<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999. COMMISSION FILE NUMBER 1-12383
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ROCKWELL INTERNATIONAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 25-1797617
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
777 EAST WISCONSIN AVENUE 53202
SUITE 1400 (ZIP CODE)
MILWAUKEE, WISCONSIN
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (414) 212-5299 (OFFICE OF
THE SECRETARY)
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SECURITIES REGISTERED PURSUANT
TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
Common Stock, $1 Par Value New York, Pacific and London Stock Exchanges
(including the associated
Preferred Share Purchase
Rights)
</TABLE>
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SECURITIES REGISTERED PURSUANT
TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of registrant's voting stock held by
non-affiliates of registrant on November 15, 1999 was approximately $8.5
billion.
190,221,589 shares of registrant's Common Stock, par value $1 per share,
were outstanding on November 15, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Proxy Statement for the Annual Meeting
of Shareowners of registrant to be held on February 2, 2000 is incorporated by
reference into Part III hereof.
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<PAGE> 2
PART I
ITEM 1. BUSINESS.
Rockwell International Corporation (the Company or Rockwell), a Delaware
corporation, is a global electronic controls and communications company with
leadership positions in industrial automation, avionics and communications and
automated call distribution systems. The Company was incorporated in 1996 and is
the successor to the former Rockwell International Corporation as a result of a
tax-free reorganization completed on December 6, 1996, pursuant to which the
Company divested its former Aerospace and Defense businesses (the A&D Business)
to The Boeing Company (Boeing). The predecessor corporation was incorporated in
1928. On September 30, 1997, the Company completed the spin-off of its
automotive component systems business (the Automotive Business) into an
independent, separately traded, publicly held company named Meritor Automotive,
Inc. (Meritor). On December 31, 1998, the Company completed the spin-off of its
semiconductor systems business (Semiconductor Systems) into an independent,
separately traded, publicly held company named Conexant Systems, Inc.
(Conexant). As used herein, the terms the "Company" or "Rockwell" include
subsidiaries and predecessors unless the context indicates otherwise.
Information included in this Annual Report on Form 10-K refers to the Company's
continuing businesses unless otherwise indicated.
For purposes hereof, whenever reference is made in any Item of this Annual
Report on Form 10-K to information under specific captions in Item 7,
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (the MD&A), or in Item 8, CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA (the Financial Statements), or to information in the Proxy
Statement for the Annual Meeting of Shareowners of the Company to be held on
February 2, 2000 (the 2000 Proxy Statement), such information shall be deemed to
be incorporated therein by such reference.
PRODUCTS AND SERVICES
The Company's business segments are engaged in research and development,
manufacture, sale and service of electronic controls and communication products.
The Company is organized based upon products and services and has three business
segments consisting of Automation, Avionics & Communications and Other
Businesses, which includes Electronic Commerce and the Science Center.
The Automation business is a supplier of industrial automation products,
systems, software and services focused on helping customers control and power
manufacturing processes. Products include controllers, I/O (input/output)
systems, drives, sensors, power devices, packaged control products, operator
interface devices, software products and services, gear reducers, mounted
bearings, power transmission components, network monitoring products and motors.
These products are primarily marketed under the Rockwell Automation,
Allen-Bradley, Rockwell Software, Dodge, and Reliance Electric brand names.
Major markets served include consumer products, food and beverage,
transportation, metals, mining, cement, pulp and paper, petroleum, specialty
chemicals, pharmaceutical, electric power, water treatment, infrastructure and
semiconductor fabrication.
The Avionics & Communications business is a supplier of electronic products
and systems, service and support solutions to the commercial aerospace and
defense industries. Products include electronic equipment for flight control,
cockpit display, navigation, voice and data communication, cockpit management,
in-flight cabin management, communications and passenger entertainment, radar,
global positioning and other command, control and communications devices
marketed primarily under the Rockwell Collins brand name. Major customers
include airframe manufacturers, the United States government and most of the
world's airlines.
Other Businesses includes the Electronic Commerce business, which is a
supplier of technologies for companies that interact with their customers over
the telephone and/or the Internet. Products include automatic call distributors,
computer telephony integration software, information collection, reporting and
management systems and call center consulting services and systems. Other
Businesses also includes the Science Center, a research and development
facility.
Financial information with respect to the Company's business segments,
including their contributions to sales and operating earnings for the three
years ended September 30, 1999, is contained under the caption RESULTS OF
OPERATIONS in the MD&A on pages 12-14 hereof, and in Note 19 of the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS in the Financial Statements.
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COMPETITIVE POSTURE
The Company competes with many manufacturers which, depending on the
product involved, range from large diversified enterprises, comparable to or
greater than the Company in scope and resources, to smaller companies
specializing in particular products. Factors which affect the Company's
competitive posture are its research and development efforts, the quality of its
products and services and its marketing and pricing strategies.
The Company's products are sold by its own sales force and through
distributors and agents.
