Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Annual Report -- [x] Reg. S-K Item 405 67 369K
2: EX-4.4 Instrument Defining the Rights of Security Holders 5 16K
3: EX-4.5 Instrument Defining the Rights of Security Holders 92 285K
4: EX-4.6 Instrument Defining the Rights of Security Holders 6 25K
5: EX-4.7 Instrument Defining the Rights of Security Holders 6 25K
6: EX-10.16 Material Contract 10 35K
7: EX-10.17 Material Contract 7 18K
8: EX-10.18 Material Contract 3 9K
9: EX-10.19 Material Contract 2 10K
10: EX-10.20 Material Contract 1 8K
11: EX-27 Financial Data Schedule (Pre-XBRL) 2 8K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13279
------------------------
UNOVA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4647021
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
360 NORTH CRESCENT DRIVE 90210-4867
Beverly Hills, California (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 888-2500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
----------------------------------------- ---------------------------------
Common Stock, par value $0.01 per share New York Stock Exchange
Rights to Purchase Series A Junior New York Stock Exchange
Participating Preferred Stock
------------------------
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes No X
On February 27, 1998, the aggregate market value of the Registrant's voting
stock held by non-affiliates was $1.037 billion.
On February 27, 1998, there were 54,510,193 shares of Common Stock
outstanding, exclusive of treasury shares.
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UNOVA, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-K
[Enlarge/Download Table]
PAGE
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PART I
Item 1: Business................................................................................... 1
Item 2: Properties................................................................................. 10
Item 3: Legal Proceedings.......................................................................... 10
Item 4: Submission of Matters to a Vote of Security Holders........................................ 10
PART II
Item 5: Market for the Registrant's Common Equity and Related Stockholder Matters.................. 11
Item 6: Selected Financial Data.................................................................... 11
Item 7: Financial Review and Analysis.............................................................. 12
Item 7A: Quantitative and Qualitative Disclosures about Market Risk................................. 16
Item 8: Financial Statements and Supplementary Data................................................ 16
Item 9: Disagreements on Accounting and Financial Disclosure....................................... 16
PART III
Item 10: Directors and Executive Officers of the Registrant......................................... 17
Item 11: Executive Compensation..................................................................... 20
Item 12: Security Ownership of Certain Beneficial Owners and Management............................. 33
Item 13: Certain Relationships and Related Transactions............................................. 35
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 36
Signatures................................................................................. 38
PART I
ITEM 1. BUSINESS
UNOVA, Inc. (the "Company" or "UNOVA") operates in two business segments:
Automated Data Systems ("ADS") and Industrial Automation Systems ("IAS"). For
the year ended December 31, 1997, ADS produced revenues and operating profits of
$636.4 million and $9.1 million, respectively, and IAS generated revenues and
operating profits of $789.8 million and $94.6 million, respectively. The Company
became an independent public company upon the distribution of its common stock
to the stockholders of Western Atlas Inc. ("WAI") on October 31, 1997.
See Note K to the consolidated and combined financial statements for
financial information by industry segment and by geographical area.
Information related to business acquisitions, investments, and dispositions
is set forth in Note B to the consolidated and combined financial statements.
GENERAL
The Company is an industrial technologies company providing customers with
solutions for improving their efficiency and productivity. The Automated Data
Systems business segment comprises automated data collection and mobile
computing products and services, principally serving the industrial market.
Customers include distribution and transportation companies, food and beverage
operations, manufacturing industries, health care providers and government
agencies. The Industrial Automation Systems business segment includes integrated
manufacturing systems, body welding and assembly systems, and precision grinding
and abrasive operations, primarily serving the worldwide automotive, off-road
and diesel engine manufacturing industries.
PRODUCTS AND SERVICES
AUTOMATED DATA SYSTEMS. The Company's automated data collection ("ADC") and
mobile computing systems business comprises the Intermec, Norand and UBI
activities. Intermec was acquired in 1991; Norand and UBI were acquired early in
1997. In 1997, these three companies were consolidated into one organization
called Intermec Technologies Corporation, serving the global bar code, data
collection and mobile computing market, which has grown approximately 12% to 15%
annually over the past five years. This newly created organization was divided
into three global product divisions: Local Area Systems, Norand Mobile Systems
and Identification Systems. ADS, which included only Intermec's results until
the 1997 acquisitions of Norand and UBI, accounted for 44%, 32% and 34% of the
Company's consolidated and combined revenues in 1997, 1996, and 1995,
respectively.
In 1997, the Company acquired radio frequency identification ("RFID")
technology from IBM Corporation. The Company intends to further develop this
RFID technology and in 1997 acquired 13% of Amtech Corporation ("Amtech") in
order to support such development. The Company and Amtech were unable to agree
on the structure of a proposed product development alliance and are currently
exploring other mutually agreeable means to complete the RFID development.
According to industry statistics, the U.S. RFID market grew over 30% in 1996 to
$200 million.
This combination of companies and capabilities establishes the Company as a
leading participant in the growing automated data collection marketplace.
Together, they offer a broad range of products which are used to gather,
organize, process, transmit and exchange information between various field-based
or in-premise locations and central computers or information retrieval systems.
By facilitating sale order processes, and tracking parts, work-in-process,
finished products and people through manufacturing, distribution and other
commercial operations, industrial users are able to control inventory and to
improve
1
ITEM 1. BUSINESS (CONTINUED)
the productivity, quality and responsiveness of their operations, from supply
chain management and enterprise resource planning ("ERP") to field sales and
service.
LOCAL AREA SYSTEMS. The Company continues to demonstrate market leadership
in the wireless LAN industry. Intermec was first to offer a network architecture
that provides customers with the ability to use multiple radio technologies
within one system. This Radio Independent-TM- wireless LAN solution supports all
major radio technologies (including synthesized UHF, 900 MHz and 2.4 GHz direct
sequence and frequency hopping spread spectrum radio technologies), giving
customers the ability to choose the best radio technology for their application.
To ensure compatibility with the customer's host system, all major industry
standard networks are supported.
The Company has developed an extensive line of hand-held computers,
stationary and vehicle-mounted terminals that combine PC-type capability with
scanning and data transmission abilities. Intermec's
TRAKKER-Registered Trademark- family of products ranges from low-cost, hand-held
batch data collection devices to sophisticated and powerful terminals, computers
and network products. For high-performance solutions, the Company's "open
systems" data collection computers deliver maximum flexibility for customers
with diverse application requirements.
NORAND MOBILE SYSTEMS. As a leader in mobile computing systems, especially
with its PEN*KEY-Registered Trademark-terminals, the Company provides
comprehensive data communications, application software, hand-held and
truck-mounted rugged PC products with peripherals and printer solutions. These
solutions enable customers engaged in route distribution, transportation and
field service applications to manage sales, service and inventory information in
real time.
Mobile computing refers to rugged PC-based devices for route accounting,
meter reading, field services and sales management, rather than general personal
or desktop computing applications. In combination with wireless communications,
mobile computing enables remote workers to have access to centralized computer
applications and databases and to send and receive information through wireless
networks for improved productivity, efficiency and accuracy of data.
IDENTIFICATION SYSTEMS. Intermec's Identification Systems products, which
include charged couple device ("CCD") scanners and imagers, wands, laser
scanners and media products, have the ability to read or collect data, and print
data on customized labels and tags.
The Company's line of flexible "on demand" bar code printers ranges from
low-cost, light- to heavy-duty industrial models that accommodate a wide array
of printing widths and label configurations. A variety of specialty printers
provides custom solutions ranging from color printing to the inclusion of
promotional information with the bar code data contents or high-resolution (400
DPI) quality to ensure sharp fonts and precise graphics, even on extremely small
labels for the electronics industry.
TECHNOLOGIES/TRENDS. The Company is consistently broadening the application
of ADC and mobile computing by developing or integrating new technologies into
its product range. Latest examples include the Company's smart, vehicle-based
docking solution for pen-based computers as well as 2-D bar codes, smart cards
and RFID. Tags or labels based on RFID technology can be updated during their
use, making them an integral part of an electronic information network.
Major offices and manufacturing facilities are located in the states of
Iowa, Ohio and Washington; and internationally in The Netherlands, Sweden,
France and Australia.
INDUSTRIAL AUTOMATION SYSTEMS. The Company is a major designer, producer
and integrator of manufacturing technologies, primarily for the global
automotive, off-road and diesel engine industries, but also for other markets
such as electronics and durable goods. Products include integrated manufacturing
systems
2
ITEM 1. BUSINESS (CONTINUED)
for the production of powertrain components such as engines, transmissions and
connecting rods, and chassis components such as steering knuckles, rear axle
housings and brake calipers; body welding and assembly systems; test and
automation equipment for integration into production lines; precision grinding
and abrasives; the redesign, remanufacturing and retooling of installed
equipment; and design/engineering services.
The Company's IAS segment includes the following divisions: Lamb Technicon
Machining Systems, Lamb Technicon Body & Assembly Systems, Lamb Assembly & Test
Systems, Modern Prototype, Lamb UK, Honsberg Lamb, Landis Gardner, Landis Lund,
Goldcrown Machinery and Cranfield Precision.
INTEGRATED MANUFACTURING SYSTEMS. The Company designs, integrates and
installs integrated machining systems for the world's automotive and off-road
vehicle industries. The integrated manufacturing systems divisions design
manufacturing solutions for all production volumes of powertrain
components-primarily engines and transmissions. Integrated manufacturing systems
accounted for 27%, 39% and 38% of the Company's consolidated and combined
revenues in fiscal 1997, 1996 and 1995, respectively.
The product lines include computer-numeric-control ("CNC") machines for
low-volume applications (up to 25,000 units of production annually), and modular
flexible production systems for medium- (25,000 to 75,000 units of production
annually) and high-volume (75,000 to 250,000 units of production annually)
requirements. The integrated manufacturing systems operations specialize in
utilizing simultaneous engineering techniques, in conjunction with its
customers, to develop optimum solutions to complex manufacturing requirements.
Historically, the Company has specialized in designing solution sets for
manufacturing cylinder heads, engine blocks and transmission cases. However, the
retooling of existing systems and the design of manufacturing processes for
smaller parts also have expanded into growing businesses for the Company in
recent years.
The Company's emphasis on engineering has resulted in the advancement of
machining processes. These upgrades offer lower life-cycle costs and improved
production performance by reducing unproductive time during operation.
Innovations also include the design of "modular" systems, which result in
shorter design, integration and installation cycles, better flexibility of
transfer line systems using less production floor space, and faster throughput
at much lower costs. The Company has developed modular transfer systems in which
parts are mounted on pallet fixtures that transport work pieces between
workstations faster than guided vehicles could between flexible machining
systems.
Recent additions to the Company's product range include modular machining
centers that perform continuous high-speed, high-precision machining of cast
iron, aluminum or magnesium parts. The Duraflex CNC machine line is designed to
produce a variety of cylinder heads or engine blocks, in a random-run
environment, while maintaining close tolerances. The MACH I-TM- dual-spindle
machine has been designed to improve the efficiency of CNC machines in
higher-volume production scenarios. The MACH I-TM- can complete a machining
operation, change tools and resume machining, all in less than one second.
These new designs allow the machines to operate in stand-alone, cellular or
system configurations. Larger systems also can be adapted to process changes by
exchanging single machining modules on a transfer line. The utilization of
advanced process technology, as represented in these newest CNC machines, has
enabled the Company to provide highly accurate, durable and truly flexible
machining systems.
The Company's emphasis on process engineering is demonstrated by its efforts
in "simultaneous engineering," a process in which manufacturing solutions are
developed with the customer while the customer's product design and engineering
phases are still underway. In these processes, another important technology,
"virtual manufacturing," creates sophisticated 3-D computer simulations that are
used by the Company to design and pre-program systems, workflow and single
machining operations.
3
ITEM 1. BUSINESS (CONTINUED)
BODY WELDING AND ASSEMBLY SYSTEMS. The Company designs automated systems to
assemble and weld high-quality automobile and truck bodies as well as other
industrial products. Robotic systems are integrated with high-precision holding
and alignment fixtures and high-volume welding equipment to produce components
and sub-assemblies for the automotive industry. The Company also provides
engineering services and advanced electronic design technology in the areas of
computer simulations and three-dimensional tool design.
Using computer simulations and 3-D tool design, UNOVA has established one of
the broadest product and process design capacities in the industry. Tool design
and prototyping are now linked directly into the actual production systems
engineering process, reducing costs and risks for customers long before their
car body projects move into the capital investment stage. Through its Assembly
and Test Systems operations, the division also designs and builds specialized
assembly and/or testing equipment and systems for a variety of manufacturing
applications. Body Welding and Assembly Systems accounted for 14%, 12% and 8% of
the Company's consolidated and combined revenues in fiscal 1997, 1996 and 1995,
respectively.
A number of proprietary technologies have been developed for use in
automotive assembly. Examples are specialized material handling solutions to
move subassemblies or complete car bodies through the manufacturing process,
such as overhead non-synchronous gantries. The Company also is recognized for
its expertise in "hemming," the process of attaching exterior sheet metal to the
interior frames of doors, hoods, deck lids and similar "hang-ons" or "closures."
Another solution is called "flexible body framing," a patented system which
enables consistent, high-precision positioning for final body assembly.
PRECISION GRINDING AND ABRASIVES. The Company develops and produces
precision grinding systems and equipment for the global manufacturing market. A
key area of the Company's expertise is the application of precision cylindrical
and disc grinding technologies to medium- and high-volume production of car
engines and transmission components such as camshafts, crankshafts or connecting
rods. Precision Grinding and Abrasives accounted for 15%, 17% and 20% of the
Company's consolidated and combined revenues in fiscal 1997, 1996 and 1995,
respectively.
Among the Company's new developments in precision grinding are a CNC machine
for grinding the lobes of automotive camshafts. This advanced camlobe grinder
uses superabrasive cubic boron nitride ("CBN") grinding wheels, which are
capable of higher grinding speeds, more consistent accuracy, and longer
effective performance life. Research into the processing of new materials also
has resulted in the development of ultra-high-precision grinding and finishing
techniques. These advances are being applied to requirements of the
microelectronics, computer, aerospace and optics industries for the manufacture
of materials such as composites, silicon, glass and ceramics.
Other technological innovations include a camshaft lobe grinder for
large-scale production of soft camshaft applications, centerless grinders for
high-production parts processing, a new generation of double-disc grinding
machines used for precision machining of parts with flat and parallel sides and
a horizontal double-disc grinder for automotive connecting rods. The Company
also has developed sophisticated software tools for monitoring and controlling
grinding processes and dressing grinding wheels.
TECHNOLOGIES/TRENDS. UNOVA continues to develop manufacturing technologies
to broaden its product offerings and respond to automotive customers' needs to
lower costs, improve fuel consumption and decrease car emissions. New modular,
multi-spindle machining centers are reducing cycle time, and flexible fixturing
systems are under development to cut costs of high-volume machining. Advances in
grinding technologies have allowed UNOVA to move into the silicon wafer market,
where the Company's technologies are applied to the grinding and polishing of
wafers for the semiconductor industry.
4
ITEM 1. BUSINESS (CONTINUED)
The Industrial Automation Systems segment's major offices and production
facilities are located in Kentucky, Illinois, Michigan, Ohio and Pennsylvania
and internationally in Canada, the United Kingdom and Germany.
BUSINESS STRATEGY
The Company's strategy is to develop products, processes and services that
help improve productivity and efficiency in a variety of manufacturing and
distribution applications. Both business segments, Automated Data Systems and
Industrial Automation Systems, offer single products as well as integrated
solutions to their customers.
Future growth in these businesses is expected to result from expansion of
the Company's existing operations and its customer base, and through
acquisitions. In seeking acquisitions, the Company will concentrate on
technologies, products and services that enhance customer productivity and
efficiency, and those that can be characterized as growth drivers.
The ongoing development of the Company's ADC/mobile computing activities
will depend primarily on the application of new technologies and products to
maintain its position in this technology-driven market. The Company believes it
has the necessary technical expertise to achieve this goal. Future geographic
opportunities have been identified outside North America, particularly in
Europe, Latin America and Asia, where the use of data collection technology is
less developed. To capitalize on these emerging markets, the Company is
expanding its international marketing, distribution and support network, and is
engaged in an ongoing program to locate Company-owned resources in key markets
worldwide. In its Industrial Automation Systems business segment, the Company
plans to continue to develop its existing customer base by seeking a greater
role in customer projects, by continuing its emphasis on product development and
by expanding its international activities.
The Company also intends to increase its presence in market segments where
it presently holds a smaller market share, such as the body welding and assembly
systems area, and the application of lower-volume flexible manufacturing systems
and CNC machines. In some areas the Company also has developed high-precision
manufacturing technologies that should allow it to establish a presence in
growth markets such as microelectronics with its new generation of
ultra-high-precision wafer grinders.
In recent years, cost-cutting needs and quality requirements in the
automotive industry have affected the Company's relationships with its
customers. The carmakers' trend toward fewer suppliers has benefited the Company
and allowed it to expand its market participation. These market-driven changes
also have forced many smaller competitors to either withdraw from the market or
reduce their role to that of a second or third tier supplier. The Company's
strategy has been to establish an extensive outsourcing network of qualified
suppliers in North America and overseas, thereby avoiding unnecessary vertical
integration and gaining flexibility in its market approach.
Both major business segments should be able to grow from established
positions in their respective markets; often serving customers in a multitude of
projects that result in repeat business opportunities.
MARKETS AND CUSTOMERS
AUTOMATED DATA SYSTEMS. Because Automated Data Systems represents
technologies that can be utilized by a company of any size, and small systems
can be installed at very low cost, the market is extensive. Worldwide sales of
automated data systems equipment reached over $7 billion in 1997, according to
estimates from independent research sources. These sources also predict that the
overall market will continue to grow at an annual rate of approximately 12% to
15% over the next several years.
5
ITEM 1. BUSINESS (CONTINUED)
Market growth is driven by the global need for technologies and solutions
that improve quality, productivity and cost-efficiency in business and
government, particularly through logistics automation, supply chain management
and ERP solutions. Worldwide coverage with a dedicated sales organization is
therefore a major advantage.
Through its application of technologies in the manufacturing,
warehouse-distribution, transportation, health care, government and other
non-retail markets, the Company maintains a strong position in the global
non-retail ADC/mobile computing market.
The Company sells and services its products through multiple sales and
distribution channels: a direct field sales force which concentrates on large,
complex systems sales; value added resellers that offer applications-specific
solutions; and alliances with major systems integrators. The Company's direct
sales organization serves customers from offices throughout North America,
Europe and in some selected countries outside these regions. An indirect sales
channel includes long-time exclusive relationships with value-added distributors
and master resellers.
Although the Company obtains approximately 48% of its sales through indirect
sales channels, no individual value-added distributor or reseller is material to
overall Company results. The Company also maintains contact with customers and
prospective users by having established user forums for automated data systems
applications and technologies.
The mobile computing systems market consists of several applications, such
as route accounting for the distribution and package/parcel delivery industries,
sales merchandising, remote delivery and field service. These applications are
generally used in the consumer products, food, beverage, wholesale, parcel
delivery, freight, field service and home service industries. The radio
frequency ("RF") systems market comprises manufacturing, warehousing and
distribution center and retail applications.
Manufacturing applications include the collection and communication of
information related to receipt of materials, work-in-progress, finished goods
inventory and other functions throughout the manufacturing process. Warehousing
and distribution center applications involve the collection and communication of
information related to receiving materials to be stored, storage locations,
materials retrieval and shipping. Retail applications include the automation of
shelf label maintenance and product shipping and receiving functions.
International sales opportunities exist in countries where mobile computing
systems market practices and other applications are similar to those in the U.S.
The extent of RF systems opportunities in any particular country is based on the
level of industrialization, the status of bar coding implementation and the RF
regulatory environment. The major markets for printers are manufacturing,
distribution, warehousing, transportation, health care, government and other
services.
