-----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, OooRN2cNJn8sQ9QY9O9h/9GX1drr57pCvRReNS4xIfnPCIa5cypVTr8qUXcVNBgc 04j8P42nV9nFoinz/284Pw== 0000950124-97-004742.txt : 19970918 0000950124-97-004742.hdr.sgml : 19970918 ACCESSION NUMBER: 0000950124-97-004742 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970916 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANDARD PRODUCTS CO CENTRAL INDEX KEY: 0000093448 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 340549970 STATE OF INCORPORATION: OH FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-02917 FILM NUMBER: 97680958 BUSINESS ADDRESS: STREET 1: 2401 S GULLEY ROAD CITY: DEARBORN STATE: MI ZIP: 48124 BUSINESS PHONE: 2162818300 MAIL ADDRESS: STREET 1: 2401 S GULLEY RD CITY: DEARBORN STATE: MI ZIP: 48124 10-K405 1 FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the Fiscal Year Ended June 30, 1997 Commission File Number: 1-2917 THE STANDARD PRODUCTS COMPANY (Exact Name of Registrant as Specified in its Charter) OHIO (State or Other Jurisdiction of Incorporation or Organization) 34-0549970 (IRS Employer Identification No.) 2401 SOUTH GULLEY ROAD DEARBORN, MICHIGAN 48124 (Address of Principal Executive Offices)(Zip Code) Registrant's telephone number, including area code: (313) 561-1100 Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Shares, $1 Par Value New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the Registrant as of September 8, 1997 (based on the closing price of the Registrant's Common Stock reported on the New York Stock Exchange Composite Tape on such date), was approximately $452.8 million. The number of shares of Common Stock outstanding as of September 8, 1997, was 16,846,738 shares. Documents incorporated by reference Portions of the Registrant's Proxy Statement related to the 1997 Annual Meeting of Shareholders are incorporated by reference in Part III. ================================================================================ 2 PART I ITEM 1. BUSINESS General and Industry Segments The Standard Products Company (the "Company") was incorporated in the State of Ohio in 1927 and is engaged primarily in the manufacture of rubber and plastic parts requiring a substantial degree of product engineering and high-volume production processes for automotive original equipment manufacturers ("OEMs") in North America, Europe and Brazil. Through its Holm Industries, Inc. subsidiary, the Company is the largest supplier of rubber and plastic sealing components for the refrigeration industry in the North America. These two businesses form the Company's Transportation Equipment Segment. The Company also manufactures precure and mold cure tread rubber for the truck tire retreading industry. This business, which operates through the Company's subsidiary, Oliver Rubber Company, constitutes the Tread Rubber Segment. Additional financial information concerning the Company's reportable business segments and geographic areas for the years ended June 30, 1997, 1996 and 1995 is included in Note 15 of the Consolidated Financial Statements found on page F-20. The Company has expanded its operations into Brazil and Mexico over the past two years. In May 1995, the Company increased its ownership in Itatiaia Standard, a Brazilian company, from 20% to 100%. This was done in connection with its construction of a new production facility in Brazil. As part of the new construction, the Company formed a new entity, Standard Products Brasil Industria E Comercio LTDA. ("SPB"). During fiscal 1997, the Company ceased production at all Itatiaia Standard locations and consolidated all manufacturing operations at SPB which operates the new plant in Varginha. In 1995, the Company formed Standard Products de Mexico, S.A. de C.V. ("SPM") In 1996, the Company sold a 30% interest in this entity to Nishikawa Rubber Company, of Hiroshima, Japan ("Nishikawa"). Construction of a new plant in Mexico began during fiscal 1997 with completion scheduled by the end of calendar 1997. This facility will manufacture automotive parts for the North American automotive original equipment market. The Company also has a 50% ownership interest in Nishikawa Standard Company ("NSC"), a North American joint venture with Nishikawa. TRANSPORTATION EQUIPMENT SEGMENT Automotive Original Equipment Products. Rubber products supplied to the automotive manufacturing industry include flocked rubber and steel weatherstrip assemblies to seal vehicle windows; flocked rubber window channel assemblies and rubber window gaskets; and vehicle body and door dynamic sealing systems. These products form the sealing system of automotive vehicles, preventing water leakage and inhibiting wind noise from entering the vehicle. Attractiveness of design is an important feature of the sealing system. An increasing number of the Company's parts are sold to automotive original equipment manufacturers as complete sealing systems. This is a departure from former practices which involved more suppliers who supplied individual parts, not complete systems. The Company also supplies molded rubber engine mounts and body cushions, which comprise a vehicle's vibration control system. Plastic products made by the Company include metallized, multicolored and embossed exterior and interior vinyl trim, painted vinyl trim and flocked vinyl and steel weatherstrip assemblies. The plastic exterior products serve as protective barriers preventing damage to the vehicle's sheet metal and can be an integral part of the vehicle's overall styling and appearance. Markets and Customers. The Company manufactures parts and accessories for automotive and truck OEMs in the United States, Brazil, Canada, and Europe. Manufacturing operations for the automotive original equipment market of this segment are conducted by the Company, SPB, Standard Products (Canada) Limited, Standard Products Limited (SPL) and Standard Products Industriel (SPI). This segment is highly dependent on the success of OEMs worldwide and on three customers in particular (Ford, General 2 3 Motors and Chrysler), the loss of one or more of which would have a material adverse effect on this segment (See Note 15 of the Consolidated Financial Statements found on page F-20 for the percentage of sales to its three largest customers). As the Company continues to expand its global position, it also spreads the risk over those additional countries and develops stronger relationships with other major OEMs, such as Fiat in South America. The general economic climate in the various geographic areas in which the Company produces and ships parts is presently good. In particular, the Brazilian economy continues to show increasing stability with only modest inflation over the last year, while North America and Europe remain in modest growth patterns that are typical of mature markets. Foreign exchange rates could affect the Company as Brazil continues a steady devaluation of its currency in support of lower inflation and various European countries adopt measures to ensure their inclusion in the European Economic Community in the year 2000. In the coming year, the Company will commence operations at its 70% owned facility at Aquascalientes, Mexico, a country emerging from considerable economic uncertainty. In addition to the factors noted above, the globalization of the economy is bringing new competition for customers in North America. Management views the Company's extensive worldwide experience as a major asset in retaining and generating new business; however, this trend has only added to the pressure from our major customers to reduce prices. Sales and Distribution. The market for new automobiles in any country is highly dependent on the general economic conditions in that country. Since most of the Company's rubber and plastic automotive products are sold as original equipment, sales of such products are directly affected by the annual car production of OEMs. The Company does not have a backlog of orders at any point in time. Instead, original equipment sales are based upon purchase orders issued annually by automobile manufacturers for each part which the Company manufactures. The purchase orders are for all or a percentage of the customers' estimated requirements and are binding, subject to the annual car production. As the year evolves, customers issue releases under those purchase orders, specifying quantities of the parts which the assembly plants require. The Company's sales and product development personnel work directly with the engineering and styling departments of the automotive OEMs in the engineering and development of its various products. The Company maintains sales offices strategically located to provide support and service to its customers. While the Company's business is not seasonal in the traditional sense, July, August and December are generally lower volume months. OEMs typically perform model changeovers and have plant shutdowns during July, European operations are closed for vacations in August and assembly plants are usually closed for a period from shortly before Christmas until after New Year's Day. The Company utilizes, as a distribution center for some of its automotive finished products, approximately 142,000 square feet of a 283,000 square foot public warehouse which it operates in Dearborn, Michigan. The balance of the warehouse space is allocated to commercial customers' use. In 1997, the Company acquired a 207,000 square foot warehouse in Goldsboro, North Carolina for use by two plants located in the surrounding area for raw materials and finished goods. The Company also distributes automotive finished products from a leased warehouse in Charlotte, North Carolina, central to the Company's other southern plants. Most of the Company's nondomestic customers are supplied directly by foreign manufacturing plants of subsidiaries of the Company. Competition. Each aspect of the Company's business in automotive products is highly competitive. No single firm competes with the Company in all aspects of this business, however, major competitors would include Gencorp, Inc., the Schlegel group of British Tire & Rubber, Harvard Industries' Kingston-Warren subsidiary and Cooper Tire and Rubber. In its international markets, the Company also competes with several other manufacturers in Europe and South America who are large and have substantial resources. There can be no assurance that competitors will not be able to take actions, including developing new technology or products, or offering prolonged reduced pricing, which could adversely affect the Company. In addition to the competitors noted above, the continued globalization of the automotive industry has brought new competition to North America. In particular, Draftex GmbH, a subsidiary of London-based 3 4 Laird Group PLC has built a new production facility in North America. While the Company competes with Draftex in Europe this has added another supplier to the field in North America at a time when customers are trying to reduce their supplier base. Although reliable industry statistics are not available, the Company believes that it is one of the leading manufacturers of rubber window and door weather sealing products and plastic trim for the worldwide automotive industry. Although each customer may emphasize a different component as its primary criteria, the automotive industry has historically competed in three areas in providing customer service: quality, cost and time. Time in this sense relates to on-time delivery, time to bring new products to market, manufacturing cycle time, etc. The Company also believes that engineering and design capabilities now play a greater role in the competitive process. Management believes the Company's investment in engineering and design capabilities is a requirement to achieving future business. The Company has historically met the customers' requirements in these areas. Other The Company, through its subsidiary, Holm Industries, Inc., manufactures a variety of custom-designed extruded plastic (primarily polyvinyl chloride and PVC compounds) gaskets and seals sold as original equipment to manufacturers of residential and commercial refrigerators, dishwashers and air conditioners. These products are custom designed to enhance energy control and, in the case of dishwashers, to prevent water leakage. Holm also produces extruded plastic parts for the residential exterior door and window industries and extruded rubber products for the automobile restoration and truck manufacturing industries. Holm is the largest supplier of extruded plastic gaskets and seals to the North American refrigeration and freezer market. Holm manufactures and sells its products in the United States and, through a Mexican joint venture and license agreements in Brazil, Argentina, and India. Working Capital The Transportation Equipment segment typically maintains a strong working capital position which provides adequate cash flow. Accounts receivable are promptly paid and inventories turn over rapidly. The Company entered into an agreement in 1995 to sell $50,000,000 of accounts receivable (See Note 4 to the Consolidated Financial Statements found on page F-15). The Company maintains sufficient credit lines under borrowing arrangements to meet the Company's cash requirements. Joint Ventures Through its North American joint venture, NSC, a general partnership owned 50% by the Company and 50% by Nishikawa, the Company manufactures vehicle body and door sealing systems for sale to North American automotive original equipment manufacturers and Japanese transplants. Major customers include Honda, Ford Motor Company and Automotive Alliance International (formerly Mazda). Manufacturing operations are conducted at plants located in Bremen, New Haven, and Topeka, Indiana. Currently, the chief operating officer of The Standard Products Company is the chief executive officer of NSC and chairman of its Policy Committee. In 1996, the Company sold 30% of its ownership interest in SPM to Nishikawa. The Company retained a 70% interest. The venture will manufacture automotive parts for the North American automotive original equipment market once construction of a new facility is completed in late 1997. TREAD RUBBER SEGMENT Products. The Company's wholly owned subsidiary, Oliver Rubber Company ("Oliver"), manufactures and markets precure and mold cure tread rubber, bonding gum, cement, repair materials and equipment for the tire retreading industry. Oliver also supplies custom mixed rubber to the Company for use in automotive original equipment products and to NSC for the manufacture of door seals for automotive original equipment. Oliver also custom mixes rubber compounds for selected customers throughout the United States. 4 5 Oliver supplies both precure and mold cure tread rubber. Precure tread rubber is shipped to a retreader partially cured and with a specially designed tread imprinted. The retreader cements the precure tread to a tire casing using heat and pressure to complete a permanent bond. Mold cure tread rubber is applied by a retread dealer to the tire casing in a pressure mold which cures the rubber and at the same time imprints into it the tread design. Markets. Oliver serves the trucking industry in North America through its licensed dealer network for precure retreading and through dealers who sell mold cure rubber. Oliver also serves markets in other areas of the world, such as India, through license arrangements and export sales. Truck mileage, and therefore demand for tread rubber, correlate with general economic conditions of the market served. Oliver also supplies mold cure tread rubber for off-the-road (OTR) construction equipment. Sales and Distribution. In North America, tread rubber products are marketed by Oliver's sales force to retread dealers, some of which are licensed by Oliver. Licensed dealers use Oliver's patented precure system and market tread rubber under the name Tuff-Cure. Competition. The tread rubber industry is very competitive with more than ten suppliers, of which three are significant. Competition is based upon the price and quality of the products supplied. While exact market share information is not available, it is estimated that based on pounds shipped, the largest supplier of precure tread rubber is Bandag, Incorporated ("Bandag"). Unlike Bandag, Oliver sells both precure and mold cure tread rubber. Management believes Oliver is currently the largest supplier of mold cure rubber in North America and the second largest supplier of tread rubber. Working Capital The Tread Rubber Segment sells to many small independent customers. Accounts receivable and the extension of credit must be monitored closely to reduce the risk of losses in collection. Inventories include a supply of finished goods on hand to fill customer orders from stock. Working capital requires careful management but has generally been sufficient to fund operating needs. RAW MATERIALS The principal materials used by the Company and its subsidiaries in its Transportation Equipment and Tread Rubber segments are synthetic rubber and rubber chemicals. In addition, other significant materials used by the Company in its Transportation Equipment segment include plastic resins, woven fabrics, flock fibers, coil steel, aluminum and adhesives. The majority of these materials are purchased on the open market from domestic suppliers. The Company believes that it has adequate supplies of raw materials available from reliable sources for the levels of production presently anticipated. ENGINEERING AND DEVELOPMENT Although the Company operates in mature industries, it continues to spend significant amounts for engineering and development of new products, processes and applications. These amounts are disclosed on the Consolidated Statements of Income found on page F-8 included herein. Product development is an essential part of the market strength of the Company. The Company's sales and product development personnel work directly with the engineering and styling departments of its major customers in the development of new products. In recent years, the Company's involvement with its automotive customers has begun at the earlier model design stage, with the Company assuming an increasing share of engineering and design capability and responsibility. The Company's main sales and product development group is located in Dearborn, Michigan, close to the purchasing and engineering groups of its largest customers. The Company also has significant product development facilities at Stratford, Ontario, Huntingdon, England and Bezons, France. 5 6 PATENTS AND LICENSES The Company holds numerous patents covering various manufacturing processes and products of the Transportation Equipment Segment and several patents relating to application processes used by its tread rubber customers. The Company has licensed certain of the patents. The Company has a license agreement with Nishikawa for sales, marketing and engineering services on certain products sold by the Company. While the Company considers some of its patents and licenses to be important in certain aspects of its business, the Company does not believe that the loss or expiration of any particular patent or license would have an adverse effect on either segment of its business. The Company actively pursues the application for patents on new products and processes. EMPLOYEES As of June 30, 1997, the Company employed approximately 10,350 persons, of whom approximately 7,600 were hourly employees. Employee relations at the Company's plants generally have been good. Approximately 50% of the Company's employees were represented by labor unions as of June 30, 1997. ENVIRONMENTAL MATTERS The Company believes that it is in substantial compliance with federal, state and local provisions regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. The Company maintains personnel whose function is to monitor compliance with environmental protection regulations. At its Gaylord, Michigan plant, the Company is correcting a previously defined condition of groundwater located under its plant by injecting such water to underground depths well below and separate from the drinking water aquifer. To the extent necessary, permits for all corrective activities have been obtained from the Michigan Department of Environmental Quality and the United States Environmental Protection Agency. Chemicals in addition to those previously defined have also been identified in the groundwater. The Company is investigating whether the source of the additional chemicals is on-site or off-site. The Company has been previously designated as a potentially responsible party in connection with several disposal sites. Settlements with payment of an immaterial amount or no amount at all have been obtained for all except two sites, one located in Jamestown, North Carolina and the other in Zionsville, Indiana. Management believes that it was an insignificant contributor at these sites and believes that these matters will be resolved without material adverse affect to the Company's financial statements. The Company has been notified by the State of New York that the property occupied by its Schenectady plant, which is expected to be closed by the end of 1997, is being investigated due to allegations concerning possible contamination resulting from the operations of the previous property owner. The State has reclassified the site based on the presence of several contaminants and has requested the Company to perform certain actions. The Company voluntarily completed interim actions and is continuing site investigations to define the extent and source of the contaminants. The Company has petitioned the State of New York to reclassify this site as one not needing further action. Where appropriate, the Company has accrued for the above mentioned items in accordance with its accounting policies. See Note 1, "Environmental Compliance and Remediation" of the Consolidated Financial Statements found on page F-13. Management believes, on the basis of presently available information, that resolution of these matters will not materially affect liquidity, capital resources or the consolidated financial condition of the Company. FOREIGN OPERATIONS The Company owns all of the outstanding shares of Standard Products (Canada) Limited, a Canadian corporation which is engaged primarily in the manufacture of rubber and plastic parts and accessories for United States and Canadian automotive OEMs. The Company also serves the automotive replacement parts market and distributes products for the truck tire retreading industry. 6 7 The Company all of the outstanding shares (except for qualifying shares held by nominees) of Standard Products Limited, an English corporation which is engaged primarily in the manufacture of rubber and plastics parts and accessories for the North American, United Kingdom and European automotive original equipment manufacturers and for the automotive replacement parts market. The Company acquired all of the issued and outstanding shares of capital stock of Standard Products Industriel ("SPI"), a corporation organized under French law in December 1992. SPI is engaged in the business of designing, developing, manufacturing and distributing rubber and plastic parts and accessories principally for the European automotive OEMs and for the automotive replacement parts market. In March 1996, the Company commenced production at a newly-constructed plant located in Varginha, Brazil. This 236,000 square foot facility manufactures plastic and rubber sealing components for the automotive original equipment industry in South America. A substantial portion of the plant's business is the production of parts for Fiat's world car, the Palio. During 1995, the Company had increased its presence in Brazil by incorporating Standard Products Brazil (SPB) and by purchasing the 80% of Itatiaia Standard not then owned by it. During 1996 and 1997 the Company consolidated all Itatiaia Standard's manufacturing operations into the new facility in Varginha. In addition to Fiat, customers of SPB include Ford, General Motors and Volkswagen. In 1995, the Company formed Standard Products de Mexico, S.A. de C.V. During 1996, the Company sold a 30% interest in this entity to Nishikawa. Construction of a new plant in Aguascalientes began during fiscal 1997. This plant is expected to begin production by the end of calendar 1997. When complete, the 76,000 square foot plant will manufacture rubber and plastic automotive parts for the North American OEMs. The Company also has minority equity interests in and licensing arrangements with firms in Japan, Korea, India, Mexico and other countries throughout the world. The Company's United States export sales in the aggregate for the three fiscal years ended June 30, 1997, 1996 and 1995, were $111,017,000, $95,793,000 and $71,749,000, respectively, of which a substantial portion is represented by sales to automotive original equipment manufacturers in Canada. The Company's experience has been that its significant foreign businesses in Canada and Western Europe do not present materially different risks or problems from those encountered in its United States markets. The risks of the Company, Standard Products (Canada) Limited, Standard Products Limited, Standard Products Brazil, and Standard Products Industriel involve meeting the customers' expectations as to the timely delivery of parts which meet their specifications. The automotive business is directly affected by the annual car production of original equipment manufacturers. Standard Products (Canada) Limited, Standard Products Limited, Standard Products Brazil and Standard Products Industriel participate in the risk of varying car builds similar to any of the Company's other automotive plants which supply domestic assembly plants. The Company expects that the risks of conducting business in the Brazilian automotive original equipment market will be greater than the North American and European automotive markets. The Company must deal with several new issues including but not limited to more stringent governmental regulation, potential high inflation, and the general economic instability associated with emerging markets. 7 8 ITEM 2. PROPERTIES The Company operates the properties for the Transportation Equipment segment as follows:
LAND PLANT LOCATION (ACREAGE) (SQUARE FEET) -------- --------- ------------- Aguascalientes, Mexico...................................... 15.9 76,000 Bezons, France.............................................. 4.3 140,000 Bolbec, France (1).......................................... 24.3 276,000 Cleveland, Ohio............................................. 12.0 157,000 Dearborn, Michigan (Warehouse and Offices).................. 13.9 358,000 Etobicoke, Ontario, Canada (1).............................. .8 33,000 Gaylord, Michigan........................................... 96.2 92,000 Georgetown, Ontario, Canada................................. 5.7 89,000 Goldsboro, North Carolina................................... 6.6 140,000 Goldsboro, North Carolina................................... 27.3 207,000 Greenville, Michigan........................................ 1.0 10,000 Griffin, Georgia............................................ 17.5 190,000 Hartselle, Alabama (1)...................................... 11.1 72,000 Huntingdon, England......................................... 11.1 175,000 Itaquaquecetuba, Brazil (2)................................. 11.9 54,000 Kittanning, Pennsylvania.................................... 6.1 80,000 Lexington, Kentucky (2)..................................... 5.9 115,000 Lillebonne, France.......................................... 9.1 100,000 Maesteg, Wales.............................................. 8.4 102,000 Mississauga, Ontario, Canada (1)............................ 5.0 97,000 Mitchell, Ontario, Canada................................... 10.5 88,000 New Ulm, Minnesota.......................................... 3.5 46,000 Plymouth, England (1)....................................... 9.0 127,000 Rocky Mount, North Carolina................................. 24.2 222,000 St. Charles, Illinois....................................... 2.3 47,000 Schenectady, New York (2)................................... 22.5 224,000 Scottsburg, Indiana......................................... 8.5 192,000 Spartanburg, South Carolina................................. 30.1 85,000 Stratford, Ontario, Canada.................................. 20.0 80,000 Stratford, Ontario, Canada.................................. 26.8 107,000 Stratford, Ontario, Canada.................................. 5.4 94,000 Tijuana, Mexico (1)......................................... -- 10,000 Varginha, Brazil............................................ 38.3 236,000 Vitre, France (1)........................................... 16.6 207,000 Winnsboro, South Carolina................................... 26.4 175,000
8 9 The Company operates the properties for the Tread Rubber segment as follows:
LAND PLANT LOCATION (ACREAGE) (SQUARE FEET) -------- --------- ------------- Asheboro, North Carolina.................................... 16.4 161,000 Athens, Georgia............................................. 32.0 109,000 Athens, Georgia (1)......................................... 3.3 37,000 Dallas, Texas (1)........................................... 6.0 96,000 Export, Pennsylvania (1).................................... 2.0 40,500 Oakland, California......................................... 4.2 112,000 Paris, Texas................................................ 28.5 31,000 Salisbury, NC............................................... 2.7 37,200 Stratford, Ontario, Canada.................................. 5.4 94,000 Wadsworth, Ohio............................................. 2.0 28,000
- ------------------------- (1) Leased from others. The leases are short to medium term operating leases, some of which have options to renew for additional periods. Rental rates are competitive for the market in which the property is located. The Company believes that all of these leased facilities could be replaced for comparable terms. (2) Location closed in late fiscal 1997 or is scheduled for closure in fiscal 1998. Land and buildings will be held for sale. The Company operates a 283,000 square foot public warehouse in Dearborn, Michigan of which the Company utilizes approximately 142,000 square feet for its own products. The Company has its corporate headquarters (including engineering and product development) at this location. In addition to the 283,000 square feet of office space, the Company also utilizes approximately 44,000 square feet of space for offices. The Company believes that all of its properties, machinery and equipment are in good operating condition and suitable and adequate for the business of the Company as presently conducted. The utilization of the Company's Transportation Equipment facilities varies with the production of passenger cars and light trucks in various countries. The utilization of the Tread Rubber facilities varies with demand for tread rubber product. Capacities of each facility are adequate to meet current demands. Management believes capacity is adequate to meet the demands of each segment's business, however, it continues to evaluate its position in each geographic area of the world and will expand or reduce capacity accordingly. ITEM 3. LEGAL PROCEEDINGS The Company was not a party to any pending legal proceedings other than ordinary routine litigation incidental to its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None EXECUTIVE OFFICERS OF THE REGISTRANT The information below is included in this report pursuant to instruction 3 to Item 401(b) of Regulation S-K. The Executive Officers of the Company are elected annually to serve for one-year terms or until their successors are elected and qualified. The Executive Officers listed below were elected on October 22, 1996, except for Mr. Roudebush who was elected on July 24, 1997 and Mr. Jacobson who was elected on 9 10 January 27, 1997. The business experience, principal occupations and employment during the last five years of the individuals holding the office are indicated in the table below.
SERVED IN PRESENT OFFICE NAME AGE POSITION WITH REGISTRANT SINCE ---- --- ------------------------ --------- James S. Reid, Jr. ............ 71 Chairman of the Board of Directors 1981 Mr. Reid resigned from his position as Chief Executive Officer, which he held since 1962, effective July 24, 1997. Ronald L. Roudebush............ 50 Vice Chairman and Chief Executive Officer 1997 Formerly, Mr. Roudebush was part owner and an officer of Milford Dodge, Inc. from 1995 and President of Rockwell Automotive from 1991 to 1994. Theodore K. Zampetis........... 52 President and Chief Operating Officer 1991 Formerly, Mr. Zampetis was Executive Vice President -- President Standard Products Automotive Operations from 1990. Donald R. Sheley, Jr. ......... 55 Vice President, Finance and Chief Financial Officer 1995 Formerly, Mr. Sheley was Vice President and Corporate Controller, Cooper Industries, Inc. from 1988 until joining the Company in July, 1995. Larry J. Enders................ 55 Vice President of the Company and President and Chief 1993 Executive Officer, Oliver Rubber Company Formerly, Mr. Enders was Vice President -- Purchasing and Worldwide Supply from 1991. James F. Keys.................. 43 Executive Vice President -- International Operations 1996 Formerly, Mr. Keys was Vice President of the Company and Managing Director of Standard Products Limited from 1991 to 1996. Stephan J. Mack................ 60 President, Holm Industries, Inc. 1986 Ted M. McQuade................. 43 Executive Vice President, North American Automotive Operations Formerly, Mr. McQuade was Manager of Production Support and Global Integration, Appliance Business, General Electric from 1990. Gerard Mesnel.................. 58 Executive Vice President -- Advanced Technology 1995 Worldwide and President and Directeur General, Standard Products Industriel Formerly, Mr. Mesnel was President/Consultant, GSF Cie. since 1990. Richard N. Jacobson............ 47 General Counsel and Secretary 1997 Formerly, Mr. Jacobson was Senior Corporate Counsel for The B. F.Goodrich Company from 1987. John C. Brandmahl.............. 58 Vice President -- Human Resources 1991 Wayne E. Hodges................ 47 Vice President -- Sales and Marketing 1995 Formerly, Mr. Hodges was Senior Vice President and Corporate Secretary of Toyoda Gosei Company Ltd. Charles F. Nagy................ 45 Treasurer 1992 Bernard J. Theisen............. 38 Corporate Controller and Assistant Secretary 1995 Formerly, Mr. Theisen was Corporate Controller for Hayes Wheels International, Inc. from 1993 and Business Unit Controller of its Fabricated Wheel Group from 1991.
10 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS On August 1, 1997, the Company had 16,810,238 share of its Common Shares $1 par value outstanding, which were owned by 975 shareholders of record. During 1997 and 1996, the Company paid quarterly cash dividends on its Common Shares of $.17 per share. Information concerning long-term debt, including restrictions and provisions relating to distributions and cash dividends on the Company's Common Shares, appears on Note 8 which appears on page F-16 of this report. The Company's Common Shares are traded on the New York Stock Exchange under the symbol SPD. Market data as shown in the following table:
1997 1996 --------------------- --------------------- FISCAL QUARTER HIGH LOW HIGH LOW -------------- ---- --- ---- --- 1st.............................................. $25.75 $18.50 $24.00 $17.00 2nd.............................................. $26.25 $22.75 $18.75 $13.50 3rd.............................................. $26.50 $22.00 $25.00 $16.38 4th.............................................. $26.88 $21.38 $28.25 $23.00
ITEM 6. SELECTED FINANCIAL DATA The information required by the Item is on page F-1 included herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is on pages F-2 through F-6 included herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data are as set forth in the "Index to Consolidated Financial Statements, Supporting Schedules and Supplemental Data" on page 19 included herein. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 11 12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT As to Executive Officers, the information required is included in Part I of this report on Form 10-K. The information required by Item 10 as to directors of the Registrant is incorporated herein by reference to the information set forth under the caption "Election of Directors" on pages 4 through 6 of the definitive Proxy Statement for the Annual Meeting of Shareholders to be held October 21, 1997 ("1997 Proxy Statement"). The information required concerning Section 16 compliance is incorporated herein by reference to the information set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 19 of the 1997 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated herein by reference to the material under the caption "Executive Compensation" on pages 7 through 14 of the 1997 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated herein by reference to the information set forth under the captions "Security Ownership of Certain Beneficial Owners and Management" on pages 1 through 3 of the 1997 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated herein by reference to the information set forth under the caption "Compensation Committee Interlocks and Insider Participation" on page 12 of the 1997 Proxy Statement. 12 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements: See Index to Consolidated Financial Statements, Supporting Schedules and Supplemental Data on page 20 included herein. (a) (2) Financial Statement Schedule: See Index to Consolidated Financial Statements, Supporting Schedules and Supplemental Data on page 20 included herein. 13 14 (a)(3) Exhibits:
IF INCORPORATED BY EXHIBIT NO. REFERENCE, DOCUMENTS UNDER REG. S-K FORM 10-K WITH WHICH EXHIBIT ITEM 601 EXHIBIT NO. DESCRIPTION WAS PREVIOUSLY FILED - -------------- ----------- ----------- --------------------------------- 2 2a Stock Sale Agreement, Dated Form 8-K, Dated January 26, 1993 December 19, 1992 with respect to (Filed with the SEC on February the acquisition of the Standard 9, 1993; see Exhibit 2 therein) Products Industriel Group. 3 3a Second Amended and Restated Quarterly Report Form 10-Q (Filed Articles of Incorporation with the SEC on November 1, 1993; see Exhibit 3a therein) 3 3b Amended and Restated Code of Form S-3 Registration No. Regulations 33-62054 (Filed with the SEC on May 5, 1993; see Exhibit 3.2 therein) 4 4a Senior Notes Agreement -- Quarterly Report Form 10-Q (Filed $75,000,000 6.55% Senior Notes with the SEC on February 11, due December 16, 2003, by and 1994; see Exhibit 4 therein) among The Standard Products Company and Metropolitan Life Insurance Company and certain of its Affiliates 4 4b First Amendment to Senior Notes Agreement -- $75,000,000 6.55% Senior Notes due December 16, 2003 by and among The Standard Products Company and Metropolitan Life Insurance Company and certain of its Affiliates dated September 22, 1995 4 4c Second Amendment to Senior Notes Quarterly Report on Form 10Q Agreement -- $75,000,000 6.55% (Filed with the SEC on February Senior Notes due December 16, 10, 1997; see Exhibit 10c 2003 by and among The Standard therein) Products Company and Metropolitan Life Insurance Company and certain of its Affiliates dated December 9, 1996 4 4d Senior Notes Agreement -- Annual Report Form 10-K (Filed $25,000,000 aggregate principal with the SEC on September 25, amount 9.56% Senior Notes due 1989; see Exhibit 4b therein) July 1, 1999 by and between the Company and Nationwide Life Insurance Company ($12,000,000), Aid Association for Lutherans ($10,000,000) and Employers Life Insurance Company of Wausau ($3,000,000) dated as of June 30, 1989
14 15
IF INCORPORATED BY EXHIBIT NO. REFERENCE, DOCUMENTS UNDER REG. S-K FORM 10-K WITH WHICH EXHIBIT ITEM 601 EXHIBIT NO. DESCRIPTION WAS PREVIOUSLY FILED - -------------- ----------- ----------- --------------------------------- 4 4e First and Second Amendments to Annual Report Form 10-K (Filed the Senior Notes Agreement -- with the SEC on September 15, $25,000,000 aggregate principal 1992; see Exhibit 4f therein) amount, dated February 22, 1991 (First Amendment) and, June 30, 1991 (Second Amendment), between the Company and Nationwide Life Insurance Company, Aid Association for Lutherans and Employers Life Insurance Company of Wausau 4 4f Third Amendment to Senior Notes Agreement aggregate principal amount $25,000,000 dated January 19, 1993, between the Company and Nationwide Life Insurance Company, and Aid Association for Lutherans and Employers Life Insurance Company of Wausau 4 4g Fourth Amendment to Senior Note Annual Report Form 10-K (Filed Agreement principal amount with the SEC on September 13, $3,000,000, dated as of January 1995) 31, 1995 by and between the Company and Employers Life Insurance Company of Wausau Fourth Amendment to Senior Note Agreement principal amount $12,000,000 dated as of January 31, 1995 by and between the Company and Nationwide Life Insurance Company Fourth Amendment to Senior Note Agreement principal amount $10,000,000 dated as of January 31, 1995 by and between the Company and Aid Association for Lutherans 4 4h Fifth Amendment to Senior Note Agreement dated September 22, 1995, aggregate principal amount $25,000,000 between the Company and Nationwide Life Insurance Company, Aid Association for Lutherans and Employers Life Insurance Company of Wausau
15 16
IF INCORPORATED BY EXHIBIT NO. REFERENCE, DOCUMENTS UNDER REG. S-K FORM 10-K WITH WHICH EXHIBIT ITEM 601 EXHIBIT NO. DESCRIPTION WAS PREVIOUSLY FILED - -------------- ----------- ----------- --------------------------------- 4 4i Credit Agreement, dated as of Annual Report Form 10-K (Filed January 19, 1993, among The with the SEC on September 14, Standard Products Company, as 1993; see Exhibit 4c therein) Borrower, and National City Bank, Society National Bank, Comerica Bank and NBD Bank, N.A. and National City, as Agent. 4 4j First Amendment to Credit Quarterly Report 10-Q (Filed with Agreement, dated as of April 30, the SEC on May 9, 1997) 1994, among The Standard Products Company, as Borrower, and National City Bank, Society National Bank, Comerica Bank and NBD Bank, N.A. and National City, as Agent. 4 4k Second Agreement of Amendment to the Credit Agreement, dated as of August 25, 1995, among The Standard Products Company, as borrower, and National City Bank as agent and for itself, Society National Bank, Comerica Bank and NBD Bank 4 4l Third Agreement of Amendment to Quarterly Report 10-Q (Filed with the Credit Agreement, dated as of the SEC on November 14, 1997; see October 25, 1996, among The Exhibit 4 therein) Standard Products Company, as borrower, and National City Bank as agent and for itself, KeyBank National Association, Comerica Bank and NBD Bank. 4 4m Confirmation and Interest Rate Annual Report Form 10-K (Filed and Currency Exchange Agreement, with the SEC on September 13, dated November 12, 1993, between 1995) the Company and National City Bank 4 4n Interest Rate and Currency Annual Report Form 10-K (Filed Exchange Agreement, Termination with the SEC on September 13, of $7 million in principal 1995) amount, dated June 16, 1995 between the Company and National City Bank 10 10a Supplemental Salaried Pension Annual Report Form 10-K (Filed Plan with the SEC on September 29, 1986; see Exhibit 10a therein) 10 10b The Standard Products Company Form S-8 Registration No. 1985 Employee Incentive Stock 33-01558 (Filed with the SEC on Option Plan November 15, 1985; see Exhibit 4a therein)
16 17
IF INCORPORATED BY EXHIBIT NO. REFERENCE, DOCUMENTS UNDER REG. S-K FORM 10-K WITH WHICH EXHIBIT ITEM 601 EXHIBIT NO. DESCRIPTION WAS PREVIOUSLY FILED - -------------- ----------- ----------- --------------------------------- 10 10c The Standard Products Company Form S-8 Registration No. 1989 Employee Incentive Stock 33-33612 (Filed with the SEC on Option Plan February 28, 1990; see Exhibit 4a therein) 10 10d The Standard Products Company Form S-8 Registration No. 1991 Employee Stock Option Plan 33-51556 (Filed with the SEC on September 2, 1992; see Exhibit 4c therein) 10 10e The Standard Products Company Form S-8 Registration No. 1991 Restricted Stock Plan 33-51554 (Filed with the SEC on September 2, 1992; see Exhibit 4c therein) 10 10f The Standard Products Company Annual Report Form 10-K (Filed Restricted Stock Agreement with the SEC on September 15, between the Company and the 1992; see Exhibit 10h therein) Chairman and Chief Executive Officer 10 10g The Standard Products Company Annual Report Form 10-K (Filed Restricted Stock Agreement with the SEC on September 15, between the Company and the 1992; see Exhibit 10i therein) President and Chief Operating Officer 10 10h The Standard Products Company Annual Report Form 10-K (Filed Restricted Stock Agreement with the SEC on September 27, between the Company and the 1996; see Exhibit 10h therein) Executive Vice President-International Operations 10 10i The Standard Products Company Form S-8 Registration No. 1993 Employee Stock Option Plan 33-53989 (Filed with the SEC on June 6, 1994; see Exhibit 4 therein) 10 10j Receivables Purchase Agreement Quarterly Report Form 10-Q (Filed dated as of September 22, 1995 with the SEC on February 13, among The Standard Products 1996; see Exhibit 10 therein) Funding Corporation as seller and The Standard Products Company as initial Master Servicer and Clipper Receivables Corporation as Purchaser and State Street Boston Capital Corporation as Administrator and National City Bank as Relationship Bank 10 10k Amendment to Receivables Purchase Agreement 10 10l Purchase and Sale Agreement dated Quarterly Report Form 10-Q (Filed as of September 22, 1995 among with the SEC on February 13, The Standard Products Company, as 1996; see Exhibit 10 therein) Originator and Master Servicer, 5 Rubber Corporation, Oliver Rubber Company, and Holm Industries, Inc., as Originators and Servicers, and The Standard Products Funding Corporation, as the Initial Purchaser 10 10m Standard Products Individual Form S-8 Registration No. Retirement and Investment Trust 333-01923 (Filed with SEC on Plan March 22, 1996; see Exhibit 4a therein)
17 18
IF INCORPORATED BY EXHIBIT NO. REFERENCE, DOCUMENTS UNDER REG. S-K FORM 10-K WITH WHICH EXHIBIT ITEM 601 EXHIBIT NO. DESCRIPTION WAS PREVIOUSLY FILED - -------------- ----------- ----------- --------------------------------- 10 10n The Standard Products Company Form S-8 Registration No. Collectively Bargained Savings 333-01921 (Filed with SEC on and Retirement Plan March 22, 1996; see Exhibit 4a therein) 10 10o Second Amendment to Receivables Quarterly Report 10-Q (Filed with Purchase Agreement the SEC on February 10, 1997; see Exhibit 10a therein) 10 10p The Standard Products Company Restricted Stock Agreement between the Company and the Executive Vice President-Advanced Technology Worldwide 10 10q The Standard Products Company Form S-8 Registration Statement 1996 Employee Stock Option Plan No. 333-21225 (Filed with SEC on February 6, 1997; see Exhibit 4(a) therein) 10 10r Letter Re: Employment of J.S. Reid, Jr., dated July 24, 1997. 10 10s Employment Agreement between the Standard Products Company and Ronald L. Roudebush dated July 1, 1997. 10 10t Employment Agreement between the Standard Products Company and Theodore K. Zampetis dated September 1, 1997. 10 10u The Standard Products Company Restricted Stock Agreement between the Company and the Chairman of the Board of Directors dated July 1, 1997. 13 13 Proxy Statement for the Annual Meeting of Shareholders to be held on October 21, 1997 21 21 Subsidiaries of Registrant 23 23 Consent of Independent Accountants 24 24 Power of Attorney 27 27 Financial Data Schedule
(b) Reports on Form 8-K: No reports have been filed during the last quarter of the fiscal year covered by this report on Form 10-K. 18 19 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, on this the 16th day of September 1997. THE STANDARD PRODUCTS COMPANY By: /s/ DONALD R. SHELEY, JR. ------------------------------------ Donald R. Sheley, Jr. Vice President, Finance and Chief Financial Officer 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/ RONALD L. ROUDEBUSH Vice Chairman and Chief Executive September 16, 1997 - ------------------------------------------ Officer; Director Ronald L. Roudebush /s/ THEODORE K. ZAMPETIS President and Chief Operating September 16, 1997 - ------------------------------------------ Officer; Director Theodore K. Zampetis /s/ DONALD R. SHELEY, JR. Vice President, Finance and Chief September 16, 1997 - ------------------------------------------ Financial Officer Donald R. Sheley, Jr. Principal Financial Officer /s/ BERNARD J. THEISEN Corporate Controller September 16, 1997 - ------------------------------------------ Principal Accounting Officer Bernard J. Theisen /s/ JAMES S. REID, JR.* Chairman of the Board of Directors, September 16, 1997 - ------------------------------------------ Director James S. Reid, Jr. /s/ JAMES C. BAILLIE* Director September 16, 1997 - ------------------------------------------ James C. Baillie /s/ EDWARD B. BRANDON* Director September 16, 1997 - ------------------------------------------ Edward B. Brandon /s/ JOHN DODDRIDGE* Director September 16, 1997 - ------------------------------------------ John Doddridge /s/ JOHN D. DRINKO* Director September 16, 1997 - ------------------------------------------ John D. Drinko /s/ CURTIS E. MOLL* Director September 16, 1997 - ------------------------------------------ Curtis E. Moll /s/ MALCOLM R. MYERS* Director September 16, 1997 - ------------------------------------------ Malcolm R. Myers /s/ LEIGH H. PERKINS, SR.* Director September 16, 1997 - ------------------------------------------ Leigh H. Perkins, Sr. /s/ ALFRED M. RANKIN, JR.* Director September 16, 1997 - ------------------------------------------ Alfred M. Rankin, Jr. /s/ ALAN E. RIEDEL * Director September 16, 1997 - ------------------------------------------ Alan E. Riedel /s/ JOHN D. SIGEL* Director September 16, 1997 - ------------------------------------------ John D. Sigel /s/ W. HAYDEN THOMPSON* Director September 16, 1997 W. Hayden Thompson *By: /s/ RICHARD N. JACOBSON ------------------------------------- Richard N. Jacobson Attorney-in-Fact
19 20 THE STANDARD PRODUCTS COMPANY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS, SUPPORTING SCHEDULES AND SUPPLEMENTAL DATA Selected Financial Data..................................... F-1 Management's Discussion and Analysis of Results of Operations and Financial Condition........................ F-2 Consolidated Financial Statements and Supplemental Data Management's Responsibility for Financial Statements...... F-7 Report of Independent Accountants......................... F-7 Consolidated Statements of Income for the Years ended June 30, 1997, 1996 and 1995................................ F-8 Consolidated Balance Sheets, June 30, 1997 and 1996....... F-9 Consolidated Statements of Cash Flows for the Years ended June 30, 1997, 1996 and 1995........................... F-10 Consolidated Statements of Shareholders' Equity for the Years ended June 30, 1997, 1996 and 1995............... F-11 Notes to the Consolidated Financial Statements............ F-12 Financial Statement Schedules: Report of Independent Accountants on the Financial Statement Schedule..................................... S-1 Schedule II Valuation and Qualifying Accounts for the Years Ended June 30, 1997, 1996 and 1995..... S-2
All schedules, other than Schedule II, are omitted since the information is not required or is otherwise furnished. Separate financial statements of the Registrant have been omitted since restricted net assets of consolidated subsidiaries and unconsolidated investees and the Company's share of the unconsolidated subsidiaries' equity is less than 25% of the Company's net assets at June 30, 1997. 20 21 SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- (THOUSANDS OF DOLLARS EXCEPT SHARE DATA) INCOME STATEMENT Net Sales......................... $1,108,268 $1,083,920 $995,926 $872,367 $763,796 $657,036 Gross Income...................... 145,456 108,482 99,455 119,427.. 108,607 94,253 Selling, General & Administrative Expenses......................... 68,559 69,616 60,121 57,787 49,768 41,760 Non-Recurring Charge.............. 17,661 -- 8,832 4,424 -- -- Interest (Income) Expense, net.... 11,859 12,779 13,010 9,093 8,214 13,659 Other (Income) Expense, net....... 918 (2,437) 233 (2,092) 399 54 Provision for Taxes on Income..... 18,929 13,947 (2,807) 17,183 16,803 15,475 Income (Loss) from Continuing Operations and Before Extraordinary Item and Cumulative Effect on Prior Years of Change in Accounting Principle.......... 27,530 14,577 20,066 33,032.. 33,423 23,305 Income (Loss) from Operations and Disposal of Discontinued Division, Net of Tax............. -- -- -- -- -- -- Income (Loss) Before Extraordinary Item and Cumulative Effect on Prior Years of Change in Accounting Principle............. 27,530 14,577 20,066 33,032 33,423 23,305 Extraordinary Item, Net of Tax.... -- -- -- -- (2,559) -- Cumulative Effect on Prior Years of Change in Accounting Principle, Net of Tax............ -- -- -- -- (8,301) -- Net Income (Loss)................. $ 27,530 $ 14,577 $20,066.. $ 33,032 $ 22,563 $ 23,305 Percent Net Income to Sales....... 2.5 1.3 2.0 3.8..... 3.0 3.5 Percent Net Income to Average Shareholders' Equity............. 10.4 5.6 8.0 14.5 12.1 19.5 PER SHARE Income (Loss) from Continuing Operations and Before Extraordinary Item and Cumulative Effect on Prior Years of Change in Accounting Principle.......... $ 1.64 $ .87 $ 1.20 $ 1.99 $ 2.21 $ 1.79 Income (Loss) from Discontinued Operations....................... -- -- -- -- -- -- Extraordinary Item, Net of Tax.... -- -- -- -- $ (.17) -- Cumulative Effect on Prior Years of Change in Accounting Principle, Net of Tax............ -- -- -- -- $ (.55) -- Net Income (Loss)................. $ 1.64 $ .87 $ 1.20 $ 1.99 $ 1.49 $ 1.79 Cash Dividends Declared........... $ .68 $ .68 $ .68 $ .65 $ .54 $ .38 Book Value........................ $ 15.96 $ 15.42 $ 15.56 $ 14.55 $ 13.56 $ 11.82 BALANCE SHEET Property, Plant & Equipment....... $ 583,614 $ 548,816 $489,534 $422,576 $377,564 $279,830 Accumulated Depreciation.......... 280,608 250,278 220,095 180,567 153,137 130,410 Total Assets...................... 691,859 684,695 701,889 624,314 564,850.. 398,793.. Working Capital................... 46,565 53,455 127,498 87,922 79,396 97,303 Long-term Debt.................... 121,804 143,041 190,522 135,381 115,607 69,289 Shareholders' Equity.............. 268,357 258,765 260,495 242,677 224,436 177,753 Cash Dividends Declared........... $ 11,579 $ 11,400 $ 11,445 $ 10,821 $ 8,450 $ 5,103 OTHER Additions to Property, Plant & Equipment, net................... $ 59,004 $ 79,684 $ 54,671 $ 59,120 $ 38,000 $ 18,367 Depreciation & Amortization....... $ 53,130 $ 52,545 $ 46,839 $ 40,495 $ 29,887 $ 26,228 Shares Outstanding................ 16,810 16,785 16,736 16,674 16,552 15,044 Average Shares Outstanding........ 16,804 16,758 16,711 16,627 15,114 13,010 1991 1990 1989 1988 ---- ---- ---- ---- (THOUSANDS OF DOLLARS EXCEPT SHARE DATA) INCOME STATEMENT Net Sales......................... $592,090 $590,699 $527,896 $473,035 Gross Income...................... 38,946 65,316 81,452 83,878 Selling, General & Administrative Expenses......................... 40,073 35,011 27,111 23,694 Non-Recurring Charge.............. -- -- -- -- Interest (Income) Expense, net.... 11,663 8,608 3,125 1,430 Other (Income) Expense, net....... 285 1,846 2,062 1,612 Provision for Taxes on Income..... 7,879 8,060 18,333 20,373 Income (Loss) from Continuing Operations and Before Extraordinary Item and Cumulative Effect on Prior Years of Change in Accounting Principle.......... (20,954) 11,791 30,821 36,769 Income (Loss) from Operations and Disposal of Discontinued Division, Net of Tax............. (24,655) -- (2,132) (2,712) Income (Loss) Before Extraordinary Item and Cumulative Effect on Prior Years of Change in Accounting Principle............. (45,609) 11,791 28,689 34,057 Extraordinary Item, Net of Tax.... -- -- -- -- Cumulative Effect on Prior Years of Change in Accounting Principle, Net of Tax............ -- -- -- -- Net Income (Loss)................. $(45,609) $ 11,791 $28,689.. $ 34,057 Percent Net Income to Sales....... -- 2.0 5.4 7.2 Percent Net Income to Average Shareholders' Equity............. -- 7.7 18.8 25.5 PER SHARE Income (Loss) from Continuing Operations and Before Extraordinary Item and Cumulative Effect on Prior Years of Change in Accounting Principle.......... $ (1.65) $ .93 $ 2.33 $ 2.71 Income (Loss) from Discontinued Operations....................... $ (1.94) -- $ (.16) $ (.20) Extraordinary Item, Net of Tax.... -- -- -- -- Cumulative Effect on Prior Years of Change in Accounting Principle, Net of Tax............ -- -- -- -- Net Income (Loss)................. $ (3.59) $ .93 $ 2.17 $ 2.51 Cash Dividends Declared........... $ .47 $ .74 $ .69 $ .61 Book Value........................ $ 8.06 $ 12.05 $ 12.05 $ 10.96 BALANCE SHEET Property, Plant & Equipment....... $251,151 $239,773 $200,801 $154,623 Accumulated Depreciation.......... 102,553 91,739 76,591 65,922 Total Assets...................... 369,272 362,399 333,741 255,211 Working Capital................... 61,594 90,014 88,937 74,759 Long-term Debt.................... 113,298 99,480 75,213 16,577 Shareholders' Equity.............. 102,366 152,829 156,348 145,800 Cash Dividends Declared........... $ 5,992 $ 9,365 $ 9,084 $ 8,194 OTHER Additions to Property, Plant & Equipment, net................... $ 21,179 $ 39,230 $ 32,506 $ 21,345 Depreciation & Amortization....... $ 24,747 $ 19,975 $ 14,196 $ 11,078 Shares Outstanding................ 12,695 12,689 12,975 13,293 Average Shares Outstanding........ 12,694 12,753 13,250 13,571