GOVERNMENT CONTRACTS
Approximately ten percent of the Company's sales is derived from United
States government contracts, almost entirely from its Avionics & Communications
business. The Avionics & Communications business supplies certain military
equipment to the United States government. In addition to normal business risks,
companies engaged in supplying military equipment to the United States
government are subject to unusual risks, including dependence on Congressional
appropriations and administrative allotment of funds, changes in governmental
procurement legislation and regulations and other policies which may reflect
military and political developments, significant changes in contract scheduling,
complexity of designs and the rapidity with which they become obsolete, constant
necessity for design improvements, intense competition for available United
States government business necessitating increases in time and investment for
design and development, difficulty of forecasting costs and schedules when
bidding on developmental and highly sophisticated technical work and other
factors characteristic of the industry. Changes are customary over the life of
United States government contracts, particularly development contracts, and
generally result in adjustments of contract prices.
Moreover, various claims (whether based on United States government or
Company audits and investigations or otherwise) have been or may be instituted
or asserted against the Company related to its United States government contract
work, including claims based on business practices and cost classifications.
Although such claims are usually resolved by detailed fact-finding and
negotiation, on those occasions when they are not so resolved, civil or criminal
legal or administrative proceedings may ensue. Depending on the circumstances
and the outcome, such proceedings could result in fines, the cancellation of or
suspension of payments under one or more United States government contracts,
suspension or debarment proceedings affecting potential further business with
the United States government, or alteration of the Company's procedures relating
to the performance or obtaining of United States government contracts.
Management of the Company believes there are no claims, audits or investigations
currently pending which will have a material adverse effect on either the
Company's business or its financial statements.
ACQUISITIONS AND DISPOSITIONS
The Company regularly considers the acquisition or development of new
businesses and reviews the prospects of its existing businesses to determine
whether any should be modified, sold or otherwise discontinued.
During 1999, the Automation business acquired Anorad Corporation,
U.K.-based EJA Engineering Ltd., substantially all of the assets of Enterprise
Technology Group, Inc., a software business, and certain assets, principally
intellectual property, of Vancouver-based Dynapro. The Avionics & Communications
business acquired Intertrade Limited and the remaining 50 percent interest in
Flight Dynamics. The total cost of these acquisitions was $241 million, of which
$214 million was allocated to intangible assets, including developed technology,
patents, assembled workforce and goodwill. The intangible assets are being
amortized on a straight-line basis over periods ranging from six to thirty
years.
On December 31, 1998, the Company completed the spin-off of Semiconductor
Systems into an independent, separately traded, publicly held company by
distributing all of the outstanding shares of Conexant to the Company's
shareowners on a pro-rata basis. The Company also sold its railroad electronics
and North American Transformer businesses during 1999.
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In the first quarter of 1998, the Avionics & Communications business
acquired the in-flight entertainment business of Hughes-Avicom International,
Inc. for $157 million. In connection with the acquisition, the Company recorded
a charge of $103 million ($63 million after tax) for purchased research and
development and recorded $70 million for other intangible assets, including
developed technology, patents, assembled workforce and goodwill, which are being
amortized on a straight-line basis over 10 years.
In October 1996, the Company sold its Graphic Systems business for
approximately $600 million. On December 6, 1996, the Company completed the
divestiture of the A&D Business to Boeing. On September 30, 1997, the Company
completed the spin-off of Meritor. The net (loss) income from operations of the
Graphic Systems business, the A&D Business, the Automotive Business and
Semiconductor Systems have been presented on the Company's Consolidated
Statement of Operations included in the Financial Statements as (Loss) income
from discontinued operations for all periods. The assets and liabilities of
Semiconductor Systems as of September 30, 1998 have been classified on the
Company's Consolidated Balance Sheet included in the Financial Statements as Net
assets of Semiconductor Systems.
Additional information relating to acquisitions and discontinued operations
is contained under the captions ACQUISITIONS and DISCONTINUED OPERATIONS in the
MD&A on page 14 hereof, and in Notes 2 and 4 of the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS in the Financial Statements.
GEOGRAPHIC INFORMATION
The Company's principal markets outside the United States are in Australia,
Brazil, Canada, China, Denmark, France, Germany, Italy, Japan, Mexico,
Singapore, Southeast Asia, Spain, Sweden, Switzerland, The Netherlands and the
United Kingdom. In addition to normal business risks, operations outside the
United States are subject to other risks including, among other factors, the
political, economic and social environments, governmental laws and regulations,
and currency revaluations and fluctuations.
Selected financial information by major geographic area for each of the
three years in the period ended September 30, 1999 is contained in Note 19 of
the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the Financial Statements.
RESEARCH AND DEVELOPMENT
In addition to research and development activities conducted by each of the
Company's businesses, the Company's Science Center conducts a basic research
program to support the strategies of the operating businesses and continues to
provide research services to Boeing, Meritor and Conexant at agreed rates. At
September 30, 1999, the Company employed approximately 5,000 professional
engineers and scientists and 2,600 supporting technical personnel.
EMPLOYEES
At September 30, 1999, the Company had approximately 41,200 employees, of
whom approximately 8,200 were employed outside the United States.
RAW MATERIALS AND SUPPLIES
Raw materials essential to the conduct of each of the Company's business
segments generally are available at competitive prices. Many items of equipment
and components used in the production of the Company's products are purchased
from others. In addition, the Avionics & Communications business generally
subcontracts major portions of systems. Although the Company has a broad base of
suppliers and subcontractors, it is dependent upon the ability of its suppliers
and subcontractors to meet performance and quality specifications and delivery
schedules.
