-----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, Spju/bimHgh4bpifrLOa6Nr8ebPN0GYdzFZsq13XpvF/XHnauknTJ/a9koQxkbZk kO6ogWuZo1pxwH15pCpIPg== 0000950152-98-002323.txt : 19980325 0000950152-98-002323.hdr.sgml : 19980325 ACCESSION NUMBER: 0000950152-98-002323 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980324 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AEROQUIP-VICKERS INC CENTRAL INDEX KEY: 0000059198 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED METAL PRODUCTS [3490] IRS NUMBER: 344288310 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-00924 FILM NUMBER: 98571937 BUSINESS ADDRESS: STREET 1: 3000 STRAYER CITY: MAUMEE STATE: OH ZIP: 43537 BUSINESS PHONE: 4198672200 MAIL ADDRESS: STREET 1: 3000 STRAYER CITY: MAUMEE STATE: OH ZIP: 43537 FORMER COMPANY: FORMER CONFORMED NAME: TRINOVA CORP DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: LIBBEY OWENS FORD CO DATE OF NAME CHANGE: 19860814 FORMER COMPANY: FORMER CONFORMED NAME: LIBBEY OWENS FORD GLASS CO DATE OF NAME CHANGE: 19681004 10-K405 1 AEROQUIP-VICKERS, INC. 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission File No. 1-924 AEROQUIP-VICKERS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Ohio 34-4288310 - ------------------------ ---------------- (State of Incorporation) (I.R.S. Employer Identification No.) 3000 Strayer, Maumee, Ohio 43537-0050 - --------------------------------------- ---------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (419) 867-2200 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - ------------------------------ ------------------------ Common Shares, $5.00 Par Value Frankfurt Stock Exchange Chicago Stock Exchange New York Stock Exchange Pacific Exchange, Inc. The Stock Exchange (London) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] [Cover page continued] 2 2 The aggregate market value of the Common Shares held by non-affiliates of the registrant as of February 17, 1998, was $1,607,596,327.50. The number of Common Shares, $5 Par Value, outstanding as of February 17, 1998, was 28,138,613. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1997 Annual Report to Security Holders are filed as Exhibit (13) filed hereto and are incorporated by reference into Parts I, II and IV. Portions of the proxy statement for the annual meeting of security holders to be held on April 16, 1998, are incorporated by reference into Part III. This document, including exhibits, contains 98 pages. The cover page consists of 2 pages. The Exhibit Index is located at page 22. [End of cover page] 3 3 PART I ------ ITEM 1. Business. - ------- (a) Aeroquip-Vickers, Inc., formerly known as TRINOVA Corporation, ("Aeroquip-Vickers") is a world leader in the manufacture and distribution of engineered components and systems, sold through its operating companies, Aeroquip Corporation ("Aeroquip") and Vickers, Incorporated ("Vickers"), to the industrial, automotive and aerospace markets. In 1997, Aeroquip-Vickers paid a quarterly dividend of $.20 per share, or $.80 per share for the year. In January 1998, the Company's Board of Directors approved a first-quarter 1998 dividend of $.22 per share. During 1997, the Company's Board of Directors authorized a program to purchase up to $100 million of the Company's outstanding common stock and, in 1997, the Company purchased 496,100 shares at a cost of $21.6 million under this and a prior Board of Directors authorization. At December 31, 1997, $80.7 million of additional common stock may be purchased under the current authorization. The Company may make further purchases during 1998, but is not committed to purchase a specific number of shares. In 1997, the Company established a Medium-Term Note program and subsequently issued debt in the amount of $100 million with interest rates from 6.61% to 7.58% and with various maturities to 2012. During the first quarter of 1998, the Company issued an additional $31 million with interest rates from 6.89% to 7.09% with maturity in 2018. Under provisions of current shelf registration statements for the Medium-Term Note program, $219 million remains available for issuance. In June 1997, the Company called its 6% convertible subordinated debentures for redemption. The debentures, which were due to mature on October 15, 2002, were convertible into common shares of the Company at a conversion price of $52.50 per share. Prior to the July 1997 redemption date, debentures in the amount of $3.7 million were converted into 70,950 shares of common stock. In December 1997, the Company called its 9.55% senior sinking fund debentures for redemption on February 3, 1998. Proceeds from additional borrowings in 1998 under the Medium-Term Note program were used to redeem the debentures. The pretax loss from redemption of the debentures amounting to approximately $2.5 million was recognized in the 1998 first quarter. On February 20, 1997, Aeroquip-Vickers announced that it planned to exit its interior automotive plastics business. In accordance with this strategy, the Company's Aeroquip subsidiary sold or closed eight facilities during 1997 that had combined sales of approximately $67 million in 1997 and $132 million in 1996. The Company recorded a special charge of $30 million in 1997 ($18.5 million net of tax) related to exiting this business. A significant portion of this charge was related to exiting this business in Germany. On March 12, 1997, Aeroquip-Vickers announced that its Vickers subsidiary and Sturman Industries, of Woodland Park, Colorado, formed a joint venture company to develop and produce integrated digital electrohydraulic systems for mobile equipment applications. 4 4 In April 1997, Komatsu Ltd. and Vickers signed an agreement creating a global alliance including the creation of a new joint-venture company, headquartered in Tokyo. In December 1997, Aeroquip Corporation signed a definitive agreement for the purchase of the assets subject to certain liabilities of Aerotech South Africa (Pty) Ltd. Aerotech's 1997 fiscal year sales were approximately $16.5 million. The South African supplier of hose assemblies and fitting products will become part of the Aeroquip Automotive Group. In January 1998, Vickers signed a definitive agreement for the purchase of Hydrokraft GmbH, an indirectly 100%-owned subsidiary of IWKA AG of Karlsruhe, Germany. Hydrokraft manufactures high-pressure axial piston hydraulic pumps, motors and transmissions for applications in stationary industrial equipment, marine, mining, chemical processing, food processing and other markets. Hydrokraft's 1997 sales were approximately $10 million. (b) "Note 15 - Business Segments" on page 87 of Exhibit (13) filed hereunder is incorporated herein by reference. (c) A description of the business done and intended to be done by Aeroquip-Vickers and its subsidiaries in each industry segment follows. (1) INDUSTRIAL: Aeroquip manufactures and sells hose and hose assemblies; hose fittings and adapters; tube fittings and adapters; couplings; refrigeration/air conditioning connectors; and molded, extruded and co-extruded plastic products. Vickers manufactures and sells hydraulic, electrohydraulic, pneumatic and electronic control devices; piston, vane and gear pumps and motors; open architecture machine controls; hydraulic and pneumatic cylinders; hydraulic power packages; electric motors and drives; hydraulic and lubrication filtration; and fluid-evaluation products and services. Principal markets for these products include construction, mining, logging and farm equipment; machine tool; process industries; electrical machinery; air conditioning/refrigeration; appliances and communications equipment; electronics; lift truck; material handling; plant maintenance; and housing and commercial construction. Sales are dispersed geographically across a broad customer base. Products are sold directly to original equipment manufacturers ("OEMs") and through a worldwide network of distributors serving aftermarket and small- and medium-sized OEM customers. The industrial business is highly competitive in terms of price, quality and service. Aeroquip has significant market position worldwide for industrial hose, fittings, couplings and adapters. Vickers has significant market position worldwide for hydraulic and electrohydraulic controls; piston and vane pumps and motors; hydraulic power packages; and electronic controls, drives and motors. Aeroquip-Vickers serves many customers in the highly diverse and fragmented industrial markets. Due to the diversity of Aeroquip-Vickers' products, there are a large number of competitors scattered across a wide variety of market segments, with no single competitor competing in each of Aeroquip-Vickers' product lines. 5 5 The order backlog for the industrial business was $232.7 million as of December 31, 1997, compared to $184.9 million as of December 31, 1996. Substantially all of the December 31, 1997, backlog is expected to be filled in 1998. (2) AUTOMOTIVE: Aeroquip manufactures and sells air conditioning, power steering, and oil and transmission cooler hose and hose assemblies; bodyside moldings; decorative bumper strips; spoilers; rocker panel claddings; and engine components. The automotive operations of Aeroquip serve worldwide automobile, light truck, sport utility and van manufacturers. Products are primarily sold directly to manufacturers. Approximately 62% of worldwide sales of Aeroquip-Vickers' automotive business are made to three major U.S. and one major European automobile manufacturers. The automotive industry is highly competitive in terms of price, quality and service. Aeroquip is a preferred supplier to the major U.S. and European automobile manufacturers. Competition for products in the automotive industry is very fragmented. (3) AEROSPACE: Aeroquip manufactures and sells hose, fittings, couplings, swivels, V-band couplings, fuel-handling products, high-pressure tube fittings, clamps and noise-reduction products. Vickers manufactures and sells fixed- and variable-displacement pumps; fuel pumps; hydraulic motors and motor packages; electric motorpumps and generator packages; valves and valve packages; electrohydraulic and electromechanical actuators; sensors and monitoring devices; and electronic controllers. The aerospace operations of Aeroquip and Vickers serve worldwide commercial aerospace and defense markets including commercial aircraft, air defense, cargo handling, combat and support vehicles, commuter aircraft, engines, marine, military aircraft, military weaponry, missiles and naval machinery. Products are sold directly to OEM businesses, commercial airlines and the government and through a distributor network. Approximately 18% of Aeroquip-Vickers' aerospace business sales are made to a major U.S. airframe manufacturer. The aerospace business is highly competitive in terms of price, quality and service. Aeroquip has significant market position worldwide for aerospace hose, fittings and quick-disconnect couplings. Vickers has significant market position worldwide for aerospace fixed- and variable-displacement hydraulic pumps, hydraulic motors and motor packages, and aerospace sensors and monitoring devices. Aeroquip-Vickers serves a large number of customers in the aerospace and defense markets. Due to the diversity of Aeroquip-Vickers' products, there are a large number of competitors scattered across a wide variety of market segments, with no single competitor competing in each of Aeroquip-Vickers' product lines. The order backlog for the aerospace business was $379.2 million as of December 31, 1997, compared to $341 million as of December 31, 1996. Approximately 8% of the December 31, 1997, backlog is not expected to be 6 6 filled in 1998 because certain contracts require deliveries after 1998. Approximately 31% of the December 31, 1997, backlog represents direct government contracts or subcontracts on government programs, which are subject to termination for convenience by the U.S. Government. (4) OTHER INFORMATION: Aeroquip-Vickers and its subsidiaries are generally not dependent upon any one source for raw materials or purchased components essential to their businesses, and it is anticipated that such raw materials and components will be available in adequate quantities to meet anticipated production schedules. Patents owned by Aeroquip-Vickers are considered important to the conduct of its present businesses. Aeroquip-Vickers is licensed under a number of patents, no one of which, individually, is considered material to its businesses. Aeroquip-Vickers is the owner of a number of U.S. and non-U.S. trademark registrations. Aeroquip-Vickers devotes engineering, research and development efforts to new products and improvement of existing products and production processes. During 1997, 1996 and 1995, Aeroquip-Vickers spent a total of $72.2 million, $74.9 million and $63 million, respectively, on these efforts. Aeroquip-Vickers employed 14,780 persons at December 31, 1997. (d) "Note 16 - Non-U.S. Operations" on page 89 of Exhibit (13) filed hereunder is incorporated herein by reference. As assessed by Aeroquip-Vickers, the risk attendant to non-U.S. operations, which is primarily in developed countries, is not significantly greater than that attendant to its U.S. operations. ITEM 2. Properties. - ------ A description of Aeroquip-Vickers' principal properties follows. Except as otherwise indicated, all properties are owned by Aeroquip-Vickers or its subsidiaries. Aeroquip-Vickers' executive offices (leased) are located in Maumee, Ohio. INDUSTRIAL: Aeroquip Corporation has executive and administrative offices in Maumee, Ohio (leased); technical centers in Ann Arbor, Michigan (leased) and Maumee, Ohio (leased); and manufacturing facilities throughout the United States and abroad, including plants in Mountain Home, Arkansas; Fitzgerald, Georgia; New Haven, Indiana; Williamsport, Maryland; Forest City, Middlesex and Norwood, North Carolina; Van Wert, Ohio; Gainesboro, Tennessee; Wausau, Wisconsin; Guaratingueta, Brazil; Chambray-Les-Tours, France; Baden-Baden and Hann-Muenden, Germany; Livorno, Italy; and Cardiff, United Kingdom. Aeroquip also owns or leases warehouse, assembly and distribution facilities and sales offices in the United States and abroad. Vickers, Incorporated has executive and administrative offices in Maumee, Ohio (leased); a technical center in Rochester Hills (leased), Michigan; and manufacturing facilities throughout the United States and abroad, including plants in Decatur, Alabama; Searcy, Arkansas; Carol Stream and Petersburg (leased), Illinois; Jackson, Michigan; Lebanon, Ohio; Omaha, 7 7 Nebraska; White City, Oregon; Greenwood, South Carolina; Memphis, Tennessee; Sao Paulo, Brazil; Suzhou, China (leased); Mumbai and Pune, India; Casella and Vignate (leased), Italy; and Bedford (leased), Havant and Telford (leased), United Kingdom. Vickers also owns or leases warehouse, assembly and distribution facilities and sales offices in the United States and abroad. AUTOMOTIVE: Aeroquip has executive and administrative offices in Maumee, Ohio (leased); technical and administrative offices in Mt. Clemens, Michigan (leased); and manufacturing facilities throughout the United States and abroad, including plants in Atlanta, Georgia; Clinton Township, Michigan (leased); Mooresville, North Carolina; Fremont, Ohio; Livingston, Tennessee; Baden-Baden, Germany; Alcala de Henares, Spain; and Brierley Hill, United Kingdom. Aeroquip also owns or leases warehouse, assembly and distribution facilities and sales offices in the United States and abroad. AEROSPACE: Aeroquip Corporation has executive and administrative offices in Maumee, Ohio (leased); and manufacturing facilities throughout the United States and abroad, including plants in Toccoa, Georgia; Jackson, Michigan (leased); Pau, France (leased); and Lakeside, United Kingdom (leased). Aeroquip also owns or leases warehouse, assembly and distribution facilities and sales offices in the United States and abroad. Vickers, Incorporated has executive and administrative offices in Maumee, Ohio (leased); and manufacturing facilities throughout the United States and abroad, including plants in Los Angeles, California; Grand Rapids, Michigan; Jackson, Mississippi; Hi-Nella, New Jersey; Glenolden, Pennsylvania; and Bedhampton, United Kingdom. Vickers also owns or leases warehouse, assembly and distribution facilities and sales offices in the United States and abroad. ITEM 3. Legal Proceedings. - ------ As previously reported, on March 26, 1992, the United States Environmental Protection Agency ("USEPA") issued an Administrative Order ("106 Order") under Section 106 of the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") to Aeroquip-Vickers' subsidiary, Aeroquip Corporation ("Aeroquip"), and five other Potentially Responsible Parties ("PRPs") relative to the San Fernando Valley Burbank Operable Unit ("BOU"), involving groundwater contamination. (Reference is made to Part I, Item 3, of Aeroquip-Vickers' Annual Report on Form 10-K for the year ended December 31, 1994.) The 106 Order requires the six PRPs to design and construct a water blending facility at a cost now estimated to be approximately $5.7 million. Aeroquip-Vickers' portion of any such cost is estimated to be 18.33% based on a cost-sharing agreement among the six PRPs which was executed by Aeroquip-Vickers on July 6, 1992. Also related to the BOU, on May 15, 1994, USEPA issued to Lockheed Corporation ("Lockheed"), Aeroquip and other PRPs a Special Notice of Liability under CERCLA for the remaining 18 years of operation and maintenance (O&M) costs associated with the blending facility, as well as a water treatment facility constructed by Lockheed under its BOU Consent Decree with 8 8 USEPA. The Special Notice of Liability also covers USEPA's past response costs. On April 26, 1994, Lockheed filed an action against Aeroquip and 105 other PRPs seeking contribution toward costs Lockheed incurred to construct the water treatment facility and related matters. In November 1995, a settlement agreement was entered into among Lockheed and most of the members of a joint defense group (the "Joint Defense Group"), including Aeroquip, which resolved this contribution action. The settlement requires the payment of $16 million by the Joint Defense Group. Aeroquip's portion of this amount is approximately $104,000. This amount reflects a credit to Aeroquip for its prior expenditures on the blending facility. The settlement is also intended to resolve Aeroquip's potential liability for the interim remedy at the Glendale Superfund site (see below), Aeroquip's potential liability for a toxic suit (known as the "Fournier" matter) brought against Lockheed, and the claims by other Joint Defense Group members against Aeroquip. USEPA and some of the Burbank PRPs are negotiating a Second Consent Decree which will provide the settling parties with protection against liability for certain matters related to the interim remedy now under way. Under the proposed Second Consent Decree all work will be carried out by the City of Burbank, and Lockheed will fund the Operation & Maintenance costs. Aeroquip and five other PRPs will be responsible for any future design defects in the blending facility and for possible other costs should USEPA decide to reopen the Consent Decree based on changed circumstances or new information. The Second Consent Decree has been executed by all parties including the United States, and is awaiting lodging with the federal court. In December 1997, Aeroquip and over 50 other Burbank Operable Unit PRPs were sued by over 2800 plaintiffs in eight law suits pending in California state court. The plaintiffs allege that hazardous and toxic waste dumped in the BOU leached into the groundwater and was released into the air causing bodily injury and property damage to the plaintiffs who were, for the most part, residents of the Burbank area. Aeroquip denies the allegations in the complaints and intends to vigorously defend itself in the litigation. As previously reported, on November 13, 1992, the USEPA, Region IX, issued a General Notice of Liability letter to Aeroquip-Vickers' subsidiary, Sterer Engineering and Manufacturing Company, now known as the Sterer Division of Vickers, Incorporated ("Vickers"). (Reference is made to Part I, Item 3, of Aeroquip-Vickers' Annual Report on Form 10-K for the year ended December 31, 1994.) The letter notified Vickers of potential liability, as defined by Section 107(a) of CERCLA, that it may incur with respect to the San Fernando Valley Glendale South Operable Unit, involving groundwater contamination. The USEPA issued its Record of Decision ("ROD") on June 18, 1993. Twenty-seven PRPs (the "PRP Group"), including Vickers, entered into an Administrative Order on Consent with the USEPA on March 21, 1994, to conduct the Remedial Design ("RD") of the interim remedy. The estimated cost of the RD is $4.7 million. Vickers' portion of the RD costs is estimated to be 2.95%, based on an interim allocation agreement among the PRPs. 9 9 On November 26, 1996, the USEPA issued a Unilateral Administrative Order under Section 106 of CERCLA to all PRPs, including Vickers, requiring the PRPs to conduct the pre-construction phase of the interim remedy. On September 30, 1997 USEPA issued another administrative order directing the Glendale PRPs, including Vickers, to carry out the interim remedial action work which includes construction, operation and maintenance (over a twelve year period) of water treatment facilities for the extraction and treatment of contaminated groundwater. The PRP Group is implementing this Order. The PRP Group has entered into an agreement to carry out an allocation of the costs for the Glendale Operable Units interim remedy. The allocation process must accommodate two separate allocations--first, the division of response costs for the Glendale Operable Units between the Glendale PRPs and Lockheed Corporation on behalf of all Burbank PRPs (see above) and, second, the internal division of response costs among the intra Glendale PRPs. Allocation of costs between Lockheed and other PRPs was determined by a technical arbitration panel and that decision has been confirmed by a California court. Lockheed has appealed the Order, but is participating in the funding of the interim remedy. In December 1997 a final settlement agreement and mutual release was negotiated among the intra-Glendale PRPs. The estimate for the cost of the interim remedy is a net present value of $81 million. Vickers share is 1.04% of the total interim remedy work, assuming the allocation between Lockheed and the PRP group remains unchanged from the arbitration award. Vickers' allocated share of the interim remedy-related costs is estimated to be in the range of $840,000 and $1.1 million. As previously reported, on July 31, 1992, the Maine Department of Environmental Protection issued an Administrative Enforcement Order to Aeroquip-Vickers and its wholly owned subsidiaries, Aeroquip Corporation ("Aeroquip") and Sterling Engineered Products Inc. ("Sterling"), as well as one other party, Pioneer Plastics Corporation ("Pioneer Plastics"), (collectively the "respondents"), pursuant to Title 38, section 1304(12) of the Maine Revised Statutes. (Reference is made to Part I, Item 3, of Aeroquip-Vickers' Annual Report on Form 10-K for the year ended December 31, 1994.) The Order, which was issued without a prior hearing, required the respondents to conduct a complete Phase II environmental assessment of alleged soil and groundwater contamination at a manufacturing site in Auburn, Maine, which was formerly owned by Sterling and is now owned by Pioneer Plastics. The Order further required the respondents to remediate any environmental contamination identified in the Phase II assessment. On May 5, 1993, a Compliance Order on Consent ("COC") was entered into by the State of Maine, Sterling and Pioneer Plastics. The COC replaces and revokes the Order issued July 31, 1992. The COC requires Sterling to conduct a site investigation and to develop and implement a remedial work plan. Sterling was merged into Aeroquip Corporation effective December 31, 1996. The cost to Aeroquip to conduct the COC site investigation, develop the remedial work plan and complete a feasibility study (the "Feasibility Study") is estimated to be approximately $1,900,000. Aeroquip's remediation costs are undetermined at this time because the Feasibility Study has not been completed. 10 10 A Vickers motor pump, which is a component of the hydraulic systems provided by Aerospatiale for Airbus Industries for use in the A330/340 aircraft, was involved in two separate fires which occurred on aircraft during ground maintenance and cargo unloading procedures. No personal injuries occurred, and Aerospatiale and Airbus Industries indicate that interim steps have been taken to prevent further incidents. A French court has appointed a panel of experts to investigate and report on the cause of the fires, related technical issues and damages. Vickers is participating in the hearings held by the panel. The report of the panel will be of an advisory nature and is not legally binding, but would serve as evidence of the facts in the event that claims are subsequently made on the merits. No claims for recovery of damages have been made at this time. Evidence was recently presented to the panel through which Airbus and Aerospatiale allege that the property damage to the aircraft involved is in excess of $45 million and that the cost of retrofitting other A330/340 aircraft will be approximately $45 million. Any property damage claims which might ultimately be brought against Vickers as a result of the fires would be covered by Vickers' aviation insurance. Vickers denies responsibility for any damages and will vigorously defend its position. The proceedings are very preliminary and, accordingly, it is impossible for Vickers to assess its exposure at this time. Vickers has been advised that it may take in excess of two years for the panel to submit its report. Aeroquip-Vickers and certain subsidiaries are defendants in various lawsuits. While the ultimate outcome of these lawsuits and the above matters cannot now be predicted, management is of the opinion, based on the facts now known to it, that the liability, if any, in these lawsuits (to the extent not provided for by insurance or otherwise) and the above matters will not have a material adverse effect upon Aeroquip-Vickers' consolidated financial position. ITEM 4. Submission of Matters to a Vote of Security Holders. - ------ None. EXECUTIVE OFFICERS OF THE REGISTRANT ------------------------------------ The names, ages, positions and recent business experience of the executive officers of Aeroquip-Vickers as of February 17, 1998, are listed below. Officers of Aeroquip-Vickers are elected annually in April by the Board of Directors at the organization meeting immediately following the annual meeting of shareholders.