F-1 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (ALL AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA) OVERVIEW The Standard Products Company (the "Company") is recognized as one of the world's leading suppliers of sealing, trim and vibration-control systems to original equipment manufacturers ("OEMs") of passenger cars and light trucks. The Company also maintains a leading position in providing sealing solutions for the refrigeration industry. These operations comprise the Company's Transportation Equipment Segment. The Company's truck tire retreading business is reported as the Tread Rubber Segment. This business also has a significant position in its industry. Net income of the Company and its consolidated subsidiaries was $27,530 in fiscal 1997, or $1.64 per common share compared with $14,577, or $0.87 per share in fiscal 1996. Results in 1997 included a non-recurring charge of $17,661, or $0.63 per share net of tax, for the closure of manufacturing facilities in Lexington, Kentucky and Schenectady, New York. The Company also incurred costs related to the closures of approximately $1,665, or $0.06 per share net of tax, in the second half of fiscal 1997 which did not qualify for immediate accrual. The Company's Financial Statements and Notes to Financial Statements on Pages F-7 through F-22, including the Report of Independent Accountants (the "Financial Statements"), should be read as an integral part of this discussion and analysis. TRANSPORTATION EQUIPMENT SEGMENT Sales by geographic location in this segment were:
1997 1996 1995 ---- ---- ---- North America........ $682,817 $687,009 $626,152 Europe............... 234,504 241,617 240,100 South America........ 58,680 29,479 2,640 -------- -------- -------- Total............ $976,001 $958,105 $868,892 ======== ======== ========
SALES PERFORMANCE - 1997 VERSUS 1996 Fiscal 1997 sales for the Transportation Equipment Segment were $976,001, an increase of $17,896, or 1.9% over the prior year. The overall sales increase was primarily attributable to the fact that the Company's new plant in Brazil was operational for the entire year. The new plant shipped products for only the final four months of fiscal 1996. The sales reduction in North America resulted primarily from decreases in sales of the Ford Taurus/Sable and Escort, Chevrolet Lumina and Plymouth/Dodge Neon. These reductions were not offset by increases in sales of the Jeep(R) Grand Cherokee and Chrysler minivan and by increased participation in various General Motors programs. In fiscal 1997, automotive production in North America was essentially flat compared to 1996, and trended downward in the fourth quarter of fiscal 1997, when car production by General Motors, Ford and Chrysler combined was more than 10% lower than in the same period of fiscal 1996. The Company is also under continued pressure from the OEMs to reduce the unit price of its products. The appliance sealing business experienced a $2,099 increase in sales over 1996 levels due to continued strong appliance demand in the United States. European sales decreased $7,113, or 2.9%, primarily as a result of currency translation related to the French franc. This was partially offset by currency translation gains arising from a stronger British pound. Volumes in Europe were up slightly over 1996 levels, principally as a result of sales to Toyota, Renault and Volvo. SALES PERFORMANCE - 1996 VERSUS 1995 Fiscal 1996 sales for the Transportation Equipment Segment were $958,105, an increase of $89,213, or 10.3%, over the prior year. The sales increase in North America was entirely related to automotive operations, and occurred despite flat year-over-year production of passenger cars and light trucks in the North American auto market. Strong sales performance by individual platforms within the industry accounted for the increased sales volume. The Chrysler minivan and Jeep(R) Grand Cherokee showed strong sales gains. Year-over-year performance was helped by the fact that this was the Company's first full year of production on the Chrysler minivan. The Ford Taurus/Sable, while declining slightly in sales, showed F-2 23 stronger volumes as the year progressed. This helped support the Company's strong fourth quarter performance. The new Ford F-150 truck also boosted sales. Sales in the appliance sealing business were essentially flat year-over-year, although strong fourth quarter production helped to offset previous quarterly declines in sales from the same periods in the prior year. In Europe, volumes increased in the United Kingdom, principally on Ford platforms, while in France volume declined, primarily due to reduced sales to Renault and Fiat. Foreign currency translations in France almost entirely offset the volume declines, while in the United Kingdom they reduced the volume gains by over 40%. In South America, results for fiscal 1995 reflect one month's revenue, while fiscal 1996 reflects a full twelve months of sales. Our new plant in Varginha, Brazil, came on-line in the last month of the third quarter of this year, adding solidly to the revenue base. OPERATING PERFORMANCE - 1997 VERSUS 1996 Despite only modest sales growth from 1996 to 1997, the Transportation Equipment segment experienced strong improvements in operating results. Operating income after charges for the plant closings in Lexington, Kentucky, and Schenectady, New York, was $55,439, an increase of $15,603 or 39.2% over fiscal 1996 levels. This improvement is attributable to the success of ongoing process improvement and cost reduction initiatives, including a focused effort on lowering raw material costs. Gross margin on sales showed continued improvement throughout the year. Operating income in Brazil also improved by over $8,500 as this operation moved from start-up toward full production. Research and development costs increased substantially due in large part to an investment by the Company in vehicle sealing systems that will have cosmetic, weight and performance characteristics superior to current products, as well as allow for cycle time improvements when placed in production. This investment totaled approximately $1,500 in fiscal 1997. Development is expected to continue into next year. The positive impact to the Company from these products and processes will be dependent on customers' acceptance of their benefits. The Company also incurred increased costs totaling $972 from the addition of engineering staff for its Brazilian operation. Selling, general and administrative expenses decreased from prior year levels due to the absence of start-up costs related to the Brazilian plant of $6,100. This decrease was substantially offset by increased personnel costs for areas targeted to improve customer service. As mentioned above and discussed in Note 3 to the attached financial statements, the Company incurred a charge of $17,661, before tax, for the closure of two North American manufacturing facilities. These closures were deemed necessary by management to consolidate operations and reduce overcapacity in this geographic area. Ongoing production programs at these sites were transferred to existing locations in the United States. The closures are expected to be completed by December 1997 and enhance Company profitability in future years. The Company continually reviews capacity as part of its business planning. OPERATING PERFORMANCE - 1996 VERSUS 1995 Fiscal 1996 began poorly but finished on a high note. First quarter gross margins were affected by high start-up costs on several significant new launches and high raw material costs. Beginning in the second quarter of fiscal 1996, costs related to these product launches and raw material costs began to decline. Cost reductions and process improvement programs also helped to generate significant margin improvements as the year unfolded. Selling, general and administrative expenses increased substantially in this segment over the prior year. This increase was the result of start-up costs in Brazil of approximately $9,100, as well as the expenses related to the sale of receivables explained further in Note 4 to the financial statements. The Company completed the closure of its Canadian plastics plant previously accrued for in 1995. Additional costs were incurred of approximately $1,000 and were charged to normal operations in fiscal 1996. TREAD RUBBER SEGMENT GENERAL Oliver Rubber Company ("Oliver") manufactures and markets precure and mold cure tread rubber, bonding gum, cement, repair materials and equipment for use in the tire retreading industry. In addition, Oliver supplies custom-mixed rubber to the Company and certain affiliates for use in the automotive original equipment business. F-3 24 SALES PERFORMANCE - 1997 VERSUS 1996 Fiscal 1997 sales for the North American based Tread Rubber segment totaled $145,497, an increase of 7.1% over fiscal 1996 sales of $135,869. Included in this amount were $13,230 of intersegment sales, an increase of 31.6% over prior year levels. The increase in intersegment sales resulted from investments made by Oliver to upgrade the capacity and quality of rubber mixing operations at its Asheboro, North Carolina plant. Increased sales to third parties were primarily the result of Oliver's agreement with Treadco, Inc., the largest independent truck tire retreader in the United States, which was signed in 1996. SALES PERFORMANCE -- 1996 VERSUS 1995 Sales for fiscal 1996 were $135,869, including intersegment sales of $10,054. This was an increase of 1.7%, or $2,213 over fiscal 1995. In fiscal 1995, Oliver closed its European operations. Accordingly, there were no sales in Europe in fiscal 1996. During fiscal 1995, sales in Europe were $5,239. Sales in North America increased by $7,452 in fiscal 1996. Roughly 46% of this increase came from additional intersegment sales to the Transportation Equipment segment. During fiscal 1996, Oliver made a significant investment in its mixing plant in Asheboro, North Carolina, resulting in improved quality and increased sales to the Transportation Equipment segment's automotive parts plants. The remainder of the increase in sales is primarily attributable to the new agreement Oliver signed in fiscal 1996 to supply Treadco, Inc. with precure tread rubber, retread equipment and related items at all of its truck tire precure retreading locations. OPERATING PERFORMANCE -- 1997 VERSUS 1996 Operating income in the Tread Rubber segment for fiscal 1997 was $9,128, an increase of $5,050, over the same period in the prior year. Approximately $2,300 of this increase is the result of the sales increases noted above. In addition, improved operating efficiencies due to the upgrade of manufacturing facilities, and an emphasis on improving product mix contributed to increased operating income. These increases were partially offset by increased administrative costs related to enhancing the information systems and selling capabilities of this segment. OPERATING PERFORMANCE -- 1996 VERSUS 1995 Operating income for the Tread Rubber Segment increased from $1,727 in fiscal 1995 to $4,078 in fiscal 1996. While this segment has made several improvements in its operating performance, particularly the quality of its mixing capabilities, the primary source of its improved profitability came from supply chain management. This resulted in savings on raw material costs that translated to improved operating income. OTHER (INCOME) EXPENSE Interest expense was $12,914 for 1997, compared to $14,944 for 1996, a decrease of $2,030. The decrease is primarily attributable to lower borrowings under the Company's revolving credit agreement during 1997. This is a result of reduced capital expenditures with the completion of the Brazilian plant and favorable cash flow from improved operations. The improvement was partially offset by increased interest from short-term borrowings, primarily in South America. Interest expense in fiscal 1996 was $14,944, an increase of $859 from 1995 levels. During the year the Company increased its borrowings to fund investments in Brazil and other capital programs. This increase was partially offset by proceeds from the sale of accounts receivable (see Note 4 to the Financial Statements), which were used to reduce outstanding debt. Royalty and dividend income have been comparable for each of the last three years. "Other, net" was an expense in fiscal 1997 of $521, a reduction of $4,450 over the 1996 income amount of $3,929. This reduction is primarily attributable to: (i) reduced interest income ($1,059), (ii) increased losses on fixed asset dispositions ($885), and (iii) reduced operating profit at the Company's joint venture, Nishikawa Standard Company ("NSC"). As explained in Note 1 of the Financial Statements, the Company's share of NSC's earnings decreased by $1,535. Other, net in fiscal 1996 exceeded the prior year level by $3,901, principally due to increased earnings at NSC. The Company's effective tax rate for fiscal 1997 was 40.7%. The reduction from the prior year relates primarily to improved operating results in Brazil. While Brazil lost money in both 1996 and 1997, reduced losses in the current year resulted in a lower effective tax rate because the Company has not recognized these benefits in either year. Implementation of royalty agreements between the Company and certain of its foreign subsidiaries also served to lower the effective tax rate between 1996 and 1997. F-4 25 The Company's effective tax rate for fiscal 1996 was 48.9%, as a result of the Company's inability to utilize net operating losses generated in its Brazilian operations. Recognition of tax benefits related to those losses will be reported in future periods as opportunities to utilize these carryforwards become more certain. LIQUIDITY AND CAPITAL RESOURCES The Company generated $80,045 of net cash from operating activities in fiscal 1997. The major sources were net income and non-cash items such as depreciation and amortization. Inventory increased by $3,733 from the prior year due to increased volume in Brazil. Inventory builds at Lexington and Schenectady related to the closure of those locations also increased inventory balances from the prior year. During fiscal 1997, the Company's net capital spending totaled $59,004, a decrease of $20,680 from the prior year when most of the expenditures to construct the Company's plant in Varginha, Brazil, were incurred. Fiscal 1997 capital spending did, however, include approximately $10,300 for the completion of the Brazilian plant as well as approximately $13,400 in Canada which included expansion of an existing plant to accommodate future General Motors demand for vibration control systems. Additional significant expenditures were also made in the United Kingdom to upgrade mixing facilities and in construction of a new plant in Mexico which is 70% owned by the Company as part of a joint venture with the Nishikawa Rubber Company of Hiroshima, Japan. Capital spending for fiscal 1998 is expected to be approximately $65,000 and will include the cost of completing the Mexican facility, which is anticipated to commence operations in the second quarter of the year. The Company utilized improved cash flow from operations and reduced levels of capital spending in the fiscal year to reduce long-term debt obligations under the Company's revolving credit agreement. This reduction in outstanding debt was partially offset by increased short-term borrowing, principally in Brazil, to fund working capital requirements. The Company also paid quarterly dividends throughout fiscal 1997 of $0.17 per share. Dividends are expected to continue throughout fiscal 1998. In September 1995, the Company generated $50,000 through the sale of accounts receivable in the United States. Proceeds from the sale were used to reduce outstanding borrowings under the Company's Revolving Credit Agreement. See Note 4 to the Consolidated Financial Statements found on page F-15 for a more detailed description of this transaction. During the three-year period ended June 30, 1997, inflation has been relatively moderate, and operating costs reflect current costs for raw materials and inventory, operating expenses and depreciation. It is important to understand that inflation, as reported on a consumer price index basis, may not bear a direct relationship to the Company's costs. Although inflation on the whole was stable during the period, as mentioned above, fiscal 1995 saw significant price increases in the raw materials used in operations. This was the result of increases in the costs of petroleum, polymers and chemicals used in the Company's business at a rate greater than the general inflation rate. The Company does not expect inflation to have any near-term material effect on the costs of its products, although there can be no assurance that such an effect will not occur in the future. Except for Brazil and Mexico, the value of the Company's consolidated assets and liabilities located outside the United States (which are translated at period-end exchange rates) and income and expenses (which are translated using rates prevailing during the fiscal year) have been affected by the translation values of the Canadian dollar, French franc and British pound. Such translation adjustments are reported as a separate component of shareholders' equity. While exchange rate fluctuations have historically not had a significant impact on the Company's reported operating results, changes in the values of the currencies noted above will impact the translation adjustments in the future. The Company's operations in Brazil and Mexico use the U.S. dollar as their functional currency. Translation adjustments for these operations are included in the determination of income. At June 30, 1997, the Company was in compliance with the various covenants under the agreements pursuant to which it may borrow money. Management expects that it will remain in compliance with these covenants through the year ending June 30, 1998. During the next year, the Company believes that its cash requirements for working capital, capital expenditures, dividends, interest and debt repayments will be met through internally generated funds and utilization of available borrowing sources. For a description of the Company's financing arrangements at June 30, 1997, see Note 8 to the Financial Statements. F-5 26 NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This standard establishes guidelines for the display of comprehensive income for financial statement purposes. The objective of the statement is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. The FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This standard requires extensive disclosure of operating segments based on the "management approach." This approach organizes segments within a company for making operating decisions and assessing performance. Reportable segments can be based on products and services, geography, legal structure or any other manner in which management disaggregates the company. Both standards are effective for fiscal years beginning after December 15, 1997. PROSPECTIVE INFORMATION The Company expects sales in its North American automotive operations to decline by approximately 10% in fiscal 1998. The sales decline is due to several factors, the most significant of which is the absence of business on certain vehicle platforms for which the Company provided products in 1997, including the Ford F-150 pickup truck and the Ford Thunderbird. Production of the Thunderbird has been discontinued. Another significant factor is price concessions granted to customers under long-term contracts. The sales decline projected in North America is expected to be partially offset by significant increases in sales in Brazil and Europe. The increase in Brazil is attributable to expected higher levels of production of the Fiat Palio. The Company provides complete sealing systems for the Palio in Brazil. As production increases, management expects continued improvement in the profitability of the Brazilian operations. The increase in Europe is due to a number of new launches in both the United Kingdom and France. New business beginning in fiscal 1999 is likely to more than offset the decline in sales that will be experienced in 1998. Despite a projected decline in sales in North America, the Company expects that the positive future impact of having closed two plants in 1997 and continued cost reduction measures, centering around manufacturing process improvements, will prevent a significant decline in earnings in North America. As mentioned above and like most automotive suppliers, the Company has agreed to reduce prices annually on many of the products that it provides, both in North America and elsewhere in the world. As a result, the Company is making an aggressive and continuing effort to reduce costs in all aspects of its operations. The Company's future success is partly dependent on the implementation of these initiatives. Management's expectations for fiscal 1998 also depend upon improved profitability of the Brazilian subsidiary, and successful launches of new programs in Europe and in the Company's NSC joint venture. CAUTIONARY STATEMENTS FOR PURPOSES OF "SAFE HARBOR" UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995 Certain statements in this Management's Discussion and Analysis, the attached Financial Statements, in the Company's press releases and in oral statements made by or with the approval of an authorized executive officer of the Company constitute "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995. These may include statements projecting, forecasting or estimating Company performance and industry trends. The achievement of the projections, forecasts or estimates is subject to certain risks and uncertainties. Actual results and events may differ materially from those projected, forecasted or estimated. The applicable risks and uncertainties include general economic and industry conditions that affect all international businesses, as well as matters that are specific to the Company and the markets it serves. General risks that may impact the achievement of such forecasts include compliance with new laws and regulations; significant raw material price fluctuations; currency exchange rate fluctuations; limits on repatriation of funds; and political uncertainties. Specific risks to the Company include risk of recession in the economies in which its products are sold; the concentration of a substantial percentage of the Company's sales with a few major OEM customers; labor relations at the Company, its customers and its suppliers; competition in pricing and new product development from larger companies with substantial resources; and continued globalization of the automotive supply base resulting in new competition in certain locations. F-6 27 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The Standard Products Company and Consolidated Subsidiaries Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this report. The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles, applying certain estimates and judgments as required. Standard Products' internal controls are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability of assets. Such controls are based on established written policies and procedures, are implemented by trained, skilled personnel with an appropriate segregation of duties and are monitored through a comprehensive internal audit program. These policies and procedures prescribe that the Company and all its employees are to maintain the highest ethical standards and that its business practices throughout the world are to be conducted in a manner which is above reproach. Arthur Andersen LLP, independent auditors, are retained to audit the Company's financial statements. Their accompanying report is based on audits conducted in accordance with generally accepted auditing standards, which include the consideration of the Company's internal controls to establish a basis for reliance thereon in determining the nature, timing and extent of audits tests to be applied. The Board of Directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent non-management Board members. The audit committee meets periodically with the independent auditors and with the Company's internal auditors, both privately and with management present, to review accounting, auditing, internal controls and financial reporting matters. LOGO LOGO Ronald L. Roudebush Donald R. Sheley, Jr. Vice Chairman and Chief Vice President, Finance Executive Officer* and Chief Financial Officer *effective July 24, 1997 REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND THE BOARD OF DIRECTORS, THE STANDARD PRODUCTS COMPANY: We have audited the accompanying consolidated balance sheets of The Standard Products Company (an Ohio corporation) and Consolidated Subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three fiscal years in the period ended June 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Standard Products Company and Consolidated Subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP LOGO July 24, 1997 Cleveland, Ohio Arthur Andersen LLP F-7 28 CONSOLIDATED STATEMENTS OF INCOME
THE STANDARD PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES FOR THE YEARS ENDED JUNE 30, ----------------------------------------- 1997 1996 1995 ---- ---- ---- (THOUSANDS OF DOLLARS EXCEPT SHARE DATA) Net Sales................................................ $1,108,268 $1,083,920 $ 995,926 Cost of Goods Sold: Materials, wages and other manufacturing costs......... 916,821 934,504 863,260 Research, engineering and development expenses......... 45,991 40,934 33,211 ---------- ---------- ---------- 962,812 975,438 896,471 ---------- ---------- ---------- Gross Income............................................. 145,456 108,482 99,455 Selling, General and Administrative Expenses............. 68,559 69,616 60,121 Non-recurring Charge (Note 3)............................ 17,661 -- 8,832 ---------- ---------- ---------- 59,236 38,866 30,502 ---------- ---------- ---------- Other (Income) Expense: Royalty and dividend income............................ (658) (673) (814) Interest expense....................................... 12,914 14,944 14,085 Other, net............................................. 521 (3,929) (28) ---------- ---------- ---------- 12,777 10,342 13,243 ---------- ---------- ---------- Income before Taxes on Income............................ 46,459 28,524 17,259 Provision for Taxes on Income............................ 18,929 13,947 (2,807) ---------- ---------- ---------- Net Income.......................................... $ 27,530 $ 14,577 $ 20,066 ========== ========== ========== Earnings Per Common Share: Primary................................................ $ 1.64 $ 0.87 $ 1.20 ---------- ---------- ---------- Fully Diluted.......................................... $ 1.64 $ 0.87 $ 1.20 ---------- ---------- ---------- Weighted average shares outstanding.................... 16,803,849 16,757,767 16,711,451
The accompanying notes are an integral part of these statements. F-8 29 CONSOLIDATED BALANCE SHEETS
THE STANDARD PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES, JUNE 30, ----------------------- 1997 1996 ---- ---- (THOUSANDS OF DOLLARS EXCEPT SHARE DATA) ASSETS Current Assets: Cash and cash equivalents................................. $ 6,972 $ -- Receivables, less allowances of $2,863 in 1997 and $2,958 in 1996................................................ 174,696 181,001 Inventories (Note 5)...................................... 66,633 60,377 Prepaid insurance, taxes, etc. ........................... 23,685 19,680 -------- -------- Total current assets................................. 271,986 261,058 -------- -------- Property, Plant and Equipment, at cost: Land and buildings........................................ 123,103 115,707 Machinery and equipment................................... 460,511 433,109 -------- -------- 583,614 548,816 Less -- Accumulated depreciation.......................... (280,608) (250,278) -------- -------- Net property, plant and equipment.................... 303,006 298,538 Goodwill, net............................................... 66,169 71,653 Other Assets, net (Note 6).................................. 50,698 53,446 -------- -------- $691,859 $684,695 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term notes payable.................................. $ 19,645 $ 1,198 Current maturities of long-term debt...................... 1,289 2,050 Accounts payable and accrued expenses (Note 7)............ 201,629 201,502 Dividend payable.......................................... 2,858 2,853 -------- -------- Total current liabilities............................ 225,421 207,603 Long-term Debt, net of current maturities................... 121,804 143,041 Other Postretirement Benefits............................... 24,953 25,230 Deferred Income Taxes and Other Credits..................... 51,324 50,056 Commitments and Contingent Liabilities (Note 13) Shareholders' Equity: Serial preferred shares, without par value, authorized 6,000,000 voting shares and 6,000,000 non-voting shares, none issued.................................... -- -- Common shares, par value $1 per share; authorized 50,000,000 shares, issued and outstanding 16,809,723 in 1997 and 16,784,867 in 1996............................ 16,810 16,785 Paid-in capital........................................... 98,066 96,906 Retained earnings......................................... 170,620 154,669 Foreign currency translation adjustments.................. (12,870) (6,318) Minimum pension liability................................. (4,269) (3,277) -------- -------- Total shareholders' equity........................... 268,357 258,765 -------- -------- $691,859 $684,695 ======== ========
The accompanying notes are an integral part of these statements. F-9 30 CONSOLIDATED STATEMENTS OF CASH FLOWS
THE STANDARD PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES FOR THE YEARS ENDED JUNE 30, ------------------------------ 1997 1996 1995 ---- ---- ---- (THOUSANDS OF DOLLARS) Cash Flows from Operating Activities: Net income................................................ $ 27,530 $ 14,577 $ 20,066 Adjustments to reconcile net income to net cash provided by (used by) operating activities: Depreciation and amortization.......................... 53,130 52,545 46,839 Deferred taxes and other credits....................... (974) 265 (2,631) Equity in income of non-consolidated affiliates........ (1,103) (2,436) (786) Effect of changes in foreign currency.................. 929 192 (2,834) Other.................................................. 2,763 1,216 (2,151) Net changes in assets and liabilities: Receivables (Note 4)................................. 5,877 18,160 9,436 Inventories.......................................... (6,079) 9,081 (14,790) Accounts payable and accrued expenses................ (2,028) 29,140 (40) -------- -------- -------- Net cash provided by operating activities....... 80,045 122,740 53,109 -------- -------- -------- Cash Flows from Investing Activities: Purchase of property, plant and equipment, net............ (59,004) (79,684) (54,671) Investments in affiliates and non-consolidated entities... (264) (199) (8,679) Assets acquired by purchase of businesses................. -- (1,581) (840) -------- -------- -------- Net cash used by investing activities........... (59,268) (81,464) (64,190) -------- -------- -------- Cash Flows from Financing Activities: Proceeds of long-term borrowings.......................... 18,076 37,791 55,929 Net increase (decrease) in short-term borrowings.......... 18,447 (3,561) (11,740) Repayment of long-term borrowings......................... (39,586) (84,659) (1,914) Cash dividends............................................ (11,579) (11,400) (11,445) Proceeds from exercise of stock options................... 134 299 477 -------- -------- -------- Net cash provided by (used by) financing activities................................... (14,508) (61,530) 31,307 -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents............................................... 703 708 (680) -------- -------- -------- Increase (decrease) in cash and cash equivalents............ 6,972 (19,546) 19,546 Cash and cash equivalents at the beginning of the year...... -- 19,546 -- -------- -------- -------- Cash and cash equivalents at the end of the year............ $ 6,972 $ -- $ 19,546 ======== ======== ========
The accompanying notes are an integral part of these statements. F-10 31 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THE STANDARD PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995 ----------------------------------------------------------------------- FOREIGN CURRENCY MINIMUM TOTAL COMMON PAID-IN RETAINED TRANSLATION PENSION SHAREHOLDERS' SHARES CAPITAL EARNINGS ADJUSTMENTS LIABILITY EQUITY ------ ------- -------- ----------- --------- ------------- (THOUSANDS OF DOLLARS EXCEPT SHARE DATA) BALANCE, JUNE 30, 1994............. $16,674 $95,614 $ 142,871 $(10,359) $(2,123) $242,677 Net income....................... -- -- 20,066 -- -- 20,066 Cash dividends ($.68 per share)........................ -- -- (11,445) -- -- (11,445) Foreign currency translation adjustments................... -- -- -- 9,863 -- 9,863 Restricted stock awards.......... -- 208 -- -- -- 208 Sale of 61,894 shares to option holders....................... 62 415 -- -- -- 477 Minimum pension liability........ -- -- -- -- (1,351) (1,351) ------- ------- --------- -------- ------- -------- BALANCE, JUNE 30, 1995............. $16,736 $96,237 $ 151,492 $ (496) $(3,474) $260,495 Net income....................... -- -- 14,577 -- -- 14,577 Cash dividends ($.68 per share)........................ -- -- (11,400) -- -- (11,400) Foreign currency translation adjustments................... -- -- -- (5,822) -- (5,822) Restricted stock awards.......... -- 419 -- -- -- 419 Sale of 48,712 shares to option holders....................... 49 250 -- -- -- 299 Minimum pension liability........ -- -- -- -- 197 197 ------- ------- --------- -------- ------- -------- BALANCE, JUNE 30, 1996............. $16,785 $96,906 $ 154,669 $ (6,318) $(3,277) $258,765 Net income....................... -- -- 27,530 -- -- 27,530 Cash dividends ($.68 per share)........................ -- -- (11,579) -- -- (11,579) Foreign currency translation adjustments................... -- -- -- (6,552) -- (6,552) Restricted stock awards.......... -- 1,051 -- -- -- 1,051 Sale of 24,856 shares to option holders....................... 25 109 -- -- -- 134 Minimum pension liability........ -- -- -- -- (992) (992) ------- ------- --------- -------- ------- -------- BALANCE, JUNE 30, 1997............. $16,810 $98,066 $ 170,620 $(12,870) $(4,269) $268,357 ======= ======= ========= ======== ======= ========
The accompanying notes are an integral part of these statements. F-11 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS EXCEPT SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Major intercompany items have been eliminated. The Company's investments in affiliate operations are accounted for by both the equity and cost methods of accounting. The cost method is followed in those situations where the Company's ownership is less than 20% and operations are conducted by management of the affiliate. Income is recorded as received. The equity method of accounting is followed in those situations of larger ownership interests but less than 51%, and the Company's results of operations include those of the affiliate to the extent of its ownership interest. The Company's investment in Nishikawa Standard Company (NSC), a 50% owned joint venture in the United States, is accounted for under the equity method. The Company's investment in NSC at June 30, 1997 and 1996 was $19,609 and $18,644 respectively and is included in Other Assets in the accompanying consolidated balance sheets. The Company's share of NSC's operating income was $969, $2,504 and $431 in fiscal 1997, 1996 and 1995, respectively. Under the terms of NSC's revolving credit and term loan facility, the joint venture partners are required to guarantee a portion of NSC's borrowings. The Company's share of these guarantees at June 30, 1997 was $8,650. CASH AND CASH EQUIVALENTS Cash and cash equivalents include bank deposits and repurchase agreements at varying rates of interest and with original maturities less than thirty days. These investments are carried at cost which approximates market value. The following is additional information related to the accompanying consolidated statements of cash flows:
1997 1996 1995 ---- ---- ---- Cash paid for interest........... $12,314 $14,962 $13,935 Cash paid for income taxes.............. $18,819 $ 6,206 $ 3,600
FOREIGN CURRENCY TRANSLATION The financial statements of the Company's foreign subsidiaries have been translated in accordance with Statement of Financial Accounting Standards (SFAS) No. 52. Except for the Brazilian and Mexican subsidiaries, current rates of exchange are used to translate the balance sheets of these entities, while the average exchange rate of each fiscal year is used for the translation of income and expense accounts. The resulting unrealized gains and losses are recorded as a component of shareholders' equity. Because the Company's Brazilian and Mexican subsidiaries operate in highly inflationary economies, the U.S. dollar has been used as the functional currency in the translation of the Brazilian and Mexican financial statements. Accordingly, foreign currency gains or losses of the Brazilian and Mexican subsidiaries have been reflected in income currently. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. The Company provides for depreciation of plant and equipment using the straight-line and sum-of-years' digits methods at annual rates based on the following estimated service lives of the property: Buildings.................... 15 to 25 years Machinery and Equipment...... 10 to 14 years Furniture and Fixtures....... 7 to 10 years
Maintenance and repair expenditures are charged to income as incurred. Expenditures for improvements and major renewals are capitalized. When assets are retired, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss on the disposition is credited or charged to income. INVENTORIES Inventories are stated at the lower of cost or market. The majority of domestic inventories are valued using the last-in, first-out (LIFO) method, and the remaining inventories are valued using the first-in, first-out (FIFO) method. Cost includes the cost of materials, direct labor and the applicable share of manufacturing overhead. F-12 33 GOODWILL Goodwill, which represents the excess of purchase price over the fair value of assets acquired, is amortized on a straight-line basis over the estimated useful life but not in excess of 40 years. Recoverability is reviewed annually or sooner if events or changes in circumstances indicate that the carrying amount may exceed fair value. Recoverability is then determined by comparing the undiscounted net cash flows of the net assets on which the goodwill applies to the net book value, including goodwill, of those assets. TAXES ON INCOME The Company has determined tax expense and other deferred tax information using the liability method, which recognizes the differences in financial reporting bases and tax bases of assets and liabilities at tax rates currently in effect. Income tax expense includes United States, foreign and state income taxes, exclusive of taxes on the undistributed income of foreign subsidiaries where it is the intention of the Company to have those subsidiaries reinvest the income locally. RETIREMENT PLANS The Company's policy is to fund the pension costs of defined benefit plans in accordance with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Defined contribution and multi-employer plans are funded as accrued, and the accrual is based upon hourly rates, or a percentage of the unit's performance. POSTRETIREMENT MEDICAL BENEFITS The Company provides postretirement health and life insurance benefits for retired salaried and certain retired hourly employees. Benefits provided under various plans, individually arranged by business unit, include health and life insurance. The plans generally provide for a means to limit the cost of the plans to the Company through cost-sharing or spending limitations. FINANCIAL INSTRUMENTS The Company's financial instruments recorded on the balance sheet include cash and cash equivalents, trade receivables and payables and debt obligations. The book value of cash and cash equivalents, trade receivables and payables and short-term debt are considered to be representative of fair value because of the short maturity of these instruments. The fair value of long-term debt is based on rates available to the Company for debt with comparable terms and maturities. Off balance sheet derivative financial instruments include a currency and interest rate swap transaction, an interest rate swap contract and foreign exchange contracts. The currency and interest rate swap transaction protects the Company from fluctuations in the value of the U.S. dollar in relation to the French franc and establishes a fixed U.S. dollar rate of return on a loan from the Company to its French subsidiary. The interest rate swap transaction converts floating rate debt under its Revolving Credit Agreement to fixed rate debt. The Company and its subsidiaries enter into foreign exchange contracts to manage exposure to foreign exchange fluctuations related to sales to foreign customers or purchases of equipment or inventory from foreign suppliers. These contracts hedge firm commitments to pay or receive foreign currency within a one-year period. The Company does not engage in speculation and does not hedge foreign currency positions which are not related to specific transactions. The gains and losses on the contracts offset losses and gains of the transactions being hedged, resulting in protection from the risks of foreign exchange movement for those transactions and avoiding losses affecting results of operations. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. ENVIRONMENTAL COMPLIANCE AND REMEDIATION Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are F-13 34 probable and the costs can be reasonably estimated. Estimated costs are based upon enacted laws and regulations, existing technology and the most probable method of remediation. The costs determined are not discounted and exclude the effects of inflation and other societal and economic factors. Where the cost estimates result in a range of equally probable amounts, the lower end of the range is accrued. REVENUE RECOGNITION The Company recognizes revenues as products are shipped to its customers. CONCENTRATION OF CREDIT RISK The Company designs and manufactures rubber and plastic components for automotive original equipment manufacturers. Financial instruments which potentially subject the Company to concentrations of credit risk are primarily accounts receivable. The Company performs ongoing credit evaluations of its customers' financial condition. The allowance for non-collection of accounts receivable is based on the expected collectibility of all accounts receivable. IMPAIRMENT OF ASSETS The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" on July 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS No. 121 did not have a material effect on the Company's consolidated financial statements. STOCK-BASED COMPENSATION Prior to July 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On July 1, 1996, the Company adopted SFAS No. 123 Accounting for Stock-Based Compensation, which allows entities to continue to apply the provisions of APB Opinion No. 25, and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in fiscal 1997 and future years as if the fair-value based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to their 1997 presentation in the financial statements. 2. ACQUISITIONS In May 1995, the Company acquired the 80% of Itatiaia Standard not previously owned by it for total consideration of $4,040. The acquisition was accounted for under the purchase method of accounting and the financial statements of the Company include the acquired assets, assumed liabilities and results of operations for June 1995. Pro forma sales and operating results are not material. Valuation of the assets acquired and liabilities assumed in accordance with Accounting Principles Board Opinion No. 16 was finalized during fiscal 1996 and resulted in recording goodwill of approximately $10,800. 3. NON-RECURRING CHARGE In 1997, the Company announced it would permanently close two automotive parts plants in Schenectady, New York and Lexington, Kentucky, and recorded a non-recurring charge of $17,661 or $0.63 per share of common stock, after tax. The closures are being undertaken to reduce overcapacity, which will allow the Company to improve customer service, reduce operating costs, and improve productivity and asset utilization. The closures, which are expected to be completed by December 1997, will result in the reduction of approximately 500 employees. The Company's provision consists of a $12,485 to recognize severance and benefits for the employees to be terminated and $5,176 for asset writedowns and building razing costs. At June 30, 1997, approximately $5,116 in costs have been charged against these accruals. The remaining amounts are F-14 35 included in Accounts payable and accrued expenses in the accompanying consolidated balance sheet. During fiscal 1997, the Company also incurred $1,665 in expenses related to the transfer of business from the closed facilities to those that will remain in operations. Since these costs are expected to benefit future operations they were not included in the non-recurring charge. Examples include, costs to move machinery, equipment and inventory, equipment set-up and relocation of employees retained by the Company. In 1995, the Company provided $8,832 to rationalize two business units. The Company has submitted the remaining assets of Oliver Rubber's European subsidiary for formal liquidation proceedings in the United Kingdom. As a result, a provision of $5,347 was recorded to reduce asset values to net realizable amounts, to accrue expenses of liquidation including severance for several employees, and to recognize foreign currency losses which were formerly deferred in the Company's foreign currency translation account. Of the amount provided, $2,309 was recorded in the first quarter of fiscal 1995 with the balance recorded in the fourth quarter. The Company attempted to realize as much asset value as possible before beginning formal liquidation. The liquidation was substantially completed in fiscal 1996. The second 1995 business unit rationalization involved the Company's plastic plant in Canada. As part of its formal plan, in fiscal 1995, the Company recorded $3,485 to provide for a work force reduction of 328 employees at this plant. Costs included in this provision in the fourth quarter were pension curtailment, severance as required by Canadian law, lease obligations for the idled portion of the leased facility, removal costs of the Company-owned equipment and reduction of idled assets to net realizable value. At June 30, 1996 the business was closed, and all production was moved to other locations. Additional costs incurred to close this business were charged to normal operations as incurred. 4. ACCOUNTS RECEIVABLE SECURITIZATION In September 1995, the Company and certain of its U.S. subsidiaries entered into an agreement to sell, on an ongoing basis, all of their accounts receivable to The Standard Products Funding Corporation (Funding Co.), a wholly owned subsidiary of the Company. Accordingly, the Company and those subsidiaries, irrevocably and without recourse, transfer all of their U.S. dollar denominated trade accounts receivable (principally representing amounts owed by original equipment customers in the U.S. automotive and related industries) to the Funding Co. The Funding Co. has sold and, subject to certain conditions, may from time to time sell an undivided interest in those receivables to the Clipper Receivables Corporation. The Funding Co. is permitted to receive advances of up to $50,000 for the sale of such undivided interest. At June 30, 1997, $50,000 has been advanced. Unless extended by amendment, the agreement expires in September 1998. Proceeds from the sale were used to reduce outstanding borrowings under the Company's Revolving Credit Agreement and are reflected as operating cash flows in the accompanying consolidated statement of cash flows. Costs of the program, which primarily consist of the purchasers' financing and administrative costs, totaled $3,104 and $2,603 in fiscal 1997 and 1996 and have been classified as Selling, General and Administrative Expenses in the accompanying consolidated statement income. The Company maintains an allowance for doubtful accounts receivable ($2,863 and $2,958 at June 30, 1997 and 1996, respectively) based on the expected collectibility of all trade accounts receivable, including receivables sold. 5. INVENTORY The major components of inventory are as follows:
(THOUSANDS OF DOLLARS) 1997 1996 ---------------------- ---- ---- Raw materials............. $29,069 $27,186 Work-in-process and finished goods.......... 37,564 33,191 ------- ------- Total, at both FIFO and LIFO cost............... $66,633 $60,377 Excess of FIFO cost over LIFO cost............... $14,019 $13,719
Approximately 50% of the Company's inventories are valued at LIFO cost. F-15 36 6. OTHER ASSETS, NET Other assets consist of the following:
(THOUSANDS OF DOLLARS) 1997 1996 ---------------------- ---- ---- Investments................. $22,508 $21,195 Tooling..................... 3,450 5,912 Patents and other intangibles............... 5,834 8,602 Deferred taxes.............. 9,401 10,300 Other....................... 9,505 7,437 ------- ------- Total................... $50,698 $53,446
Where applicable, amounts are presented net of accumulated amortization. 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following:
(THOUSANDS OF DOLLARS) 1997 1996 ---------------------- ---- ---- Accounts payable........... $ 81,214 $ 99,093 Accrued payrolls........... 34,451 26,651 Accrued other taxes........ 5,035 4,489 Federal income tax......... 3,681 -- Other accrued expenses..... 77,248 71,269 -------- -------- Total.................. $201,629 $201,502
8. FINANCING ARRANGEMENTS
(THOUSANDS OF DOLLARS) 1997 1996 ---------------------- ---- ---- Senior notes.............. $100,000 $100,000 Revolving credit agreement............... 20,000 40,000 Other debt................ 3,093 5,091 -------- -------- Total..................... 123,093 145,091 Less - current maturities.............. 1,289 2,050 -------- -------- $121,804 $143,041
At June 30, 1997, Senior Notes outstanding of $100,000 include two issues, $75,000 and $25,000. The $75,000 Senior Notes, placed directly with three affiliated insurance companies, are unsecured and accrue interest at 6.55%. Interest payments are payable semiannually, and annual principal payments of $12,500 begin in December 1998 through December 2002, with the balance due on maturity in December 2003. The $25,000 Senior Notes are also unsecured notes placed directly with the holders. The interest rate is 9.81%, interest is paid semiannually and the notes are payable July 1, 1999. Each of the Senior Note agreements requires the Company to maintain certain financial covenants as to net worth, leverage and working capital. The Revolving Credit Agreement (Credit Agreement) represents unsecured borrowings from a group of banks that have committed to make available for borrowing up to $125,000 until January 1999 with provisions for extending the agreement beyond that date upon satisfaction of certain requirements. The loans may be denominated in either U.S. dollars or certain other currencies based upon Eurodollar interest rates or the agent bank's base rate. At June 30, 1997, borrowings under the Credit Agreement bear interest at 6.28%. A commitment fee of 0.19% is due on the unused portion of the agreement. The Company has the right to convert up to $50,000 of revolving loans into a five-year term loan with quarterly repayments thereafter. The terms of the Credit Agreement also require the Company to maintain certain financial covenants as to net worth, leverage and working capital. Under the most restrictive covenants of the Company's various loan agreements, $66,464 of retained earnings were not restricted at June 30, 1997 for the payment of dividends, and the ratio of current assets liabilities was 1.21 to 1, in excess of the minimum requirement of 1.00 to 1. The maturities of long-term debt for the five years subsequent to June 30, 1997 are:
(THOUSANDS OF DOLLARS) - ---------------------- 1998 $ 1,289 1999 33,854 2000 37,500 2001 12,500 2002 12,950 Thereafter 25,000
The Company and its subsidiaries also have, from various banking sources, approximately $65,700 of unused short-term lines of credit at rates of interest approximating Eurodollar interest rates. These funds are available subject to satisfying covenant restrictions as to funded debt limitations. In 1997, the average month-end lines were $20,200, and the highest month-end balance was $38,000. Comparable amounts for 1996 were $9,000 and $17,400 and $17,800 and $23,000 for 1995. The effective annual borrowing rate was 7.3% in 1997, 6.8% in 1996 and 6.8% in 1995. At year end, the weighted interest rate was 8.1%. F-16 37 9. FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of the Company's significant balance sheet financial instruments at June 30, 1997 and 1996, are as follows:
1997 CARRYING FAIR (THOUSANDS OF DOLLARS) AMOUNT VALUES ---------------------- -------- ------ Cash and cash equivalents........... $ 6,972 $ 6,972 Short-term bank debt.... 19,645 19,645 Long-term bank debt (including current portion).............. 123,093 121,793
1996 (THOUSANDS OF DOLLARS) ---------------------- Cash and cash equivalents........... $ -- $ -- Short-term bank debt.... 1,198 1,198 Long-term bank debt (including current portion).............. 145,091 143,889
Off balance sheet derivative financial instruments at June 30, 1997 and 1996, held for purposes other than trading, were as follows:
1997 1996 ------------------ ------------------ CONTRACT/ CONTRACT/ NOTIONAL FAIR NOTIONAL FAIR AMOUNT VALUES AMOUNT VALUES --------- ------ --------- ------ (THOUSANDS OF DOLLARS) Currency and interest rate swaps......... $34,680 $ (509) $38,350 $ (431) Foreign currency exchange agreements......... 41,388 1,844 35,673 505
With regard to the combined currency and interest rate swap agreement, the nominal amount of 86,864 French francs is payable by the Company to a bank, while the amount due from the bank to the Company is $14,680. Periodic payments are made by the Company and the bank until maturity in November 2000. Interest rates are fixed with a rate of 6.5% on payments to the bank and 5.8% on payments from the bank. Exchange rate fluctuations of the French franc payable to the bank are offset by the French franc receivable from the French subsidiary. The interest rate swap contract matures in March 1999. The Company pays a fixed interest rate of 5.18% to the bank and receives a floating rate LIBOR payment from the bank on the $20,000 notional amount of the swap contract. Foreign exchange contracts hedging trade transactions mature over the next twelve months. Exchange contracts hedging foreign denominated intercompany loans mature no later than the maturity of the loan. The counterparties to each of these agreements are major commercial banks. Management believes that losses related to credit risk are remote. 10. RETIREMENT PLANS The Company and its consolidated subsidiaries have a number of plans providing pension, retirement or profit-sharing benefits for substantially all employees. These plans include defined benefit, defined contribution and multi-employer plans. For defined benefit plans, those covering salaried employees provide pension benefits based upon the individual employee's average compensation over the last five years, while hourly plans provide benefits of stated amounts for each year of service. The assets of the plans consist of listed bonds, stocks, mutual investment funds and cash securities. Pension expense is determined using assumptions at the beginning of the year. The projected benefit obligation (PBO) is determined using the assumptions at the end of the year. Assumptions used to determine pension expense and the PBO were:
1997 1996 1995 ---- ---- ---- Discount rate................ 7.75% 7.75% 8.50% Long-term rate of return on plan assets................ 9.50% 9.50% 10.00% Rate of increase in future compensation levels........ 5.00% 5.00% 5.00%
The cost of providing pension, retirement and profit-sharing benefits charged to operations amounted to $7,295 in 1997, $6,999 in 1996 and $5,444 in 1995. For 1997, the expense of defined contribution plans was $5,033 and multi-employer plan expense was $486. Comparable figures for 1996 were $4,102 and $449, and for 1995, $3,683 and $508. The expense of defined benefit plans increased during 1995 as a result of including employees of subsidiary companies in the Company's salaried pension plan. Components of pension F-17 38 expense for defined benefit plans included the following items:
1997 1996 1995 ---- ---- ---- (THOUSANDS OF DOLLARS) Service cost......... $ 2,435 $ 2,737 $ 2,753 Interest cost on PBO................ 6,262 6,265 5,868 Actual loss (gain) on plan assets........ (6,163) (12,654) 457 Net amortization and deferral........... (1,361) 6,100 (7,871) Loss due to curtailment........ 602 -- -- ------- -------- ------- Net pension expense............ $ 1,775 $ 2,448 $ 1,207
The funded status of the foreign and domestic defined benefit plans is displayed below and is based on information supplied by the Company's actuary as of March 31 of each year. In connection with the recognition of the minimum liability as required by SFAS No. 87, as of June 30, 1997, the Company has recorded an intangible asset of $1,036 included in Other Assets, net in the accompanying consolidated balance sheet, and an equity reduction of $4,269.