ENVIRONMENTAL PROTECTION REQUIREMENTS
Information with respect to the effect on the Company and its manufacturing
operations of compliance with environmental protection requirements and
resolution of environmental claims is contained in Note 18 of the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS in the Financial Statements. See also Item 3,
LEGAL PROCEEDINGS, on pages 6-8 hereof.
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PATENTS, LICENSES AND TRADEMARKS
Numerous patents and patent applications are owned or licensed by the
Company and utilized in its activities and manufacturing operations. Various
claims of patent infringement have been made against the Company. Management
believes that none of these claims will have a material adverse effect on the
Financial Statements of the Company. See Item 3, LEGAL PROCEEDINGS, on pages 6-8
hereof. While in the aggregate the Company's patents and licenses are considered
important in the operation of its business, management does not consider them of
such importance that loss or termination of any one of them would materially
affect the Company's business.
The Company's name and its registered trademarks "Rockwell" and "Rockwell
International" are important to each of its business segments. In addition, the
Company owns a large number of other important trademarks applicable to only
certain of its products, such as "Collins" for navigation and communication
equipment, "Allen-Bradley" and "A-B" for electronic controls and systems for
industrial automation, "Reliance Electric" for electric motors and "Dodge" for
mechanical power transmission products.
SEASONALITY
None of the Company's business segments is seasonal.
ITEM 2. PROPERTIES.
At September 30, 1999, the Company's businesses operated 87 plants and
research and development facilities throughout the United States and in Europe,
Brazil, Canada, India, Mexico, Australia and the Far East. These businesses also
had approximately 400 sales offices, warehouses and service centers. These
facilities had an aggregate floor space of approximately 23 million square feet.
Of this floor space, approximately 62 percent was owned by the Company and
approximately 38 percent was leased. At September 30, 1999, approximately
1.8 million square feet of floor space was not in use, most of which was in
owned facilities. A summary of floor space of these facilities at September 30,
1999 is as follows:
<TABLE>
<CAPTION>
OWNED LEASED
LOCATION AND SEGMENTS FACILITIES FACILITIES TOTAL
--------------------- ---------- ---------- -----
(In millions of square feet)
<S> <C> <C> <C>
United States:
Automation............................................. 8.7 3.4 12.1
Avionics & Communications.............................. 3.2 1.4 4.6
Other Businesses....................................... 0.3 0.2 0.5
Europe:
Automation............................................. 0.4 1.1 1.5
Avionics & Communications.............................. 0.1 -- 0.1
South America:
Automation............................................. 0.1 1.4 1.5
Avionics & Communications.............................. -- 0.1 0.1
Canada and other areas:
Automation............................................. 0.4 0.9 1.3
Corporate Offices (including unused wafer fabrication
facilities held for sale).............................. 1.0 0.3 1.3
---- --- ----
Total.......................................... 14.2 8.8 23.0
==== === ====
</TABLE>
In connection with the spin-off of Semiconductor Systems, the Company
retained ownership of wafer fabrication facilities in Colorado Springs,
Colorado, which are currently being held for sale. These facilities have
approximately one million square feet of floor space and are not currently being
used. At September 30, 1999, these facilities are included in Other current
assets on the Company's Consolidated Balance Sheet included in the Financial
Statements.
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There are no major encumbrances (other than financing arrangements which in
the aggregate are not material) on any of the Company's plants or equipment. In
the opinion of management, the Company's properties have been well maintained,
are in sound operating condition and contain all equipment and facilities
necessary to operate at present levels.
ITEM 3. LEGAL PROCEEDINGS.
Rocky Flats Plant. On January 30, 1990, a civil action was brought in the
United States District Court for the District of Colorado against the Company
and another former operator of the Rocky Flats Plant (the Plant), Golden,
Colorado, operated from 1975 through December 31, 1989 by the Company for the
Department of Energy (DOE). The action alleges the improper production, handling
and disposal of radioactive and other hazardous substances, constituting, among
other things, violations of various environmental, health and safety laws and
regulations, and misrepresentation and concealment of the facts relating
thereto. The plaintiffs, who purportedly represent two classes, sought
compensatory damages of $250 million for diminution in value of real estate and
other economic loss; the creation of a fund of $150 million to finance medical
monitoring and surveillance services; exemplary damages of $300 million; CERCLA
response costs in an undetermined amount; attorneys' fees; an injunction; and
other proper relief. On February 13, 1991, the court granted certain of the
motions of the defendants to dismiss the case. The plaintiffs subsequently filed
a new complaint, and on November 26, 1991, the court granted in part a renewed
motion to dismiss. The remaining portion of the case is pending before the
court. On October 8, 1993, the court certified separate medical monitoring and
property value classes. Effective August 1, 1996, the DOE assumed control of the
defense of the contractor defendants, including the Company, in the action.
Beginning on that date, the costs of the Company's defense, which had previously
been reimbursed to the Company by the DOE, have been and are being paid directly
by the DOE. The Company believes that it is entitled under applicable law and
its contract with the DOE to be indemnified for all costs and any liability
associated with this action.
