-----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, AhqJlrLbqftex1cPZ5KfXgukAnAiYdsdh+bvWlqQENlQxsNptoPKKbofNesTgFST 5RdFyUEp2CKhCJ+9t5liNA== 0000098362-98-000009.txt : 19980323 0000098362-98-000009.hdr.sgml : 19980323 ACCESSION NUMBER: 0000098362-98-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TIMKEN CO CENTRAL INDEX KEY: 0000098362 STANDARD INDUSTRIAL CLASSIFICATION: BALL & ROLLER BEARINGS [3562] IRS NUMBER: 340577130 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-01169 FILM NUMBER: 98569419 BUSINESS ADDRESS: STREET 1: 1835 DUEBER AVE SW CITY: CANTON STATE: OH ZIP: 44706 BUSINESS PHONE: 2164713000 FORMER COMPANY: FORMER CONFORMED NAME: TIMKEN ROLLER BEARING CO DATE OF NAME CHANGE: 19710304 10-K 1 1 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 Commission File Number 1-1169 December 31, 1997 THE TIMKEN COMPANY ______________________________________________________ (Exact name of registrant as specified in its charter) Ohio 34-0577130 ________________________________________ ___________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1835 Dueber Avenue, S.W., Canton, Ohio 44706-2798 ________________________________________ ___________________ (Address of principal executive offices) (Zip Code) Registrants telephone number, including area code (330)438-3000 ___________________ Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ______________________________ _______________________ Common Stock without par value New York Stock Exchange Rights to Purchase Common Stock without par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES X NO ___ ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. [ ]. 2 The aggregate market value of the voting stock held by all shareholders other than shareholders identified under item 12 of this Form 10-K as of February 20, 1998, was $1,670,116,320 (representing 52,191,135 shares). Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of February 20, 1998. Common Stock without par value --62,520,736 shares (representing a market value of $2,000,663,552) DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 1997 are incorporated by reference into Parts I and II. Portions of the proxy statement for the annual meeting of shareholders to be held on April 21, 1998, are incorporated by reference into parts III and IV. Exhibit Index may be found on Pages 20 through 23. 3 PART I ______ Item 1. Description of Business ________________________________ General _______ As used herein the term "Timken" or the "company" refers to The Timken Company and its subsidiaries unless the context otherwise requires. Timken, an outgrowth of a business originally founded in 1899, was incorporated under the laws of Ohio in 1904. Products ________ Timken's products are divided into two industry segments. The first includes anti-friction bearings; the second industry segment is steel. Anti-friction bearings constitute Timken's principal industry product. Basically, the tapered roller bearing made by Timken is its principal product in the anti-friction industry segment. It consists of four components (1) the cone or inner race, (2) the cup or outer race, (3) the tapered rollers which roll between the cup and cone, and (4) the cage which serves as a retainer and maintains proper spacing between the rollers. These four components are manufactured or purchased and are sold in a wide variety of configurations and sizes. Sensing devices are added to the basic tapered roller bearing and sold to sport utility vehicle and light truck markets. Matching bearings to service requirements of customers' applications requires engineering, and oftentimes sophisticated analytical techniques. The design of every tapered roller bearing made by Timken permits distribution of unit pressures over the full length of the roller. This fact, coupled with its tapered design, high precision tolerance and proprietary internal geometry and premium quality material, provides a bearing with high load carrying capacity, excellent friction-reducing qualities and long life. Timken also produces super precision ball and roller bearings for use in aerospace, medical / dental, computer disk drives and other markets having high precision applications. These bearings are mostly produced at the company's MPB Corporation subsidiary. They utilize ball and straight rolling elements and are in the super precision end of the general ball and straight roller bearing product range in the bearing industry. A majority of MPB's products are special custom-designed bearings and spindle assemblies. They often involve specialized materials and coatings for use in applications that subject the bearings to extreme operating conditions of speed and temperature. 4 Products (cont.) ________________ Other bearing products manufactured by Timken include cylindrical, spherical, straight and ball bearings for industrial markets. These bearings feature non-tapered rolling elements. This broadening of Timken's product line was achieved primarily through the 1997 acquisition of Rulmenti Grei S.A. in Ploesti, Romania. In addition, Timken produces custom-designed products called SpexxTM performance Bearings. The product line includes both tapered and cylindrical roller bearings and provides cost-effective solutions for selective applications. Steel products include steels of intermediate alloy, low alloy and some carbon grades, vacuum processed alloys, tool steel and other custom-made steel products including parts made from specialty steel. These are available in a wide range of solid and tubular sections with a variety of finishes. In April 1997, the company broke ground for its $55 million bar mill at the Harrison Steel Plant in Canton, Ohio. The investment will position the company as a cost and quality leader in continuous cast, intermediate sized alloy steel bars. The project is on schedule with full operation expected to begin in mid-1998. The company strengthened its tool and alloy steel distribution business in the fourth quarter of 1997 by opening a distribution facility in Greer, South Carolina. This facility is part of the company's OH&R distribution business, a wholly owned subsidiary of Timken's Latrobe Steel Company. Timken has been increasing the marketing of high volume semifinished components to major customers produced from its own steel. This value added activity is a growing portion of the business. The company's Steel Business produces sub-components for automotive and industrial customers at its St. Clair Precision Tubing Components Plant in Eaton, Ohio, its Tryon Peak Plant in Columbus, North Carolina and its newly constructed Winchester Parts Plant in Winchester, Kentucky. The development of the precision parts business has provided the company with the opportunity to further expand its market for tubing and capture more higher-value steel sales. This also enables the company's traditional tubing customers in the automotive and bearing industries to take advantage of higher-performing components that cost less than those they now use. In the fourth quarter of 1997, the company enhanced its parts business production capabilities with the installation of its profile ring mill, a $15 million investment at its Tryon Peak Plant which employs proprietary manufacturing processes and advanced process control technology. The Winchester Parts Plant began operations in May 1997 and 5 Products (cont.) ________________ subsequently installed additional equipment to meet the demands for its products. Sales and Distribution ______________________ Timken's products in the bearing industry segment are sold principally by its own sales organization. A major portion of the shipments are made directly from Timken's plants and the balance from warehouses located in a number of cities in the United States, Canada, England, France, Germany, Mexico, Singapore and Argentina. These warehouse inventories are augmented by authorized distributor and jobber inventories throughout the world which provide local availability when service is required. The company operates an Export Service Center in Atlanta, Georgia, which specializes in the export of tapered roller bearings for the replacement markets in the Caribbean, Central and South America and other regions. Timken's tapered roller bearings and other bearing types are used in general industry and in a wide variety of products including passenger cars, trucks, railroad cars and locomotives, machine tools, rolling mills and farm and construction equipment. MPB's products, which are at the super precision end of the general ball and straight roller bearing segment, are used in aircraft, missile guidance systems, computer peripherals, and medical / dental instruments. A significant portion of Timken's steel production is consumed in its bearing operations. In addition, sales are made to other anti-friction bearing companies and to the aircraft, automotive and truck, construction, forging, tooling and oil and gas drilling industries. In addition, sales are made to steel service centers. Timken's steel products are sold principally by its own sales organization. Most orders are custom made to satisfy specific customer applications and are shipped directly to customers from Timken's steel manufacturing plants. Timken has a number of customers in the automotive industry including both manufacturers and suppliers. However, Timken feels that because of the size of that industry, the diverse bearing applications, and the fact that its business is spread among a number of customers, both foreign and domestic, in original equipment manufacturing and aftermarket distribution, its relationship with the automotive industry is well diversified. Timken has entered into individually negotiated contracts with some of its customers in both the bearing and steel segments. These contracts may extend for one or more years and, if a price is fixed for any period extending beyond current shipments, customarily include a commitment by the customer to purchase a designated percentage of its requirements 6 Sales and Distribution (cont.) ______________________________ from Timken. Contracts extending beyond one year that are not subject to price adjustment provisions do not represent a material portion of Timken's sales. Timken does not believe that there is any significant loss of earnings risk associated with any given contract. Industry Segments _________________ Segment information in Note 13 of the Notes to Consolidated Financial Statements and Information by Industry and Geographic Area on pages 32 and 33 of the Annual Report to Shareholders for the year ended December 31, 1997, are incorporated herein by reference. Export sales from the U.S. and Canada are not separately stated since such sales amount to less than 10% of revenue. The company's Bearing Business has historically participated in the worldwide bearing markets while the Steel Business has concentrated on U.S. markets. Timken's non-U.S. operations are subject to normal international business risks not generally applicable to domestic business. These risks include currency fluctuation, changes in tariff restrictions, and restrictive regulations by foreign governments including price and exchange controls. Competition ___________ Both the anti-friction bearing business and the steel business are extremely competitive. The principal competitive factors involved, both in the United States and in foreign markets, include price, product quality, service, delivery, order lead times and technological innovation. Timken manufactures an anti-friction bearing known as the tapered roller bearing. The tapered principle of bearings made by Timken permits ready absorption of both radial and axial loads in combination. For this reason, they are particularly well adapted to reducing friction where shafts, gears, or wheels are used. Timken also produces super precision ball and straight roller bearings at its MPB subsidiary. With recent acquisitions, the company has selectively expanded its product line to include other bearing types. However, since the invention of the tapered roller bearing by its founder, Timken has maintained primary focus in its product and process technology on the tapered roller bearing segment. This has been important to its ability to remain one of the leaders in the world's bearing industry. This contrasts with the majority of Timken's major competitors who focus more heavily on other bearing types such as ball, straight roller, spherical roller and needle for the general industrial and automotive markets and are, therefore, less specialized in the tapered roller bearing segment. Timken competes 7 Competition (cont.) ___________________ with domestic manufacturers and many foreign manufacturers of anti- friction bearings. The anti-friction bearing business is intensely competitive in every country in which Timken competes. With the collapse of the former Soviet Union and the modernization of existing capacity in many countries, there remain substantial downward pricing pressures in the United States and other countries even during periods of significant demand in the United States and other markets. Moreover, international price discrimination by certain of Timken's foreign competitors and the continued absorption of antidumping duties by companies related to the foreign producers in the United States create additional pricing pressures in the United States. Imports of tapered roller bearings into the United States in 1997 were $240 million or approximately 18 percent of the domestic tapered roller bearing market. In addition, Timken estimates the tapered roller bearings contained as components of foreign automobiles and heavy equipment produced outside the United States and imported into this country, to be approximately $207 million in 1997. To address the problem of injurious dumping by various foreign competitors, the company has pursued its legal rights in the United States and in other parts of the world for many years. In the United States, antidumping orders are outstanding from cases brought by the company in the early 1970s and in 1986. The antidumping finding issued in 1976 pertains to tapered roller bearings from Japan that have an outside diameter of 4 inches or less but excluding unfinished components or parts. The finding does not apply to one major Japanese producer. In August 1986, the company filed an antidumping petition on behalf of the U.S. tapered roller bearing industry with both the U.S. International Trade Commission and the U.S. Department of Commerce alleging that imports of tapered roller bearings (including unfinished parts and components from six countries (China, Romania, Yugoslavia, Italy, Hungary, and Japan (to the extent not covered by the 1976 finding)) were being sold at less than fair value in the United States and were causing material injury to the domestic industry. The U.S. Department of Commerce found that product from each of the countries was being sold in the United States at less than fair value or "dumped," and the U.S. International Trade Commission found such imports were causing injury to the domestic industry. The Commerce Department's notice also identified the amount by which selling prices of the foreign producers were less than fair value. This amount is expressed as a weighted average percentage for each company investigated and is often referred to as the "final margin" for a particular time period. The final margins for Japanese producers as originally calculated in 1986-87 were approximately 36 percent for the major producers. Final margins for producers in other countries varied but were above 100% for one foreign producer. If requested by foreign producers, importers, or domestic producers, the dumping margins (if any) will be examined for a more recent time period. 8 Competition (cont.) ___________________ Substantial dumping margins have been found for most or all of the major producers in Japan for most years since the antidumping orders issued. On January 15, 1998, the U.S. Department of Commerce issued final margins for companies investigated for the 1995-96 time period, finding dumping margins that ranged from .34% to 29.02%. Margins for some of the major producers were 9.6%, 27.8% and 29.02%. Significant dumping margins continue to be found for certain producers from other countries covered by orders. For some countries covered by the orders, imports have declined or ceased. Some foreign producers and exporters / resellers have ceased dumping. The orders were revoked for Yugoslavia in 1995 and for Italy in 1996 as well as for selected individual producers in the other orders over time. Importers are required to post a cash deposit with the U.S. Customs Service equal to the final margin from the most recent period that has been published for a particular foreign producer from a country where an order remains outstanding. If no dumping is found or the amount of dumping is less than the cash deposit, the importer receives a refund with interest. If the dumping found in the review is greater than the amount posted as a cash deposit, the difference must be paid to the U.S. Customs Service with interest. Timken has remained deeply concerned about the persistence of unfair trade practices in its major markets and has participated in the administrative review process in the United States and elsewhere to assure that conditions of fair trade are restored if possible. The company has pursued and continues to pursue legislative changes to neutralize the price depressing effect of duty absorption that has continued in the United States for more than 20 years in some cases. The existence of the orders reduces the commercial harm that would otherwise be experienced by the company from the continued dumping practices of certain foreign competitors. In accord with the international treaty obligations of the United States, each existing antidumping duty finding or order, including those covering tapered roller bearings, will be subject to review by U.S. government agencies to determine whether dumping and injury to the domestic industry are likely to continue or recur if it is revoked. These reviews are tentatively scheduled to commence for the finding and order covering tapered roller bearings in mid-1999. The company intends to participate actively in the proceedings. Timken manufactures carbon and alloy seamless tubing, carbon and alloy steel solid bars, tool steels and other custom-made specialty steel products. Specialty steels are characterized by special chemistry, tightly controlled melting and precise processing. Maintaining high standards of product quality and reliability while keeping production costs competitive is essential to Timken's ability to 9 Competition (cont.) ___________________ compete in the specialty steel industry with domestic and foreign steel manufacturers. Backlog _______ The backlog of orders of Timken's domestic and overseas operations is estimated to have been $1.37 billion at December 31, 1997, and $1.05 billion at December 31, 1996. Actual shipments are dependent upon ever-changing production schedules of the customer. Accordingly, Timken does not believe that its backlog data and comparisons thereof as of different dates are reliable indicators of future sales or shipments. Raw Materials _____________ The principal raw materials used by Timken in its North American plants to manufacture bearings are its own steel tubing and bars and purchased strip steel. Outside North America the company purchases raw materials from local sources with whom it has worked closely to assure steel quality according to its demanding specifications. The principal raw materials used by Timken in steel manufacturing are scrap metal, nickel, and other alloys. Timken believes that the availability of raw materials and alloys are adequate for its needs, and, in general, it is not dependent on any single source of supply. Research ________ Timken's major research center, located in Stark County, Ohio near its largest manufacturing plant, is engaged in research on bearings, steels, manufacturing methods and related matters. Research facilities are also located at the MPB New Hampshire Plants, the Duston, England plant and at the Latrobe, Pennsylvania plant. Expenditures for research, development and testing amounted to approximately $43,000,000 in 1997, $41,000,000 in 1996, and $35,000,000 in 1995. The company's research program is committed to the development of new and improved bearing and steel products, as well as more efficient manufacturing processes and techniques and the expansion of application of existing products. Environmental Matters _____________________ The company continues to emphasize protecting the environment and complying with environmental protection laws. In doing so, the company has invested in pollution control equipment and updated plant operational practices. The company believes it has established adequate reserves to cover its environmental expenses and has a well-established environmental compliance audit program, which includes a proactive 10 Environmental Matters (cont.) _____________________ approach to bringing its domestic and international units to higher standards of environmental performance. This program measures performance against local laws as well as to standards that have been established for all units worldwide. It is difficult to assess the possible effect of compliance with future requirements that differ from existing ones. As previously reported, the company was uncertain whether additional emission monitoring would be required or what the cost would be when proposed emission monitoring regulations pursuant to the Clean Air Act of 1990 were issued. In 1997, the regulations were issued in a modified form from those proposed and, while some uncertainty remains, the financial impact on the company is expected to be small, certainly less than anticipated under the proposed regulations. The company also is unsure of the ultimate future financial impact to the company that could result from the United States Environmental Protection Agency's (EPA's) final rules to tighten the National Ambient Air Quality Standards for fine particulate and ozone, which were issued in July. The company and certain of its U.S. subsidiaries have been designated as potentially responsible parties (PRP's) by the United States EPA for site investigation and remediation at certain sites under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund). The claims for remediation have been asserted against numerous other entities, which are believed to be financially solvent and are expected to fulfill their proportionate share of the obligation. In 1997, the company and its Latrobe Steel subsidiary were both named a PRP at one additional site. Management believes any ultimate liability with respect to all pending actions will not materially affect the company's operations, cash flows or consolidated financial position. The company's MPB Corporation subsidiary has two environmental projects at its manufacturing locations in New Hampshire. Remediation at one plant is nearing completion. In late 1996, the second system was installed and remediation was begun at the other plant. The company had provided for the costs of these projects, which to date have been $3.5 million. A portion of these costs is being recovered from a former owner of the property. Future operating and maintenance costs are expected to be $1.7 million. MPB also filed suit against and settled with four insurance companies for reimbursement of clean-up costs. The company continued work in 1997 on environmental projects at its locations in Canton and Columbus, Ohio. Costs for these two projects are estimated to be about $2.1 million. 11 Patents, Trademarks and Licenses ________________________________ Timken owns a number of United States and foreign patents, trademarks and licenses relating to certain of its products. While Timken regards these as items of importance, it does not deem its business as a whole, or either industry segment, to be materially dependent upon any one item or group of items. Employment __________ At December 31, 1997, Timken had 20,994 associates. Thirty-nine percent of Timken's U.S. associates are covered under collective bargaining agreements. Three percent of Timken's U.S. associates are covered under collective bargaining agreements that expire within one year. Executive Officers of the Registrant ____________________________________ The officers are elected by the Board of Directors normally for a term of one year and until the election of their successors. All officers have been employed by Timken or by a subsidiary of the company during the past five-year period. The Executive Officers of the company as of February 20, 1998, are as follows: Current Position and Previous Name Age Positions During Last Five Years ___________________ ___ ____________________________________________ W. R. Timken, Jr. 59 1992 Chairman - Board of Directors; 1997 Chairman, President and Chief Executive Officer; Director; Officer since 1968. R. L. Leibensperger 59 1992 Vice President - Technology; 1995 Executive Vice President and President - Bearings; 1997 Executive Vice President, Chief Operating Officer and President - Bearings; Officer since 1986. B. J. Bowling 56 1992 Vice President - Human Resources and Logistics; 1993 Executive Vice President-Latrobe Steel Company; 1995 President-Latrobe Steel Company; 1996 Executive Vice President and President - Steel; 1997 Executive Vice President, Chief Operating Officer and President - Steel; Officer since 1996. 12 Current Position and Previous Name Age Positions During Last Five Years ___________________ ___ ____________________________________________ L. R. Brown 62 1992 Vice President and General Counsel; Secretary; 1997 Senior Vice President and General Counsel; Secretary; Officer since 1990. J. T. Elasser 45 1992 Director-President-Timken do Brasil; 1992 Director-21st Century Business Project; 1993 Deputy Managing Director-Bearings- Europe, Africa and West Asia; 1995 Managing Director-Bearings-Europe, Africa and West Asia; 1996 Vice President-Bearings-Europe, Africa and West Asia; 1997 Group Vice President - Bearings - Rail, Europe, Africa and West Asia; Officer since 1996. J. W. Griffith 44 1992 Director-Purchasing and Logistics; 1993 Director-Manufacturing-Bearings-North and South America; 1993 Vice President-Manufacturing-Bearings- North America; 1996 Vice President-Bearings-North American Automotive, Rail, Asia Pacific and Latin America; 1997 Group Vice President - Bearings - North American Automotive, Asia Pacific and Latin America; Officer since 1996. Karl P. Kimmerling 40 1992 General Manager - Primary Operations and Engineering - Latrobe Steel Company; 1995 President - Canadian Timken Ltd.; 1996 Vice President - Manufacturing - Steel; 1997 Group Vice President - Alloy Steel; Officer since 1998. G. E. Little 54 1992 Vice President - Finance; Treasurer; 1997 Senior Vice President - Finance; Treasurer; Officer since 1990. 13 Current Position and Previous Name Age Positions During Last Five Years ___________________ ___ ____________________________________________ S. J. Miraglia, Jr. 47 1992 Director-Manufacturing-Steel; 1993 Vice President-Manufacturing-Steel; 1994 Director-Manufacturing-Europe, Africa and West Asia; 1996 Vice President-Bearings-North American Industrial and Super Precision; 1997 Group Vice President - Bearings - North American Industrial and Super Precision; Officer since 1996. S. A. Perry 52 1992 Director - Purchasing and Logistics; 1993 Vice President - Human Resources and Logistics; 1997 Senior Vice President - Human Resources, Purchasing and Communications; Officer since 1993. Hans J. Sack 43 1992 Project Manager - Parts Strategy - Steel; 1993 General Manager - Parts Business - Steel; 1994 Vice President - Manufacturing - Steel; 1996 President - Latrobe Steel Company; 1997 Group Vice President - Specialty Steel and President - Latrobe Steel Company; Officer since 1998. J. J. Schubach 61 1992 Vice President - Strategic Management; 1996 Vice President - Strategic Management and Continuous Improvement; 1997 Senior Vice President - Strategic Management and Continuous Improvement; Officer since 1984. T. W. Strouble 58 1992 Director - Marketing - Bearings - North and South America; 1993 Vice President - Sales and Marketing - Bearings - North and South America; 1995 Vice President - Technology; 1997 Senior Vice President - Technology Officer since 1995. W. J. Timken 55 1992 Vice President; Director; Officer since 1992. 14 Item 2. Properties ___________________ Timken has bearing and steel manufacturing facilities at several locations in the United States. Timken also has bearing manufacturing facilities in several countries outside the United States. The aggregate floor area of these facilities worldwide is approximately 13,519,000 square feet, all of which, except for approximately 405,000 square feet, is owned in fee. The buildings occupied by Timken are principally of brick, steel, reinforced concrete and concrete block construction, all of which are suitably equipped and in satisfactory operating condition. Timken's bearing manufacturing facilities in the United States are located in Ashland, Bucyrus, Canton, Columbus and New Philadelphia, Ohio; Altavista and Richmond, Virginia; Asheboro and Lincolnton, North Carolina; Carlyle, Illinois; Gaffney, South Carolina; Keene and Lebanon, New Hampshire; Knoxville, Tennessee; Lenexa, Kansas; North Little Rock, Arkansas; Ogden, Utah; and Orange, California. These facilities, including the research facility in Canton, Ohio, and warehouses at plant locations, have an aggregate floor area of approximately 4,669,000 square feet. Timken's bearing manufacturing plants outside the United States are located in Ballarat, Australia; Benoni, South Africa; Cogozzo, Italy; Colmar, France; Duston and Wolverhampton, England; Medemblik, The Netherlands; Ploesti, Romania; Sao Paulo, Brazil; Singapore; Sosnowiec, Poland; St. Thomas, Canada; and Yantai, China. The facilities, including warehouses at plant locations, have an aggregate floor area of approximately 3,634,000 square feet. Timken's steel manufacturing facilities in the United States are located in Canton, Eaton, Wauseon and Wooster, Ohio; Columbus, North Carolina; Franklin and Latrobe, Pennsylvania; and Winchester, Kentucky. These facilities have an aggregate floor area of approximately 4,959,000 square feet. Timken also has a tool steel finishing and distribution facility in Sheffield, England. This facility has an aggregate floor area of approximately 257,000 square feet. In addition to the manufacturing and distribution facilities discussed above, Timken owns warehouses and steel distribution facilities in the United States, Canada, England, France, Scotland, Singapore, Germany, Mexico and Argentina, and leases several relatively small warehouse facilities in cities throughout the world. During 1997 Timken's Bearing and Steel Businesses continued to experience high plant utilization as a result of increased sales in most industries and geographic areas. 