1997 1996 ----------------- ----------------- LESS GREATER LESS GREATER THAN THAN THAN THAN PLAN PLAN PLAN PLAN ASSETS ASSETS ASSETS ASSETS ------ ------- ------ ------- ACCUMULATED BENEFITS ARE: (THOUSANDS OF DOLLARS) Vested benefits.......... $49,540 $27,046 $46,166 $25,278 Non-vested benefits...... 2,576 423 2,230 530 ------- ------- ------- ------- Accumulated benefit obligation............. 52,116 27,469 48,396 25,808 Projected future compensation increases.............. 6,166 735 5,719 642 ------- ------- ------- ------- PBO...................... 58,282 28,204 54,115 26,450 Plan assets at fair market value........... 62,772 20,702 60,413 21,056 ------- ------- ------- ------- PBO (in excess of) or less than plan assets................. 4,490 (7,502) 6,298 (5,394) Unrecognized transition asset.................. (4,998) (263) (5,634) (256) Unrecognized loss........ 3,416 5,061 2,054 3,696 Adjustment required to recognize minimum liability.............. -- (5,304) -- (4,362) Unrecognized prior service cost........... 2,443 1,241 2,247 1,526 ------- ------- ------- ------- Prepaid pension cost, (liability)............ $ 5,351 $(6,767) $ 4,965 $(4,790)
The Company has accrued $11,434 and $13,289 for Workers' Compensation claims as of June 30, 1997 and 1996, respectively. 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The cost of providing health and life insurance benefits for certain retired employees has been accrued based on the employees' active service lives. The expense for postretirement benefits other than pensions is detailed below. All plans under which these benefits are provided are unfunded. The Company continues to fund these benefits as claims are incurred. Spending limitations per annum are in effect for several plans and future retirees of other plans will pay a portion of these costs. A summary of plan information is as follows:
1997 1996 1995 ---- ---- ---- (THOUSANDS OF DOLLARS) Accumulated postretirement benefit obligation (APBO): Retirees.............. $22,196 $20,989 $19,874 Active participants eligible to receive benefits............ 2,442 2,177 1,872 Other active plan participants........ 3,174 2,516 2,558 ---------- --------- --------- 27,812 25,682 24,304 Unrecognized gain (loss).............. (438) 2,048 3,689 ---------- --------- --------- $27,374 $27,730 $27,993 ---------- --------- --------- Periodic postretirement benefit cost: Current service cost................ $ 271 $ 286 $ 248 Interest on postretirement benefit obligation.......... 1,922 1,990 2,033 Net amortization...... (11) (74) -- ---------- --------- --------- $ 2,182 $ 2,202 $ 2,281 ---------- --------- --------- Actuarial assumptions: Discount rate......... 7.75% 7.75% 8.50% 1997 to 2004 -- health care cost trend rate................ 10.75%-5.5% 11.5%-5.5% 13.9%-5.5% Effect of a 1% increase in health care cost trend rate: Increase year end APBO................ 7.0% 6.6% 6.3% Increase expense...... 9.2% 9.5% 7.3%
12. LEASES The Company and its subsidiaries have operating leases covering manufacturing facilities, transportation and material handling equipment, and computer hardware and software expiring at various dates through 2006. The following is a schedule of future minimum rental payments required under operating leases F-18 39 that have initial or remaining noncancelable lease terms in excess of one year as of June 30, 1997: 1998............................... $ 8,847 1999............................... 5,388 2000............................... 2,901 2001............................... 1,625 2002 and later years............... 3,302 ------- Total minimum payments required.... $22,063
Rent expense was $14,372, $14,627 and $14,209 for the years ended June 30, 1997, 1996 and 1995, respectively. 13. COMMITMENTS AND CONTINGENT LIABILITIES The Company and its subsidiaries are involved in certain legal actions and claims. In the opinion of management, any liability which may ultimately be incurred would not materially affect the financial position or results of operations of the Company. 14. COMMON SHARES Options to purchase common shares have been granted under various employee stock option plans adopted by shareholders. For each plan, options are exercisable over periods of five or ten years. The option price is either the fair market value at the time the option is granted or 110% of the fair market value at the time the option is granted for those individuals owning more than ten percent of the common shares of the Company. Generally, options become exercisable one year from the date of grant and annually thereafter. No more than 40% of the grant can be exercised in any one plan year. Summarized below is stock option activity for 1996 and 1997.
RANGE OF SHARES OPTION PRICES ------ ------------- Stock options outstanding at June 30, 1995.............. 333,571 $13.50 - $36.99 Options granted......... 156,000 17.88 - 23.50 Options exercised....... (44,056) 13.50 - 15.84 Options cancelled....... (57,875) 21.63 - 33.63 ------- Stock options outstanding at June 30, 1996.............. 387,640 $17.88 - $36.99 Options granted......... 233,450 25.25 - 26.25 Options exercised....... (6,400) 19.25 - 21.63 Options cancelled....... (65,986) 29.13 - 36.99 ------- Stock options outstanding at June 30, 1997.............. 548,704 =======
The Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," effective with the 1997 financial statements, but elected to continue to measure compensation cost using the intrinsic value method, in accordance with APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Accordingly, no compensation cost for stock options has been recognized. If compensation cost had been determined based on the estimated fair value of options previously granted, consistent with the methodology in SFAS 123, the pro forma effects on the Company's net income and income per share would have been:
1997 1996 ---- ---- Net Earnings As reported............. $27,530 $14,577 Pro forma............... 26,836 14,313 Primary and Fully Diluted Earnings per Share As reported............. $1.64 $0.87 Pro forma............... 1.60 0.85
The estimated fair value as of date of grant of options granted in 1997 and 1996, using the Black-Scholes option-pricing model, was as follows:
1997 1996 ---- ---- Estimated fair value per share of options granted during the year.................... $8.38 $7.99 Assumptions: Annualized dividend yield... 2.7% 2.7% Common Stock price volatility............... 30.5% 30.8% Risk-free rate of return.... 6.5% 6.8% Expected option term (in years)................... 7 7
At June 30, 1997, options for 162,806 shares were exercisable at an average exercise price of $26.98 a share. Shares reserved for the future granting of options were 410,629 at year end; 245,193 were reserved a year ago. In July 1997, stock options for 200,000 shares were awarded to the Company's new Chief Executive Officer. These are not reflected in the tables above. After this award, 210,629 shares remain reserved for future awards. Under The Standard Products Company 1991 Restricted Stock Plan, 375,000 common shares were reserved for restricted stock awards. Shares awarded are earned ratably over the term of the restricted stock agreement, based upon achieving F-19 40 specified performance goals. Generally, transferability of shares earned is restricted for a specified number of years following the year in which they were earned. Until the restrictions lapse, the recipient of earned restricted shares is entitled to all of the rights of a shareholder, including the right to vote the shares, but the shares are restricted as to transferability and subject to forfeiture to the Company during the restricted period. Shares awarded were 75,000 in 1995 and 187,500 in 1992. Of the shares awarded, 35,000 shares were earned in 1997, 18,400 shares in 1996 and 16,800 shares in 1995. In 1997, $1,051 was charged to operations as compensation expense based upon the market value of the earned shares. The similar charge to operations in 1996 and 1995 was $419 and $208, respectively. At year end, 112,500 shares remain available for future awards. In July 1997, the Company awarded 50,000 shares of restricted stock to its new Chief Executive Officer and 12,500 shares to the Chairman of the Board of Directors. After this award, 50,000 shares remain available for future awards. 15. SEGMENT INFORMATION The Company's operations are in two industry segments. The Transportation Equipment Segment includes extruded and molded rubber and plastic products for automotive, building and marine industries and plastic and magnetic door seals for home appliances. The Tread Rubber Segment produces tread rubber for the truck tire retreading industry. Net sales by segment include both sales to unaffiliated customers, as reported in the Company's consolidated statements of income, and intersegment sales. Operating income consists of net sales less applicable operating costs and expenses related to those sales. In computing operating income, general corporate expenses are excluded. Identifiable assets by segment are those assets that are used in the operations of each segment. General corporate assets are those not identifiable with the operations of a segment. The Company's major customers include automotive original equipment manufacturers. The percentage of sales of each of these major customers to total consolidated sales for the three-year periods 1997, 1996 and 1995, respectively, has been as follows: Chrysler - 18%, 17% and 15%; Ford - 24%, 26% and 23%; General Motors - 13%, 14% and 18%. Sales to the automotive original equipment customers include a number of different products and types of the same product, the sales of which are not interdependent. BUSINESS SEGMENT INFORMATION
1997 1996 1995 ---- ---- ---- (THOUSANDS OF DOLLARS) Net Sales: Transportation equipment............ $ 976,001 $ 958,105 $868,892 Tread rubber........... 145,497 135,869 133,656 Less -- intersegment sales................ (13,230) (10,054) (6,622) ---------- ---------- -------- Net sales................ $1,108,268 $1,083,920 $995,926 Operating Income: Transportation equipment............ $ 73,100 $ 39,836 $ 41,882 Tread rubber........... 9,128 4,078 1,727 Non-recurring charge... (17,661) -- (8,832) General corporate expenses............. (5,331) (5,048) (4,275) ---------- ---------- -------- Total operating income........... $ 59,236 $ 38,866 $ 30,502 ---------- ---------- -------- Other expense, net..... (12,777) (10,342) (13,243) ---------- ---------- -------- Income from operations before taxes.............. $ 46,459 $ 28,524 $ 17,259 Identifiable Assets: Transportation equipment............ $ 590,579 $ 585,274 $595,109 Tread rubber........... 72,483 70,788 74,229 General corporate assets............... 28,797 28,633 32,551 ---------- ---------- -------- Total identifiable assets........... $ 691,859 $ 684,695 $701,889 Capital Additions, net:(1) Transportation equipment............ $ 53,683 $ 74,456 $ 48,904 Tread rubber........... 5,321 5,228 5,767 ---------- ---------- -------- Total capital additions........ $ 59,004 $ 79,684 $ 54,671 Depreciation and Amortization: Transportation equipment............ $ 48,571 $ 48,328 $ 42,951 Tread rubber........... 4,559 4,217 3,888 ---------- ---------- -------- Total depreciation and amortization..... $ 53,130 $ 52,545 $ 46,839
- ------------------------- (1) Includes assets acquired by purchase of businesses in 1995. F-20 41 GEOGRAPHIC AREA
1997 1996 1995 ---- ---- ---- (THOUSANDS OF DOLLARS) Net Sales: United States.......... $ 619,068 $ 618,491 $574,064 Canada................. 218,427 212,046 203,265 Europe................. 234,504 242,977 245,362 Brazil................. 58,680 29,479 2,640 Less -- inter-area sales................ (22,411) (19,073) (29,405) ---------- ---------- -------- Net sales.......... $1,108,268 $1,083,920 $995,926 Net Income: United States.......... $ 16,415 $ 8,248 $ 12,821 Canada................. 10,928 8,785 1,946 Europe................. 9,180 10,732 7,915 Brazil................. (5,642) (10,345) (51) General corporate expenses, net of tax.................. (3,351) (2,843) (2,565) ---------- ---------- -------- Net income......... $ 27,530 $ 14,577 $ 20,066 Identifiable Assets: United States.......... $ 270,036 $ 297,744 $340,235 Canada................. 95,362 79,845 81,979 Europe................. 202,358 210,215 234,918 Brazil................. 90,114 68,258 12,206 Mexico................. 5,192 -- -- General corporate assets............... 28,797 28,633 32,551 ---------- ---------- -------- Total identifiable assets........... $ 691,859 $ 684,695 $701,889
16. INCOME TAXES
1997 1996 1995 ---- ---- ---- (THOUSANDS OF DOLLARS) Income before taxes: United States........... $17,016 $10,626 $ 1,265 Foreign................. 29,443 17,898 15,994 ------- ------- ------- $46,459 $28,524 $17,259 Amounts currently payable: Federal................. $ 8,887 $ 3,822 $(3,174) Foreign................. 11,030 3,585 5,779 State and local......... 1,882 1,304 1,038 ------- ------- ------- $21,799 $ 8,711 $ 3,643 Deferred taxes: Federal................. $(3,111) $ 2,656 $ (233) Foreign................. 321 2,536 (6,101) State and local......... (80) 44 (116) ------- ------- ------- (2,870) 5,236 (6,450) ------- ------- ------- Total provision..... $18,929 $13,947 $(2,807)
A reconciliation of income tax expense to the U.S. statutory rate is as follows: Tax at U.S. statutory rate... 35.0% 35.0% 35.0% Difference in effective rate of international operations................. 2.2 10.6 (34.3) Write-off of investment...... -- -- (25.7) State and local income tax... 2.5 3.1 3.4 Permanent book to tax differences not deductible................. 2.7 2.9 6.0 Tax credits.................. (1.4) -- -- Other, net................... (0.3) (2.7) (0.7) ---- ---- ----- Effective tax rate........... 40.7% 48.9% (16.3)%
Deferred tax assets (liabilities) result from differences in the basis of assets and liabilities for tax and financial statement purposes. The cumulative effect of the major items follows:
1997 1996 ---- ---- (THOUSANDS OF DOLLARS) Deferred tax assets: Nondeductible accrued expenses............... $ 8,200 $ 3,000 Employee benefits........ 16,000 16,600 Net operating loss and tax credit carryforwards.......... 14,700 14,400 All other items.......... 1,700 4,300 -------- -------- Total deferred tax assets............ $ 40,600 $ 38,300 Valuation allowance...... (14,700) (14,400) -------- -------- Net deferred tax assets............ $ 25,900 $ 23,900 Deferred tax liabilities: Depreciation and amortization........... $(24,600) $(28,300) All other items.......... (5,400) (6,000) -------- -------- Total deferred tax liabilities....... $(30,000) $(34,300) -------- -------- Net deferred tax liabilities.......... $ (4,100) $(10,400) ======== ========
In accordance with the Company's policy, as of June 30, 1997, federal income taxes have not been provided on the undistributed earnings of foreign subsidiaries. If these earnings were distributed, approximately $6,000 of tax would be payable. The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized principally due to the inability of its Brazilian subsidiaries to fully utilize available net operating loss carryforwards. The subsequent recognition of tax benefits relating to the valuation allowance will be reported in the consolidated statement of income as opportunities to utilize these carryforwards become more certain. Deferred tax assets are included in Prepaid insurance, taxes, etc. and Other Assets, net in the accompanying consolidated balance sheets. F-21 42 17. QUARTERLY AND OTHER FINANCIAL DATA (UNAUDITED) The following tables set forth a summary of the quarterly results of operations for the years ended June 30, 1997 and 1996;
1997 THREE MONTHS ENDED ----------------------------------------- SEPT. 30 DEC. 31 MARCH 31 JUNE 30 -------- ------- -------- ------- (THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA) Net sales............ $265,611 $266,620 $281,774 $294,263 Gross income......... 25,292 31,696 38,761 49,708 Net income........... 1,397 6,344 515 19,275 Earnings per common share.............. $ 0.08 $ 0.38 $ 0.03 $ 1.15
1996 THREE MONTHS ENDED ----------------------------------------- SEPT. 30 DEC. 31 MARCH 31 JUNE 30 -------- ------- -------- ------- (THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA) Net Sales............ $238,760 $264,747 $277,274 $303,139 Gross income......... 9,405 21,769 33,879 43,429 Net income........... (9,784) 1,545 7,283 15,533 Earnings per common share.............. $ (0.58) $ 0.09 $ 0.43 $ 0.93
The Company's common shares are listed on the New York Stock Exchange. Quarterly market and dividend data are shown in the following tables.
PRICE RANGE ------------------------------------ 1997 1996 ---------------- ---------------- HIGH LOW HIGH LOW ---- --- ---- --- Quarter 1st................ $25.75 $18.50 $24.00 $17.00 2nd................ $26.25 $22.75 $18.75 $13.50 3rd................ $26.50 $22.00 $25.00 $16.38 4th................ $26.88 $21.38 $28.25 $23.00
CASH DIVIDENDS DECLARED -------------- 1997 1996 ---- ---- Quarter 1st.................................. $0.17 $0.17 2nd.................................. $0.17 $0.17 3rd.................................. $0.17 $0.17 4th.................................. $0.17 $0.17 ----- ----- $0.68 $0.68
There were approximately 975 shareholders as of August 1, 1997. 18. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This standard establishes guidelines for the display of comprehensive income for financial statement purposes. The objective of the statement is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. The FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This standard requires extensive disclosure of operating segments based on the "management approach." This approach organizes segments within a company for making operating decisions and assessing performance. Reportable segments can be based on products and services, geography, legal structure or any other manner in which management disaggregates the company. Both standards are effective for fiscal years beginning after December 15, 1997. F-22 43 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULE To: The Standard Products Company We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in The Standard Products Company and Consolidated Subsidiaries 1997 Annual Report to Shareholders and have issued our report thereon dated July 24, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Capital Item 14(a)(2) of this Form 10-K is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP ARTHUR ANDERSON LLP SIG. Cleveland, Ohio July 24, 1997. S-1 44 VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (THOUSANDS OF DOLLARS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F -------- ---------- ---------- ---------- ---------- ------------- BALANCE ADDITIONS AT CHARGED TO BALANCE BEGINNING COSTS AND AT END DESCRIPTION OF PERIOD EXPENSES RECOVERIES DEDUCTIONS OF PERIOD ----------- --------- ---------- ---------- ---------- --------- Year Ended June 30, 1997 Reserve for Plant Closings(1)........... $ -- $17,661 $ -- $5,116 $12,545 ====== ======= ==== ====== ======= Allowance for doubtful accounts......... $2,958 $ 543 $ 96 $ 734 $ 2,863 ====== ======= ==== ====== ======= Year Ended June 30, 1996 Reserve for Plant Closings.............. $6,235 $ -- $ -- $6,235 $ -- ====== ======= ==== ====== ======= Allowance for doubtful accounts......... $4,978 $ 8 $113 $2,141 $ 2,958(2) ====== ======= ==== ====== ======= Year Ended June 30, 1995 Reserve for Plant Closings.............. $3,975 $ 3,485 $ -- $1,225 $ 6,235 ====== ======= ==== ====== ======= Allowance for doubtful accounts......... $3,627 $ 4,074 $230 $2,953 $ 4,978(2) ====== ======= ==== ====== =======
- ------------------------- (1) Additions are related to the closure of the Lexington, Kentucky and Schenectady, New York plants. These operations are still open at June 30, 1997. They are expected to be closed by December 31, 1997. (2) Material changes in the allowances for doubtful accounts are due to additional doubtful account reserve established in 1995 for a subsidiary plant closing and write off of these receivables during 1996. S-2 EX-4.(B) 2 EXHIBIT 4(B) 1 EXHIBIT 4(b) FIRST AMENDMENT TO SENIOR NOTES FIRST AMENDMENT TO SENIOR NOTES, dated as of September 22, 1995, by and between THE STANDARD PRODUCTS COMPANY, an Ohio corporation (the "Company"), and METROPOLITAN LIFE INSURANCE COMPANY, METROPOLITAN PROPERTY AND CASUALTY COMPANY, and METROPOLITAN INSURANCE AND ANNUITY COMPANY (collectively, the "Lenders" and individually, a "Lender"). WITNESSETH THAT: WHEREAS, the Company and each of the Lenders entered into an Agreement, dated as of December 16, 1993 (the "Agreement"), pursuant to which the Lenders agreed to loan to the Company (the "Loan") the aggregate principal amount of Seventy-Five Million Dollars ($75,000,000); and WHEREAS, the Loan is evidenced by the Company's 6.55% Senior Notes due December 16, 2003 issued to the Lenders, dated December 16, 1993 and being Registered No. R-1, R-2 and R-3 in the aggregate principal amount of Seventy-Five Million Dollars ($75,000,000) (collectively, the "Notes" and individually, a "Note"); and WHEREAS, the Company, Oliver Rubber Company ("Oliver"), Holm Industries, Inc. ("Holm"), 5 Rubber Corporation ("5 Rubber"), and The Standard Products Funding Corporation, a Delaware corporation and a wholly owned subsidiary of the Company (the "Receivables Subsidiary"), desire to enter into a Purchase and Sale Agreement that will provide, among other matters, for: the sale by the Company, Oliver, Holm and 5 Rubber (each an "Originator"), and the purchase by the Receivables Subsidiary, of all the receivables and related assets ("Receivables") then and thereafter owned by the Originators at a purchase price equal to the face amount thereof less certain discounts (including program and other expenses); a portion of the purchase price owed by the Receivables Subsidiary for the Receivables purchased from the Originators to be payable in the form of a promissory note; and the Originators to borrow money from time to time from the Receivables Subsidiary; and WHEREAS, the Company and the Receivables Subsidiary desire to enter into a Receivables Purchase Agreement among the Receivables Subsidiary, the Company, Clipper Receivables Corporation, State Street Boston Capital Corporation and National City Bank that will provide, among other matters, for: the sale by the Receivables Subsidiary, and the purchase by Clipper Receivables Corporation, of interests in the Receivables purchased from the Originators at a purchase price equal to the face amount thereof less certain discounts (including reserves), representations and warranties by the Company and the Receivables Subsidiary; affirmative and negative covenants of the Company and the Receivables Subsidiary, including certain reporting requirements and financial covenants of the Receivables Subsidiary and of the Company and its subsidiaries; the appointment of the Company as 2 Master Servicer to collect the Receivables; the grant of a security interest in the Receivables; liquidation events; and indemnification obligations of the Company and the Receivables Subsidiary; and WHEREAS, the parties desire to amend the Notes; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. Effect of Amendment; Definitions. Each Note shall be and hereby is amended as provided in Section 2 hereof. Except as expressly amended in Section 2 hereof, each Note shall continue in full force and effect in accordance with the provisions thereof on the date hereof. As used therein, the terms "Note", "this Note", "herein", "hereinafter", "hereto", "hereof", and words of similar import shall, unless the context otherwise requires, mean each Note as amended and modified by this Amendment. Capitalized terms used but not defined in this Amendment (including the recitals hereto) shall have the meanings given to them in the Notes. 2. Amendment. (A) Section 8.4 of each Note is hereby amended by inserting the following at the end of the first paragraph thereof: "; provided, however, that at any time that the Company or any Subsidiary has outstanding any Receivables Obligations the foregoing aggregate principal amount of Priority Indebtedness shall not exceed 16% of Stockholders' Equity; and provided, further, in the event that the most recent consolidated balance sheet of the Company and its Subsidiaries provided hereunder reflect amounts due as a receivable from the Person that is owed such Receivables Obligations in an amount in excess of $10,000,000, such excess amount shall be treated as Priority Indebtedness for purposes of this Section 8.4 and shall be subject to the foregoing proviso." (B) Section 8.6(A)(i) of each Note is hereby deleted and the following is substituted therefor: "(i) if such sale or disposition is (a) in the ordinary course of business, (b) a sale or disposition of Receivables by the Company to a Subsidiary or by any Subsidiary to another Subsidiary, or (c) a sale or disposition of Receivables by a Subsidiary to any Person, whether such sale is with or without recourse, if the obligations of such Subsidiary to the purchaser thereof in respect of such sale or disposition are Receivables Obligations of that -2- 3 Subsidiary, but only to the extent those Receivables Obligations do not exceed the Receivables obligations Cap or" (C) Section 8.6(A)(x) of each Note is hereby deleted and the following is substituted, therefor: "(x) the aggregate book value of all such sales or dispositions (on a consolidated basis) (1) during the most recent 12-month accounting period would exceed (iii) 15% of Total Assets or (iv) if during that 12-month accounting period the Company or any Subsidiary has outstanding any Receivables Obligations, 10% of Total Assets, in either case as computed at the end of the most recent quarter preceding such sale or (2) since the Closing Date would exceed (v) 25% of Total Assets or (vi) if the Company or any Subsidiary has outstanding any Receivables Obligations, 20% of Total Assets, in either case as computed at the end of the most recent fiscal year preceding such sale or". (D) Section 8.7 of each Note is hereby deleted and the following is substituted therefor: "8.7. Intercompany Indebtedness. The Company will not create, incur, assume or guarantee, or otherwise become or be liable in respect of, any Indebtedness in an aggregate principal amount in excess of Seven Million Five Hundred Thousand Dollars ($7,500,000) owing to any Subsidiary or Affiliate, unless such Indebtedness in excess of that amount is unsecured and is subordinated and junior in right of payment to the Notes on substantially the terms set forth in Exhibit 8.7 attached hereto." (E) Section 10 of each Note is hereby amended as follows: 1. The definition of Leverage is amended by deleting the following phrase on the tenth and eleventh lines thereof: "for Borrowed Money to the extent specified in clause (a) above plus the Stockholder's Equity, all". 2. The definition of Indebtedness is amended by inserting the following at the end of that definition: "provided, however, that there shall be excluded from the definition of Indebtedness any Receivables Obligations." 3. The definition of Priority Indebtedness is amended by inserting the following at the end of that definition: ", other than any Indebtedness of any Subsidiary to another Subsidiary." -3- 4 4. The following definitions are inserted in alphabetical order: "Receivables" means any right to payment from a Person, whether constituting an account, chattel paper, instrument or general intangible, arising from the sale of merchandise or provision of services by the Company or any Subsidiary, and includes the right to payment of any interest or finance charges and other obligations of such Person with respect thereto, together with the following: (a) all rights to, but not any obligations under, all related contracts or agreements pursuant to or under which such Person is obligated to make payments with respect to the sale of goods or provision of services; (b) all security interests, liens, guarantees, and other agreements or arrangements of any nature whatsoever from time to time supporting or securing any such right to payment; (c) all books and records evidencing or otherwise relating to the foregoing; and (d) all collections and other proceeds, including insurance policies, relating to any of the foregoing. "Receivables Obligations Cap" means, with respect to the portion of the Receivables Obligations that would correspond to principal if those Receivables Obligations were treated as indebtedness for purposes of generally accepted accounting principles, an amount equal to Fifty Million Dollars ($50,000,000), which amount may be increased by Five Million Dollars ($5,000,000) during each fiscal year of the Company commencing July 1, 1996 and July 1, 1997 so long as no Event of Default has occurred and is continuing at the time of that increase. "Receivables Obligations" means any obligation of a Subsidiary arising from the sale by that Subsidiary of Receivables to any other Person, whether on a recourse or nonrecourse basis, that for purposes of GAAP is not classified upon the balance sheet of that Subsidiary as a liability of that Subsidiary. 3. Miscellaneous. (a) This Amendment shall he construed in accordance with and governed by the laws of the State of Ohio, without reference to principles of conflicts of law. (b) This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument. -4- 5 IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed by their respective duly authorized officers as of the day and year first above written. THE STANDARD PRODUCTS COMPANY By: /s/ Charles F. Nagy ------------------------------ Title: --------------------------- METROPOLITAN LIFE INSURANCE COMPANY By: /s/ Robert Bodett ------------------------------ Title: Assistant Vice President --------------------------- METROPOLITAN PROPERTY AND CASUALTY INSURANCE COMPANY By: /s/ Robert J. Noll ------------------------------ Title: --------------------------- METROPOLITAN INSURANCE AND ANNUITY COMPANY By: /s/ Anthony J. Williamson ------------------------------ Title: --------------------------- -5- EX-4.(F) 3 EXHIBIT 4(F) 1 EXHIBIT 4(f) THIRD AMENDMENT TO NOTE AGREEMENT THIRD AMENDMENT TO NOTE AGREEMENT, dated as of January 19, 1993, by and between THE STANDARD PRODUCTS COMPANY, an Ohio corporation (the "Company"), and NATIONWIDE LIFE INSURANCE COMPANY (the "Purchaser"). WITNESSETH THAT: WHEREAS, the Company and the Purchaser entered into a Note Agreement dated as of June 30, 1989, as amended by the First Amendment to Note Agreement dated as of February 22, 1991 and the Second Amendment to Note Agreement dated as of June 30, 1991 (collectively, the "Note Agreement"), and under and subject to the terms and provisions of the Note Agreement, the Company issued its Senior Note payable to the Purchaser (the "Note"); and WHEREAS, the parties desire to amend the Note Agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. Effect of Amendment; Definitions. The Note Agreement shall be and hereby is amended as provided in Section 2 hereof. Except as expressly amended in Section 2 hereof, the Note Agreement shall continue in full force and effect in accordance with the provisions thereof on the date hereof. As used therein, the terms "Note Agreement", "Agreement", "this Agreement", "herein", "hereinafter", "hereto", "hereof", and words of similar import shall, unless the context otherwise requires, mean the Note Agreement as amended and modified by this Amendment. Capitalized terms used but not defined in this Amendment (including the recitals hereto) shall have the meanings given to them in the Note Agreement. 2. Amendment. (a) Section 5.7(a)(2) of the Note Agreement is hereby deleted and the following is substituted therefor: "2) Funded Debt of the Company and its Subsidiaries outstanding as of the date that the closing of the purchase and sale of certain shares of capital stock takes place as contemplated under the Stock Sale Agreement, dated December 19, 1992, among the Company, Mr. Jean-Claude Smadja, acting on his own behalf and on behalf of certain other individuals and entities, and Panane Holding B.V., and reflected on Exhibit G hereto," 2 (b) Exhibit G to this Amendment shall be added to the Note Agreement as Exhibit G thereto. (c) The definition of "Tangible Assets" in Section 8.1 of the Note Agreement is hereby deleted and the following is substituted therefor: "Tangible Assets shall mean as of the date of any determination thereof, the total amount of all assets of the Company and its Subsidiaries (less depreciation, depletion and other properly deductible valuation reserves) after deducting the following, except that no such deduction shall be made in respect of the assets of Standard Products Industriel SA and its Subsidiaries existing on the date that such entities become Subsidiaries of the Company: good will, patents, trade names, trade marks, copyrights, franchises, experimental expense, organization expense, unamortized debt discount and expense, deferred assets other than prepaid insurance and prepaid taxes, the excess of cost of shares acquired over book value of related assets and such other assets as are properly classified as "intangible assets" in accordance with generally accepted accounting principles." 3. Miscellaneous. (a) This Amendment shall be construed in accordance with and governed by the laws of the State of Ohio, without reference to principles of conflicts of law. (b) This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument. IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed by their respective duly authorized officers as of the day and year first above written. THE STANDARD PRODUCTS COMPANY By: /s/ Charles F. Nagy ------------------------------------- Title: Treasurer ---------------------------------- NATIONWIDE LIFE INSURANCE COMPANY By: /s/ Jeffrey G. Milburn ------------------------------------- Vice President Title: Corporate Fixed-Income Securities ---------------------------------- SIMILAR AGREEMENTS HAVE BEEN EXECUTED WITH EMPLOYER'S LIFE INSURANCE COMPANY OF WAUSAU AND THE AID ASSOCIATION FOR LUTHERANS 3 NOTE AGREEMENT DATED JUNE 30, 1989 RE: $25,000,000 OF 9.81% SENIOR NOTE DUE JULY 1, 1999 SCHEDULE OF DEBT AS OF JANUARY 20, 1993* EXHIBIT G
PRINCIPAL AMOUNT DESCRIPTION (000'S OMITTED) TERMS COLLATERAL - ----------- --------------- ----- ---------- THE STANDARD PRODUCTS COMPANY Credit Agreement with National City Bank as Agent $175,000 Expires 1/19/96 None Senior Notes $ 60,000 Annual None installments of $5,500 for $35,000; $25,000 repayable July 1, 1999 Fairfield County IRB $ 4,445 Bi-annual Winnsboro land, payments from building and April 1993 to equipment April 2003 NISCO $ 4,400 Short term loan None OLIVER RUBBER COMPANY Athens IRB $ 981 Quarterly Athens land, payments through building and November 1994 equipment Asheboro IRB $ 1,013 Quarterly Asheboro land, payments through building and December 1994 equipment Oakland IRB $ 1,750 Monthly payments Oakland land, through October building and 1997 equipment
* This schedule does not list guarantees of indebtness that relate to indebtedness scheduled herein. 4
PRINCIPAL DESCRIPTION AMOUNT TERMS COLLATERAL - ----------- --------- ----- ---------- HOLM INDUSTRIES, INC. 1983 IRB $ 292 Monthly payments Holm Industries through October assets 1993 1986 IRB $ 860 Bi-Annual Second position payment through on capital December 1996 improvements Mortgage Loan $ 175 Lump Sum Building payment due August 1993 Small business loans with the $ 78 Annual payments None City of Scottsburg through August 1993 Capital lease for DEC Computer $ 28 Monthly payments Equipment through August 1993 Capital lease for Cadcam Equipment $ 3 Monthly payments Equipment through August 1993 Promissory Notes to Dorrie $1,275 Balloon payment None and Jay Thompson May 1994 SILENT CHANNEL PRODUCTS LIMITED Secured Bank Overdraft $ 990 Open Silent Channel Facility with National assets Westminster Bank Capitalized lease with $ 917 Monthly payments Millroom Lombard Leasing through 1993 equipment
5 SCHEDULE OF ADDITIONAL INDEBTEDNESS UPON CONSUMATION OF ACQUISITION OF STANDARD PRODUCTS INDUSTRIEL AND SUBSIDIARIES AS OF JANUARY 3, 1993 (FRENCH FRANCS CONVERTED AT 12/31/92 RATE OF 5.52)
PRINCIPAL DESCRIPTION AMOUNT TERMS COLLATERAL - ----------- --------- ----- ---------- STANDARD PRODUCTS INDUSTRIAL SA Banque Generale $ 362 Expires 1993 None de Commerce Banque de Phenix $ 362 Expires 1993 None Credit Lyonnais $ 725 Expires 1994 None Banque Nationale $ 705 Expires 1997 None de Paris Banque Nationale $1,581 Expires 2000 Bezons land and building de Paris Credit Commercial $1,087 Expires 1995 None de France STANDARD PRODUCTS ATLANTIC SA Banque National $ 217 Expires 1994 None de Paris Capital lease for $1,268 Expires 2001 Building and Land Vitre Factory SOCIETY LILLIBONNAISE DE CAUTCHOUCS SA Banque Nationale $ 652 Expires 1995 None de Paris
6
DESCRIPTION PRINCIPAL - ----------- AMOUNT TERMS COLLATERAL --------- ----- ---------- LA RIVIERE INC. Pennsylvania Industrial $ 145 Expires 5/1/97 Mortgage Development Authority Merchants National Bank $ 79 Expires 6/8/02 Mortgage Merchants National Bank $ 274 Expires 1/28/11 Mortgage "5" RUBBER CORPORATION, INC. Pennsylvania Captial $ 77 Expires 8/1/96 Equipment Loan Fund Georgia Industrial $6,100 Expires 12/1/07 None Revenue Bond (Variable rate)
EX-4.(H) 4 EXHIBIT 4(H) 1 EXHIBIT 4(h) FIFTH AMENDMENT TO NOTE AGREEMENTS FIFTH AMENDMENT TO NOTE AGREEMENTS, dated as of September 22, 1995, by and between THE STANDARD PRODUCTS COMPANY, an Ohio corporation (the "Company"), and NATIONWIDE LIFE INSURANCE COMPANY and EMPLOYERS LIFE INSURANCE COMPANY OF WAUSAU (collectively, the "Purchasers"). WITNESSETH THAT: WHEREAS, the Company and each of the Purchasers entered into a separate Note Agreement dated as of June 30, 1989, as amended by the First Amendment to Note Agreement dated as of February 22, 1991, the Second Amendment to Note Agreement dated as of June 30, 1991, the Third Amendment to Note Agreement dated as of January 19, 1993, and the Fourth Amendment to Note Agreement dated as of January 31, 1995 (collectively, the "Note Agreements"), and under and subject to the terms and provisions of the Note Agreements, the Company has issued its Senior Notes payable to the Purchasers; and WHEREAS, the Company, Oliver Rubber Company ("Oliver"), Holm Industries, Inc. ("Holm"), 5 Rubber Corporation ("5 Rubber"), and The Standard Products Funding Corporation, a Delaware corporation and a wholly owned subsidiary of the Company (the "Receivables Subsidiary"), desire to enter into a Purchase and Sale Agreement that will provide, among other matters: for the sale by the Company, Oliver, Holm and 5 Rubber (each an "Originator"), and the purchase by the Receivables Subsidiary, of all the receivables and related assets ("Receivables") then and thereafter owned by the Originators at a purchase price equal to the face amount thereof less certain discounts (including program and other expenses); for a portion of the purchase price owed by the Receivables Subsidiary for the Receivables purchased from the Originators to be payable in the form of a promissory note; and for the Originators to borrow money from time to time from the Receivables Subsidiary; and WHEREAS, the Company and the Receivables Subsidiary desire to enter into a Receivables Purchase Agreement among the Receivables Subsidiary, the Company, Clipper Receivables Corporation, State Street Boston Capital Corporation and National City Bank that will provide, among other matters: for the sale by the Receivables Subsidiary, and the purchase by Clipper Receivables Corporation, of interests in the Receivables purchased from the Originators at a purchase price equal to the face amount thereof less certain discounts (including reserves); representations and warranties by the Company and the Receivables Subsidiary; affirmative and negative covenants of the Company and the Receivables Subsidiary, including certain reporting requirements and financial covenants of the Receivables Subsidiary and of the Company and its subsidiaries; the appointment of the Company as Master Servicer to collect the Receivables; the grant of a security interest in the Receivables; liquidation events; and 2 indemnification obligations of the Company and the Receivables Subsidiary; and WHEREAS, the parties desire to amend the Note Agreements; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. Effect of Amendments; Definitions. Each of the Note Agreements shall be and hereby is amended as provided in Section 2 hereof. Except as expressly amended in Section 2 hereof, the Note Agreements shall continue in full force and effect in accordance with the provisions thereof on the date hereof. As used in each of the Note Agreements, the terms "Note Agreement", "Agreement", "this Agreement", "herein", "hereinafter", "hereto", "hereof", and words of similar import shall, unless the context otherwise requires, mean that Note Agreement as amended and modified by this Amendment. Capitalized terms used but not defined in this Amendment (including the recitals hereto) shall have the meanings given to them in the respective Note Agreements. 2. Amendments. (a) Section 5.7(a)(3)(ii) of the Note Agreements is hereby deleted and the following is substituted therefor: "(ii) in the case of the issuance of any Debt of a Subsidiary or any Funded Debt of the Company secured by liens permitted by Section 5.8(i), the aggregate amount of (x) all Debt of Subsidiaries plus (y) the aggregate amount of all Debt of the Company secured by liens permitted by Section 5.8(i), shall not exceed 20% of Consolidated Net Stockholder's Equity; provided, however, that at any time that the Company or any Subsidiary has outstanding any Receivables Obligations (as that term is defined in the definition of Indebtedness), the foregoing aggregate amount shall not exceed 16% of the Consolidated Net Stockholders Equity." (b) Section 5.8(e) of the Note Agreements is hereby deleted and the following is substituted therefor: "(e) mortgages, liens or security interests (i) securing Indebtedness of a Subsidiary to the Company or to another Subsidiary or (ii) on or in any Receivables of a Subsidiary that secure or purport to secure or otherwise relate to any Receivables Obligations (as that term is -2- 3 defined in the definition of Indebtedness) of that Subsidiary, but only to the extent those Receivables Obligations do not exceed the Receivables Obligations Cap;" (c) Section 5.8(i) of the Note Agreements is hereby amended by deleting the phrase "(other than (A) Debt of a Subsidiary outstanding as of July 2, 1989 and described on Annex B to Exhibit B hereto and (B) Silent Channel Debt to the extent Silent Channel Debt does not exceed 12,500,000 pounds), shall not exceed an amount equal to 10% of Consolidated Tangible Net Worth" and inserting in lieu thereof the following "shall not exceed an amount equal to 20% of Consolidated Net Stockholder's Equity; provided, however, that at any time that the Company or any Subsidiary has outstanding any Receivables Obligations (as that term is defined in the definition of Indebtedness), the foregoing aggregate amount shall not exceed 16% of the Consolidated Net Stockholders Equity." (d) Section 5.9(a)(3) of the Note Agreements is hereby deleted and the following is substituted therefor: "(3) any Subsidiary may sell, transfer or otherwise dispose of all or any substantial part of its assets to the Company or any Subsidiary, the Company may sell, transfer or otherwise dispose of all or any part of its Receivables to any Subsidiary, and any Subsidiary may sell, transfer or otherwise dispose of Receivables to any Person, whether such sale is with or without recourse, if the obligations of such Subsidiary to the purchaser thereof in respect of such sale, transfer or disposition are Receivables Obligations (as that term is defined in the definition of Indebtedness) of that Subsidiary, but only to the extent those Receivables Obligations do not exceed the Receivables Obligations Cap." (e) Clauses (i) and (ii) of the last paragraph in Section 5.9 of the Note Agreements is hereby deleted and the following is substituted therefor: "(i) during the same fiscal year, exceeds (a) 15% of the Consolidated Total Assets or (b) if during that fiscal year the Company or any Subsidiary has outstanding any Receivables Obligations (as that term is defined in the definition of Indebtedness), 10% of the Consolidated Total Assets or (ii) since the date of this Agreement exceeds (a) 25% of Consolidated Total Assets or (b) if the Company or any Subsidiary has outstanding any Receivables Obligations (as that term is defined in the definition of Indebtedness), 20% of the Consolidated Total Assets, determined, in each case, as of the end of the immediately preceding fiscal year." -3- 4 (f) Section 8.1 of the Note Agreements is hereby amended as follows: 1. The definition of Indebtedness is amended by inserting the following at the end of that definition: "In addition, there shall be excluded from the definition of Indebtedness any obligation of a Subsidiary arising from the sale by that Subsidiary of Receivables to any other Person, whether on a recourse or nonrecourse basis, that for purposes of generally accepted accounting principles is not classified upon the balance sheet of that Subsidiary as a liability of that Subsidiary (such obligations hereinafter referred to as "Receivables Obligations")." 2. The following definitions are inserted in alphabetical order: "Receivables" means any right to payment from a Person, whether constituting an account, chattel paper, instrument or general intangible, arising from the sale of merchandise or provision of services by the Company or any Subsidiary, and includes the right to payment of any interest or finance charges and other obligations of such Person with respect thereto, together with the following: (a) all rights to, but not any obligations under, all related contracts or agreements pursuant to or under which such Person is obligated to make payments with respect to the sale of goods or provision of services; (b) all security interests, liens, guarantees, and other agreements or arrangements of any nature whatsoever from time to time supporting or securing any such right to payment; (c) all books and records evidencing or otherwise relating to the foregoing; and (d) all collections and other proceeds, including insurance policies, relating to any of the foregoing. "Receivables Obligations Cap means, with respect to the portion of the Receivables Obligations that would correspond to principal if those Receivables Obligations were treated as indebtedness for purposes of generally accepted accounting principles, an amount equal to Fifty Million Dollars ($50,000,000), which amount may be increased by Five Million Dollars ($5,000,000) during each fiscal year of the Company commencing July 1, 1996 and July 1, 1997 so long as no Event of Default has occurred and is continuing at the time of that increase." 3. Miscellaneous. (a) This Amendment shall be construed in accordance with and governed by the laws of the State of Ohio, without reference to principles of conflicts of law. (b) This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument. -4- 5 IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed by their respective duly authorized officers as of the day and year first above written. THE STANDARD PRODUCTS COMPANY By: /s/ Charles F. Nagy ------------------------------ Title: Treasurer -------------------------- NATIONWIDE LIFE INSURANCE COMPANY By: /s/ Jeffrey G. Milburn ------------------------------------- Title: Jeffrey G. Milburn ---------------------------------- Vice President Corporate Fixed-Income Securities EMPLOYERS LIFE INSURANCE COMPANY OF WAUSAU By:/s/ Jeffrey G. Milburn ------------------------------------- Title: Jeffrey G. Milburn ---------------------------------- Attorney-in-fact A SIMILAR AGREEMENT HAS BEEN EXECUTED WITH THE AID ASSOCIATION FOR LUTHERANS -5- EX-4.(K) 5 EXHIBIT 4(K) 1 EXHIBIT 4(k) AGREEMENT OF AMENDMENT This Agreement of Amendment ("Amendment") is executed at Dearborn, Michigan as of August 25, 1995 by and among THE STANDARD PRODUCTS COMPANY (the "Borrower") and NATIONAL CITY BANK ("NCB"), as agent (the "Agent") for itself, SOCIETY NATIONAL BANK ("Society"), COMERICA BANK ("Comerica"), and NBD BANK ("NBD") (hereafter collectively refered to as "Banks"). WHEREAS, Borrower, Banks and Agent entered into a credit agreement dated as of January 19, 1993, as amended by an Agreement of Amendment dated April 30, 1994 (the "Agreement") wherein Banks agreed to make revolving loans to Borrower, under certain terms and conditions, aggregating not more than the principal amount of One Hundred Seventy-Five Million Dollars ($175,000,000), which amount was reduced on June 30, 1993 to One Hundred Twenty-Five Million Dollars ($125,000,000) and which may be reduced from time to time under the Agreement; and WHEREAS, Borrower, Banks and Agent want to extend the Termination Date of the Agreement; NOW, THEREFORE, Borrower, Banks and Agent agree as follows: 1. Pursuant to subsection 2.02(k) (captioned "EXTENSION OF REVOLVING CREDIT TERMINATION DATE") the Revolving Credit Termination Date is hereby extended one year from January 19, 1997 to January 19, 1998. 2. In all other respects the credit agreement shall remain in full effect. 3. Upon the execution and delivery of this Amendment, the Borrower will not be in default under the Agreement as so Amended. IN WITNESS WHEREOF, borrowers, Banks and Agent have executed this Agreement of Amendment at the time and place first above mentioned. THE STANDARD PRODUCTS COMPANY NATIONAL CITY BANK, AS AGENT By: /s/ Charles F. Nagy By: /s/ Mary Beth S. Howe -------------------------- ------------------------------ Title: Treasurer Title: Vice President ----------------------- --------------------------- NATIONAL CITY BANK SOCIETY NATIONAL BANK By: /s/ Mary Beth S. Howe By: /s/ Richard A. Pohle -------------------------- ------------------------------ Title: Vice President Title: Vice President ----------------------- --------------------------- COMERICA BANK NBD BANK By: /s/ Michael T. Shea By: /s/ Teresa A. Kalil -------------------------- ------------------------------ Title: Vice President Title: ----------------------- --------------------------- EX-10.(K) 6 EXHIBIT 10(K) 1 EXHIBIT 10(k) AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT This Amendment to Receivables Purchase Agreement, dated as of December 29, 1995 (this "Amendment") is among the THE STANDARD PRODUCTS FUNDING CORPORATION, a Delaware corporation ("Seller"), THE STANDARD PRODUCTS COMPANY, an Ohio corporation ("Standard"), CLIPPER RECEIVABLES CORPORATION, a Delaware corporation ("Purchaser"), STATE STREET BOSTON CAPITAL CORPORATION, a Massachusetts corporation ("Administrator") and NATIONAL CITY BANK a national bank ("NCB"). Unless otherwise indicated, terms defined in Appendix A to the Receivables Purchase Agreement have the same meanings when used herein. SECTION 1 AMENDMENTS. The following amendments to the Receivables Purchase Agreement shall be effective upon satisfaction of the conditions in Section 3 of this Amendment. SECTION 1.1 Amendments to Section 7.02. In subsections (a) and (b) of Section 7.02 the reference to "Section 10.01(p)" is hereby changed to "Section 10.01(o)". SECTION 1.2 Amendments to Appendix A: Definitions. (a) Definition of Total Capitalization. In Appendix A to the Receivables Purchase Agreement, the definition of "Total Capitalization" is hereby amended and restated in its entirety to read as follows: "`Total Capitalization' means, as of any date, the sum of (i) an amount equal to Net Worth as of such date, plus (ii) an amount equal to Total Debt as of such date." (b) Definition of Net Worth. In Appendix A to the Receivables Purchase Agreement, the following definition is hereby inserted in the proper alphabetical order: "`Net Worth' means, with respect to any Person and as of any date, the consolidated net worth of such Person and its consolidated subsidiaries (excluding any "foreign currency translation adjustments" as reflected in the applicable financial statements) calculated in accordance with GAAP." SECTION 2 REPRESENTATIONS AND WARRANTIES. Seller and Standard hereby represent and warrant to the Purchaser, Administrator and NCB that: (a) The execution and delivery by them of this Amendment and the performance of their obligations under the Receivables Purchase Agreement as amended by this Amendment (as amended, the "Amended Agreement"), are within their corporate powers, have been duly authorized by all necessary corporate action, have received all necessary governmental and other consents and approvals (if any shall be required) and do not and will not contravene or conflict with, or create a lien under, (i) any provision of law, (ii) their constituent documents, (iii) any court or administrative decree applicable to them, or (iv) any contractual restriction binding upon them or their property. 2 (b) The representations and warranties of Seller contained in Section 6.01 of the Receivables Purchase Agreement are true and correct as of the date of Seller's execution and delivery of this Amendment and after giving effect hereto (except for those representations and warranties that relate solely to an earlier date). (c) This Amendment has been duly executed and delivered by them, and the Amended Agreement is their legal, valid and binding obligation, enforceable against them in accordance with its terms. (d) After giving effect to this Amendment, no Liquidation Event or Unmatured Liquidation Event shall have occurred and be continuing. SECTION 3 CONDITIONS TO EFFECTIVENESS. This Amendment shall be effective as of December 29, 1995 when the following conditions shall have been satisfied (the "Condition Satisfaction Date"): SECTION 3.1 Delivery of Counterparts. The Administrator shall have received (by telecopy or otherwise) counterparts of this Amendment or the signature pages hereto, executed by each of Seller, Standard, Purchaser, Administrator and NCB. SECTION 3.2 Other Conditions. The conditions set forth in Section 5.02 of the Receivables Purchase Agreement shall be satisfied with the same effect as if a Purchase were to be made on the Condition Satisfaction Date. SECTION 4 MISCELLANEOUS PROVISIONS. SECTION 4.1 Reaffirmation. As hereby amended, the Receivables Purchase Agreement is hereby ratified and reaffirmed by Seller and Standard. SECTION 4.2 Costs and Expenses. Seller and Standard, jointly and severally, hereby agree to pay on demand all costs and expenses incurred by the Administrator and NCB (including legal fees and other charges of counsel to the Administrator and NCB) in connection with the preparation, execution and delivery of this Amendment. SECTION 4.3 Captions. The various captions in this Amendment are included for convenience only and shall not affect the meaning or interpretation of any provision of this Amendment. SECTION 4.4 GOVERNING LAW. THIS AGREEMENT, INCLUDING THE RIGHTS AND DUTIES OF THE PARTIES HERETO, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW, EXCEPT TO THE EXTENT THAT THE PERFECTION OF THE INTERESTS OF PURCHASER IN THE RECEIVABLES OR RELATED PROPERTY IS GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. SECTION 4.5 Execution in Counterparts. This Amendment may be executed in any number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Amendment. 2 3 IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by their respective officers thereunto duly authorized. THE STANDARD PRODUCTS FUNDING CORPORATION By: /s/ Charles F. Nagy ---------------------------------------- Title: Treasurer ------------------------------------- THE STANDARD PRODUCTS COMPANY By: /s/ Donald R. Sheley, Jr. ---------------------------------------- Title: VP Finance and CFO ------------------------------------- CLIPPER RECEIVABLES CORPORATION By: /s/ Tiffany Percival ---------------------------------------- Title: Vice President ------------------------------------- STATE STREET BOSTON CAPITAL CORPORATION By: /s/ Jeffrey N. Noordhock ---------------------------------------- Title: Senior Adjuster ------------------------------------- NATIONAL CITY BANK By: /s/ Marybeth S. Howe ---------------------------------------- Title: Vice President ------------------------------------- 3 EX-10.(P) 7 EXHIBIT 10(P) 1 EXHIBIT 10(p) THE STANDARD PRODUCTS COMPANY RESTRICTED STOCK AGREEMENT This Restricted Stock Agreement (this "Agreement"), is made as of this 1st day of July, 1995, by and between The Standard Products Company, an Ohio corporation (the "Company"), and Gerard Mesnel ("Executive") under the The Standard Products Company 1991 Restricted Plan (the "Plan"); 1. The Company hereby awards to Executive up to Twenty-Five Thousand (25,000) Common Shares, $1.00 par value, of the Company ("Common Shares"), which may be earned at a rate of up to 5,000 shares per year in the current fiscal year and each of the four succeeding fiscal years, in all respects subject to the terms, conditions and provisions of this Agreement and the Plan, a copy of which is attached to this Agreement and incorporated herein by reference. 2. Common Shares awarded to Executive hereunder are subject to restriction and may not be sold, transferred or otherwise assigned until such shares are earned in accordance with paragraph 3 hereof and have vested in accordance with paragraph 4 hereof. Notwithstanding the foregoing, however, Common Shares awarded to Executive hereunder which are earned but non-vested or awarded Common Shares that remain available to Executive but are unearned shall immediately vest in Executive upon a Change in Control of the Company (as defined in the Plan). In the event of Executive's death, all earned but non-vested Common Shares and one-half of awarded Common Shares that remain available to Executive but are unearned shall vest in Executive's designated beneficiary. 3. The number of awarded Common Shares which may be earned with respect to each fiscal year at a rate of up to 5,000 shares per year in the current fiscal year and each of the succeeding four fiscal years equals the product of 5,000 multiplied by the ratio of the cash bonus earned by Executive under the Company's Officers' Bonus Plan over the maximum possible cash bonus which Executive could have earned under such Plan with respect to each such fiscal year. No more than 5,000 Common Shares may be earned in any one fiscal year and no Common Shares may be earned with respect to any fiscal year after the fiscal year ending June 30, 1999. 4. Common Shares awarded hereunder and earned by Executive in accordance with paragraph 3 above shall become vested in Executive at the end of the third fiscal year following the end of the fiscal year with respect to which such Common Shares are earned. 5. Common Shares awarded hereunder and earned in accordance with paragraph 3 above shall be issued in the name of Executive, and the Company's transfer agent will show Executive as the owner of record of such Common Shares. Executive will have all rights of a shareholder with respect to awarded and earned Common Shares, including the right to vote such shares, subject to the limitations imposed by this Agreement and the Plan. The certificates representing awarded and earned Common Shares shall not be delivered to Executive until such Common Shares become vested. If Executive shall voluntarily cease to be an employee of the Company prior to vesting of Common Shares (whether such Common Shares are earned or unearned), Executive shall forfeit to the Company all Common Shares not then vested in Executive; provided, that if Executive desires to retire as an active employee of the Company, the Compensation Committee shall have the authority to waive such forfeiture under such terms and conditions as said Committee deems appropriate. In this regard, simultaneously with the issuance of certificates representing awarded and earned Common Shares, Executive shall execute and deliver stock powers forfeiting to the Company Common Shares awarded and earned hereunder but not vested in the event Executive voluntarily ceases to be an employee of the Company prior to any vesting 2 date. Executive acknowledges that Common Shares awarded hereunder shall be subject to the restrictions and risks of forfeiture contained herein and in Section 8 of the Plan. 6. Executive hereby agrees that he shall pay to the Company, in cash, any foreign, United States federal, state or local taxes of any kind required by law to be withheld with respect to the Common Shares awarded to him hereunder. If executive does not make such payment to the company, the Company shall have the right to deduct from any payment of any kind otherwise due to Executive from the Company (or from any subsidiary of the Company), any federal, state or local taxes of any kind required by law to be withheld with respect to Common Shares awarded to Executive under this Agreement. 7. Executive represents that Common Shares awarded hereunder are being acquired by Executive not with a view toward resale or distribution an Executive will not sell or otherwise transfer such Common Shares except in compliance with the Securities Act of 1933 and the rules and regulations promulgated thereunder. Executive hereby acknowledges that Common Stares awarded hereunder shall bear legends and statements evidencing such restrictions and other restrictions contained in Section 8 of the Plan. THE STANDARD PRODUCTS COMPANY By /s/ John C. Brandmahl ------------------------------ Title Vice President Human Resources ------------------------------ Date 8/22/1995 ------------------------------ 2 3 Executive acknowledges receipt of the Plan, a copy of which is attached hereto, and represents that he is familiar with the terms and provisions thereof, and hereby agrees that Common Shares granted under this Agreement are subject to all terms and provisions of this Agreement. Executive hereby agrees to accept as binding, conclusive and firm all decisions and interpretations of the Compensation Committee of the Board of Directors of the Company. EXECUTIVE /s/ Gerard Mesnel ------------------------------- Date , 1995 3 EX-10.(R) 8 EXHIBIT 10(R) 1 EXHIBIT 10(r) July 24, 1997 Mr. James S. Reid, Jr. Chairman and Chief Executive Officer The Standard Products Company 2401 South Gulley Road Dearborn MI 48124 Dear Jim: This letter is written to confirm the arrangements we have discussed regarding your compensation after you relinquish your position as Chief Executive Officer of The Standard Products Company (the "Company"). I am writing on behalf of the Company in my capacity as Chairman of the Compensation Committee of the Board of Directors, which Committee approved the terms of this letter at its meeting on June 23, 1997. We have agreed: 1. Effective September 1, 1997 you will begin to receive benefits to which you are entitled under the Company's Supplemental Pension Plan. In addition, effective September 1, 1997, your salary from the Company will be $200,000 per annum. You will be paid at that rate through October 1999, at which time it is anticipated that you will relinquish your position as Chairman of the Board at the Annual Meeting held in October 1999. 2. During the period described above, you will continue as an employee of the Company to serve as Chairman of the Board and as a Director of the Company and you will also be advising and assisting the Company's new Chief Executive Officer. However, you will not be expected to devote your full business time and attention to the affairs of the Company. 3. During the period described in paragraph 1 above, you will continue as an employee of the Company for all purposes, including, without limitation: a. Your right to exercise previously awarded stock options; b. Vesting of the Restricted Stock you have previously earned; 2 Mr. James S. Reid, Jr. July 24, 1997 Page 2 c. Participation in all applicable benefit and welfare plans of the Company; d. Participation in fringe benefits enjoyed by top executives of the Company, including use of an automobile; e. Reimbursement of all business-related expenses; f. An office and secretarial support in the Company's Cleveland office. In addition, you will continue to participate in the Company's Executive Incentive Bonus Plan and your Salaried Pension Plan and Supplemental Pension Plan benefits shall be included as part of your base salary when computing the bonus to which you are entitled under that Plan. 4. The Company will also continue to pay for your apartment in the Detroit area for such period as you deem to be in the best interests of the Company. If the foregoing meets with your approval, please sign and return the enclosed duplicate copy of this letter. Very truly yours, THE STANDARD PRODUCTS COMPANY /s/ Alan E. Riedel By ---------------------------- Alan E. Riedel, Chairman, Compensation Committee Acknowledged and agreed to this 24th day of July 1997 /s/ James S. Reid, Jr. - ----------------------------- James S. Reid, Jr. EX-10.(S) 9 EXHIBIT 10(S) 1 EXHIBIT 10(s) EMPLOYMENT AGREEMENT Between THE STANDARD PRODUCTS COMPANY And RONALD L. ROUDEBUSH 2 TABLE OF CONTENTS