NAME AND POSITION AGE BUSINESS EXPERIENCE - ---------------------------- --- ---------------------------------- Darryl F. Allen, 54 Chairman of the Board, President Chairman of the Board, and Chief Executive Officer of President and Chief Aeroquip-Vickers since 1991. Executive Officer
11 11 William R. Ammann, 56 Vice President-Administration and Vice President-Administration Treasurer of Aeroquip-Vickers since and Treasurer 1992. James E. Kline, 56 Vice President and General Counsel Vice President and of Aeroquip-Vickers since 1989. General Counsel James M. Oathout, 53 Corporate Secretary and Senior Corporate Secretary and Attorney of Aeroquip-Vickers since Senior Attorney March 1995. Secretary and Associate General Counsel of Aeroquip-Vickers from 1988 to March 1995. Gregory R. Papp, 51 Corporate Controller of Aeroquip- Corporate Controller Vickers since 1993. Vice President and Controller of Aeroquip Corporation from July 1991 to 1993. David M. Risley, 53 Vice President - Finance and Chief Vice President - Finance Financial Officer of Aeroquip- and Chief Financial Officer Vickers since 1992. Group Vice President - Administration and Control of Aeroquip Corporation from 1991 to 1992. Howard M. Selland, 54 Executive Vice President of Executive Vice President of Aeroquip-Vickers and President of Aeroquip-Vickers and President Aeroquip Corporation since 1989. Of Aeroquip Corporation Philip G. Simonds, 57 Vice President-Taxation of Vice President-Taxation Aeroquip-Vickers since 1983. John H. Weber, 42 Executive Vice President of Executive Vice President of Aeroquip-Vickers and President of Aeroquip-Vickers and President Vickers, Incorporated since of Vickers, Incorporated August 1996. Executive Vice President of Vickers, Incorporated from January 1996 to August 1996. Group Vice President - Industrial of Vickers, Incorporated from 1994 to August 1996. General Manager Industrial Motors of General Electric Company from 1992 to 1994.
There are no family relationships among the persons named above. 12 12 PART II ------- ITEM 5. Market for Registrant's Common Equity and Related Stockholder - ------ Matters. "Stock Exchanges," "Stock Ownership," "Dividend Information," "Quarterly Common Stock Information" and "Dividend Payments per Share of Common Stock" on page 91 of Exhibit (13) filed hereunder are incorporated herein by reference. ITEM 6. Selected Financial Data. - ------ "5-Year Summary of Selected Financial Data" on page 52 of Exhibit (13) filed hereunder is incorporated herein by reference. ITEM 7. Management's Discussion and Analysis of Financial Condition - ------ and Results of Operation. "Financial Review and Analysis of Operations" on pages 53-63 of Exhibit (13) filed hereunder are incorporated herein by reference. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk. - ------- Not Applicable. ITEM 8. Financial Statements and Supplementary Data. - ------ "Quarterly Results of Operations (Unaudited)" of the registrant and its subsidiaries on pages 64-65 and the consolidated financial statements of the registrant and its subsidiaries on pages 66-90 of Exhibit (13) filed hereunder are incorporated herein by reference. ITEM 9. Changes in and Disagreements with Accountants on Accounting and - ------ Financial Disclosure. None. PART III -------- ITEM 10. Directors and Officers of the Registrant. - ------- "Election of Directors" on pages 1-2 of the proxy statement for the annual meeting to be held on April 16, 1998, are incorporated herein by reference. Information regarding executive officers is set forth in Part I of this report under the caption "Executive Officers of the Registrant." 13 13 ITEM 11. Executive Compensation. - ------- "Compensation of Directors" and "Executive Compensation" (excluding material under the captions "Aeroquip-Vickers Stock Performance Graph" and "Board Compensation Committee Report on Executive Compensation") on pages 3-4 and 5-9, respectively, of the proxy statement for the annual meeting to be held on April 16, 1998, are incorporated herein by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management. - ------- "Security Ownership" on page 4 of the proxy statement for the annual meeting to be held on April 16, 1998, is incorporated herein by reference. ITEM 13. Certain Relationships and Related Transactions. - ------- None. PART IV ------- ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - ------- (a) The following documents are filed as a part of this report. (1) The following consolidated financial statements of Aeroquip-Vickers and its subsidiaries, included on pages 66-90 of Exhibit (13) filed hereunder are incorporated by reference in Item 8. Report of Ernst & Young LLP, Independent Auditors Statement of Income - Years ended December 31, 1997, 1996 and 1995 Statement of Financial Position - December 31, 1997 and 1996 Statement of Cash Flows - Years ended December 31, 1997, 1996 and 1995 Statement of Shareholders' Equity - Years ended December 31, 1997, 1996 and 1995 Notes to Financial Statements - December 31, 1997 (2) The following consolidated financial statement schedule of Aeroquip-Vickers and its subsidiaries is filed under Item 14(d): SCHEDULE PAGE(S) -------- ------- Schedule II - Valuation and qualifying accounts 19-21 All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are either not required under the related instructions or are inapplicable, and therefore have been omitted. 14 14 (3) The following exhibits are incorporated by reference hereunder, and those exhibits marked with an asterisk (*) are management contracts or compensatory plans or arrangements required to be filed as exhibits pursuant to Item 14(c) of this report:
EXHIBIT NUMBER ------ (3)-2 Amended Articles of Incorporation (amended April 17, 1997), filed as Exhibit (3) to Form 10-Q filed on May 8, 1997 (4)-1 Rights Agreement, dated January 26, 1989, between Aeroquip-Vickers, Inc. (formerly TRINOVA Corporation) and First Chicago Trust Company of New York filed as Exhibit (2) to Form 8-A filed on January 27, 1989, as amended by the First Amendment to Rights Agreement filed as Exhibit (5) to Form 8 filed on July 1, 1992 (4)-2 Indenture, dated as of May 1, 1996, between Aeroquip-Vickers, Inc. and the First National Bank of Chicago (as successor in interest to NBD Bank) filed as Exhibit 4.1 to Form S-3 filed on August 29, 1997 (4)-3 First Supplemental Indenture, dated as of April 17, 1997, between Aeroquip-Vickers, Inc. and the First National Bank of Chicago (as successor in interest to NBD Bank) filed as Exhibit 4.2 to Form S-3 filed on August 29, 1997 (4)-4 Form of 7.875% Debentures due June 1, 2026, filed as Exhibit (4)-1 to Form 8-K filed on June 3, 1996 (4)-5 Form of Fixed Rate Notes, filed as Exhibit (4)-1(b) to Form 8-K filed April 25, 1997 (4)-6 Form of Floating Rate Notes, filed as Exhibit (4)-2(b) to Form 8-K filed April 25, 1997 (4)-7 Form of Fixed Rate Notes, filed as Exhibit (4)-1(a) to Form 8-K filed on October 2, 1997 (4)-8 Form of Floating Rate Notes, filed as Exhibit (4)-1(b) to Form 8-K filed on October 2, 1997 *(10)-4 Aeroquip-Vickers, Inc. 1994 Stock Incentive Plan, filed as Appendix A to the proxy statement for the annual meeting held on April 21, 1994 *(10)-5 Aeroquip-Vickers 1989 Non-Employee Directors' Equity Plan, filed as Exhibit (10)-12 to Form 10-K filed on March 18, 1994 *(10)-6 Aeroquip-Vickers, Inc. Plan for Optional Deferment of Directors' Fees (amended and restated effective April 1, 1995), filed as Exhibit (10)-8 to Form 10-K filed March 20, 1995 *(10)-7 Aeroquip-Vickers, Inc. Directors' Retirement Plan (amended and restated effective January 1, 1990), filed as Exhibit (10)-9 to Form 10-K filed March 20, 1995
15 15 *(10)-8 Aeroquip-Vickers, Inc. Voluntary Deferred Compensation Plan (effective April 1, 1995), filed as Exhibit (10)-11 to Form 10-K filed March 20, 1995 *(10)-9 Aeroquip-Vickers, Inc. Supplemental Benefit Plan (amended and restated effective January 1, 1995), filed as Exhibit (10)-10 to Form 10-Q filed August 10, 1995 *(10)-10 Aeroquip-Vickers, Inc. 1998 Stock Incentive Plan, filed as Appendix A to the proxy statement for the annual meeting of shareholders to be held on April 16, 1998 (this plan is subject to shareholder approval) *(10)-11 Aeroquip-Vickers, Inc. Non-Employee Directors' Stock Award Plan, filed as Appendix B to the proxy statement for the annual meeting of shareholders to be held on April 16, 1998 (this plan is subject to shareholder approval) (99)-1 Aeroquip-Vickers, Inc. Directors' Charitable Award Program, filed as Exhibit (99(i))-2 to Form 10-K filed on March 18, 1994 (99)-2 Credit Agreement, dated as of September 27, 1996, among Aeroquip-Vickers, Inc. (formerly TRINOVA Corporation) (borrower) and The Bank of Tokyo - Mitsubishi Trust Company; Citibank, N.A.; Dresdner Bank AG, New York and Grand Cayman branches; The First National Bank of Chicago; Morgan Guaranty Trust Company of New York; The Chase Manhattan Bank; and Union Bank of Switzerland, Chicago branch (banks); and Citibank, N.A. (administrative agent), filed as Exhibit (99(i))-2 to Form 10-Q filed November 14, 1996 The following exhibits are filed hereunder: (3)-1 Amended Code of Regulations (amended April 21, 1988) *(10)-1 Aeroquip-Vickers, Inc. 1987 Stock Option Plan *(10)-2 Change in Control Agreement for Officers (the Agreements executed by the Company and various executive officers of the Company are identical in all respects to the form of Agreement filed as Exhibit (10)-2 except as to differences in the identity of the officers and the dates of execution, and as to other variations directly necessitated by said differences) *(10)-3 Change in Control Agreement for Non-officers (the Agreements executed by the Company and various non-officer employees of the Company are identical in all respects to the form of Agreement filed as Exhibit (10)-3 except as to differences in the identity of the employees and the dates of execution, and as to other variations directly necessitated by said differences) (12) Statement re: Computation of Ratios (13) Portions of the 1997 Annual Report to Security Holders (to the extent incorporated by reference hereunder)
16 16 (21) Subsidiaries of the Registrant (23) Consent of Independent Auditors (24) Powers of Attorney (27) Financial Data Schedule (27)-1 Financial Data Schedule - 1997 Restated (27)-2 Financial Data Schedule - 1996 Restated (27)-3 Financial Data Schedule - 1995 Restated (b) Aeroquip-Vickers did not file any reports on Form 8-K during the fourth quarter of 1997. (c) The exhibits which are listed under Item 14(a)(3) are filed or incorporated by reference hereunder. (d) The financial statement schedule which is listed under Item 14(a)(2) is filed hereunder. 17 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AEROQUIP-VICKERS, INC. (Registrant) By: /S/ DARRYL F. ALLEN ------------------------------------- Darryl F. Allen Director, Chairman of the Board, President and Chief Executive Officer Date: March 19, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /S/ DARRYL F. ALLEN - ------------------------------------------ Darryl F. Allen 3/19/97 Director, Chairman of the (Date) Board, President and Chief Executive Officer (Principal Executive Officer) /S/ DAVID M. RISLEY - ------------------------------------------ David M. Risley 3/19/97 Vice President - Finance (Date) and Chief Financial Officer (Principal Financial Officer) /S/ GREGORY R. PAPP - ------------------------------------------ Gregory R. Papp 3/19/97 Corporate Controller (Principal Accounting Officer) PURDY CRAWFORD* - ------------------------------------------ Purdy Crawford* 3/19/97 Director (Date) 18 18 JOSEPH C. FARRELL* - ------------------------------------------ Joseph C. Farrell* 3/19/97 Director (Date) DAVID R. GOODE* - ------------------------------------------ David R. Goode* 3/19/97 Director (Date) PAUL A. ORMOND* - ------------------------------------------ Paul A. Ormond* 3/19/97 Director (Date) JOHN P. REILLY* - ------------------------------------------ John P. Reilly* 3/19/97 Director (Date) WILLIAM R. TIMKEN, JR.* - ------------------------------------------ William R. Timken, Jr.* 3/19/97 Director (Date) *By James E. Kline, Attorney-in-fact /S/ JAMES E. KLINE - ------------------------------------------ James E. Kline 3/19/97 Vice President and General Counsel (Date) 19 19 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AEROQUIP-VICKERS, INC.
- ----------------------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E - ------------------------------------------------------------------------------------------------------------------------------------ ADDITIONS BALANCE AT (1) (2) BALANCE DESCRIPTION BEGINNING CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS- AT END OF OF PERIOD AND EXPENSES ACCOUNTS-DESCRIBE DESCRIBE PERIOD - ------------------------------------------------------------------------------------------------------------------------------------ (In Thousands) YEAR ENDED DECEMBER 31, 1997 Deducted from asset accounts: Allowance for doubtful accounts $ 16,032 $ 1,485 $ - $ (2,816)-A $ 14,701 Deferred tax valuation allowance 12,589 (1,767) - (2,064)-B 6,816 (1,942)-C
Note A - Doubtful accounts charged off, net of recoveries Note B - Effect of expiration of operating loss carryforward Note C - Currency translation adjustments 20 20 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AEROQUIP-VICKERS, INC.
- ----------------------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E - ------------------------------------------------------------------------------------------------------------------------------------ ADDITIONS BALANCE AT (1) (2) BALANCE DESCRIPTION BEGINNING CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS- AT END OF OF PERIOD AND EXPENSES ACCOUNTS-DESCRIBE DESCRIBE PERIOD - ------------------------------------------------------------------------------------------------------------------------------------ (In Thousands) YEAR ENDED DECEMBER 31, 1996 Deducted from asset accounts: Allowance for doubtful accounts $ 13,241 $ 3,899 $ - $ (1,108)-A $ 16,032 Deferred tax valuation allowance 15,953 (3,853) - 489 -B 12,589
Note A - Doubtful accounts charged off, net of recoveries Note B - Currency translation adjustments 21 21 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AEROQUIP-VICKERS, INC.
- ----------------------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E - ------------------------------------------------------------------------------------------------------------------------------------ ADDITIONS BALANCE AT (1) (2) BALANCE DESCRIPTION BEGINNING CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS- AT END OF OF PERIOD AND EXPENSES ACCOUNTS-DESCRIBE DESCRIBE PERIOD - ------------------------------------------------------------------------------------------------------------------------------------ (In Thousands) YEAR ENDED DECEMBER 31, 1995 Deducted from asset accounts: Allowance for doubtful accounts $ 15,179 $ 518 $ - $ (2,456)-A $ 13,241 Deferred tax valuation allowance 29,533 (16,142) - 2,562 -B 15,953
Note A - Doubtful accounts charged off, net of recoveries Note B - Currency translation adjustments 22 22 EXHIBIT INDEX
EXHIBIT PAGE(S) - ------- ------- (3)-1 Amended Code of Regulations (amended April 21, 1988) 25-30 (3)-2 Amended Articles of Incorporation (amended Incorporated January 26, 1989), filed as Exhibit (3) to by Reference Form 10-K filed on March 18, 1994 (4)-1 Rights Agreement, dated January 26, 1989, between Incorporated Aeroquip-Vickers, Inc. (formerly TRINOVA Corporation) by Reference and First Chicago Trust Company of New York filed as Exhibit (2) to Form 8-A filed on January 27, 1989, as amended by the First Amendment to Rights Agreement filed as Exhibit (5) to Form 8 filed on July 1, 1992 (4)-2 Indenture, dated as of May 1, 1996, between Incorporated Aeroquip-Vickers, Inc. and the First National by Reference Bank of Chicago (as successor in interest to NBD Bank) filed as Exhibit 4.1 to Form S-3 filed on August 29, 1997 (4)-3 First Supplemental Indenture, dated as of April 17, Incorporated 1997, between Aeroquip-Vickers, Inc. and the First by Reference National Bank of Chicago (as successor in interest to NBD Bank) filed as Exhibit 4.2 to Form S-3 filed on August 29, 1997 (4)-4 Form of 7.875% Debentures due June 1, 2026, filed as Incorporated Exhibit (4)-1 to Form 8-K filed on June 3, 1996 by Reference (4)-5 Form of Fixed Rate Notes, filed as Exhibit (4)-1(b) Incorporated to Form 8-K filed April 25, 1997 by Reference (4)-6 Form of Floating Rate Notes, filed as Exhibit Incorporated (4)-2(b) to Form 8-K filed April 25, 1997 by Reference (4)-7 Form of Fixed Rate Notes, filed as Exhibit (4)-1(a) Incorporated to Form 8-K filed on October 2, 1997 by Reference (4)-8 Form of Floating Rate Notes, filed as Exhibit Incorporated (4)-1(b) to Form 8-K filed on October 2, 1997 by Reference (10)-1 Aeroquip-Vickers, Inc. 1987 Stock Option Plan 31-34 (10)-2 Change in Control Agreement for Officers (the 35-43 Agreements executed by the Company and various executive officers of the Company are identical in all respects to the form of Agreement filed as Exhibit (10)-2 except as to differences in the identity of the officers and the dates of execution, and as to other variations directly necessitated by said differences)
23 23 (10)-3 Change in Control Agreement for Non-officers 44-50 (the Agreements executed by the Company and various non-officer employees of the Company are identical in all respects to the form of Agreement filed as Exhibit (10)-3 except as to differences in the identity of the employees and the dates of execution, and as to other variations directly necessitated by said differences) (10)-4 Aeroquip-Vickers, Inc. 1994 Stock Incentive Plan, Incorporated filed as Appendix A to the proxy statement for the by Reference annual meeting held on April 21, 1994 (10)-5 Aeroquip-Vickers 1989 Non-Employee Directors' Incorporated Equity Plan, filed as Exhibit (10)-12 to Form 10-K by Reference filed on March 18, 1994 (10)-6 Aeroquip-Vickers, Inc. Plan for Optional Deferment Incorporated of Directors' Fees (amended and restated effective by Reference April 1, 1995), filed as Exhibit (10)-8 to Form 10-K filed March 20, 1995 (10)-7 Aeroquip-Vickers, Inc. Directors' Retirement Plan Incorporated (amended and restated effective January 1, 1990), by Reference filed as Exhibit (10)-9 to Form 10-K filed March 20, 1995 (10)-8 Aeroquip-Vickers, Inc. Voluntary Deferred Incorporated Compensation Plan (effective April 1, 1995), filed by Reference as Exhibit (10)-11 to Form 10-K filed March 20, 1995 (10)-9 Aeroquip-Vickers, Inc. Supplemental Benefit Plan Incorporated (amended and restated effective January 1, 1995), by Reference filed as Exhibit (10)-10 to Form 10-Q filed August 10, 1995 (10)-10 Aeroquip-Vickers, Inc. 1998 Stock Incentive Plan, Incorporated filed as Appendix A to the proxy statement for the by Reference annual meeting of shareholders to be held on April 16, 1998 (this plan is subject to shareholder approval) (10)-11 Aeroquip-Vickers, Inc. Non-Employee Directors' Incorporated Stock Award Plan, filed as Appendix B to the proxy by Reference statement for the annual meeting of shareholders to be held on April 16, 1998 (this plan is subject to shareholder approval) (12) Statement re: Computation of Ratios 51 (13) Portions of the 1997 Annual Report to Security 52-91 Holders (to the extent incorporated by reference hereunder)
24 24 (21) Subsidiaries of the Registrant 92 (23) Consent of Independent Auditors 93 (24) Power of Attorney 94 (27) Financial Data Schedule 95 (27)-1 Financial Data Schedule - 1997 Restated 96 (27)-2 Financial Data Schedule - 1996 Restated 97 (27)-3 Financial Data Schedule - 1995 Restated 98 (99)-1 Aeroquip-Vickers, Inc. Directors' Charitable Incorporated Award Program, filed as Exhibit (99(i))-2 to by Reference Form 10-K filed on March 18, 1994 (99)-2 Credit Agreement, dated as of September 27, 1996, Incorporated among Aeroquip-Vickers, Inc. (formerly TRINOVA by Reference Corporation) (borrower) and The Bank of Tokyo - Mitsubishi Trust Company; Citibank, N.A.; Dresdner Bank AG, New York and Grand Cayman branches; The First National Bank of Chicago; Morgan Guaranty Trust Company of New York; The Chase Manhattan Bank; and Union Bank of Switzerland, Chicago branch (banks); and Citibank, N.A. (administrative agent), filed as Exhibit (99(i))-2 to Form 10-Q filed November 14, 1996
EX-3.1 2 EXHIBIT (3)-1 1 25 EXHIBIT (3)-1 AMENDED CODE OF REGULATIONS OF AEROQUIP-VICKERS, INC. ARTICLE I SHAREHOLDERS Section 1. ANNUAL MEETING. The annual meeting of shareholders of the corporation for the election of directors, the consideration of reports to be laid before such meeting, and the transaction of such other business as may properly be brought before such meeting, shall be held at two o'clock p.m., or at such other time as may be designated by the Board of Directors, the Chairman of the Board, or by the President and specified in the notice of the meeting, on the third Thursday in April of each year, if not a legal holiday, and, if a legal holiday, then on the next succeeding business day. Section 2. SPECIAL MEETINGS. Special meetings of the shareholders of the corporation may be held on any business day, when called by the Chairman of the Board, or by the President, or by the Vice President authorized to exercise the authority of the President in case of his absence, death or disability, or by the Board acting at a meeting, or by a majority of the directors acting without a meeting, or by persons who hold twenty-five percent of all shares outstanding and entitled to vote thereat. Section 3. PLACE OF MEETINGS. Meetings of shareholders shall be held at the principal office of the corporation in the City of Maumee, Ohio, unless the Board of Directors acting at a meeting, or a majority of directors acting without a meeting, designates some other place within or without the State of Ohio and causes the notice thereof to so specify. Section 4. NOTICE OF MEETINGS. Not less than seven nor more than sixty days before the date fixed for a meeting of shareholders, written notice stating the time, place and purposes of such meeting shall be given by personal delivery or by mail to each shareholder of record entitled to notice of the meeting by or at the direction of the Chairman of the Board, the President or the Secretary. If mailed, such notice shall be addressed to the shareholder at his address as it appears on the records of the company. Section 5. WAIVER OF NOTICE. Notice of shareholders meeting may be waived in writing either before or after the holding of such meeting, which writing shall be filed or entered upon the records of the company. The attendance of any shareholder at such meeting without protesting, prior to or at the commencement of the meeting, the lack of proper notice shall be deemed to be a waiver by him of notice of such meeting. 2 26 Section 6. QUORUM; ADJOURNMENT. At any meeting of shareholders the holders of shares entitling them to exercise a majority of the voting power of the corporation, present in person or by proxy, shall constitute a quorum for such meeting, provided, however, that no action required by law, the Articles, or these Regulations to be authorized or taken by the holders of a designated proportion of the shares of the corporation, may be authorized or taken by a lesser proportion. At any meeting at which a quorum is present, all questions and business which shall come before the meeting shall be determined by the vote of the holders of a majority of such voting shares as are represented in person or by proxy, except when a greater proportion is required by law, the Articles or these Regulations. The holders of a majority of the voting shares represented at a meeting, whether or not a quorum is present, may adjourn such meeting from time to time; if any meeting is adjourned, notice of adjournment need not be given if the time and place to which it is adjourned are fixed and announced at such meeting. Section 7. PROXIES. A person who is entitled to attend a shareholders meeting, to vote thereat, or to execute consents, waivers or releases, may be represented at such meeting or vote thereat, and execute consents, waivers, and releases and exercise any of his other rights by proxy or proxies appointed by a writing signed by such person as provided by law. Section 8. FINANCIAL REPORTS. At the annual meeting, there shall be laid before the shareholders a financial statement consisting of: (1) a balance sheet containing a summary of the assets, liabilities, stated capital and surplus (showing separately any capital surplus arising from unrealized appreciation of assets, other capital surplus, and earned surplus) of the corporation as of a date not more than four months before such meeting, (2) a statement of profit and loss and surplus, including a summary of profits, dividends paid, and other changes in the surplus accounts of the corporation, for the year ending with the date of such balance sheet. An opinion signed by the President or a Vice President or the Treasurer or an Assistant Treasurer, or by a public accountant or firm of public accountants, shall be appended to such financial statement to the effect that the financial statement presents fairly the financial position of the corporation and the results of its operations in conformity with generally accepted accounting principles applied on a basis consistent for the period covered thereby, or such other opinion as is in accordance with sound accounting practices. 