-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H1z2Qw0pysnW4CkcSdhuuK5en4NgEz4C4c07XBSy7e7PY0fF4IqDG3hkiXeY2XsW 98hs+W9WxSKryoeSWGSYXg== 0000905729-99-000070.txt : 19990402 0000905729-99-000070.hdr.sgml : 19990402 ACCESSION NUMBER: 0000905729-99-000070 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HASTINGS MANUFACTURING CO CENTRAL INDEX KEY: 0000046109 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 380633740 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-03574 FILM NUMBER: 99582185 BUSINESS ADDRESS: STREET 1: 325 N HANOVER ST CITY: HASTINGS STATE: MI ZIP: 49058 BUSINESS PHONE: 6169452491 MAIL ADDRESS: STREET 1: 325 NORTH HANOVER STREET STREET 2: 325 NORTH HANOVER STREET CITY: HASTINGS STATE: MI ZIP: 49058 10-K405 1 =========================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ____________. Commission File Number 1-3574 HASTINGS MANUFACTURING COMPANY (Exact name of registrant as specified in its charter) Michigan 38-0633740 (State of incorporation) (I.R.S. Employer Identification No.) 325 North Hanover Street Hastings, Michigan 49058 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (616) 945-2491 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ----------------------------- ----------------------- Common Stock, $2.00 par value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of voting stock of Registrant held by non-affiliates as of March 22, 1999 was $7,242,235. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of March 22, 1999: Common Stock - $2 par value 789,526 Shares Documents and Information Incorporated by Reference Part III, Items 10, 11, 12 and 13 Proxy Statement for Annual Meeting to be held May 4, 1999 =========================================================================== PART I ITEM 1. BUSINESS. Hastings Manufacturing Company (the "Company") is a Michigan corporation organized in 1929 with its headquarters and U.S. manufacturing facilities in Hastings, Michigan. The Company is primarily a manufacturer of piston rings for automotive and light duty truck applications for the replacement market. In addition, certain of the Company's piston ring products are produced for original equipment applications. To a lesser extent, the Company packages and sells automotive mechanics' specialty tools and additives for engines, transmissions and cooling systems. All of the Company's products are also sold in Canada. Those products are produced and/or packaged and distributed by the Company's Canadian subsidiary, Hastings, Inc., located in Barrie, Ontario. The Company distributes its replacement products through numerous auto parts jobbers and warehouse distributors within the U.S. and Canada. These products are also distributed nationally and internationally through numerous large-scale engine rebuilders and various retailer outlets. The Company now distributes the majority of its export sales on a direct country basis. Prior to early 1997, international sales had been primarily distributed through one U.S. based customer. Prior to September 3, 1995, the Company maintained a position in the manufacture and distribution of automotive and light truck related filters. As of that date, those filter product line assets and operations were sold to CLARCOR, Inc. of Rockford, Illinois. Certain filter operations were continued through late 1996 for the purchaser under the terms of a Transition Agreement. Per the terms of that agreement, the Company was required to vacate its former Knoxville, Tennessee facility during 1996. The Company's operations formerly located at that facility, primarily piston ring packaging and distribution, were relocated to the Hastings, Michigan facility in May of that year. Additional factors related to the filter operations sale are included in Note 2 to the Consolidated Financial Statements (included in Item 8). As described in Note 3 to the Consolidated Financial Statements (included in Item 8), in December 1996 the Company implemented a restructuring plan designed to significantly reduce operating costs and provide for more efficient operations at both the U.S. and Canadian facilities. That plan included the curtailment of most Canadian based piston ring manufacturing effective April 30, 1997. As noted, the Company's Canadian subsidiary continues to distribute piston rings throughout Canada. However, its product is now sourced from the U.S. operations. The Canadian facility also continues to manufacture certain -1- piston ring parts and provides packaging operations for tools and piston ring sets. Effective in early 1999, the Canadian subsidiary became responsible for all specialty tool distribution within the Canadian, U.S., and foreign markets. Fiscal 1997 was a critical year for the Company as it exited the filter transition and implemented its restructuring effort. The Company returned to profitability for the first full year period since 1994. The Company built upon that success through the 1998 fiscal year fueled by added sales growth and a continued commitment to control its operating costs. The leveraging of the realized sales growth against a modest increase in operating expenses resulted in a favorable profit margin gain. The Company made several significant operating changes in its way of conducting business following its restructuring efforts. During 1997, for instance, the Company made substantial progress in expanding its overseas distribution channels on a country-direct basis. By the close of 1997, the Company had contracted new distribution in Australia, South America, the Middle East, Israel, Puerto Rico, and South America. The maturity of several of those markets contributed to the overall sales gain achieved in 1998. That combined sales gain however, revealed certain operating constraints within the Company's manufacturing capabilities. As a result, the Company experienced a period of product shortages through the latter half of 1998. In response to those pressures, the Company has begun the implementation of lean manufacturing principles including the conversion to a more cellular approach to certain manufacturing processes. This conversion should result in production efficiencies through both reduced product lead times and capacity improvements. This conversion process will continue through much of the 1999 calendar year. Beginning in 1996, and carrying over to 1997, the Company made substantial strides in its quality and business control operations. The Company's commitment to these initiatives was rewarded with QS-9000 and ISO-9002 quality registrations in July 1997. In February 1999, and following several successful follow-up audits, the Company was recommended for upgrade to ISO-9001 thus giving recognition to its product design capabilities. The market for the Company's products is highly competitive. The Company has two principal competitors in the pinston ring market. The principal methods of competition in the industry are price, service, product performance, and product availability. The Company ranks among the three largest domestic producers of replacement piston rings. Among the Company's trade names used in marketing its products are "Hastings," "Casite," and "Flex-Vent," which are registered trademarks in the United States and many foreign countries. The Company also holds a number of patents and licenses. In the opinion of management, the Company's business generally is not dependent upon patent protections. -2- The Company ships orders to customers within a short period, ordinarily one week or less from the time orders are received. Accordingly, backlog is not significant in the business of the Company and no separate figures of backlog are kept by the Company. The Company's sales have limited seasonal fluctuations. None of the practices of the Company or the industries in which it operates create any unusual working capital requirements that would be material to an understanding of the business taken as a whole. The sales of the Company are to many customers and are not dependent upon a single customer or a few customers. As stated in Note 12 to the Consolidated Financial Statements (included in Item 8), net sales to one customer (Chrysler Corporation), however, represented approximately $3,874,000, $3,180,000, and $3,155,000 of the Company's consolidated sales for 1998, 1997, and 1996 respectively. Raw materials essential to the production of the Company's products are standard items obtainable in the open market and are purchased from many vendors. The Company maintains its own foundry facility at the Hastings, Michigan location for producing the cast iron material required for many of its piston ring applications. Research and development are performed by the Company's engineering staff relating to improvements in products and production as well as the design and testing of new products. The Company's expenditures for research and development are not material. The Company has no material governmental contracts. Compliance with federal, state, and local environmental laws and regulations governing discharges into the environment is not expected to have a material effect upon the capital expenditures, earnings, or competitive position of the Company. The Company and its subsidiaries have a total employment of approximately 465 employees. Employee relations at all of the Company's plant locations are considered to be satisfactory. While the Company maintains operations in Canada, there are no unusual risks attendant to the Company's foreign operations. The products of the Company are sold worldwide. Financial information regarding the Company's geographic sales and long-lived assets is included in Note 12 to the Consolidated Financial Statements contained in Item 8 below. -3- ITEM 2. PROPERTIES. The general offices and manufacturing and distribution plant, which produces and distributes piston rings and, through the transition date discussed in Item 1 above, produced filters and filter component parts for CLARCOR Inc., are owned by the Company and are located at 325 North Hanover Street, Hastings, Michigan. This facility consists of approximately 260,000 square feet of production space, 154,000 square feet of available warehouse area, and 35,000 square feet of office area. The Company's wholly owned Canadian subsidiary, Hastings, Inc., owns and operates manufacturing and warehouse facilities for piston rings, additives, and mechanics' specialty tools and is located in Barrie, Ontario. This facility includes approximately 65,000 square feet of production and warehouse space and 4,000 square feet of office space. As of year-end, production levels within the Company's Hastings, Michigan facility were near 80% of capacity. ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any pending legal proceedings other than routine litigation incidental to its business. In the opinion of management, the outcome of any litigation currently pending will not materially affect the Company's consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted during the fourth quarter of 1998 to a vote of security holders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Company's common stock is traded on the American Stock Exchange (ticker symbol HMF). On March 22, 1999, there were 789,526 outstanding shares and the approximate number of record shareholders was 279. High and low sales prices and cash dividends, per quarter, are as set forth below. All results have been adjusted to reflect the two-for-one stock split as discussed in Note 13 to the Consolidated Financial Statements in Item 8 below. -4-
1998 1997 ---------------------------- --------------------------- CASH CASH STOCK PRICE DIVIDENDS STOCK PRICE DIVIDENDS HIGH LOW PAID HIGH LOW PAID ---------------------------------------------------------- First Quarter. . . . $24-1/2 $19-7/8 $.075 $15-1/8 $12-1/2 $.05 Second Quarter . . . 24-3/4 22-3/4 .08 14-3/8 13 .05 Third Quarter. . . . 23 20-3/4 .08 19-5/8 13-3/8 .075 Fourth Quarter . . . 20-3/4 16-1/2 .08 20-3/4 18-7/8 .075
The Company expects to continue its policy of paying regular quarterly dividends, although this policy is dependent upon future earnings, capital requirements, and financial condition. In addition, cash dividends are restricted in accordance with the Company's loan agreements as described in Note 6 to the Consolidated Financial Statements included in Item 8 below. Unrestricted retained earnings under the agreements amounted to $2,618,277 at December 31, 1998. The Company made no unregistered sales of any of its securities during 1998. ITEM 6. SELECTED FINANCIAL DATA.
1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- Net Sales . . . . . . . . . . . . $38,752,104 $35,574,954 $39,408,610 $63,228,312 $74,572,222 Net Income (Loss) . . . . . . . . 1,730,427 955,233 (884,843) (3,023,180) 448,921 Basic and Diluted Earnings (Loss) per Share . 2.24 1.24 (1.15) (3.93) .58 Long-Term Debt. . . . . . . . . . 4,620,000 565,625 2,028,125 3,490,625 6,223,900 Total Assets. . . . . . . . . . . 36,188,500 33,390,331 34,454,989 37,547,568 47,854,279 Dividends per Share . . . . . .315 .25 .20 .20 .20 Average Shares Outstanding: Basic . . . . . . . . . . . . . 771,496 768,516 768,516 768,516 768,516 Diluted . . . . . . . . . . . . 772,694 768,680 768,516 768,516 768,516 -5- Average shares outstanding and the related per share results have been adjusted to reflect the two-for-one stock split discussed in Note 13 to the Consolidated Financial Statements included in Item 8 below. The 1996 data includes non-recurring restructuring and relocation costs totaling $819,900. Refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 2 and 3 to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementing Data." The 1995 data includes the effects of the sale of filter operations and the subsequent realignment of the organizational structure to a smaller size. Refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 to the Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. As noted in the Company's recent filings under the Securities Exchange Act, 1997 reflected a full year of post-filter operating results following the sale of the Company's filter assets and operations in September 1995. As such, 1998 versus 1997 comparisons are not impacted by the sale. Certain comparisons between 1997 and 1996, however, continue to be impacted by the transition period following the sale, which extended through most of 1996. The effects of the post-filter transition have been fully documented in previous filings. In addition to the impact of the filter operations sale, the Company announced a restructuring program in the fourth quarter of 1996 as discussed in Note 3 to the Consolidated Financial Statements. The impact from that program is likewise reflected in the following analysis, as applicable. For the year, the Company generated net income of $1,730,427 compared to net income of $955,233 in 1997. This enhanced profitability was the result of various factors, each of which is more fully described below. These factors include a net sales gain in 1998 of 8.9% over 1997 levels; a gross profit margin improvement driven by lower material costs with overhead costs increasing at a slower pace than sales increases; and continued control over operating expenses which increased a very modest 1.7% in comparison to the 12.1% increase in gross profit. -6- RESULTS OF OPERATIONS NET SALES 1998 COMPARED TO 1997 Net sales for 1998 increased $3,177,150, or 8.9%, from $35,574,954 in 1997 to $38,752,104. This growth in net sales reflects increases in piston ring volume within the Company's domestic aftermarket, private brand, and export markets. The growth in the domestic aftermarket reflects the continued success of the Company's increased focus on this aspect of the piston ring market. The growth in the private brand area is the result of increased volume to several major customers. The increase in the export area reflects the on-going development and growth of the Company's direct export efforts. Net sales increased by $540,209, or 6.4%, in the fourth quarter primarily due to the factors discussed above related to the annual sales increase. 1997 COMPARED TO 1996 Net sales for 1997 decreased $3,833,656, or 9.7% from 1996. This decrease reflects the impact of the filter transition. Filter operations accounted for $5,992,800 in net sales for the full year of 1996, whereas there are no filter sales included in the 1997 results. As such, net sales for the remaining products in 1997 increased $2,159,144, or 6.5%. COST OF SALES AND GROSS PROFIT 1998 COMPARED TO 1997 Cost of sales for 1998 increased $1,809,202, or 7.4%, from $24,285,197 in 1997 to $26,094,399. The increase in cost of sales reflects the corresponding increase in net sales. The gross profit margin increased to 32.7% in 1998 from 31.7% in 1997. This increase is primarily due to a decrease in certain raw material costs and overhead costs increasing at a rate lower than the sales increase, offset largely by increased labor costs. As disclosed in Note 4 to the Consolidated Financial Statements, the positive effect resulting from the 1998 liquidation of certain LIFO inventory layers was comparable to 1997 (approximately $60,600 and $53,000 pre-tax reduction in costs of sales for 1998 and 1997, respectively). While overhead costs increased during 1998, the rate of increase trailed the rate of sales increase due to the fixed nature of a large portion of these costs. Labor costs increased in 1998 as a result of the collective bargaining agreement and additional overtime required by increased customer demand and the Company's efforts to significantly reduce the time from customer order to product shipment. -7- The gross profit margin generated in the fourth quarter (37.7%) was higher than the margin reported through the third quarter of 1998 (31.1%) primarily because the factors noted above had their greatest impact in the fourth quarter. 1997 COMPARED TO 1996 Cost of sales for 1997 decreased $5,013,944, or 17.1%, from 1996. The gross profit margin increased to 31.7% for 1997 from 25.7% in 1996. The aggregate cost of sales reduction, with the improvement in the gross profit margin, reflects the absence of any filter related activity in 1997. The 1996 results were affected by the transition agreement that the Company had with the purchaser of the Company's filter operations. The agreement restricted the Company to a minimum gross profit on filter products in 1996. In addition to the specific filter production costs included in the 1996 results, certain product driven distribution and support operating costs are included in cost of sales. Following the 1996 relocation of certain piston ring operations from the Company's Knoxville facility, which was included in the filter sale, those operating costs decreased from $3,785,000 in 1996 to $2,762,000 in 1997. Lastly, retiree medical costs, which are allocated to cost of sales and operating expenses, decreased in 1997 compared to 1996. As discussed in Note 9 to the Consolidated Financial Statements, in April 1997, the Company announced an amendment to its postretirement benefit plans. The amendment resulted in an $870,000 reduction in cost of sales. OPERATING EXPENSES 1998 COMPARED TO 1997 Operating expenses for 1998 increased $154,767, or 1.7%, from $9,186,371 in 1997 to $9,341,138. Advertising expenses decreased $47,911, or 12.8%, from the 1997 total. This decrease reflects the cost of a biannual product catalog expense in 1997, combined with minor 1998 reductions in cooperative advertising, printed material, and various other advertising costs. These 1998 reductions were offset slightly by an increase in advertising support staff salaries. Selling expenses decreased $179,737, or 5.8%, from the 1997 total. This decrease is primarily due to a reduction in various sales personnel expenses, offset slightly by a sales driven increase in agency commissions. General and administrative expenses increased $382,415, or 6.7%, from the 1997 total. This increase is due primarily to an increase in the provision for doubtful accounts receivable, offset by a number of insignificant account decreases. The provision increase, amounting to $422,500, relates primarily to two accounts which management believes is not indicative of the collectability of remaining accounts. -8- Fourth quarter 1998 operating expenses were $227,809 higher than the 1997 primarily due to a $220,600 charge relating to an uncollectible accounts receivable. 