PAGE ARTICLE I Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.01 Employment As Chief Executive Officer . . . . . . . . . . . . . . . . . . . . 1 1.02 Election as Director and Vice Chairman . . . . . . . . . . . . . . . . . . . . 1 1.03 Other Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II Term of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.01 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE III Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3.01 Base Salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3.02 Bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE IV Other Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4.01 Incentive, Savings and Retirement Plans . . . . . . . . . . . . . . . . . . . 2 4.02 Welfare Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4.03 Fringe Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4.04 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4.05 Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4.06 Office and Support Staff . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4.07 Vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4.08 Relocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4.09 Country Club . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE V Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5.01 Termination of Employment for Cause or Other Than for Good Reason . . . . . . 4 5.02 Termination of Employment for Death or Disability . . . . . . . . . . . . . . 4 5.03 Termination of Employment By The Company Without Cause Or By the Executive for Good Reason . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5.04 Other Termination Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE VI Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6.01 "Disability" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6.02 "Cause" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6.03 "Change in Control" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 6.04 "Good Reason" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.05 "Date of Termination" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3 ARTICLE VII Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.01 Noncompetition Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.02 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.03 Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.04 Nonalienation of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.05 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.06 Amendment and Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 7.07 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.08 Counterpart Originals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.09 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.10 Effect on Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.11 Filing with SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 7.12 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4 EMPLOYMENT AGREEMENT THIS AGREEMENT, executed this 1st day of July 1997, is made by and between THE STANDARD PRODUCTS COMPANY, an Ohio corporation having its principal place of business in Dearborn, Michigan (the "Company"), and RONALD L. ROUDEBUSH, a resident of Cincinnati, Ohio (the "Executive"). The Company desires to obtain the services of the Executive, and the Executive is willing to render such services, in accordance with the terms hereinafter set forth. Accordingly, the Company and the Executive agree as follows: ARTICLE I Duties 1.01 Employment As Chief Executive Officer. On July 1, 1997, Executive shall become an employee of the Company and on July 24, 1997, Executive shall become the Chief Executive Officer of the Company, at which time he shall assume the duties and responsibilities commensurate with that position. The Executive will report to the Board of Directors of the Company (the "Board"). During the Contract Term, and excluding any periods of vacation, sick leave or disability to which the Executive is entitled, the Executive agrees to devote the Executive's full attention and time to the business and affairs of the Company and to use the Executive's best efforts to perform faithfully and efficiently the duties and responsibilities of the Executive's positions as described herein. 1.02 Election as Director and Vice Chairman. On July 24, 1997, a special meeting of the Board shall be held to increase the number of the Board by one and to name Executive as a member of the Board with a term expiring in 1999. At the same meeting, Executive will be elected as Vice Chairman of the Board. It is planned that James S. Reid, Jr. will remain as Chairman of the Board until the Annual Meeting in October 1999, at which time Executive will be proposed to the Board as Chairman of the Board. 1.03 Other Activities. During the Contract Term (as defined in Section 2.01), it shall not be a violation of this Agreement for the Executive to serve on civic, charitable or not-for-profit boards or committees (including, without limitation, General Motors Institute), so long as such activities do not significantly interfere with the performance of the Executive's duties in accordance with this Agreement. Executive is also authorized, subject to the same limitation, to serve on the Board of Directors of Simpson Industries. Executive shall not serve on the Board of Directors of any other for-profit corporation without prior approval of the Compensation Committee of the Board. Executive shall relinquish any day-to-day 5 responsibilities relating to Milford Dodge, Inc., Milford, Ohio, but shall be permitted to remain as an investor, director, officer and employee and to own the real estate of the dealership. ARTICLE II Term of Agreement 2.01 Term. Subject to the termination provisions hereinafter provided, the term ("Contract Term") of this Agreement shall commence on July 1, 1997 and end on June 30, 1999; provided, however, that the Contract Term shall be automatically extended each day commencing with July 1, 1997 for an additional day so that this Agreement shall at all times have an unexpired term of two (2) years until the date written notice is provided by either the Company or the Executive that this Agreement is not to be further extended or until ten (10) years from the date hereof, whichever shall first occur. ARTICLE III Compensation 3.01 Base Salary. During the Contract Term, the Company shall pay or cause to be paid to the Executive in cash, in accordance with the normal payroll practices of the Company for senior executives, in installments not less frequently than monthly, an annual base salary ("Annual Base Salary") equal to $500,000 during each year of the Contract Term. The Company may from time to time increase the Executive's Annual Base Salary, provided that it shall not be reduced after any such increase, and the term Annual Base Salary as used in this Agreement shall refer to the Annual Base Salary as so increased. 3.02 Bonus. The Company shall pay or cause to be paid to the Executive a bonus in accordance with the Company's Officers Incentive Bonus Plan, as the same may be amended or modified from time to time, provided, that for the period ending June 30, 1998, Executive shall be paid the greater of $200,000 or the amount to which he would be entitled under said Plan, and further provided that the six (6) months waiting period for eligibility under said Plan is hereby waived. ARTICLE IV Other Benefits 4.01 Incentive, Savings and Retirement Plans. In addition to Annual Base Salary and Annual Bonus, the Executive shall be -2- 6 entitled to participate during the Contract Term in all incentive savings and retirement plans, practices, policies and programs applicable to other senior executives of the Company as the same may be amended or modified from time to time, and, in addition: (a) Stock Options: The Company through its Compensation Committee hereby agrees to grant to the Executive options to purchase 200,000 Common Shares of the Company pursuant to the terms of the Company's 1996 Stock Option Plan at an exercise price equal to the fair market price of such stock on the day Executive commences employment with the Company. Executive acknowledges that under the Internal Revenue Code of 1986 the amount of incentive stock options which may be first exercised in any calendar year must be limited to $100,000 and that the balance of the options he will receive each year will be "nonqualified." The options shall be exercisable in accordance with and subject to the terms of the Stock Option Agreements which are attached hereto as Exhibits A (Incentive) and B (Nonqualified), and (b) Restricted Stock: The Company through its Compensation Committee hereby agrees to grant to the Executive as of July 24, 1997, an opportunity to earn 50,000 Common Shares under the Company's 1991 Restricted Stock Plan in accordance with the terms and conditions of and subject to the vesting provisions set forth in the Restricted Stock Agreement which is attached hereto as Exhibit C. 4.02 Welfare Benefits. During the Contract Term, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company (including, and without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, dependent life, accidental death and travel accident insurance plans and programs) applicable to other senior executives of the Company, as the same may be amended or modified from time to time. 4.03 Fringe Benefits. During the Contract Term, the Executive shall be entitled to other fringe benefits applicable to other senior executives of the Company. 4.04 Expenses. During the Contract Term, the Executive shall be entitled to receive prompt reimbursement for all reasonable employment-related expenses incurred by the Executive upon the Company's receipt of accountings in accordance with practices, policies and procedures applicable to other senior executives of the Company. 4.05 Automobile. During the Contract Term and in accordance with its applicable policies, the Company shall furnish to the -3- 7 Executive an automobile of his choice in accordance with the Company's current executive automobile plan. 4.06 Office and Support Staff. During the Contract Term, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to personal secretarial and other assistance provided to other senior executives of the Company but which is consistent with his position as Chief Executive Officer. 4.07 Vacation. During the Contract Term, the Executive shall be entitled to paid vacation time in accordance with the plans, practices, policies, and programs applicable to other senior executives of the Company, but not less than four weeks in each calendar year. 4.08 Relocation. Executive will be reimbursed by the Company for his temporary living expenses and the cost of relocation from Cincinnati to the Detroit metropolitan area in accordance with the Company's relocation policy. 4.09 Country Club. During the Contract Term, the Company will reimburse Executive for entrance or admission fees and/or the cost of purchase of stock for a full resident membership in a country club in the Detroit metropolitan area, with Executive making all efforts to be reinstated at Bloomfield Hills Country Club, as well as the monthly dues and any assessments which are levied from time to time by such club. ARTICLE V Termination of Employment 5.01 Termination of Employment for Cause or Other Than for Good Reason. If, before the end of the Contract Term, the Company terminates the Executive's employment for Cause or the Executive terminates employment other than for Good Reason, then the Company shall pay to the Executive in a lump sum immediately after the Date of Termination that portion of the Executive's Annual Base Salary and full-year Bonus which is accrued but unpaid as of such Date of Termination, but the Executive shall not be entitled to receive any pro rata bonus for the year in which termination occurs nor any other compensation or benefits under this Agreement. 5.02 Termination of Employment for Death or Disability. If, before the end of the Contract Term, the Executive's employment terminates due to death or Disability, the Company shall pay to the Executive (or to the Executive's Beneficiary, as defined in Section 7.03) in a lump sum payable immediately after the Date of Termination an amount which is equal to the sum of the following: -4- 8 (a) that portion of the Executive's Annual Base Salary and any Annual Bonus which is accrued but unpaid as of the Date of Termination, (b) the Executive's pro rata bonus ("Pro Rata Bonus") for any period that has not ended prior to Date of Termination ("Termination Performance Period"), which shall be equal to the product of the Annual Bonus (the Executive's Annual Bonus for the fiscal year immediately preceding the Date of Termination or, if the Date of Termination occurs prior to the end of the first full fiscal year of the Contract Term, equal to $200,000), multiplied by a fraction, the numerator of which is the number of days in the Termination Performance Period which elapsed prior to the Date of Termination, and the denominator of which is the total number of days in the Termination Performance Period, and (c) an amount equal to the product of two times the Executive's Annual Base Salary and Annual Bonus for the fiscal year immediately preceding the Date of Termination (or $200,000 if the Date of Termination occurs prior to the end of the first full fiscal year of the Contract Term). 5.03 Termination of Employment By The Company Without Cause Or By the Executive for Good Reason. If, before the end of the Contract Term, the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason, the Executive shall receive, in a lump sum payable immediately after the Date of Termination, an amount which is equal to the sum of the following: (a) that portion of the Executive's Annual Base Salary and any Annual Bonus which is accrued but unpaid as of the Date of Termination, (b) the Executive's Pro Rata Bonus for the Termination Performance Period calculated in accordance with Section 5.02(b), (c) an amount equal to the Executive's Annual Base Salary which would be payable for the period beginning on the Date of Termination and ending on the last day of the Contract Term, and (d) an amount equal to the Executive's Annual Bonus for the remainder of the Contract Term, equal to the Executive's Annual Bonus for the fiscal year immediately preceding the Date of Termination (or, if the Date of Termination occurs prior to the end of the first full fiscal year of the Contract Term, equal to $200,000), multiplied by the number of full years and portions of years between the Termination Date and the last day of the Contract Term. -5- 9 In addition, Executive shall be entitled to: (e) the exercise and vesting rights set forth in Exhibits A, B and C, (f) the benefits to which the Executive was entitled during the Contract Term under Section 4.02 hereof for the remainder of the Contract Term. Notwithstanding the foregoing, the amount of any benefits provided under Section 4.02 shall be reduced or eliminated to the extent the Executive becomes entitled to duplicative benefits by virtue of his subsequent employment after the Date of Termination, and (g) a continuation of pension benefits under the Company's Salaried Employee's Pension Plan and the Company's Supplemental Salaried Pension Plan for the remainder of the Contract Term. 5.04 Other Termination Benefits. In addition to any amounts or benefits payable upon termination of employment hereunder as provided herein, the Executive shall be entitled to any payments or benefits required by applicable law. ARTICLE VI Certain Definitions 6.01 "Disability" means any medically determinable physical or mental impairment that can be expected to last for a continuous period of not less than six (6) months, and that renders the Executive unable to perform the duties required under this Agreement. The date of the determination of Disability is the date on which the Executive is certified as having incurred a Disability by a physician mutually acceptable to the Company and the Executive. 6.02 "Cause" means (a) the Executive's conviction of or plea of guilty or nolo contendere to any felony or other crime involving dishonesty or moral turpitude; (b) any serious misconduct in the course of the Executive's employment; and (c) the Executive's habitual neglect of the Executive's duties (other than on account of Disability) or the violation of a material Company policy after notice thereof, except that Cause shall not mean: (1) an isolated instance of bad judgment or negligence; (2) any act or omission believed by the Executive in good faith to have been in or not opposed to the best interest of the Company (without intent of the -6- 10 Executive to gain therefrom, directly or indirectly, a profit to which the Executive was not legally entitled); or (3) any act or omission with respect to which a determination could properly have been made by the Board that the Executive met the applicable standard of conduct for indemnification or reimbursement under the Code of Regulations of the Company, any applicable indemnification agreement or the laws and regulations under which the Company is governed, in each case in effect at the time of such act or omission. 6.03 "Change in Control" means the occurrence of any of the following events: (1) When any "person" as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act, but excluding the Company and any Subsidiary and any employee benefit plan sponsored or maintained by the Company or any Subsidiary (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d- 3 under the Exchange Act, as amended from time to time), of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding capital stock; provided, however, that with respect to any director who on the effective date of this Agreement is the beneficial owner or has the option to acquire 5% or more of such capital stock outstanding on such effective date, capital stock so owned or acquired pursuant to any such options shall not be counted in determining such 20% or more combined voting power; (2) When, during any period of 24 consecutive months during the existence of this Agreement, the individuals who, at the beginning of such period, constitute the Board of Directors of the Company (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof; provided, however, that a director who was not a director at the beginning of such 24- month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this Section 6.03(2); or (3) The completion of a transaction requiring shareholder approval for the acquisition of the Company by -7- 11 an entity other than the Company or a Subsidiary through purchase of assets or otherwise or any merger of the Company into another Company (unless the persons who were shareholders of the Company immediately prior to such transaction own more than 70% of the voting stock and value of the surviving company immediately following such merger in substantially the same proportions as they owned immediately prior to the merger). Provided, however, that if Executive, in his individual capacity, is a party to an agreement under which Executive agrees to the consummation of a transaction which is a Change of Control as described in subparagraphs (1) or (3) above and if Executive pursuant to that agreement becomes an equity holder in the Company or any entity which acquires the Company, then notwithstanding the foregoing provisions of Section 6.03 of this Agreement, unless the Company and Executive shall in writing otherwise agree, such transaction shall not be deemed to be a Change of Control. 6.04 "Good Reason" means the occurrence of any one of the following events: (a) the failure of the shareholders and the Directors of the Company to elect and re-elect the Executive to be Chief Executive Officer and a member and the Vice Chairman of the Board; (b) assignment to the Executive of any duties materially and adversely inconsistent with the Executive's position as specified in Article I hereof (or such other position to which he may be promoted), including status, offices, or responsibilities as contemplated under Article I of this Agreement or any other action by the Company which results in a material and adverse change in such position, status, offices, titles or responsibilities; (c) the failure of the Company to assign this Agreement to a successor to the Company; or (d) any failure by the Company to comply with any material provision of this Agreement; if the Company fails to cure such event within 30 days after written notice from the Executive. Notwithstanding any other provision in this Section 6.04, the Executive shall have Good Reason to terminate employment with the Company for any or no reason during the six-month period following the date on which a Change in Control occurs, unless the Executive in writing waives such right. -8- 12 6.05 "Date of Termination" means the date as of which the Executive's employment with the Company is terminated by the Company or by the Executive for any reason including, but not limited to, death or Disability. ARTICLE VII Miscellaneous 7.01 Noncompetition Agreement. Executive agrees to execute at the beginning of the Contract Term the Company's Noncompetition, Nondisclosure and Patent Assignment Agreement attached hereto as Exhibit D. 7.02 Successors. This Agreement shall be binding upon and inure to the benefit of the Executive and the Executive's estate and shall be binding on the Company or any successor to the Company. 7.03 Beneficiary. If the Executive dies prior to receiving all of the salary and bonus and any other amounts payable hereunder, such salary, bonus and other amounts shall be paid in a lump sum payment to the beneficiary designated in writing by the Executive ("Beneficiary") and if no such Beneficiary is designated, to the Executive's estate. 7.04 Nonalienation of Benefits. Benefits payable under this Agreement shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution or levy of any kind, either voluntary or involuntary, prior to actually being received by the Executive, and, except as provided in Section 7.03, any such attempt to dispose of any right to benefits payable hereunder shall be void. 7.05 Severability. If all or any part of this Agreement is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate any portion of this Agreement not declared to be unlawful or invalid. Any paragraph or part of a paragraph so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such paragraph or part of a paragraph to the fullest extent possible while remaining lawful and valid. 7.06 Amendment and Waiver. This Agreement shall not be altered, amended or modified except by written instrument executed by the Company and Executive. A waiver of any term, covenant, agreement or condition contained in this Agreement shall not be deemed a waiver of any other term, covenant, agreement or condition, and any waiver of any default in any such term, covenant, agreement or condition shall not be deemed a -9- 13 waiver of any later default thereof or of any other term, covenant, agreement or condition. 7.07 Notices. All notices and other communications hereunder shall be in writing and delivered by hand or by first class registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: The Standard Products Company 2401 South Gulley Road Dearborn, Michigan 48124 Attn: Vice President, Finance and Baker & Hostetler 3200 National City Center 1900 East 9th Street Cleveland, Ohio 44114 Attn: John D. Drinko If to the Executive: Mr. Ronald L. Roudebush 7386 Riverpoint Lane Cincinnati, Ohio 45255 with a copy to: Sotiroff & Abramczyk 30400 Telegraph Road Bingham Farms, Michigan 48025 Attn: Philip Sotiroff Either party may from time to time designate a new address by notice given in accordance with this Section. Notice and communications shall be effective when actually received by the addressee. 7.08 Counterpart Originals. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 7.09 Entire Agreement. This Agreement forms the entire agreement between the parties hereto with respect to any severance payment and with respect to the subject matter contained in the Agreement. 7.10 Effect on Other Agreements. This Agreement shall supersede all prior agreements, promises and representations regarding severance or other payments contingent upon termination of employment. 7.11 Filing with SEC. Executive acknowledges that the Company expects to file this Agreement as an exhibit to one of -10- 14 the Company's periodic filings with the Securities and Exchange Commission, and Executive consents to such action. 7.12 Applicable Law. The provisions of this Agreement shall be interpreted and construed in accordance with the laws of the State of Ohio, without regard to its choice of law principles. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. THE STANDARD PRODUCTS COMPANY By:/s/ James S. Reid, Jr. -------------------------------- James S. Reid, Jr., Chairman EXECUTIVE /s/ Ronald L. Roudebush ----------------------------------- Ronald L. Roudebush -11- 15 EXHIBIT A THE STANDARD PRODUCTS COMPANY 1996 EMPLOYEE STOCK OPTION PLAN INCENTIVE STOCK OPTION AGREEMENT THE STANDARD PRODUCTS COMPANY (the "Company"), for One Dollar ($1.00) and other valuable consideration, the receipt of which is hereby acknowledged, hereby grants to RONALD L. ROUDEBUSH (the "Holder") the right to purchase, at the option of the Holder, an aggregate of 15,840 Common Shares, $1 par value, of the Company (the "Shares"), at $25.25 per Share, upon the following terms and conditions: 1. None of the Shares subject hereto may be purchased during the first twelve-month period from and after the date hereof, except as provided in Section 3. Thereafter, shares subject hereto may be purchased in the amounts and subject to the vesting schedule set forth below and the provisions of Section 3: VESTING SCHEDULE ----------------
Vesting Date Number of Shares ------------ ---------------- July 2, 1998 3,960 July 2, 1999 3,960 July 2, 2000 3,960 July 2, 2001 3,960
Not more than forty percent (40%) of the number of Shares subject hereto may be purchased during any one-year period. Subject to the foregoing restrictions and vesting schedule, this option may be exercised in blocks of 50 or more Shares after July 2, 1998, and prior to a date ten (10) years from the date hereof, but not thereafter, by (i) the giving by the Holder to the Company, at its principal office in Dearborn, Michigan, of a written notice of such election, specifying the number of Shares then being purchased, (ii) the payment by the Holder to the Company of the purchase price of the Shares so specified and (iii) the giving by the Holder to the Company of the Holder's written representation that the Shares being purchased are being acquired not with a view to resale or distribution and that such Shares will not be sold or otherwise transferred except in compliance with the Securities Act of 1933 (the "1933 Act") and applicable state securities laws and authorizing the Company to imprint the certificates evidencing such Shares with a legend to that effect; provided that if, either before or after the issuance of this option, a registration is effected under the 1933 Act and applicable state securities laws with respect to the Shares subject to the Company's 1996 Employee Stock Option Plan (the "Plan") which are the subject of this option, then, in that event, any restrictions in this subparagraph (iii) or in any undertaking made pursuant hereto shall become inoperative. Upon receipt of such notice, 16 payment and any required representation, the Company will promptly cause certificates for such number of Shares so purchased to be issued and delivered to the Holder; provided, however, no Shares shall be issued and delivered upon any exercise of this option unless and until, in the opinion of counsel for the Company, any and all applicable federal and state securities laws pertaining to the issuance and delivery of such Shares have been complied with in full. 2. Payment of the purchase price may be made in cash or in Shares of the Company valued at the closing sales price per Share (or in the event there are not sales then the average of the closing bid and asked price per Share) on the New York Stock Exchange on the last trading day preceding the date on which the option is exercised. 3. This option may not be exercised unless the Holder is at the time of exercise in the employ of the Company and shall have been continuously so employed since the option was granted; provided, however: (i) In the event of a Change of Control (as that term is defined in Section 6.03 of the Agreement between the Holder and the Company dated July 1, 1997), all unvested Shares shall immediately become vested and in the event the employment of the Holder is terminated by the Company without Cause or by the Holder for Good Reason (as those terms are defined in said Agreement) within three (3) months next succeeding such termination, the Holder may exercise the option to purchase all vested Shares plus all unvested Shares, and (ii) In the event of death or Disability (as defined in said Agreement) of the Holder while in the employ of the Company, this option may be exercised within one year of said death or Disability with respect to all vested shares plus all unvested Shares by the Holder and, in the case of death, only by the executor or administrator of his estate, and (iii) In the event of the termination of the Holder's employment for any reason other than as specified in (i) or (ii) above, the Holder may exercise this option within three (3) months next succeeding such termination of employment, or within the balance of the period of this option if less than three (3) months, to the extent that he was entitled to exercise it at the date of such termination. 4. The rights hereby granted are non-transferable and non-assignable and may be exercised, during his lifetime, only by the Holder (or in the case of the permanent and total disability of the Holder, by his duly authorized legal representative but -2- 17 only if, and to the extent, permitted by Section 422 of the Code) and, after his death, only by the executor or administrator of the estate of the Holder as and to the extent provided in Paragraph 1 and 3 hereof. 5. In the event of any change in the number or kind of outstanding Shares of the Company by reason of a recapitalization, merger, consolidation, reorganization, separation, liquidation, stock split, stock dividend, combination of shares or any other change in the corporate structure or shares of stock of the Company, then, in each such event, the Company, by action of its Compensation Committee (the "Committee"), shall make such adjustment, if any, in the number and kind of Shares subject to this option and in the price per Share to be paid upon such subsequent exercise of this option as shall be necessary to preserve the economic value of the Option for the Holder. 6. This option is granted under and pursuant to the 1996 Employee Stock Option Plan (the "Plan") of the Company. 7. No later than the date as of which an amount first becomes includable in the gross income of the Holder for federal income tax purposes with respect to the option granted hereunder, the Holder shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any federal, state or local taxes of any kind required by law to be withheld with respect to such amount. Withholding obligations may be settled with shares, including Shares that are part of the option that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the optionee. 8. This option may not be exercised unless and until the Shares subject hereto have been listed on the New York Stock Exchange. 9. The option granted hereunder is intended to be an incentive stock option under the Code. This option shall be construed and exercised consistent with the intention that it be an incentive stock option and its terms may be changed by action of the Board of Directors of the Company to the extent necessary to meet the requirements of an incentive stock option and in accordance with the Plan. 10. The Plan and the option granted hereunder shall be governed by and construed in accordance with the laws of the State of Ohio. -3- 18 IN WITNESS WHEREOF, the Company has caused its corporate name to be subscribed and its corporate seal to be affixed hereto by its duly authorized officers as of the 1st day of July 1997. THE STANDARD PRODUCTS COMPANY By /s/ J.S. Reid, Jr. --------------------------------- Attest: /s/ Richard N. Jacobson - ------------------------------------ The foregoing option is hereby accepted. /s/ Ronald L. Roudebush - ------------------------------------ (Signature) -4- 19 EXHIBIT B THE STANDARD PRODUCTS COMPANY 1996 EMPLOYEE STOCK OPTION PLAN NONQUALIFIED STOCK OPTION AGREEMENT THE STANDARD PRODUCTS COMPANY (the "Company"), for One Dollar ($1.00) and other valuable consideration, the receipt of which is hereby acknowledged, hereby grants to RONALD L. ROUDEBRUSH (the "Holder") the right to purchase, at the option of the Holder, an aggregate of 184,160 Common Shares, $1 par value, of the Company (the "Shares"), at $25.25 per Share, upon the following terms and conditions: 1. None of the Shares subject hereto may be purchased during the first twelve-month period from and after the date hereof, except as provided in Section 3. Thereafter, shares subject hereto may be purchased in the amounts and subject to the vesting schedule set forth below and the provisions of Section 3: VESTING SCHEDULE
Vesting Date Number of Shares ------------ ---------------- July 2, 1998 46,040 July 2, 1999 46,040 July 2, 2000 46,040 July 2, 2001 46,040
Not more than forty percent (40%) of the number of Shares subject hereto may be purchased during any one-year period. Subject to the foregoing restrictions and vesting schedule, this option may be exercised in blocks of 50 or more Shares after July 2, 1998, and prior to a date ten (10) years from the date hereof, but not thereafter, by (i) the giving by the Holder to the Company, at its principal office in Dearborn, Michigan, of a written notice of such election, specifying the number of Shares then being purchased, (ii) the payment by the Holder to the Company of the purchase price of the Shares so specified and (iii) the giving by the Holder to the Company of the Holder's written representation that the Shares being purchased are being acquired not with a view to resale or distribution and that such Shares will not be sold or otherwise transferred except in compliance with the Securities Act of 1933 (the "1933 Act") and applicable state securities laws and authorizing the Company to imprint the certificates evidencing such Shares with a legend to that effect; provided that if, either before or after the issuance of this option, a registration is effected under the 1933 Act and applicable state securities laws with respect to the Shares subject to the Company's 1996 Employee Stock Option Plan (the "Plan") which are the subject of this option, then, in that event, any restrictions in this subparagraph (iii) or in any undertaking made pursuant hereto shall become inoperative. Upon receipt of such notice, 20 payment and any required representation, the Company will promptly cause certificates for such number of Shares so purchased to be issued and delivered to the Holder; provided, however, no Shares shall be issued and delivered upon any exercise of this option unless and until, in the opinion of counsel for the Company, any and all applicable federal or state securities laws pertaining to the issuance and delivery of such Shares have been complied with in full. 2. Payment of the purchase price may be made in cash or in Shares of the Company valued at the closing sales price per Share (or in the event there are not sales then the average of the closing bid and asked price per Share) on the New York Stock Exchange on the last trading day preceding the date on which the option is exercised. 3. This option may not be exercised unless the Holder is at the time of exercise in the employ of the Company and shall have been continuously so employed since the option was granted; provided, however: (i) In the event of a Change of Control (as that term is defined in Section 6.03 of the Agreement between the Holder and the Company dated July 1, 1997), all unvested Shares shall immediately become vested and in the event the employment of the Holder is terminated by the Company without Cause or by the Holder for Good Reason (as those terms are defined in said Agreement) within three (3) months next succeeding such termination, the Holder may exercise the option to purchase all vested Shares plus all unvested Shares, and (ii) In the event of the death or Disability (as defined in said Agreement) of the Holder while in the employ of the Company, this option may be exercised within one year of said death or Disability with respect to all vested Shares plus all unvested Shares by the Holder and, in the case of death, only by the executor or administrator of his estate, and (iii) In the event of the termination of the Holder's employment for any reason other than as specified in (i) or (ii) above, the Holder may exercise this option within three (3) months next succeeding such termination of employment, or within the balance of the period of this option if less than three (3) months, to the extent that he was entitled to exercise it at the date of such termination. 4. The rights hereby granted are non-transferable and non-assignable and may be exercised, during his lifetime, only by the Holder (or in the case of the permanent and total disability of the Holder, by his duly authorized legal representative but -2- 21 only if, and to the extent, permitted by Section 422 of the Code) and, after his death, only by the executor or administrator of the estate of the Holder as and to the extent provided in Paragraph 1 and 3 hereof. 5. In the event of any change in the number or kind of outstanding Shares of the Company by reason of a recapitalization, merger, consolidation, reorganization, separation, liquidation, stock split, stock dividend, combination of shares or any other change in the corporate structure or shares of stock of the Company, then, in each such event, the Company, by action of its Compensation Committee (the "Committee"), shall make such adjustment, if any, in the number and kind of Shares subject to this option and in the price per Share to be paid upon such subsequent exercise of this option as shall be necessary to preserve the economic value of the Option for the Holder. 6. This option is granted under and pursuant to the 1996 Employee Stock Option Plan (the Plan") of the Company. 7. No later than the date as of which an amount first becomes includable in the gross income of the Holder for federal income tax purposes with respect to the option granted hereunder, the Holder shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any federal, state or local taxes of any kind required by law to be withheld with respect to such amount. Withholding obligations may be settled with shares, including Shares that are part of the option that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the optionee. 8. This option may not be exercised unless and until the Shares subject hereto have been listed on the New York Stock Exchange. 9. The option granted hereunder shall not be treated as an incentive stock option under the Code. 10. The Plan and the option granted hereunder shall be governed by and construed in accordance with the laws of the State of Ohio. -3- 22 IN WITNESS WHEREOF, the Company has caused its corporate name to be subscribed and its corporate seal to be affixed hereto by its duly authorized officers as of the 1st day of July 1997. THE STANDARD PRODUCTS COMPANY By /s/ J.S. Reid, Jr. ------------------------- Attest: /s/ Richard N. Jacobson - ---------------------------------- The foregoing option is hereby accepted. /s/ Ronald L. Roudebush - ---------------------------------- (Signature) -4- 23 THE STANDARD PRODUCTS COMPANY RESTRICTED STOCK AGREEMENT EXHIBIT C This Restricted Stock Agreement (this "Agreement"), made as of this 1st day of July 1997, by and between The Standard Products Company, an Ohio corporation (the "Company"), and RONALD L. ROUDEBUSH ("Executive") under The Standard Products Company 1991 Restricted Plan (the "Plan"); 1. The Company hereby awards to Executive up to Fifty Thousand (50,000) Common Shares, $1.00 par value, of the Company ("Common Shares"), which may be earned at a rate of up to 12,500 Common Shares per year in the current fiscal year and each of the three succeeding fiscal years, in all respects subject to the terms, conditions and provisions of this Agreement and the Plan, a copy of which is attached to this Agreement and incorporated herein by reference. 2. Common Shares awarded to Executive hereunder are subject to restriction and may not be sold, transferred or otherwise assigned until such shares are earned in accordance with paragraph 3 hereof and have vested in accordance with paragraph 4 hereof. Notwithstanding the foregoing, however, Common Shares awarded to Executive hereunder which are earned but non-vested or awarded Common Shares that remain available to Executive but are unearned shall immediately vest in Executive upon a Change in Control of the Company (as defined in the Plan). In the event of Executive's death, all earned but non-vested Common Shares and one-half of all awarded Common Shares that remain available to Executive, but are unearned, shall vest in Executive's designated beneficiary. 3. The number of awarded Common Shares which may be earned with respect to each fiscal year at a rate of up to 12,500 Common Shares per year in the current fiscal year and each of the succeeding three fiscal years equals the product of 12,500 multiplied by the ratio of the cash bonus earned by Executive under the Company's Officers Bonus Plan over the maximum possible cash bonus which Executive could have earned under such Plan with respect to each such fiscal year. No more than 12,500 Common Shares may be earned in any one fiscal year and no Common Shares may be earned with respect to any fiscal year after the fiscal year ending June 30, 2001. 4. Common Shares awarded hereunder and earned by Executive in accordance with paragraph 3 above shall become vested in Executive at the end of the third fiscal year following the end of the fiscal year in which such Common Shares are earned. 5. Common Shares awarded hereunder and earned in accordance with paragraph 3 above shall be issued in the name of Executive, and the Company's transfer agent will show Executive as the owner of record of such Common Shares. Executive will 24 have all rights of a shareholder with respect to awarded and earned Common Shares, including the right to vote such shares, subject to the limitations imposed by this Agreement and the Plan. The certificates representing awarded and earned Common Shares shall not be delivered to Executive until such Common Shares become vested. If Executive shall voluntarily cease to be an employee of the Company prior to vesting of Common Shares (whether such Common Shares are earned or unearned), Executive shall forfeit to the Company all Common Shares not then vested in Executive. In this regard, simultaneously with the issuance of certificates representing awarded and earned Common Shares, Executive shall execute and deliver stock powers forfeiting to the Company Common Shares awarded and earned hereunder but not vested in the event Executive voluntarily ceases to be an employee of the Company prior to any vesting date. Executive acknowledges that Common Shares awarded hereunder shall be subject to the restrictions and risks of forfeiture contained herein and in Section 8 of the Plan. 6. Executive hereby agrees that he shall pay to the Company, in cash, any United States federal, state or local taxes of any kind required by law to be withheld with respect to the Common Shares awarded to him hereunder. If Executive does not make such payment to the Company, the Company shall have the right to deduct from any payment of any kind otherwise due to Executive from the Company (or from any subsidiary of the Company), any federal, state or local taxes of any kind required by law to be withheld with respect to Common Shares awarded to Executive under this Agreement. 7. Executive represents that Common Shares awarded hereunder are being acquired by Executive not with a view toward resale or distribution and Executive will not sell or otherwise transfer such Common Shares except in compliance with the Securities Act of 1933 and the rules and regulations promulgated thereunder. Executive hereby acknowledges that Common Shares awarded hereunder shall bear legends and statements evidencing such restrictions and other restrictions contained in Section 8 of the Plan. THE STANDARD PRODUCTS COMPANY By /s/ Richard N. Jacobson -------------------------------- Title General Counsel and Secretary ----------------------------- Date July 1, 1997 ------ Executive acknowledges receipt of the Plan, a copy of which is attached hereto, and represents that he is familiar with the terms and provisions thereof, and hereby agrees that Common Shares granted under this Agreement are subject to all terms and provisions of this Agreement. Executive hereby agrees to accept -2- 25 as binding, conclusive and firm all decisions and interpretations of the Compensation Committee of the Board of Directors of the Company. EXECUTIVE /s/ Ronald L. Roudebush ----------------------------- Date July 1, 1997 ------ -3- 26 EXHIBIT D Revised New Hire: April 17, 1997 THE STANDARD PRODUCTS COMPANY NONCOMPETITION, NONDISCLOSURE AND PATENT ASSIGNMENT AGREEMENT This Noncompetition, Nondisclosure and Patent Assignment Agreement (this "Agreement") is entered into this 1st day of July, 1997, by and between Ronald L. Roudebush("Employee") and The Standard Products Company, an Ohio corporation. WHEREAS, The Standard Products Company, or one of its subsidiaries or affiliates (The Standard Products Company and its subsidiaries and affiliates are collectively referred to herein as the "Company"), has agreed to employ Employee pursuant to the Employment Agreement dated July 1, 1997 (the "Employment Agreement"). WHEREAS, the Company is unwilling to employ Employee without Employee agreeing to be bound by the covenants and agreements of Employee set forth in this Agreement; WHEREAS, during the course of Employee's employment with the Company, Employee may gain access to or knowledge of, or work on the development or creation of, confidential and proprietary information, including: (a) supplier and customer lists and supplier and customer-specific information; (b) marketing plans and proposals; (c) product and process designs, formulas, processes, plans, drawings and concepts; (d) research and development data and materials, including those relating to the research and development of products, materials or manufacturing and other processes; (e) financial and accounting records; and (f) other information with respect to the Company which if divulged to the Company's competitors would impair the Company's ability to compete in the marketplace (such information is collectively referred to as "Proprietary Information"); and WHEREAS, the Company is now selling products throughout the United States and in Brazil, Canada, France, Germany, Italy, Korea, Mexico, Spain, Sweden, the United Kingdom and other members of the European Economic Community (such countries, together with any other countries in which the Company is currently conducting, or conducts business at any time during the course of Employee's employment with the Company, are hereinafter collectively referred to as the "Foreign countries"); NOW, THEREFORE, in consideration of Employee's employment with the Company, the salary or wages to be paid and benefits to be provided by the Company, and other consideration, the sufficiency of which is hereby expressly acknowledged, Employee agrees as follows: 1. During the term of Employee's employment with the Company and for a period of twelve (12) months after termination of Employee's employment with the Company for any reason, or for such shorter period as the Company may agree in writing, Employee shall not directly or indirectly engage in any activity, whether on Employee's own behalf or as an employee, consultant or independent contractor of any other person or entity which competes with the Company within the United States or any of the Foreign countries, for the development, production or sale of any product, material or process to be sold, produced or used by the Company during the course of Employee's employment with the Company, including any product, material or process which may be under development by the Company during the course of Employee's employment with the Company and of which Employee has, or hereafter gains, knowledge. 2. The noncompetition covenant set forth above will not impose undue hardship on Employee and is reasonable in both geographic scope and duration in view of: (a) the Company's legitimate interest in protecting its Proprietary Information, the disclosure of which to the Company's competitors would substantially and unfairly impair the Company's ability to compete in the marketplace or substantially and unfairly benefit the Company's competitors; (b) the specialized training to be provided to Employee by the Company and the experience to be gained by Employee during the course of Employee's employment with the Company; (c) the fact that the services to be rendered by Employee on behalf of the Company will be specialized, unique and extraordinary; (d) the fact that the Company directly competes within the United States and the Foreign countries in the sale, production and development of products, materials or processes; and (e) the consideration provided by the Company. 3. Employee shall not disclose or divulge Proprietary Information to any person or entity at any time during the course of Employee's employment with the Company or at any time thereafter, except as may be required in the ordinary course and good-faith performance of Employee's employment with the Company. At the time of termination of Employee's employment with the Company for any reason, or at such time as the Company may request, Employee shall promptly deliver or return, without retaining any copies, all Proprietary Information in Employee's possession or control, whether in the form of computer-generated documents or otherwise, and, pursuant to the Company's instructions, shall erase, destroy or return all stored data, whether stored on computer or otherwise, and shall not attempt to use or restore any such data. 1 27 4. During the term of Employee's employment with the Company and for a period of twenty-four (24) months after termination of the Employee's employment with the Company for any reason, Employee will not employ, hire, solicit, induce or identify for employment or attempt to employ, hire, solicit, induce or identify for employment, directly or indirectly, any employee(s) of the Company to leave his or her employment and become an employee, consultant or representative of any other entity, including but not limited to Employee's new employer, if any. 5. The noncompetition and nondisclosure covenants set forth above are of a special, unique, extraordinary and intellectual character, which gives them a peculiar value, the loss of which cannot be reasonably or adequately compensated for in damages in an action at law. A breach by Employee of this Agreement will cause the Company great and irreparable injury and damage. Therefore, the Company shall be entitled to the remedies of injunction, specific performance and other equitable relief to prevent a breach of this Agreement by Employee. This paragraph shall not, however, be construed as a waiver of any of the rights which the Company may have for damages or otherwise. 6. Employee shall promptly and fully disclose in writing to the Company any inventions, improvements, discoveries, operating techniques, or "know-how", whether patentable or not (hereinafter referred to as the "Inventions"), conceived or discovered by Employee, either solely or jointly with others, during the course of Employee's employment with the Company, or within six (6) months thereafter. 7. Employee shall on the request of the Company, and hereby does, assign to the Company all of Employee's right, title and interest in any of the Inventions which relate to, or are useful in connection with, any aspect of the business of the Company as carried on or contemplated at the time the Invention is made, whether or not Employee's duties are directly related thereto, and the Company shall be the sole and absolute owner of any of the Inventions so assigned; Employee shall perform any further acts or execute any papers at the expense of the Company which it may consider necessary to secure for the Company or its successors or assigns any and all rights relating to the Inventions, including patents in the United States and Foreign countries. 8. The Company shall be the sole judge as to whether the Inventions are related to or useful in connection with any aspect of the business of the Company as carried on or contemplated at the time the Invention is made and as to whether patent applications should be filed in the United States or in Foreign countries. 9. The Company shall have the option of taking a permanent, royalty-free license to manufacture, use, and sell any of the Inventions conceived or discovered by Employee during the course of Employee's employment with the Company, or within six (6) months thereafter, that are not assigned to the Company under paragraph 7. 10. Attached hereto as Schedule 1 is a complete list of all patented and unpatented Inventions conceived or discovered by Employee, either solely or jointly with others, prior to the commencement of Employee's employment with the Company and which are to be excluded from the provisions of this Agreement. 11. In the event that Employee conceives or discovers any Invention during the course of Employee's employment with the Company, or within six (6) months thereafter, which does not relate to, and is not useful in connection with, any aspect of the business of the Company as carried on or contemplated at the time the Invention is made or discovered, the Company shall, upon the written request of Employee and within ninety (90) days of the receipt thereof, notify Employee whether or not it desires to retain ownership of such invention. If the Company elects not to retain such ownership, it shall accompany such notice with a reassignment of its interest in such Invention to Employee. If, at any time after the filing of a patent application for any such Invention, the Company elects to retain only license rights therein, the Company shall convey to Employee ownership therein subject to such license rights and shall prosecute such application to final allowance or rejection. 12. Employee agrees to give an exit interview to the Company upon termination of his employment for any reason. Employee further agrees that the Company may notify anyone employing him or evidencing an intention to employ him of the existence of this Agreement. 13. Upon the execution of this Agreement by Employee and the Company, any and all previous agreements between Employee and the Company relating specifically to the subject matter of this Agreement shall be null and void and this Agreement shall constitute the sole agreement between the parties with respect to the subject matter hereof. 14. This Agreement shall inure to the benefit of the Company and any successors and assigns of the Company. 15. Any waiver of a right under this Agreement shall not be deemed or interpreted as a waiver of any other rights under this Agreement. 2 28 16. This Agreement does not and shall not be construed to create any contract or term of employment or create any Employee rights regarding terms and conditions of employment, and employee shall at all times remain and be deemed an employee at will. 17. Any alteration, modification or waiver of any of the terms of this Agreement must be made or approved by the Company in writing. 18. With respect to any provision of this Agreement finally determined by a court of competent jurisdiction to be unenforceable, Employee acknowledges and agrees that such court shall have jurisdiction to reform this Agreement so that it is enforceable to the maximum extent permitted by law, and Employee and the Company agree to abide by such court's determination. If such unenforceable provision cannot be reformed, such provision shall be severed, but every other provision of this Agreement shall remain in full force and effect. 19. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio. IN WITNESS WHEREOF, this Agreement has been executed by Employee and on behalf of The Standard Products Company, by its duly authorized officer, as of the day and year first above written. WITNESSES:EMPLOYEE: /s/ Gloria J. Toth /s/ Ronald L. Roudebush - --------------------------- ---------------------------- /s/ F. Sudres - Kovac - --------------------------- THE STANDARD PRODUCTS COMPANY By: /s/ J. S. Reid, Jr. ---------------------------------- Title: Chairman and Chief Executive Officer ---------------------------------------- cc: Corporate Human Resources 3 29 SCHEDULE 1 LIST OF INVENTIONS EXCLUDED FROM AGREEMENT 4 EX-10.(T) 10 EXHIBIT 10(T) 1 EXHIBIT 10(t) EMPLOYMENT AGREEMENT Between THE STANDARD PRODUCTS COMPANY And THEODORE K. ZAMPETIS 2 TABLE OF CONTENTS
PAGE ARTICLE I Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.01 Duties as President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.02 Efforts of Executive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.03 Other Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II Term of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.01 Initial Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.02 Renewal Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.03 Failure to Renew . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE III Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3.01 Base Salary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3.02 Bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE IV Other Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4.01 Incentive, Savings and Retirement Plans . . . . . . . . . . . . . . . . . . . . 3 4.02 Welfare Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4.03 Fringe Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4.04 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4.05 Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4.06 Office and Support Staff . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4.07 Vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE V Termination of Employment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5.01 Termination of Employment for Cause or Other Than for Good Reason . . . . . . . 5 5.02 Termination of Employment During or at End of Initial Term . . . . . . . . . . . 5 5.03 Termination of Employment for Death or Disability . . . . . . . . . . . . . . . 6 5.04 Termination of Employment by the Company without Cause or by the Executive for Good Reason During Renewal Term . . . . . . . . . . . . . . . . . 7 5.05 Other Termination Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