INDUSTRIAL AUTOMATION SYSTEMS. The Company participates in the automotive
manufacturing and general manufacturing markets. Investments by automotive
customers are driven by model changes; competitive pressures; government
regulations such as emission standards and gasoline consumption rates; and by
the customers' own internal spending cycles. Investments in diesel engine
manufacturing are driven by the infrastructure needs of emerging industrial
nations and by the efficiency benefits diesel engines offer for heavy and light
trucks and utility vehicles.
Customers for the Company's integrated manufacturing systems products are
the major auto and diesel manufacturers and their tier 1 suppliers. Although the
passenger car and light truck industries continue to represent this division's
largest market, business from diesel engine manufacturers has grown in recent
years.
6
ITEM 1. BUSINESS (CONTINUED)
The Company believes that its future growth in this business segment will be
dependent on its ability to expand the scope of products and services it can
offer to its current customer base. Many of these additional products should
also allow it to expand into other industrial manufacturing markets.
Based upon internal surveys of equipment installed at customer engine and
transmission plants, management believes that the Company is a leading global
supplier of production systems for engine, transmission and chassis components
in a more than $6 billion market. While the Company is not yet a leader in the
body welding and assembly industry, its growth rate in recent years has exceeded
that of the market which is estimated to be about $3 billion in North America
and Europe.
A substantial majority of the Industrial Automation Systems segment's total
revenues is generated by worldwide automotive and diesel engine industry
purchases of automated manufacturing systems, including integrated machining,
body welding and assembly and precision grinding systems. Among customers for
such equipment, U.S. and Canadian auto and auto-related manufacturers currently
account for more than 69% of the Industrial Automation Systems sales, and
manufacturers in Europe account for about 29%. The remainder of sales represents
products exported from the Company's production facilities, mostly for
installation in Latin America and Asia.
Recent major customers include U.S.-based Chrysler, Cummins, Ford, General
Motors, Navistar and Detroit Diesel; in foreign markets, the major Western
European auto manufacturers, BMW/Rover, Fiat, Mercedes Benz, Jaguar, Peugeot,
Renault, Volkswagen, and the European subsidiaries of the large U.S.
manufacturers, as well as Yuchai Diesel in China, Tata (Telco) in India and
Kamaz in Russia. The Company has also won major systems contracts for the
"transplant" manufacturing facilities of foreign auto makers, including both
European and Japanese, and also serves the automotive components manufacturing
market.
COMPETITION
Strong competition exists both in the domestic and international markets for
the Company's products and services. Products are sold and projects are won in
the marketplace based on price, technology and service.
AUTOMATED DATA SYSTEMS. The market for ADC/mobile computing systems is
highly fragmented. Based on independent market surveys, management believes that
Intermec Technologies Corporation is one of the largest participants measured by
revenues, with a market share close to 10% in the automated data systems
industry. The other two major participants are Symbol and Telxon. The Company
also faces strong competition for single product lines from specialized
suppliers.
The Company competes on the basis of its open modular systems approach,
network and communications expertise, applications software, level of sales and
support services, and product functionality, performance, ruggedness and overall
quality.
The market for mobile computing and RF products is highly competitive and
rapidly changing. Some firms manufacture and market hand-held systems for route
accounting applications, including Telxon and Fujitsu. In addition, a number of
firms manufacture and market radio-linked data communication products, including
LXE, Teklogix, Symbol, and Telxon. On the printer side, the Company faces
competition from Zebra, Eltron, Datamax and many others, depending on the
geographic area.
INDUSTRIAL AUTOMATION SYSTEMS. While product quality is a key determinate
in the competition to win market share, pricing remains the most important
criteria in the global market. Integrated Manufacturing Systems' strength is the
ability to design reliable and efficient manufacturing processes for its
customers
7
ITEM 1. BUSINESS (CONTINUED)
and combine them with cost-effective machining solutions in order to win orders
against strong competition.
There are numerous competitors in the markets served by integrated
manufacturing; major competitors include four German companies and one in Italy.
The market for high-volume production systems for engines and transmissions
in North America and Europe is divided among approximately ten major competitors
and numerous smaller participants. Major competitors are Thyssen/Giddings &
Lewis, Ingersoll Milling and Grob (Germany). Management estimates that the
Company has approximately a 12% share of this market.
In the body welding and assembly systems market, the Company is faced with
competitors that are involved in a broad range of assembly equipment and other
competitors that provide "niche" machines to address specific markets. Some of
the stronger competitors have been or are aligned with machine tool companies
for "total capability." In North America, there are eight main competitors and
another seven in Europe. The primary competitors include DCT, Progressive
Industries (PICO) and Valiant in the U.S.; Thyssen, FFT and Kuka in Germany and
Comau in Italy.
In the worldwide market for high-precision grinding of engine parts, the
Company has achieved a strong market position through innovative products that
improve customer efficiency while reducing their capital costs. Major
competitors are the foreign companies Koyo and Toyoda in Japan; the Koerber
Group, Naxos Union and Junkers in Germany; and Guistina in Italy.
RESEARCH AND DEVELOPMENT
Companywide expenditures on research and development activities amounted to
$53.1 million, $29.7 million and $27.5 million, substantially all of which was
sponsored by the Company, in the years ended December 31, 1997, 1996 and 1995,
respectively. The Company expensed a total of $211.5 million of acquired
in-process research and development in 1997. See further discussion in Note B to
the consolidated and combined financial statements.
PATENTS AND TRADEMARKS
The Company owns a large number of patents, trademarks and copyrights
relating to its manufactured products, which have been secured over a period of
years. These patents, trademarks and copyrights have been of value in the growth
of the Company's business and may continue to be of value in the future.
However, the Company's business generally is not dependent upon the protection
of any patent, patent application or patent license agreement, or group thereof,
and would not be materially affected by expiration thereof.
The Company has approximately 28 patent licenses under which it paid out or
received income in the year ended December 31, 1997. During 1997, the aggregate
amount of license fees paid by the Company was approximately $11.8 million, and
the aggregate amount of license fees received was approximately $914 thousand.
SEASONALITY; BACKLOG
Sales backlog was $395 million, $595 million and $579 million at December
31, 1997, 1996 and 1995, respectively. The operations of the Company are not
seasonal to any appreciable degree. The majority of the Company's backlog is
concentrated in the Industrial Automation Systems segment. The Automated Data
Systems market typically operates without a significant backlog of firm orders
and does not consider backlog to be a relevant measure of future sales.
8
ITEM 1. BUSINESS (CONTINUED)
EMPLOYEES
At December 31, 1997, the Company had approximately 7,060 full-time
employees, of which approximately 3,170 are engaged in the Automated Data
Systems business, approximately 3,770 in the Industrial Automation Systems
segment and approximately 120 in corporate and shared services.
ENVIRONMENTAL AND REGULATORY MATTERS
During 1997, the amounts incurred to comply with federal, state and local
legislation pertaining to environmental standards did not have a material effect
upon the capital expenditures or earnings of the Company.
Radio emissions are the subject of governmental regulation in all countries
in which the Company currently conducts business. In North America, both the
Canadian and the U.S. governments publish relevant regulations, and changes to
these regulations are made only after public discussion. In some countries
regulatory changes can be introduced with little or no grace period for
implementing the specified changes. Furthermore, there is little consistency
among the regulations of various countries outside North America, and future
regulatory changes in North America are possible. These conditions introduce
uncertainty into the product planning process and could have an adverse effect
on the ADC/ Mobile Computing business.
The European Community ("EC") has passed a directive requiring its members
to adopt laws relating to electro-magnetic compatibility and emissions
standards. These standards will apply to ADC/Mobile Computing products sold in
EC member countries as those countries adopt the EC standards into law.
Currently, the Company believes that its products are in material compliance
with the regulations in force in each of the EC member countries.
RAW MATERIALS
The Company uses a wide variety of raw materials in the manufacture of its
products and obtains such raw materials from a variety of suppliers. No single
supplier provides 10% or more of the Company's raw materials, nor do raw
materials from any one supplier generate 10% or more of the Company's
consolidated revenues. The Company does not have any long-term supply agreements
relating to raw materials.
9
ITEM 2. PROPERTIES
The Company's executive offices, in owned premises, are at 360 North
Crescent Drive, Beverly Hills, California. Its principal plants and offices have
an aggregate floor area of approximately 4,137,324 square feet, of which
3,392,064 square feet (82%) are located in the United States, and 745,260 square
feet (18%) are located outside of the United States, primarily in the United
Kingdom, Germany and Canada.
These properties are used by the business segments as follows:
[Download Table]
SQUARE
FEET
---------
Industrial Automation Systems........................................ 3,056,666
Automated Data Systems............................................... 748,108
---------
3,804,774
---------
---------
Approximately 3,102,885 square feet (75%) of the principal plant, office and
commercial floor area is owned by the Company, and the balance is held under
lease.
The Company's plants and offices in the United States are situated in 20
locations in the following states:
[Download Table]
SQUARE
STATE FEET
--------------------------------------------------------------------- ---------
Michigan............................................................. 887,450
Pennsylvania......................................................... 495,662
Kentucky............................................................. 400,779
California........................................................... 332,550
Washington........................................................... 312,000
Illinois............................................................. 306,015
Ohio................................................................. 289,483
Iowa................................................................. 269,725
Other states......................................................... 98,400
---------
3,392,064
---------
---------
The above-mentioned facilities are in satisfactory condition and suitable
for the particular purposes for which they were acquired or constructed and are
adequate for present operations.
The foregoing information excludes Company-held properties leased to others
and also excludes plants or offices which, when added to all other of the
Company's plants and offices in the same city, have a total floor area of less
than 50,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently, and is from time to time, subject to claims and
suits arising in the ordinary course of its business. Although the results of
litigation proceedings cannot be predicted with certainty, the Company believes
that the ultimate resolution of these proceedings will not have a material
adverse effect on the Company's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to a vote of security holders, through the
solicitation of proxies or otherwise, since October 31, 1997, the date on which
the Company became an independent public company.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
[Download Table]
PAGE
----
Quarterly Financial Information (unaudited)............................... F-23
Dividend Information...................................................... F-15
ITEM 6. SELECTED FINANCIAL DATA
UNOVA, INC.
[Enlarge/Download Table]
FIVE MONTHS
YEAR ENDED DECEMBER 31, ENDED YEAR ENDED
------------------------------------------ DECEMBER 31, JULY 31,
1997 1996 1995 1994 1993 1993
--------- --------- --------- --------- ------------- -----------
OPERATING RESULTS:
Sales and Service Revenues $ 1,426.2 $ 1,164.7 $ 942.9 $ 971.1 $ 360.9 $ 844.3
--------- --------- --------- --------- ------------- -----------
Operating Costs and Expenses
Cost of sales................................ 981.4 841.8 669.3 689.9 270.2 589.9
Selling, general and administrative (1)...... 535.9 218.7 194.1 199.9 79.4 170.6
Depreciation and amortization................ 40.6 27.0 26.1 28.7 12.0 26.8
--------- --------- --------- --------- ------------- -----------
Total...................................... 1,557.9 1,087.5 889.5 918.5 361.6 787.3
--------- --------- --------- --------- ------------- -----------
Earnings (Loss) before Interest and Taxes
(2).......................................... (131.7) 77.2 53.4 52.6 (0.7) 57.0
Interest Expense, net (3)...................... (16.7) (7.1) (9.3) (15.7) (4.3) (5.1)
Taxes on Income................................ (23.0) (28.1) (17.9) (15.3) (0.3) (20.5)
--------- --------- --------- --------- ------------- -----------
Net Earnings (Loss) (2)........................ $ (171.4) $ 42.0 $ 26.2 $ 21.6 $ (5.3) $ 31.4
--------- --------- --------- --------- ------------- -----------
--------- --------- --------- --------- ------------- -----------
Basic and Diluted Net Earnings (Loss)
per Share (2)................................ $ (3.17) $ 0.78 $ 0.49 $ 0.40 $ (0.10) $ 0.58
Equivalent Shares (4).......................... 54,056 53,892 53,892 53,892 53,892 53,892
FINANCIAL POSITION (at end of period):
Total Assets................................... $ 1,356.4 $ 1,073.8 $ 919.0 $ 860.8 $ 799.0 $ 748.0
Notes Payable and Current Portion of Long-term
Obligations.................................. $ 86.6 $ 27.5 $ 22.2 $ 41.7 $ 7.1 $ 4.3
Long-term Obligations.......................... $ 216.9 $ 14.5 $ 14.1 $ 9.0 $ 8.9 $ 19.1
Allocated Portion of Western Atlas Debt........ $ 109.6 $ 112.4 $ 112.8 $ 211.0 $ 27.3
Working Capital................................ $ 277.8 $ 266.0 $ 194.7 $ 115.2 $ 53.0 $ 199.5
Current Ratio.................................. 1.6 1.6 1.6 1.3 1.1 2.0
Total Debt as a Percentage of Total
Capitalization............................... 34% 21% 23% 27% 37% 10%
------------------------------
(1) General and Administrative Costs include allocated charges from Western
Atlas of $13.5 million, $22.2 million, $19.9 million, $27.6 million, $8.1
million and $14.1 million for the years ended December 31, 1997, 1996, 1995
and 1994, the five months ended December 31, 1993, and the fiscal year ended
July 31, 1993, respectively. The year ended December 31, 1997 includes
charges of $211.5 million, or $3.91 per share, for the value of acquired
in-process research and development activities resulting from acquisitions
made during the year.
(2) Amounts presented for the year ended July 31, 1993 are before a cumulative
effect of a change in accounting principle for the adoption of the
provisions of SFAS No. 106, EMPLOYER'S ACCOUNTING FOR POSTRETIREMENT
BENEFITS OTHER THAN PENSIONS. The Company elected immediate recognition of
the transition liability, and recorded a net of tax charge of $9.3 million.
Net earnings for the period were $22.1 million and earnings per share were
$0.41 after the cumulative effect of a change in accounting principle.
(3) Interest expense includes allocated charges from Western Atlas of $12.0
million, $8.3 million, $8.4 million, $12.1 million, $3.7 million and $3.9
million for the years ended December 31, 1997, 1996, 1995 and 1994, the five
months ended December 31, 1993, and the fiscal year ended July 31, 1993,
respectively.
(4) In thousands. The number of common shares used to calculate earnings per
share prior to 1997 is based on the number of Western Atlas Common Stock
that was outstanding as of June 30, 1997.
11
ITEM 7. FINANCIAL REVIEW AND ANALYSIS
RESULTS OF OPERATIONS
Sales and service revenues and segment operating profit for the years ended
December 31, 1997 (excluding the $211.5 million charges for acquired in-process
research and development), 1996 and 1995, were as follows:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(MILLIONS OF DOLLARS)
SALES AND SERVICE REVENUES
Automated Data Systems......................................................... $ 636.4 $ 367.3 $ 320.6
Industrial Automation Systems.................................................. 789.8 797.4 622.3
--------- --------- ---------
Total Sales and Service Revenues............................................... $ 1,426.2 $ 1,164.7 $ 942.9
--------- --------- ---------
--------- --------- ---------
SEGMENT OPERATING PROFIT
Automated Data Systems......................................................... $ 9.1 $ 30.1 $ 13.0
Industrial Automation Systems.................................................. 94.6 69.5 61.9
--------- --------- ---------
Total Segment Operating Profit................................................. $ 103.7 $ 99.6 $ 74.9
--------- --------- ---------
--------- --------- ---------
YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996
Total sales and service revenues increased $261.5 million, or 22% for the
year ended December 31, 1997 compared with the corresponding prior period. Total
segment operating profit, excluding the $211.5 million charges for acquired
in-process research and development, increased $4.1 million, or 4% for the year
ended December 31, 1997 compared to the corresponding prior period.
ADS revenues increased by $269.1 million, or 73% due to the acquisitions of
Norand Corporation ("Norand") and United Barcode Industries ("UBI"). However,
ADS operating profit declined by $21.0 million, or 70% due primarily to the
process of integrating the newly acquired companies with Intermec and the costs
of a long-term contract related to wireless radio frequency identification
("RFID") technology purchased from IBM Corporation. Operating profit margins,
which declined from 8.2% in 1996 to 1.4% in 1997, are expected to improve
following the completion of the integration efforts in 1998.
IAS revenues decreased $7.6 million, or 1% and related operating profit
increased $25.1 million, or 36% for the year ended December 31, 1997 compared
with the corresponding prior period. The decrease in IAS revenues is primarily
attributable to the sale of the Material Handling Systems ("MHS") division in
November 1996, which offsets an increase in integrated manufacturing systems
revenues. IAS experiences lower profit margins in the early stages of long-term
contracts until the development risks have been mitigated. During 1997 the
integrated manufacturing systems operations experienced a higher level of
revenues and profits from contracts in the final delivery and installation
phase. These projects contributed to an increase in operating margins for IAS
from 8.7% in 1996 to 12.0% in 1997. Accordingly, IAS backlog declined from
$545.0 million at December 31, 1996 to $332.0 million at December 31, 1997. Also
contributing to the increased operating profit are nonrecurring costs recorded
in 1996 associated with the MHS sale and the reorganization of the Company's
European and grinding businesses.
The Company acquired Norand on March 3, 1997, and UBI on April 4, 1997.
Norand designs, manufactures and markets mobile computing systems and wireless
data communications networks using radio frequency technology. UBI is a
European-based automated data collection company headquartered in Sweden. These
companies are currently being integrated into the ADS segment. Both transactions
were
12
ITEM 7. FINANCIAL REVIEW AND ANALYSIS (CONTINUED)
funded by Western Atlas borrowings and cash on hand, and have been accounted for
under the purchase method of accounting. Accordingly, the acquisition costs
(approximately $280.0 million and $107.0 million for Norand and UBI,
respectively) have been allocated to the net assets acquired based upon their
relative fair values. Such allocation resulted in $203.3 million assigned to
in-process research and development activities; $154.1 million assigned to
goodwill (amortized over 25 years); and $29.0 million assigned to other
intangibles (amortized over periods ranging from 4 to 18 years). During the
second quarter of 1997, the Company expensed the amounts assigned to acquired
in-process research and development in accordance with Financial Accounting
Standards Board Interpretation No. 4.
The Company acquired the remaining 51% of Honsberg, a German machine tool
maker, in the second quarter of 1997. The original 49% of Honsberg was acquired
during 1995. The Company acquired the stamping, engineering, and prototyping
division of Modern Prototype Company in September 1997. In December 1997, UNOVA
acquired Goldcrown Machinery, Inc., a manufacturer of precision centerless
grinding systems. Also, in November 1997, the Company acquired 13% of the common
stock of Amtech Corporation, a global provider of systems and solutions using
wireless data and RFID technologies.
Selling, general and administrative ("SG&A") expense as a percentage of
sales and service revenues increased to 22.7% for the year ended December 31,
1997, compared to 18.8% in 1996. This increase is primarily due to a higher
percentage of the Company's 1997 sales coming from the ADS segment, where SG&A
rates are historically higher than those experienced in the IAS segment. ADS
sales as a percentage of total Company sales increased to 44.6% in 1997 from
31.5% in 1996.
Net interest expense was $16.7 million and $7.1 million for the years ended
December 31, 1997 and 1996, respectively. The increase is primarily due to an
increase in the level of Western Atlas allocated debt from $109.6 million at
December 31, 1996 to $230.0 million at October 31, 1997 (when the Company paid
this amount to WAI as an intercompany dividend). The increase in allocated debt
is primarily attributable to the 1997 acquisitions of Norand and UBI.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO 1995
Total sales and service revenues increased by $221.8 million, or 24%, and
related segment operating profit increased $24.7 million, or 33% for the year
ended December 31, 1996 compared with the corresponding prior period.
ADS revenues increased by $46.7 million, or 15% as a result of the success
of new product introductions and increased deliveries on Intermec's five-year
purchase agreement with the U.S. Government. Revenues attributable to new
product introductions rose by $23.0 million, or 209%, and related unit shipments
increased 213% over 1995 levels. Revenues under the purchase agreement with the
U.S. Government increased $16.0 million, primarily attributable to a 38%
increase in unit hardware shipments.