15 Properties (cont.) __________________ Timken's manufacturing facilities expanded significantly during 1997 as a result of its four most recent acquisitions. The company also announced plans for plant expansions in several of its U.S. plants. In February 1997, Timken acquired the certain assets of Gnutti Carlo, S.p.A. near Brescia, Italy. This subsidiary is now Timken Italia, s.r.l. and serves primarily the European truck, railroad and industrial markets. The facility includes floor space of approximately 163,300 square feet and employs some 120 associates. Also in February, Timken announced plans to open a hot-forming facility in Winchester, Kentucky. The Winchester Plant, which began operations in May, is a 75,000 square foot facility and employs about 40 people. The plant produces forged bearing components from Timken steel bars. In April, the company broke ground for its $55 million bar mill at the Harrison Steel Plant in Canton, Ohio. The 119,000 square foot expansion will house a new rolling mill and bar processing equipment and is expected to be fully operational by mid-1998. In May the company announced its acquisition of the assets of Handpiece Headquarters, Inc., in Orange, California. This company repairs and rebuilds a variety of dental handpieces for dentists and other customers in its 1,200 square foot facility. In July the company acquired the aerospace bearing operations of the Torrington Company Limited, located in Wolverhampton, England. The business serves the European commercial and military aircraft industry. The facility includes floor space of 54,000 square feet and employs more than 100 people. Also in July, the company announced a $20 million investment to expand its Asheboro Plant. The expansion will increase the plant's square footage by 50%. In the fourth quarter, the company began work on its $51 million investment in the Gaffney , South Carolina plant that was announced in September 1997. The investment, which will be made over the next 5 years, will increase plant capacity by more than 25% in some areas. Additionally in the fourth quarter, the company announced a $15 million investment in new machining technology at its Bucyrus plant in Ohio. Also in the fourth quarter, the company announced the opening of a tool and alloy steel distribution facility in Greer, South Carolina. The new operation will offer steel warehousing, cutting and machining services 16 Properties (cont.) __________________ to independent retail distributors as well as industrial customers in the southeastern United States. In December, the company acquired 70% of Rulmenti Grei S.A., a bearing manufacturer in Ploesti, Romania. The company serves mainly the industrial markets in Romania as well as in Eastern and Western Europe, Asia and North America. The operation contains 498,000 square feet of manufacturing space and employs some 1,000 people. The company is a forty percent shareholder in Tata Timken Limited, a joint venture with The Tata Iron and Steel Company Limited. The joint venture consists of a manufacturing facility in Jamshedpur, India, completed in March of 1992, and four sales offices, also located in India. Item 3. Legal Proceedings __________________________ Not Applicable Item 4. Submission of Matters to a Vote of Security Holders ____________________________________________________________ No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 1997. 17 PART II _______ Item 5. Market for the Registrant's Common Equity and Related Stock ____________________________________________________________________ Holder Matters ______________ The company's common stock is traded on the New York Stock Exchange (TKR). The estimated number of record holders of the company's common stock at December 31, 1997, was 8,313. The estimated number of shareholders at December 31, 1997, was 46,394. High and low stock prices and dividends for the last two years are presented in the Quarterly Financial Data schedule on Page 1 of the Annual Report to Shareholders for the year ended December 31, 1997, and is incorporated herein by reference. Between October 1, 1996 and December 31, 1997, non-United States fiduciaries of certain employee stock purchase and savings plans established and administered in accordance with the laws of countries other than the United States purchased 44,470 shares of the company's common stock on the New York Stock Exchange on behalf of persons not resident in the United States who are employed by subsidiaries of the company. The purchases were made in reliance on Regulation S under the Securities Act of 1933 for an aggregate consideration of $1,317,941. The number of shares have been adjusted to reflect the impact of the two- for-one stock split approved by the Board of Directors on April 15, 1997. Item 6. Selected Financial Data ________________________________ The Summary of Operations and Other Comparative Data on Pages 34 and 35 of the Annual Report to Shareholders for the year ended December 31, 1997, is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and ________________________________________________________________________ Results of Operation ____________________ Management's Discussion and Analysis of Financial Condition and Results of Operations on Pages 17-24 of the Annual Report to Shareholders for the year ended December 31, 1997, is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data ____________________________________________________ The Quarterly Financial Data schedule included on Page 1, the consolidated financial statements of the registrant and its subsidiaries on Pages 18-24, the notes to consolidated financial statements on Pages 25-33, and the Report of Independent Auditors on Page 33 of the Annual 18 Report to Shareholders for the year ended December 31, 1997, are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants ______________________________________________________ on Accounting and Financial Disclosure ______________________________________ Not applicable. 19 PART III ________ Item 10. Directors and Executive Officers of the Registrant ____________________________________________________________ Required information is set forth under the caption "Election of Directors" on Pages 4-7 of the proxy statement issued in connection with the annual meeting of shareholders to be held April 21, 1998, and is incorporated herein by reference. Information regarding the executive officers of the registrant is included in Part I hereof. Item 11. Executive Compensation ________________________________ Required information is set forth under the caption "Executive Compensation" on Pages 10-20 of the proxy statement issued in connection with the annual meeting of shareholders to be held April 21, 1998, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management ________________________________________________________________________ Required information regarding Security Ownership of Certain Beneficial Owners and Management, including institutional investors owning more than 5% of the company's Common Stock, is set forth under the caption "Beneficial Ownership of Common Stock" on Pages 8-9 of the proxy statement issued in connection with the annual meeting of shareholders to be held April 21, 1998, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions ________________________________________________________ Required information is set forth under the caption "Election of Directors" on Pages 4-7 of the proxy statement issued in connection with the annual meeting of shareholders to be held April 21, 1998, and is incorporated herein by reference. 20 PART IV _______ Item 14. Exhibits, Financial Statement Schedules, and Report on Form 8-K _________________________________________________________________________ (a)(1) and (2) - The response to this portion of Item 14 is submitted as a separate section of this report. (3) Listing of Exhibits Exhibit _______ (3)(i) Amended Articles of Incorporation of The Timken Company (Effective April 16, 1996) were filed with Form S-8 dated April 16, 1996 and are incorporated herein by reference. (3)(ii) Amended Regulations of The Timken Company effective April 21, 1987, were filed with Form 10-K for the period ended December 31, 1992, and are incorporated herein by reference. (4) Sixth Amendment Agreement dated August 31, 1997, to the amended and restated credit agreement as amended February 23, 1993, May 31, 1994, November 15, 1994, and August 15, 1995, and August 31, 1996, between Timken and certain banks was filed with Form 10-Q for the period ended September 30, 1997, and is incorporated herein by reference. (4.1) Fifth Amendment Agreement dated August 31, 1996, to the amended and restated credit agreement as amended February 23, 1993, May 31, 1994, November 15, 1994, and August 15, 1995, between Timken and certain banks was filed with Form 10-Q for the period ended September 30, 1996, and is incorporated herein by reference. (4.2) Fourth Amended Agreement dated August 15, 1995, to the amended and restated credit agreement as amended February 23, 1993, May 31,1994, and November 15, 1994, between Timken and certain banks, was filed with Form 10-Q for the period ended September 30, 1995, and is incorporated herein by reference. (4.3) Third Amendment Agreement dated November 15, 1994, to the amended restated credit agreement as amended February 23, 1993, and May 31, 1994, between Timken and certain banks, was filed with Form 10-Q for the period ended September 30, 1995, and is incorporated herein by reference. 21 Listing of Exhibits (cont.) ___________________________ (4.4) Second Amendment Agreement dated May 31, 1994, to the amended restated credit agreement as amended February 23, 1993, between Timken and certain banks, was filed with Form 10-Q for the period ended June 30, 1994, and is incorporated herein by reference. (4.5) First Amendment Agreement dated February 26, 1993, to the restated credit agreement as amended December 31, 1991, between Timken and certain banks was filed with Form 10-K for the period ended December 31, 1992, and is incorporated herein by reference. (4.6) Credit Agreement amended as of December 31, 1991, between Timken and certain banks was filed with Form 10-K for the period ended December 31, 1991, and is incorporated herein by reference. (4.7) Indenture dated as of July 1, 1990, between Timken and Ameritrust Company of New York, which was filed with Timken's Form S-3 registration statement dated July 12, 1990, and is incorporated herein by reference. (4.8) First Supplemental Indenture, dated as of July 24, 1996, by and between The Timken Company and Mellon Bank, N.A. was filed with Form 10-Q for the period ended September 30, 1996, and is incorporated herein by reference. (4.9) The company is also a party to agreements with respect to other long-term debt in total amount less than 10% of the registrant's consolidated total assets. The registrant agrees to furnish a copy of such agreements upon request. Management Contracts and Compensation Plans ___________________________________________ (10) The Management Performance Plan of The Timken Company for Officers and Certain Management Personnel. (10.1) The form of Deferred Compensation Agreement entered into with Joseph F. Toot, Jr., W. R. Timken, Jr., R. L. Leibensperger and B. J. Bowling was filed with Form 10-Q for the period ended September 30, 1995, and is incorporated herein by reference. (10.2) The Timken Company 1996 Deferred Compensation Plan for officers and other key employees, was filed with Form 10-Q for the period ended September 30, 1995, and is incorporated herein by reference. 22 Listing of Exhibits (cont.) ___________________________ (10.3) The Timken Company Long-Term Incentive Plan for officers and other key employees as amended and restated as of December 20, 1995, and approved by shareholders April 16, 1996, was filed as Appendix A to Proxy Statement dated March 6, 1996, and is incorporated herein by reference. (10.4) The 1985 Incentive Plan of The Timken Company for Officers and other key employees as amended through December 17, 1997. (10.5) The form of Severance Agreement entered into with all Executive Officers of the company was filed with Form 10-K for the period ended December 31, 1996, and is incorporated herein by reference. Each differs only only as to name and date executed. (10.6) The form of Death Benefit Agreement entered into with all Executive Officers of the company was filed with Form 10-K for the period ended December 31, 1993, and is incorporated herein by reference. Each differs only as to name and date executed. (10.7) The form of Indemnification Agreements entered into with all Directors who are not Executive Officers of the company was filed with Form 10-K for the period ended December 31, 1990, and is incorporated herein by reference. Each differs only as to name and date executed. (10.8) The form of Indemnification Agreements entered into with all Executive Officers of the company who are not Directors of the company was filed with Form 10-K for the period ended December 31, 1990 and is incorporated herein by reference. Each differs only as to name and date executed. (10.9) The form of Indemnification Agreements entered into with all Executive Officers of the company who are also Directors of the company was filed with Form 10-K for the period ended December 31, 1990 and is incorporated herein by reference. Each differs only as to name and date executed. (10.10) The form of Employee Excess Benefits Agreement entered into with all active Executive Officers, certain retired Executive Officers, and certain other key employees of the company was filed with Form 10-K for the period ended December 31, 1991 and is incorporated herein by reference. Each differs only as to name and date executed, except Mr. Brown who will be given additional service. 23 Listing of Exhibits (cont.) ___________________________ (10.11) The Amended and Restated Supplemental Pension Plan of The Timken Company as adopted March 16, 1998. (10.12) The form of The Timken Company Nonqualified Stock Option Agreement for nontransferable options as adopted on November 7, 1997. (10.13) The form of The Timken Company Nonqualified Stock Option Agreement for transferable options as adopted on November 7, 1997. (10.14) The Consulting Agreement entered into with Joseph F. Toot, Jr. (10.15) The form of The Timken Company Performance Share Agreement entered into with W. R. Timken, Jr., R. L. Leibensperger and B. J. Bowling. (13) Annual Report to Shareholders for the year ended December 31, 1997, (only to the extent expressly incorporated herein by reference). (21) A list of subsidiaries of the registrant. (23) Consent of Independent Auditors. (24) Power of Attorney (27) Financial Data Schedule (b) Reports on Form 8-K: On February 6, 1998, the company filed a Form 8-K to report selected financial data. (c) The exhibits are contained in a separate section of this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE TIMKEN COMPANY By /s/ W. R. Timken, Jr. By /s/ G. E. Little ________________________________ _____________________________ W. R. Timken, Jr. G. E. Little Director and Chairman; President Senior Vice President-Finance and Chief Executive Officer Principal Financial and Accounting Officer) Date March 20, 1998 Date March 20, 1998 ________________________________ _____________________________ Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ Robert Anderson* By /s/ John M. Timken, Jr.* ______________________________ ________________________________ Robert Anderson Director John M. Timken, Jr. Director Date March 20, 1998 Date March 20, 1998 ______________________________ _______________________________ By /s/ Martin D. Walker* By /s/ W. J. Timken* ______________________________ _______________________________ Martin D. Walker Director W. J. Timken Director Date March 20, 1998 Date March 20, 1998 ______________________________ _______________________________ By /s/ Stanley C. Gault* By /s/ Joseph F. Toot, Jr.* ______________________________ _______________________________ Stanley C. Gault Director Joseph F. Toot, Jr. Director Date March 20, 1998 Date March 20, 1998 ______________________________ _______________________________ By /s/ J. Clayburn La Force, Jr.* By /s/ Charles H. West* ______________________________ _______________________________ J. Clayburn La Force, Jr. Director Charles H. West Director Date March 20, 1998 Date March 20, 1998 ______________________________ _______________________________ By /s/ Robert W. Mahoney* By /s/ Alton W. Whitehouse* ______________________________ _______________________________ Robert W. Mahoney Director Alton W. Whitehouse Director Date March 20, 1998 Date March 20, 1998 ______________________________ _______________________________ By /s/ Jay A. Precourt* ______________________________ *By: /s/ G. E. Little Jay A. Precourt Director ______________________________ Date March 20, 1998 G. E. Little, attorney-in-fact ______________________________ by authority of Power of Attorney filed as Exhibit 24 hereto EX-10 2 January 1, 1998 Exhibit 10 THE TIMKEN COMPANY MANAGEMENT PERFORMANCE PLAN Purpose The purpose of The Timken Company (the "Company") Management Performance Plan (the "Plan") is to promote the profitable growth of the Company by: - Providing rewards for achieving increasing levels of return on capital. - Recognizing corporate, business unit and individual performance achievement. - Attracting, motivating and retaining superior executive talent. Administration It is the responsibility of senior management of the Company to execute the provisions of the Plan. Based on senior management recommendations, the Compensation Committee (the "Committee") approves financial goals, participation, target bonus awards, actual bonus awards, timing of payment and other actions necessary to the administration of the Plan. Participation The participant group includes Company executive officers and other key employees of the Company and its subsidiaries in positions having a point value in excess of 1000 points based on the Company's job evaluation process. Performance Targets The primary Corporate performance measure is Return on Invested Capital, one measure of which is Earnings Before Interest and Taxes (EBIT) divided by Beginning Invested Capital (BIC). A positive Return on Invested Capital will be required to generate a Total Corporate Fund ("Total Fund") automatically. At the beginning of each year, corporate targets for Return on Invested Capital as it relates to the Cost of Capital will be set. The degree of achievement of these targets will determine the size of the Total Fund. In addition, at the beginning of each year, the Committee will specify any other financial or non-financial measures that will be used to evaluate Corporate and/or Business Unit performance for the coming year. When the Corporate threshold level of Return on Invested Capital is not achieved, the Committee, at its discretion, can approve payment of up to 25% of the target amount for the achievement of performance results that position the Company strategically for the future in such key areas as: - Cash flow - Continuous improvement - Customer satisfaction - Debt reduction - Earnings growth - Financial performance exceeding that of peer/competitor companies - Improvement of shareholder return - Inventory Management - Productivity improvement - Quality - Recruitment and development of excellent associates with emphasis on diversity - Reduction of fixed costs - Sales growth - Successful start-up of new facility - Successful acquisition/divestiture Bonus Opportunity Each position is assigned a target bonus expressed as a percentage of annual base salary. The targets are based on market data for companies that are similar for compensation purposes including similar size and similar industries. The targets are reviewed annually by management and all target bonuses for officers will be approved by the Committee. The full target bonus opportunity represents an appropriate bonus award if performance standards are met in the following areas: - Corporate return on invested capital - Business unit return on invested capital - Individual performance against preset goals Business unit targets will be set using EBIT/BIC and other measures developed by senior management. Achievement of these targets will affect the adjustment to the Business Unit Funds used to arrive at the Final Corporate Fund ("Final Fund"). The actual bonus payment will reflect a mix of corporate, business unit and individual performance as appropriate for each position. The allocations to corporate and business unit performance will be reviewed annually and changes to the allocations will be determined by senior management. Bonus Fund The Total Corporate Target Fund ("Target Fund") is derived by multiplying the annual salary of each approved participant as of November 1 of the Plan year times the Target Bonus percentage and summing. The Target Fund is adjusted as follows for the achievement of corporate financial and non-financial performance goals to arrive at the Total Fund: - Reflect corporate financial goals by reference to a table relating corporate financial achievement and a multiplier, not to exceed 140%, to be applied to the Target Fund. - Reflect corporate non-financial goals with an additional adjustment of plus or minus 25% based on a mixture of objective and subjective factors. If threshold levels of performance are not achieved, the Committee can establish, at its discretion, a Total Fund up to 25% of the Target Fund for achievement of results that successfully position the Company strategically for the future. The Total Fund is allocated to Corporate and Business Unit Funds using the allocations established for each approved participant. The Business Unit Funds are adjusted by plus or minus 25% to reflect the achievement of Business Unit EBIT/BIC goals and other non-financial goals to arrive at the Final Fund. Individual bonus amounts are adjusted for achievement of individual performance goals as follows: Outstanding performance 120% All expectations met and some exceeded 110% All expectations met 100% Most expectations met 90% or less Most expectations not met 0% Bonus Payments At the end of the year, senior management will determine whether Corporate performance has exceeded the threshold for creating a bonus fund. Senior management will recommend to the Committee the Total Fund and Final Fund based on its assessment of performance achievement at Corporate, Business Unit and individual levels. The Committee may make further adjustments to the fund or any individual bonus amount based on its assessment of financial and non-financial performance. Awards under the Plan will be paid in cash or stock. One hundred percent of awards under the Plan will be included in pension earnings and earnings for the purpose of calculating 401(k) plan benefits. Awards will not be included for purposes of any other employee benefits plans except long term disability. Exhibit 10.4 THE 1985 INCENTIVE PLAN OF THE TIMKEN COMPANY 1. Purpose. The purpose of The 1985 Incentive Plan (the "Plan") is to provide a means by which certain officers and other key employees of The Timken Company (the "Company"), or employees who have high potential for becoming key employees, may be given an opportunity to purchase or receive Common Stock of the Company. The Plan is intended to advance the interests of the Company by encouraging stock ownership among employees most likely to contribute valuable services to the Company (or subsidiaries thereof), to secure and retain the services of highly qualified persons, and by providing such persons with an additional incentive, through personal involvement with the fortunes of the Company, to continue in the service of the Company and to advance the Company's long-term success. 2. Awards Under the Plan. Awards under the Plan may be of two types: (1) "stock options" with rights to receive "dividend credits," and (2) "restricted stock rights." a) "Stock options" are rights to purchase Common Stock of the Company at the fair market value as of the date the option is granted. Such options shall be nonqualified in form (options not attempting to meet the requirements for Incentive Stock Options as defined in Section 422A of the Internal Revenue Code). Rights to receive "dividend credits" shall be included with all stock options, providing for the crediting and payment of Common Stock cash dividends in the form of "restricted stock rights" subject to the terms, conditions, and restrictions set forth in Section 7 herein. b) "Restricted stock rights" consist of restricted stock units that give the holder the right to receive, without payment of any cash to the Company (other than required withholding taxes), shares of Common Stock, subject to the terms, conditions, and restrictions set forth in Section 8 herein. "Restricted stock rights" may be granted alone, or in conjunction with stock options as the form of payment for any dividends credited to option holders. 3. Effective Date and Term of the Plan. The effective date of this Plan is May 1, 1985 and the term of the Plan shall be from May 1, 1985 to December 31, 1994. No new stock options or restricted stock rights shall be granted after December 31, 1994, but stock options and restricted stock rights previously granted may extend beyond that date, and any dividends credited in conjunction with stock options so extending may continue to be in the form of restricted stock rights until such stock options either are exercised, are terminated, or expire. 4. Shares of Stock Subject to the Plan. The shares that may be issued under this Plan shall not exceed in the aggregate 1,000,000 shares (as adjusted for a two-for-one stock split on August 31, 1988) of the Common Stock of the Company, subject to adjustment as may be provided in Section 11 herein. Shares subject to the Plan may be authorized and unissued shares or previously issued shares that have been acquired by the Company and are held in its treasury. Shares subject to stock options and restricted stock rights that terminate or expire prior to exercise or vesting shall be available for further grants or awards hereunder. 5. Administration of the Plan. The Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors, which shall consist of not fewer than three directors of the Company, none of whom is eligible for grants or awards under this Plan in accordance with the requirements set forth in Section 6 herein. Members of the Committee shall be designated by the Board and shall serve at the pleasure of the Board. Subject to the provisions of the Plan, the Committee shall have full authority to interpret the Plan, to establish and amend rules and regulations relating to the Plan, to determine the criteria of eligibility for participation in the Plan (subject to limitations set forth in Section 6), to select participants in the Plan, to determine the size and term of awards to be granted each participant, to determine the time when awards will be granted, and to make all other determinations and to take all other actions necessary or advisable for the administration of the Plan. The Committee's interpretation of the Plan, and all actions taken and determinations made by the Committee pursuant to the powers vested in it hereunder, shall be conclusive and binding on the Company, all employees of the Company and its subsidiaries, and the shareholders of the Company. 6. Eligibility for Participation. Eligibility for participation in the Plan shall be limited to officers and other key employees of the Company and its subsidiaries, and to employees judged by the Committee to have high potential to become key employees. The Committee may establish from time to time a minimum salary grade assignment or equivalent salary level in determining eligibility for participation, and in its sole discretion shall select the Plan participants, provided however that: a) No director of the Company who is not also. a full-time salaried employee shall be eligible for participation. b) No officer serving as Chairman of the Board or President who owns, directly or indirectly, or could own as a result of an award under the Plan, more than two percent of the outstanding Common Stock of the Company shall be eligible for participation. c) No employee who has received a stock option award accompanied by a right to receive dividend credits shall thereafter be eligible to receive a grant of restricted stock rights set forth in Section 8 herein. 