3 27 ARTICLE II BOARD OF DIRECTORS Section 1. GENERAL POWERS. Except where the law, the Articles of Incorporation, or these Regulations require action to be authorized or taken by shareholders, all of the authority of the corporation shall be exercised by its Board of Directors. Section 2. NUMBER OF DIRECTORS. Until changed in accordance with the provisions of these Regulations, the number of directors of the corporation (exclusive of directors, if any, to be elected by holders of Preferred Stock, voting separately as a class pursuant to the Articles of Incorporation) shall not be less than seven nor more than fifteen, the exact number within said limits to be fixed from time to time by the affirmative vote of a majority of the directors in office, either at a meeting or by action without a meeting, provided that no reduction in the number of directors shall have the effect of shortening the term of any incumbent directors. In the event that the number of directors shall be increased, the unfilled positions shall be filled as provided in Article II, Section 5. Section 3. ELECTION OF DIRECTORS. Directors shall be elected at the annual meeting of shareholders. At such meeting only persons nominated as candidates shall be eligible for election as directors, and the candidates receiving the greatest number of votes shall be elected. Section 4. TERM OF OFFICE. Directors shall hold office until the annual meeting next succeeding their election and until their successors are elected and qualified, or until their earlier resignation, removal from office, or death. Section 5. VACANCIES. In the event of the occurrence of any vacancy or vacancies in the Board, the remaining directors, though less than a majority of the whole authorized number of directors, may, by the vote of a majority of their number, fill such vacancy for the unexpired term. Section 6. MEETINGS. Immediately after each annual meeting of the shareholders, the newly elected directors shall hold an organization meeting for the purpose of electing officers and transacting any other business. Notice of such meeting need not be given. Other meetings of the Board may be held at any time within or without the State of Ohio in accordance with the by-laws, resolutions or other action by the Board. Written notice of the time and place of each such other meeting of the directors shall be given to each director either by personal delivery or by mail, by telegram or cablegram, at least two (2) days before the meeting. Notice of any meeting of the Board need not be given to any director, however, if waived by him in writing or by telegram or cablegram, before or after such meeting is held, or if he shall be present at such meeting; and any meeting of the Board shall be a legal meeting 4 28 without any notice thereof having been given, if all the directors shall be present thereat. Unless otherwise expressly stated in the notice thereof, any business may be transacted at any meeting of the Board. Section 7. QUORUM, ADJOURNMENT. Six members of the Board of Directors shall constitute a quorum for a meeting, provided that a majority of directors present at a meeting duly held, whether or not a quorum is present, may adjourn such meeting from time to time; if any meeting is adjourned, notice of adjournment need not be given if the time and place to which it is adjourned are fixed and announced at such meeting. The act of a majority of the directors present at a meeting at which a quorum is present is the act of the Board, unless the act of a greater number is required by these Regulations or the by-laws. Section 8. COMMITTEES. The Board of Directors may from time to time create or appoint an executive committee and any other committee or committees of the Board, to consist of not less than three directors, and, to the extent permitted by law, may delegate to any such committee any of the authority of the Board, however conferred, other than that of filling vacancies in the Board or in any committee of the Board. The directors may appoint one or more directors as alternate members of any such committee, who may take the place of any absent member or members at any meeting of such committee. Each such committee shall serve at the pleasure of the Board, shall act only in the intervals between meetings of the Board, and shall be subject to the control and direction of the Board. Section 9. BY-LAWS. The Board of Directors may adopt by-laws for its own government, not inconsistent with the Articles of Incorporation or these Regulations. ARTICLE III OFFICERS Section 1. GENERAL PROVISIONS. The Board of Directors may elect a Chairman of the Board and shall elect a President, a Secretary and a Treasurer and such other officers as the Board may from time to time deem necessary. The Chairman of the Board, if any, and the President shall be directors, but no one of the other officers need be a director. Any two or more offices may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required to be executed, acknowledged or verified by two or more officers. Section 2. POWERS AND DUTIES. All officers, as between themselves and the corporation shall respectively have such authority and perform such duties as may be determined from time to time by the Board of Directors, and in the absence of provision therefor by the Board, shall have such powers and duties as generally pertain to their respective offices. 5 29 The Board of Directors may from time to time delegate to any officer authority to appoint and remove subordinate officers and to prescribe their authority and duties. Section 3. TERM OF OFFICE. The officers of the corporation shall hold office during the pleasure of the Board of Directors, and unless sooner removed by the Board of Directors, until the organization meeting of the Board of Directors following the date of their election or until their successors are chosen and qualified. The Board of Directors may remove any officer at any time, with or without cause, by the affirmative vote of a majority of directors in office. A vacancy in any office occurring for whatever reason may be filled by the Board of Directors. ARTICLE IV INDEMNIFICATION OF OFFICERS, DIRECTORS AND EMPLOYEES Section 1. INDEMNIFICATION. The corporation shall indemnify, to the full extent then permitted by law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director, officer or salaried employee of the corporation, or is or was serving at the request of the corporation as a director, officer or employee of another corporation, domestic or foreign, non-profit or for profit, partnership, joint venture, trust or other enterprise. The indemnification provided hereby shall not be deemed exclusive of any other rights to which a person seeking indemnification may be entitled under any law, the articles of incorporation or any agreement,vote of shareholders or of disinterested directors or otherwise, both as to action in official capacities and as to action in another capacity while he is a director, officer or salaried employee of the corporation, and shall continue as to a person who has ceased to be director, officer or salaried employee and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 2. INSURANCE. The corporation may, to the full extent then permitted by law and authorized by the directors, purchase and maintain insurance on behalf of any persons described in the preceding paragraph against any liability asserted against and incurred by any such person in any such capacity or arising out of his status as such, whether or not the corporation would have the power to indemnify such person against such liability. 6 30 Section 3. INDEMNIFICATION AGREEMENTS. The corporation may enter into agreements with any persons described in Section 1 of this Article IV to provide indemnification against any liability asserted against or incurred by any such person in such capacity, or arising out of his status as such, to the full extent permitted by law. ARTICLE V SEAL The Board of Directors shall provide a suitable seal containing the name of the corporation. If deemed advisable by the Board of Directors, duplicate seals may be provided and kept for the purposes of the corporation. ARTICLE VI AMENDMENTS These Regulations may be amended or repealed and new regulations may be adopted by the shareholders at a meeting held for such purpose by the affirmative vote of the holders of shares entitling them to exercise a majority of the voting power of the corporation on such proposal. (Amended April 21, 1988) EX-10.1 3 EXHIBIT (10)-1 1 EXHIBIT (10)-1 31 TRINOVA CORPORATION 1987 STOCK OPTION PLAN 1. PURPOSE. The purpose of the 1987 Stock Option Plan (the "Plan" or the "1987 Plan") is to promote the interests of TRINOVA Corporation (the "Company") and its shareholders by encouraging officers and other key employees of the Company, its divisions and subsidiaries to acquire a proprietary interest in the Company (as a greater incentive to increase the Company's earnings and to remain in its employ) through the grant of stock options ("options"), with or without stock appreciation rights ("rights"), to purchase or otherwise acquire $5 Par Value Common Stock ("Common Shares") of the Company, or the transfer of Common Shares subject to such terms and restrictions as a subcommittee of not less than three disinterested members (i.e., those members who are not eligible, and have not been eligible for at least one year prior to their appointment, to participate in the Plan or in any other stock option plan of the Company or any affiliate) of the Organization and Compensation Committee of the Board of Directors ("Board") or any similar successor committee ("Committee") of the Board of the Company, appointed by the Board, may deem desirable and appropriate. The options granted may be statutory options under applicable provisions of the Internal Revenue Code and/or non-statutory options. 2. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Committee subject to the provisions of the Plan. Without limiting the generality of the foregoing, the Committee shall determine (a) the officers or other key employees to be granted options or rights ("optionees") or receive awards of restricted shares; (b) the times at which options or rights will be granted or restricted shares will be transferred; (c) the terms of each option, including, but not limited to, the number of optioned shares, the price of the optioned shares, the time when the option shall become exercisable and the duration of the exercise period, and the nature of the rights (if any) to be granted in connection with the option; (d) the terms and restrictions, including risks of forfeiture, imposed on any restricted shares transferred to an officer or other key employee; (e) the nature of the restrictions (if any) to be placed on the option or the optioned shares; and (f) the terms of each right, including but not limited to, the number of optioned shares subject to the right, the value of the right, the time when the right shall become exercisable and the duration of the exercise period, and the form in which payment of the right will be made. The Committee shall also prescribe the forms of the instruments evidencing any options or rights granted; adopt, amend and rescind rules and regulations for the administration of the Plan; construe and interpret the Plan, the rules and regulations and the instruments; and make all other determinations necessary or desirable for the administration of the Plan. 3. OPTION SHARES. Subject to the provisions of Section 10, the aggregate number of Common Shares that may be issued or transferred under this Plan, whether pursuant to options granted under the Plan or as restricted shares, or pursuant to the exercise of rights upon the surrender of options, or that may be the subject of options surrendered upon the exercise of rights granted under the Plan, shall be 750,000 shares plus up to (a) 58,400 additional shares which represent as of January 23, 1987 the aggregate number of shares available for grants under the Company's 1982 Stock Option Plan (the "1982 Plan") and (b) 453,620 additional shares as of January 23, 1987 covered by outstanding options granted under the 1982 Plan and the Company's 1975 Stock Option Plan to the extent that such options expire, terminate or are cancelled without exercise. Option shares may be unissued shares and/or treasury shares as the Board may from time to time determine. Restricted stock granted pursuant to Section 7 shall be treasury stock. Except as provided in Section 6, Common Shares subject to an option or right granted under the 1987 Plan, 2 32 which expires, terminates or is cancelled without exercise, or restricted shares which are forfeited to the Company because the risk of forfeiture materialized, shall thereafter be available for the grant of other options, rights or transfer as restricted shares under the 1987 Plan. The Committee may, with the concurrence of the affected optionee, cancel any option granted under this Plan. In the event of any such cancellation, the Committee may authorize the granting of new options (which may or may not cover the same number of shares which had been the subject of any prior option) in such manner, at such option price and subject to the same terms, conditions and discretions as, under this Plan, would have been applicable had the cancelled options not been granted. 4. ELIGIBILITY. Options and rights shall be granted, and awards of restricted shares shall be made, only to officers and other key employees of the Company, its divisions or its subsidiary corporations. The members of the Committee shall not be eligible, and shall not have been eligible for a period of at least one year prior to their appointment, to participate in this Plan or in any other plan of the Company or any affiliate entitling the participants therein to acquire stock, stock options or stock appreciation rights. In the case of options that are intended to qualify as "incentive stock options" under Section 422A of the Internal Revenue Code, the aggregate fair market value (determined as of the time the options are granted) of the stock with respect to which such options are exercisable for the first time by any optionee during any calendar year (under this and all other stock option plans of the Company and any parent and subsidiary corporations or predecessor of any such corporation) shall not exceed $100,000. "Fair market value" (as used here and throughout the Plan) means the closing price of the Company's Common Shares on the New York Stock Exchange on the date specified. The closing price shall be determined from the "NYSE-Composite Transactions" list printed in The Wall Street Journal or any equivalent publication. 5. OPTION PRICE. Except as provided in Section 7, the option price shall be no less than the greater of the fair market value of the optioned shares on the date of grant or the par value of such shares. The option price shall be payable in accordance with the terms of the option, in cash and/or in Common Shares of the Company having a fair market value on the date of exercise equal to the option price or applicable portion thereof, with such holding period for such shares as the Committee may determine. 6. APPRECIATION RIGHTS. Rights may be granted in connection with any option, either simultaneously with or subsequent to the grant of the option. A right shall entitle the optionee to receive from the Company, upon surrender of the related option, a payment equal to the value of the right. The value of the right, as determined by the Committee, shall be expressed as a percentage (not exceeding 100%) of the excess of the fair market value of the optioned shares on the date of exercise of the rights over the option price. The Committee may establish the maximum payment percentage, portion of the related options covered by the rights and form of payment, which may be cash and/or Common Shares, at the time of grant or thereafter. Rights shall be exercisable only when the related options are exercisable and may be subject to more restrictive provisions including a condition that a right may only be exercised if the optionee is subject to Section 16(b) of the Securities Exchange Act of 1934 (the "1934 Act"). Shares covered by options surrendered upon the exercise of rights shall not be available for the grant of further options, rights or awards under the Plan. 7. RESTRICTED STOCK. Common Shares may be transferred, and options may be granted for Common Shares which are, in either case, for a period determined by the Committee, and subject to a "substantial risk of forfeiture" and "non-transferable," as defined in Section 83 of the Internal Revenue Code ("restricted shares"). Any such restricted shares transferred to an officer or other key employee under this Plan may be transferred on such terms and conditions as the Committee shall impose. Further, any options to acquire any restricted shares shall be granted at such option price, if any, as determined 3 33 by the Committee, less than the fair market value of Common Shares determined without regard to any such restrictions, and shall entitle the optionee to receive Common Shares by paying less than the fair market value at date of grant, subject to such terms and conditions as the Committee shall impose. The terms and conditions to which any restricted shares may be subject, imposed by the Committee, may include prohibitions or restrictions on the transferability of the optioned shares during the period of substantial risk of forfeiture. 8. NON-TRANSFERABILITY. Options or rights granted under the Plan shall be transferable by the optionee only by will or the laws of descent and distribution, and shall be exercisable during the optionee's lifetime only by him. 9. NO RIGHTS TO EMPLOYMENT. Neither the Plan nor any option or right granted under it shall alter the terms of employment of the optionee or the right of the Company, its divisions or subsidiaries to terminate his employment. 10. ADJUSTMENTS. The Board may make or provide for such adjustments in the option price and in the number or kind of shares of the Company's Common Shares or other securities covered by outstanding options as such Board in its sole discretion, exercised in good faith, may determine is equitably required to prevent dilution or enlargement of the rights of optionees that would otherwise result from (a) any stock dividend, stock split, combination of shares, issuance of rights or warrants to purchase stock, recapitalization or other change in the capital structure of the Company; (b) any merger, consolidation, separation, reorganization, or partial or complete liquidation; or (c) any other corporate transaction or event having an effect similar to any of the foregoing. The Board may also make or provide for such adjustments in the number or kind of shares of the Company's Common Shares or other securities which may be sold or transferred under this Plan as such Board in its sole discretion, exercised in good faith, may determine is appropriate to reflect any transaction or event described in clause (a) of the preceding sentence. 11. TAX WITHHOLDING. Any compensation income realized or recognized by an officer or other key employee with respect to (a) the exercise of any option or rights granted under this Plan; (b) restricted shares transferred under this Plan, including any such income resulting from any election under Section 83(b) of the Internal Revenue Code; (c) the lapse of any such restrictions; or (d) from a disposition of any shares acquired on the exercise of an incentive stock option as defined in Section 422A (or other statutory option) prior to the satisfaction of the required holding periods, shall be subject to withholding by the Company or subsidiary of income, employment or other taxes required by Federal, state, local or foreign law. The Committee may require that the participant pay such withholding amount in cash directly to the Company or subsidiary. The Committee shall have the right to retain, rather than issue or transfer to the participant, the number of shares having a fair market value equal to the required withholding amount. In the case of restricted shares that cease to be subject to a substantial risk of forfeiture, or non-transferable, as defined for purposes of Section 83 of the Internal Revenue Code, the Committee shall have the right to retain the number of shares with a fair market value equal to the required withholding amount. In any case, the Committee may in its discretion satisfy the withholding requirement by causing the Company or a subsidiary employing the officer or other key employees to withhold the appropriate amount of any and all of such taxes from any other compensation otherwise payable to the officer or other key employee. 12. AMENDMENT AND TERMINATION OF THE PLAN. The Board may at any time amend or terminate the Plan, provided that approval by the shareholders of the Company shall be required for any amendment which would, in the absence of such shareholder approval, cause transactions under the Plan to cease to qualify as exempt transactions under Rule 16b-3 of the Securities and Exchange 4 34 Commission or any similar successor rule promulgated under the 1934 Act, increase the maximum number of shares subject to this Plan, or change the class of employees eligible for participation under this Plan. 13. EFFECTIVE DATE. The Plan shall become effective on April 16, 1987, subject to the Plan's approval by the shareholders of the Company at the Annual Meeting on such date. 14. EFFECT ON THE 1982 PLAN. Options and stock appreciation rights granted under the 1982 Plan and outstanding on the effective date of the 1987 Plan shall not be adversely affected by the adoption of the 1987 Plan. Restricted shares transferred under the 1982 Plan and outstanding as restricted shares on the effective date of the 1987 Plan shall not be adversely affected by the adoption of the 1987 Plan. However, no additional options or stock appreciation rights shall be granted under the 1982 Plan after that date. After the effective date of the 1987 Plan, no additional restricted shares shall be transferred under the 1982 Plan other than pursuant to the exercise after such effective date of options or rights granted under the 1982 Plan. The 1982 Plan shall remain in effect and shall govern such outstanding options, stock appreciation rights and restricted shares transferred under the 1982 Plan until the last of such options or stock appreciation rights is exercised or expires, terminates or is cancelled, or in the case of restricted shares, the shares are forfeited, or cease to be subject to the risk of forfeiture. As provided in Section 3, and except as provided otherwise in Section 6, shares represented by such outstanding options which are not exercised shall be available for the grant of options or awards under the 1987 Plan. EX-10.2 4 EXHIBIT (10)-2 1 EXHIBIT (10)-2 35 Elected Officer Form CHANGE IN CONTROL AGREEMENT THIS AGREEMENT (this "Agreement") by and between TRINOVA Corporation, an Ohio corporation (the "Company"), and _________________________________ (the "Executive"), dated this _____ day of __________, 199__. WITNESSETH THAT: WHEREAS, the Company recognizes that today's business environment makes it difficult to attract and retain highly qualified executive and key professional personnel unless a degree of security can be offered to those individuals against organizational and personnel changes which frequently follow a change in control of a corporation; and WHEREAS, even rumors of change-in-control transactions may cause key employees to consider major career changes in an effort to assure financial security for themselves and their families; and WHEREAS, the Company desires to assure fair treatment of its key employees in the event of a change in control and to allow them to make critical career decisions without undue time pressure and financial uncertainty, increasing their willingness to remain with the Company notwithstanding the outcome of a possible change-in-control transaction; and WHEREAS, the Company recognizes that many of its key management employees will be involved in evaluating or negotiating any offers, proposals, or other transactions which could result in a change in control of the Company and, recognizing the fiduciary obligations of such officers, believes that it is in the best interests of the Company and its shareholders to provide additional assurance that such key employees are in a position, free from personal economic and employment considerations, to be able as a practical matter to objectively assess and aggressively pursue the interests of the Company's shareholders in making these evaluations and carrying on such negotiations; NOW THEREFORE, the parties agree as follows: 1. DEFINITIONS. When used herein, the following terms shall have the meanings set forth below: A. "Average Total Compensation" shall mean the sum of the amounts determined under clauses (i) and (ii) below. (i) The higher of the Executive's annual base salary (without giving effect to any elected deferrals to a plan under Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code")) in effect on (x) the day immediately prior to the day on which the Change in Control occurred, or (y) the Executive's Resignation Date or Termination Date, as the case may be. (ii)(a) If the Executive has been employed by the Company for the last three full consecutive calendar years, the average of the two highest aggregate short-term annual incentive awards received by the Executive under the Incentive Compensation Plan attributable to services performed by 2 36 the Executive during any calendar year in the last five full calendar years (without regard to when such awards were paid or accrued); or (ii)(b) If the Executive has been employed by the Company for at least one, but less than three full consecutive calendar years, the average of the aggregate short-term annual incentive awards received by the Executive under the Incentive compensation Plan attributable to services performed by the Executive during each full calendar year he has been employed by the Company (without regard to when such awards were paid or accrued); or (ii)(c) If the Executive has been employed by the Company for less than one full calendar year, the greater of (x) his guaranteed annual incentive compensation or (y) the aggregate short-term annual incentive awards to which the Executive would have been entitled under the Incentive Compensation Plan of which the Executive was a participant on the Termination Date or Resignation Date, as the case may be, if he had worked for one full calendar year at the base salary determined under clause (i) above. B. A "Beneficial Owner" of Voting Stock is any Person who would be deemed to beneficially own such Voting Stock within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor rules or regulations thereto. C. "Benefit Period" shall mean a period of two years, commencing with the Termination Date or Resignation Date, except that if the Executive will reach age 65 within two years after the Termination Date or Resignation Date, the Benefit Period shall mean a period of years, including fractional years, commencing with the Termination Date or Resignation Date, and ending on the Executive's 65th birthday. D. "Cause" shall mean that, prior to any Termination or Resignation, the Executive shall have committed: (i) an intentional act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company; (ii) intentional wrongful damage to property of the Company; or (iii) intentional wrongful disclosure of secret processes or confidential