ADS operating profit increased by $17.1 million in 1996, and operating
margins improved from 4.1% in 1995 to 8.2% in 1996. In 1995, margins were
adversely impacted by changes in product mix and competitive pressure on pricing
of certain mature product lines. Approximately one percentage point of the 1996
increase was due to improved margins on media products (labels and printer
ribbons), while the remaining improvement resulted from the Company responding
to factors contributing to the 1995 decrease. The 1995 decrease in margins was
affected by the cost of a shift from proprietary to open architecture systems
which caused an approximate two percentage point decrease, while pricing
pressure contributed to an additional decrease of approximately two percentage
points.
IAS revenues increased by $175.1 million, or 28% in 1996, and its operating
profit increased by 12% to $69.5 million. Operating margins declined from 10.0%
in 1995 to 8.7% in 1996 as a result of lower profit
13
ITEM 7. FINANCIAL REVIEW AND ANALYSIS (CONTINUED)
recognition in the early stages of certain 1996 contracts. Backlog improved to
$545.0 million at December 31, 1996 compared to $501.0 million at the prior
year-end.
SG&A expense as a percentage of sales and service revenues decreased to
18.8% for the year ended December 31, 1996, compared to 20.6% in 1995. This
decrease is primarily due to a higher percentage of the Company's 1996 sales
coming from the IAS segment, where SG&A rates are historically lower than those
experienced in the ADS segment. Furthermore, IAS sales growth in 1996 was
attributable to divisions with lower SG&A rates, not the MHS division, which
carried a higher SG&A rate.
Net interest expense decreased from $9.3 million in 1995 to $7.1 million in
1996 because of lower levels of allocated Western Atlas debt, offset by reduced
interest income attributable to lower average balances in cash and marketable
securities.
FOREIGN CURRENCY TRANSACTIONS
The Company is subject to the effects of international currency fluctuations
due to the global nature of its operations. Currency fluctuations did not have a
significant impact on operations during fiscal years 1997, 1996 and 1995. It is
not possible to predict the Company's exposure to foreign currency fluctuations
beyond the near term because revenues generated from particular foreign
jurisdictions vary widely over time. The Company hedges transactions from time
to time, but the amount and volume of such transactions are not material.
For fiscal year 1997, the Company derived approximately 30% of its revenues
and approximately 35% of its operating profits (exclusive of corporate overhead
and charges for acquired in-process research and development) from non-U.S.
operations. However, at December 31, 1997, identifiable assets attributable to
foreign operations comprised 20% of total assets (of which the largest
components were attributable to European operations). Therefore, exposure of
identifiable assets to foreign currency fluctuations or expropriations is not
significant.
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities decreased from $149.5 million at December 31,
1996 to $13.7 million at December 31, 1997 primarily as a result of the Norand
and UBI acquisitions.
Total debt increased from $151.5 million at December 31, 1996 to $303.6
million at December 31, 1997 due primarily to the use of committed and
uncommitted credit facilities to fund the Norand and UBI acquisitions. The
remaining increase is primarily attributable to capital expenditures and working
capital needs of the operations. The Company expects that cash flow from
operations, along with available borrowing capacity, will be adequate to meet
working capital requirements. At December 31, 1997, the Company has unused
credit facilities of approximately $275.0 million. The Company does not
anticipate any material adverse decline in cash flow from operations nor any
significant changes in capital expenditures required to support ongoing
operations.
In March 1998, subsequent to the end of the fiscal year, the Company sold
$200.0 million principal amount of senior unsecured debt. The sale comprised
$100.0 million of 6.875% seven-year notes, at a price of 99.867 and $100.0
million of 7.00% ten-year notes, at a price of 99.856. Including underwriting
fees, discounts and effects of forward rate agreements entered into by the
Company to hedge the interest rates on the debt, the effective interest rates on
the seven-year and ten-year notes are 6.982% and 7.217%, respectively. The net
proceeds of approximately $198.0 million were used by the Company to repay
outstanding short-term debt, which increased the Company's total additional
available borrowing capacity to $512.0 million, comprising a $400.0 million
unsecured committed credit facility and $112.0 million of uncommitted credit
facilities.
14
ITEM 7. FINANCIAL REVIEW AND ANALYSIS (CONTINUED)
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define a year. Any such computer programs may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has identified all significant applications that will require
modification to ensure Year 2000 compliance. Internal and external resources are
being used to make the required modifications and test Year 2000 compliance. The
Company plans to complete the modification and testing process prior to December
31, 1999. In addition, the Company is actively working with others with whom it
does significant business to assess their Year 2000 compliance efforts and the
Company's exposure to them.
The total cost to the Company of these Year 2000 compliance activities has
not been and is not anticipated to be material to the financial position or
results of operations in any given year. These costs and the date on which the
Company plans to complete the Year 2000 modification are based on management's
best estimates. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans.
INFLATION
In the opinion of management, inflation has not been a significant factor in
the markets in which the Company operates and has not had a significant impact
upon the results of its operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME, and No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In
February 1998, Statement of Financial Accounting Standards No. 132, EMPLOYERS'
DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, was issued. These
statements are effective for financial statements issued for periods beginning
after December 15, 1997. The Company is evaluating what additional disclosures
may be required upon the implementation of SFAS Nos. 130, 131 and 132.
FORWARD-LOOKING STATEMENTS
The Company cautions readers that, in addition to the historical information
covered in this report, included are certain forward-looking statements and
information that are based on management's beliefs as well as on assumptions
made by and information currently available to management. Such statements are
not guarantees of future performance and involve certain risks, uncertainties
and assumptions which could cause the Company's future results to differ
materially from those expressed or implied in any forward-looking statements
made by, or on behalf of, the Company. Such factors include, but are not limited
to, fluctuations in the strength of the automotive market; technological
developments, particularly in the ADC/Mobile Computing System industry;
competitive conditions; the availability and cost of materials and supplies;
relations with the Company's employees; the Company's ability to manage its
operating costs and to integrate acquired businesses in an effective manner;
general economic conditions; governmental regulations; and risks associated with
international operations. Any forward-looking statements should be considered in
light of these factors, many of which are beyond the Company's ability to
control or predict. Readers are cautioned not to put undue reliance on
forward-looking statements. The
15
ITEM 7. FINANCIAL REVIEW AND ANALYSIS (CONTINUED)
Company disclaims any intent or obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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PAGE
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Management's Responsibility for Financial Reporting....................... F-1
Independent Auditors' Report.............................................. F-2
Consolidated and Combined Statements of Operations........................ F-3
Consolidated and Combined Balance Sheets.................................. F-4
Consolidated and Combined Statements of Cash Flows........................ F-5
Notes to Consolidated and Combined Financial Statements................... F-6
Quarterly Financial Information (unaudited)............................... F-23
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE COMPANY
Each of the directors of the Company identified below was elected to his
initial term on the Board of Directors on October 31, 1997, except that Alton J.
Brann was first elected a director of the Company on August 13, 1997. The
Certificate of Incorporation and By-laws of the Company provide that the
Company's Board will be divided into three classes of directors, with the
classes to be as nearly equal in number as possible. Of the initial directors,
Mr. Frank and Dr. Hoch will serve until the 1999 Annual Meeting of Shareholders;
Dr. Sample and Mr. Walsh will serve until the 2000 Annual Meeting of
Shareholders; and Mr. Brann will serve until the 2001 Annual Meeting of
Shareholders. Starting with the 1999 Annual Meeting of Shareholders, one class
of directors will be elected each year for a three-year term.
[Enlarge/Download Table]
POSITION WITH THE COMPANY AND
PRINCIPAL BUSINESS AFFILIATIONS
NAME AGE DURING PAST FIVE YEARS
------------------------------ --- ----------------------------------------------------------------------------
Alton J. Brann................ 56 Chairman of the Board and Chief Executive Officer of the Company and
non-executive Chairman of Western Atlas Inc. ("Western Atlas") since October
31, 1997; Chief Executive Officer of Western Atlas from March 1994 until
October 31, 1997. Prior thereto, President of Litton Industries, Inc.
("Litton") from November 1990 to March 1994 and Chief Executive Officer of
Litton from December 1992 to March 1994. Mr. Brann has been a director of
Western Atlas since February 1994 and a director of Litton since December
1990.
Stephen E. Frank.............. 56 President and Chief Operating Officer of Southern California Edison, a
subsidiary of Edison International, since June 1995. Prior thereto,
President and Chief Operating Officer of Florida Power and Light Company
beginning August 1990. Mr. Frank is also a director of Edison International
and of Washington Mutual, Inc.
Orion L. Hoch................. 69 Chairman Emeritus of Litton since March 1994. Prior thereto, Chairman of the
Board of Litton from March 1988. Dr. Hoch is also a director of Litton,
Western Atlas, Bessemer Trust Corporation, and Bessemer Trust Companies.
Steven B. Sample.............. 57 President of the University of Southern California since March 1991. Dr.
Sample is also a member of the Board of Directors of Presley Companies and
of Wm. Wrigley Jr. Company.
William D. Walsh.............. 67 Partner of Sequoia Associates, a private investment firm, since 1988. Mr.
Walsh is Chairman of the Board of Golden Valley Produce, LLC, Clayton Group,
Inc., Consolidated Freightways Corporation, Newell Manufacturing
Corporation, and Newell Industrial Corporation. He is also a director of
Basic Vegetable Products, L.P., Crown Vantage, Inc., Newcourt Credit Group
Inc., and URS Corporation.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are elected each year by the Board of
Directors at its first meeting following the Annual Meeting of Shareholders to
serve, unless the Board otherwise determines,
17
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
during the ensuing year and until their respective successors are elected and
qualified. There are no family relationships between any of the executive
officers of the Company.
[Enlarge/Download Table]
POSITION WITH THE COMPANY AND
PRINCIPAL BUSINESS AFFILIATIONS
NAME AGE DURING PAST FIVE YEARS
------------------------------ --- ----------------------------------------------------------------------------
Edward J. Borey............... 47 Vice President of the Company and Chief Operating Officer of the Company's
Automated Data Systems Group since November 6, 1997, and Chief Operating
Officer of Intermec Technologies Corporation, a subsidiary of the Company
("Intermec"), since August 22, 1997; Executive Vice President of Intermec
since March 9, 1998; and prior thereto Senior Vice President of Intermec
since March 10, 1997. Senior Vice President and General Manager of the Media
Products Division of Intermec from 1995 to August 1997 and Vice President
and General Manager of the National Tag Group of Paxar Corporation from 1992
to 1995.
Alton J. Brann................ 56 Chairman of the Board and Chief Executive Officer; for prior business
experience see "Directors of the Company" above.
Charles A. Cusumano........... 51 Vice President, Finance, since October 31, 1997. Prior thereto, Vice
President, Finance, of Western Atlas since October 1996; Vice President and
Controller of Western Atlas from March 1994 to September 1996; and Vice
President, Finance, of Litton's Industrial Automation Systems Group from
October 1988 to March 1994.
Michael E. Keane.............. 42 Senior Vice President and Chief Financial Officer since October 31, 1997.
Prior thereto, Senior Vice President and Chief Financial Officer of Western
Atlas since October 1996; Vice President and Treasurer of Western Atlas from
March 1994 to September 1996; and Director of Pensions and Insurance of
Litton from February 1991 to March 1994. A director of Amtech Corporation
since November 1997, in which the Company presently has an ownership
interest.
Michael Ohanian............... 66 Senior Vice President and Group Executive, Automated Data Systems, since
October 31, 1997, and President of Intermec since May 1995. Senior Vice
President of Western Atlas from July 8, 1997, to October 31, 1997, and Vice
President of Western Atlas from May 1996 to July 1997. Independent
consultant from September 1994 to May 1995 and Vice President, Strategic and
Government Programs, of Intermec from April 1988 to September 1994.
Norman L. Roberts............. 63 Senior Vice President and General Counsel since October 31, 1997. Prior
thereto, Senior Vice President and General Counsel of Western Atlas since
March 1994 and Senior Vice President and General Counsel of Litton from
March 1990 to March 1994.
18
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
[Enlarge/Download Table]
POSITION WITH THE COMPANY AND
PRINCIPAL BUSINESS AFFILIATIONS
NAME AGE DURING PAST FIVE YEARS
------------------------------ --- ----------------------------------------------------------------------------
Clayton A. Williams........... 64 Senior Vice President and Group Executive, Industrial Automation Systems,
since October 31, 1997. Prior thereto, Senior Vice President of Western
Atlas since May 1996 and Group Executive of Western Atlas' Manufacturing
Systems Group since December 1995; Vice President of Western Atlas from
December 1995 to May 1996; Vice President of Litton from June 1992 to
December 1995; and President of Litton's Applied Technology division from
January 1990 to December 1995.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to the Distribution, on October 31, 1997, Clayton A. Williams
received 117 shares of UNOVA Common Stock. These 117 shares should have been,
but were not, reflected on Mr. Williams' Form 3 that was filed with the SEC on
October 2, 1997. In connection with the preparation for the filing of this
report on Form 10-K, Mr. Williams' inadvertent omission of the shares in a
footnote of such Form 3 was discovered. An amendment to the Form 3 previously
filed by Mr. Williams was filed with the SEC on March 25, 1998.
On November 14, 1997, Michael Ohanian purchased 2,000 shares of UNOVA Common
Stock on the open market at a purchase price of $16.50 per share. These 2,000
shares should have been, but were not, reported on Mr. Ohanian's Form 4 that was
filed with the SEC on December 10, 1997. In connection with the preparation of
this report on Form 10-K, the failure to report the acquisition of the 2,000
shares was discovered. An amendment to the Form 4 previously filed by Mr.
Ohanian was filed with the SEC on March 25, 1998.
19
ITEM 11. EXECUTIVE COMPENSATION
For the chief executive and the four other executive officers of the Company
who, based upon employment by the Company (and by Western Atlas and their
respective subsidiaries) received the highest compensation with respect to the
fiscal year ended December 31, 1997 (the "Named Executive Officers"), the
following table sets forth information concerning compensation paid by such
companies to these individuals with respect to the periods indicated. The
principal positions listed in the table are those held by the Named Executive
Officers at the end of 1997.
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
LONG-TERM COMPENSATION
---------------------------
ANNUAL COMPENSATION SECURITIES
--------------------------------- UNDERLYING ALL OTHER
SALARY BONUS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(A) (#) ($)(B)
----------------------------------------------------- --------- ----------- --------- ------------ -------------
Alton J. Brann, Chairman of the Board 1997 713,486 875,000 500,000(c) 17,996
and Chief Executive Officer 61,601(d)
1996 687,030 928,125 61,601(d) 17,382
1995 649,065 669,638 61,601(d) 17,130
Michael E. Keane, Senior Vice President 1997 267,308 267,308 125,000(c) 6,570
and Chief Financial Officer 36,961(d)
Michael Ohanian, Senior Vice President 1997 305,781 191,113 50,000(c) 9,050
18,480(d)
1996 269,232 269,232 13,552(d) 9,250
Norman L. Roberts, Senior Vice President 1997 305,769 275,192 100,000(c) 9,060
and General Counsel 18,480(d)
1996 295,846 292,887 18,480(d) 9,057
1995 285,774 220,455 18,480(d) 10,090
Clayton A. Williams, Senior Vice President 1997 272,444 332,109 75,000(c) -0-
18,480(d)
1996 257,500 321,875 14,783(d) 45,540
1995 15,385(e) -0- 30,800(d) -0-
------------------------
(a) Bonuses awarded to the Named Executive Officers, with respect to 1997 were
paid as follows: an amount equal to 50% of the recipient's annual base pay
in effect on January 1, 1997, was paid at the time the award was determined
and the remainder will be paid one year later provided the recipient is then
in the employ of the Company or has terminated employment by reason of
death, disability, or retirement or is on an approved leave of absence.
Where a bonus exceeded 100% of the recipient's base pay at January 1, 1997,
an amount equal to one half of such base pay was paid at the time the award
was determined; and, subject to satisfaction of the conditions set forth in
the preceding sentence, an additional amount equal to 50% of such base pay
will be paid one year later. The remainder of the award will be paid two
years later. However, awards with respect to the portion of the fiscal year
subsequent to the Distribution (as defined below) made to Messrs. Brann,
Keane, and Roberts were payable in a single installment, subject to the
recipient's election to defer payment thereof.
20
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
(b) Included in this column for 1997 are the following: (i) present value costs
of the Company's portion of the 1997 premium for split-dollar life insurance
for Mr. Brann of $2,258; (ii) the amount of $2,792 representing premiums
paid by the Company with respect to the participation in the Company's
Executive Medical Plan of each of Messrs. Brann, Keane, and Roberts; (iii)
the following amounts representing interest imputed to and taxable to the
holder of loans from the Company: Mr. Brann, $11,396; Mr. Keane, $2,228; and
Mr. Roberts, $4,718; (iv) the Company's matching contributions of $1,550
made to the respective accounts of Messrs. Brann, Keane, Ohanian, and
Roberts under the Company's 401(k) plan; and (iv) the amount of $7,500 paid
to Mr. Ohanian by a subsidiary of the Company pursuant to an executive
flexible benefits plan.
(c) Represents options to purchase Company Common Stock.
(d) Represents options to purchase Western Atlas Common Stock; numbers of shares
have been adjusted for the Distribution in the manner described below.
(e) Represents the salary paid to Mr. Williams from the date of his employment
by Western Atlas, December 9, 1995, through December 31, 1995.
For the fiscal year 1997, the Named Executive Officers were employed by
Western Atlas and its subsidiaries until October 31, 1997, when the Common Stock
of the Company was distributed (the "Distribution") to the shareholders of
Western Atlas as a dividend. During this 10-month period the Named Executive
Officers received options to purchase Western Atlas Common Stock prior to the
Distribution as shown in the second table below. On October 31, 1997, the Named
Executive Officers became employees of the Company and thereafter received the
options to purchase Company Common Stock shown in the first table below. Upon
the Distribution each Western Atlas option held by the Named Executive Officers
was adjusted by (i) multiplying the number of shares of Western Atlas Common
Stock subject to the option by the Adjustment Factor (described below) and (ii)
dividing the exercise price per share of the option by the Adjustment Factor.
For these purposes the "Adjustment Factor" means the quotient obtained by
dividing (x) the Average Market Price of the Company Common Stock by (y) the
Average Market Price of the Western Atlas Common Stock. The "Average Market
Price" of Western Atlas Common Stock or Company Common Stock is the average of
the high and low daily prices of such Common Stock as reported on the New York
Stock Exchange Composite Tape on the sixth through tenth trading days,
inclusive, following the Distribution. The number of shares subject to options
to purchase Western Atlas Common Stock and the per share exercise price of such
options shown in the following tables reflect the number of shares and prices
which result from applying the adjustment described above. The Western Atlas
options held by the Named Executive Officers have also been amended to provide
that for purposes of the vesting, exercisability, and duration of these options,
service with the Company shall be deemed to be service with Western Atlas.