7. Stock Options and Dividend Credits. Stock options and rights to receive dividend credits shall be evidenced by agreements in such form and including such terms and conditions consistent with the Plan as the Committee shall determine to be appropriate. In substance, these agreements shall include the following terms and conditions: a) Number of Shares. Each option agreement shall specify the number of shares that may be purchased upon exercise of the option. b) Exercise Price. The exercise price shall be determined by the Committee, but in no event shall it be less than 100 percent of the fair market value of the Common Stock of the Company on the date of grant. c) Option Term. The term of an option, as set by the Committee, shall not exceed 10 years from the date of grant. d) Exercise Dates. Except as otherwise provided in this Plan, or in the applicable option agreement, each option will be exercisable as to one-fourth of the initial shares at any time after 1 year from date of grant, as to an additional one-fourth of the initial shares at any time after 2 years from date of grant, as to an additional one-fourth of the shares at any time after 3 years from date of grant, and as to the remaining one- fourth of the shares at any time after 4 years from date of grant. e) Medium and Time of Payment. Payment for shares purchased upon exercise of an option granted under the Plan must be made in full at the time of exercise. Payment may be in cash, check, or in Common Stock of the Company, provided that the shares of Common Stock used for payment have been owned by the participant for at least 6 months. Fair market value of Common Stock for this purpose shall be the average of the high and low selling prices, on the New York Stock Exchange or such other stock exchange or market on which Common Stock of the Company shall be principally traded, for the day on which such Common Stock is tendered (the exercise date). f) Effect of Employment Termination. (i) If the participant's employment terminates during the option term as a result of retirement with the Company's consent, or as the result of disability, any options then exercisable shall continue in force up to 3 years, but not beyond the option term. (ii) If termination of employment is the result of death, options then exercisable shall continue for up to 1 year, but not beyond the option term. Exercisable options for a disabled participant whose employment has terminated and whose death occurs within the 3 years following termination shall expire at the earliest of 1 year from the date of death, 3 years from date of the disability termination, or the last day of the option term. (iii) In the case of all other terminations (voluntary or involuntary termination of employment or retirement without the Company's consent), options exercisable on the date of termination shall expire 30 days later. All unexercisable options shall expire immediately. In the case of an approved leave of absence, the Committee shall determine whether or not the option shall continue in force and under what conditions, but in no event shall the option term be extended. g) Rights to Receive Dividend Credits. All stock option grants shall include rights to receive dividend credits in accordance with the following terms, conditions, and requirements: (i) Timing and Amount. At the end of each calendar year, the total cash dividends per Common Share paid during that year shall be multiplied by the total number of shares then in force for each participant (unexercised option shares plus unvested restricted stock units from prior dividend credits) to arrive at the participant's total dividend credit for the year; provided however that no dividend credit will be made for a year unless net income per share is at least 200 percent of the dividends per share, and that no dividends will be credited following termination of employment, even though stock options and restricted stock units may continue in force under certain termination situations. (ii) Conversion to Restricted Stock Units. A participant's dividend credit each year shall be converted into restricted stock units at the end of each calendar year based upon the average closing price of Common Stock of the Company, as reported by the New York Stock Exchange or such other stock exchange or market on which Common Stock of the Company shall be principally traded, for the 10 trading days preceding this conversion date, rounded to the nearest whole share. (iii) Vesting of Restricted Stock Units. The restricted stock units in respect of each year's dividend credit shall vest and be paid out 100 percent after a vesting period, established by the Committee, of not less than 4 years from the date credited, subject to the participant's continued employment during the vesting period. However, if the participant's employment terminates during the vesting period as the result of death, disability, or retirement with the Company's consent, all restricted stock units shall vest and be paid out within 30 days. If employment terminates for any other reason, vesting of any or all restricted stock units shall be solely at the discretion of the Committee. 8. Restricted Stock Rights. As a means of retaining and motivating selected employees who are not yet eligible for grants of stock options with rights to dividend credits, the Committee may at any time make grants of restricted stock rights to these employees. These grants shall be evidenced by agreements in such form and including such terms and conditions consistent with the Plan as the Committee shall determine to be appropriate. In substance, these agreements shall include the following terms and conditions: a) Restricted Stock Units. A restricted stock rights agreement shall specify the number of restricted stock units to which it pertains. Each restricted stock unit shall be equivalent to one share of Common Stock, and shall entitle the holder to receive, without payment of cash to the Company (other than required withholding taxes), one share of Common Stock in consideration for services performed for the Company by the holder during the vesting period. b) Dividend Credits. Each restricted stock rights agreement will also provide for cash dividends declared quarterly on the Company's Common Stock to be credited in respect of a participant's restricted stock units and accumulated without interest until the end of the vesting period. c) Vesting of Restricted Stock Units. The restricted stock units and accumulated dividend credits covered by a grant of restricted stock rights shall vest and be paid out 100 percent after a vesting period, established by the Committee, of not less than 5 years from the date granted, subject to the participant's continued employment during the vesting period. However, (i) If the participant's employment terminates during the vesting period as the result of death or disability, a portion of both the restricted stock units and the accumulated dividend credits prorated for the number of full months employed during the vesting period shall vest and be paid out within 30 days. (ii) If employment terminates for any other reason, all restricted stock units and accumulated dividend credits shall be forfeited. 9. Non-Assignability of Options and Rights. No stock option, right to receive dividend credits, or restricted stock right shall be assignable or transferable by a participant except by will or by the laws of descent and distribution, and during the participant's lifetime shall be exercisable only by the participant. 10. General Restriction. The Company shall not be obligated to deliver any shares upon the exercise of an option or vesting of a restricted stock unit unless and until, in the opinion of the Company's counsel, all applicable federal, state, and other laws and regulations have been complied with, nor, in the event the outstanding Common Stock is at the time listed upon any stock exchange, unless and until the shares to be delivered have been listed or authorized to be added to the list upon official notice of issuance upon such exchange, nor unless or until all other legal matters in connection with the issuance and delivery of shares have been approved by the Company's counsel. Without limiting the generality of the foregoing, the Company may require from the participant or other person purchasing or receiving shares of Common Stock under the Plan such investment representation or such agreement, if any, as counsel for the Company may consider necessary in order to comply with the Securities Act of 1933, may impose upon certificates evidencing the shares a restrictive legend and place a stop transfer order with its transfer agent, and may require that the participant or such other person agree that any sale of the shares will be made only on one or more specified stock exchanges or in such other manner as is permitted by the Committee and that he will notify the Company before making a disposition of the shares whether by sale, gift, or otherwise. 11. Changes in Stock. In the event of a stock dividend, split- up, or combination of shares, recapitalization or merger in which the Company is the surviving corporation or other similar capital change, the number and kind of shares of stock or securities of the Company to be subject to the Plan and to options and rights then outstanding or to be granted thereunder, the maximum number of shares of stock or securities which may be issued on the exercise of options or vesting of rights granted under the Plan, the option price and other relevant provisions shall be appropriately adjusted by the Committee, whose determination shall be binding on all persons. In the event of a consolidation or a merger in which the Company is not the surviving corporation, or any other merger in which the stockholders of the Company exchange their shares of stock in the Company for stock of another corporation, or in the event of complete liquidation of the Company, all outstanding options and rights shall thereupon terminate, provided that the Committee may, prior to the effective date of any such consolidation or merger or the completion of the liquidation, either (i) make any or all outstanding options and rights immediately exercisable or vested or (ii), in the case of a consolidation or merger, arrange to have the surviving corporation grant to the participants replacement options or rights on terms which the Committee shall determine to be fair and reasonable. If any "person," as defined in Section 13(d) under the Securities Exchange Act of 1934 and the rules and regulations thereunder in effect on May 1, 1985 ("Exchange Act"), shall make or institute a tender offer for all or any portion of the outstanding voting securities of the Company, or shall become a "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, of 30 percent or more of the outstanding voting securities of the Company, then the Committee may, in its discretion, terminate any or all outstanding options and rights or make such options and rights immediately exercisable or vested. 12. Rights as a Shareholder. The participant shall have no rights as a shareholder with respect to any shares of Common Stock of the Company held under option or subject to restricted stock rights until the date of issuance of the stock certificates to the participant for such shares. 13. Withholding Taxes. Whenever under the Plan shares are to be issued in satisfaction of options or rights granted thereunder, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy federal, state, and local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. 14. Subsidiary. For purposes of the Plan, subsidiary shall mean any corporate more than 50 percent of total combined voting power or all classes of stock of which is owned, directly or indirectly, by the Company and which, with the approval of the Board of Directors of the Company, has adopted the Plan. 15. Employment Rights. Neither the adoption of the Plan nor the granting of any option or right hereunder shall be deemed to confer upon any employee of the Company or any subsidiary the right to continued employment with the Company or any subsidiary, or to interfere in any way with the right of the Company or any subsidiary to terminate the employment of any employee at any time. 16. Amendments. The Committee may at any time discontinue granting options or rights under the Plan. The Board of Directors may at any time or times amend the Plan or amend any outstanding option or options for the purpose of satisfying the requirements of any changes in applicable laws or regulations or for any other purpose which may at the time be permitted by law; provided that (except to the extent permitted under Section 11) no such amendment shall, without the approval of the stockholders of the Company (a) increase the maximum number of shares available under the Plan (subject to adjustment as provided in Section 11), (b) reduce the minimum exercise price of options below the price provided for in Section 7(b), (c) extend the time within which options or rights may be granted, (d) extend the term of an outstanding option beyond 10 years from the date of grant or the vesting period of an outstanding restricted stock unit, (e) change the designation of the employees or class of employees eligible to receive options under the Plan. No amendment shall adversely affect the right of any participant (without the participant's consent) under any option or right theretofore granted. 17. Termination. The Board of Directors may terminate the Plan at any time prior to its scheduled expiration date, but no such termination shall adversely affect the rights of any participant (without the participant's consent) under any stock option or right theretofore granted. AMENDMENT TO THE 1985 INCENTIVE PLAN OF THE TIMKEN COMPANY Recitals WHEREAS, The Timken Company, an Ohio corporation (the "Company"), with the approval of the Company's shareholders, has established the 1985 Incentive Plan of The Timken Company, effective as of May 1, 1985 (the "Plan"); WHEREAS, the Plan previously has been restated and amended; WHEREAS, the Company desires to amend the Plan further specifically to provide optionees with an election to have the Company withhold shares of the Company's Common Stock without par value (the "Common Stock") to cover tax withholding requirements upon the issuance of shares of Common Stock in connection with the exercise of stock options and the vesting of restricted stock units representing dividend credits under stock options (the "Share Withholding Amendment"); and WHEREAS, the Board of Directors of the Company (the "Board") has approved the Share Withholding Amendment in accordance with the provisions of Section 16 of the Plan and such Amendment does not require approval by the shareholders of the Company. NOW, THEREFORE, the Plan is hereby amended as follows: 1. The Plan is amended by adding the following two sentences to the end of Section 13 of the Plan: The recipient may elect to satisfy all or any part of any such withholding obligation by surrendering to the Company a portion of the shares that are issued to the recipient in satisfaction of such options or rights. If such election is made, the shares so surrendered by the recipient shall be credited against any such withholding obligation at their fair market value (determined in accordance with Section 7(e)) on the date of such surrender. 2. Except as amended prior to the date hereof and by the Share Withholding Amendment, the Plan shall remain in full force and effect. 3. This Amendment to the 1985 Incentive Plan of The Timken Company shall be effective as of November 7, 1997, the date of the approval hereof by the Board. AMENDMENT TO THE 1985 INCENTIVE PLAN OF THE TIMKEN COMPANY WHEREAS, The Timken Company, an Ohio corporation )the "Company"), with the approval of the Company's shareholders, has established the 1985 Incentive Plan of the Timken Company, effective as of May 1, 1985 (as amended through November 7, 1997, the "Plan"); WHEREAS, the Company desires to amend the Plan further to permit Restricted Stock Units representing dividend credits in connection with stock options to be paid out upon vesting thereof in shares of the Company's Common Stock without par value or in cash and to afford the Compensation Committee of the Board of Directors the authority to amend awards outstanding under the Plan (the "Amendment"); and WHEREAS, the Board of Directors of the Company (the "Board") has approved the Amendment in accordance with the provisions of Section 16 of the Plan and such Amendment does not require approval by the shareholders of the Company. NOW, THEREFORE, the Plan is hereby amended as follows: 1. The Plan is amended by adding the following sentence to the end of Section 7 (g)(iii) of the Plan: Restricted Stock Units representing dividend credits may provide for payment upon vesting in the form of shares of Common Stock or cash. 2. The portion of the second sentence of Section 16 of the Plan before the proviso is amended to read as follows: The Board of Directors may at any time or times amend the Plan, and the Board of Directors or the Committee may at any time or times amend any outstanding options, for the purpose of satisfying any applicable lows or regulations or for any other purpose which may at the time be permitted by law; 3. Except as amended prior to the date hereof and by the Amendment, the Plan shall remain in full force and effect. 4. This Amendment to the 1985 Incentive Plan of The Timken Company shall be effective as of December 17, 1997, the date of the approval hereof by the Board. Exhibit 10.11 AMENDED AND RESTATED SUPPLEMENTAL PENSION PLAN OF THE TIMKEN COMPANY The Timken Company, 1835 Dueber Avenue, S. W., Canton, Ohio 44706, EIN 34-0577130, and its wholly-owned subsidiaries Latrobe Steel Company and MPB Corporation (collectively the "Company") hereby amend and restate the Supplemental Pension Plan of The Timken Company (the "Supplemental Plan") originally effective May 14, 1979, for the following purpose and in accordance with the provisions as set forth below. This Amended and Restated Supplemental Plan is effective November 1, 1997. 1. Purpose The purpose of the Supplemental Plan is to provide for, on or after the effective date hereof, the payment of supplemental retirement benefits: (a) to those participants of the qualified defined benefit plans of the Company whose benefits payable under such qualified defined benefit plans of the Company and related companies are subject to certain benefit limitations (collectively referred to as "Code Limitations") imposed by the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and Section 401 and Section 415 of the Internal Revenue Code of 1986, as amended (the "Code"); (b) to certain employees of the Company's international operations with whom the Company has special retirement agreements; and (c) to certain employees of the Company who have Employee Excess Benefits Agreements ("Excess Agreements") in effect with the Company. 2. Eligibility The following individuals shall be eligible for benefits under the Supplemental Plan and shall be known as participants: (a) Members of or Participants in (i) The Timken Company Retirement Plan for Salaried Employees, (ii) the 1984 Retirement Plan for Salaried Employees of The Timken Company, and (iii) those provisions of the Timken-Latrobe- MPB Retirement Plan incorporating the Restated Pension Plan for Salaried Employees of Latrobe Steel Company, and the MPB Corporation Retirement Plan (the plans identified in clauses (i), (ii) and (iii) being collectively the "Qualified Plan"), other than participants described in paragraph 2(d), who are eligible for a retirement benefit other than a deferred vested pension and whose retirement benefits under the Qualified Plan are limited pursuant to the Code Limitations; (b) Certain employees of the Company's international operations with whom the Company has special agreements concerning retirement benefits to be paid by the Supplemental Plan; (c) (i) Former employees of the Company who separated from the service of the Company, and (ii) current employees of the Company who separate from the service of the Company under circumstances which the Company, in its sole discretion, deems to be for mutually satisfactory reasons, in each case with eligibility for a deferred vested pension and whose retirement benefits under the Qualified Plan are limited by the Code Limitations; and (d) Employees of the Company who have Excess Agreements currently in effect with the Company. 3. Incorporation of the Qualified Plan The Qualified Plan, with any amendments thereto in effect on the effective date of the Supplemental Plan, shall be attached hereto as Exhibit A, and is hereby incorporated by reference into and shall be a part of the Supplemental Plan as fully as if set forth herein. Any amendment made to the Qualified Plan shall be also incorporated by reference into and form a part of the Supplemental Plan, effective as of the effective date of such amendment. The Qualified Plan, whenever referred to in the Supplemental Plan, shall mean such Qualified Plan as it exists as of the date any determination is made of benefits payable under the Supplemental Plan. All terms used herein shall have the meanings assigned to them under the provisions of the Qualified Plan unless otherwise qualified by the context of the Supplemental Plan. If there is any conflict between the provisions of the Qualified Plan and the provisions of the Supplemental Plan, the provisions of the Supplemental Plan will govern. 4. Amount of Benefit (a) The benefit payable to a participant described- in paragraphs 2(a) or (c) under the Supplemental Plan shall be the actuarial equivalent of the excess, if any, of: (i) The benefit which would have been payable to such participant under the Qualified Plan, if the provisions of the Qualified Plan were administered without regard to the Code Limitations, over (ii) The benefit which is in fact payable to such participant under the Qualified Plan. Such benefits payable under the Supplemental Plan to any participant shall be computed in accordance with the foregoing and with the objective that such participant should receive under the Supplemental Plan and the Qualified Plan the total amount which would otherwise have been payable to that participant solely under the Qualified Plan had not the Code Limitations been applicable thereto. The provisions of paragraphs 4(d), (e) and (f) will be applicable to the participant's benefit and that of a surviving spouse or other beneficiary. (b) For participants described in paragraph 2(b), the Supplemental Plan will pay the amount that is the difference between the participant's benefit calculated under the Qualified Plan, as if he had been a member of the Qualified Plan (and the participant's primary Social Security amount is the amount the participant will receive upon retirement or thereafter from any state-mandated pension programs assuming no earnings after retirement), over the amount the participant will actually receive from any private pension benefit of the international operation. The provisions of paragraphs 4(d), (e) and (f) will be applicable to the participant's benefit and that of his surviving spouse or other beneficiary. (c) The benefit payable to a participant described in paragraph 2(d) under the Supplemental Plan shall be the benefit described in such participant's Excess Agreement. (d) If a married participant dies prior to retirement, the Supplemental Plan shall pay to the participant's spouse an amount equal to the difference between the monthly pension said spouse would be entitled to receive under the Qualified Plan, were it not for the Code Limitations, and the monthly pension said spouse will actually receive under the Qualified Plan, such monthly payments to continue until said spouse's death. (e) If a married participant who was receiving the normal form of pension benefit (as defined in the Qualified Plan) dies after retirement (whether at normal retirement age or early retirement age), the Supplemental Plan shall pay to the participant's spouse an amount equal to the difference between the monthly pension said spouse would be entitled to under the Qualified Plan, were it not for the Code Limitations, and the monthly payment said spouse will actually receive under the Qualified Plan, such monthly payments to continue until said spouse's death. (f) If a participant, who was receiving an optional form of pension benefit (as defined in the Qualified Plan), dies after retirement (whether at normal retirement age or early retirement age), and, if the terms of the optional form of pension benefit provide for a benefit for a designated beneficiary, the Supplemental Plan shall pay to said beneficiary, an amount equal to the difference between the monthly pension the said beneficiary would be entitled to under the Qualified Plan, were it not for the Code Limitations, and the monthly pension the said beneficiary will actually receive under the Qualified Plan, such monthly payments to continue until such time as they would otherwise cease under the terms of the optional form of pension benefit. 5. Payment of Benefits (a) Subject to the provisions of any domestic relations order described in the final sentence of paragraph 6(b), the benefits payable to participants described in paragraphs 2(a), (c) or (d) under the Supplemental Plan shall be paid in the same form as, and coincident with, the payment of pension benefits from the Qualified Plan. Designations of beneficiaries and elections relating to optional forms of payment, made by the participant for purposes of the Qualified Plan, shall be equally applicable to the Supplemental Plan, including designations of beneficiaries for purposes of qualified domestic relations orders (within the meaning of Section 206(d)(3) of ERISA) under the Qualified Plans. Benefits payable to a participant, spouse, or beneficiary under the Supplemental Plan shall cease to be payable, at the same time as benefits payable from the Qualified Plan to such participant, spouse or beneficiary shall cease, or at such earlier time as the relevant Code Limitations are no longer applicable. (b) The benefits payable to participants described in paragraph 2(b) under the Supplemental Plan (or to their beneficiaries) shall be paid as if the participants were participants in the Qualified Plan. Such participants shall make designations of beneficiaries and elections relating to optional forms of payment for purposes of the Supplemental Plan according to the terms of the Qualified Plan, including designations of beneficiaries for purposes of qualified domestic relations orders (within the meaning of Section 206(d)(3) of ERISA) under the Qualified Plans. (c) Notwithstanding the provisions of paragraphs 5(a) and 5(b), but subject to the approval of the Compensation Committee as described in paragraph 5(d), a participant described in paragraph 2(d) may elect to receive the benefits payable to him (after taking into account the effects of any qualified domestic relations order described in paragraph 5(a) or 5(b)) under the Supplemental Plan in the form of a single lump sum payment. The lump sum payment described in the preceding sentence shall be calculated by converting the benefits otherwise payable to the participant at the time such benefits are to commence into a lump sum amount of equivalent actuarial value when computed using the actuarial factors set forth in Exhibit B to the Supplemental Plan. A participant described in paragraph 2(d) who elects to receive a single lump sum payment pursuant to the second preceding sentence may further elect that, in the event that the participant dies before receiving the single lump sum payment, benefits shall be paid to the participant's surviving spouse or other beneficiary without taking into account the election made under the second preceding sentence. Any election by a participant described in paragraph 2(d) to receive Supplemental Plan benefits in a single lump sum payment pursuant to this paragraph 5(c) shall be in writing on a form provided by the Company, which form shall be filed with the Company (i) prior to the participant's termination of employment with the Company because of involuntary termination of employment (including by reason of disability) or death or (ii) at least one year prior to the participant's voluntary retirement. Any such election may be changed or revoked by the participant at any time and from time to time without the consent of any other person by the filing of a later written election with the Company; provided that any election made less than one year prior to a participant's voluntary retirement shall not be valid, and in such case, payment shall be made in accordance with the latest valid election of the participant. The payment by the Company of a lump sum amount to a participant (or his beneficiary or estate in the event of his death) pursuant to this paragraph 5(c) shall discharge all obligations of the Company to such participant (or his beneficiary or estate) under the Supplemental Plan and such participant's Excess Agreement. (d) Payment of benefits in the form of a single lump sum payment pursuant to the election of a participant under paragraph 5(c) is subject to the approval of the Compensation Committee, which may, in its discretion, approve or withdraw its prior approval of such election at any time prior to the date the lump sum payment is actually paid to the participant and instead require that benefits be paid in such other form as is permitted by the Supplemental Plan. 6. General (a) The entire cost of the Supplemental Plan shall be paid from the general assets of the Company. It is the intent of the Company to so pay benefits under the Supplemental Plan as they become due; provided, however, that the Company may, in its sole discretion, establish or cause to be established a trust account for any or each participant pursuant to an agreement, or agreements, with a bank and direct that some or all of a participant's benefits under the Supplemental Plan be paid from the general assets of the Company which are transferred to the custody of such bank to be held by it in such trust account as property of the Company subject to the claims of its creditors until such time as benefit payments pursuant to the Supplemental Plan are made from such assets in accordance with such agreement; and until any such payment is made, neither the Plan nor any participant or beneficiary shall have any preferred claim on, or any beneficial ownership interest in, such assets. No liability for the payment of benefits under the Supplemental Plan shall (i) be imposed upon any officer, director, employee, or stockholder of the Company, (ii) be imposed upon the Trust Fund under the Qualified Plan, (iii) be paid from the Trust Fund under the Qualified Plan, or (iv) have any effect whatsoever upon the Qualified Plan or the payment of benefits from the Trust Fund under the Qualified Plan. (b) No right or interest of a participant or beneficiary under the Supplemental Plan shall be anticipated, assigned (either at law or in equity), or alienated by the participant or beneficiary, nor shall any such right or interest be subject to attachment, garnishment, levy, execution, or other legal or equitable process or in any manner be liable for or subject to the debts of any participant or beneficiary. If any participant or beneficiary (other than the surviving spouse of any deceased participant) shall attempt to or shall alienate, sell, transfer, assign, pledge, or otherwise encumber his or her benefits under the Supplemental Plan or any part thereof, or if by reason of his or her bankruptcy or other event happening at any time such benefits would devolve upon anyone else or would not be enjoyed by him or her, then the Company may terminate his or her interest in any such benefit and hold or apply it to or for his or her benefit or the benefit of his or her spouse, children, or other person or persons in fact dependent upon him or her, or any of them, in such a manner as the Company may deem proper. The Company shall not recognize any attempt by any participant or beneficiary to alienate, sell, transfer, assign, pledge, or otherwise encumber his or her benefits under the Supplemental Plan or any part thereof. This Section 6(b) shall not apply, however, in the case of a domestic relations order that would be a "qualified domestic relations order" within the meaning of Section 206(d)(3) of ERISA if the Supplemental Plan was subject to Section 206(d)(3) of ERISA. (c) Employment rights shall not be enlarged or affected hereby. The Company shall continue to have the right to discharge or retire a participant, with or without cause. 