information of the Company; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act, or failure to act, on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done, or omitted to be done, by the Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding anything in this Agreement to the contrary, the Executive shall not be deemed to have been terminated for "Cause" hereunder unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the Board of Directors of the Company (the "Board") then in office at a meeting of the Board called and held for such purpose (after reasonable notice to the Executive and an 3 37 opportunity for the Executive, together with his counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive had committed an act set forth above in this Paragraph 1.D and specifying the particulars thereof in detail. Nothing herein shall limit the right of the Executive or his beneficiaries to contest the validity or propriety of any such determination. E. A "Change in Control" shall have occurred if any of the following events shall occur: (i) The Company is merged, consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock immediately prior to such transaction; (ii) If the Company sells all or substantially all of its assets to any other corporation or other legal person, less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction are held in the aggregate by the holders of Voting Stock immediately prior to such sale; (iii) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Exchange Act, disclosing that any Person has become the Beneficial Owner of 20% or more of the Voting Stock; (iv) The Company files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (v) If during any period of two consecutive years, individuals who at the beginning of any such period constitute the Directors of the Company cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of each Director of the Company first elected during such period was approved by a vote of at least two-thirds of the Directors of the Company then still in office who were Directors of the Company at the beginning of any such period. Notwithstanding the foregoing provisions of Paragraph 1.E(iii) or 1.E(iv) hereof, a "Change in Control" shall not be deemed to have occurred for purposes of this Agreement solely because (i) the Company, (ii) an entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities, or (iii) any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock, whether in 4 38 excess of 20% or otherwise, or because the Company reports that a change in control of the Company has or may have occurred or will or may occur in the future by reason of such beneficial ownership. F. "Incentive Compensation Plan" shall mean the plan approved by shareholders of the Company on April 19, 1984 (or any Operating Company Incentive Plan) and any amendments thereto and restatements thereof, or any successor plan that may become effective subsequent to the date of this Agreement and prior to a Change in Control. G. "Operating Company" shall mean any corporation of which the Company owns directly or indirectly more than 50% of the outstanding stock having by its terms ordinary voting power to elect a majority of the board of directors of such corporation, irrespective of whether at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency. H. "Person" shall mean any "person," as the term "person" is used and defined in Section 14(d)(2) of the Exchange Act, and any "affiliate" or "associate" of any such person, as the terms "affiliate" and "associate" are defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act as in effect on the date of this Agreement. I. "Resignation" shall mean resignation by the Executive of his employment with the Company if any of the following has occurred: (i) Failure to elect or reelect the Executive to the office of the Company which the Executive held immediately prior to the Change in Control, or the removal of the Executive as a Director of the Company (or any successor thereto), if the Executive shall have been a Director of the Company immediately prior to the Change in Control; (ii) A significant adverse change in the nature or scope of the authorities, powers, functions, responsibilities or duties attached to the position with the Company which the Executive held immediately prior to the Change in Control, a reduction in the aggregate Total Compensation received by the Executive from the Company in any calendar year following the Change in Control, or the termination of the Executive's rights to any employee benefits to which he was entitled immediately prior to the Change in Control or a reduction in scope or value thereof without the prior written consent of the Executive, any of which is not remedied within 10 calendar days after receipt by the Company of written notice from the Executive of such change, reduction or termination, as the case may be; (iii) A determination by the Executive made in good faith that as a result of the Change in Control and a change in circumstances thereafter significantly affecting his position, including without limitation, a change in the scope of the business or other activities for which he was responsible immediately prior to the Change in Control, he has been rendered substantially unable to carry out, has been substantially hindered in the performance of, or has suffered a substantial reduction in, any of the authorities, powers, functions, responsibilities or duties attached to the position held by the Executive immediately prior to the Change in 5 39 Control, which situation is not remedied within 10 calendar days after written notice to the Company from the Executive of such determination; (iv) The liquidation, dissolution, merger, consolidation or reorganization of the Company or transfer of all or a significant portion of its business and/or assets, unless the successor or successors (by liquidation, merger, consolidation, reorganization or otherwise) to which all or a significant portion of its business and/or assets have been transferred (directly or by operation of law) shall have assumed all duties and obligations of the Company under this Agreement pursuant to Paragraph 8 hereof; (v) The Company shall relocate its principal executive offices, or require the Executive to have his principal location of work changed to any location which is in excess of 100 miles from the location thereof immediately prior to the Change of Control or to travel away from his office in the course of discharging his responsibilities or duties hereunder significantly more (in terms of either consecutive days or aggregate days in any calendar year) than was required of him prior to the Change of Control without, in either case, his prior written consent; or (vi) Without limiting the generality or effect of the foregoing, any material breach of this Agreement by the Company or any successor thereto. J. "Resignation Date" shall be the last day worked by an Executive who resigns his employment with the Company as provided in Paragraph 1.I of this Agreement. K. "Retirement Savings Plan" shall mean the TRINOVA Corporation Retirement Savings and Profit Sharing Plan for Corporate Employees as amended effective January 1, 1988 (or any Operating Company defined contribution plan, including profit sharing plans) and any amendments thereto and restatements thereof, or any successor plan that may become effective subsequent to the date of this agreement and prior to a Change in Control. L. "Termination" shall mean termination by the Company of the Executive's employment for any reason other than the following: (i) death; (ii) Total Disability, as defined in the Company's long-term disability plan then in effect, and the Executive begins actually to receive disability benefits pursuant to such disability plan; or (iii) Cause. The Executive may also deem himself to have been terminated under this Paragraph 1.L if the aggregate cash compensation (including base salary (without giving effect to any elected deferrals to a plan under Section 401(k) of the Code) plus awards under the Incentive Compensation Plan) received by the Executive in any calendar year following a Change in Control is an amount less than the aggregate cash compensation (including base salary (without giving effect to any elected deferrals to a plan under Section 401(k) of the Code) plus awards under the Incentive Compensation Plan) received by the Executive in the full calendar year immediately preceding the Change in Control; 6 40 provided however, if the Executive was not employed by the Company during all of the full calendar year immediately preceding the Change in Control, the amount referred to above with respect to the full calendar year immediately preceding the Change in Control shall be the sum of the amounts determined pursuant to Paragraphs 1.A(i) and 1.A(ii)(c). M. "Termination Date" shall be the last day worked by an Executive whose employment with the Company is terminated by the Company other than for the reasons set forth in Subparagraphs 1.L(i), (ii) or (iii) of this Agreement. N. "Voting Stock" means all outstanding securities of the Company entitled to vote generally in the election of directors of the Company at the time in question. 2. PAYMENTS UPON TERMINATION OR RESIGNATION. Subject to Paragraph E hereof, in the event of Termination within four years after the Change in Control, or Resignation between six months and two years after the Change in Control, the Executive shall receive: A. An amount equal to the Executive's Average Total Compensation, multiplied by the length, in years, including fractional years, of the Benefit Period. This payment shall be made by the Company within thirty calendar days after the Executive's Termination Date or Resignation Date, as the case may be. B. A contribution by the Company (or, if applicable, the Company shall cause the appropriate Operating Company to make a contribution) in an amount equal to 2 times 4.5% of the Executive's Average Total Compensation to be made within thirty calendar days after the Executive's Termination Date or Resignation Date, as the case may be, to the Executive's account in the applicable Retirement Savings Plan. These benefits shall be payable at the time and in the manner set forth in such Plan as in effect immediately prior to the Change in Control. C. During the Benefit Period, the benefits associated with continued participation in the employee health, life insurance, disability income and other welfare benefit plans of the Company and/or any Operating Company in which he was participating immediately prior to the Change in Control, upon provisions substantially similar to or more favorable to the Executive than those contained in the respective plans as of the Termination Date or the Resignation Date, provided , however, that if participation by the Executive in any of such plans is not permitted, due to the requirements for eligibility for participation contained therein, the Company shall (or shall cause the applicable Operating Company to) pay or provide for the payment of the benefits described in those plans to the Executive and/or his dependents, or, if applicable, to his beneficiaries or estate as if he were employed by the Company during the Benefit Period in the position held by him immediately prior to the Change in Control. D. Reimbursement for the cost of outplacement services rendered to the Executive as part of efforts made by the Executive to obtain employment following his Termination Date or Resignation Date. E. In the event the "present value" (as determined under Section 280G of the Code or any successor provision thereto) of the amounts payable under Paragraphs 2.A through 2.D hereof, when added to the "present value" (as determined under Section 280G of the Code or any successor provision thereto) of any other "parachute payments" (as that term is defined in Section 280G of the Code or any successor provision thereto) from the Company, 7 41 exceeds an amount (the "299% Amount") equal to 299% of the Executive's "base amount" (as that term is defined in Section 280G of the Code (without regard to Section 280G(b)(2)(A)(ii) thereof) or any successor provision thereto), then the amount of the payments otherwise payable to the Executive pursuant to this Agreement shall be reduced to the minimum extent necessary (but in no event to less than zero) so that no such payment causes the 299% Amount to be exceeded. The reduction, if any, contemplated by the immediately preceding sentence shall be effected by reducing to the extent necessary the benefits otherwise to be provided by Paragraph 2.C hereof, and then, if necessary, by reducing the benefits otherwise to be provided by Paragraph 2.B hereof, and then, if necessary, by reducing the benefits provided by Paragraph 2.A hereof. F. The determination of whether any amount otherwise payable under Paragraphs 2.A through 2.D hereof causes the 299% Amount to be exceeded shall be made, if requested by the Executive or the Company, by Jones, Day, Reavis & Pogue or such other counsel as may be selected for this purpose by the Company's independent accounting firm and approved by the Executive. 3. NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will be difficult, and may be impossible, for the Executive to find reasonably comparable employment following the Resignation Date or the Termination Date, and the parties desire to avoid possible disputes with respect to mitigation and offset matters. The Company also acknowledges that, particularly in light of Paragraph 2.E hereof, its Board of Directors has, following due consideration of the matter, determined that the benefits provided by Paragraph 2 hereof are reasonable. Accordingly, the parties hereto expressly agree that the payment of the amounts specified in Paragraph 2 hereof by the Company to the Executive in accordance with the terms of this Agreement will be liquidated damages, and that the Executive shall not be required to mitigate the amounts provided for in Paragraph 2 of this Agreement by seeking other employment or otherwise, nor shall any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise, except that the welfare benefits provided by Paragraph 2.C hereof shall be reduced to the extent comparable welfare benefits are actually received by the Executive from another employer following the Executive's Resignation Date or Termination Date, as the case may be, until the expiration of the Benefit Period. 4. ARBITRATION. Any controversy or claim arising out of or relating to this Agreement or the breach thereof, shall be settled by arbitration in the City of Toledo, Ohio, in accordance with the laws of the State of Ohio by three arbitrators, one of whom shall be appointed by the Company, one by the Executive and the third of whom shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the Chief Judge of the United States District Court for the Northern District of Ohio. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators, which shall be as provided in this Paragraph 4. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that the Executive determines in good faith to retain legal counsel and/or incur other reasonable costs or expenses in connection with any such arbitration or to enforce any or all of the Executive's rights under this Agreement or under any arbitration award, the Company shall pay 50% of the first $10,000 of attorneys' fees, costs, and expenses incurred by the Executive in connection with the enforcement of his rights, including the enforcement of any arbitration award in court, 8 42 regardless of the final outcome. The Company shall pay all such costs and expenses in excess of $10,000 incurred by the Executive. 5. NOTICES. Any notices, requests, demands, and other communications, provided for in or pertinent to this Agreement shall be sufficient if delivered to the other party hereto by means of a written notice, mailed by United States registered or certified mail, return receipt requested, postage prepaid to either the Executive's last known address, or to the Company's principal executive offices, as the case may be. 6. GOVERNING LAW. The provisions of this Agreement shall be construed and governed in accordance with the laws of the State of Ohio without giving effect to the principles of conflict of laws of such State. 7. AMENDMENT. This Agreement may be amended or canceled by mutual agreement of the parties in writing without the consent of any other person and, so long as the Executive lives, no person, other than the parties hereto shall have any rights under or interest in this Agreement or the subject matter hereof. 8. Successors and Binding Agreement. A. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement shall be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but shall not otherwise be assignable, transferable or delegable by the Company. B. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and/or legatees. C. This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Paragraph 8.A hereof. Without limiting the generality of the foregoing, the Executive's right to receive payments hereunder shall not be assignable, transferable or delegable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by his will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Paragraph 8.C, the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 9. VALIDITY. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances shall not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal shall be reformed to the extent (and only to the extent) necessary to make it enforceable, valid and legal. 9 43 10. SCOPE OF AGREEMENT. This Agreement is not a contract for employment for any period of time, does not constitute a guarantee of employment and shall not be deemed to confer any benefit on the Executive in the absence of a Change in Control. 11. TERM. The period during which this Agreement shall be in effect (the "Term") shall commence as of the date hereof and shall expire as of the later of (i) the close of business on December 31, 1992 and (ii) the expiration of the Benefit Period, provided, however, that (A) commencing on January 1, 1989 and each January 1 thereafter, the Term of this Agreement shall automatically be extended for an additional year unless, not later than September 30 of the immediately preceding year, the Company or the Executive shall have given notice that it or he, as the case may be, does not wish to have the Term extended and (B) subject to Paragraph 10 hereof, if, prior to a Change in Control, the Executive ceases for any reason to be an officer of the Company, thereupon the Term shall be deemed to have expired and this Agreement shall immediately terminate and be of no further effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its secretary, all as of the day and year first above written. ____________________________________ Executive ATTEST: TRINOVA CORPORATION ___________________________________ By: _______________________________ Secretary Vice President (Seal) EX-10.3 5 EXHIBIT (10)-3 1 44 EXHIBIT (10)-3 Other Executives Form CHANGE IN CONTROL AGREEMENT THIS AGREEMENT (this "Agreement") by and between TRINOVA Corporation, an Ohio corporation (the "Company"), and _______________________________ (the "Executive"), dated this _____ day of ____________, 199__. WITNESSETH THAT: WHEREAS, the Company recognizes that today's business environment makes it difficult to attract and retain highly qualified executive and key professional personnel unless a degree of security can be offered to those individuals against organizational and personnel changes which frequently follow a change in control of a corporation; and WHEREAS, even rumors of change-in-control transactions may cause key employees to consider major career changes in an effort to assure financial security for themselves and their families; and WHEREAS, the Company desires to assure fair treatment of its key employees in the event of a change in control and to allow them to make critical career decisions without undue time pressure and financial uncertainty, increasing their willingness to remain with the Company notwithstanding the outcome of a possible change-in-control transaction; and WHEREAS, the Company recognizes that many of its key management employees will be involved in evaluating or negotiating any offers, proposals, or other transactions which could result in a change in control of the Company and, recognizing the fiduciary obligations of such executives, believes that it is in the best interests of the Company and its shareholders to provide additional assurance that such key employees are in a position, free from personal economic and employment considerations, to be able as a practical matter to objectively assess and aggressively pursue the interests of the Company's shareholders in making these evaluations and carrying on such negotiations; NOW THEREFORE, the parties agree as follows: 1. DEFINITIONS. When used herein, the following terms shall have the meanings set forth below: A. "Average Total Compensation" shall mean the sum of the amounts determined under clauses (i) and (ii) below. (i) The higher of the Executive's annual base salary (without giving effect to any elected deferrals to a plan under Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code")) in effect on (x) the day immediately prior to the day on which the Change in Control occurred, or (y) the Executive's Termination Date. (ii)(a) If the Executive has been employed by the Company for the last three full consecutive calendar years, the average of the two highest aggregate short-term annual incentive awards received by the Executive under the Incentive Compensation Plan attributable to services performed by the Executive during any calendar year in the last five 2 45 full calendar years (without regard to when such awards were paid or accrued); or (ii)(b) If the Executive has been employed by the Company for at least one, but less than three full consecutive calendar years, the average of the aggregate short-term annual incentive awards received by the Executive under the Incentive compensation Plan attributable to services performed by the Executive during each full calendar year he has been employed by the Company (without regard to when such awards were paid or accrued); or (ii)(c) If the Executive has been employed by the Company for less than one full calendar year, the greater of (x) his guaranteed annual incentive compensation or (y) the aggregate short-term annual incentive awards to which the Executive would have been entitled under the Incentive Compensation Plan of which the Executive was a participant on the Termination Date, if he had worked for one full calendar year at the base salary determined under clause (i) above. B. A "Beneficial Owner" of Voting Stock is any Person who would be deemed to beneficially own such Voting Stock within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any successor rules or regulations thereto. C. "Benefit Period" shall mean a period of one year, commencing with the Termination Date, except that if the Executive will reach age 65 within one year after the Termination Date, the Benefit Period shall mean a period of a fractional year, commencing with the Termination Date and ending on the Executive's 65th birthday. D. "Cause" shall mean that, prior to any Termination, the Executive shall have committed: (i) an intentional act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company; (ii) intentional wrongful damage to property of the Company; or (iii) intentional wrongful disclosure of secret processes or confidential information of the Company; and any such act shall have been materially harmful to the Company. For purposes of this Agreement, no act, or failure to act, on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done, or omitted to be done, by the Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding anything in this Agreement to the contrary, the Executive shall not be deemed to have been terminated for "Cause" hereunder unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the Board of Directors of the Company (the "Board") then in office at a meeting of the Board called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with his counsel, to be heard before the Board), finding that, in the good faith opinion 3 46 of the Board, the Executive had committed an act set forth above in this Paragraph 1.D and specifying the particulars thereof in detail. Nothing herein shall limit the right of the Executive or his beneficiaries to contest the validity or propriety of any such determination. E. A "Change in Control" shall have occurred if there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Exchange Act, disclosing that any Person has become the Beneficial Owner of 20% or more of the Voting Stock; provided, however, that in the event that prior to the Termination Date, such Person files a report on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report) disclosing that it is no longer a Beneficial Owner of 20% or more of the Voting Stock, then a "Change in Control" shall not be deemed to have occurred for the purposes of this Agreement. Notwithstanding the foregoing provisions of Paragraph 1.E, a "Change in Control" shall not be deemed to have occurred for purposes of this Agreement solely because (i) the Company, (ii) an entity in which the Company directly or indirectly beneficially owns 50% or more of the voting securities, or (iii) any Company-sponsored employee stock ownership plan or any other employee benefit plan of the Company, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock, whether in excess of 20% or otherwise, or because the Company reports that a change in control of the Company has or may have occurred or will or may occur in the future by reason of such beneficial ownership. F. "Incentive Compensation Plan" shall mean the plan approved by shareholders of the Company on April 19, 1984 (or any Operating Company Incentive Plan) and any amendments thereto and restatements thereof, or any successor plan that may become effective subsequent to the date of this Agreement and prior to a Change in Control. G. "Operating Company" shall mean any corporation of which the Company owns directly or indirectly more than 50% of the outstanding stock having by its terms ordinary voting power to elect a majority of the board of directors of such corporation, irrespective of whether at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency. H. "Person" shall mean any "person," as the term "person" is used and defined in Section 14(d)(2) of the Exchange Act, and any "affiliate" or "associate" of any such person, as the terms "affiliate" and "associate" are defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act as in effect on the date of this Agreement. I. "Retirement Savings Plan" shall mean the TRINOVA Corporation Retirement Savings and Profit Sharing Plan for Corporate Employees as amended effective January 1, 1988 (or any Operating Company defined contribution plan, including profit sharing plans) and any amendments thereto and restatements thereof, or any successor plan that may become effective subsequent to the date of this agreement and prior to a Change in Control. J. "Termination" shall mean termination by the Company of the Executive's employment for any reason other than the following: 4 47 (i) death; (ii) Total Disability, as defined in the Company's long-term disability plan then in effect, and the Executive begins actually to receive disability benefits pursuant to such disability plan; or (iii) Cause. The Executive may also deem himself to have been terminated under this Paragraph 1.J if the aggregate cash compensation (including base salary (without giving effect to any elected deferrals to a plan under Section 401(k) of the Code) plus awards under the Incentive Compensation Plan) received by the Executive in any calendar year following a Change in Control is an amount less than the aggregate cash compensation (including base salary (without giving effect to any elected deferrals to a plan under Section 401(k) of the Code) plus awards under the Incentive Compensation Plan) received by the Executive in the full calendar year immediately preceding the Change in Control; provided however, if the Executive was not employed by the Company during all of the full calendar year immediately preceding the Change in Control, the amount referred to above with respect to the full calendar year immediately preceding the Change in Control shall be the sum of the amounts determined pursuant to Paragraphs 1.A(i) and 1.A(ii)(c). K. "Termination Date" shall be the last day worked by an Executive whose employment with the Company is terminated by the Company other than for the reasons set forth in Subparagraphs 1.J(i), (ii) or (iii) of this Agreement. L. "Voting Stock" means all outstanding securities of the Company entitled to vote generally in the election of directors of the Company at the time in question. 