% over the prior year.
The overall sales increase was primarily attributable to the fact that the
Company's new plant in Brazil was operational for the entire year. The new
F-2
<PAGE> 24
plant shipped products for only the final four
months of fiscal 1996.
The sales reduction in North America resulted primarily from decreases in
sales of the Ford Taurus/Sable and Escort, Chevrolet Lumina and Plymouth/Dodge
Neon. These reductions were not completely offset by increases in sales of the
Jeep(R) Grand Cherokee and Chrysler minivan and by increased participation in
various General Motors programs. In fiscal 1997, automotive production in North
America was essentially flat compared to 1996, and trended downward in the
fourth quarter of fiscal 1997, when car production by General Motors, Ford and
Chrysler combined was more than 10% lower than in the same period of fiscal
1996. The Company was also under continued pressure from the OEMs to reduce the
unit price of its products. The appliance sealing business experienced a $2,099
increase in sales over 1996 levels due to continued strong appliance demand in
the United States.
European sales decreased $7,113, or 2.9%, primarily as a result of currency
translation related to the French franc. This was partially offset by currency
translation gains arising from a stronger British pound. Volumes in Europe were
up slightly over 1996 levels, principally as a result of sales to Toyota,
Renault and Volvo.
OPERATING PERFORMANCE -- 1998 VERSUS 1997
Excluding the effect of the U.S. plant closures announced in fiscal 1997,
operating income for the Transportation Equipment segment improved by $6,605, or
9.0% to $79,705 from the previous year despite reduced sales.
Gross margins on the Company's products improved by $15,953, or 13.5%, over
prior year levels. The improved results occurred primarily in North America and
Brazil. Improvements in North American automotive operations totaled $16,153,
and were attributable to continued process enhancements, cost reduction
initiatives (particularly material savings) and efficiencies gained from the
closure of two manufacturing facilities. Operations in Brazil turned profitable
during fiscal 1998, and operating income was up $11,400 from fiscal 1997. These
improvements were offset by margin reductions in Europe, principally the United
Kingdom, as a result of start-up costs associated with a substantial number of
product launches, including the Opel Astra. In addition, the Company estimates
that the UAW strike at General Motors reduced fourth quarter pretax earnings by
approximately $2,700.
Research and development costs increased by $729, or 1.7% from the previous
year for the segment. The increase is primarily attributable to increased
personnel costs in the United Kingdom related to a substantial number of
concurrent product launches, in which several new manufacturing processes were
introduced.
Selling, general and administrative expenses increased substantially for
the segment to $54,579, a 20.7% increase from prior year levels due to
additional personnel costs of $3,400, facility costs of $1,500, depreciation on
capital expenditures $1,300 and professional fees of $1,100. This large increase
reflects the full-year cost of employees added in the fourth quarter of fiscal
1997 as part of an effort to upgrade the talent of the people in the
organization; an upgrade of leased computer hardware throughout the Company;
professional fees utilized in the support of acquisitions and other strategic
projects; and the leasing of additional space to support the foregoing efforts.
OPERATING PERFORMANCE -- 1997 VERSUS 1996
Despite only modest sales growth from 1996 to 1997, the Transportation
Equipment segment experienced strong improvements in operating results.
Operating income after charges for the plant closings in Lexington, Kentucky,
and Schenectady, New York, was $55,439, an increase of $15,603, or 39.2% over
fiscal 1996 levels. This improvement was attributable to the success of ongoing
process improvement and cost reduction initiatives, including a focused effort
on lowering raw material costs. Gross margin on sales showed continued
improvement throughout the year. Operating income in Brazil also improved by
over $8,500 as this operation moved from start-up toward full production.
Research and development costs increased substantially due in large part to
an investment by the Company in vehicle sealing systems with cosmetic, weight
and performance characteristics superior to those then in existence, and which
would allow for cycle time improvements when placed in production. This
investment totaled approximately $1,500 in fiscal 1997. The Company also
incurred increased costs totaling $972 from the addition of engineering staff
for its Brazilian operation.
F-3
<PAGE> 25
Selling, general and administrative expenses decreased from prior year
levels due to the absence of start-up costs related to the Brazilian plant of
$6,100. This decrease was substantially offset by increased personnel costs for
areas targeted to improve customer service.
The Company incurred a charge of $17,661, before tax, for the closure of
two North American manufacturing facilities. These closures were deemed
necessary by management to consolidate operations and reduce overcapacity in
this geographic area. Ongoing production programs at these sites were
transferred to existing locations in the United States. The closures were
completed in December 1997 and have enhanced the Company's profitability.
TREAD RUBBER SEGMENT
GENERAL
Oliver Rubber Company ("Oliver") manufactures and markets precure and
moldcure tread rubber, bonding gum, cement, repair materials and equipment for
use in the tire retreading industry. In addition, Oliver supplies custom-mixed
rubber to the Company and certain affiliates for use in the automotive original
equipment business.
SALES PERFORMANCE -- 1998 VERSUS 1997
Sales for fiscal 1998 for the North American based Tread Rubber segment
were $150,256, an increase of $4,759 or 3.3%, over fiscal 1997. Included in this
amount were intersegment sales of $18,375, an increase of $5,145 or 38.9%
compared to the prior year. The intersegment sales increase is the continuation
of a trend to take advantage of Oliver's upgraded mixing operations to meet the
raw material needs within the Transportation Equipment segment. Sales to third
parties in fiscal 1998 were down slightly when compared to the prior year,
decreasing $386. Reduced equipment sales in fiscal 1998 related to the Oliver's
agreement with Treadco, Inc. were offset by increased precure, moldcure and
custom mix volume gains.
SALES PERFORMANCE -- 1997 VERSUS 1996
Fiscal 1997 sales totaled $145,497, an increase of 7.1% over fiscal 1996
sales of $135,869. Included in this amount were $13,230 of intersegment sales,
an increase of 31.6% over prior year levels. The increase in intersegment sales
resulted from investments made by Oliver to upgrade the capacity and quality of
rubber mixing operations at its Asheboro, North Carolina plant. Increased sales
to third parties were primarily the result of Oliver's agreement with Treadco,
Inc., the largest independent truck tire retreader in the United States, which
was signed in 1996.
OPERATING PERFORMANCE -- 1998 VERSUS 1997
Operating income in the Tread Rubber segment for fiscal 1998 was $14,040,
an increase of $4,912, or 53.8% over the same period last year. The enhanced
operating performance is the result of continued process improvements resulting
from the upgrade of manufacturing facilities and efficiencies gained with the
closure of a manufacturing plant in Oakland, California and the relocation of
business to existing plants. The costs to close the facility, net of any gains
on the sale of land and building, were insignificant and were included in normal
operations. Oliver also benefited from favorable raw material prices, partly as
a result of the Company's worldwide procurement initiatives.
OPERATING PERFORMANCE -- 1997 VERSUS 1996
Operating income in the Tread Rubber segment for fiscal 1997 was $9,128, an
increase of $5,050, over fiscal 1996. Approximately $2,300 of this increase is
the result of the sales increases noted above. In addition, improved operating
efficiencies due to the upgrade of manufacturing facilities, and an emphasis on
improving product mix contributed to increased operating income. These increases
were partially offset by increased administrative costs related to enhancing the
information systems and selling capabilities of this segment.
OTHER (INCOME) EXPENSE
Interest expense was $12,389 for 1998, compared to $12,914 for 1997, a
decrease of $525. The decrease was primarily attributable to lower borrowings
under revolving credit agreements in the United States and France during 1998,
lower short-term interest rates in the United States and decreased interest from
hedging transactions. The lower borrowing levels are a direct result of
increased cash generated by operations. These improvements were substantially
offset by interest costs from increased short-term borrowings in Brazil and the
United Kingdom. Interest expense in
F-4
<PAGE> 26
Brazil was also impacted by its government's actions to substantially increase
short-term interest rates.
Interest expense was $12,914 for 1997, compared to $14,944 for 1996, a
decrease of $2,030. The decrease was primarily attributable to lower borrowings
under the Company's revolving credit agreement during 1997. This resulted from
reduced capital expenditures due to the completion of the Brazilian plant and
favorable cash flow from improved operations. The improvement was partially
offset by increased interest from short-term borrowings, primarily in Brazil.
Royalty and dividend income have been comparable for each of the last three
years. "Other, net" was an expense in fiscal 1998 of $7,459, an increase of
$6,938 over the 1997 expense amount of $521. This increase is primarily
attributable to: (i) increased royalty expenditures ($1,168), (ii) exchange
losses ($599), and (iii) operating losses at the Company's joint venture,
Nishikawa Standard Company ("NSC"). As explained in Note 1 of the consolidated
financial statements, the Company's share of NSC's earnings decreased by $4,702.
Other, net in fiscal 1997 declined from the prior year level by $4,450,
principally due to reduced earnings at NSC.
The Company's effective tax rate for fiscal 1998 was 36.6% as compared to
40.7% in fiscal 1997. This reduction is attributable primarily to the reversal
of prior tax adjustments and differences in the overall effective tax rate of
foreign operations. In addition, the impact from the utilization of tax credits
was reduced as a result of an overall improvement in earnings.
The Company's effective tax rate for fiscal 1997 was 40.7% as compared to
fiscal 1996 of 48.9% with the reduction related primarily to improved operating
results in Brazil. While SPB lost money in both 1996 and 1997, reduced losses in
1997 resulted in a lower effective tax rate. The Company did not recognize these
benefits in either year. Implementation of royalty agreements between the
Company and certain of its foreign subsidiaries also lowered the effective tax
rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $106,297 of net cash from operating activities in
fiscal 1998. The major sources were net income, non-cash items such as
depreciation and amortization and a reduction in accounts receivable.