i 3 ARTICLE VI Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.01 "Disability" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.02 "Cause" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.03 "Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 6.04 "Good Reason" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 6.05 "Date of Termination" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE VII Restrictive Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 7.01 Noncompetition Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE VIII Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 8.01 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 8.02 Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 8.03 Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 8.04 Nonalienation of Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 8.05 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 8.06 Amendment and Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 8.07 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 8.08 Full Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 8.09 Counterpart Originals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 8.10 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 8.11 Effect on Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 8.12 Filing with SEC/Shareholder Submission . . . . . . . . . . . . . . . . . . . . . 13 8.13 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 8.14 Legal Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ii 4 EMPLOYMENT AGREEMENT DRAFT-9/4/97 THIS AGREEMENT, dated as of the 1st day of September 1997, is made by and between THE STANDARD PRODUCTS COMPANY, an Ohio corporation having its principal place of business in Dearborn, Michigan (the "Company"), and THEODORE K. ZAMPETIS, a resident of West Bloomfield, Michigan (the "Executive"). The Company desires to continue the services of the Executive, and the Executive is willing to render such services, in accordance with the terms hereinafter set forth. Accordingly, the Company and the Executive agree as follows: ARTICLE I Duties 1.01 Duties as President. Executive is now the President and Chief Operating Officer of the Company and is on its Board of Directors (the "Board"). During the term of this Agreement, (as defined in Article II) Executive shall continue to serve as President and Chief Operating Officer of the Company and as a member of its Board. During the term of this Agreement Executive's duties and the officers reporting to Executive will be determined by the Chief Executive Officer after consultation with the Executive consistent with the provisions of Section 6.04 of this Agreement. 1.02 Efforts of Executive. During the term of this Agreement, and excluding any periods of vacation, sick leave or disability to which the Executive is entitled, the Executive agrees to devote the Executive's full attention and time to the business and affairs of the Company and to use the Executive's best efforts to perform faithfully and efficiently the duties and responsibilities of the Executive's position as described herein. 1.03 Other Activities. During the term of this Agreement, it shall not be a violation of this Agreement for the Executive to (a) serve on corporate, civic or charitable boards or committees, (b) deliver lectures, fulfill speaking engagements or teach at educational institutions or (c) manage personal investments so long as such activities do not significantly interfere with the performance of the Executive's duties in accordance with this Agreement. In the event Executive desires to join any additional corporate for-profit board, he shall obtain the approval of the Compensation Committee. 5 ARTICLE II Term of Agreement 2.01 Initial Term. Subject to the termination provisions hereinafter provided, the initial term of this Agreement shall be September 1, 1997 through August 31, 1999 (the "Initial Term"). 2.02 Renewal Term. If, no less than sixty (60) days before the end of the Initial Term, Executive and the Company mutually agree in writing to continuation of this Agreement, then, subject to the termination provisions hereinafter provided, the term ("Renewal Term") of this Agreement shall at all times be three (3) years, that is, the term of this Agreement shall be automatically extended each day for an additional day such that this Agreement shall continually have an unexpired term of three (3) years until the date three (3) years after the date written notice is provided by either the Company or the Executive that this Agreement is not to be further extended or until the date Executive reaches his Normal Retirement Date (as defined in the Company's Salaried Employees' Retirement Plan), whichever shall first occur. 2.03 Failure to Renew. If at the end of the Initial Term the parties do not mutually agree to its continuation, Executive shall have the right to elect to terminate this Agreement and receive the benefits set forth in paragraph 5.02 below. ARTICLE III Compensation 3.01 Base Salary. During the term of this Agreement, the Company shall pay or cause to be paid to the Executive in cash, in accordance with the normal payroll practices of the Company for senior executives, in installments not less frequently than monthly, an annual base salary ("Annual Base Salary") equal to no less than $440,000 each year. The Company may from time to time increase the Executive's Annual Base Salary, provided that it shall not be reduced after any such increase, and the term Annual Base Salary as used in this Agreement shall refer to the Annual Base Salary as so increased. 3.02 Bonus. The Company shall continue to pay or cause to be paid to the Executive the bonus ("Annual Bonus") to which he is entitled under the Company's Officers' Incentive Bonus Plan as a senior executive officer of the Company, subject to amendment of such Plan from time to time. -2- 6 ARTICLE IV Other Benefits 4.01 Incentive, Savings and Retirement Plans. In addition to Annual Base Salary and Annual Bonus, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable to other senior executives of the Company, as such plans and programs may be amended from time to time, and in addition: (a) Restricted Stock: Executive's Restricted Stock Agreement dated December 9, 1991 shall be amended as set forth in Exhibit A attached hereto so as to provide: (i) that all previously earned Restricted Stock will become immediately vested in the event Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason or if at the end of the Initial Term the parties are unable mutually to agree on its continuation into the Renewal Term, and (ii) that if Executive's Annual Base Salary is continued pursuant to the provisions of paragraph 5.02 or 5.04 below, Executive shall be deemed to continue to be actively employed and therefore eligible to earn Restricted Stock for the period described in paragraph 5.02(b) in the event of termination during or at the end of the Initial Term or for the period described in paragraph 5.04(b) in the event of termination during the Renewal Term, and any Restricted Stock so earned shall become immediately vested in Executive. (b) Pension Benefits: In the event (i) this Agreement is terminated as a consequence of Change in Control as defined under Section 6.03 or (ii) Executive's Annual Base Salary is continued pursuant to the provisions of paragraph 5.02 or 5.04 below, Executive will receive additional service credit for purposes of computing his retirement benefits under the Company's Salaried Employees' Pension Plan ("Salaried Plan") as if he had continued to be actively employed by the Company for the period described in paragraph 5.02(b) in the event of termination during or at the end of the Initial Term or for the period described in paragraph 5.04(b) in the event of termination during the Renewal Term. The increased benefit, if any, attributable to the additional service credit will be provided by the Company through the Company's Supplemental Salaried Pension Plan ("Supplemental Plan") or a comparable, nonqualified -3- 7 employee benefit plan and shall be paid in the same manner as the retirement benefit to which Executive is entitled under the Company's Salaried Plan subject to any appropriate adjustments for form of payments and the like. Under no circumstances shall any benefit computed under this provision, or under the Supplemental Plan, use more than the maximum number of years of service credit that can be used under the Salaried Plan, and any supplemental benefit to which Executive is otherwise entitled under this provision or the Supplemental Plan shall only be payable if and when Executive is entitled to and receives a retirement benefit under the Salaried Plan. 4.02 Welfare Benefits. During the period of his active employment the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company (including, and without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, dependent life, accidental death and travel accident insurance plans and programs) and applicable to other senior executives of the Company, as such plans and programs may be amended from time to time. 4.03 Fringe Benefits. During the period of his active employment the Executive shall be entitled to other fringe benefits applicable to other senior executives of the Company. 4.04 Expenses. During the period of his active employment the Executive shall be entitled to receive prompt reimbursement for all reasonable employment-related expenses incurred by the Executive upon the Company's receipt of accountings in accordance with practices, policies and procedures applicable to other senior executives of the Company. 4.05 Automobile. During the period of his active employment and in accordance with its applicable policies, the Company shall furnish to the Executive an automobile in accordance with the Company's current executive plan. 4.06 Office and Support Staff. During the period of his active employment the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to personal secretarial and other assistance provided with respect to other senior executives of the Company but which is consistent with and appropriate to his position as President and Chief Operating Officer. 4.07 Vacation. During the period of his active employment the Executive shall be entitled to paid vacation time in accordance with the plans, practices, policies, and programs applicable to other senior executives of the Company and at the -4- 8 end of the period of Executive's active employment compensation for any vacation earned, not taken and not compensated for, attributable to the year in which that active employment ends. ARTICLE V Termination of Employment 5.01 Termination of Employment for Cause or Other Than for Good Reason. If, before the end of the Initial or Renewal Term, the Company terminates the Executive's employment for Cause or the Executive terminates employment other than for Good Reason, then the Company shall pay to the Executive in a lump sum immediately after the Date of Termination that portion of the Executive's Annual Base Salary which is accrued but unpaid as of such Date of Termination, but the Executive shall not be entitled to receive any additional compensation or benefits under this Agreement. In the event that the Executive so terminates the Executive's employment other than for Good Reason, the Executive shall have no further obligation or liability under this Agreement other than any obligation arising under any applicable provision of Article VII. 5.02 Termination of Employment During or at End of Initial Term. If (i) Executive's employment is terminated during the Initial Term without Cause or by the Employee for Good Reason, or (ii) at the end of the Initial Term the parties are unable mutually to agree on its continuation into the Renewal Term, then Executive shall be entitled to the following: (a) that portion of the Executive's Annual Base Salary and any Annual Bonus which is accrued but unpaid as of the Date of Termination, (b) continuation of the Executive's Annual Base Salary as follows: (i) if the Executive's employment is terminated during the Initial Term by the Company without Cause or by the Executive for Good Reason, Executive's Annual Base Salary shall continue for the period beginning on the Date of Termination and ending on the last day of the Initial Term, plus a period of one (1) month (counting from the Date of Termination) for each year or partial year of service with the Company, payable no less frequently than monthly in accordance with the Company's normal payroll policy for senior executives, or (ii) if at the end of the Initial Term the parties are unable mutually to agree on its -5- 9 continuation into the Renewal Term, Executive's Annual Base Salary shall continue for a term of one (1) month (counting from the Date of Termination) for each year or partial year of service with the Company, payable no less frequently than monthly in accordance with the Company's normal payroll policy for senior executives. (c) the Executive's pro rata bonus ("Pro Rata Bonus") for any fiscal year that has not ended prior to the Date of Termination ("Termination Performance Period"), which shall be equal to the product of the Annual Bonus for the fiscal year immediately preceding the Date of Termination multiplied by a fraction, the numerator of which is the number of days in the Termination Performance Period which elapsed prior to the Date of Termination, and the denominator of which is the total number of days in the Termination Performance Period, (d) the early vesting of Restricted Stock as provided in Exhibit A, and (e) additional service credit for purposes of computing Executive's retirement benefit under the Company's Salaried Plan for the period specified in paragraph 4.01(b) in the event of termination for the reasons there stated and for the period described in subparagraph (b) (ii) above if at the end of the Initial Term the parties are unable mutually to agree on its continuation into the Renewal Term, to be implemented in the manner described in paragraph 4.01(b) above. In addition, Executive and his family shall be entitled to continuation of his medical benefits for an additional year after the Date of Termination, provided that the amount of such benefits shall be reduced or eliminated to the extent the Executive becomes entitled to duplicative benefits by virtue of his subsequent employment after the Date of Termination. 5.03 Termination of Employment for Death or Disability. If, before the end of the Initial or Renewal Term, the Executive's employment terminates due to death or Disability, the Company shall pay to the Executive (or to the Executive's Beneficiary, as defined in Section 8.03) in a lump sum immediately after the Date of Termination an amount which is equal to the sum of the following: (a) that portion of the Executive's Annual Base Salary and any annual bonus which is accrued but unpaid as of the Date of Termination, -6- 10 (b) an amount equal to the discounted value (using a discount rate of 7 3/4%) of three (3) times the Executive's Annual Base Salary, and (c) the Executive's Pro Rata Bonus for the Termination Performance Period calculated in accordance with Section 5.02(c). 5.04 Termination of Employment by the Company without Cause or by the Executive for Good Reason During Renewal Term. If, before the end of the Renewal Term, the Executive's employment is terminated by the Company without Cause or by the Executive for Good Reason, the Executive shall receive the following: (a) that portion of the Executive's Annual Base Salary and any Annual Bonus which is accrued but unpaid as of the Date of Termination, (b) the amount of the Executive's Annual Base Salary for the period beginning on the Date of Termination and ending on the last day of the Renewal Term, payable no less frequently than monthly in accordance with the Company's normal payroll policy for senior executives, (c) the Executive's Pro Rata Bonus for the Termination Performance Period calculated in accordance with Section 5.02(c), (d) the early vesting of Restricted Stock as provided in Exhibit A, and (e) additional service credit for purposes of computing Executive's retirement benefit as provided in paragraph 4.01(b) above. In addition, Executive and his family shall be entitled to continuation of his medical benefits during the remainder of the Renewal Term, provided that the amount of such benefits shall be reduced or eliminated to the extent the Executive becomes entitled to duplicative benefits by virtue of his subsequent employment after the Date of Termination. Provided, however, that if the Date of Termination is at a time in which the Executive's normal retirement date would be reached in less than three (3) years, the benefits provided in this Section 5.04 shall nevertheless cease on the Executive's normal retirement date. 5.05 Other Termination Benefits. In addition to any amounts or benefits payable upon termination of employment hereunder and except as otherwise provided herein, the Executive shall be entitled to any payments or benefits required by applicable law or expressly provided under the terms of any loan, policy or -7- 11 program of the Company as the same may exist on the Date of Termination not specifically addressed in this Agreement. ARTICLE VI Certain Definitions 6.01 "Disability" means any medically determinable physical or mental impairment that can be expected to last for a continuous period of not less than six (6) months, and that renders the Executive unable to perform the duties required under this Agreement. The date of the determination of Disability is the date on which the Executive is certified as having incurred a Disability by a physician mutually acceptable to the Company and the Executive. 6.02 "Cause" means (a) the Executive's conviction of or plea of guilty or nolo contendere to any felony or other crime involving dishonesty or moral turpitude; (b) any serious misconduct in the course of the Executive's employment; or (c) the Executive's habitual neglect of the Executive's duties (other than on account of Disability) or the violation of a material Company policy after notice thereof, except that Cause shall not mean: (1) an isolated instance or isolated instances of bad judgment or negligence; (2) any act or omission believed by the Executive in good faith to have been in or not opposed to the interest of the Company (without intent of the Executive to gain therefrom, directly or indirectly, a profit to which the Executive was not legally entitled); (3) any act or omission with respect to which a determination could properly have been made by the Board that the Executive met the applicable standard of conduct for indemnification or reimbursement under the Code of Regulations of the Company, any applicable indemnification agreement or the laws and regulations under which the Company is governed, in each case in effect at the time of such act or omission; or (4) any act or omission which occurred, and was also widely known among the senior executives of the Company to have occurred, more than twelve months before the Date of Termination. 6.03 "Change in Control" means the occurrence of any of the following events: -8- 12 (1) When any "person" as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act, but excluding the Company and any Subsidiary and any employee benefit plan sponsored or maintained by the Company or any Subsidiary (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding capital stock; provided, however, that with respect to any director who on the effective date of this Agreement is the beneficial owner or has the right to acquire 5% or more of such capital stock outstanding on such effective date, capital stock so owned or acquired pursuant to any such options shall not be counted in determining such 20% or more combined voting power; (2) When, during any period of 24 consecutive months during the existence of this Agreement, the individuals who, at the beginning of such period, constitute the Board of Directors of the Company (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof; provided, however, that a director who was not a director at the beginning of such 24- month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this Section 6.03 (2); or (3) The completion of a transaction requiring shareholder approval for the acquisition of the Company by an entity other than the Company or a Subsidiary through purchase of assets or otherwise or any merger of the Company with or into another company (unless the persons who were shareholders of the Company immediately prior to such transaction own more than 70% of the voting stock and value of the surviving company immediately following such merger in substantially the same proportions as they owned immediately prior to the merger). Provided, however, that if Executive, in his individual capacity, is a party to an agreement under which Executive agrees to the consummation of a transaction which is a Change of Control as described in subparagraphs (1) or (3) above and if Executive pursuant to that agreement becomes an equity holder in the Company or any entity which acquires the Company, then notwithstanding the foregoing provisions of Section 6.03 of this -9- 13 Agreement, unless the Company and Executive shall in writing otherwise agree, such transaction shall not be deemed to be a Change of Control. 6.04 "Good Reason" means the occurrence of any one of the following events: (a) the failure of the shareholders of the Company to reelect the Executive as a member of the Board or the failure of the directors to reelect the Executive as President or Chief Operating Officer, (b) a change in the duties of Executive or personnel reporting to Executive materially and adversely inconsistent with or inappropriate to the Executive's position as specified in Article I hereof or as subsequently agreed by Executive, including status, offices, or responsibilities as contemplated under Article I of this Agreement or any other action by the Company which results in a material and adverse change in such position, status, offices, titles or responsibilities made without Executive's advice and consent, (c) the failure of the Company to assign this Agreement to a successor to the Company, (d) any failure by the Company to comply with any material provision of this Agreement, or (e) change in the principal location at which the Executive is to perform his duties to a location more than fifty (50) miles from the City of Detroit without the Executive's consent, if the Company fails to cure such event within 30 days after written notice from the Executive; provided, however, that if the event is knowing or repeated, the Executive shall not be required to provide written notice or an opportunity to cure. Notwithstanding any other provision in this Section 6.04, the Executive shall have Good Reason to terminate employment with the Company for any or no reason during the six-month period following the date on which a Change in Control occurs, unless the Executive in writing waives such right. 6.05 "Date of Termination" means the date as of which the Executive's active employment with the Company is terminated by the Company or by the Executive for any reason including, but not limited to, death or Disability. -10- 14 ARTICLE VII Restrictive Covenants 7.01 Noncompetition Agreement. Executive agrees to execute at the time of execution of this Agreement the Company's Noncompetition, Nondisclosure and Patent Assignment Agreement attached hereto as Exhibit B. Notwithstanding any provisions of Exhibit B, Executive acknowledges and agrees that he will continue to be bound by that Agreement for one (1) year after the date he ceases receiving payments of Annual Base Salary pursuant to this Agreement. ARTICLE VIII Miscellaneous 8.01 Expenses. (a) If the Executive incurs reasonable legal or other fees and expenses in an effort to establish entitlement to benefits under this Agreement, unless a court of competent jurisdiction determines that such effort was brought without a reasonable basis or has been conducted in bad faith, the Company shall reimburse the Executive for such reasonable fees and expenses. (b) The Company shall provide reimbursement of reasonable fees and expenses, as described in paragraph (a) above, to the Executive on a monthly basis upon the Executive's written submission of a request for reimbursement together with proof that the fees and expenses were incurred. 8.02 Successors. This Agreement shall be binding upon and inure to the benefit of the Executive and the Executive's estate and shall be binding on the Company or any successor to the Company. 8.03 Beneficiary. If the Executive dies prior to receiving all of the salary and bonus and any other amounts payable hereunder, such salary, bonus and other amounts shall be paid in a lump sum payment to the beneficiary designated in writing by the Executive ("Beneficiary") and if no such Beneficiary is designated, to the Executive's estate. 8.04 Nonalienation of Benefits. Benefits payable under this Agreement shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution or levy of any kind, either voluntary or involuntary, prior to actually being received by the Executive, and, except as provided in Section 8.03, any such -11- 15 attempt to dispose of any right to benefits payable hereunder shall be void. 8.05 Severability. If all or any part of this Agreement is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not serve to invalidate any portion of this Agreement not declared to be unlawful or invalid. Any paragraph or part of a paragraph so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such paragraph or part of a paragraph to the fullest extent possible while remaining lawful and valid. 8.06 Amendment and Waiver. This Agreement shall not be altered, amended or modified except by written instrument executed by the Company and Executive. A waiver of any term, covenant, agreement or condition contained in this Agreement shall not be deemed a waiver of any other term, covenant, agreement or condition, and any waiver of any default in any such term, covenant, agreement or condition shall not be deemed a waiver of any later default thereof or of any other term, covenant, agreement or condition. 8.07 Notices. All notices and other communications hereunder shall be in writing and delivered by hand or by first class registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company: The Standard Products Company 2401 South Gulley Road Dearborn, Michigan 48124 Attn: Vice President, Finance and Baker & Hostetler LLP 3200 National City Center 1900 East 9th Street Cleveland, Ohio 44114 Attn: John D. Drinko If to the Executive: Mr. Theodore K. Zampetis 4525 Strandwyck Road W. Bloomfield, Michigan 48322-2233 with a copy to: Dickinson, Wright, Moon, Van Dusen & Freeman 500 Woodward Ave., Suite 4000 Detroit, Michigan 48226-3425 Attn: Patrick J. Ledwidge -12- 16 Either party may from time to time designate a new address by notice given in accordance with this Section. Notice and communications shall be effective when actually received by the addressee. 8.08 Full Settlement. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, nor shall the amount of any payment hereunder be reduced, except as otherwise specifically provided herein, by any compensation earned by the Executive as a result of employment by another employer. 8.09 Counterpart Originals. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 8.10 Entire Agreement. This Agreement forms the entire agreement between the parties hereto with respect to any severance payment and with respect to the subject matter contained in the Agreement. 8.11 Effect on Other Agreements. This Agreement shall supersede all prior agreements, promises and representations regarding severance or other payments contingent upon termination of employment. 8.12 Filing with SEC/Shareholder Submission. Executive acknowledges that the Company expects to file this Agreement as an exhibit to one of the Company's periodic filings with the Securities and Exchange Commission, and Executive consents to such action. 8.13 Applicable Law. The provisions of this Agreement shall be interpreted and construed in accordance with the laws of the State of Ohio, without regard to its choice of law principles. -13- 17 8.14 Legal Fees. The Company agrees to pay Executive's reasonable legal fees in connection with this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written. THE STANDARD PRODUCTS COMPANY By: /s/ Ronald L. Roudebush ------------------------------- Ronald L. Roudebush Chief Executive Officer EXECUTIVE /s/ Theodore K. Zampetis ---------------------------------- Theodore K. Zampetis -14- 18 EXHIBIT A 9/4/97 AMENDMENT TO RESTRICTED STOCK AGREEMENT This Amendment to the Restricted Stock Agreement (the "Agreement") dated December 9, 1991, by and between THE STANDARD PRODUCTS COMPANY (the "Company") and THEODORE K. ZAMPETIS (the "Executive") is made in connection with the execution of an Employment Agreement between the Company and the Executive dated September 1, 1997. The Company and Executive agree that: 1. The Agreement is hereby amended by adding the following to paragraph 2: In the event: (i) the employment of the Executive is terminated by the Company without "Cause" or by Executive for "Good Reason," as those terms are defined in the Employment Agreement between the Company and the Executive dated September 1, 1997 (the "Employment Agreement"), or (ii) at the end of the Initial Term of the Employment Agreement the parties are unable mutually to agree on its continuation into the Renewal Term, all earned but unvested common shares shall immediately vest. In addition, if Executive's Annual Base Salary is continued pursuant to the provisions of paragraph 5.02 or 5.04 of the Employment Agreement, Executive shall be deemed to continue to be actively employed and therefore eligible to earn Restricted Stock for the period described in paragraph 5.02(b) in the event of termination during or at the end of the Initial Term or for the period described in paragraph 5.04(b) in the event of termination during the Renewal Term, and any Restricted Stock so earned shall become immediately vested in Executive. 2. In all other respects, said Agreement remains unchanged and in full force and effect. Executed effective September 1, 1997. THE STANDARD PRODUCTS COMPANY By /s/ Ronald L. Roudebush ----------------------------------- Ronald L. Roudebush Chief Executive Officer By /s/ Theodore K. Zampetis ----------------------------------- Theodore K. Zampetis 19 EXHIBIT B Revised New Hire: April 17, 1997 THE STANDARD PRODUCTS COMPANY NONCOMPETITION, NONDISCLOSURE AND PATENT ASSIGNMENT AGREEMENT This Noncompetition, Nondisclosure and Patent Assignment Agreement (this "Agreement") is entered into this 1st day of September, 1997, by and between Ted Zampetis ("Employee") and The Standard Products Company, an Ohio corporation. WHEREAS, during the course of Employee's employment with the Company, Employee may gain access to or knowledge of, or work on the development or creation of, confidential and proprietary information, including: (a) supplier and customer lists and supplier and customer-specific information; (b) marketing plans and proposals; (c) product and process designs, formulas, processes, plans, drawings and concepts; (d) research and development data and materials, including those relating to the research and development of products, materials or manufacturing and other processes; (e) financial and accounting records; and (f) other information with respect to the Company which if divulged to the Company's competitors would impair the Company's ability to compete in the marketplace (such information is collectively referred to as "Proprietary Information"); and WHEREAS, the Company is now selling products throughout the United States and in Brazil, Canada, France, Germany, Italy, Korea, Mexico, Spain, Sweden, the United Kingdom and other members of the European Economic Community (such countries, together with any other countries in which the Company is currently conducting, or conducts business at any time during the course of Employee's employment with the Company, are hereinafter collectively referred to as the "Foreign countries"); NOW, THEREFORE, in consideration of Employee's employment with the Company, the salary or wages to be paid and benefits to be provided by the Company, and other consideration, the sufficiency of which is hereby expressly acknowledged, Employee agrees as follows: 1. During the term of Employee's employment with the Company and for a period of twelve (12) months after termination of Employee's employment with the Company for any reason, or for such shorter period as the Company may agree in writing, Employee shall not directly or indirectly engage in any activity, whether on Employee's own behalf or as an employee, consultant or independent contractor of any other person or entity which competes with the Company within the United States or any of the Foreign countries, for the development, production or sale of any product, material or process to be sold, produced or used by the Company during the course of Employee's employment with the Company, including any product, material or process which may be under development by the Company during the course of Employee's employment with the Company and of which Employee has, or hereafter gains, knowledge. 2. The noncompetition covenant set forth above will not impose undue hardship on Employee and is reasonable in both geographic scope and duration in view of: (a) the Company's legitimate interest in protecting its Proprietary Information, the disclosure of which to the Company's competitors would substantially and unfairly impair the Company's ability to compete in the marketplace or substantially and unfairly benefit the Company's competitors; (b) the specialized training to be provided to Employee by the Company and the experience to be gained by Employee during the course of Employee's employment with the Company; (c) the fact that the services to be rendered by Employee on behalf of the Company will be specialized, unique and extraordinary; (d) the fact that the Company directly competes within the United States and the Foreign countries in the sale, production and development of products, materials or processes; and (e) the consideration provided by the Company. 3. Employee shall not disclose or divulge Proprietary Information to any person or entity at any time during the course of Employee's employment with the Company or at any time thereafter, except as may be required in the ordinary course and good-faith performance of Employee's employment with the Company. At the time of termination of Employee's employment with the Company for any reason, or at such time as the Company may request, Employee shall promptly deliver or return, without retaining any copies, all Proprietary Information in Employee's possession or control, whether in the form of computer-generated documents or otherwise, and, pursuant to the Company's instructions, shall erase, destroy or return all stored data, whether stored on computer or otherwise, and shall not attempt to use or restore any such data. 1 20 4. During the term of Employee's employment with the Company and for a period of twenty-four (24) months after termination of the Employee's employment with the Company for any reason, Employee will not employ, hire, solicit, induce or identify for employment or attempt to employ, hire, solicit, induce or identify for employment, directly or indirectly, any employee(s) of the Company to leave his or her employment and become an employee, consultant or representative of any other entity, including but not limited to Employee's new employer, if any. 5. The noncompetition and nondisclosure covenants set forth above are of a special, unique, extraordinary and intellectual character, which gives them a peculiar value, the loss of which cannot be reasonably or adequately compensated for in damages in an action at law. A breach by Employee of this Agreement will cause the Company great and irreparable injury and damage. Therefore, the Company shall be entitled to the remedies of injunction, specific performance and other equitable relief to prevent a breach of this Agreement by Employee. This paragraph shall not, however, be construed as a waiver of any of the rights which the Company may have for damages or otherwise. 6. Employee shall promptly and fully disclose in writing to the Company any inventions, improvements, discoveries, operating techniques, or "know-how", whether patentable or not (hereinafter referred to as the "Inventions"), conceived or discovered by Employee, either solely or jointly with others, during the course of Employee's employment with the Company, or within six (6) months thereafter. 7. Employee shall on the request of the Company, and hereby does, assign to the Company all of Employee's right, title and interest in any of the Inventions which relate to, or are useful in connection with, any aspect of the business of the Company as carried on or contemplated at the time the Invention is made, whether or not Employee's duties are directly related thereto, and the Company shall be the sole and absolute owner of any of the Inventions so assigned; Employee shall perform any further acts or execute any papers at the expense of the Company which it may consider necessary to secure for the Company or its successors or assigns any and all rights relating to the Inventions, including patents in the United States and Foreign countries. 8. The Company shall be the sole judge as to whether the Inventions are related to or useful in connection with any aspect of the business of the Company as carried on or contemplated at the time the Invention is made and as to whether patent applications should be filed in the United States or in Foreign countries. 9. The Company shall have the option of taking a permanent, royalty-free license to manufacture, use, and sell any of the Inventions conceived or discovered by Employee during the course of Employee's employment with the Company, or within six (6) months thereafter, that are not assigned to the Company under paragraph 7. 10. Attached hereto as Schedule 1 is a complete list of all patented and unpatented Inventions conceived or discovered by Employee, either solely or jointly with others, prior to the commencement of Employee's employment with the Company and which are to be excluded from the provisions of this Agreement. 11. In the event that Employee conceives or discovers any Invention during the course of Employee's employment with the Company, or within six (6) months thereafter, which does not relate to, and is not useful in connection with, any aspect of the business of the Company as carried on or contemplated at the time the Invention is made or discovered, the Company shall, upon the written request of Employee and within ninety (90) days of the receipt thereof, notify Employee whether or not it desires to retain ownership of such invention. If the Company elects not to retain such ownership, it shall accompany such notice with a reassignment of its interest in such Invention to Employee. If, at any time after the filing of a patent application for any such Invention, the Company elects to retain only license rights therein, the Company shall convey to Employee ownership therein subject to such license rights and shall prosecute such application to final allowance or rejection. 12. Employee agrees to give an exit interview to the Company upon termination of his employment for any reason. Employee further agrees that the Company may notify anyone employing him or evidencing an intention to employ him of the existence of this Agreement. 13. Upon the execution of this Agreement by Employee and the Company, any and all previous agreements between Employee and the Company relating specifically to the subject matter of this Agreement shall be null and void and this Agreement shall constitute the sole agreement between the parties with respect to the subject matter hereof. 14. This Agreement shall inure to the benefit of the Company and any successors and assigns of the Company. 15. Any waiver of a right under this Agreement shall not be deemed or interpreted as a waiver of any other rights under this Agreement. 2 21 17. Any alteration, modification or waiver of any of the terms of this Agreement must be made or approved by the Company in writing. 18. With respect to any provision of this Agreement finally determined by a court of competent jurisdiction to be unenforceable, Employee acknowledges and agrees that such court shall have jurisdiction to reform this Agreement so that it is enforceable to the maximum extent permitted by law, and Employee and the Company agree to abide by such court's determination. If such unenforceable provision cannot be reformed, such provision shall be severed, but every other provision of this Agreement shall remain in full force and effect. 19. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio. IN WITNESS WHEREOF, this Agreement has been executed by Employee and on behalf of The Standard Products Company, by its duly authorized officer, as of the day and year first above written. WITNESSES:EMPLOYEE: /s/ Carol Dwyer /s/ Theodore K. Zampetis - --------------------------- ---------------------------- /s/ Gloria Toth - --------------------------- THE STANDARD PRODUCTS COMPANY By: /s/ Ronald L. Roudebush ---------------------------------- Title: VICE CHAIRMAN & CEO ---------------------------------------- cc: Corporate Human Resources 3 22 SCHEDULE 1 LIST OF INVENTIONS EXCLUDED FROM AGREEMENT 4 EX-10.(U) 11 EXHIBIT 10(U) 1 EXHIBIT 10(u) THE STANDARD PRODUCTS COMPANY RESTRICTED STOCK AGREEMENT This Restricted Stock Agreement (this "Agreement"), is made as of this 1st day of July, 1997, by and between The Standard Products Company, an Ohio corporation (the "Company"), and James S. Reid, Jr. ("Executive") under The Standard Products Company 1991 Restricted Plan (the "Plan"): 1. The Company hereby awards to Executive Twelve Thousand Five Hundred (12,500) Common Shares, $1.00 par value, of the Company ("Common Shares"), in all respects subject to the terms, conditions and provisions of this Agreement and the Plan, a copy of which is attached to this Agreement and incorporated herein by reference. 2. Common Shares awarded to Executive hereunder are subject to restriction and may not be sold, transferred or otherwise assigned until such shares have vested in accordance with paragraph 3 hereof. Notwithstanding the foregoing, however, Common Shares immediately vest in Executive upon a Change in Control of the Company (as defined in the Plan). In the event of Executive's death or disability all unvested Common Shares shall vest in Executive or his designated beneficiary, as the case may be. 3. Subject to earlier vesting pursuant to the provisions of paragraph 2, the Common Shares awarded hereunder shall become vested in Executive on July 1, 1999 or upon Executive's retirement as Chairman of the Board of the Company, whichever first occurs. 4. Common Shares awarded hereunder shall be issued in the name of Executive, and the Company's transfer agent will show Executive as the owner of record of such Common Shares. Executive will have all rights of a shareholder with respect to awarded Common Shares, including the right to vote such shares, subject to the limitations imposed by this Agreement and the Plan. The certificates representing awarded Common Shares shall not be delivered to Executive until such Common Shares become vested. If Executive shall voluntarily cease to be an employee of the Company prior to vesting of Common Shares (other than by reason of retirement as Chairman of the Company) Executive shall forfeit to the Company all Common Shares not then vested in Executive. In this regard, simultaneously with the issuance of certificates representing awarded Common Shares, Executive shall execute and deliver stock powers forfeiting to the Company Common Shares awarded hereunder but not vested in the event Executive voluntarily ceases to be an employee of the Company prior to any vesting date. Executive acknowledges that Common Shares awarded hereunder shall be subject to the restrictions and risks of forfeiture contained herein and in Section 8 of the Plan. 5. Executive hereby agrees that he shall pay to the Company, in cash, any federal, state or local taxes of any kind required by law to be withheld with respect to the Common Shares awarded to him hereunder. If Executive does not make such payment to the Company, the Company shall have the right to deduct from any payment of any kind otherwise due to Executive from the Company (or from any subsidiary of the Company), any 2 federal, state or local taxes of any kind required by law to be withheld with respect to Common Shares awarded to Executive under this Agreement. 6. Executive represents that Common Shares awarded hereunder are being acquired by Executive not with a view toward resale or distribution and Executive will not sell or otherwise transfer such Common Shares except in compliance with the Securities Act of 1933 and the rules and regulations promulgated thereunder. Executive hereby acknowledges that Common Shares awarded hereunder shall bear legends and statements evidencing such restrictions and other restrictions contained in Section 8 of the Plan. THE STANDARD PRODUCTS COMPANY By Donald R. Sheley, Jr. ------------------------------------------------------ Title Vice President, Finance and Chief Financial Officer --------------------------------------------------- Date July 1, 1997 Executive acknowledges receipt of the Plan, a copy of which is attached hereto, and represents that he is familiar with the terms and provisions thereof, and hereby agrees that Common Shares granted under this Agreement are subject to all terms and provisions of this Agreement. Executive hereby agrees to accept as binding, conclusive and firm all decisions and interpretations of the Salary and Stock Option Committee of the Board of Directors of the Company. EXECUTIVE James S. Reid, Jr. ---------------------------------------------------------- Date July 1, 1997 EX-13 12 EXHIBIT 13 1 PROXY STATEMENT SELECTED FINANCIAL DATA MANAGEMENT'S DISCUSSION AND ANALYSIS 1997 CONSOLIDATED [THE STANDARD PRODUCTS COMPANY LOGO] FINANCIAL STATEMENTS AND NOTES - -------------------------------------------------------------------------------- NOTICE OF ANNUAL MEETING OF SHAREHOLDERS ------------------ Notice is hereby given that the annual meeting of shareholders of The Standard Products Company, an Ohio corporation (the "Company"), will be held at the Company's Reid Division offices located at 2130 West 110th Street, Cleveland, Ohio 44102, on Tuesday, October 21, 1997, at 9:00 a.m., Cleveland time, for the following purposes: 1. To receive reports at the meeting. No action constituting approval or disapproval of the matters referred to in said reports is contemplated. 2. To elect five directors, each to serve for a term of three years. 3. To consider a proposal to approve the Company's 1997 Employee Stock Option Plan and to reserve 350,000 authorized but unissued Common Shares, $1 par value, for purposes of such plan. 4. To consider a proposal to approve the Company's 1997 Restricted Stock Plan and to reserve 150,000 authorized but unissued Common Shares, $1 par value, for purposes of such plan. 5. To transact such other business as may properly come before the meeting. Only shareholders of record at the close of business on September 8, 1997, will be entitled to notice of and to vote at said meeting or any adjournment thereof. Shareholders are urged to complete, date and sign the enclosed proxy and return it in the enclosed envelope. By order of the Board of Directors, Richard N. Jacobson RICHARD N. JACOBSON General Counsel and Secretary Dated: September 16, 1997 2 THE STANDARD PRODUCTS COMPANY PROXY STATEMENT ------------------ This proxy statement is furnished in connection with the solicitation of proxies to be used at the annual meeting of shareholders of The Standard Products Company, an Ohio corporation (the "Company"), to be held at the Company's Reid Division offices located at 2130 West 110th Street, Cleveland, Ohio 44102, on Tuesday, October 21, 1997 at 9:00 a.m., Cleveland time. This proxy statement and the accompanying notice and proxy will first be sent to shareholders by mail on or about September 16, 1997. Annual Report. A copy of the Company's Summary Annual Report to Shareholders for the fiscal year ended June 30, 1997 is enclosed with this proxy statement. The Company's audited consolidated financial statements and certain other financial information for its fiscal year ended June 30, 1997, are included as pages F-1 to F-22, inclusive, annexed to this proxy statement. Solicitation and Revocation of Proxies. This solicitation of proxies is made by and on behalf of the Board of Directors. The cost of the solicitation of proxies will be borne by the Company. The Company has retained Georgeson & Company, at an estimated cost of $8,500 plus reimbursement of expenses, to assist in the solicitation of proxies from brokers, nominees, institutions and individuals. In addition to solicitation of proxies by mail, Georgeson & Company and regular employees of the Company may solicit proxies by telephone or facsimile. If the enclosed proxy is returned, the shares represented thereby will be voted in accordance with any specifications made therein by the shareholder. In the absence of any such specifications, they will be voted to elect the directors set forth under "Election of Directors" below and FOR Proposal One and Proposal Two set forth herein. A shareholder's presence alone at the meeting will not operate to revoke his or her proxy. The proxy is revocable by a shareholder at any time insofar as it has not been exercised by giving notice to the Company in writing at its address indicated above or in open meeting. Outstanding Shares. The close of business on September 8, 1997 has been fixed as the record date for the determination of shareholders entitled to notice of and to vote at the meeting. On such date, the Company's voting securities outstanding consisted of 16,846,738 Common Shares, $1 par value, each of which is entitled to one vote at the meeting. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth certain information with respect to persons known to management to be the beneficial owners as of June 30, 1997, of more than five percent of the Company's Common Shares:
AMOUNT AND NATURE OF PERCENT NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS ------------------------------------ -------------------- -------- James S. Reid, Jr.(1)....................................... 1,333,393(2) 7.9% 2401 South Gulley Road Dearborn, MI 48124 The Capital Group Companies, Inc............................ 1,138,600(3) 6.8% 333 South Hope Street Los Angeles, CA 90071
- ------------------------- (1) Mr. Reid is Chairman of the Board of Directors of the Company and was its Chief Executive Officer until July 24, 1997. (2) Includes 846,814 shares owned by Mr. Reid (which amount includes 6,591 restricted shares earned in fiscal 1996 but subject to forfeiture); 139,196 shares owned by his wife, Donna S. Reid; 10,220 shares 1 3 which Mr. Reid has the right to acquire pursuant to stock options currently exercisable or exercisable within 60 days; 71,987 shares held by a life trust in which Mr. Reid has a remainder interest; 1,636 shares held for his account under the Company's Employee Stock Purchase Plan and 14,109 shares held for his account under the Company's Individual Retirement and Investment Trust Plan; and 249,431 shares held by The Standard Products Foundation, of which Mr. Reid is President and a trustee. The number of shares shown above does not include shares owned by Mr. Reid's children or grandchildren, and 210,345 shares held by two trusts as to which Mr. Reid is an income beneficiary and John D. Drinko, a member of the Board of Directors is trust advisor, which shares are included in the number of shares reported by Mr. Drinko. The number shown also does not include 12,500 restricted shares awarded to Mr. Reid effective July 1, 1997. (3) The information contained herein is based upon a Schedule 13G filing made by The Capital Group Companies, Inc. ("Capital Group"), for its fiscal year ended December 31, 1996. Capital Group is the parent holding company of a group of investment management companies that hold sole dispositive power over 1,138,600 Common Shares and sole voting power over 611,000 Common Shares. No dispositive or voting power is shared with respect to any Common Shares. Capital Group has disclaimed beneficial ownership of such securities; however, it may be deemed to "beneficially own" such securities by virtue of Rule 13d-3 under the Securities Exchange Act of 1934. SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth certain information with respect to the beneficial ownership of Common Shares of the Company as of June 30, 1997, by (a) the Company's directors (including nominees for director); (b) the Company's Chief Executive Officer during fiscal 1997 and the other four most highly compensated executive officers named in the Summary Compensation Table; and (c) the Company's executive officers and directors as a group. Except as otherwise described in the notes below, the following beneficial owners have sole voting power and sole investment power with respect to all Common Shares set forth opposite their names.
NUMBER OF SHARES PERCENT NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS ------------------------ ------------------ -------- James S. Reid, Jr........................................... 1,333,393(1) 7.9% John D. Drinko.............................................. 787,035(2) 4.7% John D. Sigel............................................... 303,540(3) 1.8% Leigh H. Perkins............................................ 243,772(4) 1.4% Theodore K. Zampetis........................................ 169,653(5) 1.0 Malcolm R. Myers............................................ 87,125(6) (7) Curtis E. Moll.............................................. 52,185(8) (7) Alan E. Riedel.............................................. 25,012 (7) W. Hayden Thompson.......................................... 20,000 (7) John Doddridge.............................................. 10,000 (7) Edward B. Brandon........................................... 6,000(9) (7) Alfred M. Rankin, Jr........................................ 2,500 (7) James C. Baillie............................................ 2,000 (7) James F. Keys............................................... 40,048(10) (7) Donald R. Sheley, Jr........................................ 6,334(11) (7) Gerard Mesnel............................................... 12,037(12) (7) Ronald L. Roudebush......................................... (13) (7) All Executive Officers and Directors as a Group............. 3,184,825 18.9%
- ------------------------- (1) A description of the Common Shares beneficially owned by Mr. Reid is set forth in Note 2 under "Security Ownership of Certain Beneficial Owners" above. (2) Includes 47,010 shares owned by Mr. Drinko; 22,143 shares held in an individual retirement account of which Mr. Drinko is the beneficiary; 36,175 shares owned by his wife, Elizabeth G. Drinko; 1,000 shares 2 4 held in a trust account of which Mrs. Drinko is the beneficiary; 165,076 shares owned by a corporation of which Mr. Drinko is a shareholder, officer and director; 51,218 shares owned by a charitable foundation established by Mr. Drinko and his wife; 210,345 shares held by two trusts as to which Mr. Drinko is a trust advisor and of which Mr. Reid is an income beneficiary; 129,062 shares owned by a foundation of which Mr. Drinko is President and a trustee; and 125,006 shares held by a charitable lead trust of which Mr. Drinko is a co-trustee. The number of shares shown in the table above does not include 80,700 shares held by a charitable lead trust in which Mr. Drinko and Mr. Sigel are co-trustees; 78,125 shares owned by Cloyes Gear & Products, Inc. of which Mr. Drinko and Mr. Myers are directors; 3,000 shares owned by a foundation of which Mr. Drinko and Mr. Myers are trustees; and 29,752 shares owned by a foundation of which Mr. Drinko and Mr. Perkins are trustees. (3) Includes 17,278 shares owned by Mr. Sigel; 179,156 shares owned by his wife, Sally C. Reid; 26,406 shares held by trusts of which his wife is a trustee; 80,700 shares owned by a charitable lead trust of which Mr. Sigel and Mr. Drinko are co-trustees. In addition, Mr. Sigel is a trustee of The Standard Products Foundation, which owns 249,431 shares, which shares are included in the number of shares reported by Mr. Reid, and are not included in the number reported by Mr. Sigel. Mr. Sigel is the son-in-law of Mr. Reid, Chairman of the Board of Directors of the Company. (4) Includes 125,873 shares owned by Mr. Perkins; 88,147 shares held by his wife, Romi Perkins; and 29,752 shares owned by a foundation of which he and Mr. Drinko are trustees. (5) Includes 106,544 shares owned by Mr. Zampetis (which amount includes 25,091 restricted shares earned in fiscal 1995, 1996, and 1997 but subject to forfeiture); 24,833 shares owned by his wife, Ann J. Zampetis; 648 shares held for his account under the Company's Employee Stock Purchase Plan; 11,176 shares held for his account under the Company's Individual Retirement and Investment Trust Plan; and 26,452 shares which Mr. Zampetis has the right to acquire pursuant to stock options currently exercisable or exercisable within 60 days. (6) Includes 6,000 shares owned by Mr. Myers; 78,125 shares owned by Cloyes Gear & Products, Inc.; and 3,000 shares owned by a foundation of which Mr. Myers and Mr. Drinko are Trustees. (7) Represents less than one percent. (8) Includes 210 shares owned by his wife, Sara Moll; 45,725 shares owned by the pension fund of MTD Products, Inc.; and 6,250 shares owned by a charitable foundation of which he is a trustee. (9) In addition, Mr. Brandon is a trustee of The Standard Products Foundation, which owned 249,431 shares as of June 30, 1997, which shares are included in the number of shares reported by Mr. Reid. (10) Includes 31,812 shares owned by Mr. Keys (which amount includes 10,037 restricted shares earned in fiscal 1995, 1996, and 1997 but subject to forfeiture); 2,306 shares held for Mr. Keys in his account under the Company's Individual Retirement and Investment Trust Plan; 5,930 shares which Mr. Keys has the right to acquire pursuant to stock options currently exercisable or exercisable within 60 days. (11) Includes 2,334 shares owned by Mr. Sheley; and 4,000 shares which Mr. Sheley has the right to acquire pursuant to stock options currently exercisable or exercisable within 60 days. (12) Includes 10,037 restricted shares earned in fiscal 1995, 1996, and 1997, but subject to forfeiture; and 2,000 shares which Mr. Mesnel has the right to acquire pursuant to stock options currently exercisable or exercisable within 60 days. (13) Mr. Roudebush's employment with the Company commenced on July 1, 1997. See "Executive Compensation -- Certain Employment Agreements" for a description of the restricted stock and stock options granted to Mr. Roudebush. The persons named in the table above disclaim any beneficial ownership with respect to shares owned by their spouses and children or by any trust, estate, foundation, custody account or other entity of which they are a trustee, trust advisor or custodian. 3 5 ELECTION OF DIRECTORS In accordance with the Company's Amended Code of Regulations, the Board of Directors has fixed the number of directors at fourteen, divided into two classes of five and one class of four. The number of directors had been fixed at thirteen until July 24, 1997, when the Board, acting under its authority as set forth in the Company's Amended Code of Regulations, voted to increase the number of directors to fourteen. At the Annual Meeting, the shares represented by proxies, unless otherwise specified, will be voted for the election of the five nominees hereinafter named, each to serve for a term of three years and until his successor is duly elected and qualified. The nominees for director are James C. Baillie, Edward B. Brandon, James S. Reid, Jr., Alan E. Riedel, and Ronald L. Roudebush, all of whom are presently directors of the Company. Messrs. Baillie, Brandon, Reid, and Riedel were each elected at the 1994 Annual Meeting of the Company's Shareholders. Mr. Roudebush was elected by the Board on July 24, 1997 to fill the seat created when the Board voted to increase the number of directors to fourteen. Proxies cannot be voted at the Annual Meeting for a greater number of persons than the five persons hereinafter named, although persons in addition to those nominees named herein may be nominated by the shareholders at the meeting. If for any reason any of the nominees is not a candidate (which is not expected) when the election occurs, it is intended that proxies will be voted for the election of a substitute nominee designated by management. The following information is furnished with respect to each person nominated for election as a director. NOMINEES FOR ELECTION AT THE ANNUAL MEETING
EXPIRATION PERIOD OF TERM OF SERVICE FOR WHICH NAME AND AGE PRINCIPAL OCCUPATION AS DIRECTOR PROPOSED ------------ -------------------- ----------- ---------- James C. Baillie Partner, Tory Tory DesLauriers & Binnington, 1994 to date 2000 59 Barristers & Solicitors, Toronto, Ontario, Canada Edward B. Brandon Retired Chairman, President and Chief Executive 1976 to date 2000 65 Officer, National City Corporation (bank holding company) James S. Reid, Jr. Chairman of the Company 1959 to date 2000 71 Alan E. Riedel Retired Vice Chairman, Cooper Industries, Inc. 1976 to date 2000 67 (worldwide diversified manufacturer of electrical products, electric power equipment, tools and hardware, and automotive products) Ronald L. Roudebush Vice Chairman and Chief Executive Officer of the 1997 to date 2000 50 Company
4 6 DIRECTORS WHOSE TERMS WILL CONTINUE AFTER THE ANNUAL MEETING The following information is furnished with respect to each person continuing as a director.