1997 COMPARED TO 1996 Total operating expenses for 1997 decreased significantly from 1996. These reductions reflect the full elimination of any filter sensitive expenses by the Company in 1997, as well as the favorable results of the December 1996 restructuring plan discussed in Note 3 to the Consolidated Financial Statements and a $180,000 reduction in retiree medical costs relating to the plan amendment discussed above and in Note 9 to the Consolidated Financial Statements. OTHER EXPENSES 1998 COMPARED TO 1997 Other expenses, net for 1998 increased by $5,987 over the 1997 net amount. Short-term borrowings in 1998 remained above the 1997 levels through late August of this year, reflecting increased working capital requirements as driven by the net sales increase. As discussed in the "Liquidity and Capital Resources" section below, the Company restructured its short- and long-term debt obligations in late August 1998. This debt restructuring had a significant effect on the interest expense amounts for both the fourth quarter and year-to-date periods. As a result, annual interest expense increased $61,452, or 12.0%, from the 1997 total. For the fourth quarter, interest expense was up $109,681, or 87.5%. Interest expense will remain higher for the next several years as the Company amortizes its long-term debt. This increase, however, should be offset by lower pension expense and Pension Benefit Guaranty Corporation (PBGC) premiums resulting from the increased funding position of the Company's defined benefit pension plans. The 1998 and 1997 interest income amounts were derived from the escrowed funds generated by the sale of the filter operations which were held until early September of this year. 1997 COMPARED TO 1996 Other expenses, net for 1997 increased by $261,639 over the 1996 net amount. The net interest position reflects both lower expense and income. This relationship represents a continued decline in net borrowings resulting from normal long-term debt amortization combined with the use of interest earning funds previously held through 1996 for capital equipment acquisitions. The 1997 and 1996 interest income amounts both reflect the interest derived from the escrowed funds noted earlier, while the 1996 amounts also reflect the interest earned on the funds held for capital -9- acquisition. The favorable 1996 "Other, net" amount primarily reflects a $204,500 gain from the termination of an interest rate swap agreement in March of that year. TAXES ON INCOME The impact of income taxes on the reported results of the Company is detailed in Note 10 to the Consolidated Financial Statements. The 1998 and 1997 effective tax rates of 37.9% and 39.4%, respectively, are higher than the statutory federal rate of 34% due primarily to the impact of state income taxes and certain nondeductible expenses. The 1996 effective tax credit rate of 28.5% is lower than the statutory rate due primarily to the increase in the valuation allowance for certain unused foreign tax credits and the recognition of an accumulated state income tax obligation. As of December 31, 1998, the Company recorded net deferred income tax assets of $7,115,493. The major components include the tax effect of net operating loss carryforwards of $1,206,318 and net accrued retirement and postretirement benefit obligations totaling $5,056,048. The realization of these recorded benefits is dependent upon the generation of future taxable income. The net operating loss carryforwards fully expire in 2010, 2011, and 2012, if not previously utilized. Management has prepared projections of taxable income for future years indicating that the cumulative net operating loss is expected to be fully utilized by the end of the first quarter of 2000. The Company further expects to be able to realize the deferred tax assets related to the retirement and postretirement benefit obligations as it pays these benefits. Such payments will constitute an expense that is deductible for tax reporting purposes over many years. During each of the ten years before the recent net operating loss carryforwards arose, the Company has been able to deduct these benefits for tax reporting purposes and reduce its current tax liability accordingly. As a result of the 1997 amendment to the retiree medical plan as discussed in Note 9 to the Consolidated Financial Statements, current tax deductible payments are expected to exceed the annual expense recognition for financial reporting purposes, thus accelerating the absorption of the future periods' tax benefit. Management believes that it is more likely than not that adequate levels of future income will be generated to absorb the net operating loss carryforwards, the deductible amounts related to the retirement and postretirement benefit obligations, and the remaining net deductible temporary differences. In addition, based upon projected foreign source income, management believes it is more likely than not that the foreign tax credits will be utilized prior to their expiration. -10- LIQUIDITY AND CAPITAL RESOURCES The Company's primary cash requirements continue to be for operating expenses such as labor costs and raw materials, and for funding accounts receivable, capital expenditures, and long-term debt service. Historically, the Company's primary sources of cash have been from operations and from bank borrowings. As a result of the full transition out of filter operations, and the favorable impact of the subsequent restructuring efforts, the Company expects to generate sufficient future funds from operations and bank borrowings to fund its growth and operating needs. In late August 1998, the Company entered into a $6,600,000 long- term debt agreement with its primary lender. This new agreement allowed the Company to take advantage of favorable interest rate conditions. Borrowings under this new long-term debt agreement were used for several purposes including: raising the Company's defined benefit plans to funding levels that would alleviate the payment of the variable rate PBGC premiums; consolidating the remaining long-term debt obligations; and paying down certain short-term notes payable. As a result of this new long-term debt agreement, the Company's short-term line with its primary lender was reduced from $5,000,000 to $3,000,000. Total short-term lines available to the Company as of December 31, 1998 totaled $5,200,000, of which $2,900,000 was unused. In connection with the floating rate debt exposure, the Company entered into an interest rate swap agreement essentially fixing the interest rate on that debt within a small range. The rate will fluctuate between 7.45% to 7.95% depending upon certain Company performance parameters. As of December 31, 1998 the "fixed" rate on those borrowings was 7.70%. During 1998, the Company used $1,192,259 of net cash for operating activities. The realized net income, depreciation, and decrease in deferred income taxes were offset by increases in accounts receivable, inventories and other assets, and a decrease in the periodic postretirement benefit obligation. The decline in the deferred income tax asset is primarily the result of the additional funding of the Company's defined benefit pension plans, as discussed above, and the partial utilization of the net operating loss carryforwards. The increased accounts receivable and inventory reflect the additional working capital requirements that are necessary to support the higher sales level. The increase in the prepaid pension asset of $2,675,688 was generated when the Company funded the defined benefit plans to specified limits. As such, it did not have a direct effect on operations during 1998. Excluding this item, net cash generated from operating activities amounted to $1,483,429. The investing activities for 1998 reflect the Company's continued commitment to enhancing its production capabilities, as capital expenditures totaled $2,246,598. Capital expenditures should decline in 1999 as the Company moves toward adopting cellular manufacturing. Investing activities also reflect the September 1998 release of escrowed funds relating to the 1995 sale of -11- filter operations. These funds were subsequently used to reduce short-term notes payable. Financing activities reflect the increased reliance on short-term borrowings to help satisfy increased working capital needs. Financing activities also reflect the proceeds from the new long-term debt agreement and the subsequent utilization of a portion of the proceeds to pay down short- and long-term debt. Dividends paid increased in 1998 due to the continued improved operating results. During 1997, the Company generated net cash of $2,129,643 from operating activities. The realized net income, depreciation and decrease in deferred income taxes were only partially countered by increased accounts receivable and a reduction in the postretirement benefit obligation. The decline in the deferred income tax asset is the result of the partial utilization of the net operating loss carryforwards, while the postretirement benefit factor reflects, in part, the impact from the modification of the retiree health plan that was effective in April 1997. The majority of the Company's 1997 investing activities reflect capital equipment purchases that the Company utilized to enhance its production capabilities. The financing activities for 1997 reflect a modest decrease in reliance on short-term borrowings combined with the reduction of long- term debt levels through normally scheduled quarterly payments. During 1996, the Company generated net cash of $1,188,280 from operating activities. The reported net loss and the reductions in accounts payable and accruals were more than offset by depreciation and reductions in accounts receivable and inventories. The realized reductions in accounts payable, accounts receivable, and inventories were primarily a result of the Company's full transition out of filter operations. The outlay of $1,343,291 for capital expenditures in 1996 reflects, in part, enhancements to the Hastings, Michigan facility in relation to the inventory and shipping operations relocation from the Knoxville facility subsequent to the filter operations sale. The financing activities for 1996 reflect a reduced reliance on short-term borrowings throughout most of the year, combined with the reduction of long-term debt levels through scheduled debt payments. As noted throughout the above discussion, the Company has realized its second consecutive year of significant sales increases from its core product lines. This growth has resulted in an increased net income level combined with increased working capital demands. The Company will continue to monitor its working capital needs in order to balance its cash and growth demands. At this time, the Company anticipates that operations (which will be subject to minimal current cash outflows for U.S. income taxes due to the utilization of the net operating loss carryforwards), in combination with the balancing of available short-term lines with operations, will generate cash flows that will be sufficient to fund its working capital, capital outlays, and dividend requirements through 1999. -12- NEW ACCOUNTING STANDARDS SFAS No. 133, entitled "Accounting for Derivative Instruments and Hedging Activities" and issued in June 1998, requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Historically, the Company has not entered into derivatives contracts for speculative purposes. The Company does periodically enter into interest rate swap and collar agreements to reduce the impact of changes in interest rates on its floating rate borrowings. However, the fair value of such derivatives are not significant. Accordingly, the Company does not expect adoption of the new standard on January 1, 2000 to materially affect its consolidated financial statements. YEAR 2000 READINESS DISCLOSURE The year 2000 (Y2K) issue is the result of computer programs having been written using two digits, rather than four, to define the applicable year. Any of the Company's computers, computer programs, manufacturing and administrative equipment, or products that have date- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. If any of the Company's systems that have date- sensitive software use only two digits, system failures or miscalculations may result causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in similar normal business activities. During 1995, the Company's internal data processing staff began an evaluation of the Company's exposure to the effects of the Y2K issue. As a member of certain automotive supplier trade associations, awareness of the Y2K issue was both highlighted and documented beginning in early 1996. At that point, the Company established a multi-disciplined committee to coordinate the Company's efforts in addressing the Y2K impact. This committee continues to include several members of the internal Executive Committee with responsibility for full board-level reporting on this issue. Through the efforts of this committee, the Company coordinates both internal and external reviews of its Y2K exposure. -13- Internally, this committee evaluated the general operating systems for the Company as well as the security systems, telecommunications networks, manufacturing equipment, and internal personal computer (PC) operations. Through the second half of 1996 and much of 1997, the Company utilized the services of an outside consultant, as well as its internal resources, to convert its computer systems to be Y2K compliant. As of December 31, 1998, the Company's core operating system and applications, its PC operating systems and the majority of its PC applications were believed to be compliant. The remaining PC applications are expected to be compliant in mid-1999, pending installation of the next software release or upgrade as needed. Manufacturing equipment testing has been completed with no perceived Y2K exposure. At this point, the Company is targeting a full-scale, live test of its operating systems for Y2K compliance in mid-1999. Incremental costs related to the Y2K project, primarily consisting of expenses related to the consultant, approximated $120,000 through 1998 with $10,000, $80,000 and $30,000 charged to operating expenses as incurred in 1998, 1997 and 1996, respectively. Internal costs, which are not incremental in nature, have not been tracked by the Company. Future costs to be incurred to complete Y2K compliance and testing procedures, primarily related to direct Company personnel, are not expected to be material. With the inception of the committee in 1996, the Company began to focus externally as well. The committee identified suppliers of products and services deemed to be critical to the Company's operations, as well as customers deemed to have the greatest Y2K exposure (e.g., EDI communications). The Company has coordinated via surveys with these key contacts. While the Company cannot guarantee Y2K compliance by its key suppliers and customers, and in many cases will be relying on statements from outside vendors without independent verification, preliminary results indicate that these key suppliers and customers are aware of the issues and are working to assure their compliance before the year 2000. At this time, the Company is not aware of any key suppliers or customers who will not be Y2K compliant by the year 2000. The Company's next steps will be to update the solicitation of key customers, obtain more detailed information from certain key suppliers and customers, and follow up with those companies who did not respond to the original surveys. In addition, final plans are being developed for the 1999 internal compliance test procedures. Pending the results of that procedure, the Company intends to prepare a contingency plan that will specify what exposures it still perceives and what it plans to do if important components are not expected to be Y2K compliant in a timely manner. The Company expects to prepare and evaluate its contingency plan by mid-1999. -14- FORWARD-LOOKING STATEMENTS With the exception of historical matters, the matters discussed in this commentary include certain predictions and projections that may be considered forward-looking statements under securities laws. These statements are subject to a number of important risks and uncertainties that could cause actual results to differ materially including, but not limited to, economic, competitive, governmental, and technological factors affecting the Company's operations, markets, products, services, and prices. The Company undertakes no obligation to update, amend, or clarify forward- looking statements, whether as a result of new information, future events or otherwise. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to potential market risks on interest rates relating to a swap agreement transacted with its primary lender in connection with its long-term debt agreement. Management believes that the fluctuation in interest rates in the near future will not have a material impact on its consolidated financial statements taken as a whole. The Company does not use derivative financial instruments for trading purposes. -15- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Hastings Manufacturing Company and Subsidiaries Consolidated Financial Statements Years Ended December 31, 1998 and 1997 Hastings Manufacturing Company and Subsidiaries Contents =============================================== Consolidated Balance Sheets - December 31, 1998 and 1997 14-15 Consolidated Statements of Income - Years Ended December 31, 1998, 1997 and 1996 16 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1998, 1997 and 1996 17 Consolidated Statements of Cash Flows - Years Ended December 31, 1998, 1997 and 1996 18-19 Notes to Consolidated Financial Statements 20-36 Report of Independent Certified Public Accountants 37 -16- Hastings Manufacturing Company and Subsidiaries Consolidated Balance Sheets ==================================================
DECEMBER 31 1998 1997 ----------- ----------- ASSETS CURRENT ASSETS Cash $ 635,773 $ 558,172 Accounts receivable, less allowance for possible losses of $210,000 and $215,000 5,489,165 5,148,906 Refundable income taxes - 13,475 Inventories (Note 4): Finished products 8,317,084 7,460,534 Work in process 660,534 572,307 Raw materials 1,620,604 1,239,657 Prepaid expenses and other assets 75,655 75,669 Future income tax benefits (Note 10) 2,395,856 2,351,687 Other current assets (Note 2) - 958,517 ----------- ----------- TOTAL CURRENT ASSETS 19,194,671 18,378,924 ----------- ----------- PROPERTY AND EQUIPMENT Land and improvements 635,692 658,243 Buildings 5,275,207 4,633,937 Machinery and equipment 19,503,267 18,180,840 ----------- ----------- 25,414,166 23,473,020 Less accumulated depreciation 16,411,078 15,156,120 ----------- ----------- NET PROPERTY AND EQUIPMENT 9,003,088 8,316,900 ----------- ----------- PREPAID PENSION ASSET (Notes 6 and 8) 2,675,688 - INTANGIBLE PENSION ASSET (Note 8) 564,949 815,189 FUTURE INCOME TAX BENEFITS (Note 10) 4,719,637 5,828,923 -17- OTHER ASSETS 30,467 50,395 ----------- ----------- $36,188,500 $33,390,331 =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -18- Hastings Manufacturing Company and Subsidiaries Consolidated Balance Sheets ==================================================
DECEMBER 31 1998 1997 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable to banks (Note 5) $ 2,300,000 $ 3,400,000 Accounts payable 1,536,612 1,475,098 Accruals: Compensation 600,599 494,781 Pension plan contribution (Note 8) - 608,786 Income taxes 41,294 - Taxes other than income 152,932 172,854 Miscellaneous 300,780 217,731 Current portion of postretirement benefit obligation (Note 9) 1,044,175 1,110,442 Current maturities of long-term debt (Note 6) 1,320,000 1,462,500 ----------- ----------- TOTAL CURRENT LIABILITIES 7,296,392 8,942,192 LONG-TERM DEBT, less current maturities (Note 6) 4,620,000 565,625 PENSION AND DEFERRED COMPENSATION OBLIGATION, less current portion (Note 8) 2,604,111 3,243,618 POSTRETIREMENT BENEFIT OBLIGATION, less current portion (Note 9) 14,650,755 15,318,770 ----------- ----------- TOTAL LIABILITIES 29,171,258 28,070,205 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Notes 6, 8 and 9) -19- STOCKHOLDERS' EQUITY (Notes 6, 7, 8 and 13) Preferred stock, $2 par value, authorized and unissued 500,000 shares - - Common stock, $2 par value, 1,750,000 shares authorized; 789,526 and 780,626 shares issued and outstanding 1,579,052 1,561,252 Additional paid-in capital 338,272 145,788 Retained earnings 7,273,410 5,793,219 Accumulated other comprehensive income: Cumulative foreign currency translation adjustment (981,073) (750,655) Pension liability adjustment ($1,806,695 and $2,165,876, net of tax of $614,276 and $736,398, respectively) (Note 8) (1,192,419) (1,429,478) ----------- ----------- Total accumulated other comprehensive income (2,173,492) (2,180,133) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 7,017,242 5,320,126 ----------- ----------- $36,188,500 $33,390,331 =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -20- Hastings Manufacturing Company and Subsidiaries Consolidated Statements of Income ==================================================
YEAR ENDED DECEMBER 31, 19987 19976 1996 ----------- ----------- ----------- NET SALES $38,752,104 $35,574,954 $39,408,610 COST OF SALES (Note 9) 26,094,399 24,285,197 29,299,141 ----------- ----------- ----------- Gross profit 12,657,705 11,289,757 10,109,469 ----------- ----------- ----------- OPERATING EXPENSES Advertising 325,070 372,981 349,660 Selling 2,940,478 3,120,215 3,593,143 General and administrative (Note 9) 6,075,590 5,693,175 6,320,095 Non-recurring restructuring and relocation costs (Notes 2 and 3) - - 819,900 ----------- ----------- ----------- 9,341,138 9,186,371 11,082,798 ----------- ----------- ----------- Operating income (loss) 3,316,567 2,103,386 (973,329) ----------- ----------- ----------- OTHER EXPENSES (INCOME) Interest expense 571,774 510,322 570,397 Interest income (35,982) (47,062) (145,853) Other, net (3,652) 62,893 (160,030) ----------- ----------- ----------- 532,140 526,153 264,514 ----------- ----------- ----------- Income (loss) before income tax expense (benefit) 2,784,427 1,577,233 (1,237,843) -21- INCOME TAX EXPENSE (BENEFIT) (Note 10) 1,054,000 622,000 (353,000) ----------- ----------- ----------- NET INCOME (LOSS) $ 1,730,427 $ 955,233 $ (884,843) =========== =========== =========== BASIC AND DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK (Notes 11 and 13) $ 2.24 $ 1.24 $ (1.15) =========== =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -22- Hastings Manufacturing Company and Subsidiaries Consolidated Statements of Stockholders' Equity ==================================================