Receivables decreased by $23,161 from the prior year due to reduced amounts
outstanding on tooling for OEMs and a decrease in general receivables as a
result of the General Motors work stoppage.
During fiscal 1998, the Company's net capital spending totaled $77,335, an
increase of $18,331 from the prior year. Fiscal 1998 capital spending included
significant expenditures in the United Kingdom related to a substantial number
of new product launches occurring in fiscal 1998 and 1999 and expenditures
totaling $7,510 for Oliver, related to a production agreement with Michelin
North America, Inc. Also included are expenditures of approximately $8,900 for
completion of the Company's new facilities in Baclair, France and in
Aguascalientes, Mexico. The plant in Mexico is owned by a joint venture which is
70% owned by the Company and 30% owned by Nishikawa Rubber Company of Hiroshima,
Japan. Capital spending for fiscal 1999 is planned to be approximately $65,000.
The Company used improved cash flow from operations in fiscal 1998 to
reduce long-term debt obligations under the Company's revolving credit agreement
and also reduce short-term debt in Brazil, which experienced significant
increases in short-term borrowing rates due to pressure on the Real, resulting
from economic deterioration in Asia. The Company also paid quarterly dividends
throughout fiscal 1998 of $0.17 per share. Dividends are expected to continue
throughout fiscal 1999.
During the three-year period ended June 30, 1998, inflation has been
relatively moderate, and operating costs reflect current costs for raw materials
and inventory, operating expenses and depreciation. It is important to
understand that inflation, as reported on a consumer price index basis, may not
bear a direct relationship to the Company's costs. Although inflation on the
whole was stable during the period, the potential exists for price increases in
the raw materials used in operations such as the costs of petroleum, polymers
and chemicals at a rate greater than the general inflation rate. The Company
does not expect inflation to have any near-term material effect on the costs of
its products, although there can be no assurance that such an effect will not
occur in the future.
Except for Brazil and Mexico, the value of the Company's consolidated
assets and liabilities located outside the United States (which are translated
at period-end exchange rates) and income and
F-5
<PAGE> 27
expenses (which are translated using rates prevailing during the fiscal year)
have been affected by the translation values of the Canadian dollar, French
franc, British pound and Polish zloty. Such translation adjustments are
reported as a separate component of shareholders' equity. While exchange rate
fluctuations have historically not had a significant impact on the Company's
reported operating results, changes in the values of the currencies noted above
will impact the translation adjustments in the future. The Company's operations
in Brazil and Mexico use the U.S. dollar as their functional currency.
Translation adjustments for these operations are included in the determination
of income.
At June 30, 1998, the Company was in compliance with the various covenants
under the agreements pursuant to which it may borrow money. Management expects
that it will remain in compliance with these covenants through the year ending
June 30, 1999.
On June 23, 1998, the Company's Board of Directors authorized the
repurchase of up to 5% of the Company's outstanding common shares over a three
year period should market conditions warrant. During the next year, the Company
believes that its cash requirements for the share repurchase, working capital,
capital expenditures, certain acquisitions, dividends, interest and debt
repayments will be met through internally generated funds and utilization of
available borrowing sources. For a description of the Company's financing
arrangements at June 30, 1998, see Note 7 to the Consolidated Financial
Statements.
YEAR 2000
The "Year 2000" problem relates to computer systems that have time and
date-sensitive programs that were designed to read years beginning with "19,"
but may not properly recognize the year 2000. If a computer system or software
application used by the Company or a third party dealing with the Company fails
because of the inability of the system or application to properly read the year
"2000," the results could conceivably have a material adverse effect on the
Company.
As a key supplier to the automotive, appliance and retreading industries,
the Company's major exposure for Year 2000 problems is the effect of shutting
down production at one of its customer's factories. While lost revenues from
such an event are a concern for the Company, the greater risks are the
consequential damages for which the Company could be liable if it in fact is
found responsible for the shutdown of one of its customer's facilities. Such a
finding could have a material adverse impact on the Company's results of
operations.
The most likely way in which the Company would shut down production at a
customer's facility is by being unable to supply parts to that customer. The
parts supplied by the Company, in most instances, are integral components of the
end products produced by the customer, and the inability to provide them may
render the customer unable to manufacture and sell its products. Breakdowns in
any number of the Company's computer systems and applications could prevent the
Company from being able to manufacture and ship its products. Examples are
failures in the Company's manufacturing application software, barcoding systems,
computer chips embedded in plant floor equipment, lack of supply of materials
from its suppliers, or lack of power, heat or water from utilities servicing its
facilities. The Company's products do not contain computer devices that require
remediation to meet Year 2000 requirements. A review of the Company's status
with respect to remediating its computer systems for Year 2000 compliance is
presented below.
For its information technology, the Company currently utilizes an IBM
AS400-based computing environment which is complemented by a series of
local-area networks ("LANs") that are connected worldwide via a wide-area
network ("WAN"). Substantially all operating systems related to the AS400s, LANs
and WAN have been updated to comply with Year 2000 requirements. In addition,
upgraded and modified versions of the Company's financial, manufacturing
(including bar coding), human resource, and other software applications which
are Year 2000 ready are available, and are now in the process of being
integrated into the Company's systems. The Company presently expects that this
integration will be substantially completed by the end of calendar year 1998.
The Company utilizes non-mainframe computers and software in its various
production processes throughout the world. In several locations it has retained
consulting firms to assist it in identifying potential Year 2000 problems in
those processes, and evaluating the readiness of the computer systems used in
those processes. General findings to date have identified only a few changes
F-6
<PAGE> 28
that need to be made to these systems. Problems have generally related to old
personal computers or memory chips which must be replaced. Although there can be
no assurance that the Company will identify and correct every Year 2000 problem
found in the computer applications used in its production processes, the Company
believes that it has in place a comprehensive program to identify and correct
any such problems, and expects to have substantially completed the remediation
of its production systems by the end of calendar year 1998. At the present time,
the Company does not believe that it requires a contingency plan with respect to
its information technology and production processes, and has therefore not
developed one.
The Company is also reviewing its building and utility systems (heat,
light, phones, etc.) for the impact of Year 2000. Many of the systems in this
area are Year 2000 ready. While the Company is working diligently with all of
its utility suppliers and has no reason to expect that they will not meet their
required Year 2000 compliance targets, there can be no assurance that these
suppliers will in fact meet the Company's requirements. The failure of any such
supplier to fully remediate its systems for Year 2000 compliance could cause a
shutdown of one or more of the Company's plants, which could impact the
Company's ability to meet its obligations to supply products to its customers.
The Company has also commenced a program to determine the Year 2000
compliance efforts of its equipment and material suppliers. The Company has sent
comprehensive questionnaires to all of its significant suppliers regarding their
Year 2000 compliance and is attempting to identify any problem areas with
respect to them. This program will be ongoing and the Company's efforts with
respect to specific problems identified will depend in part upon its assessment
of the risk that any such problems may cause the shutdown of a customer's plant
or other problem which the Company believes would have a material adverse impact
on its operations. Unfortunately, the Company cannot fully control the conduct
of its suppliers, and there can be no guarantee that Year 2000 problems
originating with a supplier will not occur. The Company has not yet developed
contingency plans in the event of a Year 2000 failure caused by a supplier or
third party, but would intend to do so if a specific problem is identified
through the programs described above. In some cases, especially with respect to
its utility vendors, alternative suppliers may not be available.
As a Tier 1 supplier in the auto industry, the Company takes an active role
in many industry-sponsored organizations, including the Automotive Industry
Action Group ("AIAG"). The AIAG has been proactive in working with OEMs and Tier
1, 2 and 3 suppliers to ensure that the industry as a whole addresses the Year
2000 problem. Tools to assist in achieving compliance include standardized
questionnaires, regular meetings of members, follow-up by AIAG personnel
regarding answers to questionnaires, etc. The Company continues to work with
such industry groups to ensure compliance.
The information presented above sets forth the key steps taken by the
Company to address the Year 2000 problem. There can be no absolute assurance
that third parties will convert their systems in a timely manner and in a way
that is compatible with the Company's systems. The Company believes that its
actions with suppliers will minimize these risks and that the cost of Year 2000
compliance for its information and production systems will not be material to
its consolidated results of operations and financial position.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." This standard establishes guidelines for the display of comprehensive
income for financial statement purposes. The objective of the statement is to
report a measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than transactions
with owners.
The FASB has issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This standard requires extensive disclosure
of operating segments based on the "management approach." This approach
organizes segments within a company for making operating decisions and assessing
performance. Reportable segments can be based on products and services,
geography, legal structure or any other manner in which management disaggregates
the company. This Statement requires reporting segment profit or loss, certain
specific revenue and expense items and segment assets. It also requires
reconciliations of total segment revenues, total segment profit or loss, total
segment assets and other amounts disclosed for
F-7
<PAGE> 29
segments to corresponding amounts reported in the Consolidated Financial
Statements. Restatement of comparative information for earlier periods presented
is required in the initial year of application. Interim information is not
required until the second year of application, at which time comparative
information is required.
The FASB has issued SFAS No. 132, "Employer's Disclosures about Pensions
and Other Post-retirement Benefits." This standard revises employers'
disclosures on pension and other postretirement benefit plans. The objective of
the statement is to standardize the disclosure requirements and report
additional information on changes in the benefit obligations and fair value of
plan assets.