7. Miscellaneous (a) The Company shall interpret where necessary, in its reasonable and good faith judgment, the provisions of the Supplemental Plan and, except as otherwise provided in the Supplemental Plan, shall determine the rights and status of participants and beneficiaries hereunder (including, without limitation, the amount of any benefit to which a participant or beneficiary may be entitled under the Supplemental Plan). Except to the extent federal law controls, all questions pertaining to the construction, validity, and effect of the provisions hereof shall be determined in accordance with the laws of the State of Ohio. (b) The Company may, from time to time, delegate all or part of the administrative powers, duties, and authorities delegated to it under the Supplemental Plan to such person or persons, office or committee as it shall select. For the purposes of ERISA, the Company shall be the plan sponsor and the plan administrator. (c) Whenever there is denied, whether in whole or in part, a claim for benefits under the Supplemental Plan filed by any person (herein referred to as the "Claimant"), the plan administrator shall transmit a written notice of such decision to the Claimant, which notice shall be written in a manner calculated to be understood by the Claimant and shall contain a statement of the specific reasons for the denial of the claim and statement advising the Claimant that, within 60 days of the date on which he or she receives such notice, he or she may obtain review of such decision in accordance with the procedures hereinafter set forth. Within such 60-day period, the Claimant or the Claimant's authorized representative may request that the claim denial be reviewed by filing with the plan administrator a written request therefor, which request shall contain the following information: (i) the date on which the Claimant's request was filed with the plan administrator; provided, however, that the date on which the Claimant's request for review was in fact filed with the plan administrator shall control in the event that the date of the actual filing is later than the date stated by the Claimant pursuant to this paragraph; (ii) the specific portions of the denial of the claim which the Claimant requests the plan administrator to review; (iii) a statement by the Claimant setting forth the basis upon which the Claimant believes the plan administrator should reverse the previous denial of the Claimant's claim for benefits and accept the claim as made; and (iv) any written material (offered as exhibits) which the Claimant desires the plan administrator to examine in its consideration of the Claimant's position as stated pursuant to clause (iii) above. Within 60 days of the date determined pursuant to clause (i) above, the plan administrator shall conduct a full and fair review of the decision denying the Claimant's claim for benefits. Within 60 days of the date of such hearing, the plan administrator shall render its written decision on review, written in a manner calculated to be understood by the Claimant, specifying the reasons and Plan provisions upon which its decision was based. 8. Amendment and Termination (a) The Company has reserved and does hereby reserve the right to amend, restate or terminate, at any time, any or all of the provisions of the Supplemental Plan, without the consent of any participant, beneficiary, or any other person. Without limiting the authority of the Board of Directors of the Company or a duly authorized committee thereof to amend, restate or terminate the Supplemental Plan, the Board of Directors of the Company has authorized and instructed its Vice President - Human Resources and Logistics (or any other officer or delegate of an officer) to amend, restate or terminate the Plan. Any amendment, restatement or termination of the Plan shall be expressed in an instrument executed in the name of the Company. Any such amendment, restatement or termination shall become effective as of the date designated in such instrument or, if no such date is specified, on the date of its execution. (b) Notwithstanding the foregoing provisions hereof, no amendment, restatement or termination of the Supplemental Plan shall, without the consent of the participant (or, in the case of his or her death, his or her beneficiary), adversely affect (i) the benefit under the Supplemental Plan of any participant or beneficiary then entitled to receive a benefit under the Supplemental Plan or (ii) the right of any participant to receive upon termination of employment with the Company (or the right of the participant's beneficiary to receive upon the participant's death) that benefit which would have been received under the Supplemental Plan if such employment of the participant had terminated immediately prior to the amendment, restatement or termination of the Supplemental Plan. Upon any termination of the Supplemental Plan, each affected participant's Supplemental Plan Benefit shall be determined and distributed to such participant in the case of such participant's death, to his beneficiary as provided in paragraphs 4(d), 4(e) and 4(f) as if the employment of the participant with the Company had terminated immediately prior to the termination of the Supplemental Plan. 9. Restriction on Competition For a period of two years following a participant's retirement, the participant shall not (a) engage or participate, directly or indirectly, in any Competitive Activity (as defined below), or (b) solicit or cause to be solicited on behalf of a competitor any person or entity which was a customer of the Company during the three year period ending on the participant's retirement date, if the Employee had any direct responsibility for such customer while employed by the Company. The term "Competitive Activity" shall mean the participant's participation, without the written consent of an officer of the Company, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Company and such enterprise's sales of any product or service competitive with any product or service of the Company amounted to 25% of such enterprise's net sales for its most recently completed fiscal year and if the Company's net sales of said product or service amounted to 25% of the Company's net sales for its most recently completed fiscal year. "Competitive Activity" shall not include (y) the mere ownership of securities in any enterprise and exercise of rights appurtenant thereto or (z) participation in management of any enterprise or business operation thereof other than in connection with the competitive operation of such enterprise. If a participant engages in activity prohibited by this section, then in addition to all other remedies available to the Company, the Company shall be released of any obligation under the Supplemental Plan to pay benefits to such participant or to such participant's spouse or beneficiary under the Supplemental Plan. IN WITNESS WHEREOF, The Company has executed this amendment and restatement of this Plan at Canton, Ohio, this 16th day of March, 1998. THE TIMKEN COMPANY /s/ Stephen A. Perry Senior Vice President - Human Resources, Purchasing and Communications Exhibit B to the Amended and Restated Supplemental Pension Plan of The Timken Company The following actuarial factors shall be used for purposes of computing a lump sum amount pursuant to paragraph 5(c) of the Supplemental Plan: Interest: Average of the 30-year Treasury bonds for the three month period ending with the second month prior to the month of distribution. Mortality: 1983 Group Annuity Mortality Table (male rates) using age nearest birthday for the employee and the 1983 Group Annuity Mortality Table (female rates) using age nearest birthday for the spouse. EXHIBIT 10.12 THE TIMKEN COMPANY Nonqualified Stock Option Agreement WHEREAS, <> <> (the "Optionee") is an employee of The Timken Company (the "Company"); WHEREAS, the execution of a stock option agreement in the form hereof has been authorized by a resolution of the Compensation Committee (the "Committee") of the Board of Directors (the "Board") of the Company that was duly adopted on _________ __, ____ (the "Date of Grant"), and is incorporated herein by this reference; and WHEREAS, the option granted hereby is intended to be a nonqualified stock option and shall not be treated as an "incentive stock option" within the meaning of that term under Section 422 of the Internal Revenue Code of 1986; NOW, THEREFORE, pursuant to the Company's Long-term Incentive Plan (as Amended and Restated as of December 20, 1995) (the "Plan") and subject to the terms and conditions thereof and the terms and conditions hereinafter set forth, the Company hereby grants to the Optionee (i) a nonqualified stock option (the "Option") to purchase <> shares of the Company's common stock without par value (the "Common Shares") at the exercise price of ___________ dollars ($_____) per Common Share (the "Exercise Price") and (ii) the right to receive dividend equivalents payable in Common Shares on a deferred basis (the "Deferred Dividend Shares") or, at the discretion of the Committee, in cash, with respect to the Common Shares covered by any unexercised portion of the Option. 1. Vesting of Option. (a) Unless terminated as hereinafter provided, the Option shall be exercisable to the extent of one- fourth (1/4th) of the Common Shares covered by the Option after the Optionee shall have been in the continuous employ of the Company or a subsidiary for one full year from the Date of Grant and to the extent of an additional one-fourth (1/4th) thereof after each of the next three successive years thereafter during which the Optionee shall have been in the continuous employ of the Company or a subsidiary. For the purposes of this agreement: "subsidiary" shall mean a corporation, partnership, joint venture, unincorporated association or other entity in which the Company has a direct or indirect ownership or other equity interest; the continuous employment of the Optionee with the Company or a subsidiary shall not be deemed to have been interrupted, and the Optionee shall not be deemed to have ceased to be an employee of the Company or a subsidiary, by reason of the transfer of his employment among the Company and its subsidiaries. (b) Notwithstanding the provisions of Section 1(a) hereof, the Option shall become immediately exercisable in full upon any change in control of the Company that shall occur while the Optionee is an employee of the Company or a subsidiary. For the purposes of this agreement, the term "change in control" shall mean the occurrence of any of the following events: (i) all or substantially all of the assets of the Company are sold or transferred to another corporation or entity, or the Company is merged, consolidated or reorganized into or with another corporation or entity, with the result that upon conclusion of the transaction less than 51 percent of the outstanding securities entitled to vote generally in the election of directors or other capital interests of the acquiring corporation or entity is owned, directly or indirectly, by the shareholders of the Company generally prior to the transaction; or (ii) there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report thereto), as promulgated pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation thereto under the Exchange Act) of securities representing 30 percent or more of the combined voting power of the then-outstanding voting securities of the Company; or (iii) the Company shall file a report or proxy statement with the Securities and Exchange Commission (the "SEC") pursuant to the Exchange Act disclosing in response to Item 1 of Form 8- K thereunder or Item 5(f) of Schedule 14A thereunder (or any successor schedule, form, report or item thereto) that a change in control of the Company has or may have occurred, or will or may occur in the future, pursuant to any then-existing contract or transaction; or (iv) the individuals who constituted the Board at the beginning of any period of two consecutive calendar years cease for any reason to constitute at least a majority thereof unless the nomination for election by the Company's shareholders of each new member of the Board was approved by a vote of at least two- thirds of the members of the Board still in office who were members of the Board at the beginning of any such period. In the event that any person described in Section 1(b)(ii) hereof files an amendment to any report referred to in Section 1(b)(ii) hereof that shows the beneficial ownership described in Section 1(b)(ii) hereof to have decreased to less than 30 percent, or in the event that any anticipated change in control referred to in Section 1(b)(iii) hereof does not occur following the filing with the SEC of any report or proxy statement described in Section 1(b)(iii) hereof because any contract or transaction referred to in Section 1(b)(iii) hereof is canceled or abandoned, the Committee may nullify the effect of Section 1(b)(ii) or 1(b)(iii) hereof, as the case may be, and reinstate the provisions of Section 1(a) hereof by giving notice thereof to the Optionee; provided, however, that any such action by the Committee shall not prejudice any exercise of the Option that may have occurred prior to the nullification and reinstatement. The provisions of Section 1(b)(ii) hereof shall again become automatically effective following any such nullification of the provisions thereof and reinstatement of the provisions of Section 1(a) hereof in the event that any person described in Section 1(b)(ii) hereof files a further amendment to any report referred to in Section 1(b)(ii) hereof that shows the beneficial ownership described in Section 1(b)(ii) hereof to have again increased to 30 percent or more. (c) Notwithstanding the provisions of Section 1(a) hereof, the Option shall become immediately exercisable in full if the Optionee should die or become permanently disabled(within the meaning of the Company's long-term disability plan) while in the employ of the Company or any subsidiary, or if the Optionee should retire under a retirement plan of the Company or any subsidiary (i) at or after age 62 or (ii) at an earlier age with the consent of the Company. (d) To the extent that the Option shall have become exercisable in accordance with the terms of this agreement, it may be exercised in whole or in part from time to time thereafter. 2. Termination of Option. The Option shall terminate automatically and without further notice on the earliest of the following dates: (a) thirty days after the date upon which the Optionee ceases to be an employee of the Company or a subsidiary, unless the cessation of his employment (i) is a result of his death, disability or retirement with the Company's consent or (ii) follows a change in control; (b) five years after the date upon which the Optionee ceases to be an employee of the Company or subsidiary (i) as a result of his disability, (ii) as a result of his retirement with the Company's consent, unless he is also a director of the Company who continues to serve as such following his retirement with the Company's consent, or (iii) following a change in control, unless the cessation of his employment following a change in control is a result of his death; (c) one year after the date upon which the Optionee ceases to be a director of the Company, but not less than five years after the date upon which he ceases to be an employee of the Company or a subsidiary, if (i) the cessation of his employment is a result of his retirement with the Company's consent and (ii) he continues to serve as a director of the Company following the cessation of his employment; (d) one year after the date of the Optionee's death regardless of whether he ceases to be an employee of the Company or a subsidiary prior to his death (i) as a result of his disability or retirement with the Company's consent or (ii) following a change in control; or (e) ten years after the Date of Grant. For the purposes of this agreement: "retirement with the Company's consent" shall mean the retirement of the Optionee prior to age 62, if the Board or the Committee determines that his retirement is for the convenience of the Company or a subsidiary, or the retirement of the Optionee at or after age 62 under a retirement plan of the Company or a subsidiary; "disability" shall mean that the Optionee has qualified for disability benefits under the Company's Long-Term Disability Program or any successor disability plan or program of the Company. In the event that the Optionee shall intentionally commit an act that the Committee determines to be materially adverse to the interests of the Company or a subsidiary, the Option shall terminate at the time of that determination notwithstanding any other provision of this agreement. 3. Payment of Exercise Price. The Exercise Price shall be payable (a) in cash in the form of currency or check or other cash equivalent acceptable to the Company, (b) by transfer to the Company of nonforfeitable, unrestricted Common Shares that have been owned by the Optionee for at least six months prior to the date of exercise or (c) by any combination of the methods of payment described in Sections 3(a) and 3(b) hereof. Nonforfeitable, unrestricted Common Shares that are transferred by the Optionee in payment of all or any part of the Exercise Price shall be valued on the basis of their fair market value as determined by the Committee from time to time. 4. Crediting of Deferred Dividend Shares. Each Deferred Dividend Share represents the right of the Optionee to receive one Common Share if and when the Deferred Dividend Share becomes nonforfeitable in accordance with Section 5(a) hereof. Upon the determination by the Committee of the number of Deferred Dividend Shares to be credited in accordance with this Section 4, Deferred Dividend Shares shall be credited annually to the Optionee as of December 31 of each year that the Option remains in effect and any portion thereof remains unexercised. The number of Deferred Dividend Shares to be credited to the Optionee for any calendar year shall be determined as follows: (a) the total amount per share of cash dividends that were paid on the outstanding Common Shares during the calendar year shall be multiplied by the total number of Common Shares then covered by both exercisable and unexercisable portions of the Option, including any Deferred Dividend Shares that shall have been previously credited to the Optionee hereunder and remain subject to forfeiture pursuant to Section 5(a) hereof; (b) the product of the arithmetical operation described in Section 4(a) hereof shall then be divided by the average closing price of the Common Shares, as reported on the New York Stock Exchange or other national market on which the Common Shares are then principally traded, for the 10 trading dates immediately preceding December 31; (c) the quotient of the arithmetical operation described in Section 4(b) hereof shall be the number of Deferred Dividend Shares that shall be credited to the Optionee for the calendar year; provided, however, that no Deferred Dividend Shares shall be credited to the Optionee for any calendar year in which the total net income per share of the outstanding Common Shares is not at least 250 percent of the total amount of cash dividends per share that were paid on the outstanding Common Shares during that calendar year, and no Deferred Dividend Shares shall be credited to the Optionee following the cessation of his employment with the Company or a subsidiary, regardless of the circumstances under which the cessation of his employment occurred and notwithstanding that the term of the Option or any Deferred Dividend Share remains in effect. 5. Vesting and Issuance of Deferred Dividend Shares. (a) A Deferred Dividend Share shall become nonforfeitable upon the earlier to occur of (i) the expiration of a period of four years from the date as of which it is credited to the Optionee on the records of the Company, if the Optionee shall have remained in the continuous employ of the Company or a subsidiary during that period, or (ii) the termination of the Optionee's employment with the Company or a subsidiary following a change in control or as a result of his death, disability or retirement with the Company's consent. If the Optionee ceases to be an employee of the Company or a subsidiary under any circumstances other than those described in Section 5(a)(ii) hereof, any Deferred Dividend Shares that shall have been previously credited to the Optionee hereunder and remain subject to forfeiture at the time of the cessation of his employment shall thereupon be forfeited automatically and without further notice unless otherwise determined by the Committee. (b) Subject to the terms and conditions of Section 6 hereof, and subject to any deferral election the Optionee may have made pursuant to any plan or program of the Company, Deferred Dividend Shares shall be issuable to the Optionee at the time when they become nonforfeitable in accordance with Section 5(a) hereof. 6. Compliance with Law. The Company shall make reasonable efforts to comply with all applicable federal and state securities laws; provided, however, notwithstanding any other provision of this agreement, the Option shall not be exercisable and the Company shall not be obligated to issue any Common Shares in payment of Deferred Dividend Shares if the exercise or issuance thereof would result in a violation of any such law. To the extent that the Ohio Securities Act shall be applicable to the Option, the Option shall not be exercisable and the Company shall not be obligated to issue any Common Shares in payment of Deferred Dividend Shares unless the Common Shares or other securities covered by the Option or to be issued in payment of Deferred Dividend Shares are (a) exempt from registration thereunder, (b) the subject of a transaction that is exempt from compliance therewith, (c) registered by description or qualification thereunder or (d) the subject of a transaction that shall have been registered by description thereunder. 7. Transferability and Exercisability. Neither the Option nor any Deferred Dividend Shares, including any interest in either thereof, shall be transferable by the Optionee except by will or the laws of descent and distribution, and the Option shall be exercisable during the lifetime of the Optionee only by him or, in the event of his legal incapacity to do so, by his guardian or legal representative acting on behalf of the Optionee in a fiduciary capacity under state law and court supervision. 8. Adjustments. The Committee shall make any adjustments in the Exercise Price and the number or kind of shares of stock or other securities covered by the Option or to be issued in payment of Deferred Dividend Shares that the Committee may determine to be equitably required to prevent any dilution or expansion of the Optionee's rights under this agreement that otherwise would result from any (a) stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, (b) merger, consolidation, separation, reorganization or partial or complete liquidation involving the Company or (c) other transaction or event having an effect similar to any of those referred to in Section 8(a) or 8(b) hereof. Furthermore, in the event that any transaction or event described or referred to in the immediately preceding sentence shall occur, the Committee may provide in substitution of any or all of the Optionee's rights under this agreement such alternative consideration as the Committee may determine in good faith to be equitable under the circumstances. 9. Withholding Taxes. If the Company shall be required to withhold any federal, state, local or foreign tax in connection with any exercise of the Option or payment of Deferred Dividend Shares, the Optionee shall pay the tax or make provisions that are satisfactory to the Company for the payment thereof. The Optionee may elect to satisfy all or any part of any such withholding obligation by surrendering to the Company a portion of the Common Shares that are issuable to the Optionee upon the exercise of the Option or payment of Deferred Dividend Shares. If such election is made, the shares so surrendered by the Optionee shall be credited against any such withholding obligation at their fair market value (as determined by the Committee from time to time) on the date of such surrender. 10. Right to Terminate Employment. No provision of this agreement shall limit in any way whatsoever any right that the Company or a subsidiary may otherwise have to terminate the employment of the Optionee at any time. 11. Relation to Other Benefits. Any economic or other benefit to the Optionee under this agreement or the Plan shall not be taken into account in determining any benefits to which the Optionee may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by the Company or a subsidiary and shall not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Company or a subsidiary. 12. Amendments. Any amendment to the Plan shall be deemed to be an amendment to this agreement to the extent that the amendment is applicable hereto; provided, however, that no amendment shall adversely affect the rights of the Optionee with respect to the Option or the Deferred Dividend Shares without the Optionee's consent. 13. Severability. In the event that one or more of the provisions of this agreement shall be invalidated for any reason by a court of competent jurisdiction, any provision so invalidated shall be deemed to be separable from the other provisions hereof, and the remaining provisions hereof shall continue to be valid and fully enforceable. 14. Governing Law. This agreement is made under, and shall be construed in accordance with, the laws of the State of Ohio. This agreement is executed by the Company on this day of , THE TIMKEN COMPANY By ___________________________ Stephen A. Perry Senior Vice President Human Resources, Purchasing & Communications The undersigned Optionee hereby acknowledges receipt of an executed original of this agreement and accepts the Option granted hereunder and the right to receive Deferred Dividend Shares with respect to the Common Shares covered thereby, subject to the terms and conditions of the Plan and the terms and conditions hereinabove set forth. ______________________________ Optionee Date: _______________________ EXHIBIT 10.13 TRANSFERABLE THE TIMKEN COMPANY Nonqualified Stock Option Agreement WHEREAS, <> <> (the "Optionee") is an employee of The Timken Company (the "Company"); WHEREAS, the execution of a stock option agreement in the form hereof has been authorized by a resolution of the Compensation Committee (the "Committee") of the Board of Directors (the "Board") of the Company that was duly adopted on ________ __, ____ (the "Date of Grant"), and is incorporated herein by this reference; and WHEREAS, the option granted hereby is intended to be a nonqualified stock option and shall not be treated as an "incentive stock option" within the meaning of that term under Section 422 of the Internal Revenue Code of 1986; NOW, THEREFORE, pursuant to the Company's Long-term Incentive Plan (As Amended and Restated as of December 20, 1995) (the "Plan") and subject to the terms and conditions thereof and the terms and conditions hereinafter set forth, the Company hereby grants to the Optionee (i) a nonqualified stock option (the "Option") to purchase <> of the Company's common stock without par value (the "Common Shares") at the exercise price of ________________ dollars ($_____) per Common Share (the "Exercise Price") and (ii) the right to receive dividend equivalents payable in Common Shares on a deferred basis (the "Deferred Dividend Shares") or, at the discretion of the Committee, in cash, with respect to the Common Shares covered by any unexercised portion of the Option. 1. Vesting of Option. (a) Unless terminated as hereinafter provided, the Option shall be exercisable to the extent of one- fourth (1/4th) of the Common Shares covered by the Option after the Optionee shall have been in the continuous employ of the Company or a subsidiary for one full year from the Date of Grant and to the extent of an additional one-fourth (1/4th) thereof after each of the next three successive years thereafter during which the Optionee shall have been in the continuous employ of the Company or a subsidiary. For the purposes of this agreement: "subsidiary" shall mean a corporation, partnership, joint venture, unincorporated association or other entity in which the Company has a direct or indirect ownership or other equity interest; the continuous employment of the Optionee with the Company or a subsidiary shall not be deemed to have been interrupted, and the Optionee shall not be deemed to have ceased to be an employee of the Company or a subsidiary, by reason of the transfer of his employment among the Company and its subsidiaries. (b) Notwithstanding the provisions of Section 1(a) hereof, the Option shall become immediately exercisable in full upon any change in control of the Company that shall occur while the Optionee is an employee of the Company or a subsidiary. For the purposes of this agreement, the term "change in control" shall mean the occurrence of any of the following events: (i) all or substantially all of the assets of the Company are sold or transferred to another corporation or entity, or the Company is merged, consolidated or reorganized into or with another corporation or entity, with the result that upon conclusion of the transaction less than 51 percent of the outstanding securities entitled to vote generally in the election of directors or other capital interests of the acquiring corporation or entity is owned, directly or indirectly, by the shareholders of the Company generally prior to the transaction; or (ii) there is a report filed on Schedule 13D or Schedule 14D- 1 (or any successor schedule, form or report thereto), as promulgated pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation thereto under the Exchange Act) of securities representing 30 percent or more of the combined voting power of the then-outstanding voting securities of the Company; or (iii) the Company shall file a report or proxy statement with the Securities and Exchange Commission (the "SEC") pursuant to the Exchange Act disclosing in response to Item 1 of Form 8-K thereunder or Item 5(f) of Schedule 14A thereunder (or any successor schedule, form, report or item thereto) that a change in control of the Company has or may have occurred, or will or may occur in the future, pursuant to any then-existing contract or transaction; or (iv) the individuals who constituted the Board at the beginning of any period of two consecutive calendar years cease for any reason to constitute at least a majority thereof unless the nomination for election by the Company's shareholders of each new member of the Board was approved by a vote of at least two-thirds of the members of the Board still in office who were members of the Board at the beginning of any such period. In the event that any person described in Section 1(b)(ii) hereof files an amendment to any report referred to in Section 1(b)(ii) hereof that shows the beneficial ownership described in Section 1(b)(ii) hereof to have decreased to less than 30 percent, or in the event that any anticipated change in control referred to in Section 1(b)(iii) hereof does not occur following the filing with the SEC of any report or proxy statement described in Section 1(b)(iii) hereof because any contract or transaction referred to in Section 1(b)(iii) hereof is canceled or abandoned, the Committee may nullify the effect of Section 1(b)(ii) or 1(b)(iii) hereof, as the case may be, and reinstate the provisions of Section 1(a) hereof by giving notice thereof to the Optionee; provided, however, that any such action by the Committee shall not prejudice any exercise of the Option that may have occurred prior to the nullification and reinstatement. The provisions of Section 1(b)(ii) hereof shall again become automatically effective following any such nullification of the provisions thereof and reinstatement of the provisions of Section 1(a) hereof in the event that any person described in Section 1(b)(ii) hereof files a further amendment to any report referred to in Section 1(b)(ii) hereof that shows the beneficial ownership described in Section 1(b)(ii) hereof to have again increased to 30 percent or more. (c) Notwithstanding the provisions of Section 1(a) hereof, the Option shall become immediately exercisable in full if the Optionee should die or become permanently disabled (within the meaning of the Company's long-term disability plan) while in the employ of the Company or any subsidiary, or if the Optionee should retire under a retirement plan of the Company or any subsidiary (i) at or after age 62 or (ii) at an earlier age with the consent of the Company. (d) To the extent that the Option shall have become exercisable in accordance with the terms of this agreement, it may be exercised in whole or in part from time to time thereafter. 