On November 13, 1990, the Company was served with a summons and complaint
in another civil action brought against the Company in the same court by James
Stone, claiming to act in the name of the United States, alleging violations of
the U.S. False Claims Act in connection with the Company's operation of the
Plant (and seeking treble damages and forfeitures) as well as a personal cause
of action for alleged wrongful termination of employment. On August 8, 1991, the
court dismissed the personal cause of action. On December 6, 1995, the DOE
notified the Company that it would no longer reimburse costs incurred by the
Company in defense of the action. On November 19, 1996, the court granted the
Department of Justice leave to intervene in the case on the government's behalf.
On April 1, 1999 a jury awarded the plaintiffs approximately $1.4 million in
damages. On May 18, 1999, the court entered judgment against the Company for
approximately $4.2 million, trebling the jury's award as required by the False
Claims Act, and imposing a civil penalty of $15,000. If the judgment is affirmed
on appeal, Mr. Stone may also be entitled to an award of attorney's fees but the
court refused to consider the matter until appeals from the judgment have been
exhausted. Both the plaintiffs and the Company have appealed the judgment, but
management believes that an outcome adverse to the Company will not have a
material effect on the Company's financial statements.
On January 8, 1991, the Company filed suit in the United States Claims
Court against the DOE, seeking recovery of $6.5 million of award fees to which
the Company alleges it is entitled under the terms of its contract with the DOE
for management and operation of the Plant during the period October 1, 1988
through September 30, 1989. On July 17, 1996, the government filed an amended
answer and counterclaim against the Company alleging violations of the U.S.
False Claims Act previously asserted in the civil action described in the
preceding paragraph. On March 20, 1997, the court stayed the case pending
disposition of the civil action described in the preceding paragraph. On August
30, 1999, the court continued the stay pending appeals in that civil action. The
Company believes the government's counterclaim is without merit, and believes it
is entitled under applicable law and its contract with the DOE to be indemnified
for any liability associated with the counterclaim.
Hanford Nuclear Reservation. On August 6, 1990 and August 9, 1990, civil
actions were filed in the United States District Court for the Eastern District
of Washington against the Company and the present and other former operators of
the DOE's Hanford Nuclear Reservation (Hanford), Hanford, Washington. The
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Company operated part of Hanford for the DOE from 1977 through June 1987. Both
actions purport to be brought on behalf of various classes of persons and
numerous individual plaintiffs who resided, worked, owned or leased real
property, or operated businesses, at or near Hanford or downwind or downriver
from Hanford, at any time since 1944. The actions allege the improper handling
and disposal of radioactive and other hazardous substances and assert various
statutory and common law claims. The relief sought includes unspecified
compensatory and punitive damages for personal injuries and for economic losses,
and various injunctive and other equitable relief.
Other cases asserting similar claims (the follow-on claims) on behalf of
the same and similarly situated individuals and groups have been filed from time
to time since August 1990, and may continue to be filed from time to time in the
future. These actions and the follow-on claims have been (and any additional
follow-on claims that may be filed are expected to be) consolidated in the
United States District Court for the Eastern District of Washington under the
name In re Hanford Nuclear Reservation Litigation. Because the claims and
classes of claimants included in the actions described in the preceding
paragraph are so broadly defined, the follow-on claims filed as of November 30,
1999 have not altered, and possible future follow-on claims are not expected to
alter, in any material respect the scope of the litigation.
Effective October 1, 1994, the DOE assumed control of the defense of
certain of the contractor defendants (including the Company) in the In re
Hanford Nuclear Reservation Litigation. Beginning on that date, the costs of the
Company's defense, which had previously been reimbursed to the Company by the
DOE, have been and are being paid directly by the DOE. The Company believes it
is entitled under applicable law and its contracts with the DOE to be
indemnified for all costs and any liability associated with these actions.
Russellville. On June 24, 1996, judgment was entered against the Company
in a civil action in the Circuit Court of Logan County, Kentucky on a jury
verdict awarding $8 million in compensatory and $210 million in punitive damages
for property damage. The action had been brought August 12, 1993 by owners of
flood plain real property near Russellville, Kentucky allegedly damaged by
polychlorinated biphenyls (PCBs) discharged from a plant owned and operated by
the Company's Measurement & Flow Control Division prior to its divestiture in
March 1989. The Company believes that the verdict is unsupported by the evidence
and, on January 22, 1997, filed a notice of appeal. Since the Company believes
it is not reasonably possible that the punitive damages will be sustained on
appeal, the Company has not accrued any reserve for those damages.
On March 24, 1997, the Circuit Court of Franklin County, Kentucky in
Commonwealth of Kentucky, Natural Resources and Environmental Protection Cabinet
vs. Rockwell, an action filed in 1986 seeking remediation of PCB contamination
resulting from unpermitted discharges of PCBs from the Company's former
Russellville, Kentucky plant, entered judgment establishing PCB cleanup levels
for the former plant site and certain offsite property and ordering additional
characterization of possible contamination in the Mud River and its floodplain.
The Court deferred any decision on the imposition of fines and penalties pending
implementation of an appropriate remediation program. On August 13, 1999, the
Court of Appeals affirmed the trial court's judgment. On September 10, 1999, the
Company filed a petition for discretionary review of that decision with the
Supreme Court of the State of Kentucky. The Company has been proceeding with
remediation and characterization efforts consistent with the trial Court's
ruling while simultaneously appealing that ruling.