SFAS Nos. 130, 131 and 132 are effective for fiscal years beginning after
December 15, 1997.
The FASB also issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This standard provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. This standard is effective for fiscal years beginning after June 15,
1999.
The Company has not determined the impact that the adoption of these new
standards will have on its Consolidated Financial Statements or disclosures.
PROSPECTIVE INFORMATION
In August 1998 the Company's Holm Industries, Inc. subsidiary purchased
certain assets and assumed certain liabilities of OEM/Miller Corporation of
Aurora, Ohio, a privately owned manufacturer of specialty corrugated plastic
tubing and molded parts for the appliance, automotive and construction
industries.
Late in fiscal 1998, the United Auto Workers called a strike against
General Motors that lasted until late July 1998. The Company has previously
reported that the impact on fiscal 1998 results was estimated at $0.10 diluted
earnings per share. The strike will also impact earnings in fiscal 1999. The
following comments do not however take into account any such impact.
The Company expects that its worldwide sales for fiscal 1999 will be down
slightly from fiscal 1998 levels. Despite the lack of revenue growth, the
Company has targeted to deliver a ten to fifteen percent improvement in diluted
earnings per share from fiscal 1998's $2.56. This improvement is partly
dependent on improved operating results by the Company's subsidiary in the
United Kingdom and at Nisco, the Company's U.S.-based joint venture with
Nishikawa Rubber. Both of these operations experienced significant losses in
fiscal 1998 related to the introduction of numerous new programs. While more new
product introductions are expected in fiscal 1999, the Company believes that the
most intense period for these operations is behind them. The targeted earnings
improvement is also significantly dependent upon continued results from the
Company's Low Cost Producer strategy. This strategy has four components: Six
Sigma quality in all operations of the Company; 100% on time delivery; use of
breakthrough technologies; and developing synergy worldwide. Further successful
initiatives as a part of this strategy are necessary to fund customer givebacks
and economic increases planned for fiscal 1999, as well as provide for true
productivity gains. The Company has achieved its goals in each of the past two
years in part through the success of its Low Cost Producer strategy.
A closer look at the sales line shows that North American automotive sales
are expected to decline by over 10% in fiscal 1999. This decline is related
primarily to the loss of some programs, principally the Jeep(R) Grand Cherokee,
and expected lower volumes on certain models for which the Company supplies
systems, such as the Ford Taurus and Escort. Customer price concessions are also
a significant factor in the anticipated sales decline. As mentioned above, this
projected sales decline does not include the impact of the UAW strike against
General Motors. The sales decline in North America is expected to be offset by
increased sales in the Tread Rubber segment as well as continued launches of new
programs in the United Kingdom.
The Company's primary market risks in fiscal 1999 are those shared by its
global customers and include, among other things, fluctuations in interest rates
and currency exchange rates, particularly in emerging markets. To the extent
these fluctuations lead to changes in consumer demand for vehicles in general or
give one automaker or group of automakers a competitive advantage over another,
the Company's sales volumes may go up or down.
A specific concern of the Company in this regard is Brazil. During fiscal
1998, the government in Brazil acted to raise interest rates to protect its
F-8
<PAGE> 30
currency from further devaluation. This had the effect of lowering demand for
"big ticket" consumer goods such as automobiles. While some automakers reduced
production significantly during this period, others made smaller adjustments or
waited to determine what, if any, adjustments they would make to their
production schedules. Now, with inventory building in their systems as
automobile sales have remained sluggish, they are lowering production, thereby
reducing demand for the Company's products. Any prolonged reduction of this
nature would have a significant impact on the Company's ability to meet its
targeted earnings performance. While a similar exposure exists in other emerging
markets in which the Company competes, especially Mexico and Poland, the impact
on financial results is unlikely to be material due to the start-up status of
these operations.
In addition to the economic impact of currency exposure, the Company is
also exposed to translation losses related to currency changes. The recent slide
in the value of the Canadian dollar will reduce the U.S. dollar reported value
of both sales and earnings generated in that country.
Price pressures in the Company's automotive businesses are due in part to
the overcapacity that exists in the global automotive industry. This
overcapacity has forced OEMs to keep prices low or offer larger incentives to
lure buyers into the showroom. OEMs have then turned to their suppliers seeking
continued price reductions. However, if current economic problems in Asia and
other emerging markets continue to spread globally, the overcapacity in the
industry could further intensify the Company's competition and lead to even
greater demands for price reductions from its customers at a time when demand
may be reduced as well. In such a scenario, the Company's financial performance
could be adversely impacted. It is important to note, however, that the Company
has successfully managed the impact of these pricing pressures in the past.
CAUTIONARY STATEMENTS FOR PURPOSES OF "SAFE HARBOR" UNDER THE PRIVATE SECURITIES
REFORM ACT OF 1995
Certain statements in this Management's Discussion and Analysis, the
attached Consolidated Financial Statements, in the Company's press releases and
in oral statements made by or with the approval of an authorized executive
officer of the Company, and in particular certain statements set forth in the
preceding section entitled "Prospective Information," constitute
"forward-looking statements," as that term is defined under the Private
Securities Litigation Reform Act of 1995. These may include statements
projecting, forecasting or estimating Company performance and industry trends.
The achievement of the projections, forecasts or estimates is subject to certain
risks and uncertainties. Actual results and events may differ materially from
those projected, forecasted or estimated. The applicable risks and uncertainties
include general economic and industry conditions that affect all international
businesses, as well as matters that are specific to the Company and the markets
it serves.
General risks that may impact the achievement of such forecasts include
compliance with new laws and regulations; significant raw material price
fluctuations; currency exchange rate fluctuations; limits on repatriation of
funds; and political uncertainties. Specific risks to the Company include risk
of recession in the economies in which its products are sold, especially in
emerging markets where recent currency weakness may lead to recessionary
conditions; the concentration of a substantial percentage of the Company's sales
with a few major OEM customers; labor relations at the Company, its customers
and its suppliers; competition in pricing and new product development from
larger companies with substantial resources; and continued globalization of the
automotive supply base resulting in new competition in certain locations.
F-9
<PAGE> 31
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The Standard Products Company
and Consolidated Subsidiaries
Management is responsible for the preparation, integrity and objectivity of
the consolidated financial statements and other financial information presented
in this report. The accompanying consolidated financial statements were prepared
in accordance with generally accepted accounting principles, applying certain
estimates and judgments as required.
Standard Products' internal controls are designed to provide reasonable
assurance as to the integrity and reliability of the financial statements and to
adequately safeguard, verify and maintain accountability of assets. Such
controls are based on established written policies and procedures, are
implemented by trained, skilled personnel with an appropriate segregation of
duties and are monitored through a comprehensive internal audit program. These
policies and procedures prescribe that the Company and all its employees are to
maintain the highest ethical standards and that its business practices
throughout the world are to be conducted in a manner which is above reproach.
Arthur Andersen LLP, independent auditors, are retained to audit the
Company's financial statements. Their accompanying report is based on audits
conducted in accordance with generally accepted auditing standards, which
include the consideration of the Company's internal controls to establish a
basis for reliance thereon in determining the nature, timing and extent of
audits tests to be applied.
The Board of Directors exercises its responsibility for these financial
statements through its Audit Committee, which consists entirely of independent
non-management Board members. The audit committee meets periodically with the
independent auditors and with the Company's internal auditors, both privately
and with management present, to review accounting, auditing, internal controls
and financial reporting matters.
<TABLE>
<S> <C>
RONALD L. ROUDEBUSH DONALD R. SHELEY, JR.
Ronald L. Roudebush Donald R. Sheley, Jr.
Vice Chairman and Chief Vice President, Finance
Executive Officer and Chief Financial
Officer
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND THE BOARD OF DIRECTORS, THE STANDARD PRODUCTS COMPANY:
We have audited the accompanying consolidated balance sheets of The
Standard Products Company (an Ohio corporation) and Consolidated Subsidiaries as
of June 30, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended June 30, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Standard
Products Company and Consolidated Subsidiaries as of June 30, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
fiscal years in the period ended June 30, 1998 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
July 23, 1998
Detroit, Michigan
F-10
<PAGE> 32
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THE STANDARD PRODUCTS COMPANY
AND CONSOLIDATED SUBSIDIARIES
FOR THE YEARS ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
---- ---- ----
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
<S> <C> <C> <C>
Net Sales................................................ $1,101,309 $1,108,268 $1,083,920
Cost of Goods Sold:
Materials, wages and other manufacturing costs......... 888,385 916,821 934,504
Research, engineering and development expenses......... 46,955 45,991 40,934
---------- ---------- ----------
935,340 962,812 975,438
---------- ---------- ----------
Gross Income............................................. 165,969 145,456 108,482
Selling, General and Administrative Expenses............. 78,025 68,559 69,616
Non-recurring Charge (Note 2)............................ -- 17,661 --
---------- ---------- ----------
87,944 59,236 38,866
---------- ---------- ----------
Other (Income) Expense:
Royalty and dividend income............................ (426) (658) (673)
Interest expense....................................... 12,389 12,914 14,944
Other, net............................................. 7,459 521 (3,929)
---------- ---------- ----------
19,422 12,777 10,342
---------- ---------- ----------
Income before Taxes on Income............................ 68,522 46,459 28,524
Provision for Taxes on Income............................ 25,078 18,929 13,947
---------- ---------- ----------
Net Income.......................................... $ 43,444 $ 27,530 $ 14,577
========== ========== ==========
Earnings Per Common Share:
Basic.................................................. $ 2.58 $ 1.64 $ 0.87
---------- ---------- ----------
Diluted................................................ $ 2.56 $ 1.63 $ 0.87
---------- ---------- ----------
Weighted average shares outstanding:
Basic.................................................. 16,848,967 16,803,849 16,757,767
Diluted................................................ 16,975,321 16,855,624 16,779,828
</TABLE>
The accompanying notes are an integral part of these statements.