2. Termination of Option. The Option shall terminate automatically and without further notice on the earliest of the following dates: (a) thirty days after the date upon which the Optionee ceases to be an employee of the Company or a subsidiary, unless the cessation of his employment (i) is a result of his death, disability or retirement with the Company's consent or (ii) follows a change in control; (b) five years after the date upon which the Optionee ceases to be an employee of the Company or subsidiary (i) as a result of his disability, (ii) as a result of his retirement with the Company's consent, unless he is also a director of the Company who continues to serve as such following his retirement with the Company's consent, or (iii) following a change in control, unless the cessation of his employment following a change in control is a result of his death; (c) one year after the date upon which the Optionee ceases to be a director of the Company, but not less than five years after the date upon which he ceases to be an employee of the Company or a subsidiary, if (i) the cessation of his employment is a result of his retirement with the Company's consent and (ii) he continues to serve as a director of the Company following the cessation of his employment; (d) one year after the date of the Optionee's death regardless of whether he ceases to be an employee of the Company or a subsidiary prior to his death (i) as a result of his disability or retirement with the Company's consent or (ii) following a change in control; or (e) ten years after the Date of Grant. For the purposes of this agreement: "retirement with the Company's consent" shall mean the retirement of the Optionee prior to age 62, if the Board or the Committee determines that his retirement is for the convenience of the Company or a subsidiary, or the retirement of the Optionee at or after age 62 under a retirement plan of the Company or a subsidiary; "disability" shall mean that the Optionee has qualified for disability benefits under the Company's Long-Term Disability Program or any successor disability plan or program of the Company. In the event that the Optionee shall intentionally commit an act that the Committee determines to be materially adverse to the interests of the Company or a subsidiary, the Option shall terminate at the time of that determination notwithstanding any other provision of this agreement. 3. Payment of Exercise Price. The Exercise Price shall be payable (a) in cash in the form of currency or check or other cash equivalent acceptable to the Company, (b) by transfer to the Company of nonforfeitable, unrestricted Common Shares that have been owned by the Optionee for at least six months prior to the date of exercise or (c) by any combination of the methods of payment described in Sections 3(a) and 3(b) hereof. Nonforfeitable, unrestricted Common Shares that are transferred by the Optionee in payment of all or any part of the Exercise Price shall be valued on the basis of their fair market value as determined by the Committee from time to time. 4. Crediting of Deferred Dividend Shares. Each Deferred Dividend Share represents the right of the Optionee to receive one Common Share if and when the Deferred Dividend Share becomes nonforfeitable in accordance with Section 5(a) hereof. Upon the determination by the Committee of the number of Deferred Dividend Shares to be credited in accordance with this Section 4, Deferred Dividend Shares shall be credited annually to the Optionee as of December 31 of each year that the Option remains in effect and any portion thereof remains unexercised. The number of Deferred Dividend Shares to be credited to the Optionee for any calendar year shall be determined as follows: (a) the total amount per share of cash dividends that were paid on the outstanding Common Shares during the calendar year shall be multiplied by the total number of Common Shares then covered by both exercisable and unexercisable portions of the Option, including any Deferred Dividend Shares that shall have been previously credited to the Optionee hereunder and remain subject to forfeiture pursuant to Section 5(a) hereof; (b) the product of the arithmetical operation described in Section 4(a) hereof shall then be divided by the average closing price of the Common Shares, as reported on the New York Stock Exchange or other national market on which the Common Shares are then principally traded, for the 10 trading dates immediately preceding December 31; (c) the quotient of the arithmetical operation described in Section 4(b) hereof shall be the number of Deferred Dividend Shares that shall be credited to the Optionee for the calendar year; provided, however, that no Deferred Dividend Shares shall be credited to the Optionee for any calendar year in which the total net income per share of the outstanding Common Shares is not at least 250 percent of the total amount of cash dividends per share that were paid on the outstanding Common Shares during that calendar year, and no Deferred Dividend Shares shall be credited to the Optionee following the cessation of his employment with the Company or a subsidiary, regardless of the circumstances under which the cessation of his employment occurred and notwithstanding that the term of the Option or any Deferred Dividend Share remains in effect. 5. Vesting and Issuance of Deferred Dividend Shares. (a) A Deferred Dividend Share shall become nonforfeitable upon the earlier to occur of (i) the expiration of a period of four years from the date as of which it is credited to the Optionee on the records of the Company, if the Optionee shall have remained in the continuous employ of the Company or a subsidiary during that period, or (ii) the termination of the Optionee's employment with the Company or a subsidiary following a change in control or as a result of his death, disability or retirement with the Company's consent. If the Optionee ceases to be an employee of the Company or a subsidiary under any circumstances other than those described in Section 5(a)(ii) hereof, any Deferred Dividend Shares that shall have been previously credited to the Optionee hereunder and remain subject to forfeiture at the time of the cessation of his employment shall thereupon be forfeited automatically and without further notice unless otherwise determined by the Committee. (b) Subject to the terms and conditions of Section 6 hereof, and subject to any deferral election the Optionee may have made pursuant to any plan or program of the Company, Deferred Dividend Shares shall be issuable to the Optionee at the time when they become nonforfeitable in accordance with Section 5(a) hereof. 6. Compliance with Law. The Company shall make reasonable efforts to comply with all applicable federal and state securities laws; provided, however, notwithstanding any other provision of this agreement, the Option shall not be exercisable and the Company shall not be obligated to issue any Common Shares in payment of Deferred Dividend Shares if the exercise or issuance thereof would result in a violation of any such law. To the extent that the Ohio Securities Act shall be applicable to the Option, the Option shall not be exercisable and the Company shall not be obligated to issue any Common Shares in payment of Deferred Dividend Shares unless the Common Shares or other securities covered by the Option or to be issued in payment of Deferred Dividend Shares are (a) exempt from registration thereunder, (b) the subject of a transaction that is exempt from compliance therewith, (c) registered by description or qualification thereunder or (d) the subject of a transaction that shall have been registered by description thereunder. 7. Transferability and Exercisability. (a) Except as provided in Section 7(b) below, neither the Option nor any Deferred Dividend Shares, including any interest in either thereof, shall be transferable by the Optionee except by will or the laws of descent and distribution, and the Option shall be exercisable during the lifetime of the Optionee only by him or, in the event of his legal incapacity to do so, by his guardian or legal representative acting on behalf of the Optionee in a fiduciary capacity under state law and court supervision. (b) Notwithstanding Section 7(a) above, the Option, any Deferred Dividend Shares, or any interest in either thereof, may be transferable by the Optionee, without payment of consideration therefor, to any one or more members of the immediate family of Optionee (as defined in Rule 16a-1(e) under the Exchange Act), or to one or more trusts established solely for the benefit of such members of the immediate family or to partnerships in which the only partners are such members of the immediate family of the Optionee; provided, however, that such transfer will not be effective until notice of such transfer is delivered to the Company; and provided, further, however, that any such transferee is subject to the same terms and conditions hereunder as the Optionee. 8. Adjustments. The Committee shall make any adjustments in the Exercise Price and the number or kind of shares of stock or other securities covered by the Option or to be issued in payment of Deferred Dividend Shares that the Committee may determine to be equitably required to prevent any dilution or expansion of the Optionee's rights under this agreement that otherwise would result from any (a) stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, (b) merger, consolidation, separation, reorganization or partial or complete liquidation involving the Company or (c) other transaction or event having an effect similar to any of those referred to in Section 8(a) or 8(b) hereof. Furthermore, in the event that any transaction or event described or referred to in the immediately preceding sentence shall occur, the Committee may provide in substitution of any or all of the Optionee's rights under this agreement such alternative consideration as the Committee may determine in good faith to be equitable under the circumstances. 9. Withholding Taxes. If the Company shall be required to withhold any federal, state, local or foreign tax in connection with any exercise of the Option or payment of Deferred Dividend Shares, the Optionee shall pay the tax or make provisions that are satisfactory to the Company for the payment thereof. The Optionee may elect to satisfy all or any part of any such withholding obligation by surrendering to the Company a portion of the Common Shares that are issuable to the Optionee upon the exercise of the Option or payment of Deferred Dividend Shares. If such election is made, the shares so surrendered by the Optionee shall be credited against any such withholding obligation at their fair market value (as determined by the Committee from time to time) on the date of such surrender. 10. Right to Terminate Employment. No provision of this agreement shall limit in any way whatsoever any right that the Company or a subsidiary may otherwise have to terminate the employment of the Optionee at any time. 11. Relation to Other Benefits. Any economic or other benefit to the Optionee under this agreement or the Plan shall not be taken into account in determining any benefits to which the Optionee may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by the Company or a subsidiary and shall not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Company or a subsidiary. 12. Amendments. Any amendment to the Plan shall be deemed to be an amendment to this agreement to the extent that the amendment is applicable hereto; provided, however, that no amendment shall adversely affect the rights of the Optionee with respect to the Option or the Deferred Dividend Shares without the Optionee's consent. 13. Severability. In the event that one or more of the provisions of this agreement shall be invalidated for any reason by a court of competent jurisdiction, any provision so invalidated shall be deemed to be separable from the other provisions hereof, and the remaining provisions hereof shall continue to be valid and fully enforceable. 14. Governing Law. This agreement is made under, and shall be construed in accordance with, the laws of the State of Ohio. This agreement is executed by the Company on this day of , . THE TIMKEN COMPANY By Stephen A. Perry Senior Vice President Human Resources, Purchasing & Communications The undersigned Optionee hereby acknowledges receipt of an executed original of this agreement and accepts the Option granted hereunder and the right to receive Deferred Dividend Shares with respect to the Common Shares covered thereby, subject to the terms and conditions of the Plan and the terms and conditions hereinabove set forth. Optionee Date: Exhibit 10.14 CONSULTING AGREEMENT ___________________________ This consulting agreement (hereinafter referred to as "Agreement") is entered into as of the 1st day of January, 1998, by and between Joseph F. Toot, Jr., (hereinafter referred to as "Consultant") and The Timken Company (hereinafter referred to as "Company"), a corporation organized and existing under the laws of the State of Ohio. WHEREAS, Consultant has been employed for many years as an officer of the Company and has acquired extensive experience and developed important relationships which the Company wishes to utilize by retaining Consultant to perform certain services as described herein; and WHEREAS, Consultant will resign as an officer and retire as an employee on December 31, 1997, under the Company's retirement program. NOW, THEREFORE, in consideration of the mutual promises and covenants, it is hereby agreed by and between the parties as follows: 1. In consideration for Consultant's services as hereinafter described, the Company agrees to pay Consultant $180,000.00 per year payable in quarterly payments of $45,000.00 to be paid on the last day of each calendar quarter beginning March 31, 1998. 2. The services to be performed by Consultant shall consist of the following: (1) Provide counsel and advice to the Company on various matters from time to time as requested by the Chairman, President and CEO and either of the Chief Operating Officers of the Company; (2) continue his relationships with customers and others in the bearing and steel industry and make calls on and entertain such persons on behalf of the Company; (3) provide advice regarding business activities in China and other Far Eastern countries, including visits to the area; (4) assist in the development of Asian strategy; and (5) provide similar services to support the interests of the Company from time to time as requested by the Chairman, President and CEO of the Company. 3. It is anticipated that Consultant will devote the equivalent of approximately one week per month to the performance of the services described above. The days on which Consultant will perform services under this Agreement, and the number of hours devoted to the performance of such services on any given day, will be determined by Consultant in his sole discretion. 4. The Company will provide an office and secretarial services for the Consultant to assist him in performing the services described in this Agreement. Consultant is not required to make use of such office or secretarial assistance and may perform the services requested under this Agreement at any location of his choice, whether inside or outside of Ohio. 5. Consultant shall be entitled to the use of Company aircraft in connection with performing services under this Agreement, provided, however, that commercial aviation will be used when practical and that scheduling for Corporate Officers shall take precedence to the extent practical. Consultant shall be entitled to use first class air travel. 6. The Company will reimburse Consultant for all reasonable and necessary expenses incurred in the performance of the services described in this Agreement. 7. Consultant agrees that he shall treat confidentially any material, non-public information, trade secrets, or proprietary data of the Company that he obtains during the course of performing his services under this Agreement. 8. Consultant agrees that, during the term of this Agreement and for three years after the termination of this Agreement, he shall not provide services to any third party that is a direct competitor of the Company. Subject to the foregoing, Consultant may provide consulting or other services to other parties during the term of this Agreement and at anytime thereafter. 9. It is agreed that Consultant shall render his services as an independent contractor and that no relationship of employer- employee shall result from the execution of this Agreement or from the performance of any services hereunder. 10. Consultant shall have the right to determine when, where, how and in what manner he will perform the services under this Agreement. It is understood that as an independent contractor, Consultant is not under the direction or control of the Company when rendering the services requested of him under this Agreement and is expected to exercise independent judgment when providing services under this Agreement. Moreover, Consultant shall not be entitled to any Company benefits as a result of performing services under this Agreement, and the Company shall not pay or withhold any federal, state, or local income tax or payroll tax of any kind on behalf of the Consultant. 11. This Agreement shall be for a term of three years terminating on December 31, 2000, provided, however, that either party may cancel and terminate this Agreement at any time by giving a sixty-day written notice to the other party of its the desire to do so. Moreover, this Agreement will terminate immediately if Consultant dies, becomes permanently disabled, or breaches any material term of this Agreement. If this Agreement is terminated prior to December 31, 2000, the quarterly payment to which Consultant would otherwise be entitled to receive will be pro-rated based on the number of days the Agreement was in effect during the calendar quarter in which the Agreement was terminated. The provisions of Paragraphs 8 and 9 hereof shall continue in full force and effect notwithstanding the termination of this Agreement. 12. This Agreement constitutes the entire agreement between the parties relative to the services referred to herein and supersedes all previous negotiations and understandings, oral or written, relative to such services. Notwithstanding the foregoing, nothing contained herein shall affect or adversely impact any compensation or benefits to which Consultant is entitled as a result of his employment by the Company prior to December 31, 1997, and his retirement on said date. 13. This Agreement shall be construed, interpreted and applied, and the legal relationship created herein shall be determined, in accordance with the laws of the State of Ohio. In witness whereof, the parties have executed this Agreement as of the date first above written. THE TIMKEN COMPANY By: ________________________________ ________________________________ (Title) ________________________________ Joseph F. Toot, Jr. DECEMBER 3, 1997 Exhibit 10.15 THE TIMKEN COMPANY Performance Share Agreement WHEREAS, <> << LName>> (the "Grantee") is a key employee of The Timken Company (the "Company"); and WHEREAS, the execution of a Performance Share Agreement (this "Agreement") in the form hereof has been authorized by a resolution of the Compensation Committee (the "Committee") of the Board of Directors (the "Board") of the Company that was duly adopted on _______________, 1997. NOW THEREFORE, pursuant to the Company's Long Term Incentive Plan (As Amended and Restated as of December 20, 1995) (the "Plan"), and subject to the terms and conditions thereof and the terms and conditions hereinafter set forth, the Company hereby grants to the Grantee ______________ Performance Shares. 1. Definitions. Capitalized terms used herein without definition shall have the meanings assigned to them in the Plan. 2. Grant of Performance Shares. The Company granted to the Grantee the number of Performance Shares specified above, which shall be earned out by the Grantee during the period commencing on January 1, 1998 and ending on December 31, 2000 (the "Performance Period") as set forth in Section 3 of this Agreement. 3. Earn-Out of Performance Shares. (a) One-third of the Performance Shares shall be earned out on December 31 of each year (the "Annual Award") during the Performance Period, but only if the Committee shall determine that (i) the Grantee shall have been in the continuous employ of the Company or any subsidiary of the Company through such December 31 and (ii) the market price of the Common Shares shall have reached the applicable price set forth in the Performance Share Vesting Table set forth below under the column "Target Price II" and maintained such price for the period specified in Section 3(c) below. (b) The Committee shall have the discretion to authorize an award based upon a reduced number of Performance Shares, up to 50 percent of the Annual Award, if the market price of the shares for any given year in the Performance Period has reached the applicable price set forth in the Performance Share Vesting Table set forth below under the column "Target Price I" and maintained such price for the period specified in Section 3(c) below. (c) The market price of the shares shall only be deemed to have reached a Target Price if the closing price of the shares on the New York Stock Exchange (as reported in the Midwest Edition of the Wall Street Journal) (the "Market Price") shall have reached the specified Target Price and remained at or above such level for a minimum of 15 trading days within any period of 90 consecutive calendar days during the calendar year immediately preceding the applicable determination date. (d) Notwithstanding the provisions of this Section 3, the Performance Shares awarded hereby that have not theretofore been earned out (other than those which were not earned out by reason of failure of the Market Price of the Common Shares to reach the applicable price set forth in the Performance Share Vesting Table) shall become immediately earned out if at any time during the employment of the Grantee a "change in control" shall occur. For the purposes of this Agreement, the term "change in control" shall mean the occurrence of any of the following events: (i) all or substantially all of the assets of the Company are sold or transferred to another corporation or entity, or the Company is merged, consolidated or reorganized into or with another corporation or entity, with the result that upon conclusion of the transaction less than 51 percent of the outstanding securities entitled to vote generally in the election of Directors or other capital interests of the acquiring corporation or entity is owned, directly or indirectly, by the shareholders of the Company generally prior to the transaction; or (ii) there is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report thereto), as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation thereto under the Exchange Act) of securities representing 30 percent or more of the combined voting power of the then-outstanding voting securities of the Company; or (iii) the Company shall file a report or proxy statement with the Securities and Exchange Commission (the "SEC") pursuant to the Exchange Act disclosing in response to Item 1 of Form 8-K thereunder or Item 5(f) of Schedule 14A thereunder (or any successor schedule, form, report or item thereto) that a change in control of the Company has or may have occurred, or will or may occur in the future pursuant to any then-existing contract or transaction; or (iv) the individuals who constituted the Board at the beginning of any period of two consecutive calendar years cease for any reason to constitute at least a majority thereof unless the nomination for election by the Company's shareholders of each new member of the Board was approved by a vote of at least two- thirds of the members of the Board still in office who were members of the Board at the beginning of any such period. In the event that any person described in Section 3(d)(ii) hereof files an amendment to any report referred to in Section 3(d)(ii) hereof that shows the beneficial ownership described in Section 3(d)(ii) hereof to have decreased to less than 30 percent, or in the event that any anticipated change in control referred to in Section 3(d)(iii) hereof does not occur following the filing with the SEC of any report or proxy statement described in Section 3(d)(iii) hereof because any contract or transaction referred to in Section 3(d)(iii) hereof is canceled or abandoned, the Committee may nullify the effect of Section 3(d)(ii) or 3(d)(iii) hereof, as the case may be, and reinstate the remaining provisions of Section 3 hereof by giving notice thereof to the Grantee. The provisions of Section 3(d)(ii) hereof shall again become automatically effective following any such nullification of the provisions thereof and the remaining provisions of Section 3 hereof shall be reinstated in the event that any person described in Section 3(d)(ii) hereof files a further amendment to any report referred to in Section 3(d)(ii) hereof that shows the beneficial ownership described in Section 3(d)(ii) hereof to have again increased to 30 percent or more. Performance Share Vesting Table TARGET PRICE I TARGET PRICE II YEAR (15-20% INCREASE) (20% OR GREATER INCREASE) 1998 [$44.85 - $46.75] [$46.75 or greater] 1999 [$53.76 - $56.13] [$56.13 or greater] 2000 [$64.55 - $67.38] [$67.38 or greater] 4. Pay-Out of Performance Shares. (a) For each calendar year during the Performance Period, if the applicable conditions have been satisfied as set forth in Section 3 hereof, the Grantee shall receive, in cash, payment for his/her Annual Award, or, if applicable, the reduced award determined pursuant to Section 3(b) hereof, multiplied by the Market Price of the Common Shares as of December 31 at the end of applicable calendar year during the Performance Period. Not later than 90 days after the end of the applicable calendar year during the Performance Period, the Committee shall determine whether the applicable Target Price has been met and, thus, whether awards have been earned. Final awards that have been earned shall be paid, less applicable tax withholdings, as soon as practicable following such determination by the Committee. (b) Prior to payment, the Company shall only have an unfunded and unsecured obligation to make payment of any earned awards to the Grantee. 5. Deferral of Performance Shares. Grantee may elect to defer all or a specified part of his or her Annual Award pursuant to the Deferral Provisions set forth in Appendix A hereto. 6. Effect of Death, Disability or Retirement. If the Grantee's employment with the Company should terminate because of death, permanent total disability or retirement with the Company's consent, prior to the end of any calendar year within the Performance Period, the extent to which the Performance Shares granted hereby shall be deemed to have been earned out shall be determined according to the earn-out provisions of Section 3 as if the Grantee's employment had not been terminated and the final award shall be multiplied by a fraction, the numerator of which is the number of full months the Grantee was employed during the current calendar year of the Performance Period and the denominator of which is the total number of months in the current year of the Performance Period; provided, however, that the Board, upon recommendation of the Committee may, in its discretion, increase payments made under the foregoing circumstances up to the full amount payable for service throughout the Performance Period if the earn-out provisions of Section 3 have been satisfied. 7. Effect of Other Terminations of Employment. In the event that the Grantee's employment shall terminate in a manner other than any specified in Section 6 hereof, the Grantee shall forfeit any rights he or she may have in any Performance Shares that have not been earned out by such Grantee at the time of such termination; provided, however, that the Board, upon recommendation of the Committee may order payment of an award, in an amount determined as in Section 6 for Termination for Death, Disability or Retirement under circumstances which warrant such exceptional treatment in the judgment of the Committee or the Board. 8. Effect of Change of Control. Notwithstanding any other provision of this Agreement, in the event that there is a change in control pursuant to Section 3(d) hereof, the Grantee shall be entitled to receive in cash an amount equal to the Market Price of the Common Shares as of the date of such change in control multiplied by the number of Performance Shares earned out pursuant to Section 3(d) by reason of such change in control. 