ACCUMULATED ADDITIONAL OTHER COMMON PAID-IN RETAINED COMPREHENSIVE STOCK CAPITAL EARNINGS INCOME TOTAL --------- ---------- ----------- ----------- ----------- BALANCE, January 1, 1996 $ 777,626 $119,318 $ 6,854,865 $(2,526,831) $ 5,224,978 Comprehensive income (loss): Net loss - - (884,843) - (884,843) Other comprehensive income (loss): Foreign currency translation adjustment - - - (11,054) (11,054) Pension liability adjustment ($1,115,188, net of tax of $379,164) (Note 8) - - - 736,024 736,024 ----------- 724,970 ----------- Total comprehensive income (loss) (159,873) Shares issued under restricted stock plan, net of shares forfeited 2,650 20,888 - - 23,538 Cash dividends ($.20 per share) - - (156,195) - (156,195) ---------- -------- ----------- ----------- ----------- BALANCE, December 31, 1996 780,276 140,206 5,813,827 (1,801,861) 4,932,448 Comprehensive income: Net income - - 955,233 - 955,233 Other comprehensive income: Foreign currency translation adjustment - - - (139,200) (139,200) Pension liability adjustment (($362,230), net of tax of ($123,158)) (Note 8) - - - (239,072) (239,072) ----------- (378,272) ----------- -23- Total comprehensive income 576,961 Shares issued under restricted stock plan, net of shares forfeited 350 5,582 - - 5,932 Cash dividends ($.25 per share) - - (195,215) - (195,215) Two-for-one stock split (Note 13) 780,626 - (780,626) - - ---------- -------- ----------- ----------- ----------- BALANCE, December 31, 1997 1,561,252 145,788 5,793,219 (2,180,133) 5,320,126 Comprehensive income: Net income - - 1,730,427 - 1,730,427 Other comprehensive income: Foreign currency translation adjustment - - - (230,418) (230,418) Pension liability adjustment ($359,181, net of tax of $122,122) (Note 8) - - - 237,059 237,059 ----------- 6,641 ----------- Total comprehensive income 1,737,068 Shares issued under restricted stock plan, net of shares forfeited 17,800 192,484 (3,300) - (206,984) Cash dividends ($.315 per share) - - (246,936) - (246,936) ---------- -------- ----------- ----------- ----------- BALANCE, December 31, 1998 $1,579,052 $338,272 $ 7,273,410 $(2,173,492) $ 7,017,242 ========== ======== =========== =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -24- Hastings Manufacturing Company and Subsidiaries Consolidated Statements of Cash Flows ==================================================
YEAR ENDED DECEMBER 31, 1998 1997 1996 ----------- ----------- ------------ Operating Activities Net income (loss) $ 1,730,427 $ 955,233 $ (884,843) Adjustments to reconcile net income (loss) to net cash from (for) operating activities: Depreciation 1,464,944 1,337,100 1,255,252 Gain on sale of property and equipment (1,991) - - Deferred income taxes (benefit) 955,000 591,000 (370,000) Change in postretirement benefit obligation (734,282) (757,820) 70,058 Changes in operating assets and liabilities: Accounts receivable (420,582) (291,894) 1,764,615 Refundable income taxes 12,994 51,933 159,290 Inventories (1,434,958) (37,063) 709,006 Prepaid expenses and other current assets (203) 31,656 (21,651) Prepaid pension cost (2,675,688) - - Other assets 20,274 93,315 (97,240) Accounts payable and accruals (108,194) 156,183 (1,396,207) ----------- ----------- ----------- Net cash from (for) operating activities (1,192,259) 2,129,643 1,188,280 ----------- ----------- ----------- Investing Activities Capital expenditures (2,246,598) (1,770,302) (1,343,291) Release of filer sale escrow funds 958,517 - - Proceeds from sale of property and equipment 7,899 1,299 - ----------- ----------- ----------- Net cash for investing activities (1,280,182) (1,769,003) (1,343,291) ----------- ----------- -----------
-25- Hastings Manufacturing Company and Subsidiaries Consolidated Statements of Cash Flows ==================================================
YEAR ENDED DECEMBER 31, 1998 1997 1996 ----------- ----------- ------------ Financing Activities Proceeds from issuance of notes payable to banks $ 9,500,000 $ 7,850,000 $ 9,900,000 Principal payments on notes payable to banks (10,600,000) (7,450,000) (8,400,000) Proceeds from issuance of long-term debt to banks 6,600,000 - - Principal payments on long-term debt (2,688,125) (1,462,500) (1,560,500) Dividends paid (246,936) (195,215) (156,195) ----------- ----------- ----------- Net cash from (for) financing activities 2,564,939 (1,257,715) (216,695) ----------- ----------- ----------- Effect of Exchange Rate Changes on Cash (14,897) (2,536) (80,017) ----------- ----------- ----------- Net Increase (Decrease) in Cash 77,601 (899,611) (451,723) Cash, beginning of year 558,172 1,457,783 1,909,506 ----------- ----------- ----------- Cash, end of year $ 635,773 $ 558,172 $ 1,457,783 =========== =========== =========== Supplemental Cash Flow Information Cash paid during the year for: Income taxes, net of refunds $ 52,593 $ (40,793) $ (172,890) Interest 591,639 524,814 578,061
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -26- Hastings Manufacturing Company and Subsidiaries Note to Consolidated Financial Statements =============================================== NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Hastings Manufacturing Company and subsidiaries (Company) is primarily a manufacturer of automotive and light duty truck piston rings for the replacement market. To a lesser extent, the Company packages and sells automotive mechanics' specialty tools and additives for engines, transmissions and cooling systems. The Company's headquarters and primary manufacturing facilities are located in Hastings, Michigan. All of the Company's products are also sold in Canada. These products are produced and/or packaged and distributed by the Company's Canadian subsidiary, Hastings, Inc., located in Barrie, Ontario. The Company distributes its products primarily through numerous auto parts jobbers and warehouse distributors for sale primarily in the automotive replacement market throughout the U.S. and Canada. Certain of the Company's piston rings are produced for original equipment applications. The Company distributes the majority of its export sales on a direct country basis. Prior to early 1997, international sales had historically been distributed through one U.S. customer. The Company performs ongoing credit evaluations of its customers and provides reserves for probable credit losses. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the parent company and its subsidiaries. Upon consolidation, all significant intercompany accounts and transactions are eliminated. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS 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. -27- REVENUE RECOGNITION The Company recognizes revenue when its products are shipped to its customers. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of the Company's financial instruments, comprised of cash, short-term receivables and payables, notes payable to banks (variable interest rate) and long-term debt (variable interest rate) approximates their carrying values. The fair value of the Company's interest rate swap agreement, as disclosed in Note 6, is not material. INVENTORIES Inventories are stated at cost, not in excess of market. The Company uses the last-in, first-out (LIFO) method of determining costs for U.S. raw material inventories. Remaining inventories are valued using the first-in, first-out (FIFO) method. PROPERTY, EQUIPMENT AND DEPRECIATION Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed primarily by the straight-line method for financial reporting purposes, based on the estimated useful lives of the respective assets, and accelerated methods with minimum lives for income tax purposes. RETIREMENT PLANS The Company sponsors noncontributory, defined benefit plans which cover all employees of the Company who are covered by collective bargaining agreements. The plans provide benefits based on an employee's earnings and years of benefit service. The Company funds these plans in amounts consistent with the funding requirements of federal laws and regulations. As discussed in Note 6, the Company provided additional funding to the plans during 1998. The plans' assets are invested in stocks, bonds, annuities and short-term investments. The Company also sponsors defined contribution retirement savings plans for its employees and has entered into a deferred compensation agreement with a former officer as described in Note 8. The Company provides certain healthcare and life insurance benefits for eligible retired employees. Postretirement benefits are accounted for on the accrual basis, during the employee's years of service, based on the expected cost of providing benefits to that employee and the employee's beneficiaries and covered dependents. -28- STOCK OPTIONS The Company applies the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its stock option plan. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. ADVERTISING COSTS All advertising costs are expensed in the period in which they are incurred. INCOME TAXES The Company provides deferred income taxes based on enacted income tax rates in effect on the dates temporary differences between the financial reporting and tax bases of assets and liabilities reverse. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in income in the period that includes the enactment date. To the extent that available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established. As disclosed in Note 10, the Company has recorded deferred tax assets reflecting the benefit of net operating loss carryforwards expiring in 2010, 2011 and 2012, foreign tax credit carryforwards expiring through 2003, accrued pension and postretirement obligations estimated to be payable in varying amounts over the next 25 to 30 years and other net deductible temporary differences. Realization of the recorded income tax benefits is dependent on generating sufficient taxable income and foreign source income prior to expiration of the loss carryforwards and foreign tax credit carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income and foreign source income during the carryforward periods are reduced. No provision for income taxes has been made on the accumulated undistributed earnings of approximately $3,795,000 of the Canadian subsidiary. These earnings are intended to be permanently reinvested in facilities and other assets and have borne income taxes that would offset, in major part, any tax liability resulting from their distribution. -29- BASIC AND DILUTED EARNINGS PER SHARE Basic earnings per share (EPS) is based on the weighted average number of shares of common stock outstanding during each period. It excludes the dilutive effects of additional common shares that would have been outstanding if the shares, under the Company's stock option plan, had been issued. It also excludes the dilutive effect of contingently issuable shares, outstanding under the Company's restricted stock plan described in Note 7, to the extent those shares have not yet been vested. Diluted EPS includes the effects of the Company's stock options and contingently issuable shares. Basic and diluted EPS are retroactively adjusted for stock dividends and stock splits. INTEREST RATE AGREEMENTS The Company enters into interest rate swap and collar agreements to reduce the impact of changes in interest rates on its floating rate borrowings. Interest rate swap agreements are contracts to exchange floating rate for fixed rate interest payments over the life of the agreements without the exchange of the underlying notional amounts. Interest rate collar agreements limit the Company's interest rates on floating rate borrowings to a range within a minimum (floor) and a maximum (cap) interest rate. The notional amounts of interest rate agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The differential paid or received on interest rate agreements is recognized as an adjustment to interest expense. The counterparty to the Company's interest rate agreements is a commercial bank with which the Company has other financial relationships. While the Company is exposed to credit loss in the event of nonperformance by the counterparty, the Company does not anticipate nonperformance by the other party, and no material loss would be expected from such non- performance. The Company does not enter into interest rate agreements, or other derivative financial instruments, for trading purposes. FOREIGN CURRENCY TRANSLATION The financial statements of the Company's Canadian operations, where the functional currency is the Canadian dollar, are translated at the exchange rate in effect at year-end for assets and liabilities. Income and expense items are translated at the average exchange rate for the year. Related translation adjustments are reported as a separate component of accumulated other comprehensive income. Gains and losses from foreign currency transactions, which are not significant, are included in current earnings. -30- NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," issued in September 1997, was adopted by the Company during 1998. SFAS No. 130 requires that all components of comprehensive income and total comprehensive income be reported in one of the following: a statement of income and comprehensive income, a statement of comprehensive income or a statement of stockholders' equity. The Company has elected to report comprehensive income in its consolidated statements of stockholders' equity. Comprehensive income is comprised of net income and all changes to stockholders' equity, except those due to investments by owners and distributions to owners. For the Company, components of comprehensive income include net income, the foreign currency translation adjustment relating to the Company's Canadian operations and the pension liability adjustment relating to the Company's underfunded pension plan, as disclosed in Note 8. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," issued in June 1997 and which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," establishes standards for the way that public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Operating segments which exhibit similar characteristics are permitted to be aggregated into a single operating segment for financial reporting purposes. As defined by SFAS No. 131, the Company has two operating segments, U.S. operations and Canadian operations, based on management's geographic reporting responsibilities. As discussed in the previous "Nature of Operations" section, all of the Company's products are sold in both the U.S. and Canada. In addition, the operating segments' production processes, types of customers, distribution methods, regulatory environment and expected long- term financial performance are very similar. Because management believes aggregation of its two operating segments is consistent with the objective and basic principles of SFAS No. 131, financial information regarding its operating segments has been aggregated for financial reporting purposes. Additional information required to be disclosed by SFAS No. 131 is included in Note 12. SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," issued in February 1998, revises employers' disclosures about pension and other postretirement benefit plans. It does -31- not change the measurement or recognition of those plans. SFAS No. 132 standardizes the disclosure requirements to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis and eliminates certain disclosures that are no longer as useful as when they were first required to be presented. Information required to be disclosed by SFAS No. 132 is included in Notes 8 and 9. SFAS No. 130, 131 and 132 were first effective for the Company's 1998 consolidated financial statements. As required, prior year information has been restated to conform to the provisions of the new standards. The implementation of these new standards did not affect results of operations or financial position. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," issued in June 1998, requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Historically, the Company has not entered into derivatives contracts for speculative purposes. The Company does periodically enter into interest rate swap and collar agreements to reduce the impact of changes in interest rates on its floating rate borrowings. However, the fair value of such derivatives are not significant. Accordingly, the Company does not expect adoption of the new standard on January 1, 2000 to materially affect its consolidated financial statements. NOTE 2 - SALE OF FILTER OPERATIONS Effective on September 3, 1995, the Company sold its filter product line assets to CLARCOR Inc. (CLARCOR) of Rockford, Illinois. The sale was accounted for as a sale of a portion of a segment of a business. As part of the sale, the Company and CLARCOR entered into a Transition Agreement which provided for the Company's manufacture and supply to CLARCOR of certain filters and filter component parts until certain manufacturing equipment, located at the Company's Hastings, Michigan plant, could be moved and set up at CLARCOR's plant facilities. It also provided for the reimbursement of certain administrative costs directly related to -32- the manufacture and supply of filters and filter components to CLARCOR. The transition period was completed during the third quarter of 1996. Expense reimbursement included in 1996 net sales amounted to $736,000. The Transition Agreement also included certain provisions for the continued distribution (not manufacture) of filter products through the Company's Canadian subsidiary, at the discretion of CLARCOR. In early November 1996, the Company received notification from CLARCOR that this arrangement would terminate on December 31, 1996. Related distribution revenue, included in 1996 net sales, amounted to $1,123,000. Total filter sales and estimated operating profit for 1996 approximated $5,992,800 and $525,000, respectively. The estimated operating profit, which reflects those operating expenses for which the Company estimated would not recur as a result of the sale, includes $625,000 of reduced filter cost of sales resulting from liquidation of LIFO inventories caused by the elimination of all remaining filter inventory. In 1996, during the course of the transition period, the Company relocated its piston ring packaging operations from Knoxville, Tennessee to Hastings, Michigan. The relocation and associated training costs were non- recurring in nature. These costs, all of which were incurred during the first and second quarters of 1996, totaled approximately $468,400 and are included in "Non-recurring restructuring and relocation costs" in the accompanying 1996 consolidated statement of income. At December 31, 1997, "Other current assets" consisted of $958,517 held in escrow relating to the sale. These funds were released from escrow in September 1998. Of the total $720,400 employee severance benefits accrued and expensed in September 1995 relating to the sale, $457,834 was paid through December 31, 1998, with the remaining $262,566 balance to be paid in monthly payments through 2005. No other filter- related assets or liabilities remained at December 31, 1998 and 1997. NOTE 3 - RESTRUCTURING COSTS In December 1996, management and the Board of Directors approved a restructuring plan designed to significantly reduce operating costs and provide for a more streamlined and efficient operating structure concentrating on piston ring manufacturing. Operating results for 1996, exclusive of non-recurring restructuring and relocation costs discussed here and in Note 2, were adversely affected by two major factors. First, fulfilling the Company's production and administrative responsibilities under the filter Transition Agreement, discussed in Note 2, proved more costly than anticipated. Second, with the assistance of an outside corporate consulting firm, management determined that staffing remained at -33- too high of a level throughout the remainder of 1996 based on actual and anticipated revenues. These factors, in addition to the CLARCOR notification discussed in Note 2, precipitated the restructuring plan. In addition to reducing staffing levels at both the U.S. and Canadian manufacturing facilities, the restructuring plan called for the termination of most Canadian piston ring manufacturing effective April 30, 1997. The Canadian subsidiary continues to distribute piston rings throughout Canada, being sourced entirely by U.S. operations. This facility also continues to manufacture certain piston ring parts and provide packaging operations for automotive mechanics' specialty tools and piston ring sets. Total restructuring costs, all recognized in the fourth quarter of 1996, amounted to $351,500 and are included in "Non-recurring restructuring and relocation costs" in the accompanying 1996 consolidated statement of income. Of the total, $247,000 and $104,500 related to employee severance benefits and consulting fees, respectively, and were paid during 1996 and 1997. NOTE 4 - INVENTORIES Inventories valued using the LIFO method were $2,654,000 and $2,272,000 at December 31, 1998 and 1997, respectively. If the FIFO method of inventory valuation had been used by the Company, inventories would have been $1,212,000 and $1,387,000 higher than reported at December 31, 1998 and 1997, respectively. Reduction of inventory quantities in 1998, 1997 and 1996 resulted in a liquidation of LIFO inventories carried at lower costs prevailing in prior years as compared to current years' purchases. The effect of