21
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
The following tables show stock option grants with respect to shares of the
Company Common Stock under employee stock option plans of the Company and
Western Atlas to the Named Executive Officers during the 1997 fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS TO PURCHASE COMPANY COMMON STOCK
[Enlarge/Download Table]
NUMBER OF PERCENTAGE OF TOTAL GRANT DATE
SECURITIES OPTIONS GRANTED EXERCISE PRESENT
UNDERLYING OPTIONS TO EMPLOYEES PRICE EXPIRATION VALUE
NAME GRANTED (#) (A) IN FISCAL YEAR ($/SH) DATE ($) (B)
------------------------------------- ------------------- ------------------- --------- ----------- ----------
Alton J. Brann....................... 26,490(c) 1.06% 18.875 11/7/07 296,000
473,510(d) 18.91% 18.875 11/7/07 5,287,000
Michael E. Keane..................... 26,490(c) 1.06% 18.875 11/7/07 296,000
98,510(d) 3.93% 18.875 11/7/07 1,100,000
Michael Ohanian...................... 10,596(e) 0.42% 18.875 11/7/07 118,000
39,404(f) 1.57% 18.875 11/7/07 440,000
Norman L. Roberts.................... 21,192(g) 0.85% 18.875 11/7/07 237,000
78,808(h) 3.15% 18.875 11/7/07 880,000
Clayton A. Williams.................. 15,894(i) 0.63% 18.875 11/7/07 177,000
59,106(j) 2.36% 18.875 11/7/07 660,000
INDIVIDUAL GRANTS TO PURCHASE WESTERN ATLAS COMMON STOCK
[Enlarge/Download Table]
NUMBER OF PERCENTAGE OF TOTAL GRANT DATE
SECURITIES OPTIONS GRANTED EXERCISE PRESENT
UNDERLYING OPTIONS TO EMPLOYEES PRICE EXPIRATION VALUE
NAME GRANTED (#) (A) IN FISCAL YEAR ($/SH) DATE ($) (B)
----------------------------------- ------------------- ------------------- ---------- ----------- ----------
Alton J. Brann..................... 61,601(k) 5.78% 60.9477 7/9/07 2,171,000
Michael E. Keane................... 36,961(k) 3.47% 60.9477 7/9/07 1,303,000
Michael Ohanian.................... 18,480(k) 1.73% 60.9477 7/9/07 651,000
Norman L. Roberts.................. 18,480(k) 1.73% 60.9477 7/9/07 651,000
Clayton A. Williams................ 18,480(k) 1.73% 60.9477 7/9/07 651,000
------------------------
(a) All options granted to the Named Executive Officers were granted at the
prevailing market price of the Company or Western Atlas Common Stock, as
applicable, on the date of grant. These options permit payment of the
exercise price and any withholding tax due upon exercise by the surrender of
already owned shares of the Company or Western Atlas Common Stock, as the
case may be, having a fair market value equal to the exercise price or the
amount of withholding tax, and also permit payment of withholding tax by
applying shares otherwise issuable upon exercise. All such options become
immediately exercisable upon the occurrence of certain events resulting in a
change of control of the Company or Western Atlas and accelerated vesting
schedules become applicable in the event of the death of the optionee while
in the employ of the Company. Change of control has the meaning described on
page 25.
(b) The Black-Scholes model was used to determine the grant date present value
of Company and Western Atlas stock options. This method requires the
assumption of certain values that affect the option price. The values which
were used in this model are the volatility of the stock price of the
22
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
Company Common Stock and Western Atlas Common Stock and the estimate of the
risk-free interest rate. Since the Company and Western Atlas do not pay a
cash dividend, no yield on the Company or Western Atlas Common Stock was
assumed. For purposes of the model used to value the options in these
tables, a volatility factor of 36% for the Company, determined from
historical industry stock price fluctuations, and 33% for Western Atlas,
determined from historical stock price fluctuations, and 5.9% and 6.2%
risk-free interest rates, respectively, determined from market information
prevailing on the respective grant dates, were used. No adjustments were
made for the nontransferability or risk of forfeiture of the stock options.
This model assumed all options are exercised on their respective expiration
dates. There is no assurance that these assumptions will prove true in the
future. The actual value of the options depends on the market price of the
Company and Western Atlas Common Stock at the date of exercise, which may
vary from the theoretical value indicated in the table.
(c) Incentive Stock Options. These options become exercisable in five equal
installments of the shares subject thereto on the first through the fifth
anniversaries of the date of grant.
(d) Nonqualified Stock Options. These options become exercisable in five equal
installments of the shares subject thereto on the first through the fifth
anniversaries of the date of grant.
(e) Incentive Stock Options. These options become exercisable in two equal
installments of 5,298 shares each on the first and the second anniversaries
of the date of grant.
(f) Nonqualified Stock Options. These options become exercisable in two equal
installments of 19,702 shares each on the first and the second anniversaries
of the date of grant.
(g) Incentive Stock Options. These options become exercisable in four
installments of 5,298 shares each on the first through the fourth
anniversaries of the date of grant.
(h) Nonqualified Stock Options. These options become exercisable in four
installments of 19,702 shares each on the first through the fourth
anniversaries of the date of grant.
(i) Incentive Stock Options. These options become exercisable in three
installments of 5,298 shares each on the first through the third
anniversaries of the date of grant.
(j) Nonqualified Stock Options. These options become exercisable in three
installments of 19,702 shares each on the first through the third
anniversaries of the date of grant.
(k) Nonqualified Stock Options. These options become exercisable in five
substantially equal installments of the shares subject thereto on the first
through the fifth anniversaries of the date of grant.
No option to purchase Company Common Stock was exercised during 1997 by any
of the Named Executive Officers, and none of such individuals held unexercised
in-the-money options to purchase
23
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
Company Common Stock at the end of 1997. The following table shows the number of
shares of Company Common Stock underlying unexercised options outstanding as of
December 31, 1997.
[Enlarge/Download Table]
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED OPTIONS
AT
DECEMBER 31, 1997
------------------------------
EXERCISABLE UNEXERCISABLE
--------------- -------------
Alton J. Brann................................................ -0- 500,000
Michael E. Keane.............................................. -0- 125,000
Michael Ohanian............................................... -0- 50,000
Norman L. Roberts............................................. -0- 100,000
Clayton A. Williams........................................... -0- 75,000
The following table provides information with respect to options to purchase
Western Atlas Common Stock exercised by any of the Named Executive Officers
during 1997 and with respect to the number and value of unexercised Western
Atlas options held by each Named Executive Officer at December 31, 1997.
WESTERN ATLAS AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES (A)
[Enlarge/Download Table]
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES WESTERN ATLAS OPTIONS AT WESTERN ATLAS OPTIONS AT
ACQUIRED ON VALUE DECEMBER 31, 1997 (#) DECEMBER 31, 1997 ($)
EXERCISE REALIZED -------------------------- -------------------------
NAME (#) (B) ($) EXERCISBLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------------------ ----------- --------- ----------- ------------- ---------- -------------
Alton J. Brann...................... 4,046 216,231 214,490 267,958 9,206,803 8,517,051
Michael E. Keane.................... 13,352 806,949 11,890 72,685 502,098 1,587,803
Michael Ohanian..................... -0- -0- 8,260 29,316 389,809 535,149
Norman L. Roberts................... 8,214 451,189 35,773 67,450 1,723,181 1,990,106
Clayton A. Williams................. -0- -0- 15,282 48,781 492,664 1,180,294
------------------------
(a) The number and value of unexercised options to purchase Western Atlas Common
Stock at the end of 1997 are shown in the table. In addition, Messrs. Brann,
Keane, Ohanian, and Roberts held the following options to purchase shares of
Common Stock of Litton Industries, Inc. ("Litton"), adjusted on account of
the 1994 distribution of the Western Atlas Common Stock to the shareholders
of Litton as a dividend and granted to them prior to such distribution. For
purposes of the vesting and exercisability of these options, service with
the Company is regarded as service with Litton.
[Enlarge/Download Table]
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
LITTON OPTIONS AT LITTON OPTIONS AT
DECEMBER 31, 1997 (#) DECEMBER 31, 1997 ($)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------------------------------------------- ----------- ------------- ----------- -------------
Alton J. Brann....................................... 23,440 10,000 884,368 333,421
Micheal E. Keane..................................... 14,000 -0- 591,141 -0-
Michael Ohanian...................................... 4,500 -0- 190,305 -0-
Norman L. Roberts.................................... 16,000 -0- 633,398 -0-
(b) During 1997 Mr. Roberts also exercised Litton options to purchase 6,000
shares, thereby realizing $243,337.
24
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
Messrs. Brann, Keane, Roberts, and certain additional officers of the
Company have entered into change in control employment agreements with the
Company (collectively, the "Agreements"). The Agreements are operative only upon
the occurrence of a change in control, which includes substantially those events
described below. Absent a change in control, the Agreements do not require the
Company to retain the executives or pay them any specified level of compensation
or benefits.
Generally, under the Agreements, a change in control is deemed to have
occurred if: (a) a majority of the Board becomes composed of persons other than
persons for whose election proxies have been solicited by the Board, or other
than persons who are then serving as directors appointed by the Board to fill
vacancies caused by death or resignation (but not removal) of a director or to
fill newly created directorships; (b) another party becomes the beneficial owner
of at least 30% of the Company's outstanding voting stock, other than as a
result of a repurchase by the Company of its voting stock; (c) the approval by
the shareholders of the Company of a merger, reorganization, consolidation with
another party (other than certain limited types of mergers), or sale or other
disposition of all or substantially all of the Company's assets; or (d) the
shareholders approve the liquidation or dissolution of the Company.
Each Agreement provides that for three years after a change in control there
will be no adverse change in the executive's salary, bonus opportunity,
benefits, or location of employment. If, during this three-year period, the
executive's employment is terminated by the Company other than for cause, or if
the executive terminates his or her employment for good reason as such terms are
defined in the Agreements (including compensation reductions, demotions,
relocation, and requiring excessive travel), or voluntarily during the 30-day
period following the first anniversary of the change in control, the executive
is entitled to receive an accrued salary and annual incentive payment through
the date of the termination and, except in the event of death or disability, a
lump-sum severance payment equal to three times the sum of the executive's base
salary and annual bonus (and certain pension credit and insurance and other
welfare plan benefits). Further, an additional payment is required in such
amount that after the payment of all taxes, income and excise, the executive
will be in the same after-tax position as if no excise tax under the Internal
Revenue Code of 1986, as amended (the "Code"), had been imposed. In the event of
termination of employment by reason of death or disability or for cause, the
Agreements terminate and the sole obligation of the Company is to pay any
amounts theretofore accrued thereunder.
The Company has entered into an employment agreement with Clayton A.
Williams whereby Mr. Williams has agreed to accept employment from the period
from October 31, 1997, to February 13, 1999. Mr. Williams serves as Group
Executive of the Company's Industrial Automation Systems operations and Senior
Vice President of the Company. Under this agreement, Mr. Williams will receive a
current annual salary of not less than $280,000 and is entitled to participate
in the cash bonus plan or plans for which he is eligible. In the event of Mr.
Williams' termination of employment without cause, he is entitled to receive the
remaining installments of base salary payable during the term of the agreement
and a PRO RATA portion of the bonus for which he would have qualified had he
remained employed throughout the year of any such termination.
Mr. Ohanian has an employment contract with Intermec Technologies
Corporation, a subsidiary of the Company, which provides for his employment
through February 28, 1999, for a base salary of $300,000 and provides that he is
eligible to receive an annual bonus, subject to the satisfaction of performance
goals established by the Compensation Committee of the Company's Board of
Directors, in accordance with the terms of any cash bonus plan in which he is
eligible to participate.
25
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
RETIREMENT BENEFITS
THE FSSP AND RELATED RETIREMENT PLAN. Messrs. Brann, Keane, Ohanian, and
Roberts participate in the Company's Financial Security and Savings Program (the
"FSSP"), a defined contribution plan intended to qualify under Sections 401(a)
and 401(k) of the Code. Participation in the FSSP is generally available to
employees of the Company located in the United States.
A participant in the FSSP may elect to defer from 2% to 18% of his or her
covered compensation for investment in the trust established under the FSSP, but
the maximum amount which the employee may contribute to the FSSP for any
calendar year is limited by provisions of the Code relating to the maximum
amount, as adjusted for inflation, which may be contributed to plans qualified
under Section 401(k) of the Code (the "401(k) Maximum Amount"), which is $9,500
for 1997. Deposits of 2% to 4% of the participant's compensation are invested in
the FSSP Retirement Fund, while deposits in excess of 4% are invested in one or
more investment funds as designated by the participant.
The Company adds to the investment fund account of an FSSP participant an
amount (not to exceed 2% of the participant's compensation) equal to 50% of the
participant's deposits in excess of 4% of his or her compensation. In the case
of employees who are classified as highly compensated pursuant to applicable
Treasury releases (those earning over $80,000 for 1997), such employees'
permissible contributions may be reduced further and the amount of the
employer's matching contributions may be limited if certain nondiscrimination
tests set forth in the Code are not achieved. A participant is entitled to
receive his or her entire FSSP account, to the extent it has become vested, upon
retirement or earlier termination of employment with the Company.
Benefits under the FSSP are intended to supplement benefits under the
Company's related retirement plan, which is a defined benefit plan. Although
deposits to the FSSP do not comprise part of the retirement plan's trust (except
for transfers of assets made at the request of a participant in connection with
a distribution, as described below), the extent of an employee's participation
in the Retirement Fund of the FSSP will affect the amount of such employee's
benefit under the related retirement plan. The employee's contribution to the
FSSP of 2% to 4% of his or her gross earnings causes the employee (if eligible
to participate in the Company's retirement plan) to become eligible to accrue
benefits under such retirement plan. Covered compensation for purposes of both
the retirement plans and the FSSP Retirement Fund is aggregate cash compensation
including bonuses and commissions but would, in the case of Messrs. Brann,
Keane, Ohanian, and Roberts be limited to $160,000 pursuant to provisions of the
Code.
The amount of a participant's annual retirement benefit at his or her normal
retirement date (generally age 65) under the Company's defined benefit
retirement plan is the higher of (A) 60% of the participant's deposits to the
Retirement Fund of the FSSP (during the entire period of his or her employment)
or (B) 85% of such deposits minus 75% of the participant's estimated Social
Security primary benefit at age 65, with adjustments in the amount of the
benefit to take into account factors such as age at retirement, degree of
vesting, and form of benefit selected. In the case of Company employees who
transferred directly from Western Atlas to the Company, contributions to the
Retirement Fund of the similar plan sponsored by Western Atlas will be included
in the computation of a participant's total deposits for purposes of the formula
set forth above. The annual retirement benefit at normal retirement age is
reduced by the actuarial equivalent of lump sum distributions made (at the
request of the participant) of the participant's Retirement Fund account in the
FSSP. Should a participant wish to receive the entire benefit described in the
formula set forth above, the participant may direct that his or her Retirement
Fund balance consisting of deposits with earnings be transferred to the
retirement plan trust.
26
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
RESTORATION PLAN. The limitations in the Code establishing the 401(k)
Maximum Amount cause certain participants in the FSSP to lose Company-provided
benefits which they could otherwise have derived from the deposit of a full 8%
of their covered compensation to the FSSP. Consequently, the Company has adopted
a noncontributory and unfunded plan (the "Restoration Plan") designed to restore
the approximate amount of lost employer-provided benefits to those employees who
participate in the FSSP to the fullest extent permitted by the applicable Code
provisions but who are unable (as a result of the 401(k) Maximum Amount
limitation) to contribute 8% of their compensation to the FSSP. Such lost
employer-provided benefits which are restored under this plan consist of (i) all
or part of the 50% matching contribution to the investment fund account of the
FSSP participant and (ii) except in the case of Mr. Brann, who participates in a
supplemental contractual arrangement (as described below), a portion of the full
benefit under the Company's retirement plan if the participant's contributions
to the FSSP Retirement Fund are limited to less than 4% of his or her
compensation. Amounts that would have been deposited to the employee's
Retirement Fund account by the employee and to his or her investment fund
account by the Company are projected with interest to the participant's normal
retirement date. Based upon these amounts, the participant's lost benefits from
the Company's retirement plan and lost Company contributions to the investment
fund are determined and converted to, and payable upon the participant's
retirement as, a single life annuity if the participant is unmarried at such
time or as a 100% joint and survivor annuity if the participant is then married.
No retirement benefit is payable under the Restoration Plan until the retired
employee has reached the age of 62.
SUPPLEMENTAL ARRANGEMENT FOR MR. BRANN. In addition to the FSSP, the
related retirement plan, and the Restoration Plan, the Company has a
noncontributory and unfunded supplemental contractual arrangement (the
"Supplemental Arrangement") designed to provide additional retirement benefits
to Mr. Brann. If Mr. Brann retires on or after age 65 following 25 years of
service with the Company (including prior service with Western Atlas and
Litton), his annual benefit (computed as a single life annuity) under the
Supplemental Arrangement is 55% of his final average compensation, less amounts
payable to Mr. Brann under Social Security and less that portion of pension
benefits deemed to have been provided by the employer's (as opposed to Mr.
Brann's) contributions which would have been received by Mr. Brann under any
other retirement plan sponsored by the Company, Western Atlas or Litton if he
was eligible to participate and had participated at all times in any such plan
to the maximum extent permitted (regardless of the degree of actual
participation). Final average compensation means one-third of covered cash
compensation (including salary and bonus) deemed to have been awarded to or
received by Mr. Brann during any three periods of 12 consecutive months
specified by Mr. Brann occurring during the 60-month period preceding his
retirement. Salary is deemed to have been received when paid and bonuses are
deemed to have been received when determined and awarded to Mr. Brann by the
Compensation Committee, regardless of when paid. For purposes of the
Supplemental Arrangement, Mr. Brann had 24 credited years of service at March
16, 1998.
If Mr. Brann's employment is terminated before he has completed 25 years of
service or attained the age of 65, then the percentage of 55% referred to above
is reduced in accordance with a schedule relating to age and length of service;
however, payment of retirement benefits to Mr. Brann under the Supplemental
Arrangement will, in no event, commence until he reaches age 62. The
Supplemental Arrangement also provides for certain salary continuation payments
in the event of Mr. Brann's disability and certain survivors' benefits in the
event of his death while employed by the Company and prior to the commencement
of the payment of retirement benefits.
The following table indicates the approximate annual combined benefit which
would be received by Mr. Brann representing the sum of (a) the benefit under the
Company's basic retirement plan deemed to
27
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
have been provided by the employer's contributions and (b) the benefit under the
Supplemental Arrangement, based on the following assumptions: (i) participation
in the voluntary retirement plans to the maximum extent permitted during the
entire period of Mr. Brann's employment, (ii) retirement at age 65, and (iii)
election of the benefit in the form of a single life annuity.
PENSION PLAN TABLE
[Download Table]
YEARS OF SERVICE
------------------------------------
REMUNERATION 15 20 25 OR MORE
------------- ---------- ---------- ------------
$ 1,200,000 $ 420,000 $ 570,000 $ 660,000
1,400,000 490,000 665,000 770,000
1,600,000 560,000 760,000 880,000
1,800,000 630,000 855,000 990,000
2,000,000 700,000 950,000 1,100,000
Although, as indicated above, the amount of such combined benefit would be
reduced by Mr. Brann's Social Security primary benefit, the foregoing table does
not give effect to such offset. Covered compensation under the Supplemental
Arrangement is aggregate cash compensation, including salary and bonus, actually
paid to Mr. Brann during the fiscal year. Since Mr. Brann received incentive
awards from Western Atlas and the Company payable in installments, and since a
portion of Mr. Brann's bonus awarded by Western Atlas and the Company for fiscal
1997 was not paid during 1997, the cash compensation paid to Mr. Brann during
1997 was $1,654,986, rather than the amount shown in the Summary Compensation
Table.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. Messrs. Keane, Ohanian, and Roberts
participate in the Company's Supplemental Executive Retirement Plan, an unfunded
plan which provides additional retirement benefits to key executive employees
designated by the Compensation Committee of the Board after nomination by the
Chief Executive Officer. A participant in this plan does not ordinarily vest in
a retirement benefit until reaching the age of 60 and completing 15 years of
service following the participant's 40th birthday and may not ordinarily begin
receiving a retirement benefit thereunder until reaching age 62. Under this plan
a participant's annual retirement benefit is the actuarial equivalent, as of the
age of the participant at retirement, of the following computation (a) 1.6% of
"average earnings" of the participant up to $125,000 (which amount is adjusted
annually for inflation) plus (b) 2.2% of "average earnings" in excess of such
amount, the sum of (a) plus (b) then being multiplied by the participant's
number of years of service (not to exceed 25) following the participant's 40th
birthday. Average earnings for purposes of this plan is the average of base
salary and bonus awarded by the Company to the participant in the three periods
of 12 consecutive months in which the participant's compensation was highest
during the final 60 months of the participant's employment. There is offset from
the benefit calculated in the manner described above the participant's Social
Security primary benefit as well as all amounts of "Company-provided" retirement
benefit which the participant receives (or could have received assuming full
participation at all times of eligibility) under other retirement plans
sponsored by the Company. For purposes of this plan, at March 16, 1998, Mr.