9. Shares Non-Transferable. The Performance Shares granted hereby and any interest in such Performance Shares are not transferable other than by will or the laws of descent and distribution. 10. Dilution and Other Adjustments. The Committee shall make any adjustments in the Target Prices and/or the number of Performance Shares then held by the Grantee that the Committee may determine to be equitably required to prevent any dilution or expansion of the Grantee's rights under this Agreement that otherwise would result from any (a) stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Company, (b) merger, consolidation, separation, reorganization or partial or complete liquidation involving the Company or (c) other transaction or event having an effect similar to any of those referred to in Section 10(a) or 10(b) hereof. Furthermore, in the event that any transaction or event described or referred to in the immediately preceding sentence shall occur, the Committee may provide in substitution of any or all of the Grantee's rights under this Agreement such alternative consideration as the Committee may determine in good faith to be equitable under the circumstances. 11. Withholding Taxes. The Company may withhold from any amounts payable under this Agreement all federal, state, local, foreign or other tax as shall be required to be withheld pursuant to any law or government regulation or ruling. 12. Right to Terminate Employment. No provision of this Agreement shall limit in any way whatsoever any right that the Company may otherwise have to terminate the employment of the Grantee at any time. 13. Relation to Other Benefits. Any economic or other benefit to the Grantee under this agreement or the Plan shall not be taken into account in determining any benefits to which the Grantee may be entitled under any profit-sharing, retirement or other benefit or compensation plan maintained by the Company or a subsidiary and shall not affect the amount of any life insurance coverage available to any beneficiary under any life insurance plan covering employees of the Company or a subsidiary. 14. Amendments. Any amendment to the Plan shall be deemed to be an amendment to this agreement to the extent that the amendment is applicable hereto; provided, however, that no amendment shall adversely affect the rights of the Grantee with respect to the Performance Shares earned out without the Grantee's consent. 15. Severability. In the event that one or more of the provisions of this agreement shall be invalidated for any reason by a court of competent jurisdiction, any provision so invalidated shall be deemed to be separable from the other provisions hereof, and the remaining provisions hereof shall continue to be valid and fully enforceable. 16. Governing Law. This agreement is made under, and shall be construed in accordance with the internal substantive laws of the State of Ohio. This agreement is executed by the Company on this ____ day of ____________. THE TIMKEN COMPANY By ________________________________ Stephen A. Perry Senior Vice President Human Resources, Purchasing and Communications The undersigned Grantee hereby acknowledges receipt of an executed original of this agreement and accepts the Performance Shares granted hereunder, subject to the terms and conditions of the Plan and the terms and conditions hereinabove set forth. __________________________ Grantee Date: ____________________ APPENDIX A DEFERRAL PROVISIONS This Appendix A sets forth the terms and conditions applicable to the Grantee's election to defer receipt of all or a specified part of his or her Annual Award pursuant to Section 5 of the Agreement. Capitalized terms used, but not otherwise defined in this Appendix A, shall have the respective meanings assigned to them in the Agreement. 1. Election to Defer. The Grantee to effect a deferral must complete and deliver an election agreement, substantially in the form attached hereto as Exhibit A, to the Director of Compensation and Benefits of the Company before the first day of the year for which such Annual Award would otherwise be paid, except in the case of an Annual Award for 1998 where the election agreement may be delivered to the Director of Compensation and Benefits of the Company within [ days after the date of the Agreement]. Unless otherwise specified by the Grantee in the election agreement, an election agreement that is timely delivered shall be effective for Annual Awards earned under this Agreement for any succeeding years until revoked or modified by written notice to the Director of Compensation and Benefits of the Company. In order to be effective to revoke or modify an election, a revocation or modification must be delivered prior to the beginning of the year for which an Annual Award is payable. 2. Amount Deferred; Period of Deferral. The Grantee shall designate in the election agreement the percentage or the dollar amount of his or her Annual Award that is to be deferred and whether the amount deferred shall remain denominated in Performance Shares or whether the amount deferred shall be translated into cash. Any amount deferred shall be deferred until the earlier to occur of (i) the date the Grantee ceases to be an employee by death, retirement or otherwise or (ii) the date specified by the Grantee in the election agreement, including a date determined by reference to the date the Grantee ceases to be an employee by death, retirement or otherwise (provided in the case where the Grantee ceases to be an employee on December 31 of a year that such date is after March 15 of the year following the year in which the Grantee ceases to be an employee). 3. Accounts. (i) Deferred amounts that are translated into cash shall be treated as if it were set aside in an account on the date the Annual Award would otherwise have been paid to the Grantee. Such account will be credited with interest computed quarterly (based on calendar quarters) on the lowest balance in the account during each quarter at such rate and in such manner as determined from time to time by the Committee. Unless otherwise determined by the Committee, interest to be credited hereunder shall be credited at the prime rate in effect according to the Wall Street Journal on the last day of each calendar quarter plus one percent. Interest for a calendar quarter shall be credited to the account as of the first day of the following quarter. (ii) Deferred amounts that remain denominated in Performance Shares shall be reflected in a separate account, which shall be credited with the number of deferred Performance Shares. Such account shall be credited from time to time with amounts equal to dividends or other distributions paid on a number of Common Shares of the Company equal to the number of Performance Shares reflected in such account, and such account shall be credited with interest on cash amounts credited to such account from time to time in the manner provided in Subsection (i) above. 4. Payment of Accounts. The amounts in the Grantee's account(s) shall be paid as provided in this Section 4. (i) Amounts described in Section 3(i) shall be paid to the Grantee in a lump sum or in a number of approximately equal quarterly installments, as designated by the Grantee in his or her election agreement. The amount of such account remaining unpaid shall continue to bear interest, as provided in Section 3(i). The lump sum payment or the first quarterly installment, as the case may be, shall be made as soon as practicable following the end of the period of deferral as specified in Section 2. (ii) Amounts described in Section 3(ii) shall be paid to a Grantee in cash as soon as practicable following the end of the period of deferral as specified in Section 2. All amounts credited to such account in respect of dividends, distributions and interest thereon as provided in Section 3(ii) shall likewise be paid to the Grantee at such time. 5. Death of Grantee. In the event of the death of the Grantee, the amount of the Grantee's account or accounts shall be paid to the beneficiary or beneficiaries designated in a writing substantially in the form attached hereto as Exhibit B (the "Beneficiary Designation"), in accordance with the Grantee's election agreement and Section 4. A Grantee's Beneficiary Designation may be changed at any time prior to his or her death by the execution and delivery of a new Beneficiary Designation. The Beneficiary Designation on file with the Company that bears the latest date at the time of the Grantee's death shall govern. In the absence of a Beneficiary Designation or the failure of any beneficiary to survive the Grantee, the amount of the Grantee's account or accounts shall be paid to the Grantee's estate in a lump sum 90 days after the appointment of an executor or administrator. In the event of the death of the beneficiary or beneficiaries after the death of a Grantee, the remaining amount of the account or accounts shall be paid in a lump sum to the estate of the last beneficiary to receive payments 90 days after the appointment of an executor or administrator. 6. Acceleration. Notwithstanding the provisions of the foregoing: (i) if a "change in control", as that term is defined in The Timken Company 1996 Deferred Compensation Plan, occurs, the amount of the Grantee's account or accounts shall immediately be paid to the Grantee in full; (ii) in the event of an unforeseeable emergency, as defined in section 1.457-2(h)(4) and (5) of the Income Tax Regulations, that is caused by an event beyond the control of the Grantee or beneficiary and that would result in severe financial hardship to the individual if acceleration were not permitted, the Committee may in its sole discretion accelerate the payment to the Grantee or beneficiary of the amount of his or her account or accounts, but only up to the amount necessary to meet the emergency. 7. Non-alienation of Deferred Amounts. No right or interest of the Grantee or any beneficiary shall, without the written consent of the Company, be (i) assignable or transferable in any manner, (ii) subject to alienation, anticipation, sale, pledge, encumbrance, attachment, garnishment or other legal process or (iii) in any manner liable for or subject to the debts or liabilities of the Grantee or beneficiary. 8. Interest of Grantee. The obligation of the Company to make payment of amounts reflected in an account merely constitutes the unsecured promise of the Company to make payments from its general assets, as provided herein, and neither the Grantee nor any beneficiary shall have any interest in, or a lien or prior claim upon, any property of the Company. It is the intention of the Company that its obligation be unfunded for tax purposes and for purposes of Title I of ERISA. The Company may create a trust to hold funds to be used in payment of its obligations under the Agreement, and may fund such trust; provided, however, that any funds contained therein shall remain liable for the claims of the Company's general creditors. EXHIBIT A PERFORMANCE SHARE GRANT THE TIMKEN COMPANY DEFERRAL ELECTION I,______________________, hereby elect pursuant to Section 5 of the Performance Share Agreement dated ________________ between myself and the Company (the "Agreement") to defer receipt of all or part of the Annual Award(s) which I otherwise would be entitled to receive as follows: Deferral of Cash Deferral of Performance Shares 1. Percentage or dollar amount 1. Percentage or dollar amount of of Annual Award, if any, (a) Annual Award (a) for 1998 only [ ] for 1998 only [ ] or (b) for or (b) for 1998 and for later years 1998 and for later years [ ]: [ ]: 25% [ ] 100% [ ] 25% [ ] 100% [ ] 50% [ ] ___% [ ] 50% [ ] ___% [ ] $ [ ] $ [ ] 2. Please defer my receipt of 2. Please make payment of the Performance Shares, payable in cash, above specified cash together together with the cash credited to with all accrued interest my account equal to dividends or reflected in my account as other distributions paid on a number as follows: of Common Shares equal to the number of Performance Shares reflected in a. Pay in lump sum [ ] such account, together with all b. Pay in __ approximately accrued interest, as follows: equal quarterly installments [ ] a. Defer until the date I cease to be an employee [ ] 3. Please defere payment or make payment of first installment as follows: a. Defer until the date I cease to be an employee [ ] b. Defer until ________ [ ] (specify date or number of years following termination of employement) b. Defer until ______ [ ] (specify date or number of years following termination of employment) I acknowledge that I have reviewed the Agreement and understand that my participation will be subject to the terms and conditions contained in the Agreement. Capitalized terms used, but not otherwise defined, in this election agreement shall have the respective meanings assigned to them in the Agreement. I understand that (i) this election agreement shall continue to be effective for subsequent Annual Awards earned under the Agreement except as specified above and except as otherwise provided in the Agreement and (ii) in order to be effective to revoke or modify this election agreement with respect to Annual Award otherwise payable for a particular year, a revocation or modification must be delivered to the Director of Compensation and Benefits of the Company prior to the beginning of the year for which such Annual Award is payable. I acknowledge that I have been advised to consult with my own financial, tax, estate planning and legal advisors before making this election to defer in order to determine the tax effects and other implications of my participation in the Agreement. Dated this______ day of_____________________, 1997. ______________________________ (Signature) (Print or type name) EXHIBIT B PERFORMANCE SHARE GRANT THE TIMKEN COMPANY BENEFICIARY DESIGNATIONS In accordance with the terms and conditions of the Performance Share Agreement dated between and The Timken Company (the "Performance Share Agreement"), I hereby designate the person(s) indicated below as my beneficiary(ies) to receive the amounts payable under said Performance Share Agreement. Name______________________________ Address___________________________ ___________________________ ___________________________ Social Sec. Nos. of Beneficiary(ies)__________________________ Relationship(s)_______________________________________________ Date(s) of Birth______________________________________________ In the event that the above-named beneficiary(ies) predecease(s) me, I hereby designate the following person as beneficiary(ies); Name______________________________ Address___________________________ ___________________________ ___________________________ Social Sec. Nos. of Beneficiary(ies)__________________________ Relationship(s)_______________________________________________ Date(s) of Birth______________________________________________ I hereby expressly revoke all prior designations of beneficiary(ies), reserve the right to change the beneficiary(ies) herein designated and agree that the rights of said beneficiary(ies) shall be subject to the terms of the Performance Share Agreement. In the event that there is no beneficiary living at the time of my death, I understand that the amounts payable under the Performance Share Agreement will be paid to my estate. ______________________ Date (Signature) (Print or type name) EX-13 3 EXHIBIT 13 FINANCIAL SUMMARY 1997 1996 (Thousands of dollars, except per share data) Net sales $ 2,617,562 $ 2,394,757 Income before income taxes 266,592 225,259 Provision for income taxes 95,173 86,322 Net income $ 171,419 $ 138,937 Earnings per share $ 2.73 $ 2.21 Earnings per share - assuming dilution $ 2.69 $ 2.19 Dividends paid per share $ 0.66 $ 0.60 In 1997, for the third consecutive year, The Timken Company achieved record sales and earnings. Net sales grew 9.3 percent to $2.618 billion. Net income increased 23.4 percent to $171.4 million. The year ended on a strong note, with record fourth quarter sales and earnings. Both the Bearing and Steel Businesses achieved profitable growth in 1997. QUARTERLY FINANCIAL DATA Dividends Net Gross Net Earnings per Share(1) per Stock Prices 1997 Sales Profit Income Basic Diluted Share High Low First Quarter $ 640,584 $153,212 $ 41,066 $ .66 $ .64 $ .165 $ 27 5/8 $ 22 5/8 Second Quarter 676,003 167,519 44,940 .72 .70 .165 36 3/4 25 7/8 Third Quarter 629,900 142,718 37,790 .60 .59 .165 41 1/2 34 Fourth Quarter 671,075 156,710 47,623 .76 .74 .165 40 1/2 31 1/16 $2,617,562 $620,159 $171,419 $ 2.73 $ 2.69 $ .660 1996 First Quarter $ 595,954 $139,215 $ 33,598 $ .54 $ .53 $ .15 $ 23 13/16 $ 18 11/16 Second Quarter 601,553 142,389 34,524 .55 .54 .15 23 3/8 19 Third Quarter 581,417 137,650 31,785 .51 .50 .15 20 1/4 18 1/4 Fourth Quarter 615,833 154,518 39,030 .62 .62 .15 23 11/16 19 1/2 $2,394,757 $573,772 $138,937 $ 2.21 $ 2.19 $ .60
(1)Annual earnings per share do not equal the sum of the individual quarters due to differences in the average number of shares outstanding during the respective periods. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS - SUMMARY During the last five years, The Timken Company has focused on growing profitably through both continuous improvement and expansion of its businesses. In that period, the company's financial performance has improved steadily. Sales have increased by about 10% per year since 1992 and total shareholder return has averaged 24.4% annually. Again in 1997, the company achieved record sales and earnings. Net sales increased 9.3% to $2.618 billion. Net income rose 23.4% to $171.4 million. Increased profitability resulted from higher sales volume as well as manufacturing efficiencies and cost savings from continuous improvement initiatives. New product development, plant openings and expansions, and acquisitions in 1997 are designed to drive further profitable growth worldwide. In the Bearing Business, higher volume and manufacturing cost reductions contributed to the growth in profits. New products and strong sales in the automotive, aerospace and industrial markets also were factors. The Steel Business achieved unprecedented levels of output without significant capacity additions. Improved productivity, combined with strong sales to oil country, automotive and aerospace markets, also increased profitability. Revenue generated through its domestic distribution business also was a factor. The company completed four acquisitions and announced several plant expansions in 1997. In the first quarter, the company acquired certain assets of Gnutti Carlo, S.p.A. near Brescia, Italy. This subsidiary is now Timken Italia, s.r.l. and serves primarily the European truck, railroad and industrial markets. In March, the company expanded its railroad bearing reconditioning capabilities internationally, with initial focus in the United Kingdom. The second quarter was a high-growth period for both the Steel and Bearing Businesses. In April, the company broke ground for its $55 million bar mill at the Harrison Steel Plant in Canton. The project is on schedule, with full operation expected to begin in mid- 1998. The Steel Business's Winchester Parts Plant in Kentucky began operations in May and already has installed additional equipment to meet demand for its products. Also in May, the Bearing Business acquired Handpiece Headquarters, Inc. in California, which repairs and rebuilds a variety of dental handpieces that use miniature bearings made by the company's MPB subsidiary. In June, the company opened a liaison office in Istanbul's busy commercial center to strengthen distribution of Timken products to the growing Turkish automotive and industrial markets. Also in June, the company paid its 300th consecutive quarterly dividend to shareholders and split its stock 2-for-1. This also was the company's 75th anniversary as a member of the New York Stock Exchange. Additionally, in the second quarter the company merged two of its tool steel distribution organizations, Ohio Alloy Steels and Houghton & Richards. The new company functions as a Latrobe Steel subsidiary. In the third quarter, the company acquired the aerospace bearing operations of The Torrington Company Limited in Wolverhampton, England. Now MPB UK Limited, it will expand the scope of the company's products and services in the European aerospace market, second in size only to the U.S. market. A $20 million investment in the company's Asheboro Plant was announced in July to increase that plant's unique ability to provide low-volume product with unprecedented speed and flexibility to customers in the industrial market. The fourth quarter brought further growth initiatives. The company began work on its $51 million investment in the Gaffney, South Carolina, plant and announced a $15 million investment in its Bucyrus plant in Ohio. Both initiatives are designed to improve operations with more advanced, computer-controlled equipment that will increase throughput, improve product quality and lower costs. In the automotive aftermarket, the company introduced a new line of bearings, seals and related components for cars and light trucks, as well as rebuild kits and individual components for the light- and heavy-duty truck market. In December, the company acquired 70% of Rulmenti Grei S.A., a bearing manufacturer in Ploesti, Romania. The plant produces bearings used in a wide range of industrial applications, including steel and aluminum rolling mills, paper mills, marine systems, and oil and gas production. It serves customers in Romania as well as in Eastern and Western Europe, Asia and North America. The Steel Business announced in the fourth quarter the opening of a tool and alloy steel distribution facility in Greer, South Carolina. The business's Tryon Peak Plant in North Carolina completed construction of its profile ring mill, a $15 million investment announced in 1996. In 1997, the company made significant leadership changes. With the retirement of long-time president and chief executive officer Joseph F. Toot, Jr., chairman W. R. Timken, Jr., took on the added responsibilities of president and chief executive officer. Serving with Mr. Timken in the office of the chairman are Robert L. Leibensperger and Bill J. Bowling, who added the responsibility of chief operating officer to their positions as executive vice president and president of the Bearing and Steel Businesses, respectively. Also, Karl P. Kimmerling and Hans J. Sack were elected officers of the company. Mr. Kimmerling is group vice president - alloy steel, and Mr. Sack is group vice president - specialty steel and president - Latrobe Steel Company. 17 CONSOLIDATED STATEMENT OF INCOME TIMKEN Year Ended December 31 1997 1996 1995 (Thousands of dollars, except per share data) Net sales $2,617,562 $2,394,757 $2,230,504 Cost of products sold 1,997,403 1,820,985 1,717,700 Gross Profit 620,159 573,772 512,804 Selling, administrative and general expenses 330,830 316,515 302,588 Operating Income 289,329 257,257 210,216 Interest expense (21,432) (17,899) (19,813) Other income (expense) (1,305) (14,099) (10,229) Income Before Income Taxes 266,592 225,259 180,174 Provision for income taxes 95,173 86,322 67,824 Net Income $171,419 $138,937 $112,350 Earnings Per Share $ 2.73 $ 2.21 $ 1.80 Earnings Per Share-assuming dilution $ 2.69 $ 2.19 $ 1.78
See accompanying Notes to Consolidated Financial Statements on pages 25 through 33. FORWARD-LOOKING STATEMENTS The statements set forth in this annual report that are not historical in nature are forward-looking statements. This is particularly true of the statements made in the Corporate Profile on pages 6 and 7. The company cautions readers that actual results may differ materially from those projected or implied in forward-looking statements made by or on behalf of the company due to a variety of important factors, such as: a) changes in world economic conditions. This includes, but is not limited to, the potential instability of governments and legal systems in countries in which the company conducts business, significant changes in currency valuations and the effects of year 2000 compliance. b) changes in customer demand on sales and product mix. This includes the effect of customer strikes and the impact of changes in industrial business cycles. c) competitive factors, including changes in market penetration and the introduction of new products by existing and new competitors. d) changes in operating costs. This includes the effect of changes in the company's manufacturing processes; changes in costs associated with varying levels of operations; changes resulting from inventory management initiatives and different levels of customer demands; the effects of unplanned work stoppages; changes in the cost of labor and benefits; and the cost and availability of raw materials and energy. e) the success of the company's operating plans, including its ability to achieve the benefits of its ongoing continuous improvement programs; its ability, along with that of its customers and suppliers, to update computer systems to be year 2000 compliant; its ability to integrate acquisitions into company operations; the ability of recently acquired companies to achieve satisfactory operating results; and the company's ability to maintain appropriate relations with unions that represent company associates in certain locations in order to avoid disruptions of business. f) unanticipated litigation, claims or assessments. This includes, but is not limited to, claims or problems related to product warranty and environmental issues. g) changes in worldwide financial markets to the extent they affect the company's ability to raise capital, have an impact on the overall performance of the company's pension fund investments and cause changes in the economy which affect customer demand. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF INCOME 1997 compared to 1996 Net sales increased in 1997 by 9.3% to $2.618 billion. The company achieved sales gains in the North American automotive, industrial and super precision bearing markets, and in the specialty alloy steel and steel components markets. Sales growth in Europe and Latin America, along with sales by the company's recently acquired businesses, also contributed to the year-to-year increase. Sales in Asia Pacific markets, still a small part of the company's total operations, weakened significantly toward year end due to the severe economic problems in that area. 18 Gross profit for 1997 increased to $620.2 million (23.7% of net sales), an 8.1% increase over 1996's gross profit of $573.8 million (24% of net sales). Higher sales volume and cost improvements related to the company's ongoing continuous improvement initiatives contributed to this growth. Costs associated with bringing products manufactured by new acquisitions to Timken quality and technological standards caused gross margins to decline slightly in 1997. Higher product costs, some associated with the exceptional levels of customer demand, also affected margins. Operating income increased to $289.3 million in 1997, up from $257.3 million in 1996. The company was successful in reducing further its selling, administrative and general expenses as a percent of sales, which were $330.8 million (12.6% of net sales) in 1997 compared to $316.5 million (13.2% of net sales) in 1996. In addition to expenses required to support the increased level of sales volume, the higher dollar figure resulted in part from the continued phase-in of the company's pay-for-performance plan for salaried associates, recent acquisitions and higher research expenditures. "Other income (expense)" for 1997 reflects lower net expense resulting primarily from a gain on the sale of property in the United Kingdom. Taxes represent about 35.7% of income before taxes. The provision for income taxes for the year 1997 included a credit relating to claims for prior years' research and development credits of $4 million, or $.06 per share. The effective income tax rate for the year exclusive of this item was 37.2%. Bearing Business net sales increased by 7.6% from $1.598 billion in 1996 to $1.719 billion in 1997. During the year, the Bearing Business grew through expansions, the launch of new products and services, and acquisitions. Sales increased in several segments including U.S. heavy- and light-duty truck, super precision, aftermarket and industrial original equipment markets. Higher bearing sales in Europe and Latin America, along with sales from bearing acquisitions completed during 1996 and 1997, also contributed to the increase. Demand for bearing products in Asia Pacific markets dropped significantly in the fourth quarter due to the economic problems there. Bearing Business operating income grew to $163.3 million in 1997, an increase of 5.2% over the $155.2 million achieved in 1996. Higher sales volume and manufacturing cost reductions resulting from the business's continuous improvement efforts helped to offset the higher cost of labor; additional hiring and training costs associated with meeting higher customer demand; and increased administrative costs related to integrating newly acquired operations. Steel Business net sales totaled $898.7 million, up 12.8% from $796.7 million in 1996. Successful marketing efforts, combined with strong demand for alloy steel products and steel components, fueled the increase in sales. Sales to oil country markets increased by more than 50%. Higher sales of specialty steel at the company's Latrobe Steel subsidiary, along with sales growth resulting from recently acquired tool steel distribution businesses, also contributed to higher 1997 sales. Operating income was $126 million in 1997, up 23.5% from the $102 million reported in 1996, and resulted primarily from higher sales volume and improved manufacturing efficiencies. Productivity improved for the year, and steel manufacturing operations achieved record levels of output. The Steel Business was able to meet increased customer demand by continuing to exceed established capacity expectations of existing equipment. Cost reductions linked to the company's ongoing continuous improvement efforts, along with lower priced scrap metal, more than offset higher labor costs and the operating costs associated with bringing the business's recently acquired European distribution operation on stream. 