2. PAYMENTS UPON TERMINATION. Subject to Paragraph E hereof, in the event of Termination within four years after the Change in Control, the Executive shall receive: A. An amount equal to the Executive's Average Total Compensation, multiplied by the length, by a year or a fractional year, of the Benefit Period. This payment shall be made by the Company within thirty calendar days after the Executive's Termination Date. B. A contribution by the Company (or, if applicable, the Company shall cause the appropriate Operating Company to make a contribution) in an amount equal to 1 times 4.5% of the Executive's Average Total Compensation to be made within thirty calendar days after the Executive's Termination Date to the Executive's account in the applicable Retirement Savings Plan. These benefits shall be payable at the time and in the manner set forth in such Plan as in effect immediately prior to the Change in Control. C. During the Benefit Period, the benefits associated with continued participation in the employee health, life insurance, disability income and other welfare benefit plans of the Company and/or any Operating Company in which he was participating immediately prior to the Change in Control, upon provisions substantially similar to or more favorable to the Executive than those contained in the respective plans as of the Termination Date, provided, however, that if participation by the Executive in any of such plans is not permitted, due to the requirements 5 48 for eligibility for participation contained therein, the Company shall (or shall cause the applicable Operating Company to) pay or provide for the payment of the benefits described in those plans to the Executive and/or his dependents, or, if applicable, to his beneficiaries or estate as if he were employed by the Company during the Benefit Period in the position held by him immediately prior to the Change in Control. D. Reimbursement for the cost of outplacement services rendered to the Executive as part of efforts made by the Executive to obtain employment following his Termination Date. E. In the event the "present value" (as determined under Section 280G of the Code or any successor provision thereto) of the amounts payable under Paragraphs 2.A through 2.D hereof, when added to the "present value" (as determined under Section 280G of the Code or any successor provision thereto) of any other "parachute payments" (as that term is defined in Section 280G of the Code or any successor provision thereto) from the Company, exceeds an amount (the "299% Amount") equal to 299% of the Executive's "base amount" (as that term is defined in Section 280G of the Code (without regard to Section 280G(b)(2)(A)(ii) thereof) or any successor provision thereto), then the amount of the payments otherwise payable to the Executive pursuant to this Agreement shall be reduced to the minimum extent necessary (but in no event to less than zero) so that no such payment causes the 299% Amount to be exceeded. The reduction, if any, contemplated by the immediately preceding sentence shall be effected by reducing to the extent necessary the benefits otherwise to be provided by Paragraph 2.C hereof, and then, if necessary, by reducing the benefits otherwise to be provided by Paragraph 2.B hereof, and then, if necessary, by reducing the benefits provided by Paragraph 2.A hereof. F. The determination of whether any amount otherwise payable under Paragraphs 2.A through 2.D hereof causes the 299% Amount to be exceeded shall be made, if requested by the Executive or the Company, by Jones, Day, Reavis & Pogue or such other counsel as may be selected for this purpose by the Company's independent accounting firm and approved by the Executive. 3. NO MITIGATION OBLIGATION. The Company hereby acknowledges that it will be difficult, and may be impossible, for the Executive to find reasonably comparable employment following the Termination Date, and the parties desire to avoid possible disputes with respect to mitigation and offset matters. The Company also acknowledges that, particularly in light of Paragraph 2.E hereof, its Board of Directors has, following due consideration of the matter, determined that the benefits provided by Paragraph 2 hereof are reasonable. Accordingly, the parties hereto expressly agree that the payment of the amounts specified in Paragraph 2 hereof by the Company to the Executive in accordance with the terms of this Agreement will be liquidated damages, and that the Executive shall not be required to mitigate the amounts provided for in Paragraph 2 of this Agreement by seeking other employment or otherwise, nor shall any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise, except that the welfare benefits provided by Paragraph 2.C hereof shall be reduced to the extent comparable welfare benefits are actually received by the Executive from another employer following the Executive's Termination Date until the expiration of the Benefit Period. 4. ARBITRATION. Any controversy or claim arising out of or relating to this Agreement or the breach thereof, shall be settled by arbitration in the City of Toledo, Ohio, in accordance with the laws of the State 6 49 of Ohio by three arbitrators, one of whom shall be appointed by the Company, one by the Executive and the third of whom shall be appointed by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the Chief Judge of the United States District Court for the Northern District of Ohio. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators, which shall be as provided in this Paragraph 4. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that the Executive determines in good faith to retain legal counsel and/or incur other reasonable costs or expenses in connection with such arbitration to enforce any or all of the Executive's rights under this Agreement or under any arbitration award, the Company shall pay 50% of the first $10,000 of attorneys' fees, costs, and expenses incurred by the Executive in connection with the enforcement of his rights, including the enforcement of any arbitration award in court, regardless of the final outcome. The Company shall pay all such costs and expenses in excess of $10,000 incurred by the Executive. 5. NOTICES. Any notices, requests, demands, and other communications, provided for in or pertinent to this Agreement shall be sufficient if delivered to the other party hereto by means of a written notice, mailed by United States registered or certified mail, return receipt requested, postage prepaid to either the Executive's last known address, or to the Company's principal executive offices, as the case may be. 6. GOVERNING LAW. The provisions of this Agreement shall be construed and governed in accordance with the laws of the State of Ohio without giving effect to the principles of conflict of laws of such State. 7. AMENDMENT. This Agreement may be amended or canceled by mutual agreement of the parties in writing without the consent of any other person and, so long as the Executive lives, no person, other than the parties hereto shall have any rights under or interest in this Agreement or the subject matter hereof. 8. Successors and Binding Agreement. A. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement shall be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but shall not otherwise be assignable, transferable or delegable by the Company. B. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and/or legatees. C. This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in Paragraph 8.A hereof. 7 50 Without limiting the generality of the foregoing, the Executive's right to receive payments hereunder shall not be assignable, transferable or delegable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by his will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Paragraph 8.C, the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 9. VALIDITY. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances shall not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal shall be reformed to the extent (and only to the extent) necessary to make it enforceable, valid and legal. 10. SCOPE OF AGREEMENT. This Agreement is not a contract for employment for any period of time, does not constitute a guarantee of employment and shall not be deemed to confer any benefit on the Executive in the absence of a Change in Control. 11. TERM. The period during which this Agreement shall be in effect (the "Term") shall commence as of the date hereof and shall expire as of the later of (i) the close of business on December 31, 1992 and (ii) termination of the Benefit Period, provided, however, that (A) commencing on January 1, 1989 and each January 1 thereafter, the Term of this Agreement shall automatically be extended for an additional year unless, not later than September 30 of the immediately preceding year, the Company or the Executive shall have given notice that it or he, as the case may be, does not wish to have the Term extended and (B) subject to Paragraph 10 hereof, if, prior to a Change in Control, the Executive ceases for any reason to be an employee of the Company, thereupon the Term shall be deemed to have expired and this Agreement shall immediately terminate and be of no further effect. IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its secretary, all as of the day and year first above written. ____________________________________ Executive ATTEST: TRINOVA CORPORATION ___________________________________ By: _______________________________ Secretary Vice President (Seal) EX-12 6 EXHIBIT 12 1 51 EXHIBIT (12)
STATEMENT RE: COMPUTATION OF RATIOS (In thousands, except per share data) Year Ended December 31 -------------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- RATIO OF EARNINGS TO FIXED CHARGES Income before income taxes and cumulative effect of accounting change $ 148,153 $ 153,421 $ 128,196 $ 101,255 $ 17,111 Dividends received, net of equity in earnings (loss) of unconsolidated affiliates 1,605 9,961 (3,704) 1,213 1 Fixed charges 46,034 41,712 31,762 30,249 33,370 --------- --------- --------- --------- --------- Income before cumulative effect of accounting change for computation purposes $ 195,792 $ 205,094 $ 156,254 $ 132,717 $ 50,482 ========= ========= ========= ========= ========= FIXED CHARGES Interest expense, including interest related to corporate owned life insurance $ 37,971 $ 34,963 $ 24,477 $ 22,582 $ 25,516 Portion of rent expense representing interest 6,819 6,288 6,903 7,303 7,490 Amortization of debt expense and debt discount 1,244 461 382 364 364 --------- --------- --------- --------- --------- Total fixed charges $ 46,034 $ 41,712 $ 31,762 $ 30,249 $ 33,370 ========= ========= ========= ========= ========= Ratio of Earnings to Fixed Charges 4.3x 4.9x 4.9x 4.4x 1.5x ========= ========= ========= ========= =========
For the purpose of computing the ratio of earnings to fixed charges, "earnings" consist of income before income taxes and cumulative effect of accounting change, plus fixed charges and dividends received, net of equity in earnings (loss) of unconsolidated affiliates. Fixed charges consists of interest expense, the portion of rent expense representing interest and amortization of debt discount. EX-13 7 EXHIBIT 13 1 52 EXHIBIT (13) PORTIONS OF THE 1997 ANNUAL REPORT TO SHAREHOLDERS 5-Year Summary of Selected Financial Data Years Ended December 31 (1997-1993) (Dollars in millions, except per share data)
1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Net sales $ 2,112.3 $ 2,032.9 $ 1,884.0 $ 1,794.7 $ 1,643.8 Income before cumulative effect adjustment 100.9a 102.7b 94.9 65.9 10.5c Net income (loss) 100.9 102.7 94.9 65.9 (59.7) Income (loss) per share: Basic: Before cumulative effect adjustment 3.60 3.62 3.29 2.29 .37 Net income (loss) 3.60 3.62 3.29 2.29 (2.11) Diluted: Before cumulative effect adjustment 3.51a 3.51b 3.20 2.26 .37c Net income (loss) 3.51 3.51 3.20 2.26 (2.11) Total assets 1,376.6 1,289.5 1,224.2 1,001.0 972.2 Long-term debt 256.7 257.7 302.4 234.9 246.2 Cash dividends per common share .80 .80 .72 .68 .68 (a) Includes a special charge of $30 million ($18.5 million net, or diluted net income per share of $.63) to exit the Company's automotive interior plastics business. (b) Includes a combined net gain from sale of unconsolidated affiliates of $5 million (diluted net income per share of $.16) and a credit for settlement of claims for prior years' research and development tax credits of $4 million (diluted net income per share of $.13). (c) Includes a special charge for severance and other personnel-related costs amounting to $26 million ($18.2 million net, or diluted net income per share of $.64) and a provision for unsuccessfully contested prior years' value-added taxes in Brazil amounting to $7 million ($4.7 million net, or diluted net income per share of $.17).
2 53 FINANCIAL REVIEW AND ANALYSIS OF OPERATIONS Results of Operations 1997 Compared with 1996 The following data provide highlights for the year 1997 compared with the year 1996.
Year Ended December 31 Percent (dollars in thousands, -------------------------- Increase except per share data) 1997 1996 (Decrease) ---------- ---------- ----------- CONSOLIDATED Net sales $2,112,293 $2,032,915 3.9% Manufacturing income 557,625 512,179 8.9 Manufacturing margin 26.4% 25.2% Operating income 191,640 (a) 176,575 8.5 Operating margin 9.1% (a) 8.7% Net income 100,853 (a) 102,721 (b) (1.8) Net income per share Basic 3.60 (a) 3.62 (b) (.6) Diluted 3.51 (a) 3.51 (b) - INDUSTRIAL Net sales 1,170,192 1,138,501 2.8 Operating income 107,032 105,703 1.3 Operating margin 9.1% 9.3% Order intake 1,226,494 1,135,852 8.0 Order backlog at December 31 232,731 184,865 25.9 AUTOMOTIVE Net sales 454,096 503,781 (9.9) Operating income 19,019 (a) 35,082 (45.8) Operating margin 4.2% (a) 7.0% AEROSPACE Net sales 488,005 390,633 24.9 Operating income 90,006 59,637 50.9 Operating margin 18.4% 15.3% Order intake 530,511 431,460 23.0 Order backlog at December 31 379,224 340,957 11.2
(a) After deducting a special charge of $30 million ($18.5 million net, or basic and diluted net income per share of $.66 and $.63, respectively). (b) Includes a net gain from sales of affiliates amounting to $17.3 million ($5 million net, or basic and diluted net income per share of $.18 and $.16, respectively) and an income tax credit of $4 million (basic and diluted net income per share of $.14 and $.13, respectively). 3 54 Consolidated net sales in 1997 of $2.11 billion were a record for the Company and were $79.4 million, or 3.9%, greater than in 1996. Sales for the industrial and aerospace segments increased 2.8% and 24.9%, respectively, but automotive segment sales declined 9.9%. The sales decline for the automotive segment was due to the sale or closure of certain interior plastics plants. Sales for these facilities that were sold or closed in 1997 were $67 million in 1997 and $132 million in 1996. Exclusive of sales in both years for the divestitures, consolidated net sales would have increased 7.6%. The divestiture is discussed more specifically later. Companies acquired in 1996 generated 1997 sales during the period for which there were no comparable 1996 sales totaling approximately $41.9 million. Including the results of acquisitions, U.S. sales increased $64.5 million, or 5%, and non-U.S. sales increased $14.9 million, or 2%. Changes in currency exchange rates reduced non-U.S. sales, principally in the automotive segment, by more than $44 million. Industrial segment sales for 1997 of $1.17 billion were also a record and were up $31.7 million, or 2.8%, over 1996. U.S. industrial sales increased $31.3 million, or 4.1%. U.S. sales to mobile equipment, truck and bus, and stationary industrial machinery markets remained strong, although sales were hindered by capacity constraints and delivery performance at a major pump manufacturing facility. The Company has a new pump manufacturing facility that will be coming into full production in 1998 that will relieve this production constraint. Sales of residential air conditioning components were down in 1997 due to unseasonably cool spring and summer temperatures. European industrial sales declined $16.8 million, or 6.3%, from 1996, principally the result of the effects of currency exchange rate changes. Industrial sales in Asia-Pacific and Brazil collectively increased $17.2 million, or 15%, over 1996. Industrial order intake of $1.23 billion increased $90.6 million, or 8%, over 1996 and was a record for the third consecutive year. Industrial order backlog at December 31, 1997, of $232.7 million was an all-time high, and was $47.9 million, or 25.9%, higher than at December 31, 1996. Automotive segment sales for 1997 declined $49.7 million, or 9.9%, from 1996. As part of its strategy to focus on fluid connectors (hose and attached fittings) in its automotive business, the Company announced in the 1997 first quarter its plans to exit the automotive interior plastics business. The Company sold or closed eight facilities during 1997 that had combined sales of approximately $67 million in 1997 and $132 million in 1996. Automotive fluid connector sales increased $13.5 million, or 5.3%, over 1996. This sales growth was recognized principally in European markets and was after the effects of changes in currency exchange rates which reduced European automotive sales by nearly $28 million. 4 55 Aerospace sales amounting to $488 million also set an all-time high and were $97.4 million, or 24.9%, over sales in 1996. $33.8 million of this increase resulted from sales generated by a business acquired in the 1996 fourth quarter. U.S. sales increased $88.3 million, or 26.7%, and non-U.S. sales increased $9.1 million, or 15.1%. 1997 sales reflected strong increases over 1996 in sales to commercial OEM and aftermarket customers and to the military aftermarket. Sales for military original equipment applications declined from the 1996 level. Aerospace order intake of $530.5 million also set a record and was $99.1 million, or 23%, higher than 1996 orders. Order backlog at $379.2 million was $38.3 million, or 11.2%, over the December 31, 1996, backlog. Consolidated manufacturing income increased $45.4 million, or 8.9%, over 1996. Manufacturing margin improved from 25.2% in 1996 to 26.4% in 1997. Manufacturing income and margin for the industrial segment declined slightly from the prior year, principally due to manufacturing performance issues at a major pump manufacturing facility, reduced volume for air conditioning components and the effects of currency exchange rate changes in Europe. Exclusive of the special charge, manufacturing income and margin for the automotive segment improved substantially over the prior year, reflecting the positive effects of divestiture of the automotive interior plastics facilities. Manufacturing margins for the remainder of the automotive segment, principally fluid connectors, have traditionally surpassed those in the interior plastics business. Manufacturing income and margin for the aerospace segment improved over that of the prior year, principally due to the substantial increase in sales volume. In conjunction with its plans to exit the automotive interior plastics business, in the 1997 first quarter the Company recorded a special charge of $30 million, comprised principally of severance, lease termination and asset disposition costs. A significant portion of this charge related to exiting operations in Germany. The sale or closure of these facilities resulted in a reduction of approximately 1,500 employees from the Company's workforce. The planned actions to which this special charge relates were substantially completed during 1997. After exiting this business, the Company's primary automotive focus is now fluid connectors. Automotive fluid connectors, used for conveying fluids in air conditioning, power steering and oil cooling systems in cars, light trucks, vans and sport utility vehicles, is a business that utilizes technologies and processes developed from Aeroquip's industrial fluid power expertise. Selling and general administrative and engineering, research and development expenses were nearly the same as in 1996 but as a percent of sales were 15.9% in 1997 compared with 16.5% in 1996. Selling and general administrative expenses in Europe were substantially lower in 1997 as a result of organizational realignments and continuing process improvements. Such costs, 5 56 however, were higher in Asia-Pacific due to the expansion of operations in the region and also higher in the U.S., particularly the aerospace segment, due to significantly higher levels of business activity in 1997. Selling and general administrative expenses for the automotive segment were lower in 1997 due to disposition of the interior plastics business. On April 11, 1997, the Company announced that it had entered into a joint-venture and global product and technology alliance with Komatsu Ltd., a world leader in the construction equipment market. This agreement is intended to extend the Company's product offering into the Japanese mobile equipment market and to provide opportunities for the development of new products for mobile equipment customers. This agreement will also enable the Company to sell the full range of hydraulic products of Komatsu and Komatsu Zenoah under the Vickers brand name on a worldwide basis through the Vickers global sales network. Risk factors associated with these forward-looking statements include, among other things, the acceptance of the Company's and Komatsu's products in expanding markets, the ability to cost-effectively develop new products, imposition of expanded barriers to trade and continued cooperation by the parties under terms of the alliance. The Company also entered into a joint-venture agreement with Sturman Industries for development of integrated digital electrohydraulic systems. Interest expense for 1997 was $1.4 million higher than in 1996. The increase was primarily attributable to a higher interest rate on long-term debt that was issued in 1996. Other income (expense) - net for 1996 included a gain of $17.3 million resulting from the sales of investments in unconsolidated affiliates. In the 1997 fourth quarter, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share." This Statement prescribes the disclosure of two earnings per share amounts - basic and diluted. The difference between the two earnings per share amounts is the effect of potentially dilutive securities outstanding. The effect for Aeroquip-Vickers was $.09 in 1997 and was attributable to convertible debt and stock options. Since the Company redeemed its outstanding convertible debt in 1997, this earnings per share differential will be less in future periods as evidenced by the fact that the earnings per share difference in the 1997 fourth quarter was only $.01. In accordance with provisions of the Statement, all prior-period earnings per share data were restated. Net income for 1997 amounted to $100.9 million. Basic and diluted net income per share was $3.60 and $3.51, respectively. 1997 net income and net income per share included the special charge to exit the automotive interior plastics business amounting to $18.5 million net, or basic and diluted net income per share of $.66 and $.63, respectively. These amounts compare with 1996 net income of $102.7 million and basic and diluted net income per share of $3.62 6 57 and $3.51, respectively. Net income for 1996 included a net gain of $5 million (basic and diluted net income per share of $.18 and $.16, respectively) from the sale of unconsolidated affiliates and a credit for settlement of claims for prior years' research and development tax credits of $4 million (basic and diluted net income per share of $.14 and $.13, respectively). The income tax provision for 1997 included a credit of $11.5 million related to the special charge to exit the automotive interior plastics business. Exclusive of this item, the effective income tax rate for 1997 was 33% and compares with the 1996 effective income tax rate of 31.1% before special items. 7 58 1996 COMPARED WITH 1995 The following data provide highlights for the year 1996 compared with the year 1995.