Roberts had 23 credited years of service, Mr. Keane had 2 credited years of
service, and Mr. Ohanian had 24 credited years of service.
The following table indicates the approximate combined annual retirement
benefit which would be received by a participant in this plan representing the
sum of (a) the Company-provided benefit under the Company's basic retirement
plan; (b) the benefit under the Restoration Plan; and (c) the benefit under the
Supplemental Executive Retirement Plan based on retirement at age 65, full
participation at all relevant
28
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
times in the basic retirement plans, and election of a benefit in the form of a
single life annuity. The table does not give effect to the offset of the
participant's Social Security benefit.
PENSION PLAN TABLE
[Download Table]
YEARS OF SERVICE
------------------------------------
REMUNERATION 15 20 25 OR MORE
------------- ---------- ---------- ------------
$ 600,000 $ 176,864 $ 235,819 $ 294,774
800,000 242,864 323,819 404,774
1,000,000 308,864 411,819 514,774
1,200,000 374,864 499,819 624,774
In addition to retirement benefits, certain benefits are payable under this
plan in the event of the death or disability of the participant. In the event of
a change of control of the Company, a participant is immediately vested in the
retirement benefit and is entitled to receive a lump sum payment equal to the
actuarial equivalent, as of the age of the participant on the date of the change
of control of the Company, of the retirement benefit which would have been
payable at age 65, unless the committee which then administers the plan elects
to defer such lump sum payment.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors of UNOVA, Inc. was
constituted on November 6, 1997, at the first meeting of the Board following the
spinoff of UNOVA to the shareholders of Western Atlas Inc. The Committee held
its first meeting on the same day.
Because ten months of UNOVA's fiscal year had already passed at the time the
Committee was established, most of the critical decisions with respect to the
compensation of the executive officers of UNOVA for the 1997 fiscal year had
been made by the Compensation Committee of Western Atlas. In addition, certain
other long-range compensation plans and policies for UNOVA were formulated prior
to the formation of the Committee, as contemplated in an agreement between
Western Atlas and UNOVA relating to the spinoff. For example, the UNOVA, Inc.
1997 Stock Incentive Plan had been adopted prior to the spinoff and Change of
Control Employment Agreements with several officers had been concluded.
The UNOVA Compensation Committee also was not involved in setting the level
of the base salary of the UNOVA executive officers for 1997. The Committee
intends to study the present base compensation levels of the UNOVA executive
officers with a view toward determining if any adjustments to these compensation
levels (including any annual raises that may be granted during fiscal 1998) are
appropriate.
The Committee's chief responsibilities for compensation awarded for or
during fiscal 1997 were with respect to certain bonus awards, or portions
thereof, and the initial grant of UNOVA stock options under the UNOVA 1997 Stock
Incentive Plan. The actions taken on these matters are discussed below.
CASH BONUS AWARDS
With respect to those executive officers of UNOVA who were members of the
corporate headquarters staff of Western Atlas prior to the spinoff, the Western
Atlas Compensation Committee determined that, since such individuals had devoted
their time to the success of both the industrial automation systems businesses
spun off as UNOVA and the oilfield services businesses of Western Atlas, it was
appropriate that certain awards be made to these individuals by the Western
Atlas Compensation Committee prior to the spinoff since the Western Atlas
Committee was familiar with the qualifications and achievements of those
individuals. This Committee firmly concurs with that decision.
29
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
The Western Atlas Compensation Committee determined that, as of June 30,
1997, Western Atlas was meeting its business plan and the plan to establish
UNOVA as an independent public company was proceeding smoothly and on schedule.
Accordingly, the Western Atlas Compensation Committee determined to award the
maximum potential bonuses, based on stipulated percentages of base salary, which
these individuals could have received under the Western Atlas 1995 Incentive
Compensation Plan, prorated for the ten months of the fiscal year which preceded
the spinoff.
With respect to such executive officers, our task was to determine whether
an additional bonus for the final two months of the 1997 year should be awarded,
and, if so, in what amount. The Committee did not believe it appropriate to base
any award solely on the results of either the entire fiscal year performance of
Western Atlas or the two months of performance following the spinoff of UNOVA
because they were not entirely appropriate measures of performance of these
particular individuals during an extraordinary year. Rather, we reviewed the
basis of the determination by the Western Atlas Compensation Committee to make
the pro-rated awards and gave particular attention to the contributions and
extraordinary efforts of these individuals toward the successful establishment
of UNOVA as an independent public company. On this basis we determined that each
of such executive officers should be awarded the remaining pro-rated amount (for
the final two months of 1997) of the maximum potential bonuses previously
determined by the Western Atlas Compensation Committee.
Based on these premises, Mr. Brann was awarded an additional bonus amount of
$147,000 and the three other executive officers who were members of the
corporate headquarters staff were awarded additional bonuses totaling $122,823
for the 1997 fiscal year. These additional bonus amounts were payable in a
single installment in February 1998, subject to the election of the recipient to
defer payment.
With respect to the executive officers associated with the Company's two
business segments, this Committee determined that the performance of the
segments for the entire fiscal year was an appropriate measure. Accordingly, we
examined the extent to which the performance goals previously established under
the Western Atlas 1995 Plan as applicable to these individuals had been met.
In the case of the executive officer responsible for the Industrial
Automation Systems segment, the performance goals were achieved at a level of
97.5%. After consideration of the performance of this business segment, we
determined to award this executive officer the maximum potential bonus that he
would have received had he participated in the Western Atlas 1995 Plan for the
entire year.
With respect to the Automated Data Systems segment, we took into
consideration two factors in determining the level of bonus to award--the
performance during 1997 of this segment as constituted at the beginning of the
fiscal year and the integration of two major acquisitions into the segment
during the year. Based on these factors, we determined to award the executive
officer associated with this business segment the bonus that would have been
payable if the performance goals previously established under the Western Atlas
1995 Plan were met at the level which would have entitled him to receive 50% of
his maximum potential bonus.
STOCK OPTIONS
The Compensation Committee of Western Atlas provided us with detailed
recommendations for initial grants to be made under the UNOVA 1997 Stock
Incentive Plan. We studied their recommendations in detail, which were based on
that Committee's methodology utilized in prior stock option awards at Western
Atlas, the methodology utilized with respect to the first Western Atlas option
grant following the earlier spinoff of Western Atlas by Litton Industries, Inc.,
and an extensive report prepared by an independent national compensation
consulting firm which considered stock-based compensation at 19 competitors of
UNOVA for executive officers with similar responsibilities.
The methodology ordinarily used by the Western Atlas Compensation Committee
in granting stock options was based on a range of potential share quantities, in
the case of each executive officer, with the value of the grants based upon a
multiple of base salary, subject to the Committee's qualitative assessment
30
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
of each individual's performance. We set multiples of base salary for executive
officers of UNOVA in a range of 5.6 to 12.9.
This Committee was satisfied that these recommendations were prepared with
considerable care and with the clear objective of allowing UNOVA to be
competitive in regard to stock-based compensation.
In concurrence with the recommendations of the Western Atlas Compensation
Committee, this Committee awarded to executive officers as a group options to
purchase an aggregate of 985,000 shares of UNOVA Common Stock at a price per
share of $18.875, the fair market value on November 6, 1997, the date of grant.
Of these options, Mr. Brann received options to purchase 500,000 shares,
representing somewhat less than 1% of UNOVA's outstanding stock.
OTHER MATTERS
The Committee has adopted a cash bonus plan and set performance goals and
maximum potential bonuses for the participants for fiscal 1998.
It will be the policy of the Committee that awards under this and other
incentive compensation plans of the Company will qualify for deduction under
Section 162(m) of the Internal Revenue Code. However, the Committee may
determine from time to time that certain awards that do not qualify for
deduction under the Code are appropriate.
THE COMPENSATION COMMITTEE
Orion L. Hoch, Chair
Stephen E. Frank
Steven B. Sample
William D. Walsh
31
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the percentage change in the
cumulative total shareholder return on UNOVA Common Stock with the cumulative
total return of the Standard & Poor's Midcap 400 Index and a composite
line-of-business index designed to reflect the mix of the Company's business
segments for the period beginning October 22, 1997, which was the date "when
issued" trading commenced in UNOVA Common Stock on the New York Stock Exchange,
and ending December 31, 1997. The composite line-of-business index was prepared
by combining the Standard & Poor's 400 Electrical Equipment Index, believed by
management to comprise companies reasonably comparable to UNOVA's Automated Data
Systems segment, and the Standard & Poor's 400 Manufacturing (Specialized)
Index, believed by management to comprise companies reasonably comparable to
UNOVA's Industrial Automation Systems segment. Each of these two indexes was
weighted based on relative sales and asset levels of the Company's business
segments. The graph assumes the investment of $100 on October 22, 1997, in UNOVA
Common Stock, in the S&P Midcap 400 Index, and in the composite line-of-business
index prepared as described above. Total shareholder return was calculated on
the basis that in each case all dividends were reinvested.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
[Download Table]
COMPOSITE LINE- S&P MIDCAP
UNOVA, INC OF-BUSINESS INDEX 400 INDEX
10/22/97 $100 $100 $100
12/31/97 83.76 93.14 98.83
32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BY MANAGEMENT
The following table sets forth the number of shares of Company Common Stock
beneficially owned directly or indirectly, by each director, each Named
Executive Officer, and all directors and executive officers as a group as of
March 16, 1998. Except as otherwise indicated, each individual named has sole
investment and voting power with respect to the securities shown.
[Enlarge/Download Table]
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP CLASS
--------------------------------------------------------------------------------- ------------------- -------------
Alton J. Brann................................................................... 20,245 (a)
Stephen E. Frank................................................................. 2,730(b) (a)
Orion L. Hoch.................................................................... 102,187(c) (a)
Michael E. Keane................................................................. 14,751 (a)
Michael Ohanian.................................................................. 2,473 (a)
Norman L. Roberts................................................................ 8,716 (a)
Steven B. Sample................................................................. 1,169(d) (a)
William D. Walsh................................................................. 60,000 (a)
Clayton A. Williams.............................................................. 2,258(e) (a)
All directors and executive officers (11 persons)................................ 296,887(f) (a)
------------------------
(a) Less than 1%.
(b) Includes 730 shares of phantom Common Stock credited to Mr. Frank's deferred
account under the Director Stock Option and Fee Plan.
(c) Includes 1,080 shares owned by Dr. Hoch's wife, as to which shares Dr. Hoch
disclaims beneficial ownership, and 730 shares of phantom Common Stock
credited to Dr. Hoch's deferred account under the Director Stock Option and
Fee Plan.
(d) Includes 669 shares of phantom Common Stock credited to Dr. Sample's
deferred account under the Director Stock Option and Fee Plan.
(e) Mr. Williams has advised the Company that he shares with his spouse voting
power and investment power with respect to such shares of Common Stock.
(f) Includes 48,500 shares of Common Stock held by The UNOVA Foundation (the
"Foundation"). Voting power and investment power with respect to these
shares are exercised by the Foundation's officers, who are elected by the
directors of the Foundation. The Foundation's directors are elected by, and
may be removed by, the Board of Directors of the Company. The officers of
the Foundation share voting power with respect to such shares of Common
Stock held by the Foundation, and one officer of the Foundation, who is also
an executive officer of the Company, has sole investment power with respect
to such shares. Thus such officers may be deemed to have incidents of
beneficial ownership thereof for certain purposes within the meaning of the
SEC regulations referred to above. Also includes 31,475 shares of Common
Stock held by the UNOVA Master Pension Trust, a trust organized to hold the
assets of certain qualified U.S. pension plans. Voting and investment power
with respect to these shares are exercised by a committee appointed by the
Board of Directors comprising four officers of the Company.
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(CONTINUED)
BY OTHERS
The following table sets forth each person or entity that as of December 31,
1997, reported beneficial ownership of more than 5% of the Company Common Stock
outstanding on such date except that Perry Corp. and Richard C. Perry reported
the acquisition on February 24, 1998, of more than 5% of the Company Common
Stock.
[Enlarge/Download Table]
AMOUNT AND NATURE PERCENT
OF BENEFICIAL OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS
------------------------------------------------------------------------------------ ------------------ -----------
Unitrin, Inc........................................................................ 12,657,764(a) 23.2%
One East Wacker Drive
Chicago, IL 60601
The Capital Group Companies, Inc.................................................... 4,112,400(b) 7.5%
333 South Hope Street
Los Angeles, CA 90071
Merrill Lynch & Co., Inc............................................................ 5,494,000(c) 10.1%
World Financial Center
North Tower
250 Vesey Street
New York, NY 10281
Dodge & Cox......................................................................... 3,487,753(d) 6.4%
One Sansome Street, 35th Floor
San Francisco, CA 94104
Perry Corp. and Richard C. Perry ................................................... 3,238,900(e) 5.9%
599 Lexington Avenue
New York, NY 10022
--------------------------
(a) Unitrin, Inc. ("Unitrin"), has reported in a filing on Schedule 13D under
the Exchange Act that these shares are owned by two of its subsidiaries,
Trinity Universal Insurance Company (7,206,776 shares) and United Insurance
Company of America (5,450,988 shares). Unitrin and each of such subsidiaries
reported that each such subsidiary shared voting power and dispositive power
with Unitrin with respect to the shares so owned. Based upon the foregoing,
Unitrin may be deemed to be the indirect beneficial owner of such 12,657,764
shares.
(b) In a filing on Schedule 13G under the Exchange Act, The Capital Group
Companies, Inc., stated that it has sole voting power with respect to 600
shares and sole dispositive power with respect to 4,112,400 shares of
Company Common Stock. The Capital Group Companies, Inc., has advised the
Company that 4,111,800 of such shares are beneficially owned by its wholly
owned subsidiary Capital Research and Management Company, which acts as
investment adviser to various investment companies. The Capital Group
Companies, Inc. disclaims beneficial ownership of these shares.
(c) In a filing on Schedule 13G under the Exchange Act, Merrill Lynch & Co.,
Inc. stated that it held shared voting power and shared dispositive power
with respect to 5,494,000 shares of Company Common Stock. The filing further
discloses that the beneficial owner of more than 5% of the outstanding
shares of Company Common Stock as of December 31, 1997, is a registered
investment company advised by Merrill Lynch Asset Management known as
Merrill Lynch Growth Fund. Merrill Lynch & Co. and various of its affiliates
disclaim beneficial ownership of the shares reported.
(d) In a filing on Schedule 13G under the Exchange Act, Dodge & Cox stated that
it has sole voting power with respect to 3,143,903 shares, shared voting
power with respect to 47,100 shares, and sole dispositive power with respect
to 3,487,753 shares. Dodge & Cox has reported that such shares are
beneficially owned by clients of such firm, including investment companies,
pension funds, and other institutional holders.
(e) In a joint filing on Schedule 13G under the Exchange Act by Richard C. Perry
and Perry Corp., Perry Corp. is described as a private investment firm of
which Richard C. Perry is the president and sole stockholder. The joint
filers state that they have sole voting power and sole dispositive power
with respect to 3,238,900 shares of Company Common Stock.
34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT
Edward J. Borey, a Vice President of the Company and Chief Operating Officer
of the Company's Automated Data Systems Group, relocated his office from
Fairfield, Ohio, to Everett, Washington, in September 1997 to assume the
position of Senior Vice President and Chief Operating Officer of Intermec
Technologies Corporation ("Intermec"), a subsidiary of the Company. To
facilitate such relocation, Intermec has purchased Mr. Borey's former residence
in Centerville, Ohio, for a purchase price of $350,000. Such purchase price was
determined by the Company's corporate director of real estate after comparing
the results of the reports of three independent real estate appraisers engaged
by the Company.
In connection with such purchase, Intermec has agreed that such residence
shall be offered for sale for a period of at least 90 days for a sales price not
less than $350,000. Should Intermec sell such residence for a gross sales price
which exceeds $350,000, the amount of gross proceeds in excess of $350,000 shall
be paid to Mr. Borey. Any loss incurred by Intermec in connection with the
purchase and sale of such residence shall be borne by Intermec.
CERTAIN BUSINESS RELATIONSHIPS
Alton J. Brann, Chairman and Chief Executive Officer of the Company, is also
a director and non-executive Chairman of Western Atlas, and Orion L. Hoch is a
director of both the Company and Western Atlas. In addition, Mr. Brann and five
additional executive officers of the Company served as executive officers of
Western Atlas during the first ten months of fiscal 1997, when the Company's
businesses were a part of Western Atlas. During this period the Company had
outstanding indebtedness to Western Atlas, of which the largest aggregate amount
outstanding at any one time during 1997 was $230 million.
Immediately prior to the distribution of the Common Stock of the Company to
the shareholders of Western Atlas on October 31, 1997, the Company paid a
dividend of $230 million to Western Atlas. The Company and Western Atlas entered
into a Distribution and Indemnity Agreement which, together with certain related
agreements, governs the relationship between Western Atlas and the Company with
respect to or in consequence of the Distribution, including the treatment of
employee benefit plan matters and liability for federal income and other taxes.
Pursuant to such agreements, the Company has received $480,000 from Western
Atlas subsequent to October 31, 1997.
INDEBTEDNESS OF MANAGEMENT
As a form of additional incentive for its key employees, the Company
provides loans to certain such employees located in the United States. Under
such program, loans in the aggregate principal amount of $1,751,000 were
outstanding at March 16, 1998, to six executive officers of the Company, as
follows: Edward J. Borey, $100,000; Alton J. Brann, $616,000; Charles A.
Cusumano, $225,000; Michael E. Keane, $275,000; Norman L. Roberts, $255,000; and
Clayton A. Williams, $280,000. These loans are unsecured, currently bear
interest at the rate of 4% per annum, and are payable on the Company's demand,
but, in any event, not later than the earlier of (i) termination of the
borrower's employment with the Company or any subsidiary thereof, or (ii)
December 31, 2002. The foregoing amounts represent the largest amount of
indebtedness of each such executive officer and present executive officers as a
group under such loan program outstanding since December 31, 1996.
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
[Enlarge/Download Table]
PAGE
---------
(a)(1) Financial Statements
See Part II
(a)(2) Financial Statement Schedules *
(a)(3) Executive Compensation Plans and Arrangements 37
(b) Reports on Form 8-K
In a report filed on Form 8-K dated December 23, 1997, the Company reported the acquisition of
proprietary radio frequency identification (RFID) technology.
(c) Index to Exhibits E1
------------------------
* All schedules and notes specified under Regulation S-X are omitted because
they are either not applicable, not required or the information called for
therein appears in the consolidated and combined financial statements or
notes thereto.
36
UNOVA, INC.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
[Enlarge/Download Table]
REPORT WITH WHICH
DESCRIPTION EXHIBIT NO. EXHIBIT WAS FILED
------------------------------------------------------------------------ ----------- -------------------------------
Employee Benefits Agreement dated October 31, 1997, between Western 10.3 September 30, 1997
Atlas Inc. and UNOVA, Inc. Form 10-Q
Change of Control Employment Agreements with Alton J. Brann, Michael E. 10.5 September 30, 1997
Keane, Norman L. Roberts and certain other officers, dated as of Form 10-Q
October 31, 1997.
Employment Agreement between Intermec Corporation and Michael Ohanian, 10.6 Form 10
dated May 18, 1995, as amended.
UNOVA, Inc. Restoration Plan. 10.8 Form 10
UNOVA, Inc. Supplemental Executive Retirement Plan. 10.9 Form 10 Amendment No. 1
Supplemental Retirement Agreement between UNOVA, Inc. and Alton J. Brann 10.10 Form 10 Amendment No. 1
dated October 1997.
Employment Agreement between UNOVA, Inc. and Clayton A. Williams, dated 10.11 Form 10 Amendment No. 1
August 1997.