1996 compared to 1995 Net sales in 1996 increased over 1995 by 7.4% to $2.395 billion. Sales growth was achieved in the U.S. automotive, aftermarket, super precision bearings and specialty alloy steel markets as well as in Australia, South Africa, Mexico and Argentina. The company's 1996 acquisitions also contributed to the increase. Sales in the U.S. heavy truck, freight car and locomotive markets, as well as sales in Europe, were weaker. Gross profit for 1996 increased to $573.8 million (24% of net sales), an increase of 11.9% over 1995's $512.8 million (23% of net sales). Improvements in productivity and success in accelerating continuous improvement in its manufacturing plants contributed to this growth. Operating income for 1996 increased to $257.3 million compared to $210.2 million in 1995. Selling, administrative and general expenses of $316.5 million (13.2% of net sales) were higher than the $302.6 million (13.6% of net sales) recorded in 1995 due primarily to the company's acquisitions, costs associated with the development of new scheduling and costing systems, and the company's pay-for-performance plan for salaried associates implemented in the fourth quarter of 1995. 19 CONSOLIDATED BALANCE SHEET December 31 1997 1996 (Thousands of dollars) ASSETS Current Assets Cash and cash equivalents $ 9,824 $ 5,342 Accounts receivable, less allowances: 1997-$7,003; 1996-$7,062 357,423 313,932 Deferred income taxes 42,071 54,852 Inventories: Manufacturing supplies 36,448 40,150 Work in process and raw materials 264,784 241,691 Finished products 144,621 137,666 Total Inventories 445,853 419,507 Total Current Assets 855,171 793,633 Property, Plant and Equipment Land and buildings 420,322 397,895 Machinery and equipment 2,257,464 2,085,305 2,677,786 2,483,200 Less allowances for depreciation 1,457,270 1,388,871 Property, Plant and Equipment-Net 1,220,516 1,094,329 Other Assets Costs in excess of net assets of acquired businesses, net of amortization, 1997-$23,448; 1996-$18,670 139,409 125,018 Deferred income taxes 26,605 3,803 Miscellaneous receivables and other assets 60,161 32,175 Deferred charges and prepaid expenses 24,688 22,380 Total Other Assets 250,863 183,376 Total Assets $2,326,550 $2,071,338 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE BALANCE SHEET The consolidated balance sheet reflects the company's commitment to maintain its strong capital structure through effective debt management. Total assets increased by $255.2 million from December 31, 1996. Accounts receivable were higher at year-end 1997 due primarily to the sales increase and to longer credit terms in countries where the company's recent acquisitions are located. The number of days' sales in receivables at December 31, 1997, was slightly higher than the year- end 1996 level. While inventory balances increased primarily due to the higher level of activity, the company succeeded in lowering the number of days' supply in inventory to 112 days at December 31, 1997, from 118 days at the end of 1996. The company continues to recognize the importance of cash flow by improving working capital usage, especially through lowering inventory levels. The company uses the LIFO method of accounting for about 80% of its inventories. Under this method, the cost of products sold approximates current cost and, therefore, reduces distortion in reporting income due to inflation. Depreciation charged to operations is based on historical cost and is significantly less than if it were based on replacement value. Other assets increased by $67.5 million during 1997. The $14.4 million increase in "costs in excess of net assets of acquired businesses" relates directly to the business acquisitions completed during the year. "Miscellaneous receivables and 20 TIMKEN December 31 1997 1996 (Thousands of dollars) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Commercial paper $ 71,566 $ 46,977 Short-term debt 61,399 59,457 Accounts payable and other liabilities 284,890 237,020 Salaries, wages and benefits 115,136 125,026 Income taxes 22,953 29,072 Current portion of long-term debt 23,620 30,396 Total Current Liabilities 579,564 527,948 Non-Current Liabilities Long-term debt 202,846 165,835 Accrued pension cost 103,061 56,568 Accrued postretirement benefits cost 409,003 398,759 Total Non-Current Liabilities 714,910 621,162 Shareholders' Equity Class I and II Serial Preferred Stock without par value: Authorized-10,000,000 shares each class, none issued -0- -0- Common stock without par value: Authorized-200,000,000 shares Issued (including shares in treasury) 63,082,626 shares in 1997; 63,050,402 shares in 1996 Stated capital 53,064 53,064 Other paid-in capital 273,873 270,840 Earnings invested in the business 749,033 619,061 Accumulated other comprehensive income (38,026) (12,799) Treasury shares at cost (1997-202,627 shares; 1996-403,512 shares) (5,868) (7,938) Total Shareholders' Equity 1,032,076 922,228 Total Liabilities and Shareholders' Equity $2,326,550 $2,071,338 See accompanying Notes to Consolidated Financial Statements on pages 25 through 33. other assets" is higher in 1997 due primarily to a receivable from the Romanian government related to the company's acquisition of a Romanian bearing manufacturer. Accrued pension liabilities were higher at December 31, 1997. The balance at December 31, 1996, was lower due to the contribution of additional funds to the company's pension plans in the third quarter of 1996. Debt of $359.4 million at December 31, 1997, exceeded the $302.7 million at year-end 1996. The 25.8% debt to total capital ratio was higher than the 24.7% at year-end 1996. Debt increased by $56.7 million in 1997 due to the cash required to purchase acquisitions, while total shareholders' equity increased by $109.8 million. In January 1998, the company issued $37 million of medium-term notes at interest rates between 6.20% and 6.74%, maturing from January 15, 2008, to January 13, 2028. The issuance of these notes completed the company's $250 million debt registration filed with the Securities and Exchange Commission (SEC) in 1990. Another shelf registration for $300 million of debt securities was approved by the board in November 1997 and is expected to be filed with the SEC in the first quarter of 1998. 21 CONSOLIDATED STATEMENT OF CASH FLOWS TIMKEN Year Ended December 31 1997 1996 1995 (Thousands of dollars) CASH PROVIDED (USED) Operating Activities Net income $171,419 $138,937 $112,350 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 134,431 126,457 123,409 Deferred income tax provision (credit) (1,564) 23,216 14,390 Common stock issued in lieu of cash to benefit plans 20,452 4,862 4,317 Changes in operating assets and liabilities: Accounts receivable (48,584) (18,348) (20,228) Inventories and other assets (30,056) (25,398) (57,821) Accounts payable and accrued expenses 66,357 (63,100) 47,568 Foreign currency translation (gain) loss (472) (215) 27 Net Cash Provided by Operating Activities 311,983 186,411 224,012 Investing Activities Purchases of property, plant and equipment-net (233,392) (150,728) (128,824) Acquisitions (78,739) (85,459) -0- Net Cash Used by Investing Activities (312,131) (236,187) (128,824) Financing Activities Cash dividends paid to shareholders (38,714) (30,244) (28,383) Purchases of treasury shares (18,083) (13,786) (170) Proceeds from issuance of long-term debt 60,453 45,000 -0- Payments on long-term debt (30,217) (288) (30,168) Short-term debt activity-net 32,485 47,461 (40,930) Net Cash Provided (Used) by Financing Activities 5,924 48,143 (99,651) Effect of exchange rate changes on cash (1,294) (287) (396) Increase (Decrease) In Cash and Cash Equivalents 4,482 (1,920) (4,859) Cash and cash equivalents at beginning of year 5,342 7,262 12,121 Cash and Cash Equivalents at End of Year $9,824 $5,342 $7,262
See accompanying Notes to Consolidated Financial Statements on pages 25 through 33. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE STATEMENT OF CASH FLOWS 1997 compared to 1996 Net cash provided by operating activities was $312 million in 1997, compared to $186.4 million in 1996. The cash generated from income in 1997 was more than sufficient to cover the additional cash required for working capital. Accounts receivable, and inventories and other assets increased during 1997 by $48.6 million and $30.1 million, respectively, primarily as a result of higher sales and production activity. The $66.4 million cash provided by higher accounts payable and accrued expenses also related primarily to the higher activity level and recent acquisitions. In 1996, the $63.1 million cash outflow resulted primarily from the contribution of additional funds to the company's pension plans. "Purchases of property, plant and equipment-net" during the twelve months ended December 31, 1997, was $233.4 million compared to $150.7 million one year earlier. The company also invested $78.7 million in acquisitions compared to $85.5 million in 1996. The company continues to invest in activities consistent with its strategy to strengthen its core bearing and alloy steel leadership positions. Recent acquisitions, along with capital investments in the company's existing operations worldwide and planned research and development expenditures, continue to accelerate growth and strengthen positions in new and existing markets. The company's debt increased in 1997. Cash was needed to fund additional investments in property, plant and equipment, 22 finance acquisitions and to buy back shares of the company's stock. Approximately 1 million of the 2 million shares authorized per the purchase plan adopted in June 1996, have been repurchased. The company expects that cash generated from operating activities during 1998 will be sufficient to cover working capital, pay dividends, fund capital expenditures and pay interest. Any further cash needs that exceed cash generated from operations will be met by short-term borrowing and issuance of medium-term notes. 1996 compared to 1995 Net cash provided by operating activities was $186.4 million in 1996 compared to $224 million in 1995. Cash generated from income in 1996 was more than sufficient to cover the additional cash required for working capital. Accounts receivable, and inventories and other assets increased during 1996 by $18.3 million and $25.4 million, respectively, as a result of higher sales and production activity. The company's 1996 "purchases of property, plant and equipment-net" was $150.7 million compared to $128.8 million in 1995. The company also invested $85.5 million in acquisitions. Debt at year-end 1996 was higher than 1995's level. Cash was required to fund the company's pension plans, to purchase property, plant and equipment, to finance acquisitions and other growth initiatives, and to buy back shares of the company's stock. MANAGEMENT'S DISCUSSION AND ANALYSIS - OTHER INFORMATION The Timken Company's efforts to be year 2000 compliant include a defined methodology of assessment, strategy definition, development, test, integration and implementation components. The company's corporate information systems department has instituted a corporate level reporting and tracking process that encompasses all of the company's year 2000 project efforts worldwide. Through the use of this methodology over the past two years, the company is well into its year 2000 conversion effort. Based on current project plans, Timken expects to have all of its critical systems year 2000 compliant by the last quarter of 1998. The costs associated with this project will not have a material effect on the company's financial position, results of operation or cash flows. As part of the company's risk management strategies, various financial instruments are used in the normal course of business. With regard to derivative transactions, the company has established a formal policy and maintains a management operating procedure for hedging activities. During the three-year period ended December 31, 1997, these financial instruments consisted primarily of foreign exchange contracts. Foreign exchange contracts are an integral tool used to manage exposure to currency rate fluctuations primarily related to purchases of inventory and equipment. Because these contracts qualify for accounting as designated hedges, the realized and unrealized gains and losses are deferred and included in inventory or property, plant and equipment, depending on the transaction. More information regarding foreign exchange contracts is in Note 3 to the Consolidated Financial Statements. Deferred gains and losses on foreign exchange contracts in 1995 - 1997 were not significant. All financial instruments involve both credit and market risks. The company addresses these risks by limiting the duration of its foreign exchange contracts to one year and by dealing only with major financial institutions. The company continues to emphasize protecting the environment and complying with environmental protection laws. In doing so, the company has invested in pollution control equipment and updated plant operational practices. The company believes it has established adequate reserves to cover its environmental expenses and has a well- established environmental compliance audit program, which includes a proactive approach to bringing its domestic and international units to higher standards of environmental performance. This program measures performance against local laws and standards established for all units worldwide. It is difficult to assess the possible effect of compliance with future requirements that differ from existing ones. As previously reported, the company was uncertain whether additional emission monitoring would be required or what the cost would be when proposed emission monitoring regulations pursuant to the Clean Air Act of 1990 were issued. In 1997, the regulations were issued in a modified form from those proposed and, while some uncertainty remains, the financial impact on the company is expected to be small, certainly less than anticipated under the proposed regulations. The company also is unsure of the ultimate future financial impact that could result from the United States Environmental Protection Agency's (EPA's) final rules to tighten the National Ambient Air Quality Standards for fine particulate and ozone, which were issued in July. The company and certain of its U.S. subsidiaries have been designated as potentially responsible parties (PRP's) by the United States EPA for site investigation and remediation at certain sites under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund). The claims for remediation have been asserted against numerous other entities, which are believed to be financially solvent and are expected to fulfill their proportionate share of the obligation. In 1997, the company and its Latrobe Steel subsidiary were both named a PRP at one additional site. Management believes any ultimate liability with respect to all pending actions will not materially affect the company's operations, cash flows or consolidated financial position. The company's MPB Corporation subsidiary has two environmental projects at its manufacturing locations in New Hampshire. Remediation at one plant is nearing completion. In late 1996, the second system was installed and remediation was begun at the other plant. The company had provided for the costs of these projects, which to date have been $3.5 million. A portion of these costs is being recovered from a former owner of the property. Future operating and maintenance costs are expected to be $1.7 million. MPB also filed suit against and settled with four insurance companies for reimbursement of clean- up costs. The company continued work in 1997 on environmental projects at its locations in Canton and Columbus, Ohio. Costs 23 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY TIMKEN Common Stock Earnings Accumulated Other Invested Other Stated Paid-In In the Comprehensive Treasury Total Capital Capital Business Income Stock (Thousands of dollars) Year Ended December 31, 1995 Balance at January 1, 1995 $ 732,891 $53,064 $254,002 $440,083 $(14,252) $ (6) Net income 112,350 112,350 Foreign currency translation adjustments (net of income tax benefit of $1,473) 173 173 Total comprehensive income 112,523 Dividends-$0.555 per share (34,631) (34,631) Issuance of 585,538 shares of common stock (1) 10,565 10,565 Purchase of 8,528 shares for treasury (170) (170) Balance at December 31, 1995 821,178 53,064 264,567 517,802 (14,079) (176) Year Ended December 31, 1996 Net income 138,937 138,937 Foreign currency translation adjustments (net of income tax benefit of $958) 1,280 1,280 Total comprehensive income 140,217 Dividends-$0.60 per share (37,678) (37,678) Issuance of 341,788 shares of common stock (1) 6,273 6,273 Purchase of 724,600 shares for treasury (13,786) (13,786) Issuance of 329,976 shares from treasury (1) 6,024 6,024 Balance at December 31, 1996 922,228 53,064 270,840 619,061 (12,799) (7,938) Year Ended December 31, 1997 Net income 171,419 171,419 Foreign currency translation adjustments (net of income tax benefit of $3,401) (22,516) (22,516) Minimum pension liability adjustment (net of income tax benefit of $1,589) (2,711) (2,711) Total comprehensive income 146,192 Dividends-$0.66 per share (41,447) (41,447) Issuance of 32,224 shares of common stock (1) 3,033 3,033 Purchase of 697,100 shares for treasury (18,083) (18,083) Issuance of 897,985 shares from treasury (1) 20,153 20,153 Balance at December 31, 1997 $1,032,076 $53,064 $273,873 $749,033 $(38,026) $(5,868) (1) Share activity was in conjunction with stock options and various benefit and dividend reinvestment plans. In 1997, the majority of shares issued from treasury related to the exercise of stock options. See accompanying Notes to Consolidated Financial Statements on pages 25 through 33.
MANAGEMENT'S DISCUSSION AND ANALYSIS - OTHER INFORMATION (Continued) for these two projects are estimated to be about $2.1 million. In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," which changes the way public companies report segment information in annual financial statements. The company will adopt SFAS No. 131 in 1998. Management does not expect the adoption to have a material impact on the company's financial statement disclosures. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TIMKEN 1. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts and operations of the company and its subsidiaries. All significant intercompany accounts and transactions are eliminated upon consolidation. Cash Equivalents: The company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Inventories: Inventories are valued at the lower of cost or market, principally by the last-in, first-out (LIFO) method. If all inventories had been valued at current costs, inventories would have been $162,709,000 and $166,818,000 greater at December 31, 1997 and 1996, respectively. Property, Plant and Equipment: Property, plant and equipment is valued at cost less accumulated depreciation. Provision for depreciation is computed principally by the straight-line method based upon the estimated useful lives of the assets. The useful lives are approximately 30 years for buildings and range from 3 to 20 years for machinery and equipment. Costs in Excess of Net Assets of Acquired Businesses: Costs in excess of net assets of acquired businesses (goodwill) are amortized on the straight-line method over 25 years for businesses acquired after 1991 and over 40 years for those acquired before 1991. The carrying value of goodwill is reviewed on a quarterly basis for recoverability based on the undiscounted cash flows of the businesses acquired over the remaining amortization period. Should the review indicate that goodwill is not recoverable, the company's carrying value of the goodwill would be reduced by the estimated shortfall of the cash flows. No reduction of goodwill for impairment was necessary in 1997 or in previous years. Income Taxes: Deferred income taxes are provided for the temporary differences between the financial reporting basis and tax basis of the company's assets and liabilities. The company plans to continue to finance expansion of its operations outside the United States by reinvesting undistributed earnings of its non-U.S. subsidiaries. The amount of undistributed earnings that is considered to be indefinitely reinvested for this purpose was approximately $70,000,000 at December 31, 1997. Accordingly, U.S. income taxes have not been provided on such earnings. While the amount of any U.S. income taxes on these reinvested earnings - if distributed in the future - is not presently determinable, it is anticipated that they would be reduced substantially by the utilization of tax credits or deductions. Such distributions would be subject to withholding taxes. 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 amounts reported in the financial statements and accompanying notes. These estimates and assumptions are reviewed and updated regularly to reflect recent experience. Foreign Currency Translation: Assets and liabilities of subsidiaries, other than those located in highly inflationary countries, are translated at the rate of exchange in effect on the balance sheet date; income and expenses are translated at the average rates of exchange prevailing during the year. The related translation adjustments are reflected as a separate component of accumulated other comprehensive income. Foreign currency gains and losses resulting from transactions and the translation of financial statements of subsidiaries in highly inflationary countries are included in results of operations. The company recorded a foreign currency exchange gain of $731,000 in 1997, and losses of $1,358,000 and $3,807,000 in 1996 and 1995, respectively. Segment Information: In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," which changes the way public companies report segment information in annual financial statements. The Statement also requires public companies to report selected segment information in interim financial reports to shareholders. The company will adopt SFAS No. 131 in 1998. Restatement of comparative information for earlier years is required in the initial year of adoption. Management does not expect the adoption of the statement to have a material impact on the company's financial statement disclosures. Comprehensive Income: Effective in the fourth quarter 1997, the company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the company's net income or shareholders' equity. SFAS No. 130 requires the company's change in the minimum pension liability and the foreign currency translation adjustments to be included in other comprehensive income. Prior years' financial statements have been reclassified to conform to these requirements. Earnings Per Share: In 1997, the FASB issued SFAS No. 128, "Earnings Per Share" which replaced the calculation of primary and fully diluted earnings per share with earnings per share and earnings per share - assuming dilution. Unlike primary earnings per share, earnings per share excludes any dilutive effects of options, warrants and convertible securities. Earnings per share - assuming dilution is very similar to the previously reported fully diluted earnings per share. Because common stock equivalents were immaterial in prior years, no difference exists between the application of SFAS No. 128 and previous methods. Accordingly, no restatement of prior years was necessary. Reclassifications: Certain amounts reported in the 1996 financial statements have been reclassified to conform to the 1997 presentation. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. FINANCING ARRANGEMENTS Long-term debt at December 31, 1997 and 1996 was as follows: 1997 1996 (Thousands of dollars) Fixed-rate Medium-Term Notes, Series A, due at various dates through November 2027, with interest rates ranging from 6.40% to 9.10% $153,000 $148,000 Variable-rate State of Ohio Air Quality and Water Development Revenue Refunding Bonds, maturing on June 1, 2001 (3.70% at December 31, 1997) 21,700 21,700 7.50% State of Ohio Pollution Control Revenue Refunding Bonds, maturing on January 1, 2002 17,000 17,000 Variable-rate State of Ohio Water Development Revenue Refunding Bonds, maturing May 1, 2007 (3.70% at December 31, 1997) 8,000 8,000 Variable-rate State of Ohio Water Development Authority Solid Waste Revenue Bonds, maturing on July 2, 2032 (3.75% at December 31, 1997) 24,000 -0- Other 2,766 1,531 226,466 196,231 Less current maturities 23,620 30,396 $202,846 $165,835 The aggregate maturities of long-term debt for the five years subsequent to December 31, 1997, are as follows: 1998-$23,620,000; 1999-$15,223,000; 2000-$776,000; 2001-$22,461,000; 2002-$52,128,000. In January 1998, the company issued $37,000,000 of medium-term notes at interest rates between 6.20% and 6.74% and maturity dates ranging from January 15, 2008, to January 13, 2028. Interest paid in 1997, 1996 and 1995 approximated $24,000,000, $18,500,000 and $26,000,000, respectively. This differs from interest expense due to timing of payments and interest capitalized of $2,200,000 in 1997, $1,800,000 in 1996 and $1,900,000 in 1995 as a part of major capital additions. The weighted-average interest rate on commercial paper borrowings during the year was 5.7% in 1997, 5.5% in 1996 and 7.5% in 1995. The weighted-average interest rate on short- term debt during the year was 6.6% in 1997, 6.3% in 1996 and 8.4% in 1995. At December 31, 1997, the company had available $228,400,000 through an unsecured $300,000,000 revolving credit agreement with a group of banks. The agreement, which expires in August 2002, bears interest based upon any one of three rates at the company's option-prime, London Interbank Offered Rate (LIBOR) or the adjusted certificate of deposit rate. The company and its subsidiaries lease a variety of real property and equipment. Rent expense under operating leases amounted to $16,689,000, $14,580,000 and $14,673,000 in 1997, 1996 and 1995, respectively. At December 31, 1997, future minimum lease payments for noncancelable operating leases totaled $40,194,000 and are payable as follows: 1998-$12,521,000; 1999-$8,520,000; 2000-$5,532,000; 2001- $4,124,000; 2002-$3,237,000; and $6,260,000, thereafter. 3. FINANCIAL INSTRUMENTS As a result of the company's worldwide operating activities, it is exposed to changes in foreign currency exchange rates which affect its results of operations and financial condition. The company and certain subsidiaries enter into forward exchange contracts to manage exposure to currency rate fluctuations primarily related to the purchases of inventory and equipment. The purpose of these foreign currency hedging activities is to minimize the effect of exchange rate fluctuations on business decisions and the resulting uncertainty on future financial results. At December 31, 1997 and 1996, the company had forward exchange contracts, all having maturities of less than one year, in amounts of $20,596,000 and $24,171,000, respectively, which approximates their fair value. The forward exchange contracts were primarily entered into by the company's German subsidiary and exchanged deutsche marks for U.S. dollars and British pounds. The realized and unrealized gains and losses on these contracts are deferred and included in inventory or property, plant and equipment depending on the transaction. These deferred gains and losses are recognized in earnings when the future sales occur or through depreciation expense. The carrying value of cash and cash equivalents, accounts receivable, commercial paper, short-term borrowings and accounts payable are a reasonable estimate of their fair value due to the short-term nature of these instruments. The fair value of the company's fixed rate debt, based on discounted cash flow analysis, was $177,000,000 and $170,000,000 at December 31, 1997 and 1996, respectively. The carrying value of this debt was $170,000,000 and $165,000,000. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TIMKEN 4. RETIREMENT PLANS The company and its subsidiaries sponsor a number of defined benefit pension plans, which cover substantially all of their associates except those at certain non-U.S. locations who are covered by government plans. These plans provide benefits primarily based on associates' compensation. In general, the company's funding policy is to contribute amounts to the plans sufficient to meet the minimum funding requirements set forth by regulations of each country, such as the Employee Retirement Income Security Act of 1974, plus such additional amounts as the company may determine to be appropriate. In arriving at the pension obligation and net periodic pension costs for the company's plans, the consulting actuary used certain assumptions as follows: 1997 1996 1995 Discount rate 7.25% 7.5% 7.25% Future compensation assumption 3% to 4% 3% to 4% 3% to 4% Expected long-term return on plan assets 9.25% 9.25% 9.25% A summary of the components of net periodic pension cost for the defined benefit plans follows: 1997 1996 1995 (Thousands of dollars) Service cost-benefits earned during the period $26,144 $27,319 $22,511 Interest cost on projected benefit obligation 88,683 84,195 80,272 Actual return on plan assets (178,580) (110,773) (178,085) Net amortization and deferral 98,696 40,569 112,521 Total pension expense $34,943 $41,310 $37,219 The following table sets forth the funded status and amounts recognized in the consolidated balance sheet at December 31, 1997 and 1996, for the company's defined benefit plans: 1997 1996 Plans Where Plans Where Plans Where Assets Accumulated Assets Exceed Benefits Exceed Accumulated Exceed Accumulated Benefits Assets Benefits (Thousands of dollars) Actuarial present value of benefit obligations: Vested benefit obligation $(538,255) $(471,354) $(892,535) Accumulated benefit obligation $(595,494) $(568,536) $(1,017,239) Projected benefit obligation $(680,004) $(616,862) $(1,145,852) Plan assets at fair value (1) 685,817 522,030 1,099,576 Projected benefit obligation (in excess of) or less than plan assets 5,813 (94,832) (46,276) Unrecognized net (gain) loss (61,779) (54,852) (95,047) Prior service cost not yet recognized in net periodic pension cost 23,143 88,552 81,927 Unrecognized net asset at transition dates, net of amortization (10,870) (1,675) (15,896) Minimum pension liability -0- (5,400) -0- Net pension liability recognized in the balance sheet $(43,693) $(68,207) $(75,292)