these reductions increased net income (or reduced the net loss) by $40,000, $35,000 and $447,300 ($.05, $.05 and $.58 per share, on a diluted basis, as adjusted for the stock split discussed in Note 13) for 1998, 1997 and 1996, respectively. Of the $447,300 amount for 1996, $412,500 resulted from the elimination of all remaining filter inventory during 1996. NOTE 5 - SHORT-TERM BORROWINGS In August 1998, the Company entered into a loan agreement with its primary lender which provides for an unsecured $6,600,000 term credit loan (see Note 6) and an unsecured $3,000,000 credit authorization for revolving credit loans and letters of credit. Under the agreement, the Company's short-term line with its primary lender was reduced from $5,000,000 to $3,000,000. Interest for both the short-term and long-term borrowings is based on three different pricing options: a negotiated rate, -34- a Eurodollar rate plus a factor and a floating rate (greater of the federal funds rate plus a factor or the prime rate). The effective Eurodollar rate and floating rate are increased by a margin rate, ranging from 1.50% to 2.00%, which is based upon certain Company performance parameters. The Company maintains two additional unsecured lines of credit with banks aggregating $2,200,000, with interest rates based on prime. Of the $5,200,000 total short-term lines available to the Company at December 31, 1998, $2,900,000 was unused. At December 31, 1997, the Company maintained unsecured lines of credit with various banks aggregating $4,700,000 with interest at negotiated rates based upon prime or LIBOR. Available borrowings amounted to $1,300,000 at December 31, 1997. The weighted average interest rate on short-term borrowings outstanding at December 31, 1998 and 1997 was 9.10% and 8.25%, respectively. The interest rate on short-term borrowings in effect at December 31, 1998 was unusually high as it is based on the federal funds interest rate which typically increases as of the last day of the calendar year. The weighted average interest rate on the Company's short-term borrowings for the seven-day period preceding December 31, 1998 was 7.4%. NOTE 6 - LONG-TERM DEBT As discussed in Note 5, the Company restructured its short-term and long-term borrowing arrangements in August 1998. The entire $6,600,000 under the term loan portion of the new loan agreement was borrowed and was used to additionally fund the Company's defined benefit plans, to pay off the previously outstanding long-term debt and, as discussed in Note 5, to reduce short-term notes payable. The additional funding to the Company's defined benefit plans resulted in the $2,675,688 prepaid pension asset in the accompanying consolidated balance sheets at December 31, 1998. The term loan is payable in quarterly principal payments of $330,000, plus interest based on the pricing options discussed in Note 5. In connection with the $6,600,000 term loan, the Company entered into an interest rate swap agreement essentially to fix the interest rate on these long-term borrowings at 5.95% plus the margin, discussed in Note 5, resulting in an interest rate range of 7.45% to 7.95%. At December 31, 1998, the interest rate in effect on these long-term borrowings was 7.70% and the notional amount of the swap agreement amounted to $5,940,000. Of the $5,940,000 outstanding long-term debt balance at December 31, 1998, $1,320,000 is due in 1999. Remaining maturities are $1,320,000 annually for the years 2000 through 2002 with the $660,000 balance due in 2003. The term loan agreement requires the Company to maintain certain financial balances and ratios and limits the amount of cash dividends. Unrestricted retained earnings under the agreement amounted to $2,618,277 at December 31, 1998. -35- In March 1996, the Company terminated its interest rate swap agreement related to its floating rate borrowings outstanding at the time, receiving $204,500 from the bank as a result of favorable interest rates. This amount is included in "Other, net" in the accompanying 1996 consolidated statement of income. At the same time, in order to continue to limit its interest rate exposure, the Company entered into an interest rate collar agreement which was in effect until the August 1998 debt restructuring discussed above. The collar agreement provided for a cap rate on floating rate borrowings of 8.25% and a related floor of 6.75%. At December 31, 1997, the Company had outstanding long-term debt totaling $2,028,125, with $1,462,500 due in 1998, under two term loans payable in quarterly installments through May 1999. Interest on these borrowings was based on LIBOR. As discussed above, these borrowings were paid off with the proceeds of the August 1998 borrowing. NOTE 7 - STOCKHOLDERS' EQUITY STOCKHOLDERS' RIGHTS PLAN On February 13, 1996, the Company's Board of Directors authorized the adoption of a Series A Preferred Stock Purchase Rights Plan (Plan). Under the Plan, a dividend distribution of one Series A Preferred Stock Purchase Right (Right) was made for each outstanding share of common stock, payable to shareholders of record on March 8, 1996. The Plan is designed to protect shareholders against unsolicited attempts to acquire control of the Company in a manner that does not offer a fair price to all shareholders. In addition, it is intended to help protect and preserve ownership of the Company's principal tradenames and trademarks. Each Right entitles shareholders to purchase one one-hundredth of a share of preferred stock from the Company at a price of $100 per share, subject to adjustment. The Rights will become exercisable only if a person or group (Acquiring Person) acquires 15% or more of the Company's common stock or announces a tender offer that would result in ownership of 30% or more of the common stock. A person beneficially owning 15% or more of the outstanding shares of common stock on February 13, 1996, or any affiliates or associates thereof, do not constitute an Acquiring Person under the Plan. The Company's Series A Preferred Stock consists of 500,000 shares authorized, at $2 par value, none of which are issued. Shares of preferred stock are reserved at a level sufficient to permit the exercise in full of all the outstanding Rights. Under terms specified in the Plan, the Company has the right to redeem the Rights at one cent per Right. -36- STOCK OPTION PLAN The Company's Stock Option and Restricted Stock Plan of 1997 permits the grant of options to directors, officers and key employees to purchase shares of common stock. A total of 38,000 shares (all share and option amounts adjusted for the two-for-one stock split discussed in Note 13) are authorized for grant under the plan. During both 1998 and 1997, 12,850 options were granted under the plan. The options, which were immediately vested upon grant, may be exercised for up to ten years after the date of the grant. A summary of activity for the plan is as follows:
YEAR ENDED DECEMBER 31, 1998 1997 ------------------------- ------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE ------ -------- ------ -------- Options outstanding, beginning of year 12,850 $ 20.125 - $ - Granted 12,850 18.250 12,850 20.125 Exercised - - - - Terminated (1,700) 20.125 - - ------ -------- ------ ------- Options outstanding, end of year 24,000 $ 19.121 12,850 $20.125 ====== ======== ====== ======= Options exercisable, end of year 11,150 $ 20.125 - $ - ====== ======== ====== ======= Options available for grant, end of year 14,000 25,150 ====== ======
The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting For Stock-Based Compensation," relating to its stock option plan. Accordingly, no compensation cost has been recognized. Had compensation cost for the Company's stock options been determined based on -37- their fair values at the grant dates consistent with the provisions of SFAS No. 123, the Company's net income and earnings per share, on a diluted basis, would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, 1998 1997 ---------- -------- Net income - as reported $1,730,427 $955,233 Net income - pro forma 1,654,919 871,533 Earnings per share on a diluted basis - as reported 2.24 1.24 Earnings per share on a diluted basis - pro forma 2.14 1.13 ========== ========
The weighted average fair values per option at the date of grant for options granted under the plan during 1998 and 1997 was $6.17 and $7.32, respectively. The fair values of the option awards were estimated using the Black-Scholes option-pricing model with the following weighted- average assumptions:
YEAR ENDED DECEMBER 31, 1998 1997 ---------- -------- Dividend yield 1.50% 1.50% Expected volatility 35.98% 34.00% Risk-free interest rate 4.51% 5.71% Expected life in years 5.00 5.00 ===== =====
RESTRICTED STOCK PLAN The Company has established a restricted stock plan under which certain officers and key employees may be awarded shares of restricted stock as deferred compensation. Shares awarded pursuant to the plan are restricted as to sale and transfer for periods of up to five years. The stock awards vest 20% per year over the five-year period if predetermined corporate performance goals are met. If goals are not met, the current -38- year's vesting amount is forfeited. If there is a change in control of the Company, the shares will vest immediately. The recipient of the award has all the rights of a shareholder, provided that all performance goals are met. During 1998, 1997 and 1996, the Company awarded 10,600, 5,000 and 5,600 shares, respectively, of its common stock valued at $219,700, $68,438 and $71,400, respectively, as deferred compensation which is charged to expense based upon the vesting schedule and upon achievement of the performance goals. Shares valued at $21,402 (1,700 shares), $62,506 (4,650 shares) and $47,862 (2,950 shares) were forfeited during 1998, 1997 and 1996, respectively. Share amounts have been adjusted for the stock split discussed in Note 13. -39- NOTE 8 - PENSION AND RETIREMENT SAVINGS Information regarding the Company's defined benefit plans as of and for the years ended December 31, 1998, 1997 and 1996 is as follows:
YEAR ENDED DECEMBER 31, 1998 1997 1996 ----------- ----------- ----------- CHANGE IN BENEFIT OBLIGATION Benefit obligation, beginning of year $16,999,923 $16,361,101 $16,902,042 Service cost 10,403 14,073 23,316 Interest cost 1,127,711 1,187,023 1,177,904 Actuarial (gain) loss 198,040 898,019 (314,453) Benefits paid (1,480,157) (1,460,293) (1,427,708) ----------- ----------- ----------- Benefit obligation, end of year 16,855,920 16,999,923 16,361,101 ----------- ----------- ----------- CHANGE IN PLAN ASSETS Fair value of plan assets, beginning of year 13,407,163 12,729,054 12,083,154 Actual return on plan assets 1,118,034 1,815,742 1,134,411 Employer contributions 3,727,181 322,826 936,389 Benefits paid (1,480,157) (1,460,459) (1,424,900) ----------- ----------- ----------- Fair value of plan assets, end of year 16,772,221 13,407,163 12,729,054 ----------- ----------- ----------- Funded status (83,699) (3,592,760) (3,632,047) Unrecognized actuarial loss 2,147,995 2,168,785 2,253,620 Unrecognized transition obligation 611,392 815,189 1,018,986 ----------- ----------- ----------- Net amount recognized in the consolidated balance sheets $ 2,675,688 $ (608,786) $ (359,441) =========== =========== =========== AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS Prepaid pension cost $ 2,675,688 $ - $ - Pension obligation (2,371,644) (2,981,065) (2,745,228) Accrued pension plan contribution - (608,786) (359,441) Intangible asset 564,949 815,189 941,583 Accumulated other comprehensive income, before tax effect 1,806,695 2,165,876 1,803,645 ----------- ----------- ----------- -40- Net amount recognized in the consolidated balance sheets $ 2,675,688 $ (608,786) $ (359,441) =========== =========== =========== WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount rate 6.75% 7.00% 7.50% Expected return on plan assets 8.00% 8.00% 8.00% Range of expected compensation increase 0-5.5% 0-5.5% 0-5.5% COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 10,403 $ 14,073 $ 23,316 Interest cost 1,127,711 1,187,023 1,177,904 Expected return on plan assets (1,052,551) (946,392) (914,140) Amortization of unrecognized transition obligation 203,797 203,797 203,797 Amortization of unrecognized net loss 153,347 113,670 145,566 ----------- ----------- ----------- Net periodic benefit cost $ 442,707 $ 572,171 $ 636,443 =========== =========== ===========
The above represents the aggregation of amounts for the Company's two defined benefit plans. As of December 31, 1998, one of the plans had an accumulated benefit obligation in excess of plan assets. For that plan, the benefit obligation and accumulated benefit obligation, which are equal, amounted to $14,888,810 and the fair value of plan assets amounted to $14,659,752. The Company's foreign subsidiary maintains a defined contribution retirement savings plan. Due to overfunding of the plan, there were no contributions in 1998, 1997 and 1996. The Company has two defined contribution retirement savings plans, covering substantially all domestic employees, which are funded solely through contributions based on formulas as defined in the plan agreements. The assets are held in trust for the sole benefit of the employees. Contribution expense was $668,000, $569,000 and $656,000 for 1998, 1997 and 1996, respectively, relating to these plans. As part of the sale of its filter operations, as described in Note 2, the Company entered into a deferred compensation agreement with a former officer of the Company. The deferred compensation benefits are to be paid over a period of ten years, commencing in November 1995. Deferred -41- compensation expense, representing the present value of future payments, amounted to $343,450 in 1995 and was included as a cost of the filter operations sale. At December 31, 1998 and 1997, respectively, the deferred compensation liability amounted to $262,566 and $290,347, of which $30,086 and $27,780 was due within one year. NOTE 9 - POSTRETIREMENT BENEFIT PLANS Information regarding the Company's postretirement benefit plans as of and for the years ended December 31, 1998, 1997 and 1996 is as follows:
YEAR ENDED DECEMBER 31, 1998 1997 1996 ----------- ----------- ----------- CHANGE IN BENEFIT OBLIGATION Benefit obligation, beginning of year $ 9,824,296 $ 18,801,763 $ 19,437,103 Service cost 49,855 93,153 216,106 Interest cost 669,152 851,571 1,350,383 Amendment - (7,346,249) - Actuarial (gain) loss 298,894 (1,251,069) (656,325) Benefits paid (949,725) (1,324,872) (1,545,504) ------------ ------------ ------------ Benefit obligation, end of year $ 9,892,472 $ 9,824,297 $ 18,801,763 ============ ============ ============ Funded status $ (9,892,472) $ (9,824,297) $(18,801,763) Unrecognized prior service benefit relating to 1997 plan amendment (6,465,014) (6,968,577) - Unrecognized actuarial loss 662,556 363,662 1,614,731 ------------ ------------ ------------ Net amount recognized in the consolidated balance sheets (15,694,930) (16,429,212) (17,187,032) Less current portion (1,044,175) (1,110,442) (1,641,040) ------------ ------------ ------------ Long-term portion $(14,650,755) $(15,318,770) $(15,545,992) ============ ============ ============ WEIGHTED-AVERAGE DISCOUNT RATE ASSUMPTION AS OF DECEMBER 31 6.75% 7.00% 7.50% ============ ============ ============ -42- COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 49,855 $ 93,153 $ 216,106 Interest cost 669,152 851,571 1,350,383 Amortization of unrecognized prior service cost (503,563) (377,672) - Amortization of unrecognized net loss - - 49,072 ------------ ------------ ------------ Net periodic benefit cost $ 215,444 $ 567,052 $ 1,615,561 ============ ============ ============
Because the Company's contributions to the plans are fixed on a per active and retired employee basis, assumed inflationary increases or decreases in health care costs would have no impact on the postretirement benefit obligation at December 31, 1998, or on the future annual aggregate service and interest costs. In early April 1997, the Company announced the amendment of its postretirement benefit plans, principally to adjust the cost-sharing provisions. The amendment resulted in a reduction of the Company's accumulated postretirement benefit obligation by $7,346,249, which created an unrecognized prior service benefit. Net periodic postretirement benefit cost for 1997, including amortization of the unrecognized prior service benefit over a period of 15 years, was reduced by approximately $1,050,000 (approximately $870,000 related to "Cost of Sales" and $180,000 related to "General and Administrative" expenses) as a result of the plan amendment. In early 1998, the Company received a letter from legal representatives of its bargaining unit retirees requesting a meeting with Company management and legal counsel to discuss the Company's legal obligation to provide the postretirement benefits at the pre-amendment level. While negotiations continue as of the date of this report, management believes that adjustments to the plans, if any, will not have a material effect on the financial position or results of operations of the Company. NOTE 10 - INCOME TAXES The components of income (loss) before income taxes are as follows: -43-
YEAR ENDED DECEMBER 31, 1998 1997 1996 ---------- ---------- ----------- Domestic $2,717,888 $1,648,915 $(1,087,158) Foreign 66,539 (71,682) (150,685) ---------- ---------- ----------- $2,784,427 $1,577,233 $(1,237,843) ========== ========== ===========
Income tax expense (benefit) is made up of the following components:
Year ended December 31, 1998 DEFERRED- VALUATION ALLOWANCE CURRENT DEFERRED CHANGE TOTAL -------- --------- --------- --------- Domestic $ 68,000 $ 985,000 $ - $1,026,000 Foreign 31,000 (3,000) - 28,000 -------- --------- --------- ---------- $ 99,000 $ 955,000 $ - $1,054,000 ======== ========= ========= ========== Year ended December 31, 1997 Domestic $ 39,000 $ 602,000 $ - $ 641,000 Foreign (8,000) (11,000) - (19,000) -------- --------- --------- --------- $ 31,000 $ 591,000 $ - $ 622,000 ======== ========= ========= ========= Year ended December 31, 1996 Domestic $ 54,000 $(399,000) $ 40,000 $(305,000) Foreign (37,000) (11,000) - (48,000) -------- --------- --------- --------- $ 17,000 $(410,000) $ 40,000 $(353,000) ======== ========= ========= =========
-44- The tax effects of temporary differences that give rise to the net future income tax benefit are as follows:
DECEMBER 31, 1998 1997 ---------- ---------- Deferred income tax assets: Postretirement benefit obligation $5,336,277 $5,625,932 Pension obligation - 886,652 Current asset valuation allowances 751,214 736,138 Net operating loss carryforwards 1,206,318 796,643 Foreign tax credit carryforwards 316,924 304,659 Deferred compensation 89,268 98,718 Other 293,393 273,295 ---------- ---------- Total deferred income tax assets 7,993,394 8,722,037 ---------- ---------- Deferred income tax liabilities: Accumulated depreciation (437,023) (374,306) Prepaid pension costs (280,229) - Other (160,649) (167,121) ---------- ---------- Total deferred income tax liabilities (877,901) (541,427) ---------- ---------- Net deferred income tax assets 7,115,493 8,180,610 Less current portion 2,395,856 2,351,687 ---------- ---------- Noncurrent portion $4,719,637 $5,828,923 ========== ==========
The Company's net operating loss carryforwards for federal income tax purposes amounted to $3,547,994 at December 31, 1998, of which $686,098 expires in 2010, $100,185 in 2011 and $2,761,711 in 2012, if not previously utilized. Foreign tax credits, amounting to $316,924 at December 31, 1998, expire through 2003, if not previously utilized. -45- Income taxes differed from the amount computed by applying the federal statutory rate of 34% to income before income tax expense (benefit) as follows:
YEAR ENDED DECEMBER 31, 1998 1997 1996 ---------- -------- --------- Computed "expected" tax (benefit) $ 947,000 $536,000 $(421,000) Increase (decrease) in tax resulting from: Valuation allowance change due to foreign tax credits - - 40,000 State income taxes, net of federal income tax benefit 38,000 44,000 36,000 Other 69,000 42,000 (8,000) ---------- -------- --------- $1,054,000 $622,000 $(353,000) ========== ======== =========
NOTE 11 - EARNINGS PER SHARE A reconciliation of the numerators and denominators in the basic and diluted EPS calculations follows: -46-
YEAR ENDED DECEMBER 31, 1998 1997 1996 ---------- -------- --------- Numerator: Net income (loss) used for both basic and diluted EPS calculation $1,730,427 $955,233 $(884,843) ========== ======== ========= Denominator: Weighted average shares outstanding for the period - used for basic EPS calculation 771,496 768,516 768,516 Dilutive effect of stock options and contingently issuable shares 1,198 164 - ---------- -------- --------- Weighted average shares outstanding for the period - used for diluted EPS calculation 772,694 768,680 768,516 ========== ======== =========
All outstanding shares have been adjusted for the two-for-one stock split discussed in Note 13. NOTE 12 - GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION The Company's net sales were made to customers in the following countries:
YEAR ENDED DECEMBER 31, 1998 1997 1996 ----------- ----------- ----------- United States $29,178,656 $26,592,046 $28,982,205 Canada 4,101,109 4,552,463 5,004,885 Other foreign countries 5,472,339 4,430,445 5,421,520 ----------- ----------- ----------- Consolidated total $38,752,104 $35,574,954 $39,408,610 =========== =========== ===========