F-11
<PAGE> 33
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
THE STANDARD PRODUCTS
COMPANY AND CONSOLIDATED
SUBSIDIARIES, JUNE 30,
-------------------------
1998 1997
---- ----
(THOUSANDS OF DOLLARS
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 1,625 $ 6,972
Receivables, less allowances of $3,949 in 1998 and $2,863
in 1997................................................ 151,535 174,696
Inventories (Note 4)...................................... 61,139 66,633
Prepaid expenses.......................................... 25,319 23,685
--------- ---------
Total current assets................................. 239,618 271,986
--------- ---------
Property, Plant and Equipment, at cost:
Land and buildings........................................ 125,906 123,103
Machinery and equipment................................... 498,282 460,511
--------- ---------
624,188 583,614
Less -- Accumulated depreciation.......................... (293,836) (280,608)
--------- ---------
Net property, plant and equipment.................... 330,352 303,006
Goodwill, net............................................... 63,617 66,169
Other Assets, net (Note 5).................................. 50,659 50,698
--------- ---------
$ 684,246 $ 691,859
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term notes payable.................................. $ 14,994 $ 19,645
Current maturities of long-term debt...................... 14,031 1,289
Accounts payable and accrued expenses (Note 6)............ 183,646 201,629
Dividend payable.......................................... 2,869 2,858
--------- ---------
Total current liabilities............................ 215,540 225,421
Long-term Debt, net of current maturities................... 92,457 121,804
Other Postretirement Benefits............................... 24,362 24,953
Deferred Income Taxes and Other Credits..................... 51,715 51,324
Commitments and Contingent Liabilities (Note 12)
Shareholders' Equity:
Serial preferred shares, without par value, authorized
6,000,000 voting shares and 6,000,000 non-voting
shares, none issued.................................... -- --
Common shares, par value $1 per share; authorized
50,000,000 shares, issued and outstanding 16,877,693 in
1998 and 16,809,723 in 1997............................ 16,878 16,810
Paid-in capital........................................... 99,462 98,066
Retained earnings......................................... 202,599 170,620
Foreign currency translation adjustments.................. (16,991) (12,870)
Minimum pension liability................................. (1,776) (4,269)
--------- ---------
Total shareholders' equity........................... 300,172 268,357
--------- ---------
$ 684,246 $ 691,859
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-12
<PAGE> 34
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THE STANDARD PRODUCTS COMPANY
AND CONSOLIDATED SUBSIDIARIES
FOR THE YEARS ENDED JUNE 30,
------------------------------------
1998 1997 1996
---- ---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income................................................ $ 43,444 $ 27,530 $ 14,577
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 55,131 53,130 52,545
Deferred taxes and other credits....................... 1,005 (974) 265
Equity in income of non-consolidated affiliates........ 3,478 (1,103) (2,436)
Effect of changes in foreign currency.................. 1,163 929 192
Other.................................................. (2,528) 2,763 1,216
Net changes in assets and liabilities:
Receivables (Note 3)................................. 23,161 5,877 18,160
Inventories.......................................... 5,025 (6,079) 9,081
Accounts payable and accrued expenses................ (23,582) (2,028) 29,140
-------- -------- --------
Net cash provided by operating activities......... 106,297 80,045 122,740
-------- -------- --------
Cash Flows from Investing Activities:
Purchase of property, plant and equipment, net............ (77,335) (59,004) (79,684)
Investments in affiliates and non-consolidated entities... (1,307) (264) (199)
Assets acquired by purchase of businesses................. -- -- (1,581)
-------- -------- --------
Net cash used by investing activities............. (78,642) (59,268) (81,464)
-------- -------- --------
Cash Flows from Financing Activities:
Proceeds of long-term borrowings.......................... 27,144 18,076 37,791
Net increase (decrease) in short-term borrowings.......... (4,651) 18,447 (3,561)
Repayment of long-term borrowings......................... (43,666) (39,586) (84,659)
Cash dividends............................................ (11,465) (11,579) (11,400)
Proceeds from exercise of stock options................... 533 134 299
-------- -------- --------
Net cash used by financing activities............. (32,105) (14,508) (61,530)
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... (897) 703 708
-------- -------- --------
Increase (decrease) in cash and cash equivalents............ (5,347) 6,972 (19,546)
Cash and cash equivalents at the beginning of the year...... 6,972 -- 19,546
-------- -------- --------
Cash and cash equivalents at the end of the year............ $ 1,625 $ 6,972 $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-13
<PAGE> 35
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
THE STANDARD PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
----------------------------------------------------------------------
FOREIGN
CURRENCY MINIMUM TOTAL
COMMON PAID-IN RETAINED TRANSLATION PENSION SHAREHOLDERS'
SHARES CAPITAL EARNINGS ADJUSTMENTS LIABILITY EQUITY
------ ------- -------- ----------- --------- -------------
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1995.............. $16,736 $96,237 $151,492 $ (496) $(3,474) $260,495
Net income........................ -- -- 14,577 -- -- 14,577
Cash dividends ($.68 per share)... -- -- (11,400) -- -- (11,400)
Foreign currency translation
adjustments.................... -- -- -- (5,822) -- (5,822)
Restricted stock awards........... -- 419 -- -- -- 419
Sale of 48,712 shares to option
holders........................ 49 250 -- -- -- 299
Minimum pension liability......... -- -- -- -- 197 197
------- ------- -------- -------- ------- --------
BALANCE, JUNE 30, 1996.............. $16,785 $96,906 $154,669 $ (6,318) $(3,277) $258,765
Net income........................ -- -- 27,530 -- -- 27,530
Cash dividends ($.68 per share)... -- -- (11,579) -- -- (11,579)
Foreign currency translation
adjustments.................... -- -- -- (6,552) -- (6,552)
Restricted stock awards........... -- 1,051 -- -- -- 1,051
Sale of 24,856 shares to option
holders........................ 25 109 -- -- -- 134
Minimum pension liability......... -- -- -- -- (992) (992)
------- ------- -------- -------- ------- --------
BALANCE, JUNE 30, 1997.............. $16,810 $98,066 $170,620 $(12,870) $(4,269) $268,357
Net income........................ -- -- 43,444 -- -- 43,444
Cash dividends ($.68 per share)... -- -- (11,465) -- -- (11,465)
Foreign currency translation
adjustments.................... -- -- -- (4,121) -- (4,121)
Restricted stock awards........... -- 931 -- -- -- 931
Sale of 67,950 shares to option
holders........................ 68 465 -- -- -- 533
Minimum pension liability........... -- -- -- -- 2,493 2,493
------- ------- -------- -------- ------- --------
BALANCE, JUNE 30, 1998.............. $16,878 $99,462 $202,599 $(16,991) $(1,776) $300,172
======= ======= ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-14
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. Major intercompany items have
been eliminated.
The Company's investments in affiliate operations are accounted for by both
the equity and cost methods of accounting. The cost method is followed in those
situations where the Company's ownership is less than 20% and operations are
conducted by management of the affiliate. Income is recorded as received. The
equity method of accounting is followed in those situations of larger ownership
interests but less than 51%, and the Company's results of operations include
those of the affiliate to the extent of its ownership interest.
The Company's investment in Nishikawa Standard Company (NSC), a 50% owned
joint venture in the United States, is accounted for under the equity method.
The Company's investment in NSC at June 30, 1998 and 1997 was $17,076 and
$19,609, respectively, and is included in Other Assets in the accompanying
consolidated balance sheets. In 1998, the Company made a $1,200 contribution in
capital to the partnership to be used for general operating purposes. The
Company's share of NSC's operating income (loss) was ($3,733), $969 and $2,504
in fiscal 1998, 1997 and 1996, respectively.
Under the terms of NSC's revolving credit and term loan facility, the joint
venture partners are required to guarantee a portion of NSC's borrowings. The
Company's share of these guarantees at June 30, 1998 was $8,050.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include bank deposits and repurchase agreements
at varying rates of interest and with original maturities less than thirty days.
These investments are carried at cost which approximates market value.
The following is additional information related to the accompanying
consolidated statements of cash flows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash paid for
interest........... $13,054 $12,314 $14,962
Cash paid for income
taxes.............. $20,087 $18,819 $ 6,206
</TABLE>
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries have been
translated in accordance with Statement of Financial Accounting Standards (SFAS)
No. 52. Except for the Brazilian and Mexican subsidiaries, current rates of
exchange are used to translate the balance sheets of these entities, while the
average exchange rate of each fiscal year is used for the translation of income
and expense accounts. The resulting unrealized gains and losses are recorded as
a component of shareholders' equity. Because the Company's Mexican subsidiary
operates in a highly inflationary economy, the U.S. dollar has been used as the
functional currency in the translation of the Mexican financial statements. The
Brazilian economy ceased to be high inflationary during fiscal 1998, however
SFAS 52 prescribes criteria which, if met, allows for the translation of its
results using the remeasurement process. The Company will continue to use the
U.S. dollar as the functional currency until the criteria specified in SFAS 52
are no longer met. Accordingly, foreign currency gains or losses of the
Brazilian and Mexican subsidiaries have been reflected in income currently.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. The Company provides
for depreciation of plant and equipment using the straight-line and
sum-of-years' digits methods at annual rates based on the following estimated
service lives of the property:
<TABLE>
<S> <C>
Buildings.................... 15 to 25 years
Machinery and Equipment...... 10 to 14 years
Furniture and Fixtures....... 7 to 10 years
</TABLE>
Maintenance and repair expenditures are charged to income as incurred.