Other. In July 1995, a federal grand jury impaneled by the United States
District Court for the Central District of California began an investigation
into a July 1994 explosion at the Santa Susana Field Laboratory operated by the
Company's former Rocketdyne Division in which two scientists were killed and a
technician was injured. On April 11, 1996, pursuant to an agreement between the
Company and the United States Attorney for the Central District of California,
the Company entered a plea of guilty to two counts of unpermitted disposal of
hazardous waste and one count of unpermitted storage of hazardous waste, all of
which are felony violations of the Resource Conservation and Recovery Act, and
paid a fine of $6.5 million to settle potential federal criminal claims arising
out of the federal government's investigation. Investigation under other U.S.
and California laws continues. While the Company has no information on the
status of these
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investigations, further civil sanctions could be imposed on the current owner of
the facility, Boeing North American, Inc. (BNA), for which the Company would be
required to indemnify BNA.
On December 27, 1995, one shareowner, purporting to act derivatively on
behalf of the Company, commenced an action in the Superior Court of the State of
California for the County of Orange against 13 of the Company's directors, and
the Company as a nominal defendant, alleging principally breaches of fiduciary
duties in failing properly to manage the business of the Company in a manner to
prevent certain violations of applicable federal and state laws, including
environmental laws, by certain named and unnamed employees or agents of the
Company. The action seeks declaratory judgment, damages suffered by the Company
as a result of the alleged conduct, plaintiffs' costs and expenses and other
proper relief.
On February 27, 1996, a similar suit, making similar allegations and
seeking similar relief, was filed against the Company and the same directors,
plus Don H. Davis, Jr., by two other shareowners in the Superior Court of the
State of California for the County of Los Angeles. On August 7, 1996, the Los
Angeles County action was dismissed voluntarily by the plaintiffs. On August 22,
1996, a First Amended Consolidated Complaint was filed in the Orange County
action, adding the plaintiffs from the dismissed Los Angeles County suit as
party plaintiffs to the Orange County suit. A Second Amended Consolidated
Complaint was filed in the Orange County action on November 27, 1996.
Subsequently, on February 4, 1997, plaintiffs voluntarily dismissed the action
with respect to two of the director-defendants, Judith L. Estrin and William H.
Gray, III. The Company and the director-defendants are defending the
consolidated action. Non-expert discovery has been completed and the court has
under submission defendants' motion for summary judgment.
Various other lawsuits, claims and proceedings have been or may be
instituted or asserted against the Company relating to the conduct of its
business, including those pertaining to product liability, environmental, safety
and health, intellectual property, employment and government contract matters.
Although the outcome of litigation cannot be predicted with certainty and some
lawsuits, claims or proceedings may be disposed of unfavorably to the Company,
management believes the disposition of matters which are pending or asserted
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 were submitted to a vote of security holders during the fourth
quarter of 1999.
ITEM 4a. EXECUTIVE OFFICERS OF THE COMPANY.
The name, age, office and position held with the Company and principal
occupations and employment during the past five years of each of the executive
officers of the Company as of November 30, 1999 are as follows:
<TABLE>
<CAPTION>
NAME, OFFICE AND POSITION, AND PRINCIPAL OCCUPATIONS AND EMPLOYMENT AGE
- ------------------------------------------------------------------- ---
<S> <C>
DON H. DAVIS, JR.--Chairman of the Board of Rockwell since February
1998 and Chief Executive Officer of Rockwell since October 1997;
President and Chief Operating Officer of Rockwell from July 1995
to October 1997; Executive Vice President and Chief Operating
Officer of Rockwell prior thereto............................. 59
W. MICHAEL BARNES--Senior Vice President, Finance & Planning and
Chief Financial Officer of Rockwell........................... 57
WILLIAM J. CALISE, JR.--Senior Vice President, General Counsel and
Secretary of Rockwell......................................... 61
JOHN D. COHN--Senior Vice President, Marketing and Communications
of Rockwell since July 1999; Vice President-Global Strategy
Development of Rockwell Collins from February 1999 to June 1999;
Director, Global Business Development and Strategic Planning of
Rockwell Collins from November 1996 to February 1999; Regional
Director-Europe and Africa of Rockwell Collins prior thereto... 45
</TABLE>
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<TABLE>
<CAPTION>
NAME, OFFICE AND POSITION, AND PRINCIPAL OCCUPATIONS AND EMPLOYMENT AGE
- ------------------------------------------------------------------- ---
<S> <C>
STEVEN S. GARDNER--Vice President and General Tax Counsel of
Rockwell since March 1998; Associate General Tax Counsel of
Rockwell from October 1997 to March 1998; European Tax Counsel of
Rockwell from January 1996 to October 1997; European Area Tax
Counsel of Dow Corning (silicone products) prior thereto...... 44
JAMES E. HART--Vice President, Strategic Sourcing of Rockwell since
April 1999; Vice President and Program Manager, Strategic
Sourcing Initiative of Rockwell from November 1998 to April 1999;
Vice President, Finance, Materials and Business Planning of
Rockwell Automation, Control and Information Group prior
thereto....................................................... 50
CLAYTON M. JONES--Senior Vice President of Rockwell and President,
Rockwell Collins since January 1999; Executive Vice President of