(1) Plans' assets are primarily invested in listed stocks and bonds and cash equivalents. The company also sponsors defined contribution retirement and savings plans covering substantially all associates in the United States. The company contributes Timken Company common stock to certain plans based on formulas established in the respective plan agreements. At December 31, 1997, the plans had net assets of $515,328,000, including 6,883,283 shares of Timken Company common stock. Company contributions to the plans, including performance sharing, amounted to $16,245,000 in 1997, $14,761,000 in 1996 and $12,968,000 in 1995. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. POSTRETIREMENT BENEFITS The company and its subsidiaries sponsor several unfunded postretirement plans that provide health care and life insurance benefits for eligible retirees and dependents. Depending on retirement date and associate classification, certain health care plans contain contributions and cost-sharing features such as deductibles and coinsurance. The remaining health care plans and the life insurance plans are noncontributory. The postretirement benefit obligation and net periodic postretirement benefits cost were determined by application of the terms of the current medical and life insurance plans, including established deductibles, coinsurance and maximums, together with relevant actuarial assumptions. For measurement purposes, the company assumed a weighted-average annual rate of increase in the per capita cost of health care benefits (health care cost trend rate) of 8.5% declining gradually to 5% in 2004 and thereafter. The weighted-average discount rate used was 7.25% in 1997, 7.5% in 1996 and 7.25% in 1995. Net periodic postretirement benefits cost included the following components: 1997 1996 1995 (Thousands of dollars) Service cost $4,116 $4,332 $3,750 Interest cost on accumulated postretirement benefits obligation 28,691 28,299 30,217 Net amortization and deferral (4,547) (4,610) (3,190) Net periodic postretirement benefits cost $28,260 $28,021 $30,777 The following table sets forth the components of the accumulated postretirement benefits obligation recognized in the balance sheet at December 31, 1997 and 1996: 1997 1996 (Thousands of dollars) Accumulated postretirement benefits obligation: Retirees $(260,590) $(253,234) Fully eligible active plan participants (67,223) (65,040) Other active plan participants (86,757) (79,683) (414,570) (397,957) Unrecognized net gain 41,460 29,230 Unrecognized prior service cost (45,506) (49,778) Postretirement benefits obligation recognized in the balance sheet $(418,616) $(418,505) Increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997, by approximately $37,800,000 and the net periodic postretirement benefits cost for 1997 by approximately $2,860,000. 6. CONTINGENCIES The company and certain of its U.S. subsidiaries have been designated as potentially responsible parties (PRPs) by the United States Environmental Protection Agency for site investigation and remediation under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund) with respect to certain sites. The claims for remediation have been asserted against numerous other entities which are believed to be financially solvent and are expected to fulfill their proportionate share of the obligation. In addition, the company is subject to various lawsuits, claims and proceedings which arise in the ordinary course of its business. The company accrues costs associated with environmental and legal matters when they become probable and reasonably estimable. Environmental costs include compensation and related benefit costs associated with associates expected to devote significant amounts of time to the remediation effort and post-monitoring costs. Accruals are established based on the estimated undiscounted cash flows to settle the obligations and are not reduced by any potential recoveries from insurance or other indemnification claims. Management believes that any ultimate liability with respect to these actions, in excess of amounts provided, will not materially affect the company's operations, cash flows or consolidated financial position. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TIMKEN 7. ACQUISITIONS During 1997, the company made the following acquisitions: - February 1997 -- Gnutti Carlo S.p.A., of Brescia, Italy, a manufacturer of medium-sized industrial bearings for primarily the European truck, railroad and industrial markets. - May 1997 -- Handpiece Headquarters, Inc., which repairs and rebuilds a variety of dental handpieces. - July 1997 -- The aerospace bearing operations of the Torrington Company Limited located in Wolverhampton, England. - December 1997 -- 70% of Rulmenti Grei S.A., a bearing manufacturer in Ploesti, Romania, which produces bearings used in industrial applications, including steel and aluminum rolling mills, paper mills, marine systems, and oil and gas systems. During 1996, the company completed the acquisitions of three companies (Ohio Alloy Steels, Inc., Houghton & Richards, Inc., and Sanderson Kayser Ltd.) that service, finish and distribute tool steel and operate as subsidiaries of Latrobe Steel Company. In April 1996, the company purchased a fourth company, FLT Prema Milmet S.A., a manufacturer of automotive, agricultural and industrial machinery bearings. Also, the company joined with Yantai Bearing Factory to form the Yantai Timken Company Limited joint venture in March 1996. The company holds a 60% interest in the joint venture, which provides tapered roller bearings to the Chinese automotive and agricultural markets. The total cost of these acquisitions amounted to $78,739,000 in 1997 and $85,459,000 in 1996. A portion of the purchase price has been allocated to the assets and liabilities acquired based on their fair values at the dates of acquisition. The purchase allocation for Rulmenti Grei is preliminary, subject to obtaining asset appraisals. The fair value of the assets was $85,619,000 in 1997 and $68,709,000 in 1996, and the fair value of liabilities assumed was $20,075,000 in 1997 and $11,843,000 in 1996. The excess of the purchase price over the fair value of the net assets acquired has been allocated to the intangible asset, "costs in excess of net assets of acquired businesses." All of the acquisitions were accounted for as purchases. The company's consolidated financial statements include the results of operations of the acquired businesses for the period subsequent to the effective date of these acquisitions. Pro forma results of operations have not been presented because the effect of these acquisitions was not significant. 8. RESEARCH AND DEVELOPMENT Expenditures committed to research and development amounted to approximately $43,000,000 in 1997; $41,000,000 in 1996; and $35,000,000 in 1995. Such expenditures may fluctuate from year to year depending on special projects and needs. 9. EARNINGS PER SHARE On April 15, 1997, the company's Board of Directors approved a two-for- one stock split effected in the form of a stock dividend. As a result of this action, shareholders received on June 2, 1997, a stock dividend of one share of the company's common stock for each full share of common stock outstanding to holders of record on May 16, 1997. All references throughout this annual report to shares of common stock, per share and stock option data have been restated to reflect the two-for-one stock split. The following table sets forth the reconciliation of the numerator and the denominator of earnings per share and earnings per share - assuming dilution for the years ended December 31: 1997 1996 1995 (Thousands of dollars, except per share data) Numerator: Net income for earnings per share and earnings per share - assuming dilution -- income available to common shareholders $ 171,419 $ 138,937 $ 112,350 Denominator: Denominator for earnings per share -- weighted- average shares 62,786,387 62,776,132 62,388,736 Effect of dilutive securities: Stock options and awards -- based on the treasury stock method 1,017,747 733,570 601,274 Denominator for earnings per share - assuming dilution -- adjusted weighted-average shares 63,804,134 63,509,702 62,990,010 Earnings per share $ 2.73 $ 2.21 $ 1.80 Earnings per share - assuming dilution $ 2.69 $ 2.19 $ 1.78
29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. STOCK COMPENSATION PLANS The company has elected to follow Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock options to key associates and directors. Under APB Opinion No. 25, because the exercise price of the company's stock options equals the market price of the underlying common stock on the date of grant, no compensation expense is recognized. Under the company's stock option plans, shares of common stock have been made available to grant at the discretion of the Compensation Committee of the Board of Directors to officers and key associates in the form of stock options, stock appreciation rights, restricted shares and deferred shares. In addition, shares can be awarded to directors not employed by the company. Under these plans, the price of stock options granted equals the market price of the company's common stock at the date of grant. The options have a ten-year term and vest in 25% increments annually beginning twelve months after the date of grant. Pro forma information regarding net income and earnings per share is required by Financial Accounting Standard (FAS) No. 123, and has been determined as if the company had accounted for its associate stock options under the fair value method of FAS No. 123. The fair value for these options was estimated at the date of grant using a Black- Scholes option pricing model. For purposes of pro forma disclosures, the estimated fair value of the options granted under the plan is amortized to expense over the options' vesting periods. The pro forma information for grants in 1997, 1996 and 1995 indicates a decrease in net income of $2,901,000 in 1997, $1,131,000 in 1996 and $320,000 in 1995. Following is the pro forma information and the related assumptions under the Black-Scholes method: 1997 1996 1995 (Thousands of dollars except per share data) Pro forma net income $168,518 $137,806 $112,030 Earnings per share $2.68 $2.19 $1.80 Earnings per share - assuming dilution $2.64 $2.17 $1.78 Assumptions: Risk-free interest rate 6.90% 6.52% 7.13% Dividend yield 3.13% 3.33% 3.49% Expected stock volatility 0.235 0.219 0.226 Expected life - years 8 8 8 Under SFAS No. 123, the first year to recognize pro forma stock-based compensation expense was 1995. Based on the estimated life of the grants, 1997 was the first year to demonstrate the full effect on pro forma net income of amortizing compensation expense related to stock options. A summary of activity related to stock options for the above plan is as follows for the years ended December 31: 1997 1996 1995 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price Outstanding - beginning of year 3,091,994 $17.80 2,913,416 $16.52 2,810,386 $15.77 Granted 762,200 26.44 654,000 22.06 563,800 18.69 Exercised (653,608) 16.41 (437,872) 15.56 (435,370) 14.49 Canceled or expired (20,450) 18.77 (37,550) 18.12 (25,400) 16.85 Outstanding - end of year 3,180,136 $20.15 3,091,994 $17.80 2,913,416 $16.52 Options exercisable 1,617,355 1,782,044 1,695,116 Reserved for future use 2,396,441 3,125,658 802,166
Exercise prices for options outstanding as of December 31, 1997, range from $12.88 to $26.44 and the weighted-average remaining contractual life of these options is four years. The estimated weighted-average fair values of stock options granted during 1997, 1996 and 1995 were $7.58, $5.79 and $5.13, respectively. At December 31, 1997 a total of 236,350 restricted stock rights, restricted shares or deferred shares have been awarded under the above plans and are not vested. The company distributed 71,188 and 41,006 common shares in 1997 and 1996, respectively, as a result of awards of restricted stock rights, restricted shares and deferred shares. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TIMKEN 11. INCOME TAXES The provision (credit) for income taxes consisted of the following: 1997 1996 1995 Current Deferred Current Deferred Current Deferred (Thousands of dollars) United Sates: Federal $76,866 $(4,627) $47,120 $20,596 $38,321 $14,104 State and local 10,248 (294) 6,271 2,573 4,120 1,841 Foreign 9,623 3,357 9,715 47 10,993 (1,555) $96,737 $(1,564) $63,106 $23,216 $53,434 $14,390
The company made income tax payments of approximately $93,486,000 in 1997, $54,100,000 in 1996 and $38,000,000 in 1995. Taxes paid differ from current taxes provided, primarily due to the timing of payments. The effect of temporary differences giving rise to deferred tax assets and liabilities at December 31, 1997 and 1996 was as follows: 1997 1996 (Thousands of dollars) Deferred tax assets: Accrued postretirement benefits cost $155,888 $156,178 Accrued pension cost 39,271 25,565 Benefit accruals 21,126 22,803 Foreign tax loss and credit carryforwards 12,702 10,734 Other-net 19,932 23,016 Valuation allowance (12,702) (10,734) 236,217 227,562 Deferred tax liability-depreciation (167,541) (168,907) Net deferred tax asset $68,676 $58,655 Following is the reconciliation between the provision for income taxes and the amount computed by applying the statutory U.S. federal income tax rate of 35% to income before income taxes: 1997 1996 1995 (Thousands of dollars) Income tax at the statutory federal rate $93,307 $78,841 $63,061 Adjustments: State and local income taxes, net of federal tax benefit 6,470 5,749 3,876 Tax on foreign remittances -0- 944 1,363 Research tax credit claims for prior years (4,000) -0- -0- Other items (604) 788 (476) Provision for income taxes $95,173 $86,322 $67,824 Effective income tax rate 36% 38% 38% 12. IMPAIRMENT AND RESTRUCTURING CHARGES In December 1993, the company initiated a restructuring program aimed at significantly increasing continuous improvement in its manufacturing plants worldwide. In addition, the company recorded certain charges for additional administrative streamlining and writing off impaired assets. In total, $48,000,000 was charged to operations in 1993; $31,000,000 relating to the restructuring program and $17,000,000 for impaired assets. The worldwide restructuring program was completed in 1997 and has improved productivity, increased manufacturing efficiencies and accelerated annual cost reductions. In 1993, a reserve was established for separation costs associated with the planned reduction of 865 plant associates and separation and relocation costs for 65 salaried administrative associates worldwide. In total, 451 plant associates and 56 administrative associates were laid off as a result of the program. During 1997, the company made cash expenditures totaling $1,989,000 relating to separation costs and reversed the remaining reserve of $1,629,000 into income to end the program as of December 31, 1997. Prior to 1997, the company expended cash of $18,144,000 relating to separation and relocation costs, recorded noncash charges of $3,336,000, and reversed $5,902,000 of the reserve into income. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. SEGMENT INFORMATION The Timken Company is a worldwide leader in the manufacture of antifriction bearings and specialty steels, sold principally through its own sales organization following normal credit practices. Sales of the company's bearings are made predominantly to manufacturers in the automotive, machinery, railroad, aerospace and agricultural industries, and to service replacement markets. The company's tapered roller bearings are used in a wide variety of products including passenger cars, trucks, railroad cars and locomotives, aircraft wheels, machine tools, rolling mills and farm and construction equipment. Super precision bearings, in the general ball and straight roller bearing segment, are used in aircraft, missile guidance systems, computer peripherals and medical instruments. Steel products include steels of intermediate alloy, low alloy and carbon grades, vacuum processed alloys, tool steel and other custom- made steel products including parts made from specialty steel. These are available in a wide range of solid and tubular sections with a variety of finishes. A significant portion of the company's steel products is consumed in its bearing operations. In addition, sales are made to other antifriction bearing companies and to aircraft, automotive, forging, tooling and oil and gas drilling industries. Sales are also made to steel service centers. Tool steels increasingly are being sold through newly acquired distribution facilities. Information by Industry (1) Bearing Steel Consolidated (Thousands of dollars) 1997 Net sales $1,718,876 $898,686 $2,617,562 Operating income 163,280 126,049 289,329 Assets employed at year-end 1,455,086 871,464 2,326,550 Depreciation and amortization 76,625 57,806 134,431 Capital expenditures 122,350 107,582 229,932 1996 Net sales $1,598,040 $796,717 $2,394,757 Operating income 155,224 102,033 257,257 Assets employed at year-end 1,287,509 783,829 2,071,338 Depreciation and amortization 72,396 54,061 126,457 Capital expenditures 106,616 49,309 155,925 1995 Net sales $1,524,728 $705,776 $2,230,504 Operating income 136,233 73,983 210,216 Assets employed at year-end 1,223,623 702,302 1,925,925 Depreciation and amortization 69,539 53,870 123,409 Capital expenditures 91,676 39,512 131,188
(1)Intersegment sales are accounted for at values based on market prices. Intersegment steel sales to the Bearing Business of $204,295,000 in 1997, $185,677,000 in 1996 and $214,808,000 in 1995 are eliminated on consolidation and are not included in the figures presented. Operating income relating to these sales is also eliminated. 32 TIMKEN United Other Information by Geographic Area (1) States Europe Countries Consolidated (Thousands of dollars) 1997 Net sales $2,077,822 $339,630 $200,110 $2,617,562 Operating income 245,025 22,947 21,357 289,329 Income before income taxes 219,916 25,335 21,341 266,592 Assets employed at year-end 1,841,181 372,612 112,757 2,326,550 1996 Net sales $1,885,347 $315,474 $193,936 $2,394,757 Operating income 219,423 17,250 20,584 257,257 Income before income taxes 192,250 14,428 18,581 225,259 Assets employed at year-end 1,683,742 276,521 111,075 2,071,338 1995 Net sales $1,742,286 $316,223 $171,995 $2,230,504 Operating income 178,408 7,623 24,185 210,216 Income before income taxes 153,670 5,388 21,116 180,174 Assets employed at year-end 1,597,708 243,721 84,496 1,925,925
REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of The Timken Company We have audited the accompanying consolidated balance sheets of The Timken Company and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Timken Company and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Canton, Ohio February 5, 1998 33 SUMMARY OF OPERATIONS AND OTHER COMPARATIVE DATA (Thousands of dollars, except per share data) 1997 1996 1995 1994 Statements of Income Net sales: Bearing $1,718,876 $1,598,040 $1,524,728 $1,312,323 Steel 898,686 796,717 705,776 618,028 Total net sales 2,617,562 2,394,757 2,230,504 1,930,351 Cost of products sold 1,997,403 1,820,985 1,717,700 1,509,347 Selling, administrative and general expenses 330,830 316,515 302,588 282,429 Impairment and restructuring charges -0- -0- -0- -0- Operating income (loss) 289,329 257,257 210,216 138,575 Earnings before interest and taxes (EBIT) 288,024 243,158 199,987 136,195 Interest expense 21,432 17,899 19,813 24,872 Income (loss) before income taxes 266,592 225,259 180,174 111,323 Provisions for income taxes (credit) 95,173 86,322 67,824 42,859 Income (loss) before cumulative effect of accounting changes 171,419 138,937 112,350 68,464 Net income (loss) $ 171,419 $ 138,937 $ 112,350 $ 68,464 Balance Sheets Inventory $ 445,853 $ 419,507 $ 367,889 $ 332,304 Current assets 855,171 793,633 710,258 657,180 Working capital 275,607 265,685 247,895 178,556 Property, plant and equipment (less depreciation) 1,220,516 1,094,329 1,039,382 1,030,451 Total assets 2,326,550 2,071,338 1,925,925 1,858,734 Total debt 359,431 302,665 211,232 279,519 Total liabilities 1,294,474 1,149,110 1,104,747 1,125,843 Shareholders' equity $1,032,076 $ 922,228 $ 821,178 $ 732,891 Other Comparative Data Net income (loss)/ Total assets 7.4% 6.7% 5.8% 3.7% Net income (loss)/ Net sales 6.5% 5.8% 5.0% 3.5% EBIT/Beginning invested capital(1) 16.1% 15.2% 12.7% 9.1% Net cash provided by operating activities $ 311,983 $ 186,411 $ 224,012 $ 146,674 Inventory days (FIFO) 111.9 118.0 112.6 118.4 Net sales per associate(2) $ 130.5 $ 132.4 $ 134.2 $ 119.9 Capital expenditures $ 229,932 $ 155,925 $ 131,188 $ 119,656 Depreciation and amortization $ 134,431 $ 126,457 $ 123,409 $ 119,255 Capital expenditures/ Depreciation 177.3% 127.0% 109.1% 102.6% Dividends per share $ 0.66 $ 0.60 $ 0.555 $ 0.50 Income (loss) before cumulative effect of accounting changes per share(3) $ 2.73 $ 2.21 $ 1.80 $ 1.11 Debt to total capital 25.8% 24.7% 20.5% 27.6% Number of associates at year-end 20,994 19,130 17,034 16,202 Number of shareholders(4) 46,394 31,813 26,792 49,968
(1)EBIT/Beginning invested capital, a type of return on asset ratio, is used internally to measure the company's performance. In broad terms, invested capital is total assets minus non-interest-bearing current liabilities. (2)Based on the average number of associates employed during the year. (3)Based on the average number of shares outstanding during the year and excludes the cumulative effect of accounting changes in 1993, which related to the adoption of FAS No. 106, 109 and 112. 34 TIMKEN 1993 1992 1991 1990(5) 1989 1988 $1,153,987 $1,169,035 $1,128,972 $1,173,056 $1,042,122 $1,002,412 554,774 473,275 518,453 527,955 490,840 551,731 1,708,761 1,642,310 1,647,425 1,701,011 1,532,962 1,554,143 1,366,164 1,296,511 1,309,893 1,284,232 1,157,125 1,178,839 274,141 296,826 297,660 286,427 250,676 235,072 48,000 -0- 41,000 -0- -0- -0- 20,456 48,973 (1,128) 130,352 125,161 140,232 8,700 42,091 (15,277) 125,155 113,710 132,745 29,619 28,660 26,673 26,339 17,217 20,879 (20,919) 13,431 (41,950) 98,816 96,493 111,866 (3,250) 8,979 (6,263) 43,574 41,148 45,954 (17,669) 4,452 (35,687) 55,242 55,345 65,912 $ (271,932) $4,452 $(35,687) $ 55,242 $ 55,345 $ 65,912 $299,783 $ 310,947 $ 320,076 $ 379,543 $ 344,135 $ 350,410 586,384 556,017 562,496 657,865 608,224 619,456 153,971 165,553 148,950 238,486 359,773 348,322 1,024,664 1,049,004 1,058,872 1,025,565 932,828 941,121 1,789,719 1,738,450 1,759,139 1,814,909 1,565,961 1,593,031 276,476 320,515 273,104 266,392 80,647 182,341 1,104,407 753,387 740,168 740,208 501,157 619,315 $ 685,312 $ 985,063 $1,018,971 $1,074,701 $1,064,804 $ 973,716 (15.2)% 0.3% (2.0)% 3.0% 3.5% 4.1% (15.9)% 0.3% (2.2)% 3.2% 3.6% 4.2% 0.5% 2.6% (0.9)% 8.3% 7.6% 9.6% $ 153,720 $ 115,501 $ 140,419 $ 181,852 $ 165,144 $ 106,652 122.8 138.3 140.5 163.2 167.5 161.0 $ 104.5 $ 95.3 $ 90.0 $ 94.2 $ 86.9 $ 89.4 $ 92,940 $ 139,096 $ 144,678 $ 120,090 $ 91,536 $ 78,943 $ 118,403 $ 114,433 $ 109,252 $ 101,260 $ 91,070 $ 88,756 80.2% 124.4% 135.6% 120.4% 100.5% 88.9% $ 0.50 $ 0.50 $ 0.50 $ .49 $ 0.46 $ 0.35 $ (0.29) $ 0.07 $ (0.60) $ 0.92 $ 0.94 $ 1.17 28.7% 24.5% 21.1% 19.9% 7.0% 15.8% 15,985 16,729 17,740 18,860 17,248 18,050 28,767 31,395 26,048 25,090 22,445 21,184
(4)Includes an estimated count of shareholders having common stock held for their accounts by banks, brokers and trustees for benefit plans. The higher court for 1994 relates to shareholders in wrap accounts at brokers. (5)Includes MPB Corporation for seven months. 35 APPENDIX TO EXHIBIT 13 On page 1 of the printed document, three bar charts were shown that contain the following information: (1) Net Sales ($ Millions) 1993 1,709 1994 1,930 1995 2,230 1996 2,395 1997 2,618 (2) Total Annual Return To Shareholders 1993 30.7% 1994 7.8% 1995 11.7% 1996 23.1% 1997 53.4% (3) Productivity (Net Sales / Total Compensation) Index: 1993 = 100 1993 100% 1994 107% 1995 113% 1996 120% 1997 126% On page 32 of the printed document, three pie chars were shown that contain the following information: (1) The Timken Company Net Sales to Customers Bearings 66% Steel 34% (2) The Timken Company Net Sales by Geographic Area United States 79% Europe 13% Other 8% (3) The Steel Business Net Sales - Total Customers 81% Intersegment 19% On page 34 of the printed document, two bar charts were shown that contain the following information: (1) Total Net Sales (Billions of Dollars) Bearing Steel 1988 1.002 0.552 1989 1.042 0.491 1990 1.173 0.528 1991 1.129 0.518 1992 1.169 0.473 1993 1.154 0.555 1994 1.312 0.618 1995 1.525 0.706 1996 1.598 0.797 1997 1.719 0.899 (2) Return on Net Sales (before cumulative effect of accounting changes): Operating Income (Loss) Income(Loss) 1988 9.0% 4.2% 1989 8.2% 3.6% 1990 7.7% 3.2% 1991 -.1% -2.2% 1992 3.0% .3% 1993 1.2% -1.0% 1994 7.2% 3.5% 1995 9.4% 5.0% 1996 10.7% 5.8% 1997 11.1% 6.5% On page 35 of the printed document, two bar charts were shown that contain the following information: (1) Earnings* and Dividends per Share (*before cumulative effect of accounting changes): Earnings Dividends 1988 1.17 0.350 1989 0.94 0.460 1990 0.92 0.490 1991 -0.60 0.500 1992 0.07 0.500 1993 -0.29 0.500 1994 1.11 0.500 1995 1.80 0.555 1996 2.21 0.600 1997 2.73 0.660 (2) EBIT/Beginning Invested Capital 1988 9.6% 1989 7.6% 1990 8.3% 1991 -0.9% 1992 2.6% 1993 0.5% 1994 9.1% 1995 12.7% 1996 15.2% 1997 16.1% EX-21 4 Exhibit 21. Subsidiaries of the Registrant ___________________________________________ The Timken Company has no parent company. The active subsidiaries of the Company (all of which are included in the consolidated financial statements of the Company and its subsidiaries) are as follows: Percentage of voting securities State or sovereign owned directly power under laws or indirectly Name of which organized by Company __________________________________________________________________ Australian Timken Proprietary, Limited Victoria, Australia 100% Timken do Brasil Comercio e Industria, Ltda. Sao Paulo, Brazil 100% British Timken Limited England 100% Canadian Timken, Limited Ontario, Canada 100% Timken Communications Company Ohio 100% EDC, Inc. Ohio 100% Timken Espana, S.L. Spain 100% Timken Europa GmbH Germany 100% Timken Europe B.V. Netherlands 100% Timken Finance Europe B.V. Netherlands 100% Handpiece Headquarters Corp. Delaware 100% Timken Italia, S.R.L. Italy 100% Latrobe Steel Company Pennsylvania 100% Timken de Mexico S.A. de C.V. Mexico 100% M.P.B. Corporation Delaware 100% M.P.B. Europa B.V. Netherlands 100% M.P.B. Singapore Pte. Ltd. Singapore 100% M.P.B. UK, Ltd. England 100% Nihon Timken K.K. Japan 100% OH&R Special Steels Company Delaware 100% Timken Polska Sp.z.o.o. Poland 100% Rail Bearing Service Corporation Virginia 100% Timken Romania S.A. Romania 70% Sanderson Special Steels Limited England 100% The Timken Service & Sales Co. Ohio 100% Timken Servicios Administrativos S.A. de C.V. Mexico 100% Timken Singapore Pte. Ltd. Singapore 100% Timken South Africa (Pty.) Ltd. South Africa 100% Timken De Venezuela C.A. Venezuela 100% Yantai Timken Company Limited China 60% ____________________ The Company also has a number of inactive subsidiaries which were incorporated for name-holding purposes and a foreign sales corporation subsidiary. EX-23 5 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference of our report dated February 5, 1998, with respect to the consolidated financial statements and schedule of The Timken Company included in this Annual Report (Form 10-K) for the year ended December 31, 1997, in the following Registration Statements and in the related Prospectuses: Registration Filing Number Description of Registration Statement Date 2-97340 1985 Incentive Plan of The Timken Company - November 19, 1990 Post-effective Amendment No. 1 to Form S-8 333-02553 The Timken Company Long-Term Incentive April 16, 1996 Plan - Form S-8 333-17503 The Timken Company Dividend Reinvestment December 9, 1996 Plan - Form S-3 33-36839 Voluntary Investment Program for Hourly August 15, 1997 Employees of Latrobe Steel Company - Post-effective Amendment No. 2 to Form S-8 33-55121 Voluntary Investment Pension Plan for August 15, 1997 Hourly Employees of The Timken Company - Post-effective Amendment No. 1 to Form S-8 333-16465 The MPB Corporation Employees' Savings August 15, 1997 Plan - Post-effective Amendment No. 1 to Form S-8 333-17509 The Timken Company - Latrobe Steel Company August 15, 1997 Savings and Investment Pension Plan - Post-effective Amendment No. 1 to Form S-8 333-33737 The Hourly Pension Investment Plan - August 15, 1997 Form S-8 333-41155 OH&R Investment Plan - Form S-8 November 26, 1997 333-43847 The Timken Company International Stock January 7, 1998 Ownership Plan - Form S-8 333-45753 Rail Bearing Service Employee Savings February 6, 1998 Plan - Form S-8 333-45891 $300,000,000 Medium-Term Notes, Series A - February 9, 1998 Form S-3 ERNST & YOUNG LLP Canton, Ohio March 19, 1998 EX-24 6 POWER OF ATTORNEY Each of the undersigned Directors and/or Officers of The Timken Company, an Ohio corporation (the "Company"), hereby constitutes and appoints W. R. Timken, Jr., Gene E. Little and Larry R. Brown, and each of them, his true and lawful attorney-in-fact, with full power of substitution and resubstitution, for him and in his name, place and stead, to sign on his behalf as a Director and/or Officer of the Company, qn Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, on Form 10-K for the fiscal year ended December 31, 1997 and to sign any and all amendments to such Annual Report, and to file the same, with all exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact full power and authority to do and perform any and all other acts and deeds whatsoever that may be necessary or required in connection with the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney- in-fact may lawfully do or cause to be done by virtue thereof. EXECUTED this 6th day of February, 1998. /s/ R. Anderson /s/ Ward J. Timken _____________________________ ______________________________ Robert Anderson, Director Ward J. Timken, Director and Vice President /s/ Stanley C. Gault /s/ W. R. Timken, Jr. _____________________________ ______________________________ Stanley C. Gault, Director W. R. Timken, Jr., Director and Chairman, President and Chief Executive Officer /s/ J. Clayburn LaForce, Jr. /s/ Joseph F. Toot, Jr. _____________________________ ______________________________ J. Clayburn La Force, Jr., Joseph F. Toot, Jr., Director Director /s/ Gene E. Little /s/ M. D. Walker _____________________________ ______________________________ Gene E. Little, Senior Vice Martin D. Walker, Director President - Finance (Principal Financial Accounting Officer) /s/ Robert W. Mahoney /s/ Charles H. West _____________________________ ______________________________ Robert W. Mahoney, Director Charles H. West, Director /s/ Jay A. Precourt /s/ A. W. Whitehouse _____________________________ ______________________________ Jay A. Precourt, Director Alton W. Whitehouse, Director /s/ John M. Timken, Jr. _____________________________ John M. Timken, Jr., Director EX-27 7
5 This schedule contains summary financial information extracted from the company's consolidated Balance Sheet and Profit & Loss financial statements and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1997 DEC-31-1997 9,824 0 364,426 7,003 445,853 855,171 2,677,786 1,457,270 2,326,550 579,564 202,846 0 0 318,358 713,718 2,326,550 2,617,562 2,617,562 1,997,403 1,997,403 0 0 21,432 266,592 95,173 171,419 0 0 0 171,419 2.73 2.69
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