-47- The location of the Company's long-lived assets is as follows:
YEAR ENDED DECEMBER 31, 1998 1997 1996 ----------- ----------- ----------- United States $ 7,781,410 $ 7,098,006 $ 6,754,303 Canada 1,221,678 1,218,894 1,182,137 ----------- ----------- ----------- Consolidated total $ 9,003,088 $ 8,316,900 $ 7,936,440 =========== =========== ===========
Net sales to one customer represented approximately $3,874,000, $3,180,000 and $3,155,000 of the Company's consolidated sales for 1998, 1997 and 1996, respectively. NOTE 13 - STOCK SPLIT On February 17, 1997, the Board of Directors authorized a two- for-one stock split, effected in the form of a stock dividend, effective March 23, 1997, payable to shareholders of record on March 2, 1997. On a split basis, the Company had 780,626 shares outstanding at December 31, 1997. An amount equal to the par value of the common shares issued will be transferred from retained earnings to common stock to effect the stock split. This transfer has been reflected in the consolidated statements of stockholders' equity at December 31, 1997. All references to number of common shares, except shares authorized, and to all per share information have been adjusted to reflect the stock split on a retroactive basis. -48- Report of Independent Certified Public Accountants Hastings Manufacturing Company Hastings, Michigan We have audited the accompanying consolidated balance sheets of Hastings Manufacturing Company and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 Hastings Manufacturing Company and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/BDO Seidman, LLP BDO Seidman, LLP Grand Rapids, Michigan February 26, 1999 -49- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item is incorporated herein by reference from the sections entitled "Directors and Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's definitive proxy statement relating to its Annual Meeting of Shareholders to be held May 4, 1999. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated herein by reference from the sections entitled "Compensation of Directors," "Executive Compensation," and "Deferred Compensation" and in the Registrant's definitive proxy statement relating to its Annual Meeting of Shareholders to be held May 4, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is incorporated herein by reference from the section entitled "Voting Securities" in the Registrant's definitive proxy statement relating to its Annual Meeting of Shareholders to be held May 4, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item, if any, is incorporated herein by reference from the sections entitled "Directors and Executive Officers" and "Compensation Committee Interlocks and Insider Participation" in the Registrant's definitive proxy statement relating to its Annual Meeting of Shareholders to be held May 4, 1999. -50- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. ITEM 14(a)1. FINANCIAL STATEMENTS. (A) The following financial statements are filed as part of this document in Item 8, "Financial Statements and Supplementary Data." PAGE Consolidated Balance Sheets as of December 31, 1998 and 1997 14-15 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 16 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 17 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 18-19 Notes to Consolidated Financial Statements 20-36 Report of Independent Certified Public Accountants 37 (B) Financial Statement Schedule Report of Independent Certified Public Accountants 46 Schedule II - Valuation and Qualifying Accounts 47 ITEM 14(a)2. FINANCIAL STATEMENT SCHEDULES. The Financial Statement Schedule set forth in the Index to Financial Statement Schedules hereto is filed as a part of this Form 10-K Report. ITEM 14(a)3. EXHIBITS. NUMBER 3(a) Amended Articles of Incorporation of Hastings Manufacturing Company, filed as an exhibit to the Form 10-Q Quarterly Report for the period ended September 30, 1998, are here incorporated by reference. 3(b) Bylaws of Hastings Manufacturing Company, filed as an exhibit to the Form S-8 Registration Statement (File No. 333-74489) filed on March 16, 1999, are here incorporated by reference. -51- 4(a) NBD Bank Amended and Restated Letter Agreement for $6,600,000 Term Loan and $3,000,000 Credit Authorization to Make Revolving Credit Loans and Issue Letters of Credit dated August 28, 1998, filed as an exhibit to the Form 10-Q Quarterly Report for the period ended September 30, 1998, is here incorporated by reference. 4(b) Restated Master Agreement dated August 10, 1998, regarding an interest rate swap transaction between Hastings Manufacturing Company and NBD Bank, filed as an exhibit to the Form 10-Q Quarterly Report for the period ended September 30, 1998, is here incorporated by reference. 4(c) Commercial Line of Credit Agreement and Note, dated as of January 23, 1998, between Hastings Manufacturing Company and Hastings City Bank, filed as an exhibit to the Form 10-Q Quarterly Report for the period ended June 30, 1998, is here incorporated by reference. 4(d) Preferred Stock Purchase Rights Plan, filed as an exhibit to Form 8-K filed with the Securities and Exchange Commission on February 15, 1996, is here incorporated by reference. 4(e) Confirmation, dated as of March 12, 1996, regarding an interest rate collar transaction between Hastings Manufacturing Company and NBD Bank, filed as an exhibit to the Form 10-K Annual Report for the year ended December 31, 1996, is here incorporated by reference. 10(a) List of Recipients of Indemnity Agreement and Form of Indemnity Agreement. 10(b) 1990 Restricted Stock Plan. 10(c) Asset Purchase Agreement between Hastings Manufacturing Company and CLARCOR Inc. dated as of September 3, 1995, filed as an exhibit to the Form 8-K filed with the Securities and Exchange Commission on September 20, 1995, is incorporated herein by reference. 10(d) Transition Agreement, dated September 3, 1995, among Hastings Filters, Inc., Hastings Manufacturing Company and Hastings, Inc. and joined in by CLARCOR Inc., filed as an exhibit to the Form 10-Q Quarterly Report for the period ended September 30, 1997, is incorporated herein by reference. -52- 10(e) Stock Option and Restricted Stock Plan of 1997, filed as Exhibit A to the Company's Proxy Statement for its 1998 annual Meeting, is here incorporated by reference. 10(f) Form of Incentive Stock Option Agreement for use under the 1997 Stock Option and Restricted Plan of 1997. 10(g) Form of Nonqualified Stock Option Agreement for use under the Stock Option and Restricted Stock Plan of 1997. 21 Subsidiaries of Hastings Manufacturing Company. 23 Consent of BDO Seidman, LLP 24 Powers of Attorney 27 Financial Data Schedule as of December 31, 1998 and for the year then ended. - --------------------- Management contract or compensatory plan or arrangement. ITEM 14(b). REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the fourth quarter of 1998. -53- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed below on its behalf by the undersigned, thereunto duly authorized. HASTINGS MANUFACTURING COMPANY (registrant) Dated: March 31, 1999 By /S/ THOMAS J. BELLGRAPH Thomas J. Bellgraph Its Vice President, Finance (Principal Financial and Accounting Officer) -54- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated below (such persons constituting a majority of the board of directors). SIGNATURE TITLE DATE /S/ ANDREW F. JOHNSON Co-Chief Executive March 31, 1999 Andrew F. Johnson Officer, President/ Operations and Director /S/ MARK R. S. JOHNSON Co-Chief Executive March 31, 1999 Mark R. S. Johnson Officer, President/ Marketing and Director */S/ DALE W. KOOP Director March 31, 1999 Dale W. Koop */S/ MONTY C. BENNETT Director March 31, 1999 Monty C. Bennett */S/ DOUGLAS A. DECAMP Director March 31, 1999 Douglas A. DeCamp ________________________ Director March __, 1999 William R. Cook */S/ NEIL A. GARDNER Director March 31, 1999 Neil A. Gardner */S/ RICHARD L. FOSTER Director March 31, 1999 Richard L. Foster *By /S/ THOMAS J. BELLGRAPH Thomas J. Bellgraph Attorney In Fact -55- HASTINGS MANUFACTURING COMPANY AND SUBSIDIARIES FINANCIAL STATEMENT SCHEDULES FORM 10-K ITEM 14(a)2 YEAR ENDED DECEMBER 31, 1998 -56- HASTINGS MANUFACTURING COMPANY AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENT SCHEDULES PAGE Report of Independent Certified Public Accountants on Financial Statement Schedule 46 Schedule: II - Valuation and Qualifying Accounts 47 Other schedules have been omitted because they were inapplicable or otherwise not required. -57- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE Hastings Manufacturing Company Hastings, Michigan The audits referred to in our report dated February 26, 1999 relating to the consolidated financial statements of Hastings Manufacturing Company and subsidiaries, which is contained in Item 8 of this Form 10-K, included the audit of the financial statement schedule listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based upon our audits. In our opinion, such financial statement schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO Seidman, LLP BDO Seidman, LLP Grand Rapids, Michigan February 26, 1999 -58- HASTINGS MANUFACTURING COMPANY AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------- ---------- ------------------------ ----------- ---------- ADDITIONS ------------------------ BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER DEDUCTIONS/ END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS PERIOD - ----------- ---------- ---------- ---------- ----------- ---------- $ $ $ $ $ Year Ended December 31, 1998: Allowance for possible losses and receivables 215,000 458,400 -- 463,500 210,000 ======= ======= ======= ======= ======= Year Ended December 31, 1997: Allowance for possible losses on receivables 215,000 36,000 -- 36,000 215,000 ======= ======= ======= ======= ======= Year Ended December 31, 1996: Allowance for possible losses on receivables 225,000 5,300 -- 15,300 215,000 ======= ======= ======= ======= =======
-59- EXHIBIT INDEX NUMBER 3(a) Amended Articles of Incorporation of Hastings Manufacturing Company, filed as an exhibit to the Form 10-Q Quarterly Report for the period ended September 30, 1998, are here incorporated by reference. 3(b) Bylaws of Hastings Manufacturing Company, filed as an exhibit to the Form S-8 Registration Statement (File No. 333-74489) filed on March 16, 1999, are here incorporated by reference. 4(a) NBD Bank Amended and Restated Letter Agreement for $6,600,000 Term Loan and $3,000,000 Credit Authorization to Make Revolving Credit Loans and Issue Letters of Credit dated August 28, 1998, filed as an exhibit to the Form 10-Q Quarterly Report for the period ended September 30, 1998, is here incorporated by reference. 4(b) Restated Master Agreement dated August 10, 1998, regarding an interest rate swap transaction between Hastings Manufacturing Company and NBD Bank, filed as an exhibit to the Form 10-Q Quarterly Report for the period ended September 30, 1998, is here incorporated by reference. 4(c) Commercial Line of Credit Agreement and Note, dated as of January 23, 1998, between Hastings Manufacturing Company and Hastings City Bank, filed as an exhibit to the Form 10-Q Quarterly Report for the period ended June 30, 1998, is here incorporated by reference. 4(d) Preferred Stock Purchase Rights Plan, filed as an exhibit to Form 8-K filed with the Securities and Exchange Commission on February 15, 1996, is here incorporated by reference. 4(e) Confirmation, dated as of March 12, 1996, regarding an interest rate collar transaction between Hastings Manufacturing Company and NBD Bank, filed as an exhibit to the Form 10-K Annual Report for the year ended December 31, 1996, is here incorporated by reference. 10(a) List of Recipients of Indemnity Agreement and Form of Indemnity Agreement. 10(b) 1990 Restricted Stock Plan. -60- 10(c) Asset Purchase Agreement between Hastings Manufacturing Company and CLARCOR Inc. dated as of September 3, 1995, filed as an exhibit to the Form 8-K filed with the Securities and Exchange Commission on September 20, 1995, is incorporated herein by reference. 10(d) Transition Agreement, dated September 3, 1995, among Hastings Filters, Inc., Hastings Manufacturing Company and Hastings, Inc. and joined in by CLARCOR Inc., filed as an exhibit to the Form 10-Q Quarterly Report for the period ended September 30, 1997, is incorporated herein by reference. 10(e) Stock Option and Restricted Stock Plan of 1997, filed as Exhibit A to the Company's Proxy Statement for its 1998 annual Meeting, is here incorporated by reference. 10(f) Form of Incentive Stock Option Agreement for use under the 1997 Stock Option and Restricted Plan of 1997. 10(g) Form of Nonqualified Stock Option Agreement for use under the Stock Option and Restricted Stock Plan of 1997. 21 Subsidiaries of Hastings Manufacturing Company. 23 Consent of BDO Seidman, LLP 24 Powers of Attorney 27 Financial Data Schedule as of December 31, 1997 and for the year then ended. - --------------------- Management contract or compensatory plan or arrangement. -61- EX-10 2 EXHIBIT 10(a) LIST OF RECIPIENTS OF INDEMNITY AGREEMENTS On May 10, 1988, Hastings Manufacturing Company entered into an Indemnity Agreement in the form attached hereto with each officer and/or director listed below: Stephen I. Johnson Mark R.S. Johnson Andrew F. Johnson Robert H. Wallin William R. Cook Roderick G. Miller Monty C. Bennett Dale W. Koop Neil A. Gardener Richard L. Foster Donald A. DeCamp Thomas J. Bellgraph Laura J. Lykins INDEMNITY AGREEMENT This Agreement is made as of the 10th day of May, 1988, by and between HASTINGS MANUFACTURING COMPANY, a Michigan corporation ("Hastings") and the undersigned officer and/or director of Hastings ("Indemnitee"). WHEREAS, it is essential to Hastings to retain and attract as directors and officers the most capable persons available; and WHEREAS, the substantial increase in corporate litigation subjects directors and officers to expense litigation risks at the same time that the availability of directors' and officers' liability insurance has been severely limited; and WHEREAS, it is now and has always been the express policy of Hastings to indemnify its directors and officers so as to provide them with the maximum possible protection permitted by law; and WHEREAS, Indemnitee does not regard the protection available under Hastings' Articles of Incorporation and Bylaws as adequate in the present circumstances, and may not be willing to continue to serve as a director or officer without adequate protection, and Hastings desires Indemnitee to serve in such capacity. NOW, THEREFORE, the parties agree as follows: SECTION 1. DEFINITIONS. As used in this Agreement: (a) "Expenses" shall mean all costs, expenses and obligations paid or incurred in connection with investigating, litigating, being a witness in, defending or participating in, or preparing to litigate, defend, be a witness in or participate in any matter that is the subject of a Proceeding (as defined below), including attorneys' and accountants' fees and court costs. (b) "Proceeding" shall mean any threatened, pending, or completed action, suit or proceeding, or any inquiry or investigation, whether brought by or in the right of Hastings or otherwise and whether of a civil, criminal, administrative or investigative nature, in which Indemnitee may be or may have been involved as a party or otherwise by reason of the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of Hastings, or by reason of any action taken by Indemnitee or any inaction on Indemnitee's part while acting as a director, officer, employee, agent or fiduciary of Hastings, or by reason of the fact that Indemnitee is or was serving at the request of Hastings as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise. (c) "Resolution Costs" shall include any amount paid in connection with a Proceeding and in satisfaction of a judgment, fine, penalty or any amount paid in settlement. SECTION 2. AGREEMENT TO SERVE. Indemnitee agrees to serve as a director and/or officer of Hastings for so long as Indemnitee is duly elected or appointed or until the tender of Indemnitee's written resignation. SECTION 3. INDEMNIFICATION. The indemnification provided under this Agreement shall be as follows: (a) Hastings shall indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee in connection with any Proceeding. Additionally, in any Proceeding other than a Proceeding by or in the right of Hastings, Hastings shall indemnify Indemnitee against all Resolution Costs actually and reasonably incurred by Indemnitee in connection with such Proceeding. No indemnification shall be made under this subsection: (i) with respect to remuneration paid to Indemnitee if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; (ii) on account of any suit in which judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of Hastings pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto, or similar provisions of any federal, state, or local law; (iii) on account of Indemnitee's conduct which is determined by a final judgment or other final adjudication to have been knowingly fraudulent, deliberately dishonest or willful misconduct; -2- (iv) on account of Indemnitee's conduct which by a final judgment or other final adjudication is determined to have been in bad faith, in opposition to the best interests of Hastings or produced an unlawful personal benefit; (v) with respect to a criminal proceeding if the Indemnitee knew or reasonably should have known that Indemnitee's conduct was illegal; or (vi) if a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful. (b) In addition to any indemnification provided under Subsection 3(a) above, Hastings shall indemnify Indemnitee against any Expenses or Resolution Costs incurred by Indemnitee, regardless of the nature of the Proceeding in which Expenses and/or Resolution Costs were incurred, if such Expenses or Resolution Costs would have been covered under the directors' and officers' liability insurance policies, if any, in effect on the effective date of this Agreement or any such insurance policies which become effective on any subsequent date. (c) In addition to any indemnification provided under Subsections 3(a) and 3(b) above, Hastings shall provide Indemnitee, to the fullest extent allowed by law as presently or hereafter enacted or interpreted, with indemnification against any Expenses and/or Resolution Costs incurred by Indemnitee in connection with any Proceeding. To the extent a change in the Michigan Business Corporation Act (whether by statute or judicial decision) permits greater indemnification, either by agreement or otherwise, than presently provided by law or this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. (d) Without limiting Indemnitee's right to indemnification under any other provision of this Agreement, Hastings shall indemnify Indemnitee in accordance with the provisions of this Subsection if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any Proceeding by or in the right of Hastings to procure a judgment in its favor by reason of the fact that Indemnitee was or is a director and/or officer of Hastings or is or was serving at the request of Hastings as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against all Expenses actually and reasonably incurred by Indemnitee and any amounts paid by Indemnitee in settlement of such Proceeding, -3- but only if Indemnitee acted in good faith in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of Hastings, except that no indemnification shall be made under this Subsection in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to Hastings in the performance of his duty to Hastings, unless and only to the extent that any court in which such Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such amounts as such court shall deem proper. (e) Notwithstanding anything in this Agreement to the contrary, prior to a Change in Control (as hereinafter defined), Indemnitee shall not be entitled to indemnification pursuant to this Agreement in connection with any Proceeding initiated by Indemnitee against Hastings or any director, officer, employee, agent or fiduciary of Hastings (in such capacity) unless Hastings has joined in or consented to the initiation of such Proceeding. SECTION 4. PAYMENT OF INDEMNIFICATION. (a) Expenses incurred by the Indemnitee and subject to indemnification under Section 3 above shall be paid directly by Hastings or reimbursed to the Indemnitee within two (2) days after the receipt of a written request of the Indemnitee providing that Indemnitee undertakes to repay any amount paid or advanced under this Section to the extent that it is ultimately determined that Indemnitee is not entitled to such indemnification. (b) Except as otherwise provided in Section 4(a) above, any indemnification under Section 3 above shall be made no later than thirty (30) days after receipt by Hastings of the written request of Indemnitee, unless within said thirty (30) day period the Board of Directors, by a majority vote of a quorum consisting of directors who are not parties to such Proceeding, determines that the Indemnitee is not entitled to the indemnification set forth in Section 3 or unless the Board of Directors refers the Indemnitee's indemnification request to independent legal counsel. In cases where there are no directors who are not parties to the Proceeding, the indemnification request is referred to independent legal counsel. If the indemnification request is referred to independent legal counsel, then Indemnitee shall be paid no later than forty-five (45) days after Indemnitee's initial request to Hastings unless within that time -4- independent legal counsel presents to the Board of Directors a written opinion stating in unconditional terms that indemnification is not allowed under Section 3 of this Agreement. If a Change in Control (as defined in Section 5) occurs and results in individuals who were directors prior to the circumstances giving rise to the Change in Control ceasing for any reason to constitute a majority of the Board of Directors, the above determination, if any, shall be made by independent legal counsel and not the Board of Directors. Hastings agrees to pay the reasonable fees of the independent legal and to fully indemnify such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant thereto. If there has not been a Change in Control as defined in Section 5, independent legal counsel shall be selected by the Board or Directors or the executive committee of the board, and if there has been a Change in Control, the independent legal counsel shall be selected by Indemnitee. (c) The right to indemnification payments as provided by this Agreement shall be enforceable by Indemnitee in any court of competent jurisdiction. The burden of proving that indemnification is not permitted by this Agreement shall be on Hastings or on the person challenging the indemnification. Neither the failure of Hastings, including its Board of Directors, to have made a determination prior to the commencement of any Proceeding that indemnification is proper, nor an actual determination by Hastings, including its Board of Directors or independent legal counsel, that indemnification is not proper, shall bar an action by Indemnitee to enforce this Agreement or create a presumption that Indemnitee is not entitled to indemnification under this Agreement. If the Board of Directors or independent legal counsel determines in accordance with Section 4(b) above that Indemnitee would not be permitted to be indemnified in whole or in part, Indemnitee shall have the right to commence litigation in any court in the State of Michigan having subject matter jurisdiction thereof and in which venue is proper seeking an independent determination by the court or challenging any such determination by the Board of Directors or independent legal counsel, and Hastings hereby consents to service of process and to appear in any such proceeding. Expenses incurred by Indemnitee in connection with successfully establishing Indemnitee's right to indemnification, in whole or in part, shall also be reimbursed by Hastings. SECTION 5. ESTABLISHMENT OF TRUST. In the event of a Potential Change in Control of Hastings, as hereafter defined, Hastings shall, upon written request by Indemnitee, create a trust for the benefit of the -5- Indemnitee and from time to time upon written request of Indemnitee shall fund such trust in an amount sufficient to satisfy any and all Expenses or Resolution Costs that may properly be subject to indemnification under Section 3 above anticipated at the time of each such request. The amount or amounts to be deposited in the trust pursuant to this funding obligation shall be determined by a majority vote of a quorum consisting of directors who are not parties to such Proceeding, the executive committee of the Board of Directors or the President of Hastings. If all such individuals are parties to the Proceeding, the amount or amounts to be deposited in the trust shall be determined by independent counsel. The terms of the trust shall provide that upon a Change in Control: (i) the trust shall not be revoked or the principal thereof invaded, without the written consent of the Indemnitee; (ii) the trustee shall advance, within two (2) business days of a request by the Indemnitee, any amount properly payable to Indemnitee under Subsection 4(a) of this Agreement; (iii) the trust shall continue to be funded by the Corporation in accordance with the funding obligation set forth above; (iv) the trustee shall promptly pay to the Indemnitee all amounts for which the Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise; and (v) all unexpended funds in such trust shall revert to Hastings upon a final determination by a court of competent jurisdiction that the Indemnitee has been fully indemnified under the terms of this Agreement. The trustee shall be chosen by the Indemnitee and shall be a national or state bank having a combined capital and surplus of not less than $50,000,000. Nothing in this Section shall relieve Hastings of any of its obligations under this Agreement. At the time of each draw from the trust fund, the Indemnitee shall provide the trustee with a written request providing that Indemnitee undertakes to repay such amount to the extent that it is ultimately determined that Indemnitee is not entitled to such indemnification. Any funds, including interest or investment earnings thereon, remaining in the trust fund shall revert and be paid to Hastings if: (i) a Change in Control has not occurred; and (ii) if the executive committee of the Board of Directors or the Chairman or Chief Executive Officer of Hastings determines that the circumstances giving rise to that particulate funding of the trust no longer exists. For purposes of this Section and Section 7 hereof, a "Change in Control" shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14a promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), provided that, without limitation, such a change in control shall be deemed to have occurred if: (i) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of Hastings and any new director whose election by the Board of Directors or nomination for election by Hastings' shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously -6- so approved, cease for any reason to constitute a majority thereof; (ii) the shareholders of Hastings approve a merger or consolidation of Hastings with any other corporation, other than a merger or consolidation which would result in the voting securities of Hastings outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 80% of the total voting power represented by the voting securities of Hastings or such surviving entity outstanding immediately after such merger or consolidation; or (iii) the shareholders of Hastings approve a plan of complete liquidation of Hastings or an agreement for the sale or disposition by Hastings of all or substantially all of Hastings' assets. For purposes of this Section, a "Potential Change in Control" shall be deemed to have occurred if (i) Hastings enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) any person (including Hastings) publicly announces an intention to take or to consider taking actions which once consummated would constitute a Change in Control; or (iii) the Board of Directors adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. SECTION 6. PARTIAL INDEMNIFICATION; SUCCESSFUL DEFENSE. If Indemnitee in entitled under any provision of this Agreement to indemnification by Hastings for some or a portion of the Expenses or Resolution Costs actually and reasonably incurred by Indemnitee but not, however, for the total amount thereof, Hastings shall nevertheless indemnify Indemnitee for the portion of such Expenses or Resolution Costs to which Indemnitee is entitled. Moreover, notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any or all claims relating in whole or in part to a Proceeding or in defense of any issue or matter therein, including dismissal without prejudice, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. SECTION 7. CONSENT. Unless and until a Change in Control has occurred, Hastings shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any Proceeding made without Hastings' written consent. Hastings shall not settle any Proceeding in any manner which would impose any penalty or limitation on Indemnitee without Indemniteels written consent. Neither Hastings nor the Indemnitee will unreasonably withhold their consent to any proposed settlement. SECTION 8. SEVERABILITY. If this Agreement or any portion hereof (including any provision within a single section, subsection or sentence) shall be held to be invalid, void or otherwise unenforceable on any ground -7- by any court of competent jurisdiction, Hastings shall nevertheless indemnify Indemnitee as to any Expenses or Resolution Costs with respect to any Proceeding to the full extent permitted by law or any applicable portion of this Agreement that shall not have been invalidated, declared void or otherwise held to be unenforceable. SECTION 9. INDEMNIFICATION HEREUNDER NOT EXCLUSIVE. The indemnification provided by this Agreement shall be in addition to any other rights to which Indemnitee may be entitled under the Articles of Incorporation, the Bylaws, any agreement, any vote of shareholders or disinterested directors, the Michigan Business Corporation Act, or otherwise, both as to actions in Indemnitee's official capacity and as to actions in another capacity while holding such office. SECTION 10. NO PRESUMPTION. For purposes of this Agreement, the termination of any claim, action, suit or proceeding, by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. SECTION 11. SUBROGATION. In the event of payment under this Agreement, Hastings shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable Hastings to effectively bring suit to enforce such rights. SECTION 12. NO DUPLICATION OF PAYMENTS. Hastings shall not be liable under this Agreement to make any payment to the extent Indemnitee has otherwise actually received payment (under any insurance policy, Bylaw or otherwise) of the amounts otherwise indemnifiable hereunder. SECTION 13. NOTICE. Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give to Hastings notice in writing as soon as practicable of any claim for which indemnity will or could be sought under this Agreement. Notice to Hastings shall be directed to Hastings Manufacturing Company, 325 North Hanover, Hastings, Michigan 49058, Attention: Secretary (or to such other individual or address as Hastings shall designate in writing to Indemnitee). Notice shall be deemed received three (3) days after the date postmarked if sent by prepaid mail properly addressed. In addition, Indemnitee shall give Hastings such -8- information and cooperation as it may reasonably require and shall be within Indemnitee's power to give. SECTION 14. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall constitute the original. SECTION 15. CONTINUATION OF INDEMNIFICATION. The indemnification rights provided to Indemnitee under this Agreement, including the right provided under Subsection 4(a) above, shall continue after Indemnitee has ceased to be a director, officer, employee, agent or fiduciary of Hastings or any other corporation, partnership, joint venture, trust or other enterprise in which Indemnitee served in any such capacity at the request of Hastings. SECTION 16. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of-the business or assets of Hastings, spouse, heirs, and personal and legal representatives. SECTION 17. APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan applicable to contracts made and to be performed in such state without giving effects to the principles of conflicts of laws. SECTION 18. LIABILITY INSURANCE. To the extent Hastings maintains an insurance policy or policies providing directors' and officers' liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any director, officer, employee, agent or fiduciary of Hastings. SECTION 19. PERIOD OF LIMITATIONS. No legal action shall be brought and no cause of action shall be asserted by or on behalf of Hastings or any affiliate of Hastings against Indemnitee, Indemnitee's spouse, heirs, executors or personal or legal representatives after the expiration of two (2) years from the date of accrual of such cause of action, and any claim or cause of action of Hastings or its affiliate shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two (2) year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action such shorter period shall govern. -9- SECTION 20. AMENDMENTS; WAIVER. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. ATTEST: HASTINGS MANUFACTURING COMPANY ______________________________ By __________________________________________ Monty C. Bennett Mark R. S. Johnson Secretary Executive Vice President - Marketing INDEMNITEE _____________________________________________ -10- EX-10 3 EXHIBIT 10(b) 1990 RESTRICTED STOCK PLAN ARTICLE 1 PURPOSE The purpose of this Plan is to provide an opportunity for the executive officers and certain other key employees of Hastings Manufacturing Company ("Hastings") or its subsidiaries to acquire shares of Common Stock of Hastings, thereby giving such persons an additional incentive to contribute to the prosperity of Hastings, and to assist Hastings in attracting, rewarding, and retaining well-qualified executive personnel. ARTICLE 2 DEFINITIONS The following words have the following meanings unless a different meaning is plainly required by the context: 2.1 "Board" means the board of directors of Hastings. 2.2 "Change in Control" means a change in control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14a promulgated under the Exchange Act, provided that, without limitation, such change in control shall be deemed to have occurred if (a) any "Person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 25 percent or more of the combined voting power of the Company's then outstanding securities, or (b) during any period of 2 consecutive years, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority of the Board (unless the election or nomination for election by the Company's shareholders of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period). 2.3 "Common Stock" means the Common Stock (par value $2 per share) of Hastings. 2.4 "Code" means the Internal Revenue Code of 1986, as amended. 2.5 "Committee" means the Compensation Committee of the Board or such other committee as the Board shall designate for the purpose of administration of the Plan. No Committee member while a member shall be eligible to participate in this Plan or in any other plan of the Company providing for the issuance of stock or stock options, nor have been eligible to so participate within the 1-year period immediately prior to appointment to the Committee. 2.6 "Competition" means participation, directly or indirectly, in the ownership, management, financing, or control of any business which is the same as or similar to the present or future businesses of Hastings or its subsidiaries. Such participation could be by way of employment, consulting services, directorship, or officership. Ownership of less than 5 percent of the shares of any corporation whose shares are publicly traded on any national or regional stock exchange or over the counter shall not be deemed competition. 2.7 "Disability" of an employee means that by reason of accident, physical illness, or mental illness, (a) the employee does not fulfill his normal responsibility as an employee of Hastings for a period of at least 1 year, (b) Hastings and the employee agree that the employee is or will be unable to perform his or her normal responsibilities as an employee for a period of at least 1 year, or (c) there is a dispute as to disability and a physician or panel of physicians determines that the employee is or will be unable to perform his or her normal responsibility for a period of at least 1 year. Disputes regarding existence or date of disability shall be determined by a licensed physician selected by agreement of Hastings and the employee. Such physician's fees shall be paid by Hastings. If they cannot agree upon a physician, the dispute shall be determined by a majority of a panel of three licensed physicians, one selected by Hastings, one selected by the employee, and the third selected by the first two. Hastings and the employee shall each pay the fees of the physician they select, and the fees of the third physician shall be shared equally. The date of disability shall be the beginning of the 1-year period or the date determined to be the onset of the disability by the physician or panel of physicians. 2.8 "Employee" means any executive officer in the service of Hastings or any of its subsidiaries, except any person who serves only as a director. An individual's status as an Employee shall not be affected by a leave of absence without pay. 2.9 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.10 "Performance Goals" means goals concerning the performance of Hastings that will be set each year by the Board or by the Committee. -2- 2.11 "Retirement" means the voluntary termination of all employment by the employee. 2.12 "Plan" means Hastings' 1990 Restricted Stock Plan as in effect from time to time. 2.13 "Recipient" means an Employee to whom Restricted Stock has been awarded under Article 3 of the Plan. 2.14 "Restricted Period" means a period of up to 5 years following the date of the award of the Restricted Stock during which the Recipient will forfeit Recipient's right to receive all or a portion of the Restricted Stock upon termination of employment or upon Hastings' failure to meet certain corporate performance goals. The Restricted Period for grant of Restricted Stock may provide for delayed vesting, which means periodic lapsing of the restrictions. 2.15 "Restricted Stock" means Common Stock awarded to a Recipient under Articles 4 and 5 of the Plan, which stock is subject to the restrictions of Article 6 of the Plan. 2.16 "Restricted Stock Agreement" means an agreement between Hastings and a Recipient that sets forth the terms and conditions of an individual award of Restricted Stock. 2.17 "Subsidiary" means any corporation of which a majority of the outstanding voting stock is directly or indirectly owned or controlled by Hastings, or by one or more subsidiaries. 2.18 "Vest" or "vesting" means the time when the restrictions on transfer of the Restricted Stock lapse or are removed. ARTICLE 3 ADMINISTRATION 3.1 The Committee shall administer the Plan, shall have sole authority to award Restricted Stock under the Plan to any Employee, and shall determine all questions arising in connection with the Plan, including its interpretation. All decisions with respect to the Plan and its interpretation made by the Committee shall be final; provided, however, that the Committee may not award Restricted Stock to any voting member of the Committee. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Restricted Stock awarded under it. -3- 3.2 If so directed by the Board of Directors, the Committee shall consult with the Company's Compensation Committee or with the Board of Directors prior to awarding Restricted Stock to any Recipient. 3.3 The awarding of Restricted Stock pursuant to the Plan shall be entirely within the discretion of the Committee and nothing herein contained shall be construed to give an Employee any right to participate under the Plan or receive any Restricted Stock under it. ARTICLE 4 RESTRICTED STOCK 4.1 Twenty thousand shares of authorized Common Stock may be available for awards of Restricted Stock under the Plan. Such shares may be either unissued or treasury shares. If any such shares are forfeited through termination of employment, failure to meet corporate performance goals, or otherwise prior to lapse of restrictions, such shares may be reissued in subsequent grants of Restricted Stock under the Plan. 4.2 Restricted Stock awarded under the Plan shall be subject to the restrictions set forth in Article 6. 4.3 Each award of Restricted Stock under the Plan shall be evidenced by a Restricted Stock Agreement containing the terms and conditions of the award as described in Article 6 and such other provisions as the Committee may deem appropriate. 4.4 All or a portion of the Restricted Stock granted to a Recipient may be released from restrictions or be forfeited from time to time according to the terms of the Plan and the applicable Restricted Stock Agreement. After the Restricted Period shall lapse with respect to shares of the stock, such shares shall no longer be deemed Restricted Stock whether or not the certificates for those shares have been delivered to the Recipient. 4.5 Any certificates evidencing shares of Restricted Stock awarded pursuant to the Plan shall be registered in the name of the Recipient and deposited, together with a stock power endorsed in blank, with Hastings. At the discretion of the Committee, any such certificates may be deposited in a bank designated by the Committee or delivered to the Recipient. Each such certificate shall bear the following legend: The shares represented by this certificate were issued subject to certain restrictions under the Hastings Manufacturing Company 1990 Restricted Stock Plan. A copy of the Plan is on -4- file in the office of the Secretary of Hastings Manufacturing Company. This certificate is held subject to the terms and conditions contained in a restricted stock agreement which includes a prohibition against the sale or transfer of the stock represented by this certificate except in compliance with that agreement. 4.6 Certificates for shares of stock released from the restrictions shall be delivered to the Recipient upon request within a reasonable period of time. The Recipient shall sign all documents necessary and appropriate to facilitate such delivery. 