Rockwell Collins from November 1996 to January 1999; Vice
President and General Manager of Rockwell Collins Air Transport
Division from October 1995 to November 1996; Senior Vice
President-Government Operations & International of Rockwell from
February 1995 to October 1995; Vice President-Aerospace
Government Affairs and Marketing of Rockwell prior thereto.... 50
KEITH D. NOSBUSCH--Senior Vice President of Rockwell and President,
Rockwell Automation Control Systems since November 1998; Senior
Vice President-Automation Control and Information Group of
Rockwell Automation from February 1996 to November 1998; Vice
President-Presence Sensing Products of Rockwell Automation prior
thereto....................................................... 48
GEORGE C. ODDEN--Vice President, Corporate Development of Rockwell
since June 1999; Director, Mergers and Acquisitions of Warburg
Dillon Read LLC (investment banking) from April 1999 to June
1999; Associate Director, Warburg Dillon Read LLC from September
1997 to April 1999; Associate, Warburg Dillon Read LLC prior
thereto....................................................... 34
JAMES P. O'SHAUGHNESSY--Vice President and Chief Intellectual
Property Counsel of Rockwell since May 1996; partner of Foley &
Lardner (law firm) prior thereto.............................. 52
DENNIS J. POPOVEC--Vice President and Treasurer of Rockwell since
March 1997; Assistant Treasurer of Rockwell prior thereto..... 44
WILLIAM E. SANDERS--Vice President and Controller of Rockwell since
August 1997; Assistant Controller of Rockwell from October 1996
to August 1997; Accounting Executive, Financial Reports of
Rockwell prior thereto........................................ 47
WILLIAM A. SANTE, II--General Auditor of Rockwell............... 56
JOHN R. STOCKER--Vice President, Law of Rockwell................ 58
JOEL R. STONE--Senior Vice President, Human Resources of Rockwell
since December 1996; Vice President, Compensation & Benefits of
Rockwell prior thereto........................................ 55
JOSEPH D. SWANN--Vice President of Rockwell and President, Rockwell
Automation Power Systems since June 1998; Senior Vice President
and General Manager-Dodge Mechanical Group, Rockwell Automation
prior thereto................................................. 58
EARL S. WASHINGTON--Senior Vice President & Special Assistant to
the Chairman and Chief Executive Officer of Rockwell since June
1999; Senior Vice President, Corporate Marketing and
Communications of Rockwell from February 1998 to June 1999;
Senior Vice President, Communications of Rockwell from September
1995 to February 1998; Vice President, Advertising and Public
Relations of Rockwell prior thereto........................... 54
</TABLE>
There are no family relationships, as defined, between any of the above
executive officers. No officer of the Company was selected pursuant to any
arrangement or understanding between him and any person other than the Company.
All executive officers are elected annually.
9
<PAGE> 10
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The principal market on which the Company's Common Stock is traded is the
New York Stock Exchange. The Company's Common Stock is also traded on the
Pacific and London Stock Exchanges. On November 15, 1999, there were 53,894
shareowners of record of the Company's Common Stock.
The following table sets forth the high and low trading price of the
Company's Common Stock on the New York Stock Exchange--Composite Transactions
reporting system during each quarter of the Company's fiscal years ended
September 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
FISCAL QUARTERS HIGH LOW HIGH LOW
- --------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First..................................... 52 5/16 32 1/8 58 5/8 44 5/16
Second.................................... 49 7/16 39 15/16 61 5/8 48 3/8
Third..................................... 63 9/16 41 1/4 59 1/16 46 9/16
Fourth.................................... 64 15/16 48 7/8 48 1/4 33 3/4
</TABLE>
On December 6, 1996, each Rockwell shareowner became entitled to receive
.042 share (presently .084 share) of Boeing common stock for each share of
Rockwell Common Stock or Class A Common Stock owned. On September 30, 1997, each
Rockwell shareowner received one-third of a share of Meritor common stock for
each share of Rockwell Common Stock owned. On December 31, 1998, each Rockwell
shareowner received one-half of a share (presently one share) of Conexant common
stock for each share of Rockwell Common Stock owned. At September 30, 1999, such
fractional shares of Boeing, Meritor and Conexant common stock per Rockwell
share had values of $3.58, $6.96 and $36.33, respectively. Rockwell's current
stock price does not reflect the value of the Boeing, Meritor and Conexant
fractional shares.
During the year ended September 30, 1999, the Company repurchased, through
open-market purchases, 3.5 million shares of Common Stock.
The following table sets forth the aggregate quarterly cash dividends per
common share (comprised of the Common Stock and, until February 23, 1997, the
date of its automatic conversion to Common Stock, Class A Common Stock) during
each of the Company's five fiscal years ended September 30, 1999:
<TABLE>
<CAPTION>
CASH DIVIDENDS PER
FISCAL YEAR COMMON SHARE(1)
- ----------- ------------------
<S> <C>
1999........................................................ $1.02
1998........................................................ 1.02
1997........................................................ 1.16
1996........................................................ 1.16
1995........................................................ 1.08
</TABLE>
- ---------------
(1) Upon the spin-off of Meritor on September 30, 1997, the Company's annual
$1.16 per share dividend was set at $1.02 for Rockwell and 14 cents for
Meritor. Per share dividend amounts indicated do not include dividends paid
on the fractional shares of Boeing and Meritor received on December 6, 1996
and September 30, 1997, respectively, by Rockwell shareowners.