Expenditures for improvements and major renewals are capitalized. When assets
are retired, the related cost and accumulated depreciation are removed from the
accounts, and any gain or loss on the disposition is credited or charged to
income.
INVENTORIES
Inventories are stated at the lower of cost or market. A substantial
portion of domestic invento-
F-15
<PAGE> 37
ries are valued using the last-in, first-out (LIFO) method, and the remaining
inventories are valued using the first-in, first-out (FIFO) method. Cost
includes the cost of materials, direct labor and the applicable share of
manufacturing overhead.
GOODWILL
Goodwill, which represents the excess of purchase price over the fair value
of assets acquired, is amortized on a straight-line basis over the estimated
useful life but not in excess of 40 years. Recoverability is reviewed annually
or sooner if events or changes in circumstances indicate that the carrying
amount may exceed fair value. Recoverability is then determined by comparing the
undiscounted net cash flows of the net assets on which the goodwill applies to
the net book value, including goodwill, of those assets.
TAXES ON INCOME
The Company has determined tax expense and other deferred tax information
using the liability method, which recognizes the differences in financial
reporting bases and tax bases of assets and liabilities at tax rates currently
in effect. Income tax expense includes United States, foreign and state income
taxes, exclusive of taxes on the undistributed income of foreign subsidiaries
where it is the intention of the Company to have those subsidiaries reinvest the
income locally.
RETIREMENT PLANS
The Company's policy is to fund the pension costs of defined benefit plans
in accordance with the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). Defined contribution and multi-employer plans are funded as
accrued and the accrual is based upon hourly rates, or a percentage of the
unit's performance.
POSTRETIREMENT MEDICAL BENEFITS
The Company provides postretirement health and life insurance benefits for
retired salaried and certain retired hourly employees. Benefits provided under
various plans, individually arranged by business unit, include health and life
insurance. The plans generally provide for a means to limit the cost of the
plans to the Company through cost-sharing or spending limitations.
FINANCIAL INSTRUMENTS
The Company's financial instruments recorded on the balance sheet include
cash and cash equivalents, trade receivables and payables and debt obligations.
The book value of cash and cash equivalents, trade receivables and payables and
short-term debt are considered to be representative of fair value because of the
short maturity of these instruments. The fair value of long-term debt is based
on rates available to the Company for debt with comparable terms and maturities.
Off balance sheet derivative financial instruments include a currency and
interest rate swap transaction and foreign exchange contracts. The currency and
interest rate swap transaction protects the Company from fluctuations in the
value of the U.S. dollar in relation to the French franc and establishes a fixed
U.S. dollar rate of return on a loan from the Company to its French subsidiary.
The interest rate swap transaction converts floating rate debt under its
Revolving Credit Agreement to fixed rate debt.
The Company and its subsidiaries enter into foreign exchange contracts to
manage exposure to foreign exchange fluctuations related to sales to foreign
customers or purchases of equipment or inventory from foreign suppliers. These
contracts hedge firm commitments to pay or receive foreign currency within a
one-year period. The Company does not engage in speculation and does not hedge
foreign currency positions which are not related to specific transactions. The
gains and losses on the contracts offset losses and gains of the transactions
being hedged, resulting in protection from the risks of foreign exchange
movement for those transactions and avoiding losses affecting results of
operations.
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 and
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.
F-16
<PAGE> 38
ENVIRONMENTAL COMPLIANCE AND REMEDIATION
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations and do not contribute to current or future revenue
generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the costs can be reasonably
estimated. Estimated costs are based upon enacted laws and regulations, existing
technology and the most probable method of remediation. The costs determined are
not discounted and exclude the effects of inflation and other societal and
economic factors. Where the cost estimates result in a range of equally probable
amounts, the lower end of the range is accrued.
REVENUE RECOGNITION
The Company recognizes revenues as products are shipped to its customers.
CONCENTRATION OF CREDIT RISK
The Company designs and manufactures rubber and plastic components for
automotive original equipment manufacturers. Financial instruments which
potentially subject the Company to concentrations of credit risk are primarily
accounts receivable. The Company performs ongoing credit evaluations of its
customers' financial condition. The allowance for non-collection of accounts
receivable is based on the expected collectibility of all accounts receivable.
IMPAIRMENT OF ASSETS
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of " on July 1, 1996. This Statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of SFAS No. 121
did not have a material effect on the Company's consolidated financial
statements.
STOCK-BASED COMPENSATION
Prior to July 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
July 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which allows entities to continue to apply the provisions of APB
Opinion No. 25, and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in fiscal 1997 and
future years as if the fair-value based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to their 1998
presentation in the financial statements.
2. NON-RECURRING CHARGE
In 1997, the Company announced it would permanently close two automotive
parts plants in Schenectady, New York and Lexington, Kentucky, and recorded a
non-recurring charge of $17,661 or $0.63 per share of common stock, after tax.
The closures were undertaken to reduce overcapacity, which management feels will
allow the Company to improve customer service, reduce operating costs, and
improve productivity and asset utilization. The closures were completed by
December 1997, resulting in the reduction of 470 employees.
The Company's provision consisted of $12,485 to recognize severance and
benefits for terminated employees and $5,176 for asset writedowns and building
razing costs. Additional costs will be charged to normal operations as incurred.
During fiscal 1997, the Company also incurred $1,665 in expenses related to
the transfer of business from the closed facilities to those that will remain in
operations. Since these costs are expected to benefit future operations they
were not included in the non-recurring charge. Examples include costs to move
F-17
<PAGE> 39
machinery, equipment and inventory, equipment set-up and relocation of employees
retained by the Company.
3. ACCOUNTS RECEIVABLE SECURITIZATION
In September 1995, the Company and certain of its U.S. subsidiaries entered
into an agreement to sell, on an ongoing basis, all of their accounts receivable
to The Standard Products Funding Corporation (Funding Co.), a wholly owned
subsidiary of the Company. Accordingly, the Company and those subsidiaries,
irrevocably and without recourse, transfer all of their U.S. dollar denominated
trade accounts receivable (principally representing amounts owed by original
equipment customers in the U.S. automotive and related industries) to the
Funding Co. The Funding Co. has sold and, subject to certain conditions, may
from time to time sell an undivided interest in those receivables to the Clipper
Receivables Corporation. The Funding Co. is permitted to receive advances of up
to $50,000 for the sale of such undivided interest. At June 30, 1998, $50,000
has been advanced. The agreement, which was to expire in September 1998, was
extended to November 2000.
Proceeds from the sale were used to reduce outstanding borrowings under the
Company's Revolving Credit Agreement and are reflected as operating cash flows
in the accompanying consolidated statement of cash flows. Costs of the program,
which primarily consist of the purchasers' financing and administrative costs,
totaled $3,158 and $3,104 in fiscal 1998 and 1997 and have been classified as
Selling, General and Administrative Expenses in the accompanying consolidated
statement of income. The Company maintains an allowance for doubtful accounts
receivable ($3,949 and $2,863 at June 30, 1998 and 1997, respectively) based on
the expected collectibility of all trade accounts receivable, including
receivables sold.
4. INVENTORY
The major components of inventory are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Raw materials............. $24,898 $29,069
Work-in-process and
finished goods.......... 36,241 37,564
------- -------
Total, at both FIFO and
LIFO cost............... $61,139 $66,633
Excess of FIFO cost over
LIFO cost............... $13,119 $14,019
</TABLE>
Approximately 46% of the Company's inventories are valued at LIFO cost.
5. OTHER ASSETS, NET
Other assets consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Investments................... $18,976 $22,508
Tooling....................... 9,312 3,450
Patents and license
agreements.................. 3,299 2,448
Other intangibles............. 1,967 3,386
Deferred taxes................ 8,810 9,401
Other......................... 8,295 9,505
------- -------
Total..................... $50,659 $50,698
</TABLE>
Where applicable, amounts are presented net of accumulated amortization.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Accounts payable........... $ 92,965 $ 81,214
Accrued payrolls........... 30,675 34,451
Accrued other taxes........ 4,108 5,035
Federal income tax......... 1,996 3,681
Other accrued expenses..... 53,902 77,248
-------- --------
Total.................. $183,646 $201,629
</TABLE>
F-18
<PAGE> 40
7. FINANCING ARRANGEMENTS
<TABLE>
<CAPTION>
1998 1997
---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Senior notes............. $100,000 $100,000
Revolving credit
agreement.............. -- 20,000
Other debt............... 6,488 3,093
-------- --------
Total............... 106,488 123,093
Less -- current
maturities............. 14,031 1,289
-------- --------
$ 92,457 $121,804
</TABLE>
At June 30, 1998, Senior Notes outstanding of $100,000 include two issues,
$75,000 and $25,000. The $75,000 Senior Notes, placed directly with three
affiliated insurance companies, are unsecured and accrue interest at 6.55%.