Year Ended December 31 Percent (dollars in thousands, -------------------------- Increase except per share data) 1996 1995 (Decrease) ---------- ---------- ----------- CONSOLIDATED Net sales $2,032,915 $1,884,013 7.9% Manufacturing income 512,179 476,343 7.5 Manufacturing margin 25.2% 25.3% Operating income 176,575 159,209 10.9 Operating margin 8.7% 8.5% Net income 102,721 (a) 94,896 8.2 Net income per share Basic 3.62 (a) 3.29 10.0 Diluted 3.51 (a) 3.20 9.7 INDUSTRIAL Net sales 1,138,501 1,051,106 8.3 Operating income 105,703 121,962 (13.3) Operating margin 9.3% 11.6% Order intake 1,135,852 1,061,553 7.0 Order backlog at December 31 184,865 201,460 (8.2) AUTOMOTIVE Net sales 503,781 494,016 2.0 Operating income 35,082 24,107 45.5 Operating margin 7.0% 4.9% AEROSPACE Net sales 390,633 338,891 15.3 Operating income 59,637 38,631 54.4 Operating margin 15.3% 11.4% Order intake 431,460 327,827 31.6 Order backlog at December 31 340,957 266,423 28.0
(a) Includes a net gain from sales of affiliates amounting to $17.3 million ($5 million net, or basic and diluted net income per share of $.18 and $.16, respectively) and an income tax credit of $4 million (basic and diluted net income per share of $.14 and $.13, respectively). 8 59 Consolidated net sales in 1996 of $2.03 billion were $148.9 million, or 7.9%, greater than in 1995. Sales for the industrial, automotive and aerospace segments increased 8.3%, 2.0% and 15.3%, respectively. Businesses acquired in the 1995 fourth quarter and during 1996 generated 1996 sales of nearly $119 million, principally in the industrial segment. Including the results of these acquisitions, U.S. sales increased $116 million, or 9.9%, and non-U.S. sales increased $32.9 million, or 4.6%. Changes in currency exchange rates reduced non-U.S. sales by nearly $17 million. Industrial segment sales for 1996 of $1.14 billion were $87.4 million, or 8.3%, greater than in 1995. Industrial segment sales for 1996 included full-year sales for Vickers Electronic Systems acquired in December 1995, and for Summa Manufacturing Company since its acquisition in June 1996. U.S. industrial sales increased $88 million, or 13.1%, over 1995. Industrial operations in Asia-Pacific continued to expand, contributing to a 1996 sales increase of nearly 8% over 1995. Sales in Europe were flat compared with 1995, and sales in Brazil declined 19.3%. Order intake increased 7% over 1995. Order backlog at December 31, 1996, was $184.9 million. Automotive segment sales for 1996 of $503.8 million increased $9.8 million, or 2%, over 1995. U.S. automotive sales were $16.8 million, or 7.6%, lower than in 1995, principally the result of concluding a number of automotive platform programs with U.S. car manufacturers in the latter half of 1995. As a result, following the closing of two automotive plastics plants in 1995, a third plastics plant was closed in 1996. European automotive sales increased $26.6 million, or 9.7%, despite the unfavorable effects of changes in currency exchange rates. The increased European volume was driven by higher sales of fluid connectors for use in autos and light trucks. During the year, the Company announced that its automotive segment had won new fluid connectors business that is expected to generate sales in Europe and the U.S. totaling nearly $800 million over several years beginning in 1997 and continuing through the year 2002. Inasmuch as this announcement constitutes a forward-looking statement, it is important to bear in mind that the value of this new business is based on customers' anticipated production of the new models, the expected level of consumer acceptance and the expected increase in worldwide demand for automotive power steering and air conditioning systems. Aerospace segment sales for 1996 of $390.6 million represented a $51.7 million, or 15.3%, increase over 1995. U.S. sales increased 15.7% and European sales increased 12.8%, reflecting continued strength across all original equipment and aftermarket sectors. 1996 sales included full-year sales for two small acquisitions that were completed in late 1995 and sales since acquisition for the Electrical Engineering & Manufacturing Company that was acquired in early December 1996. Aerospace order intake of $431.5 million represented a 31.6% increase over 1995 order intake, and order backlog increased to $341 million, which was 28% higher than at December 31, 1995. 9 60 Consolidated manufacturing income increased $35.8 million, or 7.5%, over 1995, but manufacturing margin declined slightly from 25.3% to 25.2%. Manufacturing income for the industrial segment was flat compared with the prior year, but manufacturing margin declined due to the performance of the Brazilian operations, lower profit margins for companies recently acquired and a shift in product mix. Automotive manufacturing income increased 14.3%, and manufacturing margin improved from the prior year due to the benefits recognized from downsizing of facilities and from a favorable mix of product sales. Higher sales volume and continued process improvements contributed to a 25.5% increase in manufacturing income and a 2.6 percentage-point increase in manufacturing margin for the aerospace segment over 1995. Selling and general administrative and engineering, research and development expenses were $18.5 million, or 5.8%, higher in 1996, but as a percent of sales were slightly lower than in 1995. The increase in overhead expenses was principally due to costs associated with companies recently acquired in the industrial segment, but also represents expanding initiatives for new product and business development. Interest expense for 1996 was $6.6 million higher than in 1995. The increase was attributable to higher average debt levels during 1996, principally the result of acquisitions. In the 1996 second quarter, the Company sold its 35% interest in Yokohama Aeroquip K.K., and its 49% interest in Aeroquip Mexicana S.A. The two transactions resulted in a combined pretax gain of $17.3 million reported in Other income (expense) - net in the Statement of Income. The combined pretax gain included net translation gains of $6.4 million previously deferred in the currency translation component of equity. The Company expects that the sales of its interests in the two unconsolidated affiliates will stimulate growth in its industrial markets in Mexico and the Asia-Pacific region. Net income for 1996 amounted to $102.7 million and diluted net income per share of $3.51 compared with net income of $94.9 million, or diluted net income per share of $3.20, in 1995. Net income for 1996 included a net gain of $5 million, or diluted net income per share of $.16, from the sale of unconsolidated affiliates and a credit for settlement of claims for prior years' research and development tax credits of $4 million, or diluted net income per share of $.13. Exclusive of these items, the effective income tax rate for 1996 was 31.1%, compared with 26% in 1995. The 26% effective income tax rate for 1995 reflected, among other things, the utilization of tax loss carryforwards outside the U.S. for which deferred tax valuation allowances had previously been provided. 10 61 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Cash provided by operating activities in 1997 amounted to $137.7 million, compared with $125.8 million in 1996. Working capital requirements for 1997 included $31.1 million to finance a higher level of receivables and $47.2 million for growth in inventories. These cash requirements were partially offset by lower cash requirements for payables and income taxes. In 1997, the Company received $43.4 million from the sales of its automotive interior plastics facilities. In 1996, the Company received $40.3 million from the sales of its joint ventures in Japan and Mexico and an injection-molding plastics products facility. Also during 1996, the Company completed two business acquisitions. The adjusted aggregate purchase prices for these business acquisitions amounted to $42.5 million. Capital expenditures totaled $139.8 million in 1997. This represents the highest capital expenditure level in the Company's history and includes more than $23 million to bring a new state-of-the-art pump manufacturing facility on line, as well as other expenditures for capacity expansion and equipment modernization and replacement. An increase in spending is projected for 1998 in support of the Company's growth initiatives and continued manufacturing process improvements. Quarterly dividend payments were $.20 per share in 1997, or $.80 per share for the year. In January 1998, the Company's Board of Directors approved a first-quarter 1998 dividend of $.22 per share. During 1997, the Company's Board of Directors authorized a program to purchase up to $100 million of the Company's outstanding common stock and, in 1997, the Company purchased 496,100 shares at a cost of $21.6 million under this and a prior Board of Directors authorization. At December 31, 1997, $80.7 million of additional common stock may be purchased under the current authorization. The Company may make further purchases during 1998, but is not committed to purchase a specific number of shares. In 1997, the Company established a Medium Term Note program and subsequently issued debt in the amount of $100 million with interest rates from 6.61% to 7.58% and with various maturities to 2012. The remaining borrowing capacity at December 31, 1997 under provisions of current shelf registration statements for the Medium Term Note program was $250 million. The Company also maintains a revolving credit agreement with a consortium of U.S. and non-U.S. banks expiring in 2001 under which the Company may borrow up to $175 million. The agreement is intended to support the Company's commercial paper borrowings and, to the extent not so utilized, provide domestic borrowing capacity. The remaining borrowing capacity under this agreement at December 31, 1997, was $138.8 million. In addition to this agreement, the Company has uncommitted arrangements with various banks to provide short-term financing as necessary. 11 62 In June 1997, the Company called its 6% convertible subordinated debentures for redemption. The debentures, which were due to mature on October 15, 2002, were convertible into common shares of the Company at a conversion price of $52.50 per share. Prior to the July 1997 redemption date, debentures in the amount of $3.7 million were converted into 70,950 shares of common stock. In December 1997, the Company called its 9.55% senior sinking fund debentures for redemption on February 3, 1998. Proceeds from additional borrowings in 1998 under the Medium Term Note program will be used to redeem the debentures. The pretax loss from redemption of the debentures amounting to approximately $2.5 million will be recognized in the 1998 first quarter. The Company expects that cash flow from operating activities and remaining available credit lines will be sufficient to meet normal operating requirements including payment of debt obligations maturing in the near term, planned acquisitions and planned capital expenditures. In 1997, the Company expanded the objectives of its foreign exchange risk management program. The revised policy focuses on, among other things, mitigating the exchange risk of certain forecasted and recorded transactions. In line with policy guidelines, the Company will use forward exchange contracts and currency options to manage certain of these exposures. In December 1997, the Company entered into currency option contracts to hedge certain forecasted monthly purchases and sales transactions denominated in currencies other than the functional currencies of the originating locations that otherwise would expose the Company to foreign currency exchange rate risk. The Company also expanded its use of forward exchange contracts to hedge the effects of changes in exchange rates on certain recorded receivables and payables denominated in currencies other than the functional currencies of the originating locations. Forward exchange and option contracts are entered into with major commercial banks with high credit ratings. Forward exchange contracts and options are not held for trading or speculative purposes and the Company is not a party to any leveraged derivatives. The terms of contracts in place at December 31, 1997, are one year or less. The Company or certain of its subsidiaries have been named parties to various lawsuits, claims and proceedings, including being named potentially responsible parties (PRP) for site investigation and cleanup costs under the Comprehensive Environmental Response, Compensation, and Liability Act (Superfund) or similar regulations with respect to certain sites, as well as other product liability, tort and contract claims and lawsuits which have arisen in the ordinary course of the Company's business. While the ultimate outcome of the various lawsuits, claims and proceedings, including PRP designations and other environmental matters, cannot now be predicted, the Company believes that costs, in excess of amounts provided or covered by insurance as it relates to litigation, arising out of these matters, will not have a material adverse effect on the Company's consolidated financial position. 12 63 The Company is in the process of assessing and taking actions to correct problems caused by the inability of certain of its information systems to properly process transactions using dates in the Year 2000 and beyond, or to operate at the turn of the century. The Year 2000 Issue is faced by virtually all manufacturing and services companies that use computer systems to support business operations and that incorporate computer systems in their products. In 1997, the Company's Information Technology leadership team prepared an assessment of the Year 2000 Issue exposure in each operating unit within the Corporate entity. During 1998, the Company will continue its efforts to assure completion of system testing and auditing in a timely and effective manner. The Company is also developing responses to customer inquiries relative to its Year 2000 readiness, and assessing readiness of its supplier base. From a cost perspective, the Company has budgeted the necessary funds to address Year 2000 Issue related projects. The incremental cost of compliance is anticipated to be relatively low as both Aeroquip and Vickers are in the process of replacing existing systems with packaged software which is date compliant. These systems replacement projects have been undertaken to optimize business operations and have been incorporated into the capital budgets of the Company. Risk factors which may affect the Company's ability to meet its implementation schedule to process transactions and operate efficiently in the Year 2000 and beyond include, but are not necessarily limited to availability of date compliant software from vendors; availability of necessary resources, both internal and external, to install new purchased software or reprogram existing software and complete the necessary testing; and readiness of customers, vendors and service providers to operate in the Year 2000. Portions of the narrative set forth in this Financial Review and Analysis of Operations, which are not historical in nature, are forward-looking statements. The Company's actual performance may differ from that contemplated by the forward-looking statements as a result of a variety of factors, which include, in addition to those mentioned elsewhere herein, the condition of the economy, the condition of the markets that the Company serves and the success of the Company's strategic plans and contemplated capital investments. 13 64 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 1997 and 1996.
1997 ----------------------------------------------------------------------------- Three Months Ended ----------------------------------------------------------------- Year Ended Mar 31 Jun 30 Sep 30 Dec 31 Dec 31 ------- ------- ------- ---------- ---------- (In thousands, except per share data) Net sales $ 538,426 $ 556,278 $ 494,777 $ 522,812 $2,112,293 Manufacturing income 132,475 147,037 134,406 143,707 557,625 Net income 5,694 33,630 30,104 31,425 100,853 Net income per share Basic .20 1.20 1.07 1.12 3.60 Diluted .20 1.15 1.05 1.11 3.51 Average shares outstanding Basic 27,974 27,948 28,153 28,150 28,050 Diluted 28,116 30,020 29,036 28,372 29,369 1996 ----------------------------------------------------------------------------- Three Months Ended ----------------------------------------------------------------- Year Ended Mar 31 Jun 30 Sep 30 Dec 31 Dec 31 ------- ------- ------- ---------- ---------- (In thousands, except per share data) Net sales $ 512,113 $ 517,924 $ 492,983 $ 509,895 $2,032,915 Manufacturing income 126,257 133,909 122,854 129,159 512,179 Net income 24,415 33,060 20,757 24,489 102,721 Net income per share Basic .85 1.16 .73 .88 3.62 Diluted .83 1.11 .72 .85 3.51 Average shares outstanding Basic 28,755 28,551 28,286 27,949 28,384 Diluted 30,689 30,516 30,228 29,914 30,335
14 65 (a) The 1996 and first three quarters of 1997 net income per share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share." For purposes of computing diluted net income per share, the assumed conversion of the Company's 6% convertible debentures was included in average shares outstanding as follows: 1,904,762 shares for each of the 1996 periods and the 1997 second quarter; 627,667 shares in the 1997 third quarter; and 1,109,298 shares for the year 1997. Net income was increased for the after-tax equivalent of interest expense on the convertible debentures. (b) The 1997 first quarter included a special charge of $30 million ($18.5 million net, or diluted net income per share of $.66 [$.63 for the year]) to exit the Company's automotive interior plastics business. (c) In the 1997 third quarter, the annual effective income tax rate was reduced. The cumulative year-to-date adjustment increased third-quarter net income by $1.3 million, or diluted net income per share of $.05. (d) The 1997 fourth quarter included income amounting to $4.3 million ($2.6 million net, or diluted net income per share of $.09) from recovery of previously incurred development and pre-production costs with an aerospace customer arising from the termination of a component design and production supply contract, reduced by a charge of $2.6 million ($1.6 million net, or diluted net income per share of $.05) to recognize a product liability claim from an industrial customer for a unique product that is no longer manufactured. (e) The income tax provision for the 1996 first quarter included a credit for settlement of claims for prior years' research and development credits of $4 million, or diluted net income per share of $.13. (f) The 1996 second quarter included a combined net gain from sale of unconsolidated affiliates amounting to $5 million, or diluted net income per share of $.16. (g) In the 1996 fourth quarter, the annual effective income tax rate was reduced. The cumulative year-to-date adjustment increased fourth-quarter net income by $1.9 million, or diluted net income per share of $.06. 15 66 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Shareholders and Board of Directors Aeroquip-Vickers, Inc. We have audited the accompanying statement of financial position of Aeroquip-Vickers, Inc. (name changed from TRINOVA Corporation) and subsidiaries as of December 31, 1997 and 1996, and the related statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aeroquip-Vickers, Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /S/ ERNST & YOUNG LLP ------------------------------ Toledo, Ohio January 21, 1998 16 67 STATEMENT OF INCOME Years ended December 31, 1997, 1996 and 1995 (In thousands, except per share data)
1997 1996 1995 -------- -------- -------- Net sales $2,112,293 $2,032,915 $1,884,013 Cost of products sold 1,554,668 1,520,736 1,407,670 ---------- ---------- ---------- MANUFACTURING INCOME 557,625 512,179 476,343 Selling and general administrative expenses 263,824 260,712 254,141 Engineering, research and development expenses 72,161 74,892 62,993 Special charge 30,000 -- -- ---------- ---------- ---------- OPERATING INCOME 191,640 176,575 159,209 Interest expense (27,171) (25,813) (19,199) Other income (expense) - net (16,316) 2,659 (11,814) ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 148,153 153,421 128,196 Income taxes 47,300 50,700 33,300 ---------- ---------- ---------- NET INCOME $ 100,853 $ 102,721 $ 94,896 ========== ========== ========== NET INCOME PER SHARE Basic $ 3.60 $ 3.62 $ 3.29 ========== ========== ========== Diluted $ 3.51 $ 3.51 $ 3.20 ========== ========== ==========
The Notes to Financial Statements are an integral part of this statement. 17 68 STATEMENT OF FINANCIAL POSITION December 31, 1997 and 1996 (Dollars in thousands, except per share data)
1997 1996 ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 18,736 $ 23,934 Receivables 348,822 342,712 Inventories 294,767 262,169 Other current assets 49,323 45,272 ----------- ----------- TOTAL CURRENT ASSETS 711,648 674,087 Plants and properties 993,002 997,350 Less accumulated depreciation 518,860 559,867 ----------- ----------- 474,142 437,483 Other assets 190,806 177,917 ----------- ----------- TOTAL ASSETS $ 1,376,596 $ 1,289,487 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 84,044 $ 31,819 Accounts payable 111,800 106,205 Income taxes 30,496 21,150 Other accrued liabilities 212,800 188,973 Current maturities of long-term debt 1,857 76,809 ----------- ----------- TOTAL CURRENT LIABILITIES 440,997 424,956 Long-term debt 256,707 257,727 Postretirement benefits other than pensions 122,272 121,793 Other liabilities 46,421 38,595 SHAREHOLDERS' EQUITY Common stock - par value $5 a share Authorized - 100,000,000 shares Outstanding - 28,064,981 and 27,912,077 shares, respectively (after deducting 6,215,865 and 6,297,819 shares, respectively, in treasury) 140,325 139,559 Additional paid-in capital 41,288 20,675 Retained earnings 366,676 307,398 Currency translation adjustments (38,090) (21,216) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 510,199 446,416 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,376,596 $ 1,289,487 =========== ===========
The Notes to Financial Statements are an integral part of this statement. 18 69 STATEMENT OF CASH FLOWS Years ended December 31, 1997, 1996 and 1995 (In thousands)
1997 1996 1995 ----------- ----------- ----------- OPERATING ACTIVITIES Net income $ 100,853 $ 102,721 $ 94,896 Adjustments to reconcile net income to net cash provided by operating activities: Special charge 30,000 -- -- Depreciation 66,562 68,684 63,697 Amortization 6,639 4,789 902 Gain on sales of affiliates -- (17,300) -- Dividends received from affiliates -- 9,932 39 Deferred income taxes (467) 11,997 (7,051) Changes in certain assets and liabilities, excluding effects from special charge, acquisitions and dispositions - -Receivables (31,073) (44,783) (38,820) - -Inventories (47,215) 10,656 (28,693) - -Accounts payable 19,018 (75) 1,483 - -Income taxes 15,969 (15,929) 15,216 - -Other assets, payables and accruals (9,354) (5,991) 27,001 Restructuring payments - net (16,666) 810 (7,104) Other 3,418 274 (4,781) ----------- ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 137,684 125,785 116,785 INVESTING ACTIVITIES Capital expenditures (139,811) (90,626) (93,955) Businesses acquired -- (42,540) (113,841) Sales of businesses and affiliates 43,381 40,261 -- Other 1,561 1,483 697 ----------- ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES (94,869) (91,422) (207,099) FINANCING ACTIVITIES Cash dividends (22,465) (22,705) (20,800) Increase (decrease) in notes payable 50,866 (1,444) 30,776 Long-term borrowings 100,000 107,145 75,886 Repayments of long-term borrowings (172,669) (77,465) (9,041) Purchases of common stock (21,590) (32,213) (5,473) Stock issuance under stock plans 20,133 3,287 6,087 Other (924) (2,440) -- ----------- ----------- ----------- NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (46,649) (25,835) 77,435 Effect of exchange rate changes on cash and cash equivalents (1,364) (780) 1,137 ----------- ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,198) 7,748 (11,742) Cash and cash equivalents at beginning of year 23,934 16,186 27,928 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 18,736 $ 23,934 $ 16,186 =========== =========== ===========
The Notes to Financial Statements are an integral part of this statement. 19 70 STATEMENT OF SHAREHOLDERS' EQUITY Years ended December 31, 1997, 1996 and 1995 (Dollars in thousands, except per share data)
Additional Currency Common Paid-In Retained Translation Stock Capital Earnings Adjustments --------- ----------- -------- ----------- BALANCE AT JANUARY 1, 1995 $ 143,979 $ 12,511 $ 184,930 $ (21,374) Net income 94,896 Cash dividends paid ($.72 a share) (20,800) Issuance of 215,478 shares, net of shares exchanged, under stock plans 1,077 5,422 Purchase of 186,200 treasury shares (931) (4,542) Translation adjustments - net 5,704 --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1995 144,125 17,933 254,484 (15,670) Net income 102,721 Cash dividends paid ($.80 a share) (22,705) Issuance of 108,990 shares, net of shares exchanged, under stock plans 545 2,742 Purchase of 1,022,100 treasury shares (5,111) (27,102) Translation adjustments - net (5,546) --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1996 139,559 20,675 307,398 (21,216) Net income 100,853 Cash dividends paid ($.80 a share) (22,465) Issuance of 578,054 shares, net of shares exchanged, under stock plans 2,891 17,242 Issuance of 70,950 shares upon conversion of long-term debt 355 3,371 Purchase of 496,100 treasury shares (2,480) (19,110) Translation adjustments - net (16,874) --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1997 $ 140,325 $ 41,288 $ 366,676 $ (38,090) ========= ========= ========= =========