PERIOD EXPIRATION OF SERVICE OF CURRENT NAME AND AGE PRINCIPAL OCCUPATION AS DIRECTOR TERM ------------ -------------------- ----------- ---------- John Doddridge Chairman and Chief Executive Officer, Intermet 1995 to date 1998 57 Corporation (manufacturer of precision ductile and gray iron castings for the automotive and truck industries) Leigh H. Perkins Chairman, The Orvis Company, Inc. (manufacturer 1969 to date 1998 69 and distributor of fishing tackle and sporting goods) Alfred M. Rankin, Chairman, President and Chief Executive 1989 to date 1998 Jr. Officer, NACCO Industries, Inc. (holding 55 company with operations in mining and manufacturing of small electrical appliances and forklift trucks service parts) John D. Sigel Senior Partner, Hale and Dorr, Boston, 1991 to date 1998 44 Massachusetts (law firm) W. Hayden Thompson Chairman and Chief Executive Officer, Solarflo 1982 to date 1998 70 Corporation (manufacturer of gas and electric heating equipment) John D. Drinko Senior Partner, Baker & Hostetler LLP, 1957-1958 1999 76 Cleveland, Ohio (law firm) 1967-1968 1969 to date Curtis E. Moll Chairman and Chief Executive Officer, MTD 1991 to date 1999 58 Products, Inc. (manufacturer of outdoor power equipment and tools, dies and stampings for the automotive industry) Malcolm R. Myers Chairman, Cloyes Gear & Products, Inc. 1984 to date 1999 63 (manufacturer of automotive timing components) Theodore K. President and Chief Operating Officer of the 1991 to date 1999 Zampetis Company 52
Each of the above directors and nominees for election as a director has had the principal occupation indicated for at least five years, except Messrs. Doddridge, Brandon, and Roudebush. Mr. Doddridge served as Vice Chairman and Chief Executive Officer of Magna International, Inc., from November 1992 to November 1994, and President of North American operations of Dana Corporation from mid-1989 to 1992. Mr. Brandon served as Chairman, President, and Chief Executive Officer of National City Corporation until his retirement on September 30, 1995. Mr. Roudebush was part owner and an officer of Milford Dodge, Inc., Milford, Ohio, an auto dealership, from August 1995 through May 1997. Prior to that, he had been employed in the automotive business of Rockwell International Corporation since 1973. From 1991 through November 1994, he served as President, Rockwell Automotive, the operating unit of Rockwell International Corporation which included all of Rockwell's worldwide automotive businesses. Mr. Brandon is a director of National City Corporation and RPM, Inc. Mr. Doddridge is a director of Detroit Diesel Corporation. Mr. Moll is a director of Shiloh Industries, Inc. Mr. Rankin is a director of The B.F.Goodrich Company and The Vanguard Group. Mr. Riedel is a director of Belden Inc., Arkwright Mutual Insurance Company and Chairman of Gardner Denver Machinery, Inc. Mr. Roudebush is a director of Simpson Industries, Inc. Mr. Zampetis is a director of Shiloh Industries, Inc. and National City Bank. During the fiscal year ended June 30, 1997, the Board of Directors held seven meetings. During the last fiscal year the Board of Directors appointed an Audit Committee, a Finance Committee and a Compensation Committee. The Board of Directors does not have a Nominating Committee. With the exception of Mr. Sigel, each member of the Board of Directors attended at least 75% of the meetings of the Board of Directors and of 5 7 the committees on which he served. Mr. Sigel attended five of the seven meetings of the Board, and two of the three meetings of the Audit Committee. The Audit Committee of the Board of Directors of the Company (the "Audit Committee"), of which Mr. Brandon was Chairman and Messrs. Baillie, Moll, Myers, Rankin, Sigel and Thompson were members, held three meetings and consulted informally on other occasions during the last fiscal year. The Audit Committee recommends annually to the Board of Directors the independent public accountants for the Company, reviews with the independent public accountants the arrangements for and scope of the audits to be conducted by them and the results of those audits, and reviews various financial and accounting matters affecting the Company. The Compensation Committee of the Board of Directors of the Company (the "Compensation Committee"), of which Mr. Riedel was chairman and Messrs. Brandon, Myers and Perkins were members, held six meetings and consulted informally on other occasions during the last fiscal year. The Compensation Committee periodically reviews and determines the compensation, including fringe benefits and incentive compensation, of officers and management personnel of the Company and administers the Company's restricted stock and stock option plans. The Compensation Committee also determines the officers and key employees of the Company who participate in those plans and the stock options and restricted stock awards to be granted. The Finance Committee, of which Mr. Drinko was chairman and Messrs. Doddridge, Moll, Perkins, Riedel and Thompson were members, held two meetings and consulted informally during the last fiscal year. The Finance Committee administers the investments of the Company's retirement funds and renders advice and counsel to management on financial matters affecting the Company. Director's Compensation. Each director who is not an officer of the Company or a subsidiary of the Company is compensated at the rate of $23,000 per year. Each director also receives $1,000 for attendance at each meeting of the Board of Directors and for each meeting of any committee not held in conjunction with a meeting of the Board of Directors. Committee Chairmen receive an additional $1,000 per year. 6 8 EXECUTIVE COMPENSATION The following information is set forth with respect to the Company's Chief Executive Officer and each of the Company's four other most highly compensated executive officers for fiscal year 1997. I. SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION ---------------------------------- -------------------- AWARDS -------------------- RESTRICTED OTHER ANNUAL STOCK STOCK ALL OTHER NAME AND FISCAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS COMPENSATION PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) ($) (#) ($)(3) ------------------ ------ ------ ------ ------------ ---------- ------- ------------ James S. Reid, Jr. 1997 $600,000 $300,000 -- (4) -- $3,454 Chairman and Chief 1996 600,000 158,190 -- -- -- 3,594 Executive Officer 1995 600,000 144,000 -- -- -- 1,957 Theodore K. Zampetis 1997 $440,000 $220,000 -- (5) -- $3,454 President and Chief 1996 410,000 108,096 -- -- 50,000 3,594 Operating Officer 1995 400,000 96,000 -- -- -- 1,957 James F. Keys 1997 $289,750 $144,875 -- (6) 5,000 $3,094 Executive Vice 1996 241,074 63,559 -- -- 15,000 3,734 President-International 1995 168,220 33,430 -- -- -- 3,038 Donald R. Sheley, Jr.(7) 1997 $238,125 $119,063 -- -- 10,000 $ 360 Vice President-Finance 1996 215,625 56,849 -- -- 10,000 240 and Chief Financial Officer 1995 -- -- -- -- -- -- Gerard Mesnel(8) 1997 $224,250 $112,125 -- (9) 15,000 -- Executive Vice President -- 1996 207,000 54,576 -- -- 5,000 -- Advanced Technology Worldwide 1995 191,250 45,900 -- -- -- --
- ------------------------- (1) Amounts shown represent bonuses earned pursuant to the Company's Officers Incentive Compensation Plan. (2) Total perquisites and other personal benefits for each of the named executive officers do not exceed the threshold amounts specified in the regulations promulgated by the Securities and Exchange Commission. (3) Amounts shown represent the Company's contributions on behalf of Messrs. Reid, Zampetis and Keys under the Individual Retirement and Investment Trust Plan and, in the case of Messrs. Reid, Zampetis and Sheley, under the Employee Stock Purchase Plan. During fiscal year 1997, the Company's contributions on behalf of both Mr. Reid and Mr. Zampetis under each of the Individual Retirement and Investment Trust Plan and the Employee Stock Purchase Plan were $3,094 and $360, respectively. (4) Mr. Reid was awarded 62,500 restricted Common Shares (adjusted to reflect a 5-for-4 stock split of the Company's Common Shares effected in the form of a stock dividend paid on June 3, 1993, to shareholders of record on May 20, 1993) in fiscal 1992. Under the terms of the award, up to 12,500 of the awarded Common Shares could be earned in each of five consecutive fiscal years beginning in fiscal 1992, based on the percentage of bonus earned during such fiscal year. Awarded Common Shares earned by Mr. Reid are subject to forfeiture until the end of the second fiscal year following the fiscal year in which such awarded Common Shares are earned. Mr. Reid earned 6,000 of the awarded Common Shares in fiscal year 1995 and 6,591 in fiscal year 1996, 6,000 of which shares vested on June 30, 1997, and 6,591 of which shares will vest on June 30, 1998. On June 23, 1997, the Compensation Committee awarded Mr. Reid an additional 12,500 restricted Common Shares, effective July 1, 1997. Under the terms of the award, all of the shares were considered earned on the effective date of the award. The shares are subject to forfeiture until the earlier of July 1, 1999 or the date on which Mr. Reid retires from his position as Chairman of the Board of the Company. In the event of Mr. Reid's death, all earned but unvested awarded Common Shares shall vest in his designated beneficiary. Based on the last reported sale price of the Company's Common Shares on the New York Stock Exchange on June 30, 1997, the total Common Shares earned during the past three years under the 1992 award and the 1997 award had a fair market value of $633,548. No more shares can be earned by Mr. Reid under either award. Dividends are paid 7 9 only with respect to the awarded Common Shares which are earned. For a discussion of the bonuses payable to the Company's officers, see "Executive Compensation -- Compensation Committee Report." (5) Mr. Zampetis was awarded 125,000 restricted Common Shares (adjusted to reflect a 5-for-4 stock split of the Company's Common Shares effected in the form of a stock dividend paid on June 3, 1993 to shareholders of record on May 20, 1993) in fiscal 1992. Under the terms of the award, up to 12,500 of the awarded Common Shares may be earned in each of ten consecutive fiscal years beginning in fiscal 1992, based on the percentage of bonus earned during such fiscal year. Awarded Common Shares earned by Mr. Zampetis are subject to forfeiture until the end of the third fiscal year following the fiscal year in which such awarded Common Shares are earned, except that if his employment is terminated by the Company without "cause" or if he terminates his employment for "good reason," as defined in his employment agreement (see "Certain Employment Agreements") or if his employment is not continued beyond August 31, 1999, all Common Shares then earned by him which are subject to forfeiture will become immediately vested. In addition, he will continue to be eligible to earn additional Common Shares, which will not be subject to forfeiture, during any period when his base salary is continued after his employment ends. Mr. Zampetis earned 6,000 of the awarded Common Shares in fiscal year 1995, 6,591 Common Shares in fiscal year 1996, and 12,500 in fiscal year 1997. 10,400 shares earned by Mr. Zampetis in fiscal year 1994 vested on June 30, 1997. The shares earned in fiscal years 1995, 1996, and 1997 will vest on the last day of fiscal 1998, 1999, and 2000, respectively. In the event of Mr. Zampetis' death, all earned but unvested awarded Common Shares and one-half of awarded but unearned Common Shares will vest in his designated beneficiary. Based on the last reported sale price of the Company's Common Shares on the New York Stock Exchange on June 30, 1997, the total Common Shares earned during the past three years under the 1992 award had a fair market value of $633,548. Dividends are paid only with respect to the awarded Common Shares which have been earned. For a discussion of the bonuses payable to the Company's officers, see "Executive Compensation -- Compensation Committee Report." (6) Mr. Keys was awarded 50,000 restricted Common Shares in fiscal 1995. Under the terms of the award, up to 5,000 of the awarded Common Shares may be earned in each of ten consecutive fiscal years beginning in fiscal 1995, based on the percentage of bonus earned during such fiscal year. Awarded Common Shares earned by Mr. Keys are subject to forfeiture until the end of the third fiscal year following the fiscal year in which such awarded Common Shares are earned. Mr. Keys earned 2,400 of the awarded Common Shares in fiscal year 1995, 2,637 Common Shares in fiscal 1996, and 5,000 shares in fiscal 1997. These shares will vest on the last day of fiscal 1998, 1999, and 2000, respectively. In the event of Mr. Keys' death, all earned but unvested awarded Common Shares and one-half of awarded but unearned Common Shares will vest in his designated beneficiary. Based on the last reported sale price of the Company's Common Shares on the New York Stock Exchange on June 30, 1997, the total Common Shares earned during the past three years under the 1995 award had a fair market value of $253,434. Dividends are paid only with respect to the awarded Common Shares which have been earned. For a discussion of the bonuses payable to the Company's officers, see "Executive Compensation -- Compensation Committee Report." (7) Mr. Sheley commenced employment with the Company on July 17, 1995. (8) In addition to serving as Executive Vice President -- Advanced Technology Worldwide, Mr. Mesnel also serves as President and Directeur General, Standard Products Industriel, the Company's subsidiary in France. (9) Mr. Mesnel was awarded 25,000 restricted Common Shares in fiscal 1995. Under the terms of the award, up to 5,000 of the awarded Common Shares may be earned in each of five consecutive fiscal years beginning in fiscal 1995, based on the percentage of bonus earned during such fiscal year. Awarded Common Shares earned by Mr. Mesnel are subject to forfeiture until the end of the third fiscal year following the fiscal year in which such awarded Common Shares are earned. Mr. Mesnel earned 2,400 of the awarded Common Shares in fiscal year 1995, 2,637 Common Shares in fiscal 1996, and 5,000 shares in fiscal 1997. These shares will vest on the last day of fiscal 1998, 1999, and 2000, respectively. In the event of Mr. Mesnel's death, all earned but unvested awarded Common Shares and one-half of awarded but unearned Common Shares will vest in his designated beneficiary. Based on the last reported sale price of the Company's Common Shares on the New York Stock Exchange on June 30, 1997, the total Common Shares earned during the past three years under the 1995 award had a fair market value of $253,434. Dividends are paid only with respect to the awarded Common Shares which have been earned. For a discussion of the bonuses payable to the Company's officers, see "Executive Compensation -- Compensation Committee Report." 8 10 II. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED PERCENTAGE OF ANNUAL RATES OF TOTAL OPTIONS STOCK GRANTED TO PRICE APPRECIATION OPTIONS EMPLOYEES EXERCISE FOR OPTION TERM(3) GRANTED IN FISCAL PRICE EXPIRATION -------------------- NAME #(1) YEAR(2) ($/SHARE) DATE 5%($) 10%($) ---- ------- ------------- --------- ---------- ----- ------ James S. Reid, Jr................ -- -- -- -- -- -- Theodore K. Zampetis............. -- -- -- -- -- -- James F. Keys.................... 5,000 2.14 25.25 June 2007 $ 67,832 $166,569 Donald R. Sheley, Jr............. 10,000 4.28 25.25 June 2007 135,664 333,138 Gerard Mesnel.................... 15,000 6.42 25.25 June 2007 203,496 499,707
- ------------------------- (1) Options are not exercisable for the one-year period from the date of grant, then no more than 40% of such options may be exercised in any succeeding one-year period. (2) Based on 233,450 options granted to all employees during the fiscal year. (3) These amounts are based on hypothetical appreciation rates of 5% and 10% and are not intended to forecast the actual future appreciation of the Company's stock price. No gain to optionees is possible without an actual increase in the price of the Company's shares, which increase will benefit all of the Company's shareholders. All calculations are based on a ten-year option period, and upon the assumption that 40% of each option grant will be exercised at the end of the eighth and ninth years after the date of the grant, and 20% will be exercised at the end of the ten-year term. III. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
VALUE OF NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FISCAL FISCAL YEAR-END(#) YEAR-END($) SHARES VALUE ------------- --------------- ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/ NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE ---- ----------- -------- ------------- ------------- James S. Reid, Jr..................... -- -- 10,220/ 1,200 $ -- Theodore K. Zampetis.................. -- -- 26,452/34,188 $29,771/$57,729 James F. Keys......................... -- -- 5,930/16,070 $ 7,228/$19,023 Donald R. Sheley, Jr.................. -- -- 4,000/16,000 $12,500/$18,750 Gerard Mesnel......................... -- -- 2,000/18,000 $ 3,500/$ 5,250
CERTAIN EMPLOYMENT AGREEMENTS The Company entered into a letter agreement with James S. Reid, Jr., dated July 24, 1997, with respect to Mr. Reid's continuing employment arrangements. The letter confirmed that Mr. Reid would resign his position as Chief Executive Officer of the Company, effective July 24, 1997, but will remain as Chairman of the Board. The letter provides that effective September 1, 1997, Mr. Reid's annual salary will be $200,000 per year. That rate of compensation will continue until the Company's Annual Meeting of Shareholders in October 1999, when it is anticipated that Mr. Reid will resign from his position as Chairman of the Board. In addition to receiving his pension under the Company's Salaried Employees' Retirement Plan (under federal law, payment of his pension commenced on April 1, 1997, after he reached age 70 1/2), he will begin receiving payments on September 1, 1997 from the Company's supplemental pension plan. Mr. Reid will also continue to participate in all other executive and employee benefit plans of the Company. For purposes of calculating 9 11 Mr. Reid's annual bonus under the Company's Officers Incentive Bonus Plan, his pension and supplemental pension payments will be considered part of his base salary. Ronald L. Roudebush was employed by the Company on July 1, 1997, and was elected by the Board of Directors as a member of the Board and Vice Chairman and Chief Executive Officer, effective July 24, 1997. He has entered into a two-year "evergreen" employment agreement with the Company, expiring on June 30, 2007. Under the agreement, Mr. Roudebush will receive a base salary of $500,000 per year, and will participate in the Company's Officers Incentive Bonus Plan. His bonus under the Plan will not be less than $200,000 for fiscal year 1998. He will also participate in all executive and employee benefit plans of the Company. In the event of his termination without "cause," or if he resigns his employment for "good reason" or within six months after a "change in control," Mr. Roudebush will be entitled to a lump sum equal to two years of base salary and bonus payments, and a continuation of benefits during the two-year period. Mr. Roudebush has also executed a non-compete agreement with the Company. Mr. Roudebush was awarded stock options to purchase 200,000 shares of the Company's Common Shares under its 1996 Stock Option Plan, at a price equal to the fair market value of the Company's Common Shares on July 1, 1997. Those options will vest in four equal annual installments, commencing on July 2, 1998. After vesting, all options will remain exercisable until June 30, 2007, provided that Mr. Roudebush remains employed until that date. In the event of a change in control of the Company, as defined in the option agreements, all nonvested options will immediately become vested and to the extent not then exercisable, will become exercisable upon the termination, or in certain cases, the resignation of Mr. Roudebush. Mr. Roudebush was also awarded 50,000 shares of restricted stock under the Company's 1991 Restricted Stock Plan. Pursuant to the terms of his award, Mr. Roudebush will have an opportunity to earn up to 12,500 shares of the Company's Common Shares in each of fiscal years 1998 through 2001. The number earned in each of those years will be the percentage of 12,500 which equals the percentage of the Company's earnings per share target for that year which is achieved by the Company. Shares earned will become vested at the end of the third fiscal year following the fiscal year in which they were earned, except that in the event of a change in control of the Company, as defined in the Plan, all shares granted to Mr. Roudebush will immediately vest. In the event of Mr. Roudebush's death, all earned but unvested awarded Common Shares and one-half of awarded but unearned Common Shares will vest in his designated beneficiary. The Company has also entered into an employment agreement with Theodore K. Zampetis, pursuant to which he will continue to serve as President and Chief Operating Officer. The agreement provides an incentive for Mr. Zampetis to remain in his present position at least through August 31, 1999, by providing for his base salary to continue for one month for each year of service if he serves through that date. Mr. Zampetis had 24 years of service as of June 30, 1997. He will also be entitled to the same salary continuation if, prior to August 31, 1999, his employment is terminated without "cause," or if he resigns his employment for "good reason" or within six months after a "change in control". In addition, he will receive pension service credit for the same period his base salary continues. See also footnote 5 under "Executive Compensation -- 1. Summary Compensation Table" regarding the restricted stock previously awarded to him. If Mr. Zampetis and the Company agree to continue his employment after August 31, 1999, the employment term will convert to a three-year "evergreen" arrangement, under which he will be entitled to a continuation of his base salary and the benefits described in the previous paragraph for a three-year period following the occurrence of any of the events described in the previous paragraph. In no event will payments under his agreement continue beyond his 65th birthday. Mr. Zampetis has also signed a non-compete agreement. PENSION PLAN AND SUPPLEMENTAL PLAN Salaried employees of the Company with one year of full-time service are eligible to participate in The Standard Products Company Salaried Employees' Pension Plan (the "Pension Plan") and The Standard Products Company Supplemental Salaried Employees' Pension Plan (the "Supplemental Plan"). Except as 10 12 otherwise noted in "Table I. Summary Compensation Table," the amounts shown therein exclude amounts, if any, expended for financial reporting purposes by the Company as contributions, reserves or benefits paid under the Pension Plan and the Supplemental Plan. The Pension Plan provides for normal retirement benefits based on the highest average monthly compensation for 60 consecutive months within the last 120 months prior to retirement (final average compensation). The basic formula is 1 1/15% times final average compensation (up to but not exceeding Social Security-covered compensation), plus 1 2/3% of the amount (if any) of final average compensation in excess of Social Security-covered compensation, all multiplied by the participant's years of pension service under the Plan (up to a maximum of 30 years). Employees who were hired prior to July 1, 1976, may have their normal retirement benefit calculated under an alternative formula as follows: final average compensation multiplied by a percentage equal to the sum of (i) 21.25%, plus (ii) 0.75% for each year of pension service up to a maximum of 25 years (that is, a maximum of 40%). In addition, the Plan provides that the minimum normal retirement benefit shall in all events be no less than $13 multiplied by a participant's years of pension service. Certain of these benefit formulas were adopted effective July 1, 1989, to comply with the Tax Reform Act of 1986. Notwithstanding any new benefit formulas, each participant is entitled to a benefit no less than his or her accrued benefit as of June 30, 1989. Participants may elect that retirement benefits be paid in the form of a life annuity, a ten-year or five-year sum certain annuity, or various joint and surviving spouse options; the Plan's normal retirement benefit amount is payable monthly, based on a single-life annuity with five years certain. Compensation covered under the Pension Plan includes (i) base salary, (ii) bonuses, (iii) payments for overtime, (iv) salary deferred under the Company's Individual Retirement Plan, and (v) the taxable amount value of Restricted Stock that vests in any Plan Year under the Restricted Stock Plan. Extraordinary payments and Company contributions to the Company's Individual Retirement Plan are not included in compensation. Additionally, the collective value of the taxable amount of vested Restricted Stock and bonuses received in any Plan Year in excess of 50% of base salary in that Plan Year is not included in compensation. The Supplemental Plan is a nonqualified plan which provides a supplemental benefit for eligible salaried employees under terms and conditions similar to those under the Pension Plan. The supplemental benefit is equal to the excess of (i) the benefit that would have been payable to the employee under the Pension Plan without regard to certain annual retirement income and benefit limitations imposed by federal law over (ii) the benefit payable to the employee under the Pension Plan. 11 13 The table below shows estimated annual benefits payable (assuming payments made in the normal retirement form, and not under any of the various survivor forms of benefit payments) under the Pension Plan and the Supplemental Plan to any salaried employee upon retirement in the 1997 Plan Year at age 65 after selected periods of service.
AVERAGE ANNUAL ESTIMATED ANNUAL BENEFITS UPON RETIREMENT IN 1997 PLAN YEAR SALARY USED WITH YEARS OF SERVICE INDICATED TO DETERMINE -------------------------------------------------------------- BENEFITS 15 YEARS 20 YEARS 25 YEARS 30 YEARS AND OVER - -------------- -------- -------- -------- ----------------- $125,000 ............................ $ 28,613 $ 45,313 $ 50,000 $ 57,225 150,000 ............................ 34,863 54,375 60,000 69,725 175,000 ............................ 41,113 63,438 70,000 82,225 200,000 ............................ 47,363 72,500 80,000 94,725 225,000 ............................ 53,613 81,563 90,000 107,225 250,000 ............................ 59,863 90,625 100,000 119,725 300,000 ............................ 72,363 108,750 120,604 144,725 350,000 ............................ 84,863 126,875 141,438 169,725 400,000 ............................ 97,363 145,000 162,271 194,725 450,000 ............................ 109,863 163,125 183,104 219,725 500,000 ............................ 122,363 181,250 203,938 244,725 550,000 ............................ 134,863 199,375 224,771 269,725 600,000 ............................ 147,363 217,500 245,604 294,725 650,000 ............................ 159,863 235,625 266,438 319,725 700,000 ............................ 172,363 253,750 287,271 344,725 750,000 ............................ 184,863 271,875 308,104 369,725 800,000 ............................ 197,363 290,000 328,938 394,725 850,000 ............................ 209,863 308,125 349,771 419,725 900,000 ............................ 222,363 326,250 370,604 444,725
As of June 30, 1997, the credited years of service for retirement purposes were as follows: Mr. Reid -- 41; Mr. Zampetis -- 24; Mr. Keys -- 25; and Mr. Sheley -- 1. Mr. Mesnel does not participate in the Plan. On August 18, 1997, the Board of Directors authorized the establishment of two non-qualified deferred compensation plans, to be effective November 1, 1997. Under the first of the plans, management and executive-level employees of the Company, including the named executive officers, will be permitted to defer compensation that could have been deferred under the Company's 401(k) plan but for the limitations placed on "highly-compensated" employees under the Internal Revenue Code, and but for the dollar limit that can be contributed annually to such a plan under Section 402(g) of the Internal Revenue Code. The second plan permits additional amounts of compensation to be deferred by the same individuals, regardless of any limitation placed on their ability to contribute to the 401(k) plan. Under both plans, compensation deferred by eligible participants will be credited to an unfunded account established for each participant. No funds will be set aside to satisfy the obligation owed under the plans. Amounts deferred will be credited with interest at the Moody's Long-Term Baa Corporate Bond Index rate, which approximates the Company's long-term borrowing rate. Participants will receive payment of the amounts owed to them from the general assets of the Company. Those amounts will generally not be payable until after the participant terminates employment. In the event of a change in control of the Company, as such term is defined in the plans, cash equal to the amounts credited to the accounts of participants will be funded in a "rabbi trust," which will exist solely to pay benefits to participants, except that such funds will be available to creditors of the Company in the event of the insolvency of the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Brandon, Myers, Perkins and Riedel are the members of the Company's Compensation Committee. There are no Compensation Committee interlocks. 12 14 Transactions with Management. Edward B. Brandon, a director of the Company, is a director and the retired Chairman, President and Chief Executive Officer of National City Corporation. The Company has a $125,000,000 revolving credit agreement with National City Bank, Cleveland, Ohio ("National City"), a wholly owned subsidiary of National City Corporation, and three other banks, until January 1999. National City has a 31.4% participation in such credit agreement. The Company borrowed from National City during the 1997 fiscal year on a short-term uncommitted line of credit at prevailing market rates. John D. Drinko, a director of the Company, is senior advisor to the policy committee of Baker & Hostetler LLP, which law firm acts as principal outside counsel for the Company. PERFORMANCE GRAPH Set forth below is a line graph comparing the cumulative total return of a hypothetical investment in the Common Shares with the cumulative total return of a hypothetical investment in each of the Standard & Poor's Composite -- 500 Index and the Dow Jones Auto Parts Index based on the respective market price of each such investment at the end of each of the Company's fiscal years shown below, assuming in each case an initial investment of $100 on July 1, 1992, and reinvestment of dividends.
MEASUREMENT PERIOD STANDARD DOW JONES STANDARD & (FISCAL YEAR COVERED) PRODUCTS CO. AUTO PARTS POOR'S INDEX COMPOSITE - 500 INDEX 1992 100.00 100.00 100.00 1993 134.61 124.04 113.65 1994 115.88 121.53 115.25 1995 88.66 135.44 145.30 1996 98.09 150.50 183.08 1997 109.73 185.90 246.61
COMPENSATION COMMITTEE REPORT The Company's executive compensation program is administered by the Compensation Committee, which has responsibility for reviewing all aspects of the compensation program for the executive officers of the Company. The Compensation Committee is comprised of the four directors listed at the end of this report, none of whom is an employee of the Company. The Compensation Committee's primary objective with respect to executive compensation is to establish programs which attract and retain key managers and align their compensation with the Company's overall business strategies, values, and performance. To this end, the Compensation Committee has established, and the Board of Directors has endorsed, an executive compensation philosophy to compensate executive officers based on their responsibilities, achievement of annual established goals and the Company's overall annual and longer-term performance. 13 15 The primary components of the Company's executive compensation program are: (i) base salaries, (ii) annual cash incentive opportunities, and (iii) long-term incentive opportunities in the form of stock-based awards. Each of these primary components of compensation is discussed below. Base Salaries. Base salaries for each of the Company's executive officers are generally established annually by the Compensation Committee using as a guide one or more widely accepted salary evaluation systems -- taking into account individual and Company performance and competitive, inflationary, and internal equity considerations. With respect to the $600,000 base salary established for Mr. Reid in June 1996 for fiscal 1997, which is the same base salary as paid to Mr. Reid in fiscal 1996, the Compensation Committee took into account Mr. Reid's overall responsibilities, as well as a review of the compensation paid to chief executive officers of comparable companies. Annual Cash Incentives. All executives of the Company are eligible to receive annual cash bonus awards based on a set percentage of base salary with a maximum bonus attainable equal to 50% of base salary. Each year the Company's Board of Directors, usually at the Board meeting held in August, sets a target goal for maximum bonus awards based on the Company's earnings per common share. Actual bonus awards paid are proportional to the percentage of the target goal actually attained. The bonus target in fiscal year 1997 was $2.25 (exclusive of the charge taken by the Company in the third quarter of fiscal 1997 in respect of the closure of two automotive parts plants) per common share. Since earnings per common share, as adjusted for the bonus awards, for fiscal 1997 were $2.33 (exclusive of special charges), the bonus award for fiscal 1997 to each executive officer of the Company, including Mr. Reid, was equal to 50% of base salary. Long-Term Stock Incentives. The Company's restricted stock plan permits the Compensation Committee to award restricted shares, which awards are designed to attract and retain well-qualified personnel for positions of substantial responsibility with the Company and its subsidiaries. Awards of restricted Common Shares may be made by the Compensation Committee in its sole discretion. Awards of 62,500 and 125,000 restricted Common Shares (adjusted to reflect a 5-for-4 stock split of the Company's Common Shares effected in the form of a stock dividend paid on June 3, 1993 to shareholders of record on May 20, 1993) were made in fiscal 1992 to Messrs. Reid and Zampetis, respectively. An additional award of 12,500 shares was made to Mr. Reid on July 1, 1997. In fiscal 1995, Mr. Keys was awarded 50,000 restricted Common Shares, and Mr. Mesnel was awarded 25,000 restricted Common Shares. See "Table I -- Summary Compensation Table" set forth on page 7 of this proxy statement for a discussion of the terms pursuant to which the restricted Common Shares awarded to Messrs. Reid, Zampetis, Keys, and Mesnel are earned and subject to forfeiture. Other than the foregoing awards, the only award made under the Plan was made to Mr. Roudebush, who became employed by the Company on July 1, 1997, and was elected Vice Chairman and Chief Executive Officer of the Company on July 24, 1997. The award to Mr. Roudebush is described in this proxy statement under "Certain Employment Agreements" on page 9. The Company's stock option plans permit the Compensation Committee, in its sole discretion, to grant stock option awards which are designed to encourage and enable key management employees of the Company to acquire a larger stock ownership and personal financial interest in the Company. The Compensation Committee believes that stock option awards subject to periodic vesting enable the Company to attract and retain qualified individuals for service with the Company. Individual option grants, with exercise prices at least equal to the fair market value of the Company's Common Shares on the date of grant, are determined by the Compensation Committee based on the executive's current performance, potential for future responsibility, and the impact of the particular executive officer's performance on the operational results of the Company. Stock option awards during the last fiscal year to each of the Chief Executive Officer and the other four most highly compensated executive officers of the Company are set forth in "Table II -- Option Grants in Last Fiscal Year" on page 9 of this proxy statement. The award to Mr. Roudebush is described in this proxy statement under "Certain Employment Agreements" on page 9. Alan E. Riedel, Chairman Edward B. Brandon Malcolm R. Myers Leigh H. Perkins 14 16 PROPOSAL ONE: 1997 EMPLOYEE STOCK OPTION PLAN The Board of Directors of the Company, at a meeting of the Board on August 18, 1997, approved The Standard Products Company 1997 Employee Stock Option Plan (the "1997 Stock Option Plan") and directed that the 1997 Stock Option Plan be submitted to the shareholders for approval at the annual meeting. The primary purpose of the 1997 Stock Option Plan is to encourage and enable key management employees of the Company and its subsidiaries to acquire a larger stock ownership and personal financial interest in the Company and thereby provide additional incentive for the promotion of the welfare of the Company and for the continued service of the participants with the Company. A copy of the 1997 Stock Option Plan is attached to this proxy statement as Exhibit A. THE FOLLOWING DESCRIPTION OF THE 1997 STOCK OPTION PLAN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO EXHIBIT A. Description of the Plan Shareholder approval of the 1997 Stock Option Plan is being sought to qualify the 1997 Stock Option Plan as an incentive stock option plan under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), in order for awards of options to be eligible for exemption from the dollar limitation on deductions imposed by Section 162(m) of the Code and to satisfy a condition of the Plan requiring shareholder approval of the Plan. Under the 1997 Stock Option Plan, awards of options to purchase Common Shares may be made to key employees of the Company or its subsidiaries. The options provided for under the 1997 Stock Option Plan may be either incentive stock options intended to qualify for favorable tax treatment under Section 422 of the Code or nonqualified stock options which do not qualify for such treatment. The aggregate number of Common Shares with respect to which awards may be made under the 1997 Stock Option Plan is 350,000. Such maximum number of Common Shares is subject to appropriate adjustment upon the occurrence of certain events, including stock dividends, recapitalizations, mergers, reorganizations, consolidations, stock splits, stock consolidations or certain other changes in the Common Shares. Common Shares which are not purchased under an option which has terminated or lapsed may be used for the further grant of options under the 1997 Stock Option Plan. The 1997 Stock Option Plan is administered by the Compensation Committee, each member of which is a "Non-Employee Director" (as defined in Rule 16b-3 promulgated under Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act")) and an "outside director" within the meaning of Section 162(m) of the Code. Subject to the terms of the 1997 Stock Option Plan, the Compensation Committee has sole authority to determine and designate persons to whom awards are to be made under the 1997 Stock Option Plan and the nature and terms, including vesting schedules, of such awards. Options granted under the 1997 Stock Option Plan may not be exercised more than ten years after the date of grant. The aggregate fair market value (determined on the date of grant) of the Common Shares subject to incentive stock options under all option plans of an employer corporation (and its parent and subsidiary corporations) which are exercisable for the first time by an employee in any calendar year may not exceed $100,000. In no event shall there be granted under the 1997 Stock Option Plan to any employee options to purchase more than 250,000 Common Shares. The Compensation Committee, in its sole discretion, will determine the vesting schedule of each option granted under the 1997 Stock Option Plan; provided, however, that options may not be exercised during the first year after they are granted. The 1997 Stock Option Plan provides that the option price shall not be less than 100% of the fair market value of the Common Shares on the date such option is granted or 110% of such fair market value in the case of an incentive stock option granted to an employee holding more than 10% of the Company's outstanding Common Shares on the date of grant. The purchase price of the Common Shares subject to options must be paid in full by an optionee at the time of exercise of such option in either cash or Common Shares. 15 17 No cash consideration will be received by the Company for granting options under the 1997 Stock Option Plan. Options will be granted in consideration of the services rendered or to be rendered to the Company by the employees receiving the options. Options will be granted to key management employees of the Company or its subsidiaries who are in a position to contribute substantially to the growth and success of the Company and its subsidiaries. No director who is not an employee of the Company or one of its subsidiaries will be eligible to receive options. TAX CONSEQUENCES With respect to nonqualified stock options, in general, for federal income tax purposes under present law: (i) The grant of a nonqualified stock option, by itself, will not result in income to the optionee. (ii) Except as provided in (v) below, the exercise of a nonqualified stock option (in whole or in part, according to its terms) will result in ordinary income to the optionee at that time in an amount equal to the excess (if any) of the fair market value of the shares on the date of exercise over the option price. (iii) Except as provided in (v) below, the tax basis of the shares acquired upon exercise of a nonqualified stock option, which will be used to determine the amount of any capital gain or loss on a future taxable disposition of such shares, will be the fair market value of the shares on the date of exercise. (iv) No deduction will be allowable to the employer corporation upon the grant of a nonqualified stock option, but upon the exercise of a nonqualified stock option, a deduction will in general be allowable to the employer corporation at that time in an amount equal to the amount of ordinary income realized by the optionee exercising such option, provided withholding and/or reporting requirements are satisfied. (v) With respect to the exercise of a nonqualified stock option and the payment of the option price by the delivery of Common Shares, to the extent that the number of shares received does not exceed the number of shares surrendered, no taxable income will be realized by the optionee at that time, the tax basis of the shares received will be the same as the tax basis of the shares surrendered, and the holding period of the optionee in the shares received will include his holding period in the shares surrendered. To the extent that the number of shares received exceeds the number of shares surrendered, ordinary income will be realized by the optionee at the time in the amount of the fair market value of such excess shares, the tax basis of such excess shares will be equal to the fair market value of such shares at the time of exercise, and the holding period of the optionee in such shares will begin on the date such shares are transferred to the optionee. With respect to incentive stock options, in general, for federal income tax purposes under present law: (i) Neither the grant nor the exercise of an incentive stock option, by itself, will result in income to the optionee; however, the excess of the fair market value of the shares at the time of exercise over the option price is (unless there is a disposition of the shares acquired upon exercise of an incentive stock option in the taxable year of exercise) includable in alternative minimum taxable income which may, under certain circumstances, result in alternative minimum tax liability to the optionee. (ii) If the shares acquired upon exercise of an incentive stock option are disposed of in a taxable transaction after the later of two years from the date on which the option is granted or one year from the date on which such shares are transferred to the optionee, long-term capital gain or loss will be realized by the optionee in an amount equal to the difference between the amount realized by the optionee and the optionee's basis which, except as provided in (v) below, is the option price. (iii) Except as provided in (v) below, if the shares acquired upon the exercise of an incentive stock option are disposed of within the two-year period from the date of grant or the one-year period after the transfer of the shares to the optionee (a "disqualifying disposition"): (a) Ordinary income will be realized by the optionee at the time of such disqualifying disposition in the amount of the excess, if any, of the fair market value of the shares at the time of 16 18 such exercise over the option price, but not in an amount exceeding the excess, if any, of the amount realized by the optionee over the option price. (b) Short-term or long-term capital gain will be realized by the optionee at the time of any such disqualifying disposition in an amount equal to the excess, if any, of the amount realized over the fair market value of the shares at the time of such exercise. (c) Short-term or long-term capital loss will be realized by the optionee at the time of any such disqualifying disposition in an amount equal to the excess, if any, of the option price over the amount realized. (iv) No deduction will be allowed to the employer corporation with respect to incentive stock options granted or shares transferred upon exercise thereof, except that if a disqualifying disposition is made by the optionee, the employer corporation will in general be entitled to a deduction in the taxable year in which the disqualifying disposition occurred in an amount equal to the amount of ordinary income realized by the optionee making such disposition, provided withholding and/or reporting requirements are satisfied. (v) With respect to the exercise of an incentive stock option and the payment of the option price by the delivery of Common Shares, to the extent that the number of shares received does not exceed the number of shares surrendered, no taxable income will be realized by the optionee at that time, the tax basis of the shares received will be the same as the tax basis of the shares surrendered, and the holding period (except for purposes of the one-year period referred to in (iii) above) of the optionee in shares received will include this holding period in the shares surrendered. To the extent that the number of shares received exceeds the number of shares surrendered, no taxable income will be realized by the optionee at that time, such excess shares will be considered incentive stock option stock with a zero basis, and the holding period of the optionee in such shares will begin on the date such shares are transferred to the optionee. If the shares surrendered were acquired as the result of the exercise of an incentive stock option and the surrender takes place within two years from the date the option relating to the surrendered shares was granted or within one year from the date of such exercise, the surrender will result in a disqualifying disposition and the optionee will realize ordinary income at that time in the amount of the excess, if any, of the fair market value at the time of exercise of the shares surrendered over the basis of such shares. If any of the shares received are disposed of in a disqualifying disposition, the optionee will be treated as first disposing of the shares with a zero basis. The Board of Directors may at any time amend the 1997 Stock Option Plan or any part thereof as it shall deem advisable; provided, however, that the Board of Directors shall obtain any approval by shareholders which is necessary pursuant to Sections 422 and 162(m) of the Code. No amendment may be made in any option then outstanding under the 1997 Stock Option Plan, however, which would impair the rights of the optionee without the consent of such optionee. VOTE REQUIRED FOR APPROVAL The affirmative vote of the holders of a majority of the Common Shares present at the annual meeting is required to adopt this proposal. THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE 1997 STOCK OPTION PLAN. 17 19 PROPOSAL TWO: 1997 RESTRICTED STOCK PLAN The Board of Directors of the Company, at a meeting of the Board on August 18, 1997, approved The Standard Products Company 1997 Restricted Stock Plan (the "Restricted Stock Plan") and directed that the Restricted Stock Plan be submitted to the shareholders for approval at the annual meeting. The primary purposes of the Restricted Stock Plan are to attract and retain well-qualified personnel for positions of substantial responsibility with the Company and to provide incentives to such persons to enhance the long-term welfare of the Company and to continue in its service, through the award of Common Shares over an extended period of time, the number of which Common Shares shall generally depend on the earnings performance of the Company over a period of years. A copy of the Restricted Stock Plan is attached to this proxy statement as Exhibit B. THE FOLLOWING DESCRIPTION OF THE RESTRICTED STOCK PLAN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO EXHIBIT B. DESCRIPTION OF THE PLAN The Plan provides for the grant of awards of Common Shares to select officers and key employees of the Company. An award of Common Shares to an employee is evidenced by a written agreement between the Company and the employee. Such agreement, subject to the provisions of the Restricted Stock Plan, will specify the performance goals and other conditions to which an award of Common Shares is subject, and the period of time that awarded shares will be subject to forfeiture. Awarded Common Shares will be issued in the name of the employee, delivered to the employee and held by the Company subject to forfeiture. The award of Common Shares to an employee under the Restricted Stock Plan does not entitle such employee to, or disqualify him from, a further award of Common Shares at a later date. The aggregate number of Common Shares that may be awarded under the Restricted Stock Plan is 150,000. In no event will there be awarded under the Restricted Stock Plan any more than an aggregate number of 100,000 Common Shares to any one individual. The Committee may adjust the number and kind of Common Shares available for distribution and subject to forfeiture to prevent dilution or enlargement of rights in the event of a change in the number or kind of outstanding shares of the Company by reason of recapitalization, merger, consolidation, reorganization, separation, liquidation, stock split, stock dividend, combination of shares or any other change in the corporate structure or shares of capital stock in the Company. Common Shares issued under the Restricted Stock Plan which are subject to forfeiture are non-transferable but holders of such shares have all other rights of a shareholder, including the right to vote such shares and to receive dividends. The Committee may provide in the written agreement with the employee that the forfeiture period with respect to awarded Common Shares may lapse upon an employee's death or disability or upon a "Change in Control" of the Company (as such term is defined in the Restricted Stock Plan). Any Common Shares awarded under the Restricted Stock Plan which are subject to forfeiture (i) may not be sold, transferred, assigned, pledged, hypothecated, anticipated, alienated, encumbered or changed, whether voluntarily, involuntarily or by operation of law, and (ii) shall be forfeited to the Company in the event the employee to whom such Common Shares were awarded voluntarily terminates his employment with the Company during the period of time, if any, specified by the Committee. Absence or leave approved by the Committee is not considered an interruption of service or employment for purposes of the Restricted Stock Plan. At the time the award is made and the certificates representing the Common Shares are delivered to the employee and held by the Company, the employee shall execute one or more blank stock powers and deliver the same to the Company so that shares which are forfeited may be cancelled. TAX CONSEQUENCES An employee is deemed to have ordinary income in an amount equal to the fair market value of the awarded Common Shares in the taxable year in which the awarded Common Shares are no longer subject to forfeiture unless, within 30 days of when such Common Shares are awarded, an employee makes an election 18 20 under Section 83(b) of the Code to include in income the fair market value (determined without regard to any restrictions other than those which by their terms will never lapse) of the shares on the date of award. The employer corporation is entitled to deductions for federal income tax purposes in the same amount in the employer corporation's taxable year in which the employee has income if the employer corporation deducts and withholds appropriate federal withholding tax. VOTE REQUIRED FOR APPROVAL The affirmative vote of the holders of Common Shares entitling such holders to exercise a majority of the voting power of the Company is required to adopt this proposal. THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE PROPOSAL TO APPROVE THE RESTRICTED STOCK PLAN. SHAREHOLDER PROPOSALS FOR 1998 ANNUAL MEETING Any shareholder proposals intended to be presented at the Company's 1998 Annual Meeting of Shareholders must be received by the Company at 2401 South Gulley Road, Dearborn, Michigan 48124, Attention: Corporate Secretary, on or before May 16, 1998, for inclusion in the Company's proxy statement and form of proxy relating to the 1998 Annual Meeting of Shareholders. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and owners of more than 10% of the Company's Common Shares, to file with the Securities and Exchange Commission (the "SEC") and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of Common Shares and other equity securities of the Company. Executive officers, directors and owners of more than 10% of the Common Shares are required by SEC regulations to furnish the Company with copies of all forms they file pursuant to Section 16(a). To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required during the fiscal year ended June 30, 1997, all Section 16(a) filing requirements applicable to its executive officers, directors and greater-than-10% beneficial owners were complied with. OTHER MATTERS Copies of the Company's Annual Report on Form 10-K as submitted to the Securities and Exchange Commission are available to shareholders without charge upon written request. Please address your request to Mr. Donald R. Sheley, Jr., Vice President, Finance at the Company's Corporate Headquarters, 2401 South Gulley Road, Dearborn, Michigan 48124. The Company has not selected its independent public accountants for the current fiscal year. This selection will be made later in the year by the Board of Directors. Representatives of Arthur Andersen LLP, which served as the Company's independent public accountants during the fiscal year ended June 30, 1997, are expected to be present at the annual meeting with the opportunity to make a statement if they so desire and to be available to respond to appropriate questions. If the enclosed proxy is executed and returned to the Company, the persons named in it will vote the shares represented by such proxy at the meeting. The form of proxy permits specification of a vote for the election of directors as set forth under "Election of Directors" above, the withholding of authority to vote in the election of directors, or the withholding of authority to vote for one or more specified nominees. 19 21 Where a choice has been specified in the proxy, the shares represented will be voted in accordance with such specification. If no specification is made, such shares will be voted at the meeting to elect directors as set forth under "Election of Directors" above and FOR Proposals One and Two above. Under Ohio law and the Company's Second Amended and Restated Articles of Incorporation, as amended, broker non-votes and abstaining votes will not be counted in favor of or against any nominee. Under Ohio law and the Company's Second Amended and Restated Articles of Incorporation, as amended, broker non-votes and abstaining votes with respect to Proposals One and Two will in effect be votes against such proposal. If any other matters shall properly come before the meeting, the persons named in the proxy will vote thereon in accordance with their judgment. Management does not know of any other matters which will be presented for action at the meeting. By order of the Board of Directors, Richard N. Jacobson RICHARD N. JACOBSON General Counsel and Secretary Dated: September 16, 1997 20 22 EXHIBIT A THE STANDARD PRODUCTS COMPANY 1997 EMPLOYEE STOCK OPTION PLAN 1. INCENTIVE PURPOSE. The purpose of The Standard Products Company 1997 Employee Stock Option Plan (the "Plan") is to encourage and enable key management employees of The Standard Products Company, an Ohio corporation (the "Company"), and its subsidiaries to acquire a larger stock ownership and personal financial interest in the Company and thereby provide additional incentive for the promotion of the welfare of the Company and for the continued service of the participants with the Company. 