Interest payments are payable semiannually, and annual principal payments of
$12,500 begin in December 1998 through December 2002, with the balance due on
maturity in December 2003. The $25,000 Senior Notes are also unsecured notes
placed directly with the holders. The interest rate of 9.81% is paid
semiannually and the notes are payable July 1, 1999.
Each of the Senior Note agreements requires the Company to maintain certain
financial covenants as to net worth and leverage.
The Revolving Credit Agreement (Credit Agreement) represents unsecured
borrowings from a group of banks that have committed to make available for
borrowing up to $225,000 until September 2002 with provisions for extending the
agreement beyond that date upon satisfaction of certain requirements. The loans
may be denominated in either U.S. dollars or certain other currencies based upon
Eurodollar interest rates or the agent bank's base rate. An annual facility fee
of 0.125% is due on the total commitment. The terms of the Credit Agreement also
require the Company to maintain certain financial covenants as to net worth and
leverage.
Under the most restrictive covenants of the Company's various loan
agreements, $66,558 of retained earnings were not restricted at June 30, 1998
for the payment of dividends.
The maturities of long-term debt for the five years subsequent to June 30,
1998 are:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
<S> <C>
1999..................... $14,031
2000..................... 38,070
2001..................... 13,089
2002..................... 12,907
2003..................... 12,905
Thereafter............... 15,486
</TABLE>
The Company and its subsidiaries also have, from various banking sources,
approximately $56,400 of unused short-term lines of credit at rates of interest
approximating Eurodollar interest rates. These funds are available subject to
satisfying covenant restrictions as to funded debt limitations. In 1998, the
average borrowings under these sources was $24,800, and the highest month-end
balance was $37,800. Comparable amounts for 1997 were $20,200 and $38,000 and
$9,000 and $17,400 for 1996. The effective annual borrowing rate was 8.3% in
1998, 7.3% in 1997 and 6.8% in 1996. At June 30, 1998, the weighted interest
rate was 7.9%.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's significant balance
sheet financial instruments at June 30, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998 CARRYING FAIR
(THOUSANDS OF DOLLARS) AMOUNT VALUES
---------------------- -------- ------
<S> <C> <C>
Cash and cash
equivalents........... $ 1,625 $ 1,625
Short-term bank debt.... 14,994 14,994
Long-term bank debt
(including current
portion).............. 106,488 106,988
</TABLE>
<TABLE>
<CAPTION>
1997
(THOUSANDS OF DOLLARS)
----------------------
<S> <C> <C>
Cash and cash
equivalents........... $ 6,972 $ 6,972
Short-term bank debt.... 19,645 19,645
Long-term bank debt
(including current
portion).............. 123,093 121,793
</TABLE>
F-19
<PAGE> 41
Off balance sheet derivative financial instruments at June 30, 1998 and
1997, held for purposes other than trading, were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
CONTRACT/ CONTRACT/
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUES AMOUNT VALUES
--------- ------ --------- ------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Currency and interest
rate swaps......... $31,010 $(219) $34,680 $ (509)
Foreign currency
exchange
agreements......... 14,000 148 41,388 1,844
</TABLE>
With regard to the combined currency and interest rate swap agreement, the
nominal amount of 65,148 French francs is payable by the Company to a bank,
while the amount due from the bank to the Company is $11,010. Periodic payments
are made by the Company and the bank until maturity in November 2000. Interest
rates are fixed with a rate of 6.5% on payments to the bank and 5.8% on payments
from the bank. Exchange rate fluctuations of the French franc payable to the
bank are offset by the French franc receivable from the French subsidiary.
The interest rate swap contract matures in March 1999. The Company pays a
fixed interest rate of 5.18% to the bank and receives a floating rate LIBOR
payment from the bank on the $20,000 notional amount of the swap contract.
Foreign exchange contracts hedging trade transactions mature over the next
twelve months. Exchange contracts hedging foreign denominated intercompany loans
mature no later than the maturity of the loan.
The counterparties to each of these agreements are major commercial banks.
Management believes that losses related to credit risk are remote.
The Company actively monitors its exposure to risk from changes in foreign
exchange rates and interest rates. Derivative financial instruments are used to
reduce the impact of these risks. The Company does not use these instruments for
trading purposes and does not use instruments where there are no underlying
exposures. Management believes that its use of these instruments to reduce risk
is in the Company's best interest.
The Company has estimated its market risk exposures using sensitivity
analyses. Market risk exposure has been defined as the change in fair value of a
derivative financial instrument and related balance sheet position assuming a
10% adverse change in market prices or rates. Fair value was determined using
quoted market prices.
A 63 basis point increase in interest rates (10% of the Company's weighted
average worldwide interest rate) affecting the company's floating financial
instruments, including debt obligations, interest rate swap contract and
accounts receivable securitization, would result in an increase in annual
interest expense of approximately $283.
The Company has financial and related balance sheet positions that are
sensitive to foreign currency exchange rates, including foreign currency forward
exchange contracts and non-functional currency denominated receivables and
payables. The net amount that is exposed to changes in foreign currency rates is
then subjected to a 10% change in the value of the foreign currency versus the
U.S. dollar. A 10% adverse change in foreign exchange rates would result in a
pre-tax expense of approximately $248.
9. RETIREMENT PLANS
The Company and its consolidated subsidiaries have a number of plans
providing pension, retirement or profit-sharing benefits for substantially all
employees. These plans include defined benefit, defined contribution and
multi-employer plans. For defined benefit plans, those covering salaried
employees provide pension benefits based upon the individual employee's average
compensation over the last five years, while hourly plans provide benefits of
stated amounts for each year of service. The assets of the plans consist of
listed bonds, stocks, mutual investment funds and cash securities.
Pension expense is determined using assumptions at the beginning of the
year. The projected benefit obligation (PBO) is determined using the assumptions
at the end of the year. Assumptions used to determine pension expense and the
PBO were:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate............ 7.25% 7.75% 7.75%
Long-term rate of return
on plan assets......... 9.50% 9.50% 9.50%
Rate of increase in
future compensation
levels................. 4.50% 5.00% 5.00%
</TABLE>
F-20
<PAGE> 42
The cost of providing pension, retirement and profit-sharing benefits
charged to operations amounted to $7,634 in 1998, $7,295 in 1997 and $6,999 in
1996. For 1998, the expense of defined contribution plans was $5,550 and
multi-employer plan expense was $232. Comparable figures for 1997 were $5,033
and $486, and for 1996, $4,102 and $449. Components of pension expense for
defined benefit plans included the following items:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service cost......... $ 2,470 $ 2,435 $ 2,737
Interest cost on
PBO................ 6,648 6,262 6,265
Actual gain on plan
assets............. (23,887) (6,163) (12,654)
Net amortization and
deferral........... 16,225 (1,361) 6,100
Loss due to
curtailment........ 396 602 --
-------- ------- --------
Net pension
expense............ $ 1,852 $ 1,775 $ 2,448
</TABLE>
The funded status of the foreign and domestic defined benefit plans is
displayed below and is based on information supplied by the Company's actuary as
of March 31 of each year. In connection with the recognition of the minimum
liability as required by SFAS No. 87, as of June 30, 1998, the Company has
recorded an intangible asset of $1,229 included in Other Assets, net in the
accompanying consolidated balance sheet, and an equity reduction of $1,776.
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
LESS GREATER LESS GREATER
THAN THAN THAN THAN
PLAN PLAN PLAN PLAN
ASSETS ASSETS ASSETS ASSETS
------ ------- ------ -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
ACCUMULATED BENEFITS
ARE:
Vested benefits........ $60,894 $22,937 $49,540 $27,046
Non-vested benefits.... 3,550 479 2,576 423
------- ------- ------- -------
Accumulated benefit
obligation........... 64,444 23,416 52,116 27,469
Projected future
compensation
increases............ 7,306 824 6,166 735
------- ------- ------- -------
PBO.................... 71,750 24,240 58,282 28,204
Plan assets at fair
market value......... 83,430 18,769 62,772 20,702
------- ------- ------- -------
PBO (in excess of) or
less than plan
assets............... 11,680 (5,471) 4,490 (7,502)
Unrecognized transition
asset................ (4,566) (67) (4,998) (263)
Unrecognized net (gain)
loss................. (4,036) 2,668 3,416 5,061
Adjustment required to
recognize minimum
liability............ -- (3,005) -- (5,304)
Unrecognized prior
service cost......... 2,291 1,228 2,443 1,241
------- ------- ------- -------
Prepaid pension cost,
(liability).......... $ 5,369 (4,647) $ 5,351 $(6,767)
</TABLE>
The Company has accrued $9,791 and $11,434 for Workers' Compensation claims
as of June 30, 1998 and 1997, respectively.
10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The cost of providing health and life insurance benefits for certain
retired employees has been accrued based on the employees' active service lives.
The expense for postretirement benefits other than pensions is detailed below.
All plans under which these benefits are provided are unfunded.
The Company continues to fund these benefits as claims are incurred.
Spending limitations per annum are in effect for several plans and future
retirees of other plans will pay a portion of these costs.