4.7 If any increase, decrease, or adjustment in the Common Stock of Hastings is made as a result of a stock dividend, stock split, reverse stock split, recapitalization, added rights, or any other similar corporate event, or as a result of a merger, consolidation, or other reorganization of Hastings, the Board shall make an appropriate adjustment in the aggregate number of shares subject to the Plan, and the maximum number of shares which may be awarded to any Recipient; provided, however, that any fractional shares resulting from any such adjustment may be eliminated. ARTICLE 5 CALCULATION AND VESTING OF AWARDS 5.1 The Board of Directors or the Committee shall establish Performance Goals for each calendar year in order to establish a standard for determining the extent to which Restricted Stock awards for such calendar year shall vest. One set of Performance Goals shall be so established which shall be applicable to all or to specified categories of Plan participants and shall reflect what the Board of Directors or the Committee believes represents a challenging goal for either Hastings or a division or subsidiary of Hastings, for either one, all, or some combination of (a) aftertax rate of return on shareholders' equity, (b) pretax rate of return on sales, (c) pretax rate of return on assets, (d) sales growth rate, or (e) any other standard considered appropriate by the Committee. Individual Performance Goals for eligible Recipients may also be established. Rate of return, sales growth rates and any other standards for Performance Goals shall be computed based on the amounts shown in Hastings' annual certified financial statements; provided, however, that the Committee may adjust such amounts for such extraordinary and special items or other unusual charges or credits as it shall deem appropriate for purposes of the Plan. In determining whether or not the Performance Goals established for a particular calendar year have been met, the Board of Directors or the Committee may exclude from its calculations -5- any figures attributable to the acquisition of another corporation by Hastings. 5.2 The Committee may grant awards of Restricted Stock to Recipients for such numbers of shares of Restricted Stock as the Committee shall deem appropriate in each instance. Any such grant is subject to approval by the Board of Directors if the Board directs the Committee to submit such awards to the Board for approval. The Restricted Period shall be 5 years for each award. For each year during that 5-year term for which the applicable Performance Goals are met, 20 percent of the Restricted Shares awarded to the Recipient shall vest in the Recipient. For each year during the 5-year term for which the applicable Performance Goals are not met, 20 percent of the Restricted Shares awarded to the Recipient shall be forfeited by the Recipient. ARTICLE 6 TERMS AND CONDITIONS OF RESTRICTED STOCK The award of Restricted Stock under the Plan shall be subject to the following terms and conditions: 6.1 In addition to the requirement that the Performance Goals be met, the Restricted Stock shall be awarded on the condition that the Recipient remain in the employment of Hastings, or one or more of its parents or subsidiaries during the Restricted Period applicable to designated shares except as otherwise provided in this Article 6; but such condition shall have no effect on the right of Hastings or any subsidiary to terminate the Recipient's employment at any time. 6.2 Unless otherwise provided in the Restricted Stock Agreement, in the event of the death or Disability of the Recipient during the Restricted Period, (a) With respect to any calendar year at the end of which the Recipient is living and actively employed by Hastings, the Recipient shall vest in any shares of Restricted Stock set to vest or be forfeited with respect to the Performance Goals applicable to the Plan in the same manner as otherwise provided in this Plan, regardless of whether or not the Recipient's death or disability occurs prior to or after the date on which it is determined to what extent the Performance Goals for that calendar year have been met. (b) With respect to the calendar year in which the Recipient's death or termination of employment because of -6- disability occurs, if the Recipient has additional shares of Restricted Stock that would have vested or been forfeited because of Hastings' attainment or non-attainment of the Performance Goals established for the calendar year in which the Recipient's death or termination of employment because of disability occurs, then as of the end of that calendar year the Recipient or the Recipient's estate shall forfeit or become vested in such shares in the same manner as if the Recipient were alive and employed by Hastings at the time of final determination as to whether or not those Performance Goals were met. (c) For the calendar year following the calendar year in which the Recipient's death or termination of employment because of disability occurred, if the Recipient has additional shares of Restricted Stock that would have vested or been forfeited because of Hastings' attainment or non-attainment of the Performance Goals established for that calendar year (following the calendar year in which the Recipient's death or termination of employment because of disability occurred), then as of the end of that second calendar year the Recipient or the Recipient's estate shall forfeit or become vested in such shares in the same manner as if the Recipient were alive and employed by Hastings at the time of final determination as to whether or not those Performance Goals were met. (d) Any unvested shares of Restricted Stock that would vest only upon the attainment by Hastings of Performance Goals for a calendar year later than the calendar year following the calendar year in which the Recipient's death or termination of employment by reason of disability occurred shall be forfeited by the Recipient as of the date of the Recipient's death or termination of employment by reason of disability. 6.3 In the event of Retirement by the Recipient, the Recipient's right to the Restricted Stock shall cease and terminate as of the date of Retirement unless, upon notice from the Recipient of a proposed Retirement date, the Committee consents to waive the termination of the Recipient's right to the Restricted Stock in connection with the proposed Retirement. With such consent, the restrictions shall lapse or the Restricted Stock shall be forfeited at the normal time periods, depending on whether or not the Performance Goals of the Company are met, unless vesting of the Restricted Stock is otherwise accelerated under this Article 6 or unless the provisions concerning Competition apply. 6.4 In the event of a Change in Control during the Restricted Period, the Recipient's right to all of the Recipient's Restricted Stock shall, upon election by the Recipient and consent by the Committee as constituted at the time of Change in Control within 90 days of such Change in Control, -7- vest as of the date of the Change in Control and upon such election the Recipient's Restricted Stock may be transferred free of the restrictions under this Plan, except for those restrictions described in Paragraph 6.9 of this article; provided, however, that if the vesting, when considered with all other payments and benefits from the Company to the Recipient, constitutes a "parachute payment," as defined in Section 280G(b)(2) of the Code, then the Recipient's right to the Restricted Stock shall vest only to the extent that the aggregate present value of all payments and benefits in the nature of compensation, to which Section 280G(b)(2) of the Code applies, does not exceed 299 percent of the annualized average of the Recipient's gross income from the Company for federal income tax purposes during the 5-year period ending on the last day of the Company's taxable year preceding the date of the Change in Control. 6.5 If the Recipient enters into Competition with Hastings or terminates his or her employment during the Restricted Period for any reason other than Retirement with the Committee's consent, death or Disability, the Recipient's right to the Restricted Stock which has not vested shall cease and terminate as of the date of competition or termination and the Recipient shall promptly surrender to Hastings such Restricted Stock held by the Recipient together with any distribution on such stock made after the date of termination. Hastings may use the stock power provided hereunder to complete the reregistration of any certificate and may divide any shares represented by a certificate into restricted and nonrestricted shares. 6.6 The shares of Restricted Stock which have not vested shall not be sold, exchanged, transferred, pledged, or otherwise disposed of by the Recipient during the Restricted Period, other than to Hastings pursuant to Paragraphs 6.5 and 6.7 of this article or by will or by the laws of descent or distribution. The Recipient shall agree to execute from time to time at the request of Hastings such stock powers with respect to the Restricted Stock as may be appropriate to facilitate the reregistration of the Restricted Stock pursuant to the Plan. 6.7 If any assignment, pledge, transfer, or other disposition, voluntary or involuntary, of the Restricted Stock which has not vested shall be made or attempted during the Restricted Period, except as provided above in Paragraph 6.5 of this article, the Recipient's right to the Restricted Stock shall immediately cease and terminate and the Recipient shall promptly surrender to Hastings all such Restricted Stock in Recipient's possession. 6.8 During the Restricted Period, the Recipient shall have all rights of a shareholder with respect to the Restricted Stock, including (a) the right to vote any shares at shareholders' meetings, (b) the right to receive, without restriction, all cash dividends paid with respect to such Restricted Stock, and (c) the right to participate with respect to such -8- Restricted Stock in any stock dividend, stock split, recapitalization, or other adjustment in the Common Stock of Hastings or any merger, consolidation, or other reorganization involving an increase or decrease or adjustment in the Common Stock of Hastings; provided, however, that if any Performance Goals are not met and any shares of Restricted Stock are accordingly forfeited, these rights of the Recipient with respect to such shares shall terminate immediately upon that forfeiture. Any new, additional, or different shares or other security received by the Recipient pursuant to any such stock dividend, stock split, recapitalization, or reorganization shall be subject to the same terms, conditions, and restrictions as those relating to the Restricted Stock for which such shares were received. 6.9 The Recipient shall represent and warrant that the Recipient is acquiring the Restricted Stock for the Recipient's own account and investment and without any intention to resell or distribute the Restricted Stock. The Recipient shall agree not to resell or distribute such Restricted Stock after the Restricted Period except upon such conditions as Hastings may reasonably specify to insure compliance with federal and state securities laws. Hastings may require appropriate legends to be placed on the certificates to meet such requirements. 6.10 Hastings shall have a right of first refusal with respect to any proposed sale or other disposition of any vested Restricted Shares. The Recipient must notify Hastings in writing of any such proposed sale or disposition, and that notice must contain all the terms of the proposed sale or disposition. Hastings shall have 30 days after receipt of that written notice to purchase from the Recipient the number of such shares which are the subject of the proposed sale or other disposition, with that purchase to be at the same price and upon the same terms as those of the proposed sale or other disposition. If Hastings does not exercise its right of first refusal within 30 days, or earlier notifies the Recipient in writing that Hastings waives its right of first refusal with respect to the proposed sale or other disposition, the Recipient may consummate the sale or other disposition, but only at the price and upon the terms proposed. The shares shall remain subject to this right of first refusal after any such transfer, and all stock certificates representing shares awarded hereunder shall bear an appropriate legend reflecting such right. ARTICLE 7 WITHHOLDING TAX Hastings shall have the right to withhold, with respect to any stock distributed under the Plan, any taxes required by law to be withheld because of such distribution. Such withholding may be deducted from any -9- wages or other property held by Hastings for distribution to the Recipient. If there are insufficient funds or property to provide for any such withholding, Hastings may condition delivery of the shares upon deposit of the appropriate withholding amount by the Recipient. ARTICLE 8 EFFECTIVE DATE, AMENDMENT, AND TERMINATION OF PLAN This Plan shall be effective when it has been approved by the Board of Directors of Hastings. The Board may amend, suspend, or terminate the Plan or any portion thereof at any time; provided that no amendment, suspension, or termination shall impair the rights of any Recipient, without the Recipient's consent, in any Restricted Stock previously granted. The Committee may amend the Plan to the extent necessary for the efficient administration of the Plan, or to conform it to the provisions of any federal or state law or regulation. -10- EX-10 4 EXHIBIT 10(f) Option No.: ISO99-________________ Grantee:___________________________ Grant Date: ______________________ Expiration Date: __________________ Number of Shares: ________________ Exercise Price: ___________________ - --------------------------------------------------------------------------- HASTINGS MANUFACTURING COMPANY ________________ INCENTIVE STOCK OPTION AGREEMENT PURSUANT TO STOCK OPTION AND RESTRICTED STOCK PLAN OF 1997 ________________ This Incentive Stock Option Agreement (the "Agreement") is made as of the Grant Date set forth above by and between HASTINGS MANUFACTURING COMPANY ("Hastings") and the grantee named above (the "Grantee"). The Hastings Manufacturing Company Stock Option and Restricted Stock Plan of 1997 (the "Plan") is administered by the Compensation Committee of Hastings's Board of Directors (the "Committee"). The Committee has determined that the Grantee is eligible to participate in the Plan and to grant to the Grantee an option to purchase shares of Hastings' common stock, $2 par value ("Common Stock"), from Hastings. All of the rights of the Grantee are subject to the terms, conditions and provisions of the Plan, which are incorporated by reference into this Agreement. The Grantee acknowledges receipt of a copy of the Plan and the Plan Description and accepts this option subject to all of the terms, conditions and provisions of the Plan, and subject to the following further terms and conditions: 1. GRANT. Hastings grants to the Grantee an option to purchase shares of Hastings' Common Stock as set forth above. This option is an incentive stock option as defined in Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"). If the aggregate fair market value (determined at the time of grant) of the stock with respect to which incentive stock options are exercisable for the first time by the Grantee during any calendar year exceeds $100,000, taking into account options under the Plan and all other stock option plans of Hastings, options exceeding the $100,000 limitation shall be considered nonqualified stock options. 2. PRICE. The price of the shares of Common Stock to be purchased upon exercise of this option shall be the Exercise Price per share set forth above (subject to adjustment as provided in the Plan). 3. EXERCISE. The right to exercise this option shall commence on the Grant Date shown above and shall terminate on the Expiration Date shown above, unless earlier terminated under the Plan. The Grantee's right to exercise this option shall vest in the manner specified in EXHIBIT A. The Committee may, in its sole discretion, accelerate the vesting of the option at any time before full vesting; PROVIDED, HOWEVER, that if any such acceleration would cause a portion of the option not to qualify as an incentive stock option, the Committee may divide the option and stock issued upon exercise into incentive stock option shares and nonqualified option shares. The Grantee shall deliver to Hastings at the time of payment an executed notice of exercise in the form of EXHIBIT B, which shall be effective upon receipt by the Chief Financial Officer at Hastings' main office, accompanied by full payment (as set forth below) of the option price. Hastings will deliver to the Grantee a certificate or certificates for such shares; PROVIDED, HOWEVER, that the time of delivery may be postponed for such period as may be required for Hastings with reasonable diligence to comply with any registration requirements under the Securities Act of 1933, the Securities Exchange Act of 1934, any requirements under any other law or regulation applicable to the issuance, listing or transfer of such shares, or any agreement or regulation of any exchange or quotation service upon which shares of Common Stock may be listed or quoted for trading. If the Grantee fails to accept delivery of and pay for all or any part of the number of shares specified in the notice upon tender or delivery of the shares, the Grantee's right to exercise the option with respect to such undelivered shares shall terminate. 4. PAYMENT BY THE GRANTEE. The Exercise Price for each share purchased under this option shall be payable in cash (or by certified check, bank draft or money order) or, if the Committee consents, in shares of Common Stock (including Common Stock to be received upon a simultaneous exercise) or other consideration substantially equivalent to cash. The Committee may permit payment of all or a portion of the Exercise Price in the form of a promissory note or in installments according to terms approved by the Committee. The Board of Directors of Hastings may restrict or suspend the power of the Committee to permit such loans and may require that adequate security be provided. For purposes of payment to Hastings in whole or in part with shares of Common Stock (including shares of Common Stock to be received upon a simultaneous exercise), shares of Common Stock -2- shall be valued as follows: (a) if shares of Common Stock are listed or quoted for trading on an exchange or quotation system, at the mean of the highest and lowest sales prices of shares of Common Stock reported on such exchange or system that is the primary stock exchange or system for trading of Common Stock on the date of exercise, or if such exchange or system is closed on that date, the last preceding date on which such exchange or system was open for trading and on which shares of Common Stock were traded; or (b) if shares of Common Stock are not listed or quoted for trading on an exchange or quotation system, at a price determined by the Board of Directors. Such payment shall be made by delivery, or satisfactory assurances of delivery, to Hastings of the certificate(s) representing all of the shares of Common Stock to be used as payment, duly endorsed for transfer or accompanied by stock powers duly endorsed, in forms sufficient to vest lawful title in Hastings. The Grantee shall represent and warrant to Hastings with respect to all Common Stock used as payment under the terms of this Agreement that the Grantee has good and marketable title to the shares to be used as payment and the absolute right to sell, assign, transfer and deliver the shares to Hastings pursuant to this Agreement, free and clear of all liens, pledges, encumbrances, options, rights of first refusal or other claims of any nature whatsoever, except transfer restrictions required under applicable federal and state securities laws. Payment with Common Stock may be used in combination with payment with cash. 5. REGISTRATION AND LISTING. The stock options granted under this Agreement are conditional upon (a) the effective registration or exemption of the Plan, the options granted under the Plan and the stock to be received upon exercise of options under the Securities Act of 1933 and applicable state or foreign securities laws, and (b) the effective listing of the stock on any applicable stock exchange or quotation system. 6. ACCELERATION. This option shall be immediately exercisable in the event of any Change in Control of Hastings. "Change in Control" is defined in the Plan. 7. TRANSFERABILITY. Unless the Committee consents otherwise, this option shall not be sold, exchanged, transferred, pledged, assigned or otherwise alienated or hypothecated during the term of the option except by will or the laws of descent or distribution. 8. TERMINATION FOR "CAUSE." This option shall terminate at the times provided in the Plan. For purposes of this Agreement, "cause" for termination of employment shall have the meaning given to that term under any employment or other severance agreement between the Grantee and Hastings; in the absence of any such agreement or any definition of such term, "cause" for the purposes of this Agreement shall mean the Grantee's neglect, continued failure or inability to perform, or poor performance of, -3- duties, consistent failure to attain assigned objectives, misappropriation of corporate property, intentional damage to Hastings property, activities in aid of a competitor, insubordination, dishonesty, conviction of a crime involving moral turpitude or performance of any act (including any dishonest or fraudulent act) detrimental to the interests of Hastings. 