2. AMOUNT OF STOCK. Upon the approval of the Plan by the shareholders, there shall be reserved, allotted and set aside for issuance under the Plan 350,000 of the presently authorized but unissued Common Shares, $1.00 par value, of the Company (the "Common Shares"), subject to Paragraph 13. As set forth in Paragraph 19 of the Plan, all of such options may be granted as incentive stock options, all of such options may be granted as nonqualified stock options, or such options may be granted as both incentive stock options and nonqualified stock options. 3. ADMINISTRATION. The Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors which shall consist of not less than three members, none of whom are employees of the Company or its subsidiaries or are eligible to receive an incentive or nonqualified stock option while serving as a member of the Committee, and each of whom shall be a "Non-Employee Director" within the meaning of Rule 16b-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, or any successor definition adopted by the Securities and Exchange Commission, and an "outside director" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The Board may also select one or more qualified Directors to serve as alternate members of the Committee, who may take the place of any absent member or members at any meeting of the Committee. The Committee shall be authorized to administer the Plan in accordance with its terms and may adopt, amend or repeal such rules and regulations as the Committee may desire concerning the conduct of its affairs. The interpretation and construction by the Committee of any provision of the Plan or of any stock option granted under it and the administration of the Plan by the Committee shall be final. No member of the Board of Directors or the Committee shall be liable for any action taken or omitted or any determination made in good faith in connection with the Plan. 4. PARTICIPATION. Subject to the limitations herein set forth, the Committee may grant incentive or nonqualified stock options from time to time during the period ending August 17, 2007, to such key management employees of the Company or any subsidiary thereof as in the opinion of the Committee will best further the interests of the Company and achieve the purposes of the Plan. No option shall be granted to any individual who, at the time the option is granted: (i) Shall not be an employee of the Company or a subsidiary (as defined in Section 424(f) of the Code) thereof, or (ii) Shall be a member of the Committee. 5. THE OPTION PRICE. Except as provided in Paragraph 7, the option price per Common Share to be paid upon the exercise of any stock option, as determined by the Committee, shall be not less than the fair market value per Common Share at the time the option is granted. Such fair market value shall be the first sale price per Common Share (or in the event there are no sales, then the average of the opening bid and asked prices per Common Share) on the New York Stock Exchange on the date on which the option is granted. 6. LENGTH OF OPTION. Except as otherwise provided, each option shall be exercisable no later than ten (10) years from the date it is granted. Each option granted to an employee, who at the time the incentive stock option is granted to him, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the employee corporation or of its parent or subsidiary corporation under the attribution rules set forth in Section 424(d) of the Code, shall be exercisable no later than five (5) years from the date it is granted. The Committee, in its sole discretion, will determine the vesting schedule of each option granted A-1 23 under this Plan; provided, however, that no option may be exercised prior to one year from the date it is granted. Except as provided in Paragraphs 8, 9 and 10 hereof, no option may be exercised unless the optionee is at the time of such exercise in the employ of the Company or of a subsidiary thereof and shall have been continuously so employed since the granting of his option. Absence or leave approved by the Committee in accordance with applicable provisions of the Code and the regulations promulgated thereunder shall not be considered an interruption of employment for purposes of the Plan. 7. LIMITATION ON GRANTING OF OPTIONS. The Committee shall not grant incentive stock options if the aggregate fair market value (determined at the time the option is granted) of Common Shares with respect to which incentive stock options are exercisable for the first time by an employee during any calendar year (under all option plans of his employer corporation and its parent and subsidiary corporations) shall exceed $100,000. In no event shall there be granted under the 1997 Stock Option Plan or any other stock option plan of the Company to any employee in any calendar year options to purchase more than 250,000 Common Shares. If any employee, at the time an incentive stock option is granted to him, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the employer corporation or its parent or subsidiary corporations (taking into account the attribution of stock ownership rules set forth in Section 424(d) of the Code), the option price per Common Share to be paid upon the exercise of such incentive stock option shall not be less than one hundred and ten percent (110%) of the fair market value per Common Share at the time the incentive stock option is granted, as determined in accordance with Paragraph 5. 8. TERMINATION OF EMPLOYMENT. If an optionee shall cease to be employed by the Company or a subsidiary thereof on account of normal retirement, early retirement, or disability, either physical or mental, he may exercise his option to the extent that he was entitled to exercise it at the date of such cessation or for such greater number of shares subject to the option as to which the Committee may authorize an acceleration of time of exercise under the option. If such cessation of employment is for any reason other than death or permanent and total disability (within the meaning of Section 22 (e)(3) of the Code), said optionee may exercise his option to the same extent, but only within the three months next succeeding such cessation of employment; provided, however, that in the event of an uninterrupted transfer of employment to or between the Company and/or any parent or subsidiary corporation of the Company, such option shall continue in effect until the employee ceases to be employed by all such affiliated corporations. Neither the Plan, nor the granting of any option thereunder, will confer upon any optionee any right with respect to continuance of employment by the Company, or any subsidiary thereof, nor will it interfere in any way with his right, or the employer's right, to terminate his employment at any time. 9. DEATH OF OPTIONEE. In the event of the death of an optionee while in the employ of the Company or a subsidiary thereof, the options theretofore granted to him shall be exercisable only within one year next succeeding such death, or within the balance of the period of the option if less than one year, and then only by the administrator or executor of his estate and to the extent that the deceased optionee was entitled to exercise it at the date of his death. 10. DISABILITY OF OPTIONEE. In the event of the permanent and total disability (within the meaning of Section 22(e)(3) of the Code) of the optionee while in the employ of the Company or a subsidiary thereof, the options theretofore granted to him shall be exercisable only within the one-year period next succeeding his cessation of employment or within the balance of the period of the option if less than one year. 11. NONASSIGNABILITY. Each option shall by its terms provide that it is not transferable by the optionee other than by will or the laws of descent and distribution and that it is exercisable during his lifetime, only by the optionee or by the optionee's duly authorized legal representative if the optionee is unable to exercise his option as a result of the optionee's disability, but only if, and to the extent, permitted by Section 422 of the Code, and after his death, only by his administrator or executor, as above permitted; provided, however, that if so provided in the instrument evidencing the Option, the Compensation Committee may permit any optionee to transfer the Option during his lifetime to one or more members of his family or to one or more trusts for the benefit of one or more members of his family, provided that no consideration is paid for the transfer and that such transfer would not result in the loss of any exemption under Rule 16b-3 for any Option that the A-2 24 Compensation Committee does not permit to be so transferred. The transferee of an Option shall be subject to all restrictions, terms, and conditions applicable to the Option prior to its transfer, except that the Option shall not be further transferable inter vivos by the transferee. The Compensation Committee may impose on any transferable Option and on the Common Shares to be issued upon the exercise of the Option such limitations and conditions as the Committee deems appropriate. 12. METHOD OF EXERCISE. Options shall be exercised in blocks of fifty (50) or more shares. Exercise of options shall be by the execution by the person entitled at the time to exercise the options of a written notice of such exercise and delivery thereof to the Company at its principal office in Dearborn, Michigan, which notice shall specify the number of shares being purchased. In the case of Common Shares purchased under options (unless such Common Shares have in either case been registered under the Securities Act of 1933 (the "1933 Act")), the written notice shall contain a representation in form approved by the Company that such Common Shares are being acquired not with a view to resale or distribution and will not be sold or otherwise transferred except upon compliance with the 1933 Act and the Rules and Regulations issued thereunder. In the case of the exercise of an option, such notice shall be accompanied by payment in full of the option price of the Common Shares. Payment of the option price with respect to any stock option may be made in cash or in Common Shares valued at the closing sale price per Common Share (or in the event there are no sales, then the average of the closing bid and asked prices per Common Share) on the New York Stock Exchange on the last trading day preceding the date on which the option is exercised. Upon receipt of such notice and payment, the Company will promptly issue and deliver its certificate for the number of Common Shares being purchased under options. No person, estate or other entity shall have any of the rights of a shareholder with reference to Common Shares subject to an option until a certificate or certificates for the shares have been delivered. An option granted under this Plan may be exercised for any lesser number of Common Shares than the full amount for which it could be exercised subject to the first two sentences of this Paragraph. Such a partial exercise of an option shall not affect the right to exercise the option from time to time in accordance with this Plan for the remaining Common Shares subject to the option. 13. ADJUSTMENTS. In the event of any change in the number or kind of outstanding shares of the Company by reason of recapitalization, merger, consolidation, reorganization, separation, liquidation, stock split, stock dividend, combination of shares or any other change in the corporate structure or shares of stock of the Company, the Committee in its discretion shall make an appropriate adjustment in the number and kind of shares for which options may thereafter be granted both in the aggregate and as to each optionee, as well as in the number and kind of shares subject to options theretofore granted and the option price payable upon exercise of such options. 14. REALLOCATION OF UNUSED SHARES. Shares which are not purchased under options which terminate or lapse may be used for the further grant of options under the Plan. 15. EXPIRATION AND TERMINATION OF THE PLAN. Options may be granted under the Plan at any time up to and including August 17, 2007, on which date the Plan will expire, except as to options then outstanding under the Plan, which options shall remain in effect until they have been exercised or have expired. 16. AMENDMENT AND REVOCATION. The Board of Directors shall have the right to alter, amend or revoke the Plan or any part thereof at any time and from time to time; provided, however, that the Board of Directors shall obtain any approval by shareholders which is necessary for continued applicability of Rule 16b-3 of the Securities and Exchange Commission; and provided, further, that, without the consent of the optionees, no change may be made in any option theretofore granted which will impair the rights of such optionees. 17. COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES. a. No option shall be exercisable and no Common Shares will be delivered under this Plan except in compliance with all applicable federal and state laws and regulations including, without limitation, compliance with the rules of all domestic stock exchanges on which the Company's Common Shares may be listed. Any share certificate issued to evidence Common Shares may bear legends and statements the Committee shall deem advisable to assure compliance with federal and state laws and regulations. No option shall be exercisable, and no Common Shares will be delivered under this Plan, until the Company has obtained A-3 25 consent or approval from regulatory bodies, federal or state, having jurisdiction over such matters as the Committee may deem advisable. b. In the case of the exercise of an option by a person or estate acquiring the right to exercise the option by bequest or inheritance, the Committee may require reasonable evidence as to the ownership of the option and may require such consents and releases of taxing authorities as it may deem advisable. 18. WITHHOLDING OF TAXES. No later than the date as of which an amount first becomes includable in the gross income of an optionee for federal income tax purposes with respect to any option granted under the Plan, the optionee shall pay to the Company, or make arrangements satisfactory to the Committee regarding the payment of, any federal, state or local taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Committee, withholding obligations may be settled with Common Shares, including Common Shares that are a part of the option that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and its subsidiaries and affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due the optionee. 19. TYPES OF OPTIONS. Options granted under the Plan may be: (i) options which are intended to qualify and are identified as incentive stock options under Section 422 of the Code; (ii) options which are not intended clearly to qualify under Section 422 of the Code and are clearly identified as options which are not to be treated as incentive stock options under Section 422 of the Code; or (iii) both of the foregoing. 20. GOVERNING LAW. The Plan, all options and action taken thereunder and any agreements relating thereto, shall be governed by and construed in accordance with the laws of the State of Ohio. A-4 26 EXHIBIT B THE STANDARD PRODUCTS COMPANY 1997 RESTRICTED STOCK PLAN 1. INCENTIVE PURPOSE. The purposes of The Standard Products Company 1997 Restricted Stock Plan (the "Plan") are to attract and retain well qualified personnel for positions of substantial responsibility with the Company and its subsidiaries and to provide incentives to such persons to enhance the long-term welfare of the Company and to continue in its service through the award of Common Shares which are generally earned over an extended period of time. 2. DEFINITIONS. For purposes hereof, the following words and phrases shall have the meanings indicated. (a) "Change in Control" means the occurrence of any of the following events: (1) When any "person," as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act, but excluding the Company and any Subsidiary and any employee benefit plan sponsored or maintained by the Company or any Subsidiary (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding capital stock; provided, however, that with respect to any director who, on the effective date of this Plan, is the beneficial owner or has the option to acquire five percent or more of such capital stock outstanding on such effective date, capital stock so owned or acquired pursuant to any such options shall not be counted in determining such 20% or more combined voting power; (2) when, during any period of 24 consecutive months during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board of Directors of the Company (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof; provided, however, that a director who was not a director at the beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this Section 2(a)(2); or (3) the completion of a transaction requiring shareholder approval for the acquisition of the Company by an entity other than the Company or a Subsidiary through purchase of assets, or any merger of the Company into another company (unless the persons who were shareholders of the Company immediately prior to such transaction own more than 70% of the voting stock and value of the surviving company immediately following such merger in substantially the same proportions as they owned immediately prior to the merger). (b) "Committee" means the Compensation Committee of the Board of Directors of the Company. (c) "Common Shares" means Common Shares, $1 par value per share, of the Company. (d) "Company" means The Standard Products Company. (e) "Disability" means disability as determined under procedure established by the Committee for purposes of the Plan. (f) "Employee" means any employee of the Company or a Subsidiary who is an officer or other key employee thereof. (g) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (h) "Plan" means The Standard Products Company 1997 Restricted Stock Plan, as set forth herein and as the same subsequently may be amended or modified. B-1 27 (i) "Subsidiary" means a corporation which is a wholly-owned subsidiary, directly or indirectly, of the Company. (j) Whenever appropriate, words used herein in the singular may be read as the plural and the plural may be read as the singular. (k) Masculine pronouns used herein shall be deemed to refer both to women and men. 3. AMOUNT OF STOCK. Upon the approval of the Plan by the shareholders, there shall be reserved, allotted or set aside for issuance under the Plan 150,000 of the presently authorized but unissued Common Shares of the Company, subject to paragraph 13. Any Common Shares issued hereunder may consist, in whole or in part, of authorized and unissued Common Shares or treasury shares. 4. ADMINISTRATION. The Plan shall be administered by the Committee, each member of which is a "Non-Employee Director," as defined in Rule 16b-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Exchange Act"), and an "outside director" within the meaning of Section 162(m) of the Code. The Board may also select one or more Non-Employee Directors to serve as alternate members of the Committee, who may take the place of any absent member or members at any meeting of the Committee. The Committee shall administer the Plan in accordance with its terms and may adopt, amend and repeal such rules and regulations as the Committee may desire concerning the conduct of its affairs. The interpretation and construction by the Committee of any provision of the Plan or of any stock award granted under it and the administration of the Plan by the Committee shall be final. No member of the Board of Directors or the Committee shall be liable for any action taken or omitted or determination made in good faith in connection with the Plan. Subject to the terms of the Plan, the Committee shall determine the Employees to whom Common Shares shall be awarded under the Plan, the number of Common Shares to be awarded to Employees under the Plan (which number shall not exceed 100,000 Common Shares over the term of the Plan), the performance goals, terms and other conditions, if any, of the award, the period of time that awarded shares are subject to forfeiture as provided in paragraph 8 below and the statements or legends to be placed on certificates representing the Common Shares issued under the Plan. 5. ELIGIBILITY. Common Shares may be awarded under the Plan to Employees subject to the attainment of such performance goals or fulfillment of such other conditions, if any, as the Committee in its sole discretion shall determine. No member of the Committee shall be eligible for an award of Common Shares under the Plan while serving as a Committee member. 6. TERMS AND CONDITIONS OF AWARD. An award of Common Shares to an Employee shall be evidenced by a written agreement between the Company and the Employee. Such agreement shall specify the performance criteria, such as earnings per share, stock price, or return on equity, terms and other conditions to which an award of Common Shares is subject, if any, and the period of time, if any, that awarded shares are subject to forfeiture, subject in any event to the provisions of this Plan. The award of Common Shares to an Employee under the Plan shall not entitle such employee to, or disqualify him from, a further award of Common Shares at a later date. 7. SECURITIES LAWS AND SECURITIES EXCHANGE RESTRICTIONS ON COMMON SHARES AWARDED UNDER THE PLAN. In the case of all Common Shares awarded under the Plan (unless such Common Shares have been registered under the Securities Act of 1933 (the "1933 Act"), the written agreement evidencing the award of Common Shares shall contain a representation in form approved by the Committee and the Company that such Common Shares are being acquired not with a view to resale or distribution and will not be sold or otherwise transferred by the employee to whom the award is made, except in compliance with the 1933 Act and the rules and regulations thereunder. The Committee may impose such other restrictions on the Common Shares as it may deem advisable, including, without limitation, any restrictions necessary to meet the requirements of the New York Stock Exchange or any other stock exchange or quotation system of a national securities association under which the Common Shares or shares of the same class are then listed and traded, and any Blue Sky or state securities laws applicable to the Common Shares. Share certificates issued in connection with awards of Common Shares under the Plan shall bear such legends and statements as the Committee shall deem advisable to assure compliance with federal and state securities laws and regulations. B-2 28 8. FORFEITURE OF COMMON SHARES. Common Shares awarded to an Employee under the Plan shall be subject to forfeiture for such period of time as shall be determined by the Committee and set forth in the written agreement evidencing the award. The Committee may provide in the written agreement that the forfeiture period with respect to awarded Common Shares may lapse upon an Employee's death, Disability, Change in Control of the Company, or such other event as determined by the Compensation Committee. Any Common Shares awarded under the Plan which are subject to forfeiture (a) shall not be sold, transferred, assigned, pledged, hypothecated, anticipated, alienated, encumbered or charged, whether voluntarily, involuntarily, or by operation of law, and (b) shall be forfeited to the Company in the event an Employee to whom such Common Shares were awarded voluntarily ceases to be an Employee during the period of time, if any, specified by the Committee. Absence or leave approved by the Committee shall not be considered an interruption of service or employment for purposes of the Plan. Common Shares awarded under the Plan will be issued in the name of Employee to whom awarded and held by the Company for the Employee subject to forfeiture for such period of time as the Committee may determine. At the time the award is made and the certificates representing the Common Shares delivered to the Employee and held by the Company, the Employee shall execute one or more blank stock powers and deliver the same to the Company so that any shares which are forfeited may be cancelled. 9. TERM OF PLAN. This Plan shall continue until terminated by the Committee. The Committee shall have the unrestricted right to amend, modify, suspend or terminate the Plan at any time. 10. SHAREHOLDER RIGHTS. Employees to whom awards of Common Shares have been granted under the Plan shall have all rights of shareholders with respect to the Common Shares which are the subject of such awards, subject to the provisions of paragraph 8 hereof. 11. NO ENLARGEMENT OF EMPLOYEE RIGHTS. The award of Common Shares under the Plan to an Employee shall not confer any right to the Employee to continue in the employ of the Company or of a Subsidiary and shall not restrict or interfere in any way with the right of his employer to terminate his employment, with or without cause, at any time. 12. WITHHOLDING OF TAXES. The Committee may require, as a condition to the award of Common Shares to an Employee under the Plan, that such Employee pay to the Company, in cash, any federal, state or local taxes of any kind required by law to be withheld with respect to the award to such Employee of Common Shares. The Company, to the extent permitted or required by law, shall have the right to deduct, from any payment of any kind otherwise due to such Employee, any federal, state or local taxes of any kind required by law to be withheld with respect to the award of Common Shares under the Plan to such Employee. In order to facilitate payment of applicable withholding taxes, an employee to whom an award of Common Shares has been granted may request, subject to the Committee's sole discretion, the Company to purchase an amount of Common Shares equal to the federal and state withholding tax, if any, payable in the taxable year in which the awarded Common Shares are no longer subject to forfeiture; provided that the proceeds of the Company's purchase shall be used to pay such withholding taxes and that no purchase shall be made if such purchase would violate a rule or regulation promulgated under the 1934 Act or the 1933 Act. 13. ADJUSTMENT OF SHARES. The Committee may adjust the number and kind of Common Shares, both in the aggregate and as to each grantee, available for distribution and subject to forfeiture to prevent dilution or enlargement of rights in the event of a change in the number or kind of outstanding shares of the Company by reason of recapitalization, merger, consolidation, reorganization, separation, liquidation, stock splits, stock dividend, combination of shares or any other change in the corporate structure or Common Shares of the Company. B-3 29 THE STANDARD PRODUCTS COMPANY INDEX TO SELECTED FINANCIAL DATA, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND CONSOLIDATED FINANCIAL STATEMENTS Selected Financial Data..................................... F-1 Management's Discussion and Analysis of Results of Operations and Financial Condition........................ F-2 Consolidated Financial Statements and Supplemental Data Management's Responsibility for Financial Statements...... F-7 Report of Independent Accountants......................... F-7 Consolidated Statements of Income for the Years ended June 30, 1997, 1996 and 1995................................ F-8 Consolidated Balance Sheets, June 30, 1997 and 1996....... F-9 Consolidated Statements of Cash Flows for the Years ended June 30, 1997, 1996 and 1995........................... F-10 Consolidated Statements of Shareholders' Equity for the Years ended June 30, 1997, 1996 and 1995............... F-11 Notes to Consolidated Financial Statements................ F-12
30 SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- (THOUSANDS OF DOLLARS EXCEPT SHARE DATA) INCOME STATEMENT Net Sales......................... $1,108,268 $1,083,920 $995,926 $872,367 $763,796 $657,036 Gross Income...................... 145,456 108,482 99,455 119,427 108,607 94,253 Selling, General & Administrative Expenses......................... 68,559 69,616 60,121 57,787 49,768 41,760 Non-Recurring Charge.............. 17,661 -- 8,832 4,424 -- -- Interest (Income) Expense, net.... 11,859 12,779 13,010 9,093 8,214 13,659 Other (Income) Expense, net....... 918 (2,437) 233 (2,092) 399 54 Provision for Taxes on Income..... 18,929 13,947 (2,807) 17,183 16,803 15,475 Income (Loss) from Continuing Operations and Before Extraordinary Item and Cumulative Effect on Prior Years of Change in Accounting Principle.......... 27,530 14,577 20,066 33,032 33,423 23,305 Income (Loss) from Operations and Disposal of Discontinued Division, Net of Tax............. -- -- -- -- -- -- Income (Loss) Before Extraordinary Item and Cumulative Effect on Prior Years of Change in Accounting Principle............. 27,530 14,577 20,066 33,032 33,423 23,305 Extraordinary Item, Net of Tax.... -- -- -- -- (2,559) -- Cumulative Effect on Prior Years of Change in Accounting Principle, Net of Tax............ -- -- -- -- (8,301) -- Net Income (Loss)................. $ 27,530 $ 14,577 $20,066 $ 33,032 $ 22,563 $ 23,305 Percent Net Income to Sales....... 2.5 1.3 2.0 3.8 3.0 3.5 Percent Net Income to Average Shareholders' Equity............. 10.4 5.6 8.0 14.5 12.1 19.5 PER SHARE Income (Loss) from Continuing Operations and Before Extraordinary Item and Cumulative Effect on Prior Years of Change in Accounting Principle.......... $ 1.64 $ .87 $ 1.20 $ 1.99 $ 2.21 $ 1.79 Income (Loss) from Discontinued Operations....................... -- -- -- -- -- -- Extraordinary Item, Net of Tax.... -- -- -- -- $ (.17) -- Cumulative Effect on Prior Years of Change in Accounting Principle, Net of Tax............ -- -- -- -- $ (.55) -- Net Income (Loss)................. $ 1.64 $ .87 $ 1.20 $ 1.99 $ 1.49 $ 1.79 Cash Dividends Declared........... $ .68 $ .68 $ .68 $ .65 $ .54 $ .38 Book Value........................ $ 15.96 $ 15.42 $ 15.56 $ 14.55 $ 13.56 $ 11.82 BALANCE SHEET Property, Plant & Equipment....... $ 583,614 $ 548,816 $489,534 $422,576 $377,564 $279,830 Accumulated Depreciation.......... 280,608 250,278 220,095 180,567 153,137 130,410 Total Assets...................... 691,859 684,695 701,889 624,314 564,850 398,793 Working Capital................... 46,565 53,455 127,498 87,922 79,396 97,303 Long-term Debt.................... 121,804 143,041 190,522 135,381 115,607 69,289 Shareholders' Equity.............. 268,357 258,765 260,495 242,677 224,436 177,753 Cash Dividends Declared........... $ 11,579 $ 11,400 $ 11,445 $ 10,821 $ 8,450 $ 5,103 OTHER Additions to Property, Plant & Equipment, net................... $ 59,004 $ 79,684 $ 54,671 $ 59,120 $ 38,000 $ 18,367 Depreciation & Amortization....... $ 53,130 $ 52,545 $ 46,839 $ 40,495 $ 29,887 $ 26,228 Shares Outstanding................ 16,810 16,785 16,736 16,674 16,552 15,044 Average Shares Outstanding........ 16,804 16,758 16,711 16,627 15,114 13,010 1991 1990 1989 1988 ---- ---- ---- ---- (THOUSANDS OF DOLLARS EXCEPT SHARE DATA) INCOME STATEMENT Net Sales......................... $592,090 $590,699 $527,896 $473,035 Gross Income...................... 38,946 65,316 81,452 83,878 Selling, General & Administrative Expenses......................... 40,073 35,011 27,111 23,694 Non-Recurring Charge.............. -- -- -- -- Interest (Income) Expense, net.... 11,663 8,608 3,125 1,430 Other (Income) Expense, net....... 285 1,846 2,062 1,612 Provision for Taxes on Income..... 7,879 8,060 18,333 20,373 Income (Loss) from Continuing Operations and Before Extraordinary Item and Cumulative Effect on Prior Years of Change in Accounting Principle.......... (20,954) 11,791 30,821 36,769 Income (Loss) from Operations and Disposal of Discontinued Division, Net of Tax............. (24,655) -- (2,132) (2,712) Income (Loss) Before Extraordinary Item and Cumulative Effect on Prior Years of Change in Accounting Principle............. (45,609) 11,791 28,689 34,057 Extraordinary Item, Net of Tax.... -- -- -- -- Cumulative Effect on Prior Years of Change in Accounting Principle, Net of Tax............ -- -- -- -- Net Income (Loss)................. $(45,609) $ 11,791 $28,689 $ 34,057 Percent Net Income to Sales....... -- 2.0 5.4 7.2 Percent Net Income to Average Shareholders' Equity............. -- 7.7 18.8 25.5 PER SHARE Income (Loss) from Continuing Operations and Before Extraordinary Item and Cumulative Effect on Prior Years of Change in Accounting Principle.......... $ (1.65) $ .93 $ 2.33 $ 2.71 Income (Loss) from Discontinued Operations....................... $ (1.94) -- $ (.16) $ (.20) Extraordinary Item, Net of Tax.... -- -- -- -- Cumulative Effect on Prior Years of Change in Accounting Principle, Net of Tax............ -- -- -- -- Net Income (Loss)................. $ (3.59) $ .93 $ 2.17 $ 2.51 Cash Dividends Declared........... $ .47 $ .74 $ .69 $ .61 Book Value........................ $ 8.06 $ 12.05 $ 12.05 $ 10.96 BALANCE SHEET Property, Plant & Equipment....... $251,151 $239,773 $200,801 $154,623 Accumulated Depreciation.......... 102,553 91,739 76,591 65,922 Total Assets...................... 369,272 362,399 333,741 255,211 Working Capital................... 61,594 90,014 88,937 74,759 Long-term Debt.................... 113,298 99,480 75,213 16,577 Shareholders' Equity.............. 102,366 152,829 156,348 145,800 Cash Dividends Declared........... $ 5,992 $ 9,365 $ 9,084 $ 8,194 OTHER Additions to Property, Plant & Equipment, net................... $ 21,179 $ 39,230 $ 32,506 $ 21,345 Depreciation & Amortization....... $ 24,747 $ 19,975 $ 14,196 $ 11,078 Shares Outstanding................ 12,695 12,689 12,975 13,293 Average Shares Outstanding........ 12,694 12,753 13,250 13,571
F-1 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (ALL AMOUNTS IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA) OVERVIEW The Standard Products Company (the "Company") is recognized as one of the world's leading suppliers of sealing, trim and vibration-control systems to original equipment manufacturers ("OEMs") of passenger cars and light trucks. The Company also maintains a leading position in providing sealing solutions for the refrigeration industry. These operations comprise the Company's Transportation Equipment Segment. The Company's truck tire retreading business is reported as the Tread Rubber Segment. This business also has a significant position in its industry. Net income of the Company and its consolidated subsidiaries was $27,530 in fiscal 1997, or $1.64 per common share compared with $14,577, or $0.87 per share in fiscal 1996. Results in 1997 included a non-recurring charge of $17,661, or $0.63 per share net of tax, for the closure of manufacturing facilities in Lexington, Kentucky and Schenectady, New York. The Company also incurred costs related to the closures of approximately $1,665, or $0.06 per share net of tax, in the second half of fiscal 1997 which did not qualify for immediate accrual. The Company's Financial Statements and Notes to Financial Statements on Pages F-7 through F-22, including the Report of Independent Accountants (the "Financial Statements"), should be read as an integral part of this discussion and analysis. TRANSPORTATION EQUIPMENT SEGMENT Sales by geographic location in this segment were:
1997 1996 1995 ---- ---- ---- North America........ $682,817 $687,009 $626,152 Europe............... 234,504 241,617 240,100 South America........ 58,680 29,479 2,640 -------- -------- -------- Total............ $976,001 $958,105 $868,892 ======== ======== ========
SALES PERFORMANCE - 1997 VERSUS 1996 Fiscal 1997 sales for the Transportation Equipment Segment were $976,001, an increase of $17,896, or 1.9% over the prior year. The overall sales increase was primarily attributable to the fact that the Company's new plant in Brazil was operational for the entire year. The new plant shipped products for only the final four months of fiscal 1996. The sales reduction in North America resulted primarily from decreases in sales of the Ford Taurus/Sable and Escort, Chevrolet Lumina and Plymouth/Dodge Neon. These reductions were not offset by increases in sales of the Jeep(R) Grand Cherokee and Chrysler minivan and by increased participation in various General Motors programs. In fiscal 1997, automotive production in North America was essentially flat compared to 1996, and trended downward in the fourth quarter of fiscal 1997, when car production by General Motors, Ford and Chrysler combined was more than 10% lower than in the same period of fiscal 1996. The Company is also under continued pressure from the OEMs to reduce the unit price of its products. The appliance sealing business experienced a $2,099 increase in sales over 1996 levels due to continued strong appliance demand in the United States. European sales decreased $7,113, or 2.9%, primarily as a result of currency translation related to the French franc. This was partially offset by currency translation gains arising from a stronger British pound. Volumes in Europe were up slightly over 1996 levels, principally as a result of sales to Toyota, Renault and Volvo. SALES PERFORMANCE - 1996 VERSUS 1995 Fiscal 1996 sales for the Transportation Equipment Segment were $958,105, an increase of $89,213, or 10.3%, over the prior year. The sales increase in North America was entirely related to automotive operations, and occurred despite flat year-over-year production of passenger cars and light trucks in the North American auto market. Strong sales performance by individual platforms within the industry accounted for the increased sales volume. The Chrysler minivan and Jeep(R) Grand Cherokee showed strong sales gains. Year-over-year performance was helped by the fact that this was the Company's first full year of production on the Chrysler minivan. The Ford Taurus/Sable, while declining slightly in sales, showed F-2 32 stronger volumes as the year progressed. This helped support the Company's strong fourth quarter performance. The new Ford F-150 truck also boosted sales. Sales in the appliance sealing business were essentially flat year-over-year, although strong fourth quarter production helped to offset previous quarterly declines in sales from the same periods in the prior year. In Europe, volumes increased in the United Kingdom, principally on Ford platforms, while in France volume declined, primarily due to reduced sales to Renault and Fiat. Foreign currency translations in France almost entirely offset the volume declines, while in the United Kingdom they reduced the volume gains by over 40%. In South America, results for fiscal 1995 reflect one month's revenue, while fiscal 1996 reflects a full twelve months of sales. Our new plant in Varginha, Brazil, came on-line in the last month of the third quarter of this year, adding solidly to the revenue base. OPERATING PERFORMANCE - 1997 VERSUS 1996 Despite only modest sales growth from 1996 to 1997, the Transportation Equipment segment experienced strong improvements in operating results. Operating income after charges for the plant closings in Lexington, Kentucky, and Schenectady, New York, was $55,439, an increase of $15,603 or 39.2% over fiscal 1996 levels. This improvement is attributable to the success of ongoing process improvement and cost reduction initiatives, including a focused effort on lowering raw material costs. Gross margin on sales showed continued improvement throughout the year. Operating income in Brazil also improved by over $8,500 as this operation moved from start-up toward full production. Research and development costs increased substantially due in large part to an investment by the Company in vehicle sealing systems that will have cosmetic, weight and performance characteristics superior to current products, as well as allow for cycle time improvements when placed in production. This investment totaled approximately $1,500 in fiscal 1997. Development is expected to continue into next year. The positive impact to the Company from these products and processes will be dependent on customers' acceptance of their benefits. The Company also incurred increased costs totaling $972 from the addition of engineering staff for its Brazilian operation. Selling, general and administrative expenses decreased from prior year levels due to the absence of start-up costs related to the Brazilian plant of $6,100. This decrease was substantially offset by increased personnel costs for areas targeted to improve customer service. As mentioned above and discussed in Note 3 to the attached financial statements, the Company incurred a charge of $17,661, before tax, for the closure of two North American manufacturing facilities. These closures were deemed necessary by management to consolidate operations and reduce overcapacity in this geographic area. Ongoing production programs at these sites were transferred to existing locations in the United States. The closures are expected to be completed by December 1997 and enhance Company profitability in future years. The Company continually reviews capacity as part of its business planning. OPERATING PERFORMANCE - 1996 VERSUS 1995 Fiscal 1996 began poorly but finished on a high note. First quarter gross margins were affected by high start-up costs on several significant new launches and high raw material costs. Beginning in the second quarter of fiscal 1996, costs related to these product launches and raw material costs began to decline. Cost reductions and process improvement programs also helped to generate significant margin improvements as the year unfolded. Selling, general and administrative expenses increased substantially in this segment over the prior year. This increase was the result of start-up costs in Brazil of approximately $9,100, as well as the expenses related to the sale of receivables explained further in Note 4 to the financial statements. The Company completed the closure of its Canadian plastics plant previously accrued for in 1995. Additional costs were incurred of approximately $1,000 and were charged to normal operations in fiscal 1996. TREAD RUBBER SEGMENT GENERAL Oliver Rubber Company ("Oliver") manufactures and markets precure and mold cure tread rubber, bonding gum, cement, repair materials and equipment for use in the tire retreading industry. In addition, Oliver supplies custom-mixed rubber to the Company and certain affiliates for use in the automotive original equipment business. F-3 33 SALES PERFORMANCE - 1997 VERSUS 1996 Fiscal 1997 sales for the North American based Tread Rubber segment totaled $145,497, an increase of 7.1% over fiscal 1996 sales of $135,869. Included in this amount were $13,230 of intersegment sales, an increase of 31.6% over prior year levels. The increase in intersegment sales resulted from investments made by Oliver to upgrade the capacity and quality of rubber mixing operations at its Asheboro, North Carolina plant. Increased sales to third parties were primarily the result of Oliver's agreement with Treadco, Inc., the largest independent truck tire retreader in the United States, which was signed in 1996. SALES PERFORMANCE -- 1996 VERSUS 1995 Sales for fiscal 1996 were $135,869, including intersegment sales of $10,054. This was an increase of 1.7%, or $2,213 over fiscal 1995. In fiscal 1995, Oliver closed its European operations. Accordingly, there were no sales in Europe in fiscal 1996. During fiscal 1995, sales in Europe were $5,239. Sales in North America increased by $7,452 in fiscal 1996. Roughly 46% of this increase came from additional intersegment sales to the Transportation Equipment segment. During fiscal 1996, Oliver made a significant investment in its mixing plant in Asheboro, North Carolina, resulting in improved quality and increased sales to the Transportation Equipment segment's automotive parts plants. The remainder of the increase in sales is primarily attributable to the new agreement Oliver signed in fiscal 1996 to supply Treadco, Inc. with precure tread rubber, retread equipment and related items at all of its truck tire precure retreading locations. OPERATING PERFORMANCE -- 1997 VERSUS 1996 Operating income in the Tread Rubber segment for fiscal 1997 was $9,128, an increase of $5,050, over the same period in the prior year. Approximately $2,300 of this increase is the result of the sales increases noted above. In addition, improved operating efficiencies due to the upgrade of manufacturing facilities, and an emphasis on improving product mix contributed to increased operating income. These increases were partially offset by increased administrative costs related to enhancing the information systems and selling capabilities of this segment. OPERATING PERFORMANCE -- 1996 VERSUS 1995 Operating income for the Tread Rubber Segment increased from $1,727 in fiscal 1995 to $4,078 in fiscal 1996. While this segment has made several improvements in its operating performance, particularly the quality of its mixing capabilities, the primary source of its improved profitability came from supply chain management. This resulted in savings on raw material costs that translated to improved operating income. OTHER (INCOME) EXPENSE Interest expense was $12,914 for 1997, compared to $14,944 for 1996, a decrease of $2,030. The decrease is primarily attributable to lower borrowings under the Company's revolving credit agreement during 1997. This is a result of reduced capital expenditures with the completion of the Brazilian plant and favorable cash flow from improved operations. The improvement was partially offset by increased interest from short-term borrowings, primarily in South America. Interest expense in fiscal 1996 was $14,944, an increase of $859 from 1995 levels. During the year the Company increased its borrowings to fund investments in Brazil and other capital programs. This increase was partially offset by proceeds from the sale of accounts receivable (see Note 4 to the Financial Statements), which were used to reduce outstanding debt. Royalty and dividend income have been comparable for each of the last three years. "Other, net" was an expense in fiscal 1997 of $521, a reduction of $4,450 over the 1996 income amount of $3,929. This reduction is primarily attributable to: (i) reduced interest income ($1,059), (ii) increased losses on fixed asset dispositions ($885), and (iii) reduced operating profit at the Company's joint venture, Nishikawa Standard Company ("NSC"). As explained in Note 1 of the Financial Statements, the Company's share of NSC's earnings decreased by $1,535. Other, net in fiscal 1996 exceeded the prior year level by $3,901, principally due to increased earnings at NSC. The Company's effective tax rate for fiscal 1997 was 40.7%. The reduction from the prior year relates primarily to improved operating results in Brazil. While Brazil lost money in both 1996 and 1997, reduced losses in the current year resulted in a lower effective tax rate because the Company has not recognized these benefits in either year. Implementation of royalty agreements between the Company and certain of its foreign subsidiaries also served to lower the effective tax rate between 1996 and 1997. F-4 34 The Company's effective tax rate for fiscal 1996 was 48.9%, as a result of the Company's inability to utilize net operating losses generated in its Brazilian operations. Recognition of tax benefits related to those losses will be reported in future periods as opportunities to utilize these carryforwards become more certain. LIQUIDITY AND CAPITAL RESOURCES The Company generated $80,045 of net cash from operating activities in fiscal 1997. The major sources were net income and non-cash items such as depreciation and amortization. Inventory increased by $3,733 from the prior year due to increased volume in Brazil. Inventory builds at Lexington and Schenectady related to the closure of those locations also increased inventory balances from the prior year. During fiscal 1997, the Company's net capital spending totaled $59,004, a decrease of $20,680 from the prior year when most of the expenditures to construct the Company's plant in Varginha, Brazil, were incurred. Fiscal 1997 capital spending did, however, include approximately $10,300 for the completion of the Brazilian plant as well as approximately $13,400 in Canada which included expansion of an existing plant to accommodate future General Motors demand for vibration control systems. Additional significant expenditures were also made in the United Kingdom to upgrade mixing facilities and in construction of a new plant in Mexico which is 70% owned by the Company as part of a joint venture with the Nishikawa Rubber Company of Hiroshima, Japan. Capital spending for fiscal 1998 is expected to be approximately $65,000 and will include the cost of completing the Mexican facility, which is anticipated to commence operations in the second quarter of the year. The Company utilized improved cash flow from operations and reduced levels of capital spending in the fiscal year to reduce long-term debt obligations under the Company's revolving credit agreement. This reduction in outstanding debt was partially offset by increased short-term borrowing, principally in Brazil, to fund working capital requirements. The Company also paid quarterly dividends throughout fiscal 1997 of $0.17 per share. Dividends are expected to continue throughout fiscal 1998. In September 1995, the Company generated $50,000 through the sale of accounts receivable in the United States. Proceeds from the sale were used to reduce outstanding borrowings under the Company's Revolving Credit Agreement. See Note 4 to the Consolidated Financial Statements found on page F-15 for a more detailed description of this transaction. During the three-year period ended June 30, 1997, inflation has been relatively moderate, and operating costs reflect current costs for raw materials and inventory, operating expenses and depreciation. It is important to understand that inflation, as reported on a consumer price index basis, may not bear a direct relationship to the Company's costs. Although inflation on the whole was stable during the period, as mentioned above, fiscal 1995 saw significant price increases in the raw materials used in operations. This was the result of increases in the costs of petroleum, polymers and chemicals used in the Company's business at a rate greater than the general inflation rate. The Company does not expect inflation to have any near-term material effect on the costs of its products, although there can be no assurance that such an effect will not occur in the future. Except for Brazil and Mexico, the value of the Company's consolidated assets and liabilities located outside the United States (which are translated at period-end exchange rates) and income and expenses (which are translated using rates prevailing during the fiscal year) have been affected by the translation values of the Canadian dollar, French franc and British pound. Such translation adjustments are reported as a separate component of shareholders' equity. While exchange rate fluctuations have historically not had a significant impact on the Company's reported operating results, changes in the values of the currencies noted above will impact the translation adjustments in the future. The Company's operations in Brazil and Mexico use the U.S. dollar as their functional currency. Translation adjustments for these operations are included in the determination of income. At June 30, 1997, the Company was in compliance with the various covenants under the agreements pursuant to which it may borrow money. Management expects that it will remain in compliance with these covenants through the year ending June 30, 1998. During the next year, the Company believes that its cash requirements for working capital, capital expenditures, dividends, interest and debt repayments will be met through internally generated funds and utilization of available borrowing sources. For a description of the Company's financing arrangements at June 30, 1997, see Note 8 to the Financial Statements. F-5 35 NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This standard establishes guidelines for the display of comprehensive income for financial statement purposes. The objective of the statement is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. The FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This standard requires extensive disclosure of operating segments based on the "management approach." This approach organizes segments within a company for making operating decisions and assessing performance. Reportable segments can be based on products and services, geography, legal structure or any other manner in which management disaggregates the company. Both standards are effective for fiscal years beginning after December 15, 1997. PROSPECTIVE INFORMATION The Company expects sales in its North American automotive operations to decline by approximately 10% in fiscal 1998. The sales decline is due to several factors, the most significant of which is the absence of business on certain vehicle platforms for which the Company provided products in 1997, including the Ford F-150 pickup truck and the Ford Thunderbird. Production of the Thunderbird has been discontinued. Another significant factor is price concessions granted to customers under long-term contracts. The sales decline projected in North America is expected to be partially offset by significant increases in sales in Brazil and Europe. The increase in Brazil is attributable to expected higher levels of production of the Fiat Palio. The Company provides complete sealing systems for the Palio in Brazil. As production increases, management expects continued improvement in the profitability of the Brazilian operations. The increase in Europe is due to a number of new launches in both the United Kingdom and France. New business beginning in fiscal 1999 is likely to more than offset the decline in sales that will be experienced in 1998. Despite a projected decline in sales in North America, the Company expects that the positive future impact of having closed two plants in 1997 and continued cost reduction measures, centering around manufacturing process improvements, will prevent a significant decline in earnings in North America. As mentioned above and like most automotive suppliers, the Company has agreed to reduce prices annually on many of the products that it provides, both in North America and elsewhere in the world. As a result, the Company is making an aggressive and continuing effort to reduce costs in all aspects of its operations. The Company's future success is partly dependent on the implementation of these initiatives. Management's expectations for fiscal 1998 also depend upon improved profitability of the Brazilian subsidiary, and successful launches of new programs in Europe and in the Company's NSC joint venture. CAUTIONARY STATEMENTS FOR PURPOSES OF "SAFE HARBOR" UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995 Certain statements in this Management's Discussion and Analysis, the attached Financial Statements, in the Company's press releases and in oral statements made by or with the approval of an authorized executive officer of the Company constitute "forward-looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995. These may include statements projecting, forecasting or estimating Company performance and industry trends. The achievement of the projections, forecasts or estimates is subject to certain risks and uncertainties. Actual results and events may differ materially from those projected, forecasted or estimated. The applicable risks and uncertainties include general economic and industry conditions that affect all international businesses, as well as matters that are specific to the Company and the markets it serves. General risks that may impact the achievement of such forecasts include compliance with new laws and regulations; significant raw material price fluctuations; currency exchange rate fluctuations; limits on repatriation of funds; and political uncertainties. Specific risks to the Company include risk of recession in the economies in which its products are sold; the concentration of a substantial percentage of the Company's sales with a few major OEM customers; labor relations at the Company, its customers and its suppliers; competition in pricing and new product development from larger companies with substantial resources; and continued globalization of the automotive supply base resulting in new competition in certain locations. F-6 36 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The Standard Products Company and Consolidated Subsidiaries Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this report. The accompanying consolidated financial statements were prepared in accordance with generally accepted accounting principles, applying certain estimates and judgments as required. Standard Products' internal controls are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability of assets. Such controls are based on established written policies and procedures, are implemented by trained, skilled personnel with an appropriate segregation of duties and are monitored through a comprehensive internal audit program. These policies and procedures prescribe that the Company and all its employees are to maintain the highest ethical standards and that its business practices throughout the world are to be conducted in a manner which is above reproach. Arthur Andersen LLP, independent auditors, are retained to audit the Company's financial statements. Their accompanying report is based on audits conducted in accordance with generally accepted auditing standards, which include the consideration of the Company's internal controls to establish a basis for reliance thereon in determining the nature, timing and extent of audits tests to be applied. The Board of Directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent non-management Board members. The audit committee meets periodically with the independent auditors and with the Company's internal auditors, both privately and with management present, to review accounting, auditing, internal controls and financial reporting matters. Ronald L. Roudebush Donald R. Sheley, Jr. Ronald L. Roudebush Donald R. Sheley, Jr. Vice Chairman and Chief Vice President, Finance Executive Officer* and Chief Financial Officer *effective July 24, 1997 REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND THE BOARD OF DIRECTORS, THE STANDARD PRODUCTS COMPANY: We have audited the accompanying consolidated balance sheets of The Standard Products Company (an Ohio corporation) and Consolidated Subsidiaries as of June 30, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three fiscal years in the period ended June 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Standard Products Company and Consolidated Subsidiaries as of June 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended June 30, 1997 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP July 24, 1997 Cleveland, Ohio Arthur Andersen LLP F-7 37 CONSOLIDATED STATEMENTS OF INCOME