The Notes to Financial Statements are an integral part of this statement. 20 71 NOTES TO FINANCIAL STATEMENTS December 31, 1997 (Dollars in thousands, except per share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Change of Company Name: In 1997, shareholders of the Company approved a change in the Company's name to Aeroquip-Vickers, Inc. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. Affiliated companies in which the Company's ownership is 20% to 50% are accounted for by the equity method. All significant intercompany transactions and accounts are eliminated upon consolidation. Use of Estimates: The preparation of financial statements in accordance with generally accepted accounting principles requires management to make certain estimates and exercise judgment affecting the reported amounts in the statements of income, financial position and cash flows, including the disclosures in the notes to financial statements. Actual results could differ from those estimates. Cash Equivalents: Marketable securities that are highly liquid and have original maturities of three months or less are classified as cash equivalents. The carrying amount approximates fair value. Inventories: Inventories are stated at the lower of cost or market. Inventory costs for U.S. operations are determined principally by the last-in, first-out (LIFO) method. The remaining inventory costs are determined primarily by the first-in, first-out (FIFO) method. Plants and Properties: Plants and properties are carried at cost. Depreciation is generally computed by the straight-line method over the estimated useful lives of the respective assets. In general, depreciation is provided at annual rates of 2.5% to 3% on buildings and 8% to 12% on equipment. Intangibles: Intangible assets are included in Other assets at cost less accumulated amortization and consist principally of goodwill. Goodwill represents the excess of cost over fair value of assets acquired, for which the amortization periods are principally 30 to 40 years using the straight-line method. Other intangibles include software and patents for which the amortization periods range from five to 15 years on a straight-line basis. The carrying amounts for goodwill and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that such carrying amounts may not be recoverable. For any long-lived assets that are determined to be impaired, a loss would be recognized for the difference between the carrying value and the fair value for assets to be held. Life Insurance: The Company's investment in corporate-owned life insurance is recorded net of policy loans. Net life insurance expense, including interest expense of $10,800, $9,150 and $5,278 on policy loans in 1997, 1996 and 1995, respectively, is included in Other income (expense) - net in the Statement of Income. 21 72 NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Accounting Pronouncements: The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," in 1997. The Company adopted this accounting standard on December 31, 1997. All prior-period earnings per share data, including quarterly earnings per share, have been restated in accordance with provisions of the Statement. The FASB also issued Statement of Financial Accounting Standards Nos. 130, "Reporting Comprehensive Income," and 131, "Disclosures about Segments of an Enterprise and Related Information." The Company will adopt the provisions of Statement Nos. 130 and 131 in 1998. Statement 130 requires that comprehensive income, which includes net income and other comprehensive income consisting of foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain security investments, be reported as a total in the financial statements. Historically, the Company's only component of other comprehensive income has been foreign currency items. Statement No. 131 requires that operating segment financial information be reported on a basis consistent with the Company's internal reporting that is used for evaluating segment performance and allocating resources. Adoption of Statement Nos. 130 and 131 will have no effect on the Company's consolidated results of operations, financial position or cash flows. However, adoption of Statement No. 131 will affect the disclosure of business segment information. Stock Options: The Company follows the intrinsic value method of accounting for stock options under Accounting Principles Board Opinion No. 25. When stock options are exercised, common stock is credited for the par value of shares issued; additional paid-in capital is credited for the consideration received in excess of par value and any related income tax benefits. Derivative Financial Instruments: The Company uses forward exchange contracts and currency options to manage certain foreign exchange exposures. The Company enters into forward exchange contracts to hedge the effects of changes in exchange rates on certain recorded receivables and payables that are denominated in currencies other than the functional currencies of the originating locations. Forward exchange contracts are marked to market with changes in market value recorded in income as foreign exchange gains or losses offsetting the losses or gains on the underlying transactions, i.e., the fair value method. The Company enters into currency option contracts to hedge certain anticipated transactions. These currency option contracts are designated as hedges of certain forecasted monthly purchases and sales transactions that are denominated in currencies other than the functional currencies of the originating locations, that otherwise would expose the Company to foreign currency exchange rate risk. Gains on currency options are included in sales and cost of products sold when realized. Premiums on currency options are deferred and amortized to cost of products sold on a straight-line basis over the life of the contracts. Forward exchange and option contracts are entered into with major commercial banks with high credit ratings. Forward exchange contracts and options are not held for trading or speculative purposes, and the Company is not a party to any leveraged derivatives. The terms of these contracts are generally one year or less. 22 73 NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Revenue Recognition: Revenue is recognized when products are shipped to customers. NOTE 2 - NET INCOME PER SHARE Following is a reconciliation of income and average shares for purposes of calculating basic and diluted net income per share:
1997 1996 1995 ---- ---- ---- Basic Net Income per Share - -------------------------- Net income $ 100,853 $ 102,721 $ 94,896 ========== ========== ========== Average common shares outstanding 28,049,749 28,384,089 28,867,936 ========== ========== ========== Basic Net Income per Share $3.60 $3.62 $3.29 ========== ========== ========== Diluted Net Income per Share - ---------------------------- Net income $ 100,853 $102,721 $ 94,896 After-tax equivalent of interest expense on 6% convertible debentures 2,192 3,720 3,720 ---------- ---------- ---------- Income for purposes of computing diluted net income per share $ 103,045 $106,441 $ 98,616 ========== ========== ========== Average common shares outstanding 28,049,749 28,384,089 28,867,936 Dilutive stock options 209,927 46,019 56,742 Assumed conversion of 6% convertible debentures 1,109,298 1,904,762 1,904,762 ---------- ---------- ---------- Average common shares for purposes of computing diluted net income per share 29,368,974 30,334,870 30,829,440 ========== ========== ========== Diluted Net Income per Share $3.51 $3.51 $3.20 ========== ========== ==========
The 6% convertible debentures were redeemed in July 1997 (see Note 7). As a result, the difference between basic and diluted net income per share will diminish in future periods. 23 74 NOTES TO FINANCIAL STATEMENTS NOTE 2 - NET INCOME PER SHARE (Continued) Options to purchase an average of 771,000 and 495,615 shares of common stock were outstanding during 1996 and 1995, respectively, that were not included in the computation of diluted net income per share because the option exercise prices were greater than the average market price of common shares and, therefore, the effect would have been anti-dilutive. NOTE 3 - SPECIAL CHARGE In 1997, the Company exited its automotive interior plastics business and recorded a special charge of $30,000 ($18,500 net, or diluted net income per share of $.63), comprised principally of severance, lease termination and asset disposition costs. The Company sold or closed eight facilities during 1997 that had combined sales of approximately $67,000, $132,000 and $144,000 in 1997, 1996 and 1995, respectively. The sale or closure of these facilities resulted in a reduction of approximately 1,500 employees from the Company's workforce. The planned actions to which this special charge relates were substantially completed during 1997. NOTE 4 - ACQUISITIONS On December 7, 1996, the Company acquired certain assets and liabilities and the business of the Electrical Engineering & Manufacturing Company (EEMCO), a division of DATRON Inc., for $36,345. EEMCO is a designer and manufacturer of actuators, specialty motors and generators, flight control systems, electronic controls and actuation systems for commercial and military aerospace applications. It also provides overhaul and repair services for its products. In June 1996, the Company acquired all of the issued and outstanding capital stock of Summa Manufacturing Corporation (Summa) for $9,771. Summa is a manufacturer of vane pumps and replacement parts for mobile and industrial applications. Effective December 30, 1995, the Company acquired certain assets and liabilities and the business of the Electronic Systems Division, now Vickers Electronic Systems (VES), from Cincinnati Milacron Inc. for $105,267. VES designs and manufactures computer controls, software and drives used in machine tools and plastics processing equipment. Also in December 1995, the Company acquired certain assets and liabilities and the businesses of two operations serving the aerospace market for an aggregate purchase price of $7,767. All of the aforementioned acquisitions were accounted for as purchases, and their operations were included in the Statement of Income from their respective acquisition dates. Had these acquisitions occurred as of the beginning of the respective years, the pro forma results of operations giving effect to the acquisitions would not be materially different from the net sales, net income and net income per share presented in the Statement of Income. 24 75 NOTES TO FINANCIAL STATEMENTS NOTE 5 - GAIN ON SALE OF UNCONSOLIDATED AFFILIATES In 1996, the Company sold its 35% interest in Yokohama Aeroquip K.K. and its 49% interest in Aeroquip Mexicana S.A. The two transactions resulted in a net combined pretax gain of $17,300 ($5,000 net, or diluted net income per share of $.16). The combined pretax gain included net translation gains of $6,387 previously deferred in the currency translation component of equity. NOTE 6 - INVENTORIES Inventory costs determined by the LIFO method accounted for approximately 61% and 54% of the total inventories at December 31, 1997 and 1996, respectively. If all inventories valued by the LIFO method had been valued at current costs, these inventories would have been approximately $27,884 and $32,768 higher than reported at December 31, 1997 and 1996, respectively. NOTE 7 - DEBT
1997 1996 -------- -------- 7.875% senior debentures, due June 1, 2026 $100,000 $100,000 Medium term notes - interest rates from 6.61% to 7.58% - due at various dates from 2002 to 2012 100,000 -- 9.55% senior sinking fund debentures, due February 1, 2018 42,000 42,000 6% convertible subordinated debentures, due October 15, 2002 -- 100,000 7.95% notes, due May 1, 1997 -- 75,000 Industrial revenue bonds - interest rates from 5.8% to 7.625% - due at various dates to 2013 7,300 7,333 Other 9,264 10,203 -------- -------- 258,564 334,536 Less current maturities 1,857 76,809 -------- -------- $256,707 $257,727 ======== ========
In June 1997, the Company called its 6% convertible subordinated debentures for redemption. The debentures, which were due to mature on October 15, 2002, were convertible into common shares of the Company at a conversion price of $52.50 per share. Prior to the redemption date, debentures in the amount of $3,726 were converted into 70,950 shares of common stock. 25 76 NOTES TO FINANCIAL STATEMENTS NOTE 7 - DEBT (Continued) The 9.55% senior sinking fund debentures are subject to redemption prior to February 1, 2018, at the option of the Company, in whole or in part, at specified declining redemption prices plus accrued interest. In December 1997, the Company called these debentures for redemption on February 3, 1998. Proceeds from additional borrowings in 1998 under the Company's Medium Term Note program will be used to redeem the debentures. The pretax loss from redemption of the debentures amounting to approximately $2,500 will be recognized in the 1998 first quarter. During 1996, the Company filed a shelf registration statement with the Securities and Exchange Commission and issued thereunder $100,000 of 30-year debentures due June 1, 2026. In 1997, the Company established a $150,000 Medium Term Note program, committing to this program the remaining debt capacity of $150,000 under the 1996 shelf registration. Upon issuance, each series of notes may mature nine months or more from date of issuance and may have either a fixed or floating rate of interest. Notes in the amount of $100,000 were issued under this program in 1997. Also in 1997, the Company filed another shelf registration statement with the Securities and Exchange Commission, committing an additional $200,000 to the Medium Term Note program. The remaining borrowing capacity under the Medium Term Note program at December 31, 1997, was $250,000. Under terms of a revolving credit agreement, negotiated in 1996 and expiring August 31, 2001, with a consortium of U.S. and non-U.S. banks, the Company may borrow up to $175,000. Borrowings under the credit line bear interest at rates agreed to by the Company and lenders. This agreement is maintained to support the Company's commercial paper borrowings and, to the extent not so utilized, to provide domestic borrowings. The remaining borrowing capacity under this agreement at December 31, 1997, was $138,800. Covenants of the revolving credit agreement and certain other debt instruments require the Company to maintain certain financial ratios, including a limitation that the Company's debt-to-capitalization ratio (exclusive of the effects of the change in accounting for postretirement benefit obligations) not exceed a specified amount. At December 31, 1997, retained earnings of $237,000 were available for the payment of cash dividends and purchase of common stock. Maturities of long-term debt in 1998 and in the four succeeding years are $1,857, $1,143, $909, $261 and $170. Interest paid on all debt during 1997, 1996 and 1995 amounted to $27,664, $27,392 and $19,250, respectively. The weighted-average interest rate of outstanding notes payable at December 31, 1997 and 1996, was 6.5% and 5.7%, respectively. 26 77 NOTES TO FINANCIAL STATEMENTS NOTE 8 - CONTINGENCIES The Company or certain of its subsidiaries have been named parties to various lawsuits, claims and proceedings, including being named potentially responsible parties (PRP) for site investigation and cleanup costs under the Comprehensive Environmental Response, Compensation, and Liability Act (Superfund) or similar regulations with respect to certain sites, as well as other product liability, tort and contract claims and lawsuits which have arisen in the ordinary course of the Company's business. While the ultimate outcome of the various lawsuits, claims and proceedings, including PRP designations and other environmental matters, cannot now be predicted, the Company believes that costs, in excess of amounts provided or covered by insurance as it relates to litigation, arising out of these matters, will not have a material adverse effect on the Company's consolidated financial position. NOTE 9 - INCOME TAXES The components of income before income taxes consist of the following:
1997 1996 1995 ------ ------ ------ U.S. $ 84,300 $ 73,644 $ 45,506 Non-U.S. 63,853 79,777 82,690 -------- -------- -------- $148,153 $153,421 $128,196 ======== ======== ========
Income tax expense consists of the following:
1997 1996 1995 ------ ------ ------ Current: U.S. federal $ 23,231 $ 21,920 $ 21,131 State and local 2,070 2,676 1,810 Non-U.S. 22,466 14,107 17,410 -------- -------- -------- 47,767 38,703 40,351 Deferred: U.S. federal (136) 4,356 (6,787) Non-U.S. (331) 7,641 (264) -------- -------- -------- (467) 11,997 (7,051) -------- -------- -------- $ 47,300 $ 50,700 $ 33,300 ======== ======== ========
27 78 NOTES TO FINANCIAL STATEMENTS NOTE 9 - INCOME TAXES (Continued) The effects of temporary differences and loss carryforwards giving rise to deferred tax assets and liabilities are as follows:
1997 1996 ------ ------ Gross Deferred Tax Assets Postretirement benefits other than pensions $ 42,704 $ 42,849 Tax loss carryforwards 8,668 15,885 Employee benefit accruals 14,289 11,992 Other 9,617 2,320 --------- --------- 75,278 73,046 Gross Deferred Tax Liabilities Depreciation (33,241) (32,169) Other (7,980) (6,226) --------- --------- (41,221) (38,395) Valuation allowances (6,816) (12,589) --------- --------- Net deferred tax assets $ 27,241 $ 22,062 ========= =========
The components of net deferred tax assets are classified in the Statement of Financial Position as follows:
1997 1996 ------ ------ Current assets $ 3,679 $ 837 Non-current assets 30,958 28,189 Non-current liabilities (7,396) (6,964) --------- --------- Net deferred tax assets $ 27,241 $ 22,062 ========= =========
28 79 NOTES TO FINANCIAL STATEMENTS NOTE 9 - INCOME TAXES (Continued) Valuation allowances decreased $5,773, $3,364 and $13,580 in 1997, 1996 and 1995, respectively. Reconciliation of the statutory U.S. federal income tax rate to the effective income tax rate follows:
1997 1996 1995 ------ ------ ------ Statutory U.S. federal income tax rate 35.0% 35.0% 35.0% Increase (decrease) resulting from: State and local taxes, net of U.S. federal tax benefit .9 1.1 1.0 Basis differences on affiliates sold - 4.1 - Research and development credit (1.9) (2.6) - Taxes in excess of (less than) the U.S. tax rate on non-U.S. earnings, including utilization of net operating loss carryforwards 1.0 (3.2) (9.1) Other (3.1) (1.4) (.9) ---- ---- ----- Effective income tax rate 31.9% 33.0% 26.0% ==== ==== =====
At December 31, 1997, the Company had non-U.S. net operating loss carryforwards of $24,700 for income tax purposes. Loss carryforwards of approximately $11,900 have no expiration dates and the remainder expire in years through 2000. Income tax expense for the years 1997, 1996 and 1995 was reduced by $1,770, $3,730 and $5,440, respectively, due to utilization of operating loss carryforwards. Non-U.S. operating loss carryforwards in the amount of $5,600 expired in 1997, resulting in the loss of future tax benefits and a reduction in valuation allowances in the amount of $2,100. The Company does not provide deferred income taxes on undistributed earnings of certain of its non-U.S. subsidiaries which have been reinvested indefinitely. Undistributed earnings of non-U.S. subsidiaries for which U.S. income taxes have not been provided approximated $120,900 at December 31, 1997. Should these earnings be remitted, certain countries will impose withholding taxes that will be available for use as credits against any U.S. federal income tax liability, subject to certain limitations. It is not practical to estimate the amount of tax that would be payable should the Company remit these earnings. Income taxes paid during 1997, 1996 and 1995 amounted to $31,798, $54,633 and $25,135, respectively. 29 80 NOTES TO FINANCIAL STATEMENTS NOTE 10 - LEASES The Company and its subsidiaries lease a variety of real property and equipment. Rent expense under operating leases amounted to approximately $20,457, $18,863 and $20,709 for 1997, 1996 and 1995, respectively. Future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1997, are as follows: 1998 $ 14,447 1999 11,035 2000 8,412 2001 6,714 2002 5,018 Thereafter 13,698 -------- $ 59,324 ========
NOTE 11 - FINANCIAL INSTRUMENTS At December 31, 1997, long-term debt amounting to $258,564, including current maturities, had an estimated fair value of $269,000. Estimated fair value for long-term debt, including current maturities, at December 31, 1996, was $339,677. Fair value for notes payable at December 31, 1997 and 1996, was approximately equal to the carrying amounts at those dates. At December 31, 1997, the Company had forward exchange contracts outstanding with notional amounts equivalent to $12,800. The carrying amounts of these outstanding forward exchange contracts were $227. Fair value was approximately equal to the carrying amounts. These forward exchange contracts will mature at various dates through April 1998. At December 31, 1997, the Company held currency option contracts maturing at various dates through December 1998, with notional amounts equivalent to $61,600. Fair value of these currency option contracts was approximately $600. The Company had no forward exchange or currency option contracts outstanding at December 31, 1996. 30 81 NOTES TO FINANCIAL STATEMENTS NOTE 12 - RETIREMENT PLANS The Company has trusteed defined-contribution plans as its primary retirement vehicle covering most full-time U.S. employees and certain non-U.S. employees. Annual expense for the major defined-contribution plans is based primarily upon employee participation and earnings of the Company. The Company follows the policy of funding retirement plan contributions accrued. The Company also has trusteed defined-benefit plans covering a limited number of full-time U.S. employees. The defined-benefit plans typically provide for full vesting after five years of service, and benefits are principally based on employee earnings and/or length of service. The Company's funding policy for these plans is to make annual contributions at least sufficient to meet minimum legal funding requirements. Various plans are also in effect for subsidiaries operating outside the U.S., including trusteed or insured, government-sponsored and unfunded plans. The following table sets forth the funded status and amounts recorded in the Company's Statement of Financial Position for defined-benefit plans.
1997 1996 ------------------------------ ----------------------------- Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed Benefits Assets Benefits Assets ----------- ----------- ----------- ---------- Actuarial present value of benefit obligation: Vested benefit obligation $118,100 $ 33,000 $110,300 $ 34,800 ======== ======== ======== ======== Accumulated benefit obligation $119,900 $ 33,400 $111,600 $ 36,100 ======== ======== ======== ======== Projected benefit obligation $125,600 $ 35,000 $117,700 $ 40,100 Plans' assets at fair value 167,200 14,200 139,000 15,200 -------- -------- -------- -------- Projected benefit obligation (in excess of) less than plans' assets 41,600 (20,800) 21,300 (24,900) Unrecognized net gain (25,500) (8,200) (5,700) (6,900) Unrecognized net (asset) obligation less amortization (800) 1,200 (800) 1,600 Unrecognized prior service cost 4,600 1,600 3,300 1,800 -------- -------- -------- -------- Net pension asset (liability) recorded in the Statement of Financial Position $ 19,900 $(26,200) $ 18,100 $(28,400) ======== ======== ======== ========
31 82 NOTES TO FINANCIAL STATEMENTS NOTE 12 - RETIREMENT PLANS (Continued) Components of net periodic pension cost for the defined-benefit plans and the total contributions charged to pension expense for the defined-contribution plans are summarized below.
1997 1996 1995 ------ ------ ------ Defined-benefit plans: Service cost - benefits earned $ 2,200 $ 2,400 $ 2,300 Interest cost 11,300 11,300 11,200 Actual return on plans' assets (37,800) (13,500) (22,700) Net amortization and deferral 24,600 1,000 10,900 -------- -------- -------- Net pension cost - defined-benefit plans 300 1,200 1,700 Defined-contribution plans 42,000 37,000 37,700 Other non-U.S. retirement plans 1,000 1,200 1,400 -------- -------- -------- Total $ 43,300 $ 39,400 $ 40,800 ======== ======== ========
The defined-benefit plans' assets consist of equity securities, corporate and government bonds, and real estate. Following are assumptions used in determining the plans' net periodic pension cost and benefit obligations. The measurement dates for these plans were principally September 30.