On July 1, 1999, the Company issued 151, 158 and 158 shares of restricted
stock, respectively, to the following directors of the Company: Donald R. Beall,
George L. Argyros and John D. Nichols. These shares were issued pursuant to
deferral elections made in accordance with the Company's Directors Stock Plan in
partial or full payment for retainer fees otherwise payable in cash. The
issuance of all such shares was exempt from the registration requirements of the
Securities Act of 1933 pursuant to Section 4(2) thereof.
ITEM 6. SELECTED FINANCIAL DATA.
The following sets forth selected consolidated financial data in respect of
the Company's continuing operations. The selected consolidated financial data
have been derived from the consolidated financial statements of the Company. The
data should be read in conjunction with the MD&A and the Financial
10
<PAGE> 11
Statements. The statement of operations data for the five years ended September
30, 1999 and the related balance sheet data have been derived from the audited
consolidated financial statements of the Company.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
1999 1998(a) 1997(b) 1996(c) 1995
---- ------- ------- ------- ----
(in millions, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales........................................... $7,043 $6,752 $6,370 $5,784 $5,169
Interest expense................................ 84 58 27 22 14
Income (loss) from continuing operations before
accounting change............................. 582 (109) 437 364 308
Earnings (loss) per share from continuing
operations before accounting change:
Basic......................................... 3.06 (0.55) 2.04 1.67 1.42
Diluted....................................... 3.01 (0.55) 2.01 1.65 1.39
Cash dividends per share........................ 1.02 1.02 1.16 1.16 1.08
BALANCE SHEET DATA: (at end of period)
Total assets.................................... $6,704 $7,170 $7,642 $8,564 $7,977
Long-term debt.................................. 911 908 156 156 167
Shareowners' equity............................. 2,637 3,245 4,811 4,256 3,782
</TABLE>
- ---------------
(a) Includes pre-tax charges of $597 million ($508 million after tax, or $2.57
per diluted share) for costs associated with asset impairments and a
comprehensive restructuring program and $103 million ($63 million after tax,
or 31 cents per diluted share) relating to the write-off of purchased
research and development in connection with an acquisition.
(b) Includes a charge of $23 million (before and after tax), or 11 cents per
diluted share, relating to the write-off of purchased research and
development in connection with an acquisition.
(c) Includes a pre-tax charge of $76 million ($47 million after tax, or 22 cents
per diluted share) related to restructuring actions and a tax credit of $65
million, or 29 cents per diluted share, related to the settlement of
research and experimentation tax credit refund claims for years prior to
1996.
11
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Summary of Results of Operations
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(in millions)
<S> <C> <C> <C> <C> <C>
SALES:
Automation.................................. $4,411 $4,546 $4,494 $4,165 $3,590
Avionics & Communications................... 2,395 1,980 1,674 1,459 1,443
Other Businesses............................ 237 226 202 160 136
------ ------ ------ ------ ------
Total.................................... $7,043 $6,752 $6,370 $5,784 $5,169
====== ====== ====== ====== ======
SEGMENT OPERATING EARNINGS:
Automation.................................. $ 661 $ 594 $ 598 $ 537 $ 481
Avionics & Communications................... 448 272 253 166 185
Other Businesses............................ 30 13 13 11 (6)
------ ------ ------ ------ ------
Total.................................... 1,139 879 864 714 660
Special charges............................... -- (597) -- (76) --
Purchased research and development............ -- (103) (23) -- --
General corporate -- net...................... (165) (96) (79) (84) (108)
Interest expense.............................. (84) (58) (27) (22) (14)
------ ------ ------ ------ ------
Income from continuing operations before
income taxes and accounting change.......... 890 25 735 532 538
Provision for income taxes.................... (308) (134) (298) (168) (230)
------ ------ ------ ------ ------
Income (loss) from continuing operations
before accounting change.................... $ 582 $ (109) $ 437 $ 364 $ 308
====== ====== ====== ====== ======
</TABLE>
1999 Compared to 1998
Sales increased four percent in 1999 to $7 billion from $6.8 billion in
1998 due to strong growth at Rockwell Collins. The composition of sales was as
follows (in billions):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
U.S. Commercial............................................. $4.1 $4.1
International............................................... 2.2 2.1
U.S. Government............................................. 0.7 0.6
---- ----
Total............................................. $7.0 $6.8
==== ====
</TABLE>
Earnings per share from continuing operations in 1999 of $3.01 were up 29
percent over comparable 1998 earnings (before special items) of $2.33. The
related income increased $120 million to $582 million from $462 million in 1998.
Effective September 30, 1999, Rockwell revised the presentation of its
business segments. The Avionics & Communications segment is now comprised solely
of Rockwell Collins while Rockwell Electronic Commerce and Rockwell Science
Center have been combined into the Other Businesses segment. Prior period
amounts have been reclassified to conform with the current year presentation.