THE STANDARD PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES FOR THE YEARS ENDED JUNE 30, ----------------------------------------- 1997 1996 1995 ---- ---- ---- (THOUSANDS OF DOLLARS EXCEPT SHARE DATA) Net Sales................................................ $1,108,268 $1,083,920 $ 995,926 Cost of Goods Sold: Materials, wages and other manufacturing costs......... 916,821 934,504 863,260 Research, engineering and development expenses......... 45,991 40,934 33,211 ---------- ---------- ---------- 962,812 975,438 896,471 ---------- ---------- ---------- Gross Income............................................. 145,456 108,482 99,455 Selling, General and Administrative Expenses............. 68,559 69,616 60,121 Non-recurring Charge (Note 3)............................ 17,661 -- 8,832 ---------- ---------- ---------- 59,236 38,866 30,502 ---------- ---------- ---------- Other (Income) Expense: Royalty and dividend income............................ (658) (673) (814) Interest expense....................................... 12,914 14,944 14,085 Other, net............................................. 521 (3,929) (28) ---------- ---------- ---------- 12,777 10,342 13,243 ---------- ---------- ---------- Income before Taxes on Income............................ 46,459 28,524 17,259 Provision for Taxes on Income............................ 18,929 13,947 (2,807) ---------- ---------- ---------- Net Income.......................................... $ 27,530 $ 14,577 $ 20,066 ========== ========== ========== Earnings Per Common Share: Primary................................................ $ 1.64 $ 0.87 $ 1.20 ---------- ---------- ---------- Fully Diluted.......................................... $ 1.64 $ 0.87 $ 1.20 ---------- ---------- ---------- Weighted average shares outstanding.................... 16,803,849 16,757,767 16,711,451
The accompanying notes are an integral part of these statements. F-8 38 CONSOLIDATED BALANCE SHEETS
THE STANDARD PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES, JUNE 30, ----------------------- 1997 1996 ---- ---- (THOUSANDS OF DOLLARS EXCEPT SHARE DATA) ASSETS Current Assets: Cash and cash equivalents................................. $ 6,972 $ -- Receivables, less allowances of $2,863 in 1997 and $2,958 in 1996................................................ 174,696 181,001 Inventories (Note 5)...................................... 66,633 60,377 Prepaid insurance, taxes, etc. ........................... 23,685 19,680 -------- -------- Total current assets................................. 271,986 261,058 -------- -------- Property, Plant and Equipment, at cost: Land and buildings........................................ 123,103 115,707 Machinery and equipment................................... 460,511 433,109 -------- -------- 583,614 548,816 Less -- Accumulated depreciation.......................... (280,608) (250,278) -------- -------- Net property, plant and equipment.................... 303,006 298,538 Goodwill, net............................................... 66,169 71,653 Other Assets, net (Note 6).................................. 50,698 53,446 -------- -------- $691,859 $684,695 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term notes payable.................................. $ 19,645 $ 1,198 Current maturities of long-term debt...................... 1,289 2,050 Accounts payable and accrued expenses (Note 7)............ 201,629 201,502 Dividend payable.......................................... 2,858 2,853 -------- -------- Total current liabilities............................ 225,421 207,603 Long-term Debt, net of current maturities................... 121,804 143,041 Other Postretirement Benefits............................... 24,953 25,230 Deferred Income Taxes and Other Credits..................... 51,324 50,056 Commitments and Contingent Liabilities (Note 13) Shareholders' Equity: Serial preferred shares, without par value, authorized 6,000,000 voting shares and 6,000,000 non-voting shares, none issued.................................... -- -- Common shares, par value $1 per share; authorized 50,000,000 shares, issued and outstanding 16,809,723 in 1997 and 16,784,867 in 1996............................ 16,810 16,785 Paid-in capital........................................... 98,066 96,906 Retained earnings......................................... 170,620 154,669 Foreign currency translation adjustments.................. (12,870) (6,318) Minimum pension liability................................. (4,269) (3,277) -------- -------- Total shareholders' equity........................... 268,357 258,765 -------- -------- $691,859 $684,695 ======== ========
The accompanying notes are an integral part of these statements. F-9 39 CONSOLIDATED STATEMENTS OF CASH FLOWS
THE STANDARD PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES FOR THE YEARS ENDED JUNE 30, ------------------------------ 1997 1996 1995 ---- ---- ---- (THOUSANDS OF DOLLARS) Cash Flows from Operating Activities: Net income................................................ $ 27,530 $ 14,577 $ 20,066 Adjustments to reconcile net income to net cash provided by (used by) operating activities: Depreciation and amortization.......................... 53,130 52,545 46,839 Deferred taxes and other credits....................... (974) 265 (2,631) Equity in income of non-consolidated affiliates........ (1,103) (2,436) (786) Effect of changes in foreign currency.................. 929 192 (2,834) Other.................................................. 2,763 1,216 (2,151) Net changes in assets and liabilities: Receivables (Note 4)................................. 5,877 18,160 9,436 Inventories.......................................... (6,079) 9,081 (14,790) Accounts payable and accrued expenses................ (2,028) 29,140 (40) -------- -------- -------- Net cash provided by operating activities....... 80,045 122,740 53,109 -------- -------- -------- Cash Flows from Investing Activities: Purchase of property, plant and equipment, net............ (59,004) (79,684) (54,671) Investments in affiliates and non-consolidated entities... (264) (199) (8,679) Assets acquired by purchase of businesses................. -- (1,581) (840) -------- -------- -------- Net cash used by investing activities........... (59,268) (81,464) (64,190) -------- -------- -------- Cash Flows from Financing Activities: Proceeds of long-term borrowings.......................... 18,076 37,791 55,929 Net increase (decrease) in short-term borrowings.......... 18,447 (3,561) (11,740) Repayment of long-term borrowings......................... (39,586) (84,659) (1,914) Cash dividends............................................ (11,579) (11,400) (11,445) Proceeds from exercise of stock options................... 134 299 477 -------- -------- -------- Net cash provided by (used by) financing activities................................... (14,508) (61,530) 31,307 -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents............................................... 703 708 (680) -------- -------- -------- Increase (decrease) in cash and cash equivalents............ 6,972 (19,546) 19,546 Cash and cash equivalents at the beginning of the year...... -- 19,546 -- -------- -------- -------- Cash and cash equivalents at the end of the year............ $ 6,972 $ -- $ 19,546 ======== ======== ========
The accompanying notes are an integral part of these statements. F-10 40 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THE STANDARD PRODUCTS COMPANY AND CONSOLIDATED SUBSIDIARIES FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995 ----------------------------------------------------------------------- FOREIGN CURRENCY MINIMUM TOTAL COMMON PAID-IN RETAINED TRANSLATION PENSION SHAREHOLDERS' SHARES CAPITAL EARNINGS ADJUSTMENTS LIABILITY EQUITY ------ ------- -------- ----------- --------- ------------- (THOUSANDS OF DOLLARS EXCEPT SHARE DATA) BALANCE, JUNE 30, 1994............. $16,674 $95,614 $ 142,871 $(10,359) $(2,123) $242,677 Net income....................... -- -- 20,066 -- -- 20,066 Cash dividends ($.68 per share)........................ -- -- (11,445) -- -- (11,445) Foreign currency translation adjustments................... -- -- -- 9,863 -- 9,863 Restricted stock awards.......... -- 208 -- -- -- 208 Sale of 61,894 shares to option holders....................... 62 415 -- -- -- 477 Minimum pension liability........ -- -- -- -- (1,351) (1,351) ------- ------- --------- -------- ------- -------- BALANCE, JUNE 30, 1995............. $16,736 $96,237 $ 151,492 $ (496) $(3,474) $260,495 Net income....................... -- -- 14,577 -- -- 14,577 Cash dividends ($.68 per share)........................ -- -- (11,400) -- -- (11,400) Foreign currency translation adjustments................... -- -- -- (5,822) -- (5,822) Restricted stock awards.......... -- 419 -- -- -- 419 Sale of 48,712 shares to option holders....................... 49 250 -- -- -- 299 Minimum pension liability........ --..... -- -- -- 197 197 ------- ------- --------- -------- ------- -------- BALANCE, JUNE 30, 1996............. $16,785 $96,906 $ 154,669 $ (6,318) $(3,277) $258,765 Net income....................... -- -- 27,530 -- -- 27,530 Cash dividends ($.68 per share)........................ -- -- (11,579) -- -- (11,579) Foreign currency translation adjustments................... -- -- -- (6,552) -- (6,552) Restricted stock awards.......... -- 1,051 -- -- -- 1,051 Sale of 24,856 shares to option holders....................... 25 109 -- -- -- 134 Minimum pension liability........ -- -- -- -- (992) (992) ------- ------- --------- -------- ------- -------- BALANCE, JUNE 30, 1997............. $16,810 $98,066 $ 170,620 $(12,870) $(4,269) $268,357 ======= ======= ========= ======== ======= ========
The accompanying notes are an integral part of these statements. F-11 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THOUSANDS OF DOLLARS EXCEPT SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Major intercompany items have been eliminated. The Company's investments in affiliate operations are accounted for by both the equity and cost methods of accounting. The cost method is followed in those situations where the Company's ownership is less than 20% and operations are conducted by management of the affiliate. Income is recorded as received. The equity method of accounting is followed in those situations of larger ownership interests but less than 51%, and the Company's results of operations include those of the affiliate to the extent of its ownership interest. The Company's investment in Nishikawa Standard Company (NSC), a 50% owned joint venture in the United States, is accounted for under the equity method. The Company's investment in NSC at June 30, 1997 and 1996 was $19,609 and $18,644 respectively and is included in Other Assets in the accompanying consolidated balance sheets. The Company's share of NSC's operating income was $969, $2,504 and $431 in fiscal 1997, 1996 and 1995, respectively. Under the terms of NSC's revolving credit and term loan facility, the joint venture partners are required to guarantee a portion of NSC's borrowings. The Company's share of these guarantees at June 30, 1997 was $8,650. CASH AND CASH EQUIVALENTS Cash and cash equivalents include bank deposits and repurchase agreements at varying rates of interest and with original maturities less than thirty days. These investments are carried at cost which approximates market value. The following is additional information related to the accompanying consolidated statements of cash flows:
1997 1996 1995 ---- ---- ---- Cash paid for interest........... $12,314 $14,962 $13,935 Cash paid for income taxes.............. $18,819 $ 6,206 $ 3,600
FOREIGN CURRENCY TRANSLATION The financial statements of the Company's foreign subsidiaries have been translated in accordance with Statement of Financial Accounting Standards (SFAS) No. 52. Except for the Brazilian and Mexican subsidiaries, current rates of exchange are used to translate the balance sheets of these entities, while the average exchange rate of each fiscal year is used for the translation of income and expense accounts. The resulting unrealized gains and losses are recorded as a component of shareholders' equity. Because the Company's Brazilian and Mexican subsidiaries operate in highly inflationary economies, the U.S. dollar has been used as the functional currency in the translation of the Brazilian and Mexican financial statements. Accordingly, foreign currency gains or losses of the Brazilian and Mexican subsidiaries have been reflected in income currently. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. The Company provides for depreciation of plant and equipment using the straight-line and sum-of-years' digits methods at annual rates based on the following estimated service lives of the property: Buildings.................... 15 to 25 years Machinery and Equipment...... 10 to 14 years Furniture and Fixtures....... 7 to 10 years
Maintenance and repair expenditures are charged to income as incurred. Expenditures for improvements and major renewals are capitalized. When assets are retired, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss on the disposition is credited or charged to income. INVENTORIES Inventories are stated at the lower of cost or market. The majority of domestic inventories are valued using the last-in, first-out (LIFO) method, and the remaining inventories are valued using the first-in, first-out (FIFO) method. Cost includes the cost of materials, direct labor and the applicable share of manufacturing overhead. F-12 42 GOODWILL Goodwill, which represents the excess of purchase price over the fair value of assets acquired, is amortized on a straight-line basis over the estimated useful life but not in excess of 40 years. Recoverability is reviewed annually or sooner if events or changes in circumstances indicate that the carrying amount may exceed fair value. Recoverability is then determined by comparing the undiscounted net cash flows of the net assets on which the goodwill applies to the net book value, including goodwill, of those assets. TAXES ON INCOME The Company has determined tax expense and other deferred tax information using the liability method, which recognizes the differences in financial reporting bases and tax bases of assets and liabilities at tax rates currently in effect. Income tax expense includes United States, foreign and state income taxes, exclusive of taxes on the undistributed income of foreign subsidiaries where it is the intention of the Company to have those subsidiaries reinvest the income locally. RETIREMENT PLANS The Company's policy is to fund the pension costs of defined benefit plans in accordance with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Defined contribution and multi-employer plans are funded as accrued, and the accrual is based upon hourly rates, or a percentage of the unit's performance. POSTRETIREMENT MEDICAL BENEFITS The Company provides postretirement health and life insurance benefits for retired salaried and certain retired hourly employees. Benefits provided under various plans, individually arranged by business unit, include health and life insurance. The plans generally provide for a means to limit the cost of the plans to the Company through cost-sharing or spending limitations. FINANCIAL INSTRUMENTS The Company's financial instruments recorded on the balance sheet include cash and cash equivalents, trade receivables and payables and debt obligations. The book value of cash and cash equivalents, trade receivables and payables and short-term debt are considered to be representative of fair value because of the short maturity of these instruments. The fair value of long-term debt is based on rates available to the Company for debt with comparable terms and maturities. Off balance sheet derivative financial instruments include a currency and interest rate swap transaction, an interest rate swap contract and foreign exchange contracts. The currency and interest rate swap transaction protects the Company from fluctuations in the value of the U.S. dollar in relation to the French franc and establishes a fixed U.S. dollar rate of return on a loan from the Company to its French subsidiary. The interest rate swap transaction converts floating rate debt under its Revolving Credit Agreement to fixed rate debt. The Company and its subsidiaries enter into foreign exchange contracts to manage exposure to foreign exchange fluctuations related to sales to foreign customers or purchases of equipment or inventory from foreign suppliers. These contracts hedge firm commitments to pay or receive foreign currency within a one-year period. The Company does not engage in speculation and does not hedge foreign currency positions which are not related to specific transactions. The gains and losses on the contracts offset losses and gains of the transactions being hedged, resulting in protection from the risks of foreign exchange movement for those transactions and avoiding losses affecting results of operations. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. ENVIRONMENTAL COMPLIANCE AND REMEDIATION Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are F-13 43 probable and the costs can be reasonably estimated. Estimated costs are based upon enacted laws and regulations, existing technology and the most probable method of remediation. The costs determined are not discounted and exclude the effects of inflation and other societal and economic factors. Where the cost estimates result in a range of equally probable amounts, the lower end of the range is accrued. REVENUE RECOGNITION The Company recognizes revenues as products are shipped to its customers. CONCENTRATION OF CREDIT RISK The Company designs and manufactures rubber and plastic components for automotive original equipment manufacturers. Financial instruments which potentially subject the Company to concentrations of credit risk are primarily accounts receivable. The Company performs ongoing credit evaluations of its customers' financial condition. The allowance for non-collection of accounts receivable is based on the expected collectibility of all accounts receivable. IMPAIRMENT OF ASSETS The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" on July 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The adoption of SFAS No. 121 did not have a material effect on the Company's consolidated financial statements. STOCK-BASED COMPENSATION Prior to July 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On July 1, 1996, the Company adopted SFAS No. 123 Accounting for Stock-Based Compensation, which allows entities to continue to apply the provisions of APB Opinion No. 25, and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in fiscal 1997 and future years as if the fair-value based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to their 1997 presentation in the financial statements. 2. ACQUISITIONS In May 1995, the Company acquired the 80% of Itatiaia Standard not previously owned by it for total consideration of $4,040. The acquisition was accounted for under the purchase method of accounting and the financial statements of the Company include the acquired assets, assumed liabilities and results of operations for June 1995. Pro forma sales and operating results are not material. Valuation of the assets acquired and liabilities assumed in accordance with Accounting Principles Board Opinion No. 16 was finalized during fiscal 1996 and resulted in recording goodwill of approximately $10,800. 3. NON-RECURRING CHARGE In 1997, the Company announced it would permanently close two automotive parts plants in Schenectady, New York and Lexington, Kentucky, and recorded a non-recurring charge of $17,661 or $0.63 per share of common stock, after tax. The closures are being undertaken to reduce overcapacity, which will allow the Company to improve customer service, reduce operating costs, and improve productivity and asset utilization. The closures, which are expected to be completed by December 1997, will result in the reduction of approximately 500 employees. The Company's provision consists of a $12,485 to recognize severance and benefits for the employees to be terminated and $5,176 for asset writedowns and building razing costs. At June 30, 1997, approximately $5,116 in costs have been charged against these accruals. The remaining amounts are F-14 44 included in Accounts payable and accrued expenses in the accompanying consolidated balance sheet. During fiscal 1997, the Company also incurred $1,665 in expenses related to the transfer of business from the closed facilities to those that will remain in operations. Since these costs are expected to benefit future operations they were not included in the non-recurring charge. Examples include, costs to move machinery, equipment and inventory, equipment set-up and relocation of employees retained by the Company. In 1995, the Company provided $8,832 to rationalize two business units. The Company has submitted the remaining assets of Oliver Rubber's European subsidiary for formal liquidation proceedings in the United Kingdom. As a result, a provision of $5,347 was recorded to reduce asset values to net realizable amounts, to accrue expenses of liquidation including severance for several employees, and to recognize foreign currency losses which were formerly deferred in the Company's foreign currency translation account. Of the amount provided, $2,309 was recorded in the first quarter of fiscal 1995 with the balance recorded in the fourth quarter. The Company attempted to realize as much asset value as possible before beginning formal liquidation. The liquidation was substantially completed in fiscal 1996. The second 1995 business unit rationalization involved the Company's plastic plant in Canada. As part of its formal plan, in fiscal 1995, the Company recorded $3,485 to provide for a work force reduction of 328 employees at this plant. Costs included in this provision in the fourth quarter were pension curtailment, severance as required by Canadian law, lease obligations for the idled portion of the leased facility, removal costs of the Company-owned equipment and reduction of idled assets to net realizable value. At June 30, 1996 the business was closed, and all production was moved to other locations. Additional costs incurred to close this business were charged to normal operations as incurred. 4. ACCOUNTS RECEIVABLE SECURITIZATION In September 1995, the Company and certain of its U.S. subsidiaries entered into an agreement to sell, on an ongoing basis, all of their accounts receivable to The Standard Products Funding Corporation (Funding Co.), a wholly owned subsidiary of the Company. Accordingly, the Company and those subsidiaries, irrevocably and without recourse, transfer all of their U.S. dollar denominated trade accounts receivable (principally representing amounts owed by original equipment customers in the U.S. automotive and related industries) to the Funding Co. The Funding Co. has sold and, subject to certain conditions, may from time to time sell an undivided interest in those receivables to the Clipper Receivables Corporation. The Funding Co. is permitted to receive advances of up to $50,000 for the sale of such undivided interest. At June 30, 1997, $50,000 has been advanced. Unless extended by amendment, the agreement expires in September 1998. Proceeds from the sale were used to reduce outstanding borrowings under the Company's Revolving Credit Agreement and are reflected as operating cash flows in the accompanying consolidated statement of cash flows. Costs of the program, which primarily consist of the purchasers' financing and administrative costs, totaled $3,104 and $2,603 in fiscal 1997 and 1996 and have been classified as Selling, General and Administrative Expenses in the accompanying consolidated statement income. The Company maintains an allowance for doubtful accounts receivable ($2,863 and $2,958 at June 30, 1997 and 1996, respectively) based on the expected collectibility of all trade accounts receivable, including receivables sold. 5. INVENTORY The major components of inventory are as follows:
(THOUSANDS OF DOLLARS) 1997 1996 ---------------------- ---- ---- Raw materials............. $29,069 $27,186 Work-in-process and finished goods.......... 37,564 33,191 ------- ------- Total, at both FIFO and LIFO cost............... $66,633 $60,377 Excess of FIFO cost over LIFO cost............... $14,019 $13,719
Approximately 50% of the Company's inventories are valued at LIFO cost. F-15 45 6. OTHER ASSETS, NET Other assets consist of the following:
(THOUSANDS OF DOLLARS) 1997 1996 ---------------------- ---- ---- Investments................. $22,508 $21,195 Tooling..................... 3,450 5,912 Patents and other intangibles............... 5,834 8,602 Deferred taxes.............. 9,401 10,300 Other....................... 9,505 7,437 ------- ------- Total................... $50,698 $53,446
Where applicable, amounts are presented net of accumulated amortization. 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following:
(THOUSANDS OF DOLLARS) 1997 1996 ---------------------- ---- ---- Accounts payable........... $ 81,214 $ 99,093 Accrued payrolls........... 34,451 26,651 Accrued other taxes........ 5,035 4,489 Federal income tax......... 3,681 -- Other accrued expenses..... 77,248 71,269 -------- -------- Total.................. $201,629 $201,502
8. FINANCING ARRANGEMENTS
(THOUSANDS OF DOLLARS) 1997 1996 ---------------------- ---- ---- Senior notes.............. $100,000 $100,000 Revolving credit agreement............... 20,000 40,000 Other debt................ 3,093 5,091 -------- -------- Total..................... 123,093 145,091 Less - current maturities.............. 1,289 2,050 -------- -------- $121,804 $143,041
At June 30, 1997, Senior Notes outstanding of $100,000 include two issues, $75,000 and $25,000. The $75,000 Senior Notes, placed directly with three affiliated insurance companies, are unsecured and accrue interest at 6.55%. Interest payments are payable semiannually, and annual principal payments of $12,500 begin in December 1998 through December 2002, with the balance due on maturity in December 2003. The $25,000 Senior Notes are also unsecured notes placed directly with the holders. The interest rate is 9.81%, interest is paid semiannually and the notes are payable July 1, 1999. Each of the Senior Note agreements requires the Company to maintain certain financial covenants as to net worth, leverage and working capital. The Revolving Credit Agreement (Credit Agreement) represents unsecured borrowings from a group of banks that have committed to make available for borrowing up to $125,000 until January 1999 with provisions for extending the agreement beyond that date upon satisfaction of certain requirements. The loans may be denominated in either U.S. dollars or certain other currencies based upon Eurodollar interest rates or the agent bank's base rate. At June 30, 1997, borrowings under the Credit Agreement bear interest at 6.28%. A commitment fee of 0.19% is due on the unused portion of the agreement. The Company has the right to convert up to $50,000 of revolving loans into a five-year term loan with quarterly repayments thereafter. The terms of the Credit Agreement also require the Company to maintain certain financial covenants as to net worth, leverage and working capital. Under the most restrictive covenants of the Company's various loan agreements, $66,464 of retained earnings were not restricted at June 30, 1997 for the payment of dividends, and the ratio of current assets liabilities was 1.21 to 1, in excess of the minimum requirement of 1.00 to 1. The maturities of long-term debt for the five years subsequent to June 30, 1997 are:
(THOUSANDS OF DOLLARS) - ---------------------- 1998 $ 1,289 1999 33,854 2000 37,500 2001 12,500 2002 12,950 Thereafter 25,000
The Company and its subsidiaries also have, from various banking sources, approximately $65,700 of unused short-term lines of credit at rates of interest approximating Eurodollar interest rates. These funds are available subject to satisfying covenant restrictions as to funded debt limitations. In 1997, the average month-end lines were $20,200, and the highest month-end balance was $38,000. Comparable amounts for 1996 were $9,000 and $17,400 and $17,800 and $23,000 for 1995. The effective annual borrowing rate was 7.3% in 1997, 6.8% in 1996 and 6.8% in 1995. At year end, the weighted interest rate was 8.1%. F-16 46 9. FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of the Company's significant balance sheet financial instruments at June 30, 1997 and 1996, are as follows:
1997 CARRYING FAIR (THOUSANDS OF DOLLARS) AMOUNT VALUES ---------------------- -------- ------ Cash and cash equivalents........... $ 6,972 $ 6,972 Short-term bank debt.... 19,645 19,645 Long-term bank debt (including current portion).............. 123,093 121,793
1996 (THOUSANDS OF DOLLARS) ---------------------- Cash and cash equivalents........... $ -- $ -- Short-term bank debt.... 1,198 1,198 Long-term bank debt (including current portion).............. 145,091 143,889
Off balance sheet derivative financial instruments at June 30, 1997 and 1996, held for purposes other than trading, were as follows:
1997 1996 ------------------ ------------------ CONTRACT/ CONTRACT/ NOTIONAL FAIR NOTIONAL FAIR AMOUNT VALUES AMOUNT VALUES --------- ------ --------- ------ (THOUSANDS OF DOLLARS) Currency and interest rate swaps......... $34,680 $ (509) $38,350 $ (431) Foreign currency exchange agreements......... 41,388 1,844 35,673 505
With regard to the combined currency and interest rate swap agreement, the nominal amount of 86,864 French francs is payable by the Company to a bank, while the amount due from the bank to the Company is $14,680. Periodic payments are made by the Company and the bank until maturity in November 2000. Interest rates are fixed with a rate of 6.5% on payments to the bank and 5.8% on payments from the bank. Exchange rate fluctuations of the French franc payable to the bank are offset by the French franc receivable from the French subsidiary. The interest rate swap contract matures in March 1999. The Company pays a fixed interest rate of 5.18% to the bank and receives a floating rate LIBOR payment from the bank on the $20,000 notional amount of the swap contract. Foreign exchange contracts hedging trade transactions mature over the next twelve months. Exchange contracts hedging foreign denominated intercompany loans mature no later than the maturity of the loan. The counterparties to each of these agreements are major commercial banks. Management believes that losses related to credit risk are remote. 10. RETIREMENT PLANS The Company and its consolidated subsidiaries have a number of plans providing pension, retirement or profit-sharing benefits for substantially all employees. These plans include defined benefit, defined contribution and multi-employer plans. For defined benefit plans, those covering salaried employees provide pension benefits based upon the individual employee's average compensation over the last five years, while hourly plans provide benefits of stated amounts for each year of service. The assets of the plans consist of listed bonds, stocks, mutual investment funds and cash securities. Pension expense is determined using assumptions at the beginning of the year. The projected benefit obligation (PBO) is determined using the assumptions at the end of the year. Assumptions used to determine pension expense and the PBO were:
1997 1996 1995 ---- ---- ---- Discount rate................ 7.75% 7.75% 8.50% Long-term rate of return on plan assets................ 9.50% 9.50% 10.00% Rate of increase in future compensation levels........ 5.00% 5.00% 5.00%
The cost of providing pension, retirement and profit-sharing benefits charged to operations amounted to $7,295 in 1997, $6,999 in 1996 and $5,444 in 1995. For 1997, the expense of defined contribution plans was $5,033 and multi-employer plan expense was $486. Comparable figures for 1996 were $4,102 and $449, and for 1995, $3,683 and $508. The expense of defined benefit plans increased during 1995 as a result of including employees of subsidiary companies in the Company's salaried pension plan. Components of pension F-17 47 expense for defined benefit plans included the following items:
1997 1996 1995 ---- ---- ---- (THOUSANDS OF DOLLARS) Service cost......... $ 2,435 $ 2,737 $ 2,753 Interest cost on PBO................ 6,262 6,265 5,868 Actual loss (gain) on plan assets........ (6,163) (12,654) 457 Net amortization and deferral........... (1,361) 6,100 (7,871) Loss due to curtailment........ 602 -- -- ------- -------- ------- Net pension expense............ $ 1,775 $ 2,448 $ 1,207
The funded status of the foreign and domestic defined benefit plans is displayed below and is based on information supplied by the Company's actuary as of March 31 of each year. In connection with the recognition of the minimum liability as required by SFAS No. 87, as of June 30, 1997, the Company has recorded an intangible asset of $1,036 included in Other Assets, net in the accompanying consolidated balance sheet, and an equity reduction of $4,269.
1997 1996 ----------------- ----------------- LESS GREATER LESS GREATER THAN THAN THAN THAN PLAN PLAN PLAN PLAN ASSETS ASSETS ASSETS ASSETS ------ ------- ------ ------- ACCUMULATED BENEFITS ARE: (THOUSANDS OF DOLLARS) Vested benefits.......... $49,540 $27,046 $46,166 $25,278 Non-vested benefits...... 2,576 423 2,230 530 ------- ------- ------- ------- Accumulated benefit obligation............. 52,116 27,469 48,396 25,808 Projected future compensation increases.............. 6,166 735 5,719 642 ------- ------- ------- ------- PBO...................... 58,282 28,204 54,115 26,450 Plan assets at fair market value........... 62,772 20,702 60,413 21,056 ------- ------- ------- ------- PBO (in excess of) or less than plan assets................. 4,490 (7,502) 6,298 (5,394) Unrecognized transition asset.................. (4,998) (263) (5,634) (256) Unrecognized loss........ 3,416 5,061 2,054 3,696 Adjustment required to recognize minimum liability.............. -- (5,304) -- (4,362) Unrecognized prior service cost........... 2,443 1,241 2,247 1,526 ------- ------- ------- ------- Prepaid pension cost, (liability)............ $ 5,351 $(6,767) $ 4,965 $(4,790)
The Company has accrued $11,434 and $13,289 for Workers' Compensation claims as of June 30, 1997 and 1996, respectively. 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The cost of providing health and life insurance benefits for certain retired employees has been accrued based on the employees' active service lives. The expense for postretirement benefits other than pensions is detailed below. All plans under which these benefits are provided are unfunded. The Company continues to fund these benefits as claims are incurred. Spending limitations per annum are in effect for several plans and future retirees of other plans will pay a portion of these costs. A summary of plan information is as follows:
1997 1996 1995 ---- ---- ---- (THOUSANDS OF DOLLARS) Accumulated postretirement benefit obligation (APBO): Retirees.............. $22,196 $20,989 $19,874 Active participants eligible to receive benefits............ 2,442 2,177 1,872 Other active plan participants........ 3,174 2,516 2,558 ---------- --------- --------- 27,812 25,682 24,304 Unrecognized gain (loss).............. (438) 2,048 3,689 ---------- --------- --------- $27,374 $27,730 $27,993 ---------- --------- --------- Periodic postretirement benefit cost: Current service cost................ $ 271 $ 286 $ 248 Interest on postretirement benefit obligation.......... 1,922 1,990 2,033 Net amortization...... (11) (74) -- ---------- --------- --------- $ 2,182 $ 2,202 $ 2,281 ---------- --------- --------- Actuarial assumptions: Discount rate......... 7.75% 7.75% 8.50% 1997 to 2004 -- health care cost trend rate................ 10.75%-5.5% 11.5%-5.5% 13.9%-5.5% Effect of a 1% increase in health care cost trend rate: Increase year end APBO................ 7.0% 6.6% 6.3% Increase expense...... 9.2% 9.5% 7.3%
12. LEASES The Company and its subsidiaries have operating leases covering manufacturing facilities, transportation and material handling equipment, and computer hardware and software expiring at various dates through 2006. The following is a schedule of future minimum rental payments required under operating leases F-18 48 that have initial or remaining noncancelable lease terms in excess of one year as of June 30, 1997: 1998............................... $ 8,847 1999............................... 5,388 2000............................... 2,901 2001............................... 1,625 2002 and later years............... 3,302 ------- Total minimum payments required.... $22,063
Rent expense was $14,372, $14,627 and $14,209 for the years ended June 30, 1997, 1996 and 1995, respectively. 13. COMMITMENTS AND CONTINGENT LIABILITIES The Company and its subsidiaries are involved in certain legal actions and claims. In the opinion of management, any liability which may ultimately be incurred would not materially affect the financial position or results of operations of the Company. 14. COMMON SHARES Options to purchase common shares have been granted under various employee stock option plans adopted by shareholders. For each plan, options are exercisable over periods of five or ten years. The option price is either the fair market value at the time the option is granted or 110% of the fair market value at the time the option is granted for those individuals owning more than ten percent of the common shares of the Company. Generally, options become exercisable one year from the date of grant and annually thereafter. No more than 40% of the grant can be exercised in any one plan year. Summarized below is stock option activity for 1996 and 1997.
RANGE OF SHARES OPTION PRICES ------ ------------- Stock options outstanding at June 30, 1995.............. 333,571 $13.50 - $36.99 Options granted......... 156,000 17.88 - 23.50 Options exercised....... (44,056) 13.50 - 15.84 Options cancelled....... (57,875) 21.63 - 33.63 ------- Stock options outstanding at June 30, 1996.............. 387,640 $17.88 - $36.99 Options granted......... 233,450 25.25 - 26.25 Options exercised....... (6,400) 19.25 - 21.63 Options cancelled....... (65,986) 29.13 - 36.99 ------- Stock options outstanding at June 30, 1997.............. 548,704 =======
The Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," effective with the 1997 financial statements, but elected to continue to measure compensation cost using the intrinsic value method, in accordance with APB Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Accordingly, no compensation cost for stock options has been recognized. If compensation cost had been determined based on the estimated fair value of options previously granted, consistent with the methodology in SFAS 123, the pro forma effects on the Company's net income and income per share would have been:
1997 1996 ---- ---- Net Earnings As reported............. $27,530 $14,577 Pro forma............... 26,836 14,313 Primary and Fully Diluted Earnings per Share As reported............. $1.64 $0.87 Pro forma............... 1.60 0.85
The estimated fair value as of date of grant of options granted in 1997 and 1996, using the Black-Scholes option-pricing model, was as follows:
1997 1996 ---- ---- Estimated fair value per share of options granted during the year.................... $8.38 $7.99 Assumptions: Annualized dividend yield... 2.7% 2.7% Common Stock price volatility............... 30.5% 30.8% Risk-free rate of return.... 6.5% 6.8% Expected option term (in years)................... 7 7
At June 30, 1997, options for 162,806 shares were exercisable at an average exercise price of $26.98 a share. Shares reserved for the future granting of options were 410,629 at year end; 245,193 were reserved a year ago. In July 1997, stock options for 200,000 shares were awarded to the Company's new Chief Executive Officer. These are not reflected in the tables above. After this award, 210,629 shares remain reserved for future awards. Under The Standard Products Company 1991 Restricted Stock Plan, 375,000 common shares were reserved for restricted stock awards. Shares awarded are earned ratably over the term of the restricted stock agreement, based upon achieving F-19 49 specified performance goals. Generally, transferability of shares earned is restricted for a specified number of years following the year in which they were earned. Until the restrictions lapse, the recipient of earned restricted shares is entitled to all of the rights of a shareholder, including the right to vote the shares, but the shares are restricted as to transferability and subject to forfeiture to the Company during the restricted period. Shares awarded were 75,000 in 1995 and 187,500 in 1992. Of the shares awarded, 35,000 shares were earned in 1997, 18,400 shares in 1996 and 16,800 shares in 1995. In 1997, $1,051 was charged to operations as compensation expense based upon the market value of the earned shares. The similar charge to operations in 1996 and 1995 was $419 and $208, respectively. At year end, 112,500 shares remain available for future awards. In July 1997, the Company awarded 50,000 shares of restricted stock to its new Chief Executive Officer and 12,500 shares to the Chairman of the Board of Directors. After this award, 50,000 shares remain available for future awards. 15. SEGMENT INFORMATION The Company's operations are in two industry segments. The Transportation Equipment Segment includes extruded and molded rubber and plastic products for automotive, building and marine industries and plastic and magnetic door seals for home appliances. The Tread Rubber Segment produces tread rubber for the truck tire retreading industry. Net sales by segment include both sales to unaffiliated customers, as reported in the Company's consolidated statements of income, and intersegment sales. Operating income consists of net sales less applicable operating costs and expenses related to those sales. In computing operating income, general corporate expenses are excluded. Identifiable assets by segment are those assets that are used in the operations of each segment. General corporate assets are those not identifiable with the operations of a segment. The Company's major customers include automotive original equipment manufacturers. The percentage of sales of each of these major customers to total consolidated sales for the three-year periods 1997, 1996 and 1995, respectively, has been as follows: Chrysler - 18%, 17% and 15%; Ford - 24%, 26% and 23%; General Motors - 13%, 14% and 18%. Sales to the automotive original equipment customers include a number of different products and types of the same product, the sales of which are not interdependent. BUSINESS SEGMENT INFORMATION
1997 1996 1995 ---- ---- ---- (THOUSANDS OF DOLLARS) Net Sales: Transportation equipment............ $ 976,001 $ 958,105 $868,892 Tread rubber........... 145,497 135,869 133,656 Less -- intersegment sales................ (13,230) (10,054) (6,622) ---------- ---------- -------- Net sales................ $1,108,268 $1,083,920 $995,926 Operating Income: Transportation equipment............ $ 73,100 $ 39,836 $ 41,882 Tread rubber........... 9,128 4,078 1,727 Non-recurring charge... (17,661) -- (8,832) General corporate expenses............. (5,331) (5,048) (4,275) ---------- ---------- -------- Total operating income........... $ 59,236 $ 38,866 $ 30,502 ---------- ---------- -------- Other expense, net..... (12,777) (10,342) (13,243) ---------- ---------- -------- Income from operations before taxes.............. $ 46,459 $ 28,524 $ 17,259 Identifiable Assets: Transportation equipment............ $ 590,579 $ 585,274 $595,109 Tread rubber........... 72,483 70,788 74,229 General corporate assets............... 28,797 28,633 32,551 ---------- ---------- -------- Total identifiable assets........... $ 691,859 $ 684,695 $701,889 Capital Additions, net:(1) Transportation equipment............ $ 53,683 $ 74,456 $ 48,904 Tread rubber........... 5,321 5,228 5,767 ---------- ---------- -------- Total capital additions........ $ 59,004 $ 79,684 $ 54,671 Depreciation and Amortization: Transportation equipment............ $ 48,571 $ 48,328 $ 42,951 Tread rubber........... 4,559 4,217 3,888 ---------- ---------- -------- Total depreciation and amortization..... $ 53,130 $ 52,545 $ 46,839
- ------------------------- (1) Includes assets acquired by purchase of businesses in 1995. F-20 50 GEOGRAPHIC AREA
1997 1996 1995 ---- ---- ---- (THOUSANDS OF DOLLARS) Net Sales: United States.......... $ 619,068 $ 618,491 $574,064 Canada................. 218,427 212,046 203,265 Europe................. 234,504 242,977 245,362 Brazil................. 58,680 29,479 2,640 Less -- inter-area sales................ (22,411) (19,073) (29,405) ---------- ---------- -------- Net sales.......... $1,108,268 $1,083,920 $995,926 Net Income: United States.......... $ 16,415 $ 8,248 $ 12,821 Canada................. 10,928 8,785 1,946 Europe................. 9,180 10,732 7,915 Brazil................. (5,642) (10,345) (51) General corporate expenses, net of tax.................. (3,351) (2,843) (2,565) ---------- ---------- -------- Net income......... $ 27,530 $ 14,577 $ 20,066 Identifiable Assets: United States.......... $ 270,036 $ 297,744 $340,235 Canada................. 95,362 79,845 81,979 Europe................. 202,358 210,215 234,918 Brazil................. 90,114 68,258 12,206 Mexico................. 5,192 -- -- General corporate assets............... 28,797 28,633 32,551 ---------- ---------- -------- Total identifiable assets........... $ 691,859 $ 684,695 $701,889
16. INCOME TAXES
1997 1996 1995 ---- ---- ---- (THOUSANDS OF DOLLARS) Income before taxes: United States........... $17,016 $10,626 $ 1,265 Foreign................. 29,443 17,898 15,994 ------- ------- ------- $46,459 $28,524 $17,259 Amounts currently payable: Federal................. $ 8,887 $ 3,822 $(3,174) Foreign................. 11,030 3,585 5,779 State and local......... 1,882 1,304 1,038 ------- ------- ------- $21,799 $ 8,711 $ 3,643 Deferred taxes: Federal................. $(3,111) $ 2,656 $ (233) Foreign................. 321 2,536 (6,101) State and local......... (80) 44 (116) ------- ------- ------- (2,870) 5,236 (6,450) ------- ------- ------- Total provision..... $18,929 $13,947 $(2,807)
A reconciliation of income tax expense to the U.S. statutory rate is as follows: Tax at U.S. statutory rate... 35.0% 35.0% 35.0% Difference in effective rate of international operations................. 2.2 10.6 (34.3) Write-off of investment...... -- -- (25.7) State and local income tax... 2.5 3.1 3.4 Permanent book to tax differences not deductible................. 2.7 2.9 6.0 Tax credits.................. (1.4) -- -- Other, net................... (0.3) (2.7) (0.7) ---- ---- ----- Effective tax rate........... 40.7% 48.9% (16.3)%
Deferred tax assets (liabilities) result from differences in the basis of assets and liabilities for tax and financial statement purposes. The cumulative effect of the major items follows (millions of dollars):
1997 1996 ---- ---- (THOUSANDS OF DOLLARS) Deferred tax assets: Nondeductible accrued expenses............... $ 8,200 $ 3,000 Employee benefits........ 16,000 16,600 Net operating loss and tax credit carryforwards.......... 14,700 14,400 All other items.......... 1,700 4,300 -------- -------- Total deferred tax assets............ $ 40,600 $ 38,300 Valuation allowance...... (14,700) (14,400) -------- -------- Net deferred tax assets............ $ 25,900 $ 23,900 Deferred tax liabilities: Depreciation and amortization........... $(24,600) $(28,300) All other items.......... (5,400) (6,000) -------- -------- Total deferred tax liabilities....... $(30,000) $(34,300) -------- -------- Net deferred tax liabilities.......... $ (4,100) $(10,400) ======== ========
In accordance with the Company's policy, as of June 30, 1997, federal income taxes have not been provided on the undistributed earnings of foreign subsidiaries. If these earnings were distributed, approximately $6,000 of tax would be payable. The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized principally due to the inability of its Brazilian subsidiaries to fully utilize available net operating loss carryforwards. The subsequent recognition of tax benefits relating to the valuation allowance will be reported in the consolidated statement of income as opportunities to utilize these carryforwards become more certain. Deferred tax assets are included in Prepaid insurance, taxes, etc. and Other Assets, net in the accompanying consolidated balance sheets. F-21 51 17. QUARTERLY AND OTHER FINANCIAL DATA (UNAUDITED) The following tables set forth a summary of the quarterly results of operations for the years ended June 30, 1997 and 1996;
1997 THREE MONTHS ENDED ----------------------------------------- SEPT. 30 DEC. 31 MARCH 31 JUNE 30 -------- ------- -------- ------- (THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA) Net sales............ $265,611 $266,620 $281,774 $294,263 Gross income......... 25,292 31,696 38,761 49,708 Net income........... 1,397 6,344 515 19,275 Earnings per common share.............. $ 0.08 $ 0.38 $ 0.03 $ 1.15
1996 THREE MONTHS ENDED ----------------------------------------- SEPT. 30 DEC. 31 MARCH 31 JUNE 30 -------- ------- -------- ------- (THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA) Net Sales............ $238,760 $264,747 $277,274 $303,139 Gross income......... 9,405 21,769 33,879 43,429 Net income........... (9,784) 1,545 7,283 15,533 Earnings per common share.............. $ (0.58) $ 0.09 $ 0.43 $ 0.93
The Company's common shares are listed on the New York Stock Exchange. Quarterly market and dividend data are shown in the following tables.
PRICE RANGE ------------------------------------ 1997 1996 ---------------- ---------------- HIGH LOW HIGH LOW ---- --- ---- --- Quarter 1st................ $25.75 $18.50 $24.00 $17.00 2nd................ $26.25 $22.75 $18.75 $13.50 3rd................ $26.50 $22.00 $25.00 $16.38 4th................ $26.88 $21.38 $28.25 $23.00
CASH DIVIDENDS DECLARED -------------- 1997 1996 ---- ---- Quarter 1st.................................. $0.17 $0.17 2nd.................................. $0.17 $0.17 3rd.................................. $0.17 $0.17 4th.................................. $0.17 $0.17 ----- ----- $0.68 $0.68
There were approximately 975 shareholders as of August 1, 1997. 18. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This standard establishes guidelines for the display of comprehensive income for financial statement purposes. The objective of the statement is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. The FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This standard requires extensive disclosure of operating segments based on the "management approach." This approach organizes segments within a company for making operating decisions and assessing performance. Reportable segments can be based on products and services, geography, legal structure or any other manner in which management disaggregates the company. Both standards are effective for fiscal years beginning after December 15, 1997. F-22 52 - -------------------------------------------------------------------------------- THE STANDARD PRODUCTS COMPANY PROXY ------------------------------ The undersigned hereby appoints JAMES S. REID, JR., DONALD R. SHELEY, JR. and RICHARD N. JACOBSON, and each of them, attorneys and proxies of the undersigned, with full power of substitution, to attend the annual meeting of shareholders of The Standard Products Company to be held at the Company's Reid Division offices located at 2130 West 110th Street, Cleveland, Ohio, on Tuesday, October 21, 1997 at 9:00 a.m., Eastern Daylight Time, or any adjournment thereof, and to vote the number of shares of said Company which the undersigned would be entitled to vote, and with all the power the undersigned would possess, if personally present, as follows: 1. [ ] FOR, or [ ] WITHHOLD AUTHORITY to vote for, the following nominees for election as directors of the class the term of which will expire in 2000: James C. Baillie, Edward B. Brandon, James S. Reid, Jr., Alan E. Riedel, and Ronald L. Roudebush. (INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, WRITE THAT NOMINEE'S NAME ON THE LINE PROVIDED BELOW.) ----------------------------------------------------------- 2. [ ] FOR, [ ] ABSTAIN, or [ ] AGAINST the proposal to approve The Standard Products Company 1997 Employee Stock Option Plan and to reserve 350,000 authorized but unissued Common Shares, $1 par value, for purposes of such Plan. 3. [ ] FOR, [ ] ABSTAIN, or [ ] AGAINST the proposal to approve The Standard Products Company 1997 Restricted Stock Plan and to reserve 150,000 authorized but unissued Common Shares, $1 par value, for purposes of such Plan. 4. On such other business as may properly come before the meeting. - -------------------------------------------------------------------------------- THE PROXIES WILL VOTE AS SPECIFIED ABOVE, OR IF A CHOICE IS NOT SPECIFIED, THEY WILL VOTE FOR THE NOMINEES LISTED IN ITEM 1 AND FOR ITEMS 2 AND 3. THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF THE COMPANY. Receipt of the Notice of Annual Meeting of Shareholders and Proxy Statement dated September 16, 1997 is hereby acknowledged. Dated: ---------------------, 1997 ----------------------------- ----------------------------- ----------------------------- Signature(s) (Please sign exactly as your name or names appear hereon, indicating, where proper, official position or representative capacity.) EX-21 13 EXHIBIT 21 1 EXHIBIT NO. 21 SUBSIDIARIES OF THE STANDARD PRODUCTS COMPANY The following is a list of all subsidiaries of the Registrant as of June 30, 1997.
JURISDICTION IN WHICH NAME INCORPORATED ---- ------------ Admiral Retread Equipment, Inc.............................. Ohio 5 Rubber Corporation........................................ Pennsylvania Holm Industries, Inc........................................ Indiana Itatiaia Standard LTDA...................................... Brazil Nisco Holding Company....................................... Delaware Nishikawa Standard Company.................................. (1) Oliver Rubber Company....................................... California Standard Products Brasil Industria E Comercio LTDA.......... Brazil SPB Comercio E Participoes LTDA............................. Brazil Standard Products Funding Corporation....................... Delaware Standard Products Industriel................................ France Standard Products Limited................................... United Kingdom Standard Products (Canada) Limited.......................... Dominion of Canada Standard Products International, Inc........................ Delaware Standard Products de Mexico, S.A. de C.V.................... Mexico(2) Stantech, Inc............................................... Delaware Westborn Service Center, Inc................................ Michigan Union Trucking Company...................................... Michigan
- ------------------------- (1) A Delaware General Partnership of which the Registrant is a 50% partner. This entity is not a consolidated subsidiary. (2) 70% owned by the Registrant. EX-23 14 EXHIBIT 23 1 EXHIBIT NO. 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated July 24, 1997, included and incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 File Numbers 333-01923, 333-01921, 33-53989, 33-51554, 33-51556, 33-34437, 33-33612, 33-38348, 33-01558, 2-63498, 2-91928 and 2-86957. ARTHUR ANDERSEN LLP ARTHUR ANDERSON LLP Cleveland, Ohio September 15, 1997. EX-24 15 EXHIBIT 24 1 EXHIBIT 24 POWER OF ATTORNEY The undersigned directors of The Standard Products Company, an Ohio corporation (the "Company"), for purposes of fulfilling the annual reporting requirements of the Securities and Exchange Act, as amended, and the rules and regulations promulgated thereunder, hereby constitute and appoint Donald R. Sheley, Jr., and Richard N. Jacobson, and each of them, severally, as their attorney-in-fact and agent, with full power of substitution and resubstitution, in their names and on their behalf, to sign in their capacities as such attorney-in-fact the Company's Annual Report on Form 10-K, for the fiscal year ended June 30, 1997, and any and all amendments, attachments, and addendums thereto, with full power and authority to perform and do any and all acts and things whatsoever which any such attorney or substitute may deem necessary or advisable to be performed or done in connection with any or all of the above-described matters, as fully as each of the undersigned could do if personally present and acting, hereby ratifying and approving all acts of any such attorney or substitute. IN WITNESS WHEREOF, the undersigned have executed this Power of attorney as the 18th day of August, 1997. /s/ James S. Reid, Jr. /s/ Malcolm R. Myers - --------------------------------- ------------------------------- James S. Reid, Jr. Chairman Malcolm R. Myers /s/ James C. Baillie /s/ Leigh H. Perkins - --------------------------------- ------------------------------- James C. Baillie Leigh H. Perkins /s/ Edward B. Brandon /s/ Alfred M. Rankin, Jr. - --------------------------------- ------------------------------- Edward B. Brandon Alfred M. Rankin, Jr. /s/ John Doddridge /s/ Alan E. Riedel - --------------------------------- ------------------------------- John Doddridge Alan E. Riedel /s/ John D. Drinko /s/ John D. Sigel - --------------------------------- ------------------------------- John D. Drinko John D. Sigel /s/ Curtis E. Moll /s/ W. Hayden Thompson - --------------------------------- ------------------------------- Curtis E. Moll W. Hayden Thompson EX-27 16 EXHIBIT 27
5 1,000 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 6,972 0 177,559 2,863 66,633 271,986 583,614 280,608 691,859 225,421 121,804 0 0 16,810 251,547 691,859 1,108,268 1,108,268 962,812 1,049,032 (137) 0 12,914 46,459 18,929 27,530 0 0 0 27,530 1.64 1.64
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