1997 1996 1995 ------ ------ ------ Discount rates: U.S. 7.5% 7.5% 7.5% Non-U.S. 7.2 7.5 7.5 Rates of increase in future compensation: U.S. 4.0 4.0 4.0 Non-U.S. 3.0-5.0 3.0-5.5 3.0-6.0 Long-term rate of return on assets 10.0 10.0 10.0
32 83 NOTES TO FINANCIAL STATEMENTS NOTE 13 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company and its subsidiaries provide access to benefits under life insurance and health care plans for most retired U.S. and certain retired non-U.S. employees and eligible spouses (participants). Generally, benefits for most covered retirees outside the U.S. are provided through government-sponsored or retiree-funded programs. Benefits for U.S. retirees are generally subject to participant contributions, deductibles, co-payment provisions and certain other limitations. The Company has reserved the right to amend or terminate these benefit plans at any time. Most U.S. health care plans recognize that the Company, as the secondary provider to Medicare, will contribute toward the cost of providing health care benefits for participants who retire at age 65 or older and have at least 10 years of service at retirement. The amount of the Company's contribution for participants retiring after January 1, 1995, except for one group for which the date is January 1, 1997, is limited to an established amount. Accordingly, as medical costs escalate, those participants who retire subsequent to the above dates will share in the cost of the benefits by paying the difference between the Company's average annual per-capita claims costs and the established amount. During a transition period, the Company will also contribute toward the cost of health care for participants who retire prior to age 65, providing they had met certain age and service-period requirements as of January 1, 1995. The amount of the Company's contribution will not exceed the established amount. Such participants will share in the cost of benefits by paying the difference between the Company's average annual per-capita claims costs and the established amount. Those participants retiring before reaching age 65 who do not meet the age and service-period requirements will have the option to purchase health care benefits at full cost until becoming eligible for a Company contribution at age 65. Components of postretirement benefit cost are as follows:
1997 1996 1995 ------- ------- ------- Service cost - benefits earned $ 1,700 $ 1,700 $ 1,400 Interest cost 8,100 8,200 7,600 Net amortization and deferral (1,700) (1,700) (1,700) --------- --------- --------- Postretirement benefit cost $ 8,100 $ 8,200 $ 7,300 ========= ========= =========
33 84 NOTES TO FINANCIAL STATEMENTS NOTE 13 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (Continued) The Company's postretirement benefit plans are not funded. The status of the plans at December 31, 1997 and 1996 (based on measurement of the accumulated postretirement benefit obligation at September 30), is as follows:
1997 1996 -------- -------- Accumulated postretirement benefit obligation: Retirees $ 67,904 $ 74,273 Plans' participants fully eligible to receive benefits 13,382 14,280 Other active plan participants 21,319 22,594 --------- --------- 102,605 111,147 Unrecognized prior service cost 10,471 12,101 Unrecognized net gains (losses) 9,196 (1,455) --------- --------- Accrued postretirement benefits other than pensions $ 122,272 $ 121,793 ========= =========
Following are assumptions used in determining the postretirement benefit cost and the accumulated postretirement benefit obligation:
1997 1996 1995 ------- ------- ------- Discount rate 7.5% 7.5% 7.5% Projected health care cost trend rates: Under age 65 8.6 9.1 9.6 Over age 65 6.4 6.7 7.0 Ultimate 5.25 5.25 5.25 Year ultimate health care cost trend rate is achieved 2008 2008 2008
The projected health care cost trend rates listed above for under and over age 65 participants represent assumed increases in per capita cost of covered health care benefits for 1998, 1997 and 1996, respectively. For future years, the rates are assumed to decrease gradually and remain at the ultimate trend rate thereafter. A one-percentage-point increase in the projected health care cost trend rates would increase the 1997 postretirement benefit cost by $500 and the accumulated postretirement benefit obligation as of September 30, 1997, by $4,800. 34 85 NOTES TO FINANCIAL STATEMENTS NOTE 14 - CAPITAL STOCK AND EMPLOYEE STOCK OPTIONS The Company has rights outstanding as set forth in a Rights Agreement, whereby holders of common stock have one right for each share of common stock outstanding. When exercisable, each right entitles its holder to buy one one-hundredth of a new preferred share for $125. The Company has 4,000,000 shares of serial preferred stock authorized, of which no shares were outstanding at December 31, 1997 or 1996. If a person or group acquires 20% or more of the Company's outstanding common stock without complying with the Ohio Control Share Acquisition Act, or engages in certain self-dealing transactions, holders of rights will be entitled to purchase (a) common stock of the Company at one-half the market price, or (b) shares of an acquiring company at one-half the market price, depending upon the circumstances of the transaction. The Company may redeem the rights at a price of $.01 per right at any time prior to the rights becoming exercisable. The rights expire in 1999. The Company's 1994 Stock Incentive Plan (the 1994 Plan) permits the issuance of stock options, stock appreciation rights (SARs) and performance awards to selected salaried employees as approved by the Organization and Compensation Committee of the Board of Directors. The number of shares of common stock that may be issued or transferred under the 1994 Plan may not exceed 1,419,900 shares. Options may be granted to selected employees to purchase common stock at a price not less than 100% of fair market value on the date of grant. The term of each award will be determined by the Organization and Compensation Committee. All options granted as of December 31, 1997, expire 10 years after date of grant. Options granted prior to 1996 became exercisable one year after date of grant. Options granted thereafter become exercisable ratably over a three-year period commencing one year following date of grant. Options that expire, terminate or are canceled without exercise are available for the grant of new awards. Performance awards may be granted to selected employees to receive future payments contingent on continuous service with the Company and achievement of pre-established goals under provisions of the Company's Mid-Term Incentive Plan. Such awards may be settled in cash, common shares available under the 1994 Plan or a combination of both as determined by the Organization and Compensation Committee. In January 1998, 1997 and 1996, 16,925, 44,314 and 40,977 shares, respectively, of common stock were distributed to participants as performance awards under provisions of the Mid-Term Incentive Plan for the three-year periods ended December 31, 1997, 1996 and 1995, respectively. In 1998, the Company discontinued its Mid-Term Incentive Plan. The Company accounts for its employee stock options in accordance with Accounting Principles Board Opinion No. 25 and related interpretations. As a result, no compensation expense for employee stock options has been recognized in the financial statements because such options were granted at market value at date of grant. However, pro forma information regarding net income and net income per share is required by Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," and has been determined for disclosure purposes as if the Company had accounted for employee stock options under the fair value method as prescribed by that statement. The fair values of the Company's employee stock options were estimated as of the dates of grant using the Black-Scholes option pricing model with the following assumptions for 1997, 1996 and 1995, respectively: 35 86 NOTES TO FINANCIAL STATEMENTS NOTE 14 - CAPITAL STOCK AND EMPLOYEE STOCK OPTIONS (Continued)
1997 1996 1995 ------- ------- ------- Risk-free interest rates 5.8% 6.52% 6.23% Expected dividend yields 1.9% 2.30% 2.13% Expected stock price volatility .323 .319 .329 Weighted-average expected option life 5 years 6 years 6 years
For purposes of pro forma disclosures, the estimated fair values of employee stock options are amortized to expense over the options' vesting periods. The estimated fair values per share of options granted during 1997, 1996 and 1995 were $13.43, $11.36 and $11.73, respectively. Pro forma net income and net income per share for 1997, 1996 and 1995 are as follows:
1997 1996 1995 ------- ------- ------- Net income As reported $100,853 $102,721 $ 94,896 Pro forma 99,505 101,293 93,616 Diluted net income per share As reported 3.51 3.51 3.20 Pro forma 3.46 3.46 3.16
Options outstanding at December 31, 1997, had a range of exercise prices from $22.50 to $42.13 and a weighted-average remaining contractual life of approximately eight years. At December 31, 1997, the Company had 1,204,969 shares of common stock reserved for issuance in connection with stock options and performance awards. The following table summarizes stock option activity for the years 1997, 1996 and 1995.
1997 1996 1995 -------------------------- ---------------------- -------------------- Weighted- Weighted- Weighted- Average Average Average Option Exercise Option Exercise Option Exercise Shares Price Shares Price Shares Price -------------------------- ---------------------- -------------------- Outstanding at January 1 1,405,950 $ 31.30 1,164,980 $ 30.67 1,097,230 $ 29.29 Granted 342,000 42.13 349,000 33.02 312,500 33.75 Exercised (592,041) 29.52 (86,030) 29.18 (200,350) 27.72 Forfeited (16,998) 34.77 (4,500) 33.58 (9,000) 33.75 Canceled (9,000) 33.44 (17,500) 33.52 (35,400) 31.46 Outstanding at December 31 1,129,911 35.44 1,405,950 31.30 1,164,980 30.67 Exercisable at December 31 587,754 32.38 1,059,950 30.74 861,480 29.58 Available for future awards at December 31 58,133 391,060 762,374
36 87 NOTES TO FINANCIAL STATEMENTS NOTE 15 - BUSINESS SEGMENTS The Company is managed as two businesses - Aeroquip and Vickers, through the industrial, automotive and aerospace business segments. Aeroquip and Vickers are worldwide manufacturers and distributors of components and systems to industrial, automotive and aerospace markets. Sales are direct to customers through Company sales personnel, or indirect through independent distributors. The industrial business segment serves original equipment and aftermarket customers in various worldwide markets (principally in the U.S., Europe, Asia-Pacific and Brazil) including construction, mining, logging and farm equipment; machine tool; process industries; electrical machinery; air conditioning/refrigeration; electronics; lift truck; material handling; plant maintenance; and housing and commercial construction. The automotive business segment serves worldwide automobile, light truck, sport utility and van manufacturers (principally in the U.S. and Europe). The aerospace business segment serves original equipment and aftermarket customers in worldwide commercial aerospace and defense markets (principally in the U.S. and Europe) including commercial aircraft, air defense, cargo handling, combat and support vehicles, commuter aircraft, engines, marine, defense aircraft, military weaponry, missiles and naval machinery. Products include all pressure ranges of hose, fittings, adapters and couplings; hydraulic pumps, motors and cylinders; electric motors and drives; hydraulic and electronic controls; filters; fluid-evaluation products and services; and a variety of custom-engineered molded and extruded plastic products. Operating income is net sales less operating expenses. Operating expenses include cost of products sold; selling and general administrative expenses; and engineering, research and development expenses. Operating income for 1997 included a charge of $30,000 in the automotive segment to exit the interior plastics business (see Note 3). Identifiable assets by business segment include all assets directly identified with those operations. Corporate assets consist of cash, receivables, properties and deferred charges. 37 88 NOTES TO FINANCIAL STATEMENTS NOTE 15 - BUSINESS SEGMENTS (Continued) The following data relate to business segments:
Depreciation Identi- and Operating fiable Amortization Capital Net Sales Income Assets Expense Expenditures ----------- ----------- ----------- ----------- ------------ 1997 - ---- Industrial $1,170,192 $ 107,032 $ 849,171 $ 42,334 $ 93,563 Automotive 454,096 19,019(a) 167,843 13,750 24,048 Aerospace 488,005 90,006 315,679 14,680 18,899 ---------- ---------- ---------- ---------- ---------- $2,112,293 216,057 1,332,693 70,764 136,510 ========== Corporate (24,417) 42,321 2,437 3,301 Investments in affiliates - 1,582 - - ---------- ---------- ---------- ---------- $ 191,640(a) $1,376,596 $ 73,201 $ 139,811 ========== ========== ========== ========== 1996 - ---- Industrial $1,138,501 $ 105,703 $ 765,734 $ 39,941 $ 58,221 Automotive 503,781 35,082 236,113 17,945 17,715 Aerospace 390,633 59,637 255,221 12,927 13,313 ---------- ---------- ---------- ---------- ---------- $2,032,915 200,422 1,257,068 70,813 89,249 ========== Corporate (23,847) 30,226 2,660 1,377 Investments in affiliates - 2,193 - - ---------- ---------- ---------- ---------- $ 176,575 $1,289,487 $ 73,473 $ 90,626 ========== ========== ========== ========== 1995 - ---- Industrial $1,051,106 $ 121,962 $ 709,503 $ 31,151 $ 58,298 Automotive 494,016 24,107 235,665 19,042 21,848 Aerospace 338,891 38,631 200,315 12,029 12,198 ---------- ---------- ---------- ---------- ---------- $1,884,013 184,700 1,145,483 62,222 92,344 ========== Corporate (25,491) 39,679 2,377 1,611 Investments in affiliates - 38,989 - - ---------- ---------- ---------- ---------- $ 159,209 $1,224,151 $ 64,599 $ 93,955 ========== ========== ========== ==========
(a) Includes a special charge amounting to $30,000. 38 89 NOTES TO FINANCIAL STATEMENTS NOTE 16 - NON-U.S. OPERATIONS U.S. net sales include export sales to unaffiliated non-U.S. customers of $185,541, $186,132 and $150,212 in 1997, 1996 and 1995, respectively. Currency exchange losses charged to Other income (expense) - net amounted to $4,293, $2,846 and $1,849 in 1997, 1996 and 1995, respectively. The following summary of financial data pertains to the Company and its non-U.S. operations. The geographic groupings of non-U.S. operations have been based on similarities of business environments and geographic proximity.
United States Europe Other Eliminations Consolidated ------ ------ ----- ------------ ------------ 1997 - ---- Net sales $1,356,334 $ 624,140 $ 131,819 $ - $2,112,293 Operating income (loss) 155,151 37,234 (745) - 191,640(a) Identifiable assets 987,461 323,624 119,286 55,357 1,375,014 Total assets 989,043 323,624 119,286 55,357 1,376,596 Total liabilities 727,831 150,267 50,932 62,633 866,397 ========== ========== =========== ========== =========== 1996 - ---- Net sales $1,291,875 $ 626,411 $ 114,629 $ - $2,032,915 Operating income 123,337 51,432 1,806 - 176,575 Identifiable assets 907,912 332,225 87,999 40,842 1,287,294 Total assets 910,105 332,225 87,999 40,842 1,289,487 Total liabilities 726,536 140,598 29,087 53,150 843,071 ========== ========== ========== ========== ========== 1995 - ---- Net sales $1,175,509 $ 592,799 $ 115,705 $ - $1,884,013 Operating income 111,029 35,707 12,473 - 159,209 Identifiable assets 806,641 321,995 83,165 26,639 1,185,162 Total assets 845,630 321,995 83,165 26,639 1,224,151 Total liabilities 676,523 141,636 31,325 26,205 823,279 ========== ========== ========== ========== ==========
(a) Includes a special charge amounting to $9,700 in the United States and $20,300 in Europe, totaling $30,000. 39 90 NOTES TO FINANCIAL STATEMENTS NOTE 17 - OTHER INFORMATION
1997 1996 -------- -------- RECEIVABLES - ----------- Receivables $363,523 $358,744 Less allowance for doubtful accounts 14,701 16,032 -------- -------- $348,822 $342,712 ======== ======== INVENTORIES - ----------- In-process and finished products $239,800 $202,214 Raw materials and manufacturing supplies 54,967 59,955 -------- -------- $294,767 $262,169 ======== ======== OTHER CURRENT ASSETS - -------------------- Deferred income taxes $ 3,679 $ 837 Prepaid expenses and other current assets 45,644 44,435 -------- -------- $ 49,323 $ 45,272 ======== ======== PLANTS AND PROPERTIES - AT COST - ------------------------------- Land and improvements $ 21,458 $ 22,543 Buildings 198,882 205,948 Machinery and equipment 694,572 718,289 Construction in progress 78,090 50,570 -------- -------- $993,002 $997,350 ======== ======== OTHER ASSETS - ------------ Goodwill, net of accumulated amortization of $13,077 and $9,509 in 1997 and 1996, respectively $111,905 $110,005 Deferred income taxes 30,958 28,189 Receivables, deposits and other assets 47,943 39,723 -------- -------- $190,806 $177,917 ======== ======== NOTES PAYABLE - ------------- Commercial paper $ 36,177 $ 27,657 Short-term notes payable to banks 47,867 4,162 -------- -------- $ 84,044 $ 31,819 ======== ======== OTHER ACCRUED LIABILITIES - ------------------------- Employees' compensation and amounts withheld therefrom $117,107 $111,561 Taxes, other than income taxes 10,177 6,433 Other accrued liabilities 85,516 70,979 -------- -------- $212,800 $188,973 ======== ========
40 91 INVESTOR INFORMATION STOCK EXCHANGES - --------------- Aeroquip-Vickers' common stock is traded on the New York, Chicago and Pacific Stock Exchanges, and on the London and Frankfurt Stock Exchanges. Our NYSE ticker symbol is ANV. STOCK OWNERSHIP - --------------- On December 31, 1997, there were 9,071 record holders of Aeroquip-Vickers' common stock. Although exact information is unavailable, Aeroquip-Vickers estimates there are approximately 7,000 additional beneficial owners, based upon the 1997 proxy solicitation. DIVIDEND INFORMATION - -------------------- Cash dividends have been paid without interruption on common stock since 1933. The payment of dividends is subject to restrictions described in Note 7 of Notes to Financial Statements. QUARTERLY COMMON STOCK INFORMATION - ----------------------------------
1997 1996 ---- ---- Quarter Ended High Low Close High Low Close March 31 40.38 33.50 33.50 32.75 27.25 31.88 June 30 49.38 32.63 47.25 36.00 31.25 33.38 September 30 57.50 47.50 49.00 33.75 27.88 31.63 December 31 56.25 46.00 49.06 37.13 29.00 36.38
DIVIDEND PAYMENTS PER SHARE OF COMMON STOCK - -------------------------------------------
1997 1996 -------- -------- March $ .20 $ .20 June .20 .20 September .20 .20 December .20 .20 -------- -------- $ .80 $ .80
EX-21 8 EXHIBIT 21 1 92 EXHIBIT (21) AEROQUIP-VICKERS, INC. SUBSIDIARIES OF THE REGISTRANT The assets and business of all subsidiaries listed below are included in the 1997 consolidated financial statements of the Registrant. In addition to those named, 8 U.S. and 22 non-U.S. consolidated subsidiaries and 4 affiliated companies that are accounted for by the cost and/or equity methods are not disclosed. The undisclosed subsidiaries and affiliated companies in the aggregate do not constitute a significant subsidiary.
Incorporated or Percent of Organized - Voting Securities Company State or Country Owned - ---------------------------------- ------------------ ----------------- Aeroquip-Vickers, Inc. Ohio Registrant SUBSIDIARIES OF REGISTRANT Aeroquip Corporation Michigan 100 Aeroquip International Inc. Delaware 100 Vickers, Incorporated Delaware 100 Vickers International Inc. Delaware 100 Aeroquip A.G. Switzerland 100 Aeroquip do Brasil, S.A. Brazil 99.5 Aeroquip Iberica S.A. Spain 100 Aeroquip Inoac Company Michigan 51 Aeroquip-Vickers International GmbH Germany 100 Aeroquip Ltd. Barbados 100 Aeroquip-Vickers Export Trading Company Virgin Islands 100 Aeroquip-Vickers Inc. Canada 100 Aeroquip-Vickers Limited United Kingdom 100 Aeroquip-Vickers Pte. Ltd. Singapore 100 Aeroquip-Vickers Pty. Ltd. Australia 100 Aeroquip-Vickers S.A. France 100 Aeroquip-Vickers Sdn. Bhd. Malaysia 100 Aeroquip-Vickers S.p.A. Italy 100 Vickers do Brasil Ltda. Brazil 100 Vickers Systems Asia Pacific Pte. Ltd. Singapore 100 Vickers Systems International Ltd. India 51 Vickers Systems Limited Hong Kong 100
EX-23 9 EXHIBIT 23 1 93 EXHIBIT (23) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Aeroquip-Vickers, Inc. of our report dated January 21, 1998, included in Exhibit 13 to Form 10-K. Our audits also included the financial statement schedule of Aeroquip-Vickers, Inc. listed in Item 14(a)(2). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in Registration Statement No. 333-34663 on Form S-3 and Post-Effective Amendment No. 1 to Registration Statement No. 333-1709 both dated August 29, 1997, and in the related prospectus dated September 19, 1997; Registration Statement No. 333-1709 on Form S-3 and Post-Effective Amendment No. 2 to Registration Statement No. 33-9127 on Form S-3 both dated March 14, 1996, and in the related Prospectus dated March 20, 1996; Post-Effective Amendment No. 2 to Registration Statement No. 33-14682 on Form S-8 dated April 28, 1989; Registration Statement No. 33-28638 on Form S-8 dated May 10, 1989; Registration Statement No. 33-54059 on Form S-8 dated June 10, 1994; Registration Statement No. 33-55399 on Form S-8 dated September 8, 1994; and Registration Statement No. 333-33047 on Form S-8 dated August 7, 1997, of our report dated January 21, 1998, with respect to the financial statements of Aeroquip-Vickers, Inc. incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Aeroquip-Vickers, Inc. /S/ ERNST & YOUNG LLP Toledo, Ohio March 23, 1998 EX-24 10 EXHIBIT 24 1 94 Exhibit 24 DIRECTORS OF AEROQUIP-VICKERS, INC. ANNUAL REPORT ON FORM 10-K POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that the undersigned directors of Aeroquip-Vickers, Inc., an Ohio corporation ("Aeroquip-Vickers"), do hereby constitute and appoint Darryl F. Allen, James E. Kline and William R. Ammann, and each of them, a true and lawful attorney in their name, place and stead, in any and all capacities, to sign their names to Aeroquip-Vickers' Annual Report on Form 10-K for the year ended December 31, 1997, and any and all amendments to such Form 10-K, and to cause the same to be filed with the Securities and Exchange Commission, granting unto said attorneys and each of them full power and authority to do and perform any act and thing necessary and proper to be done in the premises, as fully to all intents and purposes as the undersigned could do if personally present, and the undersigned hereby ratify and confirm all that said attorneys or any one of them shall lawfully do or cause to be done by virtue hereof. This Power of Attorney may be executed in multiple counterparts, each of which shall be deemed an original with respect to the person executing it. IN WITNESS WHEREOF, the undersigned have hereunto set their hands as of the 22ND day of January, 1998. /S/ PURDY CRAWFORD /S/ PAUL A. ORMOND Purdy Crawford Paul A. Ormond Director Director /S/ JOSEPH C. FARRELL /S/ JOHN P. REILLY Joseph C. Farrell John P. Reilly Director Director /S/ DAVID R. GOODE /S/ WILLIAM R. TIMKEN, JR. David R. Goode William R. Timken, Jr. Director Director EX-27 11 EXHIBIT 27
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF FINANCIAL POSITION AND THE CONDENSED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 DEC-31-1997 18,736 0 363,523 14,701 294,767 711,648 993,002 518,860 1,376,596 440,997 256,707 140,325 0 0 369,874 1,376,596 2,112,293 2,112,293 1,554,668 1,554,668 0 0 27,171 148,153 47,300 100,853 0 0 0 100,853 3.60 3.51
EX-27.1 12 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF FINANCIAL POSITION AND THE CONDENSED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS 6-MOS 3-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 SEP-30-1997 JUN-30-1997 MAR-31-1997 31,112 26,718 37,277 0 0 0 370,415 388,062 384,445 14,171 14,751 14,239 284,739 276,273 265,213 728,788 732,813 725,575 984,786 984,471 985,213 536,728 543,468 554,326 1,365,291 1,361,284 1,339,346 451,225 474,070 478,551 257,628 257,763 258,808 0 0 0 0 0 0 141,150 140,214 139,954 350,160 327,811 300,263 1,365,291 1,361,284 1,339,346 1,589,481 1,094,704 538,426 1,589,481 1,094,704 538,426 1,175,563 815,192 405,951 1,175,563 815,192 405,951 30,000 30,000 0 0 0 0 20,610 14,365 7,371 101,228 57,524 6,594 31,800 18,200 900 69,428 39,324 5,694 0 0 0 0 0 0 0 0 0 69,428 39,324 5,694 2.48 1.41 .20 2.41 1.37 .20
EX-27.2 13 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF FINANCIAL POSITION AND THE CONDENSED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR 9-MOS 6-MOS 3-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 SEP-30-1996 JUN-30-1996 MAR-31-1996 23,934 33,082 18,538 19,051 0 0 0 0 358,744 373,150 363,444 357,629 16,032 15,148 14,299 14,526 262,169 249,783 254,912 252,270 674,087 687,284 664,868 656,958 997,350 992,939 973,196 965,328 559,867 563,711 546,406 540,584 1,289,487 1,274,618 1,248,133 1,255,640 424,956 429,746 409,096 383,079 257,727 251,962 252,304 302,301 0 0 0 0 0 0 0 0 139,559 140,298 142,317 143,007 306,857 288,045 279,998 263,960 1,289,487 1,274,618 1,248,133 1,255,640 2,032,915 1,523,020 1,030,037 512,113 2,032,915 1,523,020 1,030,037 512,113 1,520,736 1,140,000 769,871 385,856 1,520,736 1,140,000 769,871 385,856 0 0 0 0 0 0 0 0 25,813 19,361 13,127 6,285 153,421 120,632 89,675 30,515 50,700 42,400 32,200 6,100 102,721 78,232 57,475 24,415 0 0 0 0 0 0 0 0 0 0 0 0 102,721 78,232 57,475 24,415 3.62 2.74 2.01 .85 3.51 2.66 1.94 .83
EX-27.3 14 EXHIBIT 27.3
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF FINANCIAL POSITION AND THE CONDENSED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1995 DEC-31-1995 16,186 0 305,387 13,241 269,284 616,405 959,286 533,925 1,224,151 360,173 302,352 0 0 144,125 256,747 1,224,151 1,884,013 1,884,013 1,407,670 1,407,670 0 0 19,199 128,196 33,300 94,896 0 0 0 94,896 3.29 3.20
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