UNOVA, Inc. 1997 Stock Incentive Plan. 10.12 September 30, 1997
Form 10-Q
UNOVA, Inc. Executive Severance Plan. 10.13 September 30, 1997
Form 10-Q
Form of Promissory Notes in favor of the Company given by certain 10.14 September 30, 1997
officers and key employees. Form 10-Q
Board resolution dated September 24, 1997 establishing the UNOVA, Inc. 10.15 September 30, 1997
Incentive Loan Program. Form 10-Q
UNOVA, Inc. Management Incentive Compensation Plan 10.16 December 31, 1997
Form 10-K
UNOVA, Inc. Executive Survivor Benefit Plan 10.17 December 31, 1997
Form 10-K
Amendment No. 1 to Employment Agreement between Intermec Corporation and 10.18 December 31, 1997
Michael Ohanian, dated February 28, 1997. Form 10-K
Amendment No. 2 to Employment Agreement between Intermec Technologies 10.19 December 31, 1997
Corporation and Michael Ohanian, dated February 28, 1998. Form 10-K
Amendment to Employment Agreement between UNOVA, Inc. and Clayton A. 10.20 December 31, 1997
Williams, dated March 24, 1998. Form 10-K
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNOVA, INC.
/s/ MICHAEL E. KEANE
----------------------------------------------------------------
Michael E. Keane
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
March 18, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Director, Chairman of the
/s/ ALTON J. BRANN Board
------------------------------ and Chief Executive March 18, 1998
Alton J. Brann Officer
/s/ STEPHEN E. FRANK
------------------------------ Director March 18, 1998
Stephen E. Frank
/s/ ORION L. HOCH
------------------------------ Director March 18, 1998
Orion L. Hoch
/s/ STEVEN B. SAMPLE
------------------------------ Director March 18, 1998
Steven B. Sample
/s/ WILLIAM D. WALSH
------------------------------ Director March 18, 1998
William D. Walsh
/s/ CHARLES A. CUSUMANO Vice President, Finance
------------------------------ (Chief Accounting March 18, 1998
Charles A. Cusumano Officer)
38
UNOVA, INC.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated and combined financial statements of UNOVA, Inc. and
subsidiaries and related financial information included in this Annual Report,
have been prepared by the Company, whose management is responsible for their
integrity. These statements, which necessarily reflect estimates and judgments,
have been prepared in conformity with generally accepted accounting principles.
The Company maintains a system of internal controls to provide reasonable
assurance that assets are safeguarded and transactions are properly executed and
recorded. As part of this system, the Company has an internal audit staff to
monitor the compliance with and the effectiveness of established procedures.
The consolidated and combined financial statements have been audited by
Deloitte & Touche LLP, independent auditors, whose report appears on page F-2.
The Audit and Compliance Committee of the Board of Directors, which consists
solely of directors who are not employees of the Company, meets periodically
with management, the independent auditors and the Company's internal auditors to
review the scope of their activities and reports relating to internal controls
and financial reporting matters. The independent and internal auditors have full
and free access to the Audit and Compliance Committee and meet with the
Committee both with and without the presence of Company management.
/s/Michael E. Keane
Michael E. Keane
Senior Vice President and
Chief Financial Officer
March 11, 1998
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
UNOVA, Inc.
Beverly Hills, California
We have audited the accompanying consolidated and combined balance sheets of
UNOVA, Inc. and subsidiaries (as described in Note A) as of December 31, 1997
and 1996, and the related consolidated and combined statements of operations,
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, such consolidated and combined financial statements present
fairly, in all material respects, the financial position of UNOVA, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the 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.
Deloitte & Touche LLP
Los Angeles, California
March 11, 1998
F-2
UNOVA, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Sales and Service Revenues.............................................. $ 1,426,247 $ 1,164,682 $ 942,852
------------ ------------ ------------
Costs and Expenses
Cost of sales......................................................... 981,380 841,820 669,279
Selling, general and administrative................................... 324,405 218,672 194,069
Depreciation and amortization......................................... 40,672 27,043 26,116
Acquired in-process research and development charges.................. 211,500
Interest, net......................................................... 16,689 7,111 9,347
------------ ------------ ------------
Total Costs and Expenses............................................ 1,574,646 1,094,646 898,811
------------ ------------ ------------
Earnings (Loss) before Taxes on Income.................................. (148,399) 70,036 44,041
Taxes on Income......................................................... (22,968) (28,014) (17,837)
------------ ------------ ------------
Net Earnings (Loss)..................................................... $ (171,367) $ 42,022 $ 26,204
------------ ------------ ------------
------------ ------------ ------------
Basic and Diluted Earnings (Loss) per Share............................. $ (3.17) $ .78 $ .49
------------ ------------ ------------
------------ ------------ ------------
See accompanying notes to consolidated and combined financial statements.
F-3
UNOVA, INC.
CONSOLIDATED AND COMBINED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
[Enlarge/Download Table]
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents........................................................... $ 13,685 $ 149,467
Accounts receivable, net of allowance for doubtful accounts
of $19,719 (1997) and $5,124 (1996)............................................... 448,079 394,572
Inventories, net of progress billings............................................... 150,537 94,452
Deferred tax assets................................................................. 106,694 53,636
Other current assets................................................................ 30,072 3,664
------------ ------------
Total Current Assets.............................................................. 749,067 695,791
Property, Plant and Equipment, Net.................................................... 157,680 132,508
Goodwill and Other Intangibles, Net of Accumulated Amortization
of $54,266 (1997) and $42,095 (1996)................................................ 366,098 178,810
Other Assets.......................................................................... 83,513 66,684
------------ ------------
Total Assets.......................................................................... $ 1,356,358 $ 1,073,793
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities
Accounts payable.................................................................... $ 311,759 $ 242,168
Payrolls and related expenses....................................................... 72,909 50,567
Notes payable and current portion of long-term obligations.......................... 86,645 27,461
Due to Western Atlas Inc............................................................ 109,574
------------ ------------
Total Current Liabilities......................................................... 471,313 429,770
------------ ------------
Long-term Obligations................................................................. 216,938 14,507
------------ ------------
Deferred Tax Liabilities.............................................................. 22,918 22,727
------------ ------------
Other Long-term Liabilities........................................................... 55,700 32,281
------------ ------------
Commitments and Contingencies
Shareholders' Investment
Preferred stock (50,000,000 shares authorized)......................................
Common stock (54,510,193 shares outstanding)........................................ 545
Additional paid-in capital.......................................................... 603,743
Accumulated deficit................................................................. (8,041)
Cumulative currency translation adjustment.......................................... (6,758)
Investment by Western Atlas Inc..................................................... 574,508
------------ ------------
Total Shareholders' Investment.................................................... 589,489 574,508
------------ ------------
Total Liabilities and Shareholders' Investment $ 1,356,358 $ 1,073,793
------------ ------------
------------ ------------
See accompanying notes to consolidated and combined financial statements.
F-4
UNOVA, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
----------- ----------- ----------
Cash and Cash Equivalents at Beginning of Year.............................. $ 149,467 $ 103,501 $ 29,190
----------- ----------- ----------
Cash Flows from Operating Activities:
Net earnings (loss)....................................................... (171,367) 42,022 26,204
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities (net of acquisitions):
Acquired in-process research and development charges.................... 211,500
Depreciation and amortization........................................... 40,672 27,043 26,116
Deferred taxes.......................................................... 2,162 (9,803) 7,519
Change in pensions...................................................... (11,217) (6,983) (7,772)
Change in accounts receivable........................................... 39,752 (142,159) 47,712
Change in inventories................................................... (9,167) 21,986 (19,613)
Change in other current assets.......................................... (12,540) (804) 4,012
Change in accounts payable.............................................. (53,830) 73,701 (11,572)
Change in payrolls and related expenses................................. 6,238 (2,382) (99)
Other operating activities.............................................. (1,247) 6,537 6,519
----------- ----------- ----------
Net cash provided by operating activities............................. 40,956 9,158 79,026
----------- ----------- ----------
Cash Flows from Investing Activities:
Acquisition of businesses net of cash acquired............................ (400,754) (2,284)
Capital expenditures...................................................... (30,310) (22,541) (23,944)
Investment in unconsolidated companies.................................... (8,500) (3,632)
Investment in radio frequency identification technology................... (8,200)
Proceeds from sale of businesses.......................................... 31,100
Other investing activities................................................ 7,117 1,049 775
----------- ----------- ----------
Net cash (used in) provided by investing activities..................... (440,647) 9,608 (29,085)
----------- ----------- ----------
Cash Flows from Financing Activities:
Short-term obligations, net............................................... 243,938 3,818 (20,848)
Dividend paid to Western Atlas Inc........................................ (230,000)
Net transactions with Western Atlas Inc................................... 190,338 25,747 38,195
Change in due to Western Atlas Inc........................................ 120,426 (2,855) (352)
Repayment of borrowings................................................... (62,847) (649)
Other financing activities................................................ 2,054 1,139 7,375
----------- ----------- ----------
Net cash provided by financing activities............................... 263,909 27,200 24,370
----------- ----------- ----------
Resulting in (Decrease) Increase in Cash and Cash Equivalents............... (135,782) 45,966 74,311
----------- ----------- ----------
Cash and Cash Equivalents at End of Year.................................... $ 13,685 $ 149,467 $ 103,501
----------- ----------- ----------
----------- ----------- ----------
See accompanying notes to consolidated and combined financial statements.
F-5
UNOVA, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
GENERAL INFORMATION. UNOVA, Inc. ("UNOVA" or the "Company") became an
independent public company on October 31, 1997 (the "Distribution Date"), when
all of the UNOVA common stock was distributed to holders of common stock of
Western Atlas Inc. ("WAI"), in the form of a dividend (the "Distribution").
Every WAI shareholder of record on October 24, 1997 was entitled to receive one
share of UNOVA common stock for each WAI share of common stock held of record.
NATURE OF OPERATIONS. UNOVA is an industrial technologies company providing
global customers with solutions for improving their efficiency and productivity.
The Automated Data Systems business segment is comprised of automated data
collection ("ADC") and mobile computing products and services, principally
serving the industrial market. Customers are the global distribution and
transportation companies, food and beverage operations, manufacturing
industries, health care providers and government agencies. The Industrial
Automation Systems business segment includes integrated manufacturing systems,
body welding and assembly systems, and precision grinding and abrasives
operations, primarily serving the worldwide automotive, off-road and diesel
engine manufacturing industries.
PRINCIPLES OF CONSOLIDATION AND COMBINATION. The consolidated and combined
financial statements include those of the Company, its subsidiaries and
companies in which UNOVA has a controlling interest. Investments in companies
over which UNOVA has influence but not a controlling interest are accounted for
using the equity method. Investments in other companies are carried at cost. All
material intercompany transactions have been eliminated.
The combined financial statements for all periods presented prior to the
Distribution Date include the historical accounts and operations of the former
WAI businesses that now comprise the Company. They include, at their historical
amounts, the assets, liabilities, revenues and expenses directly related and
those allocated to the businesses that now comprise the Company's operations.
A pro rata share of certain general and administrative corporate costs
incurred by WAI have been allocated to the Company based on the relative ratio
of such projected costs to be incurred by WAI and the Company individually. Such
costs include general management, legal, tax, treasury, insurance, financial
audit, financial reporting, human resources and real estate services.
The Company's historical debt includes an allocation of a portion of WAI's
corporate debt, based on the Company's estimated past capital requirements.
Interest expense related thereto has been included in the Company's statements
of operations at WAI's estimated blended historical rate of interest on long-
term borrowings of 7.5%.
Management believes the above stated allocations were made on a reasonable
basis; however, they do not necessarily reflect the results of operations which
would have occurred had the Company been an independent entity nor are they
necessarily indicative of future expenses or income (see Note J).
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses for each reporting period. Actual
results could differ from those estimates.
EARNINGS PER SHARE. In December 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), EARNINGS PER
SHARE, which replaces the presentation of primary earnings per share with a
presentation of basic earnings per share based upon the weighted
F-6
NOTE A: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
average number of common shares for the period. It also requires dual
presentation of basic and diluted earnings per share of companies with complex
capital structures. Under the provisions of SFAS 128, basic and diluted earnings
per share amounts were the same for all periods presented in the consolidated
and combined statements of operations. The 1997 basic earnings per share
computation was based on 54,056,243 weighted average shares, while the diluted
earnings per share computation was based on 54,056,798 shares. The Company used
53,891,534 shares, the outstanding shares of WAI common stock at June 30, 1997,
to calculate both basic and diluted earnings per share in the years ended
December 31, 1996 and 1995. At December 31, 1997, Company employees and
directors held 2,504,500 options to purchase Company common stock. These options
could become dilutive in future periods if the market price of the Company's
common stock exceeds the exercise price of the outstanding options.
CASH EQUIVALENTS. The Company considers time deposits and commercial paper
purchased within three months of their date of maturity to be cash equivalents.
INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out method) or market.
REVENUE RECOGNITION. Revenues are generally recognized when products are
shipped or as services are performed. Revenues and profits on long-term
contracts associated with the Company's operations are recorded under the
percentage-of-completion method of accounting. Any anticipated losses on
contracts are charged to operations as soon as they are determinable. General
and administrative costs are expensed as incurred.
RESEARCH AND DEVELOPMENT. Research and development costs are charged to
expense as incurred. Total expenditures on research and development activities
amounted to $53.1 million, $29.7 million and $27.5 million, in the years ended
December 31, 1997, 1996 and 1995, respectively. The Company expensed a total of
$211.5 million of acquired in-process research and development in 1997. See
further discussion in Note B.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is stated at
cost. Depreciation, computed generally by the straight-line method for financial
reporting purposes, is provided over the estimated useful lives of the related
assets.
INCOME TAXES. The Company accounts for income taxes using the asset and
liability approach which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and the tax-bases of assets and liabilities. For
further discussion of accounting policies for taxes see Note G.
The Company's domestic operations and their foreign branches have been
included in WAI's consolidated tax returns (for periods prior to the
Distribution Date). Any tax benefits related to these operations have been
recorded in these financial statements if such were realizable by WAI on a
consolidated basis. Foreign entities included in these financial statements
provide taxes in accordance with local laws and regulations.
CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
and cash equivalents and trade receivables. The Company places its cash and cash
equivalents with high credit quality institutions and limits the amount of
credit exposure with any one institution. Concentrations of credit risk with
respect to trade receivables are limited because a large number of
geographically diverse customers make up the Company's customer base, thus
spreading the trade credit risk. The Company evaluates the creditworthiness of
its customers and maintains an allowance for anticipated losses.
F-7
NOTE A: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A different automotive industry customer was significant to the Company's
revenues in each of the three years ended 1997. One customer represented 13% of
revenues in 1997, another represented 15% of revenues in 1996, and another
represented 11% of revenues in 1995.
FOREIGN CURRENCIES. The currency effects of translating the financial
statements of those non-U.S. entities of the Company which operate in local
currency environments are included in the "cumulative currency translation
adjustment" component of shareholders' investment. Currency transaction gains
and losses are included in the consolidated and combined statements of
operations and were not material for any periods presented herein.
GOODWILL AND OTHER INTANGIBLES. Goodwill is amortized on a straight-line
basis over periods ranging from 15 to 40 years. Other intangibles are amortized
on a straight-line basis over periods ranging from four to 18 years. The Company
assesses the recoverability of goodwill at the end of each fiscal year or as
circumstances warrant. Factors considered in evaluating recoverability include
management's plans for the operations to which the goodwill relates and the
historical earnings and projected undiscounted cash flows of such operations.
IMPAIRMENT OF LONG-LIVED ASSETS. The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be fully recoverable. An impairment is
recorded to write-down long-lived assets to their fair value if the undiscounted
cash flows estimated to be generated by the asset are less than its carrying
amount.
ENVIRONMENTAL COSTS. Provisions for environmental costs are recorded when
the Company determines its responsibility for remedial efforts and such amounts
are reasonably estimable.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
REPORTING COMPREHENSIVE INCOME, and No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. In February 1998, Statement of Financial
Accounting Standards No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS, was issued. These statements are effective for
financial statements issued for periods beginning after December 15, 1997. The
Company is evaluating what additional disclosures may be required upon the
implementation of SFAS Nos. 130, 131 and 132.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform to the current year presentation.
NOTE B: BUSINESS ACQUISITIONS, INVESTMENTS, AND DISPOSITIONS
ACQUISITIONS AND INVESTMENTS
The Company acquired Norand Corporation ("Norand") on March 3, 1997, and
United Barcode Industries ("UBI") on April 4, 1997. Norand designs, manufactures
and markets mobile computing systems and wireless data communications networks
using radio frequency technology. UBI is a European-based ADC company
headquartered in Sweden. These companies are currently being integrated into the
Automated Data Systems segment. Both transactions were funded by Western Atlas
borrowings and cash on hand, and have been accounted for under the purchase
method of accounting. Accordingly, the acquisition costs (approximately $280.0
million and $107.0 million for Norand and UBI, respectively) have been allocated
to the net assets acquired based upon their relative fair values. Such
allocation resulted in $203.3 million assigned to acquired in-process research
and development activities; $154.1 million assigned to goodwill (amortized over
25 years using the straight-line method); and $29.0 million assigned to other
intangibles (amortized over periods ranging from four to 18 years using the
straight-line method). During
F-8
NOTE B: BUSINESS ACQUISITIONS, INVESTMENTS, AND DISPOSITIONS (CONTINUED)
the second quarter, the Company expensed the amounts assigned to acquired
in-process research and development projects that had not yet achieved
technological feasibility in accordance with Financial Accounting Standards
Board Interpretation No. 4 ("FIN 4").
The Norand acquisition added increased knowledge and capabilities in
wireless data communication using radio frequency ("RF") technology and mobile
computing solutions for the logistics markets. In the communications area,
Norand brings advanced access point and docking station technology,
communication software, product configuration and ergonomics. This acquisition
also expands the Company's offering in the RF spread-spectrum technology. The
mobile computing technology allows the Company to enter the route accounting,
meter reading, and field service markets. Norand provides the Company with
pen-based, hand-held computers with desktop PC performance that is important to
these markets.
The UBI acquisition provides two major product line technologies: bar code
on-demand printers with labels and ribbons, and hand-held scanners. UBI's
printer technology complements the Company's existing printer offerings with
low-end, low-cost printers and high-end, high-speed printers. UBI also provides
enhanced media-handling systems, such as linerless adhesive labels and software.
The scanner technology includes scanners based on charge-coupled device ("CCD")
technology, which is an alternative to laser scanners in many applications. UBI
also brings software that improves laser scanning for one- and two-dimensional
symbologies.
In addition to the amount charged to in-process research and development,
the Company expects to expend an additional $30 million over the next three
years to develop these technologies into commercially viable products. These
expenditures include engineering labor, material costs, overhead charges, and
software development, as well as general and administrative expenses.
The allocation of the acquisition cost of Norand and UBI is preliminary and
subject to revision upon receipt of pending information, such as final
assessment of certain legal and environmental exposures and the completion of
certain appraisals. Any such revisions are not expected to have a material
impact on the Company's consolidated and combined financial statements.
The Company acquired the remaining 51% of Honsberg, a German machine tool
maker, in the second quarter of 1997. The original 49% of Honsberg was acquired
during 1995. The Company purchased the stamping, engineering and prototyping
division of Modern Prototype Company in September 1997. In December 1997, UNOVA
acquired Goldcrown Machinery, Inc., a manufacturer of precision centerless
grinding systems. Although these acquisitions are integral to the Company's
goals, they are not material in the aggregate to UNOVA's consolidated and
combined financial statements.
In December 1997, the Company acquired radio frequency identification
("RFID") technology from IBM Corporation. In connection with this acquisition,
the Company recorded a $13.0 million after-tax charge to expense acquired
in-process research and development in accordance with FIN 4 and the anticipated
loss on a related long-term contract. The Company intends to further develop
this RFID technology and in 1997 acquired 13% of Amtech Corporation ("Amtech")
in order to support such development. The Company and Amtech were unable to
agree on the structure of a proposed product development alliance and are
currently exploring other mutually agreeable means to complete the RFID
development.