F-21
<PAGE> 43
A summary of plan information is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Accumulated
postretirement
benefit obligation
(APBO):
Retirees........... $ 21,854 $ 22,196 $ 20,989
Active participants
eligible to
receive
benefits......... 2,157 2,442 2,177
Other active plan
participants..... 3,385 3,174 2,516
---------- ----------- ----------
27,396 27,812 25,682
Unrecognized gain
(loss)........... (636) (438) 2,048
Unrecognized prior
service cost..... (42) -- --
---------- ----------- ----------
$ 26,718 $ 27,374 $ 27,730
---------- ----------- ----------
Periodic
postretirement
benefit cost:
Current service
cost............. $ 356 $ 271 $ 286
Interest on
postretirement
benefit
obligation....... 2,087 1,922 1,990
Net amortization... 84 (11) (74)
---------- ----------- ----------
$ 2,527 $ 2,182 $ 2,202
---------- ----------- ----------
Actuarial
assumptions:
Discount rate...... 7.25% 7.75% 7.75%
1998 to 2005 --
health care cost
trend rate....... 10.0%-5.5% 10.75%-5.5% 11.5%-5.5%
Effect of a 1%
increase in health
care cost trend
rate:
Increase year end
APBO............. 7.4% 7.0% 6.6%
Increase expense... 8.7% 9.2% 9.5%
</TABLE>
11. LEASES
The Company and its subsidiaries have operating leases covering
manufacturing facilities, transportation and material handling equipment, and
computer hardware and software expiring at various dates through 2036.
The following is a schedule of future minimum rental payments required
under operating leases that have initial or remaining noncancelable lease terms
in excess of one year as of June 30, 1998:
<TABLE>
<S> <C>
1999............................... $ 7,186
2000............................... 4,978
2001............................... 2,765
2002............................... 1,433
2003 and later years............... 2,387
-------
Total minimum payments required.... $18,749
</TABLE>
Rent expense was $13,445, $14,372 and $14,627 for the years ended June 30,
1998, 1997 and 1996, respectively.
12. COMMITMENTS AND CONTINGENT LIABILITIES
The Company and its subsidiaries are involved in certain legal actions and
claims. In the opinion of management, any liability which may ultimately be
incurred would not materially affect the financial position or results of
operations of the Company.
The Company retains the risk with respect to certain employee medical and
workers' compensation benefits. Medical coverage is capped at $1,000 over the
lifetime of the employee. The Company has insurance to cover catastrophic claims
for workers' compensation benefits in excess of $500 per claim and $15,100 in
the aggregate. Reserves are included in accrued liabilities in the accompanying
consolidated balance sheets.
13. COMMON SHARES
Options to purchase common shares have been granted under various employee
stock option plans adopted by shareholders. For each plan, options are
exercisable over periods of five or ten years. The option price is either the
fair market value at the time the option is granted or 110% of the fair market
value at the time the option is granted for those individuals owning more than
ten percent of the common shares of the Company. Under the plan, 40% of the
options become exercisable one year from the date of grant, an additional 40%
after the second year, and the remainder after the third year. The options have
a maximum life of ten years
F-22
<PAGE> 44
from the date of the grant. Summarized below is
stock option activity for 1997 and 1998.
<TABLE>
<CAPTION>
RANGE OF
SHARES OPTION PRICES
------ -------------
<S> <C> <C>
Stock options
outstanding at June
30, 1996.............. 387,640 $17.88 - $36.99
Options granted......... 233,450 25.25 - 26.25
Options exercised....... (6,400) 19.25 - 21.63
Options cancelled....... (65,986) 29.13 - 36.99
-------
Stock options
outstanding at June
30, 1997.............. 548,704 $17.88 - $36.99
Options granted......... 342,550 25.25 - 29.00
Options exercised....... (53,070) 17.88 - 29.13
Options cancelled....... (56,024) 19.25 - 36.99
-------
Stock options
outstanding at June
30, 1998.............. 782,160
</TABLE>
The Company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," effective with the 1997 financial statements, but elected to
continue to measure compensation cost using the intrinsic value method, in
accordance with APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." Accordingly, no compensation cost for stock options has been
recognized. If compensation cost had been determined based on the estimated fair
value of options previously granted, consistent with the methodology in SFAS
123, the pro forma effects on the Company's net income and income per share
would have been:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net Earnings
As reported............. $43,444 $27,530
Pro forma............... 42,017 26,836
Diluted
Earnings per Share
As reported............. $2.56 $1.63
Pro forma............... 2.48 1.59
</TABLE>
The estimated fair value as of date of grant of options granted in 1998 and
1997, using the Black-Scholes option-pricing model, was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Estimated fair value per share
of options granted during the
year......................... $9.05 $8.38
Assumptions:
Annualized dividend yield.... 2.3% 2.7%
Common Stock price
volatility................ 28.1% 30.5%
Risk-free rate of return..... 5.5% 6.5%
Expected option term (in
years).................... 7 7
</TABLE>
At June 30, 1998, options for 260,240 shares were exercisable at an average
exercise price of $23.63 a share. Shares reserved for the future granting of
options were 456,895 at year end; 410,629 were reserved a year ago.
Under The Standard Products Company's 1997 and 1991 Restricted Stock Plans,
525,000 common shares were reserved for restricted stock awards. Shares awarded
are earned ratably over the term of the restricted stock agreement, based upon
achieving specified performance goals. Generally, transferability of shares
earned is restricted for a specified number of years following the year in which
they were earned. Until the restrictions lapse, the recipient of earned
restricted shares is entitled to all of the rights of a shareholder, including
the right to vote the shares, but the shares are restricted as to
transferability and subject to forfeiture to the Company during the restricted
period. Shares awarded were 62,500 in 1998, 75,000 in 1995 and 187,500 in 1992.
Of the shares awarded, 32,600 shares were earned in 1998, 35,000 shares in 1997
and 18,400 shares in 1996. In 1998, $931 was charged to operations as
compensation expense based upon the market value of the earned shares. The
similar charge to operations in 1997 and 1996 was $1,051 and $419, respectively.
At year end, 200,000 shares remain available for future awards.
14. EARNINGS PER SHARE
The Company has adopted the provisions of SFAS No. 128, "Earnings per
Share." The information required by this pronouncement is presented on the face
of the Company's "Consolidated Statements of Operations." A reconciliation of
the numerators and denominators of the basic and diluted earnings per share are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Income........... $43,444 $27,530 $14,577
------- ------- -------
Basic:
Basic Shares....... 16,849 16,804 16,758
------- ------- -------
Basic EPS.......... $2.58 $1.64 $0.87
------- ------- -------
Diluted:
Basic Shares....... 16,849 16,804 16,758
Stock Options...... 126 52 22
------- ------- -------
16,975 16,856 16,780
------- ------- -------
Diluted EPS.......... $2.56 $1.63 $0.87
------- ------- -------
</TABLE>
F-23
<PAGE> 45
15. SEGMENT INFORMATION
The Company's operations are in two industry segments. The Transportation
Equipment Segment includes extruded and molded rubber and plastic products for
automotive, building and marine industries and plastic and magnetic door seals
for home appliances. The Tread Rubber Segment produces tread rubber for the
truck tire retreading industry. Net sales by segment include both sales to
unaffiliated customers, as reported in the Company's consolidated statements of
income and intersegment sales. Operating income consists of net sales less
applicable operating costs and expenses related to those sales. In computing
operating income, general corporate expenses are excluded. Identifiable assets
by segment are those assets that are used in the operations of each segment.
General corporate assets are those not identifiable with the operations of a
segment.
The Company's major customers include automotive original equipment
manufacturers. The percentage of sales of each of these major customers to total
consolidated sales for the three-year periods 1998, 1997 and 1996, respectively,
has been as follows: Chrysler -- 18%, 18% and 17%; Ford -- 22%, 24% and 26%;
General Motors -- 13%, 13% and 14%. Sales to the automotive original equipment
customers include a number of different products and types of the same product,
the sales of which are not interdependent.
BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net Sales:
Transportation
equipment......... $ 969,428 $ 976,001 $ 958,105
Tread rubber........ 150,256 145,497 135,869
Less -- intersegment
sales............. (18,375) (13,230) (10,054)
---------- ---------- ----------
Net sales......... $1,101,309 $1,108,268 $1,083,920
Operating Income:
Transportation
equipment......... $ 79,705 $ 73,100 $ 39,836
Tread rubber........ 14,040 9,128 4,078
Non-recurring
charge............ -- (17,661) --
General corporate
expenses.......... (5,801) (5,331) (5,048)
---------- ---------- ----------
Total operating
income........ $ 87,944 $ 59,236 $ 38,866
---------- ---------- ----------
Other expense,
net............... (19,422) (12,777) (10,342)
---------- ---------- ----------
Income from
operations
before taxes.... $ 68,522 $ 46,459 $ 28,524
Identifiable Assets:
Transportation
equipment......... $ 573,902 $ 590,579 $ 585,274
Tread rubber........ 82,464 72,483 70,788
General corporate
assets............ 27,880 28,797 28,633
---------- ---------- ----------
Total
identifiable
assets........ $ 684,246 $ 691,859 $ 684,695
Capital Additions,
net:
Transportation
equipment......... $ 66,099 $ 53,683 $ 74,456
Tread rubber........ 11,236 5,321 5,228
---------- ---------- ----------
Total capital
additions..... $ 77,335 $ 59,004 $ 79,684
Depreciation and
Amortization:
Transportation
equipment......... $ 50,492 $ 48,571 $ 48,328
Tread rubber........ 4,639 4,559 4,217
---------- ---------- ----------
Total
depreciation
and
amortization... $ 55,131 $ 53,130 $ 52,545
</TABLE>
F-24
<PAGE> 46
GEOGRAPHIC AREA
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net Sales:
United States....... $ 593,747 $ 619,068 $ 618,491
Canada.............. 224,515 218,427 212,046
Europe.............. 229,593 234,504 242,977
Brazil.............. 76,913 58,680 29,479
Mexico.............. 833 -- --
Less -- inter-area
sales............. (24,292) (22,411) (19,073)
---------- ---------- ----------
Net sales......... $1,101,309 $1,108,268 $1,083,920
Net Income:
United States....... $ 30,288 $ 16,415 $ 8,248
Canada.............. 18,628 10,928 8,785
Europe.............. (2,719) 9,180 10,732
Brazil.............. 1,943 (5,642) (10,345)
Mexico.............. (1,018) -- --
General corporate
expenses, net of
tax............... (3,678) (3,351) (2,843)
---------- ---------- ----------
Net income........ $ 43,444 $ 27,530 $ 14,577
Identifiable Assets:
United States....... $ 265,302 $ 270,036 $ 297,744
Canada.............. 85,009 95,362 79,845
Europe.............. 212,130 202,358 210,215
Brazil.............. 84,512 90,114 68,258
Mexico.............. 9,413 5,192 --
General corporate
assets............ 27,880 28,797 28,633
---------- ---------- ----------
Total identifiable
assets.......... $ 684,246 $ 691,859 $ 684,695
</TABLE>
16. INCOME TAXES
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Income before taxes:
United States....... $43,570 $17,016 $10,626
Foreign............. 24,952 29,443 17,898
------- ------- -------
Total........... $68,522 $46,459 $28,524
Provision for income
taxes:
Current taxes:
Federal............. $ 7,760 $ 8,887 $ 3,822
Foreign............. 8,994 11,030 3,585
State and local..... 2,217 1,882 1,304
------- ------- -------
Total........... $18,971 $21,799 $ 8,711
Deferred taxes:
Federal............. $ 6,881 $(3,111) $ 2,656
Foreign............. (875) 321 2,536
State and local..... 101 (80) 44
------- ------- -------
Total........... 6,107 (2,870) 5,236
------- ------- -------
Total
provision..... $25,078 $18,929 $13,947
</TABLE>
A reconciliation of income tax expense to the U.S. statutory rate is as
follows:
<TABLE>
<S> <C> <C> <C>
Tax at U.S. statutory rate......... 35.0% 35.0% 35.0%
Difference in effective rate of
international operations......... (.9) 2.2 10.6
State and local income tax......... 2.2 2.5 3.1
Permanent book to tax differences
not deductible................... .5 2.7 2.9
Tax credits........................ (.2) (1.4) --
Other, net......................... -- (0.3) (2.7)
---- ---- ----
Effective tax rate................. 36.6% 40.7% 48.9%
</TABLE>
Deferred tax assets (liabilities) result from differences in the basis of
assets and liabilities for tax and financial statement purposes. The cumulative
effect of the major items follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Deferred tax assets:
Nondeductible accrued
expenses.............. $ 5,500 $ 8,200
Employee benefits....... 15,100 16,000
Net operating loss and
tax credit
carryforwards......... 11,200 11,100
All other items......... 800 1,700
-------- --------
Total deferred tax
assets........... $ 32,600 $ 37,000
Valuation allowance..... (11,200) (11,100)
-------- --------
Net deferred tax
assets........... $ 21,400 $ 25,900
Deferred tax liabilities:
Depreciation and
amortization.......... $(28,800) $(24,600)
All other items......... (3,900) (5,400)
-------- --------
Total deferred tax
liabilities...... $(32,700) $(30,000)
-------- --------
Net deferred tax
liabilities......... $(11,300) $ (4,100)
</TABLE>
In accordance with the Company's policy, as of June 30, 1998, federal
income taxes have not been provided on the undistributed earnings of foreign
subsidiaries. If these earnings were distributed, approximately $5,800 of
additional tax would be payable.
F-25
<PAGE> 47
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized principally due to the
inability of its Brazilian subsidiaries to fully utilize available net operating
tax loss carryforwards in addition to unutilized tax credits and state net
operating tax loss carryforwards. The subsequent recognition of tax benefits
relating to the valuation allowance will be reported in the consolidated
statement of income as opportunities to utilize these carryforwards become more
certain.
Deferred tax assets are included in Prepaid expenses and Other Assets, net
in the accompanying consolidated balance sheets.
17. QUARTERLY AND OTHER FINANCIAL DATA (UNAUDITED)
The following tables set forth a summary of the quarterly results of
operations for the years ended June 30, 1998 and 1997;
<TABLE>
<CAPTION>
1998
THREE MONTHS ENDED
-----------------------------------------
SEPT. 30 DEC. 31 MARCH 31 JUNE 30
-------- ------- -------- -------
(THOUSANDS OF DOLLARS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales............ $246,173 $282,544 $277,942 $294,650
Gross income......... 27,237 39,304 46,088 53,340
Net income........... 2,811 8,761 13,559 18,313
Earnings per common
share -- Diluted... $ 0.16 $ 0.52 $ 0.80 $ 1.08
</TABLE>
<TABLE>
<CAPTION>
1997
THREE MONTHS ENDED
-----------------------------------------
SEPT. 30 DEC. 31 MARCH 31 JUNE 30
-------- ------- -------- -------
(THOUSANDS OF DOLLARS
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net Sales............ $265,611 $266,620 $281,774 $294,263
Gross income......... 25,292 31,696 38,761 49,708
Net income........... 1,397 6,344 515 19,275
Earnings per common
share -- Diluted... $ 0.08 $ 0.38 $ 0.03 $ 1.14
</TABLE>
The Company's common shares are listed on the New York Stock Exchange.
Quarterly market and dividend data are shown in the following tables.
<TABLE>
<CAPTION>
PRICE RANGE
------------------------------------
1998 1997
---------------- ----------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
Quarter
1st................ $27.50 $25.13 $25.75 $18.50
2nd................ $31.00 $24.44 $26.25 $22.75
3rd................ $33.56 $25.56 $26.50 $22.00
4th................ $35.88 $27.75 $26.88 $21.38
</TABLE>
<TABLE>
<CAPTION>
CASH DIVIDENDS
DECLARED
--------------
1998 1997
---- ----
<S> <C> <C>
Quarter
1st.................................. $0.17 $0.17
2nd.................................. $0.17 $0.17
3rd.................................. $0.17 $0.17
4th.................................. $0.17 $0.17
----- -----
$0.68 $0.68
</TABLE>
There were approximately 921 shareholders as of September 1, 1998.
18. NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
This standard establishes guidelines for the display of comprehensive income for
financial statement purposes. The objective of the statement is to report a
measure of all changes in equity of an enterprise that result from transactions
and other economic events of the period other than transactions with owners.
The FASB also issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This standard requires extensive disclosure
of operating segments based on the "management approach." This approach
organizes segments within a company for making operating decisions and assessing
performance. Reportable segments can be based on products and services,
geography, legal structure or any other manner in which management disaggregates
the company. This Statement requires reporting segment profit or loss, certain
specific revenue and expense items and segment assets. It also requires
reconciliations of total segment revenues, total segment profit or loss, total
segment assets and other amounts disclosed for segments to corresponding amounts
reported in the Consolidated Financial Statements. Restatement of comparative
information for earlier periods
F-26
<PAGE> 48
presented is required in the initial year of application. Interim information is
not required until the second year of application, at which time comparative
information is required.
The FASB has issued SFAS No. 132, "Employer's Disclosures about Pensions
and Other Postretirement Benefits." This standard revises employers' disclosures
on pension and other postretirement benefit plans. The objective of the
statement is to standardize the disclosure requirements and report additional
information on changes in the benefit obligations and fair value of plan assets.
SFAS Nos. 130, 131 and 132 are effective for fiscal years beginning after
December 15, 1997.
The FASB also issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This standard provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. This standard is effective for fiscal years beginning after June 15,
1999.
The Company has not determined the impact that the adoption of these new
standards will have on its Consolidated Financial Statements or disclosures.
F-27
<PAGE> 49
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE STANDARD PRODUCTS COMPANY
PROXY
------------------------------
The undersigned hereby appoints RONALD L. ROUDEBUSH, DONALD R. SHELEY, JR.
and RICHARD N. JACOBSON, and each of them, attorneys and proxies of the
undersigned, with full power of substitution, to attend the annual meeting of
shareholders of The Standard Products Company to be held at the Company's Reid
Division offices located at 2130 West 110th Street, Cleveland, Ohio, on Tuesday,
October 20, 1998 at 9:00 a.m., Eastern Daylight Time, or any adjournment
thereof, and to vote the number of shares of said Company which the undersigned
would be entitled to vote, and with all the power the undersigned would possess,
if personally present, as follows:
1. [ ] FOR, or [ ] WITHHOLD AUTHORITY to vote for, the following nominees
for election as directors of the class the term of which will expire in
2001: John Doddridge, Leigh H. Perkins, Alfred M. Rankin, Jr., John D.
Sigel, and W. Hayden Thompson.
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
WRITE THAT NOMINEE'S NAME ON THE LINE PROVIDED BELOW.)
-----------------------------------------------------------
2. On such other business as may properly come before the meeting.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE PROXIES WILL VOTE AS SPECIFIED ABOVE, OR IF A CHOICE IS NOT SPECIFIED,
THEY WILL VOTE FOR THE NOMINEES LISTED IN ITEM 1.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY.
Receipt of the Notice of Annual
Meeting of Shareholders and Proxy
Statement dated September 15, 1998
is hereby acknowledged.
Dated: 1998
---------------------,
----------------------------------
----------------------------------
----------------------------------
Signature(s)
(Please sign exactly as your name
or names appear hereon,
indicating, where proper, official
position or representative
capacity.)