9. CORPORATE CHANGES. In the event of any stock dividend, stock split or other increase or reduction in the number of shares of Common Stock outstanding, the number and class of shares covered by this option, and the Exercise Price, are subject to adjustment as provided in the Plan. 10. ADMINISTRATION. The Committee has full power and authority to interpret the provisions of the Plan, to supervise the administration of the Plan and to make all other determinations considered necessary or advisable under the Plan. All determinations, interpretations and selections made by the Committee regarding the Plan shall be final and conclusive. 11. SHAREHOLDER RIGHTS. The Grantee shall have no rights as a shareholder with respect to any shares covered by this option until the date of issuance of a stock certificate to the Grantee for such shares. 12. EMPLOYMENT BY HASTINGS. The grant of this option shall not impose upon Hastings or any subsidiary any obligation to retain the Grantee in its employ for any given period or upon any specific terms of employment. Hastings or any subsidiary may at any time dismiss the Grantee from employment, free from any liability or claim under the Plan, unless otherwise expressly provided in any written agreement with the Grantee. 13. ILLEGALITY. The Grantee will not exercise this option, and Hastings will not be obligated to issue any shares to the Grantee under this option, if the exercise thereof or the issuance of such shares shall constitute a violation by the Grantee or Hastings of any provisions of any law, order or regulation of any governmental authority. 14. CERTIFICATIONS. The Grantee acknowledges that he or she has been furnished and has read the Plan Description relating to the Plan. The Grantee hereby represents and warrants that the Grantee is acquiring the option granted under this Agreement for the Grantee's own account and investment and without any intent to resell or distribute the shares upon exercise of the option. The Grantee shall not resell or distribute the shares received upon exercise of the option except in compliance with such conditions as Hastings may reasonably specify to ensure compliance with federal and state securities laws. 15. AGREEMENT CONTROLS. The Plan is incorporated in this Agreement by reference. Capitalized terms not defined in this Agreement shall have -4- those meanings provided in the Plan. In the event of any conflict between the terms of this Agreement and the terms of the Plan, the provisions of this Agreement shall control. 16. EFFECTIVE DATE. This option shall be effective as of the date set forth at the top of this Agreement. 17. NOTICE OF DISQUALIFYING DISPOSITION. The Grantee agrees to notify Hastings if the Grantee sells shares acquired through the proper exercise of this option within two years of the date of this option or within one year of the exercise of this option to enable Hastings to claim the deduction to which it will thereby become entitled. This option has been issued by the Board of Directors upon recommendation of the Compensation Committee of Hastings. HASTINGS MANUFACTURING COMPANY By: _________________________________________ Its:_________________________________________ "Hastings" X____________________________________________ "Grantee" -5- EXHIBIT A VESTING SCHEDULE
DATE OF VESTING NUMBER OF SHARES _________________ ________________ _________________ ________________ _________________ ________________ _________________ ________________ _________________ ________________
EXHIBIT B HASTINGS MANUFACTURING COMPANY STOCK OPTION AND RESTRICTED STOCK PLAN OF 1997 NOTICE OF EXERCISE Date ________________ Hastings Manufacturing Company 325 North Hanover Street Hastings, Michigan 49058 Re: Option No. ________________ Gentlemen: I hereby exercise Option No. _____________ granted to me on _______________, to the extent of ____________________ shares of the Common Stock, $2 par value, of Hastings Manufacturing Company. Pursuant to the terms and conditions of such option, I am enclosing herewith payment in the amount of _____________________________ Dollars ($___________) or hereby enclose shares having an aggregate market value of _____________________________ Dollars ($__________). Very truly yours, ________________________________________ Register shares in the name of: ________________________________________ Address: ________________________________________ ________________________________________ Social Security Number: ________________________________________ EX-10 5 EXHIBIT 10(g) Option No.: NQ99-__________________ Grantee: __________________________ Grant Date: _______________________ Expiration Date: __________________ Number of Shares: _________________ Exercise Price: ___________________ - --------------------------------------------------------------------------- HASTINGS MANUFACTURING COMPANY ________________ NON-QUALIFIED STOCK OPTION AGREEMENT PURSUANT TO STOCK OPTION AND RESTRICTED STOCK PLAN OF 1997 ________________ This Non-Qualified Stock Option Agreement (the "Agreement") is made as of the Grant Date set forth above by and between HASTINGS MANUFACTURING COMPANY ("Hastings") and the grantee named above (the "Grantee"). The Hastings Manufacturing Company Stock Option and Restricted Stock Plan of 1997 (the "Plan") is administered by the Compensation Committee of Hastings's Board of Directors (the "Committee"). The Committee has determined that the Grantee is eligible to participate in the Plan and to grant to the Grantee an option to purchase shares of Hastings' common stock, $2 par value ("Common Stock"), from Hastings. All of the rights of the Grantee are subject to the terms, conditions and provisions of the Plan, which are incorporated by reference into this Agreement. The Grantee acknowledges receipt of a copy of the Plan and the Plan Description and accepts this option subject to all of the terms, conditions and provisions of the Plan, and subject to the following further terms and conditions: 1. GRANT. Hastings grants to the Grantee an option to purchase shares of Hastings' Common Stock, as set forth above. This option is a non-qualified option and is not an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. PRICE. The price of the shares of Common Stock to be purchased upon exercise of this option shall be the Exercise Price per share set forth above (subject to adjustment as provided in the Plan). 3. EXERCISE. The right to exercise this option begins on the Grant Date shown above and shall terminate on the Expiration Date shown above, unless earlier terminated under the Plan. The Grantee's right to exercise this option shall vest in the manner specified in EXHIBIT A. The Committee may, in its sole discretion, accelerate vesting of the option at any time before full vesting. The Grantee shall deliver to Hastings at the time of payment an executed notice of exercise in the form of EXHIBIT B, which shall be effective upon receipt by the Chief Financial Officer at Hastings' main office, accompanied by full payment (as set forth below) of the option price. Hastings will deliver to the Grantee a certificate or certificates for such shares; PROVIDED, HOWEVER, that the time of delivery may be postponed for such period as may be required for Hastings with reasonable diligence to comply with any registration requirements under the Securities Act of 1933, the Securities Exchange Act of 1934, any requirements under any other law or regulation applicable to the issuance, listing or transfer of such shares, or any agreement or regulation of any exchange or quotation service upon which shares of Common Stock may be listed or quoted for trading. If the Grantee fails to accept delivery of and pay for all or any part of the number of shares specified in the notice upon tender or delivery of the shares, the Grantee's right to exercise the option with respect to such undelivered shares shall terminate. 4. PAYMENT BY GRANTEE. The Exercise Price for each share purchased under this option shall be payable in cash (or by certified check, bank draft or money order) or, if the Committee consents, in shares of Common Stock (including Common Stock to be received upon a simultaneous exercise) or other consideration substantially equivalent to cash. The Committee may permit payment of all or a portion of the Exercise Price in the form of a promissory note or in installments according to terms approved by the Committee. The Board of Directors of Hastings may restrict or suspend the power of the Committee to permit such loans and may require that adequate security be provided. For purposes of payment to Hastings in whole or in part with shares of Common Stock (including shares of Common Stock to be received upon a simultaneous exercise), shares of Common Stock shall be valued as follows: (a) if shares of Common Stock are listed or quoted for trading on an exchange or quotation system, at the mean of the highest and lowest sales prices of shares of Common Stock reported on such exchange or system that is the primary stock exchange or system for trading of Common Stock on the date of exercise, or if such exchange or system is closed on that date, the last preceding date on which such exchange or system was open for trading and on which shares of Common Stock were traded; or (b) if shares of Common Stock are not listed or quoted for trading on an exchange or quotation system, at a price determined by the Board of Directors. Such -2- payment shall be made by delivery, or satisfactory assurances of delivery, to Hastings of the certificate(s) representing all of the shares of Common Stock to be used as payment, duly endorsed for transfer or accompanied by stock powers duly endorsed, in forms sufficient to vest lawful title in Hastings. The Grantee shall represent and warrant to Hastings with respect to all Common Stock used as payment under the terms of this Agreement that the Grantee has good and marketable title to the shares to be used as payment and the absolute right to sell, assign, transfer and deliver the shares to Hastings pursuant to this Agreement, free and clear of all liens, pledges, encumbrances, options, rights of first refusal or other claims of any nature whatsoever, except transfer restrictions required under applicable federal and state securities laws. Payment with Common Stock may be used in combination with payment with cash. 5. REGISTRATION AND LISTING. The stock options granted under this Agreement are conditional upon (a) the effective registration or exemption of the Plan, the options granted under the Plan and the stock to be received upon exercise of options under the Securities Act of 1933 and applicable state or foreign securities laws, and (b) the effective listing of the stock on any applicable stock exchange or quotation system. 6. TAX WITHHOLDING. Hastings or one of its subsidiaries shall be entitled to (a) withhold and deduct from the Grantee's future wages (or from other amounts that may be due and owing to the Grantee from Hastings or a subsidiary), or make other arrangements for the collection of, all legally required amounts necessary to satisfy any and all federal, state and local withholding and employment-related taxes attributable to the option granted under this Agreement, including, without limitation, the grant, exercise or vesting of, or payment of dividends with respect to, the option; or (b) require the Grantee promptly to remit the amount of such withholding to Hastings or a subsidiary before taking any action with respect to the option. Unless the Committee provides otherwise, withholding may be satisfied by withholding Common Stock to be received upon exercise or by delivery to Hastings of previously owned Common Stock. 7. ACCELERATION. This option shall be immediately exercisable in the event of any Change in Control of Hastings. "Change in Control" is defined in the Plan. 8. TRANSFERABILITY. Unless the Committee consents otherwise, this option shall not be sold, exchanged, transferred, pledged, assigned or otherwise alienated or hypothecated during the term of the option except by will or the laws of descent or distribution. 9. TERMINATION FOR "CAUSE." This option shall terminate at the times provided in the Plan. For purposes of this Agreement, "cause" for termination of employment shall have the meaning given to that term under -3- any employment or other severance agreement between the Grantee and Hastings; in the absence of any such agreement or any definition of such term, "cause" for the purposes of this Agreement shall mean the Grantee's neglect, continued failure or inability to perform, or poor performance of, duties, consistent failure to attain assigned objectives, misappropriation of corporate property, intentional damage to Hastings property, activities in aid of a competitor, insubordination, dishonesty, conviction of a crime involving moral turpitude or performance of any act (including any dishonest or fraudulent act) detrimental to the interests of Hastings. 10. CORPORATE CHANGES. In the event of any stock dividend, stock split or other increase or reduction in the number of shares of Common Stock outstanding, the number and class of shares covered by this option, and the Exercise Price, are subject to adjustment as provided in the Plan. 11. ADMINISTRATION. The Committee has full power and authority to interpret the provisions of the Plan, to supervise the administration of the Plan and to make all other determinations considered necessary or advisable under the Plan. All determinations, interpretations and selections made by the Committee regarding the Plan shall be final and conclusive. 12. SHAREHOLDER RIGHTS. The Grantee shall have no rights as a shareholder with respect to any shares covered by this option until the date of the issuance of a stock certificate to the Grantee for such shares. 13. EMPLOYMENT BY HASTINGS. The grant of this option shall not impose upon Hastings or any subsidiary any obligation to retain the Grantee in its employ for any given period or upon any specific terms of employment. Hastings or any subsidiary may at any time dismiss the Grantee from employment, free from any liability or claim under the Plan, unless otherwise expressly provided in any written agreement with the Grantee. 14. ILLEGALITY. The Grantee will not exercise this option, and Hastings will not be obligated to issue any shares to the Grantee under this option, if the exercise thereof or the issuance of such shares shall constitute a violation by the Grantee or Hastings of any provisions of any law, order or regulation of any governmental authority. 15. CERTIFICATIONS. The Grantee acknowledges that he or she has been furnished and has read the Plan Description relating to the Plan. The Grantee hereby represents and warrants that the Grantee is acquiring the option granted under this Agreement for the Grantee's own account and investment and without any intent to resell or distribute the shares upon exercise of the option. The Grantee shall not resell or distribute the shares received upon exercise of the option except in compliance with such conditions as Hastings may reasonably specify to ensure compliance with federal and state securities laws. -4- 16. AGREEMENT CONTROLS. The Plan is incorporated in this Agreement by reference. Capitalized terms not defined in this Agreement shall have those meanings provided in the Plan. In the event of any conflict between the terms of this Agreement and the terms of the Plan, the provisions of this Agreement shall control. 17. EFFECTIVE DATE. This option shall be effective as of the date set forth at the top of this Agreement. This option has been issued by the Board of Directors upon recommendation of the Compensation Committee of Hastings. HASTINGS MANUFACTURING COMPANY By:__________________________________________ Its:_________________________________________ "Hastings" X____________________________________________ "Grantee" -5- EXHIBIT A VESTING SCHEDULE
DATE OF VESTING NUMBER OF SHARES ________________ _______________ ________________ _______________ ________________ _______________ ________________ _______________ ________________ _______________
EXHIBIT B HASTINGS MANUFACTURING COMPANY STOCK OPTION AND RESTRICTED STOCK PLAN OF 1997 NOTICE OF EXERCISE Date ________________ Hastings Manufacturing Company 325 North Hanover Street Hastings, Michigan 49058 Re: Option No. ________________ Gentlemen: I hereby exercise Option No. _____________ granted to me on _______________, to the extent of ____________________ shares of the Common Stock, $2 par value, of Hastings Manufacturing Company. Pursuant to the terms and conditions of such option, I am enclosing herewith payment in the amount of ______________________________ Dollars ($___________) or hereby enclose shares having an aggregate market value of _____________________________ Dollars ($__________). I authorize Hastings or my subsidiary employer to withhold from any regular cash compensation payable to me any taxes required to be withheld under federal, state or local law as a result of this exercise. If required by Hastings, I agree to remit to Hastings, in cash, any such taxes prior to Hastings's delivery of any shares of Common Stock purchased through this exercise. Very truly yours, ________________________________________ Register shares in the name of: ________________________________________ Address: ________________________________________ ________________________________________ Social Security Number: ________________________________________ EX-21 6 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT
JURISDICTION OF PERCENT NAME OF SUBSIDIARY INCORPORATION OWNERSHIP - ------------------ --------------- --------- Hastings, Inc. Ontario 100% HMC, Inc. (formerly Douglas Corporation) Michigan 100%
EX-23 7 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference and use of our report dated February 26, 1999 on the consolidated financial statements of Hastings Manufacturing Company and subsidiaries which appears on page 37 of this Form 10-K for the year ended December 31, 1998 in the previously filed S-8 registration statement (Registration No. 333-74489) for that company's Stock Option and Restricted Stock Plan of 1997. /s/ BDO Seidman, LLP BDO Seidman, LLP Grand Rapids, Michigan March 31, 1999 EX-24 8 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints ANDREW F. JOHNSON and THOMAS J. BELLGRAPH, and each of them, such individual's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of HASTINGS MANUFACTURING COMPANY for the year ended December 31, 1998, together with any and all amendments thereto, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission or other regulatory authority, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Signature: /S/ DALE W. KOOP Print Name: DALE W. KOOP Title: DIRECTOR POWER OF ATTORNEY KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints ANDREW F. JOHNSON and THOMAS J. BELLGRAPH, and each of them, such individual's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of HASTINGS MANUFACTURING COMPANY for the year ended December 31, 1998, together with any and all amendments thereto, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission or other regulatory authority, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Signature: /S/MONTY C. BENNETT Print Name: MONTY C. BENNETT Title: DIRECTOR POWER OF ATTORNEY KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints ANDREW F. JOHNSON and THOMAS J. BELLGRAPH, and each of them, such individual's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of HASTINGS MANUFACTURING COMPANY for the year ended December 31, 1998, together with any and all amendments thereto, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission or other regulatory authority, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Signature: /S/DOUGLAS A. DECAMP Print Name: DOUGLAS A DECAMP Title: DIRECTOR POWER OF ATTORNEY KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints ANDREW F. JOHNSON and THOMAS J. BELLGRAPH, and each of them, such individual's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of HASTINGS MANUFACTURING COMPANY for the year ended December 31, 1998, together with any and all amendments thereto, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission or other regulatory authority, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Signature: /S/NEIL A. GARDNER Print Name: NEIL A. GARDNER Title: DIRECTOR POWER OF ATTORNEY KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints ANDREW F. JOHNSON and THOMAS J. BELLGRAPH, and each of them, such individual's true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such individual and in his or her name, place and stead, in any and all capacities, to sign the Form 10-K of HASTINGS MANUFACTURING COMPANY for the year ended December 31, 1998, together with any and all amendments thereto, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission or other regulatory authority, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Signature: /S/RICHARD L. FOSTER Print Name: RICHARD L. FOSTER Title: DIRECTOR EX-27 9 ART. 5 FDS FOR FORM 10-K
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HASTINGS MANUFACTURING COMPANY AND SUBSIDIARIES FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 635,773 0 5,489,165 210,000 10,598,222 19,194,671 25,414,166 (16,411,078) 36,188,500 7,296,392 5,940,000 1,579,052 0 0 5,438,190 36,188,500 38,752,104 38,752,104 26,094,399 26,094,399 0 458,500 571,774 2,784,427 1,054,000 1,730,427 0 0 0 1,730,427 2.24 2.24
-----END PRIVACY-ENHANCED MESSAGE-----