F-9
NOTE B: BUSINESS ACQUISITIONS, INVESTMENTS, AND DISPOSITIONS (CONTINUED)
The fair values of Norand, UBI, Honsberg, Modern Prototype and Goldcrown
Machinery assets and liabilities at their respective acquisition dates are
presented below for supplemental cash flow disclosure purposes:
[Enlarge/Download Table]
(IN THOUSANDS OF DOLLARS)
---------------------------------------------------------------------------------
Current assets................................................................... $ 164,153
Property, plant & equipment...................................................... 29,093
Goodwill and intangibles......................................................... 201,380
Other non-current assets......................................................... 55,956
Total debt....................................................................... (84,163)
Other current liabilities........................................................ (146,724)
Other non-current liabilities.................................................... (11,642)
In-process research and development.............................................. 203,300
-----------
Purchase price................................................................... 411,353
Less cash acquired............................................................... (10,599)
-----------
Purchase price, net of cash acquired............................................. $ 400,754
-----------
-----------
The Company made acquisitions and investments during 1995, including
Cranfield Precision Engineering, a grinding technology company located in the
United Kingdom. These acquisitions are integral to the Company's goals, though
not material in the aggregate to the Company's consolidated and combined
financial statements.
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following pro forma information for the years ended December 31, 1997
and 1996 gives effect to the acquisition of Norand as if it had occurred on
January 1, 1997 and 1996, respectively.
Unaudited pro forma sales and service revenues, net earnings and earnings
per share for the year ended December 31, 1996 are $1,405.8 million, $27.9
million and $0.52, respectively, reflecting the Norand acquisition as if it had
occurred on January 1, 1996, after giving effect to certain pro forma
adjustments, including amortization of goodwill and other intangibles, and
interest associated with the increase in allocated WAI debt.
The following unaudited pro forma combined statement of operations for the
year ended December 31, 1997 has been prepared from the historical financial
statements of the Company and Norand Corporation. Norand's historical operations
for the two months ended March 1, 1997 have been combined with the Company's
operations for the year ended December 31, 1997 (which include Norand subsequent
to the acquisition date), reflecting the acquisition as if it had occurred on
January 1, 1997.
F-10
NOTE B: BUSINESS ACQUISITIONS, INVESTMENTS, AND DISPOSITIONS (CONTINUED)
The unaudited pro forma financial information is not necessarily indicative
of what the results of operations would have been if the combination had
occurred on the above-mentioned dates. Additionally, such information is not
predictive of future results of operations.
[Enlarge/Download Table]
NORAND
UNOVA HISTORICAL HISTORICAL TWO
YEAR ENDED MONTHS ENDED
DECEMBER 31, 1997 MARCH 1, 1997 ADJUSTMENTS
----------------- -------------- ---------------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Sales and Service Revenues.............................. $1,426,247 $36,798
----------------- -------
Costs and Expenses
Cost of sales......................................... 981,380 21,675
Selling, general and administrative................... 324,405 17,168
Depreciation and amortization......................... 40,672 1,932 $ 1,127(a)
In-process research and development charges........... 211,500 (203,300)(b)
Interest-net.......................................... 16,689 979 2,171(c)(d)
----------------- ------- ----------
Total Costs and Expenses............................ 1,574,646 41,754 (200,002)
----------------- ------- ----------
Earnings (Loss) before Taxes on Income.................. (148,399) (4,956) 200,002
Taxes on Income......................................... (22,968) 1,487 1,889(e)
----------------- ------- ----------
Net Earnings (Loss)..................................... $ (171,367) $(3,469) $ 201,891
----------------- ------- ----------
----------------- ------- ----------
Earnings (Loss) per Share (Equivalent Shares of 54.1
million)............................................... $ (3.17) $ (0.06) $ 3.73
----------------- ------- ----------
----------------- ------- ----------
COMBINED PRO
FORMA YEAR ENDED
DECEMBER 31, 1997
-----------------
Sales and Service Revenues.............................. $1,463,045
-----------------
Costs and Expenses
Cost of sales......................................... 1,003,055
Selling, general and administrative................... 341,573
Depreciation and amortization......................... 43,731
In-process research and development charges........... 8,200
Interest-net.......................................... 19,839
-----------------
Total Costs and Expenses............................ 1,416,398
-----------------
Earnings (Loss) before Taxes on Income.................. 46,647
Taxes on Income......................................... (19,592)
-----------------
Net Earnings (Loss)..................................... $ 27,055
-----------------
-----------------
Earnings (Loss) per Share (Equivalent Shares of 54.1
million)............................................... $ 0.50
-----------------
-----------------
The following pro forma adjustments give effect to the acquisition of Norand
as if it had occurred on January 1, 1997.
a) To record amortization of goodwill and other intangible assets acquired in
the acquisition of Norand.
b) To eliminate the Company's non-recurring, non-tax deductible charge to
expense acquired in-process research and development activities acquired
from Norand and UBI in accordance with FIN 4.
c) To record incremental interest expense on allocated Western Atlas corporate
debt using the Western Atlas estimated blended historical 7.5% annual rate.
d) To eliminate Norand's historical interest expense related to short-term
borrowings under agreements which were repaid with additional Western Atlas
corporate debt concurrent with the Company's acquisition of Norand.
e) To adjust the pro forma combined effective federal and state income tax rate
to 42%.
DISPOSITIONS
The Company sold its Material Handling Systems operations in November of
1996 and received cash proceeds of approximately $31 million. The activities of
the division were not considered a core business of the Company.
F-11
NOTE C: CASH AND CASH EQUIVALENTS, DEBT AND INTEREST
Cash and cash equivalents amounted to $13.7 million and $149.5 million at
December 31, 1997 and December 31, 1996, respectively, and consisted mainly of
time deposits and commercial paper.
Notes payable and long-term obligations consist of the following:
[Enlarge/Download Table]
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(THOUSANDS OF DOLLARS)
Borrowings under revolving credit facility, with average interest at 6.0%, due
1998.......................................................................... $ 200,000
Notes payable, with average interest at 5.1% (1997) and 5.6% (1996)............. 86,411 $ 27,045
Industrial revenue bonds, with average interest at 5.6% (1997) and 5.5% (1996),
due through 2005.............................................................. 13,500 13,500
Other, with average interest at 6.2% (1997) and 5.2% (1996), due through 2002... 3,672 1,423
---------- ----------
303,583 41,968
Less notes payable and current portion of long-term obligations................. (86,645) (27,461)
---------- ----------
Long-term obligations........................................................... $ 216,938 $ 14,507
---------- ----------
---------- ----------
As of December 31, 1997 the Company classified $200.0 million of short-term
debt as long-term to reflect the debt offering that occurred in March 1998,
which is discussed below.
Notes payable and long-term obligations at December 31, 1997 mature as
follows:
[Enlarge/Download Table]
(THOUSANDS OF
YEAR ENDING DECEMBER 31, DOLLARS)
------------------------------------------------------------------------
1998.................................................................... $ 86,645
1999.................................................................... 1,064
2000.................................................................... 1,081
2001.................................................................... 1,009
2002.................................................................... 284
Thereafter.............................................................. 213,500
--------
$ 303,583
--------
--------
The Company has an unsecured committed credit facility with a group of banks
from which it may borrow up to $400.0 million. Under this credit facility, which
expires in September 2002, the Company may borrow at the prime rate or rates
based on the London Interbank Offered Rate, certificates of deposit or other
rates which are mutually acceptable to the banks and the Company. At December
31, 1997, $200.0 million of the credit facility was available for the Company's
general use. In addition, the Company maintains other uncommitted credit
facilities and lines of credit of which $75.0 million was available to the
Company at December 31, 1997.
The Company is in compliance with its various debt covenants which relate to
the Company's incurrence of debt, mergers, consolidations and sale of assets and
require the Company to satisfy certain leverage ratios.
Financial instruments on the Company's consolidated and combined balance
sheets include accounts receivable, notes payable, accounts payable, and
payrolls and related expenses, which approximate their market values due to
their short maturity. The fair market value of long-term obligations does not
differ significantly from their carrying value as of December 31, 1997, due to
the variable interest rates on the
F-12
NOTE C: CASH AND CASH EQUIVALENTS, DEBT AND INTEREST (CONTINUED)
Company's long-term debt. UNOVA also has off-balance-sheet guarantees and
letter-of-credit reimbursement agreements with face values totaling $54.8
million at December 31, 1997 relating principally to the guarantee of
performance on contracts.
Debt allocated from WAI was $109.6 million at December 31, 1996. Immediately
prior to the Distribution, the Company paid to WAI a dividend in the amount of
$230.0 million which represented the WAI debt allocation at October 31, 1997.
Interest expense related thereto of $12.0 million, $8.3 million, and $8.4
million on the allocated portion of WAI's corporate debt for the years ended
December 31, 1997, 1996 and 1995, respectively, has been included in the
Company's statements of operations at WAI's estimated blended historical rate of
interest on long-term borrowings of 7.5%.
Net interest expense is composed of the following:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(THOUSANDS OF DOLLARS)
Interest expense............................................. $ 20,234 $ 11,533 $ 12,174
Interest income.............................................. (3,545) (4,422) (2,827)
--------- --------- ---------
Net interest expense......................................... $ 16,689 $ 7,111 $ 9,347
--------- --------- ---------
--------- --------- ---------
The Company made interest payments to non-related parties of $6.6 million,
$2.6 million, and $3.8 million in the years ended December 31, 1997, 1996 and
1995, respectively. Capitalized interest costs in each of the periods presented
were not material.
In March 1998, subsequent to the end of the fiscal year, the Company sold
$200.0 million principal amount of senior unsecured debt. The sale comprised
$100.00 million of 6.875% seven-year notes, at a price of 99.867 and $100.0
million of 7.00% ten-year notes, at a price of 99.856. Including underwriting
fees, discounts and effects of forward rate agreements entered into by the
Company to hedge the interest rates on the debt, the effective interest rates on
the seven-year and ten-year notes are 6.982% and 7.217%, respectively. The net
proceeds of approximately $198.0 million were used by the Company to repay
outstanding short-term debt.
NOTE D: ACCOUNTS RECEIVABLE AND INVENTORIES
Accounts receivable consists of the following:
[Enlarge/Download Table]
DECEMBER 31
----------------------
1997 1996
---------- ----------
(THOUSANDS OF DOLLARS)
Trade receivables, net................................................ $ 202,890 $ 132,814
Receivables related to long-term contracts
Amounts billed...................................................... 116,865 49,538
Unbilled costs and accrued profit on progress completed and
retentions........................................................ 128,324 212,220
---------- ----------
Net accounts receivable............................................... $ 448,079 $ 394,572
---------- ----------
---------- ----------
The unbilled costs and retentions at December 31, 1997 are expected to be
entirely billed and collected during 1998.
F-13
NOTE D: ACCOUNTS RECEIVABLE AND INVENTORIES (CONTINUED)
Inventories consist of the following:
[Enlarge/Download Table]
DECEMBER 31
----------------------
1997 1996
---------- ----------
(THOUSANDS OF DOLLARS)
Raw materials and work in process............................................... $ 94,845 $ 65,016
Finished goods.................................................................. 38,074 18,697
Inventoried costs related to long-term contracts................................ 29,656 35,062
Less progress billings.......................................................... (12,038) (24,323)
---------- ----------
Net inventories................................................................. $ 150,537 $ 94,452
---------- ----------
---------- ----------
NOTE E: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
[Enlarge/Download Table]
DECEMBER 31
----------------------
1997 1996
---------- ----------
(THOUSANDS OF DOLLARS)
Property, plant and equipment, at cost
Land.......................................................................... $ 23,418 $ 23,283
Buildings and improvements.................................................... 102,462 105,445
Machinery and equipment....................................................... 213,582 165,257
Less accumulated depreciation................................................... (181,782) (161,477)
---------- ----------
Net property, plant and equipment............................................... $ 157,680 $ 132,508
---------- ----------
---------- ----------
Depreciation expense was $27.4 million, $20.7 million and $20.9 million for
the years ended December 31, 1997, 1996 and 1995, respectively. The net book
value of assets under capital leases was not material at December 31, 1997 and
1996.
The range of estimated useful lives of the major classes of assets are:
[Download Table]
Buildings................................................. 10-45 years
Building improvements..................................... 2-20 years
Machinery and equipment................................... 2-15 years
As of December 31, 1997, minimum rental commitments under noncancellable
operating leases were:
[Enlarge/Download Table]
YEAR ENDING DECEMBER 31,
------------------------------------------------------------------------ OPERATING LEASES
--------------------
(THOUSANDS OF
DOLLARS)
1998.................................................................... $ 10,307
1999.................................................................... 7,546
2000.................................................................... 5,373
2001.................................................................... 3,540
2002.................................................................... 2,414
Thereafter.............................................................. 6,855
-------
$ 36,035
-------
-------
F-14
NOTE E: PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Rental expense for operating leases, including amounts for short-term leases
with nominal, if any, future rental commitments, was $17.9 million, $10.4
million and $9.8 million, for the years ended December 31, 1997, 1996 and 1995,
respectively. The minimum future rentals receivable under subleases and
contingent rental expenses were not significant.
NOTE F: SHAREHOLDERS' INVESTMENT
Changes in shareholders' investment are summarized as follows:
[Enlarge/Download Table]
CUMULATIVE
ADDITIONAL CURRENCY NET TOTAL
COMMON PAID-IN ACCUMULATED TRANSLATION INVESTMENT BY SHAREHOLDERS'
(THOUSANDS OF DOLLARS) STOCK CAPITAL DEFICIT ADJUSTMENT WESTERN ATLAS INVESTMENT
------------------------------------- ----------- ---------- ------------ ----------- ------------- -------------
BALANCE, JANUARY 1, 1995............. $ 439,415 $ 439,415
Net earnings......................... 26,204 26,204
Currency translation adjustment...... (1,155) (1,155)
Net transactions with Western Atlas
Inc................................ 38,195 38,195
------------- -------------
BALANCE, DECEMBER 31, 1995........... 502,659 502,659
Net earnings......................... 42,022 42,022
Currency translation adjustment...... 4,080 4,080
Net transactions with Western Atlas
Inc................................ 25,747 25,747
------------- -------------
BALANCE, DECEMBER 31, 1996........... 574,508 574,508
Net loss to Distribution Date........ (163,326) (163,326)
Currency translation adjustment to
Distribution Date.................. (3,699) (3,699)
Net transactions with Western Atlas
Inc................................ 190,338 190,338
Distribution of common stock to UNOVA
shareholders....................... $ 545 $ 601,689 $ (4,413) (597,821)
Net loss from Distribution Date to
December 31, 1997.................. $ (8,041) (8,041)
Currency translation adjustment from
Distribution Date to December 31,
1997............................... (2,345) (2,345)
Other................................ 2,054 2,054
----- ---------- ------------ ----------- ------------- -------------
BALANCE, DECEMBER 31, 1997........... $ 545 $ 603,743 $ (8,041) $ (6,758) -- $ 589,489
----- ---------- ------------ ----------- ------------- -------------
----- ---------- ------------ ----------- ------------- -------------
At December 31, 1997, there were authorized 250 million shares of common
stock, par value $0.01, and 50 million shares of preferred stock, par value
$0.01. No cash dividends were paid on the common stock in the year ended
December 31, 1997.
STOCK OPTIONS
The UNOVA, Inc. 1997 Stock Incentive Plan (the "1997 Plan") provides for the
grant of incentive awards to officers and other key employees. Incentive awards
may be granted in the form of stock options,
F-15
NOTE F: SHAREHOLDERS' INVESTMENT (CONTINUED)
with or without related stock appreciation rights, or in the form of restricted
stock. Under the 1997 Plan, stock options may not be granted at a price less
than the market value of the Company's common stock on the date of grant. The
Company also has a Director Stock Option Plan (the "Director Plan") which
provides for the grant of stock options to the Company's non-employee directors.
Under this plan, stock options are granted annually at the market value of the
Company's common stock on the date of grant. The number of options granted
annually is fixed by the plan. Such options become fully exercisable on the
first anniversary of their grant.
Subsequent to the Distribution, the Company granted 2,404,500 options to
officers and other key employees under the 1997 Plan and 100,000 options to
non-employee directors under the Director Plan. These options were granted at a
weighted-average exercise price of $18.80. None of these options have been
exercised and none were exercisable at December 31, 1997, and there were a total
of 3,495,500 options available for grant under both plans as of December 31,
1997. No awards in the form of stock appreciation rights or restricted stock
have been granted under the 1997 Plan.
Outstanding stock option data at December 31, 1997:
[Download Table]
OPTIONS OUTSTANDING
---------------------------------------------------
WEIGHTED-AVERAGE
EXERCISE REMAINING WEIGHTED-AVERAGE
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
------------- ----------- ------------------- -----------------
$14.88 16,000 9.97 $ 14.88
$17.56 100,000 9.84 $ 17.56
$18.88 2,388,500 9.85 $ 18.88
The weighted-average fair value of stock options granted during 1997 was
$7.76 per option. The fair value of each stock option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1997: risk-free interest rate of
5.8%, expected life of five years, and expected volatility of 36%, determined
from historical industry stock price fluctuations. There is no assurance that
the assumptions used in determining the fair values of stock options will prove
true in the future. The actual value of the options depends on several factors,
including the actual market price of the common stock on the date of exercise.
Changes in any of these factors as well as fluctuations in the market price of
the Company's common stock will cause the actual value of these options to vary
from the theoretical value indicated above.
EMPLOYEE STOCK PURCHASE PLAN
Effective January 1, 1998, UNOVA adopted an Employee Stock Purchase Plan
under which the Company is authorized to sell up to five million shares of
common stock to its eligible full-time employees. Under the terms of the plan,
which is intended to qualify under Section 423 of the Internal Revenue Code,
employees can choose to have up to 8% of their annual earnings (up to a maximum
amount of $21,250 per calendar year) withheld to purchase the Company's common
stock. The purchase price of the stock is 85% of the lower of the market price
on the first day or last day of the applicable offering period, which is
normally six months in duration.
PRO FORMA COMPENSATION COST DISCLOSURE
The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board Opinion No. 25, under which no compensation
cost has been recognized for stock option awards. Had compensation cost for
these plans been determined consistent with Statement of Financial Accounting
Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company's pro
forma net loss and loss per share for 1997 would have been $173.6 million and
$3.21, respectively.
F-16
NOTE F: SHAREHOLDERS' INVESTMENT (CONTINUED)
SHAREHOLDER RIGHTS PLAN
On September 24, 1997, the Company's Board of Directors adopted a Share
Purchase Rights Plan (the "Plan") and, in accordance with such Plan, declared a
dividend of one preferred share purchase right (the "Right") for each
outstanding share of Company common stock, payable to shareholders of record on
October 31, 1997. The Plan will cause substantial dilution to a party that
attempts to acquire the Company in a manner or on terms not approved by the
Board of Directors. Each Right entitles the holder to purchase from the Company
one one-hundredth of a share of Series A Preferred Stock at a price of seventy
dollars. The Rights become exercisable if a person other than a person which
presently holds more than 15 percent of the Company's common stock acquires 15
percent or more, or announces a tender offer for 15 percent or more, of the
Company's outstanding common stock. If a person acquires 15 percent or more of
the Company's outstanding common stock, each right will entitle the holder to
purchase the Company's common stock having a market value of twice the exercise
price of the Right. The Rights, which expire in September 2007, may be redeemed
by UNOVA at a price of one cent per Right at any time prior to a person
acquiring 15 percent or more of the outstanding common stock.
NOTE G: TAXES ON INCOME
Earnings (loss) before taxes on income by geographic area are as follows:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
----------- --------- ---------
(THOUSANDS OF DOLLARS)
United States.............................................. $ (113,075) $ 47,470 $ 41,989
Other nations.............................................. (35,324) 22,566 2,052
----------- --------- ---------
$ (148,399) $ 70,036 $ 44,041
----------- --------- ---------
----------- --------- ---------
Taxes on income consist of the following provisions (benefits):
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- --------- ---------
(THOUSANDS OF DOLLARS)
Currently Payable:
U.S. taxes................................................ $ 13,821 $ 31,619 $ 8,926
International taxes....................................... 10,124 6,446 1,392
---------- --------- ---------
23,945 38,065 10,318
---------- --------- ---------
Deferred:
U.S. taxes................................................ 242 (9,685) 8,220
International taxes....................................... (1,219) (366) (701)
---------- --------- ---------
(977) (10,051) 7,519
---------- --------- ---------
$ 22,968 $ 28,014 $ 17,837
---------- --------- ---------
---------- --------- ---------
Deferred taxes result from the effect of transactions which are recognized
in different periods for financial and tax reporting purposes and relate
primarily to employee benefits, depreciation and other valuation allowances.
F-17
NOTE G: TAXES ON INCOME (CONTINUED)
The primary components of the Company's deferred tax assets and liabilities
are as follows:
[Enlarge/Download Table]
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- --------------------
ASSET LIABILITY ASSET LIABILITY
---------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
Accrued liabilities.............................. $ 49,194 $ 32,197
Receivables and inventory........................ 14,431 8,426
Retiree medical benefits......................... 6,255 4,501
Intangibles...................................... 9,025 23
Tax credit carryforward.......................... 4,887
Deferred income.................................. 10,195 810
Net operating loss carryforward.................. 9,136
Pensions......................................... $ 14,251 $ 11,239
Accelerated depreciation......................... 6,123 6,892
Other items...................................... 3,571 2,544 7,679 4,596
---------- --------- --------- ---------
$ 106,694 $ 22,918 $ 53,636 $ 22,727
---------- --------- --------- ---------
---------- --------- --------- ---------
For tax purposes, the Company has available at December 31, 1997, a net
operating loss carryforward of approximately $26.0 million expiring in 2009 and
2010. The Company also has general business credit carryforwards of
approximately $4.9 million which expire during the 2005 through 2010 time
period.
The following is a reconciliation of income taxes at the U.S. statutory rate
to the provision for income taxes:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- --------- ---------
(THOUSANDS OF DOLLARS)
Tax at U.S. statutory rate.................................. $ (51,940) $ 24,513 $ 15,414
Nondeductible acquired in-process research and
development................................................ 71,050
State income taxes net of federal benefit................... 1,625 1,382 1,285
Amortization of nondeductible goodwill...................... 4,431 1,916 1,916
Foreign earnings taxed at other than U.S. statutory rate.... (223) 60 100
Other items................................................. (1,975) 143 (878)
---------- --------- ---------
$ 22,968 $ 28,014 $ 17,837
---------- --------- ---------
---------- --------- ---------
The Company made tax payments of $44.4 million, $26.1 million and $15.1
million, in the years ended December 31, 1997, 1996 and 1995, respectively.
It is the policy of the Company to accrue appropriate U.S. and foreign
income taxes on earnings which are intended to be remitted by foreign
subsidiaries to the parent company. Unremitted earnings, which have been or are
intended to be permanently reinvested by foreign subsidiaries, were
approximately $4.0 million at December 31, 1997.
F-18
NOTE H: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has retirement and pension plans which cover most of its
employees. Most of the Company's U.S. employees are covered by a contributory
defined benefit plan, under which annual contributions are made to the extent
such contributions are actuarially determined.
There are also defined contribution voluntary savings programs generally
available for U.S. employees, which are intended to qualify under Sections
401(a) and 401(k) of the Internal Revenue Code. These plans are designed to
enhance the retirement programs of participating employees. Under these plans,
the Company matches up to 50% of a certain portion of participants'
contributions.
Certain of the Company's non-U.S. subsidiaries also have a retirement plan
for employees. The pension liabilities and their related costs are computed in
accordance with the laws of the individual nations and appropriate actuarial
practices.
U.S. PENSION PLANS
A summary of the components of net periodic pension cost for the U.S.
defined benefit plans and defined contribution plans for the years ended
December 31, 1997, 1996 and 1995, is as follows:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- ---------- ----------
(THOUSANDS OF DOLLARS)
Defined benefit plans
Service cost - benefits earned during the period......... $ 5,988 $ 6,507 $ 4,565
Interest cost on projected benefit obligation............ 10,075 10,107 9,619
Actual return on plan assets............................. (88,571) (41,727) (58,985)
Net amortization and deferral............................ 62,673 19,371 37,439
--------- ---------- ----------
Net periodic pension income................................ (9,835) (5,742) (7,362)
Defined contribution plans................................. 4,160 2,983 2,414
--------- ---------- ----------
Net periodic pension income................................ $ (5,675) $ (2,759) $ (4,948)
--------- ---------- ----------
--------- ---------- ----------
Actuarial assumptions for the Company's U.S. defined benefit plans included
an expected long-term rate of return on plan assets of 9 1/4% for fiscal years
1997 and 1996. The weighted-average discount rate used in determining the
actuarial present value of the projected benefit obligation was 7 1/2% at
December 31, 1997 and 1996. The rate of increase in future compensation levels
was 5% at December 31, 1997 and 1996.
F-19
NOTE H: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of the Company's U.S. plans
and amounts recognized in the Company's balance sheets at December 31, 1997 and
1996.
[Enlarge/Download Table]
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(THOUSANDS OF DOLLARS)
Actuarial present value of benefit obligations
Vested benefit obligation............................................................. $ (132,477) $ (125,121)
----------- -----------
Accumulated benefit obligation........................................................ $ (133,460) $ (126,092)
----------- -----------
Projected benefit obligation.......................................................... $ (151,649) $ (139,026)
Fair value of plan assets............................................................... 345,347 267,956
Unrecognized net transition asset....................................................... (12,769) (16,268)
Unrecognized net gain................................................................... (145,050) (87,550)
----------- -----------
Prepaid pension cost.................................................................... $ 35,879 $ 25,112
----------- -----------
----------- -----------
The above table includes prepaid pension cost presented net of pension
liabilities for plans in which accumulated benefits exceed plan assets. As of
December 31, 1997 and 1996, these liabilities amounted to $16.2 million and
$13.5 million, respectively.
Plan assets consist primarily of equity securities and investment grade
fixed income securities. The excess of plan assets over the projected benefit
obligation at August 1, 1986 (when the Company adopted SFAS No. 87) and
subsequent unrecognized gains and losses are fully amortized over the average
remaining service period of active employees expected to receive benefits under
the plans, generally 15 years.
NON-U.S. PENSION PLAN
For the principal non-U.S. pension plan located in the United Kingdom, the
weighted-average discount rate used was 7% at December 31, 1997. The rate of
increase in future compensation used was 4%, and the rate of return on assets
was 7 1/2% at December 31, 1997.
Pension costs for the non-U.S. plan were not material for any of the periods
presented herein. The actuarial present value of projected benefits at December
31, 1997 was $35.6 million compared with net assets available for benefits of
$40.4 million.
OTHER POSTRETIREMENT BENEFITS
In addition to pension benefits, certain of the Company's U.S. employees are
covered by postretirement health care and life insurance defined benefit plans.
These benefit plans are unfunded.
The net periodic postretirement benefit costs were not material for any of
the periods presented herein. The accumulated benefit obligation at December 31,
1997 was $19.6 million, of which $17.8 million was attributable to retirees and
$1.8 million to other active plan participants. The accumulated benefit
obligation at December 31, 1996 was $18.5 million, of which $14.7 million was
attributable to retirees and $3.8 million was attributable to active plan
participants.
Actuarial assumptions used to measure the accumulated benefit obligation
include a discount rate of 7 1/2% at December 31, 1997 and 1996. The assumed
health care cost trend rate for fiscal year 1997 was 12.4% and is projected to
decrease over 20 years to 6%, where it is expected to remain thereafter. The
effect of a one-percentage-point increase in the assumed health care cost trend
rate on the service cost and
F-20
NOTE H: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
interest cost components of the net periodic postretirement benefit cost is not
material. A one-percentage-point increase in the assumed health care cost trend
rate on the accumulated benefit obligation results in an increase of
approximately $1.9 million.
NOTE I: LITIGATION, COMMITMENTS AND CONTINGENCIES
The Company is currently, and is from time to time, subject to claims and
suits arising in the ordinary course of its business. In the opinion of the
Company's General Counsel, the ultimate resolution of currently pending
proceedings will not have a material adverse effect on the Company's
consolidated and combined financial statements.
NOTE J: RELATED PARTY TRANSACTIONS
Immediately prior to the Distribution, the Company paid a dividend of $230.0
million to WAI with funds borrowed under the Company's revolving credit
facility.
Included in other assets are amounts due from certain Company officers and
other related parties of $2.1 million and $1.6 million at December 31, 1997 and
1996, respectively.
Included in general and administrative costs are allocated charges from WAI
of $13.5 million, $22.2 million, and $19.9 million, for the years ended December
31, 1997, 1996, and 1995, respectively.
Included in interest expense are allocated charges from WAI of $12.0
million, $8.3 million, and $8.4 million, for the years ended December 31, 1997,
1996, and 1995, respectively.
NOTE K: BUSINESS SEGMENT REPORTING
The Company reports its operations in two business segments: the Automated
Data Systems segment and the Industrial Automation Systems segment. Material
Handling Systems was sold during the fourth quarter of 1996. Figures for this
division were reported as part of the Industrial Automation Systems segment.
Activities are primarily product sales oriented. Export sales are not
material.
Corporate and other amounts include corporate operating costs, net interest
expense and currency transaction gains and losses (see Notes A and J). Assets
classified as corporate and other amounts consist of cash and cash equivalents
and other corporate assets.
F-21
NOTE K: BUSINESS SEGMENT REPORTING (CONTINUED)
OPERATIONS BY BUSINESS SEGMENT
(MILLIONS OF DOLLARS)
[Enlarge/Download Table]
AUTOMATED INDUSTRIAL CORPORATE
YEAR ENDED DATA AUTOMATION AND OTHER
DECEMBER 31, SYSTEMS SYSTEMS AMOUNTS TOTAL
--------------- ------------- ------------- ----------- ---------
Sales............................................. 1997 $ 636 $ 790 $ 1,426
1996 367 798 1,165
1995 321 622 943
Operating profit (loss)........................... 1997 (202)(A) 95 $ (25) (132)(A)
1996 30 70 (23) 77
1995 13 62 (22) 53
Capital expenditures.............................. 1997 16 14 30
1996 9 14 23
1995 8 16 24
Depreciation and amortization expense............. 1997 25 15 1 41
1996 11 15 1 27
1995 12 13 1 26
Identifiable assets at year end................... 1997 642 650 64 1,356
1996 277 620 177 1,074
1995 289 499 131 919
------------------------
(A) Includes the $211.5 million charges for acquired in-process research and
development.
OPERATIONS BY GEOGRAPHIC AREA
(MILLIONS OF DOLLARS)
[Enlarge/Download Table]
YEAR ENDED UNITED OTHER CORPORATE
DECEMBER 31, STATES EUROPE NATIONS AND OTHER TOTAL
--------------- --------- ----------- ----------- ----------- ---------
Sales........................................... 1997 $ 989 $ 363 $ 74 $ 1,426
1996 950 193 22 1,165
1995 771 151 21 943
Operating profit (loss)......................... 1997 (78) (35) 6 $ (25) (132)
1996 78 22 (23) 77
1995 70 4 1 (22) 53
Identifiable assets at year end................. 1997 1,015 261 16 64 1,356
1996 751 136 10 177 1,074
1995 671 105 12 131 919
F-22
UNOVA, INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
[Enlarge/Download Table]
COMMON
BASIC DILUTED STOCK SALES
GROSS NET EARNINGS EARNINGS PRICE
SALES PROFIT EARNINGS PER SHARE PER SHARE HIGH/LOW (1)
------ ------- ------------- ----------- ----------- --------------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, 1997
First Quarter..................................... $323.1 $ 88.9 $ 11.6 $ 0.21 $ 0.21
Second Quarter.................................... 409.3 122.7 (189.1)(2) (3.51) (3.51)
Third Quarter..................................... 361.8 116.4 11.7 0.22 0.22
Fourth Quarter.................................... 332.0 99.9 (5.6)(3) (0.10) (0.10) $19 1/4 14 1/8
YEAR ENDED DECEMBER 31, 1996
First Quarter..................................... $240.4 $ 68.0 $ 8.2 $ 0.15 $ 0.15
Second Quarter.................................... 264.1 73.4 8.7 0.16 0.16
Third Quarter..................................... 310.0 81.0 11.0 0.20 0.20
Fourth Quarter.................................... 350.2 88.0 14.1 0.26 0.26
As of February 27, 1998 there were approximately 21,687 holders of record of
the Company's common stock.
(1) The common stock began trading on the New York Stock Exchange under the
symbol "UNA" on October 22, 1997 on a "when issued" basis, and "regular way"
on November 3, 1997. Prior to October 31, 1997, the Company was a wholly
owned subsidiary of Western Atlas Inc.
(2) In June 1997, the Company expensed $203.3 million of in-process research and
development activities in connection with the acquisitions of Norand and
UBI.
(3) In December 1997, the company expensed $4.9 million (net of tax) of
in-process research and development activities in connection with the
acquisition of RFID technology.
F-23
UNOVA, INC.
INDEX TO EXHIBITS
[Enlarge/Download Table]
EXHIBIT NO. DESCRIPTION OF EXHIBIT
------------- -----------------------------------------------------------------------------------------------------
4.1 $400,000,000 Credit Agreement dated September 24, 1997, among UNOVA, Inc., the Banks listed therein,
and Morgan Guaranty Trust Company of New York, as Agent, filed on October 1, 1997 as Exhibit 10M to
Amendment No. 1 to the Company's Registration Statement on Form 10 No. 001-13279 and incorporated
herein by reference.
4.2 Rights Agreement dated September 24, 1997, between UNOVA, Inc. and The Chase Manhattan Bank, as
Rights Agent, to which is annexed the form of Right Certificate as Exhibit A, filed on October 22,
1997 as Exhibit 3C to Amendment No. 2 to the Company's Registration Statement on Form 10 No.
001-13279.
4.3 Instruments defining the rights of holders of long-term debt of the Company are not filed as exhibits
because the amount of debt authorized under any such instrument does not exceed 10% of the total
assets of the Company and its consolidated subsidiaries. The Company hereby undertakes to furnish a
copy of any such instrument to the Commission upon request.
4.4 Amendment No. 1 to the $400,000,000 Credit Agreement, dated January 15, 1998.*
4.5 Indenture dated as of March 11, 1998 between the Company and The First National Bank of Chicago,
Trustee, providing for the issuance of securities in series.*
4.6 Form of 6.875% Notes due March 15, 2005 issued by the Company under such indenture.*
4.7 Form of 7.00% Notes due March 15, 2008 issued by the Company under such indenture.*
10.1 Distribution and Indemnity Agreement dated October 31, 1997, between Western Atlas Inc. and UNOVA,
Inc, filed as Exhibit 10.1 to the Company's September 30, 1997 Quarterly Report on Form 10-Q, and
incorporated herein by reference.
10.2 Tax Sharing Agreement dated October 31, 1997, between Western Atlas Inc., and UNOVA, Inc., filed as
Exhibit 10.2 to the Company's September 30, 1997 Quarterly Report on Form 10-Q, and incorporated
herein by reference.
10.3 Employee Benefits Agreement dated October 31, 1997, between Western Atlas Inc., and UNOVA, Inc.,
filed as Exhibit 10.3 to the Company's September 30, 1997 Quarterly Report on Form 10-Q, and
incorporated herein by reference.
10.4 Intellectual Property Agreement dated October 31, 1997, between Western Atlas Inc., and UNOVA, Inc.,
filed as Exhibit 10.4 to the Company's September 30, 1997 Quarterly Report on Form 10-Q, and
incorporated herein by reference.
10.5 Change of Control Employment Agreements with Alton J. Brann, Michael E. Keane, Norman L. Roberts and
certain other officers of the Company, dated as of October 31, 1997, filed as Exhibit 10.5 to the
Company's September 30, 1997 Quarterly Report on Form 10-Q, and incorporated herein by reference.
10.6 Employment Agreement between Intermec Corporation and Michael Ohanian, dated May 18, 1995, as
amended, filed on August 18, 1997 as Exhibit 10J to the Company's Registration Statement on Form 10
No. 001-13279 and incorporated herein by reference.
10.7 UNOVA, Inc. Director Stock Option and Fee Plan, filed as Exhibit 10.7 to the Company's September 30,
1997 Quarterly Report on Form 10-Q, and incorporated herein by reference.
10.8 UNOVA, Inc. Restoration Plan, filed on August 18, 1997 as Exhibit 10I to the Company's Registration
Statement on Form 10 No. 001-13279 and incorporated herein by reference.
E-1
[Enlarge/Download Table]
EXHIBIT NO. DESCRIPTION OF EXHIBIT
------------- -----------------------------------------------------------------------------------------------------
10.9 UNOVA, Inc. Supplemental Executive Retirement Plan, filed on October 1, 1997 as Exhibit 10H to
Amendment No. 1 to the Company's Registration Statement on Form 10 No. 001-13279 and incorporated
herein by reference.
10.10 Supplemental Retirement Agreement between UNOVA, Inc. and Alton J. Brann, filed on October 1, 1997 as
Exhibit 10L to Amendment No. 1 to the Company's Registration Statement on Form 10 No. 001-13279 and
incorporated herein by reference.
10.11 Employment Agreement dated August 1997, between UNOVA, Inc., and Clayton A. Williams, filed on
October 1, 1997 as Exhibit 10K to Amendment No. 1 to the Company's Registration Statement on Form
10 No. 001-13279 and incorporated herein by reference.
10.12 UNOVA, Inc. 1997 Stock Incentive Plan, filed as Exhibit 10.12 to the Company's September 30, 1997
Quarterly Report on Form 10-Q, and incorporated herein by reference.
10.13 UNOVA, Inc. Executive Severance Plan, filed as Exhibit 10.13 to the Company's September 30, 1997
Quarterly Report on Form 10-Q, and incorporated herein by reference.
10.14 Form of Promissory Notes in favor of the Company given by certain officers and key employees, filed
as Exhibit 10.14 to the Company's September 30, 1997 Quarterly Report on Form 10-Q, and
incorporated herein by reference.
10.15 Board resolution dated September 24, 1997 establishing the UNOVA, Inc. Incentive Loan Program, filed
as Exhibit 10.15 to the Company's September 30, 1997 Quarterly Report on Form 10-Q, and
incorporated herein by reference.
10.16 UNOVA, Inc. Management Incentive Compensation Plan.*
10.17 UNOVA, Inc. Executive Survivor Benefit Plan.*
10.18 Amendment No. 1 to Employment Agreement between Intermec Corporation and Michael Ohanian, dated
February 28, 1997.*
10.19 Amendment No. 2 to Employment Agreement between Intermec Technologies Corporation and Michael
Ohanian, dated February 28, 1998.*
10.20 Amendment to Employment Agreement between UNOVA, Inc. and Clayton A. Williams, dated March 24, 1998.*
21 Subsidiaries of the Registrant included herein on page E-3.
23 Independent Auditors' Consent included herein on page E-4.
27 Financial Data Schedule (filed only electronically with the Securities and Exchange Commission).
------------------------
* Copies of these documents have been included in this Annual Report on Form
10-K filed with the Securities and Exchange Commission.
E-2
EXHIBIT 21
UNOVA, INC.
SUBSIDIARIES OF THE REGISTRANT
[Enlarge/Download Table]
JURISDICTION
OF PERCENTAGE OF
NAME OF SUBSIDIARY INCORPORATION OWNERSHIP
-------------------------------------------------------------- ------------- -------------
Intermec Technologies Corporation............................. Washington 100
UNOVA Industrial Automation Systems, Inc...................... Delaware 100
The Registrant has additional operating subsidiaries which, considered in the
aggregate as a single subsidiary, do not constitute a significant subsidiary.
All above-listed subsidiaries have been consolidated in the Registrant's
financial statements.
E-3
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Amendment No. 1 to registration
statement No. 333-42839 of UNOVA, Inc. on Form S-3 and registration statements
Nos. 333-39003, 333-39005, and 333-39007 of UNOVA, Inc. each filed on Form S-8,
of our report dated March 11, 1998, appearing in this Annual Report on Form 10-K
of UNOVA, Inc. for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 26, 1998
E-4
Dates Referenced Herein and Documents Incorporated by Reference
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