Automation's sales of $4.4 billion in 1999 were down three percent from
1998 due to a $130 million sales decline at the motors business. Despite
sluggish markets, Automation achieved record operating earnings of $633 million
in 1999, excluding a $28 million gain resulting from the sale of our North
American Transformer business. Automation's higher operating performance was
driven by significant improvements in manufacturing processes and material cost
reductions, which more than offset investments in new product development and
launch costs. Operating earnings in 1999 also include a $9 million charge
related to the consolidation of the power systems businesses. Operating results
for 1998 include a $16 million gain related to
12
<PAGE> 13
the favorable resolution of certain environmental matters with Exxon
Corporation. Operating earnings as a percent of sales were 14.4 percent in 1999,
excluding the $28 million gain, compared to 13.1 percent in 1998.
Avionics & Communications achieved a 21 percent increase in sales during
1999 to $2.4 billion from $2 billion in 1998. All of Rockwell Collins'
businesses, passenger systems, government systems, air transport and business
and regional systems, posted sales increases in 1999. Rockwell Collins also
generated a 34 percent increase in customer service and support revenue in 1999.
Rockwell Collins' operating earnings in 1999 of $416 million, excluding a $32
million gain associated with the sale of the railroad electronics business, were
up 36 percent from 1998 operating earnings of $307 million, excluding a $35
million charge in 1998 for the estimated loss on a government systems contract.
Higher operating earnings in 1999 were driven by outstanding performance at the
air transport and business and regional systems businesses. Operating earnings
as a percent of sales in 1999 (excluding the $32 million gain) were 17.4 percent
compared to 15.5 percent in 1998 (excluding the $35 million contract charge).
Sales for Other Businesses increased five percent in 1999 to $237 million.
Operating earnings in 1999 of $30 million include approximately $14 million
resulting from the favorable resolution of an intellectual property matter.
The increase in general corporate expenses in 1999 is due to charges of
approximately $37 million for costs incurred in connection with the Company's
relocation of its corporate office and a $29 million loss associated with the
write-off of its investment in Goss Graphics Systems, Inc. preferred stock.
1998 Compared to 1997
Sales increased six percent in 1998 to $6.8 billion from $6.4 billion in
1997 due primarily to strong markets for Rockwell Collins products. Income from
continuing operations (before special items) for 1998 totaled $462 million, or
$2.33 per share, compared to $460 million, or $2.12 per share in 1997.
Automation demonstrated its ability in 1998 to perform in uncertain global
markets by offsetting lower sales in North America and the Asia-Pacific region
with gains in Europe and Latin America. Sales in 1998 of $4.5 billion were about
the same as 1997. Operating earnings for 1998 were $594 million compared to $598
million in 1997. Operating earnings as a percent of sales were 13.1 percent in
1998 compared to 13.3 percent in 1997 as operating efficiencies and
cost-reduction actions implemented in June 1998 substantially offset the effects
of performance issues at the motors business.
Avionics & Communications achieved an 18 percent increase in sales during
1998 to $2 billion from $1.7 billion in 1997. Significant sales increases
occurred at the Company's commercial air transport and business and regional
aircraft systems businesses in 1998. Approximately one-third of the sales
increase in 1998 was due to inclusion of the passenger systems business, which
was acquired in December 1997. Avionics & Communications' operating earnings for
1998, excluding a third quarter government contract reserve of $35 million, were
up 21 percent from 1997. Operating earnings as a percent of sales in 1998,
before special items and the contract reserve, were 15.5 percent compared to
15.1 percent in 1997.
Sales for Other Businesses increased to $226 million in 1998 from $202
million in 1997. Operating earnings of $13 million in 1998 were consistent with
the operating earnings of 1997.
Special items in 1998 consisted of a pre-tax charge of $103 million, or 31
cents per share, for purchased research and development in connection with the
acquisition of the passenger systems business and a pre-tax charge of $597
million, or $2.57 per share, for asset impairments and a comprehensive
restructuring program. A significant component of the asset impairment charge
related to the writedown of long-lived assets (primarily goodwill) associated
with Rockwell Automation's motors business. The special charges related to the
business segments as follows: Automation, $488 million; Avionics &
Communications, $88 million; Other Businesses, $11 million; and Corporate, $10
million. Including special items, the 1998 loss from continuing operations,
before an accounting change, was $109 million, or 55 cents per share, compared
to 1997 income from continuing operations of $437 million, or $2.01 per share.
In addition, the Company recorded an after-tax charge of $17 million, or nine
cents per share, related to a change in accounting method at the Avionics &
Communications business for certain general and administrative costs related to
government contracts. Including the effect of the accounting change and the
results of discontinued operations, the net loss for 1998
13
<PAGE> 14
was $427 million, or $2.16 per share, compared to 1997 net income of $644
million, or $2.97 per share. The special item in 1997 was a pre-tax charge of
$23 million, or 11 cents per share, for purchased research and development
related to the acquisition of a Rockwell Automation software business.
DISCONTINUED OPERATIONS
On December 31, 1998, the Company completed the spin-off of Semiconductor
Systems into an independent, separately traded, publicly held company by
distributing all of the outstanding shares of Conexant Systems, Inc. to the
Company's shareowners on a pro-rata basis. In connection with this spin-off, the
Company retained ownership of wafer fabrication facilities in Colorado Springs,
Colorado, which are currently being held for sale. The Company accrued for
Semiconductor Systems' estimated first quarter 1999 operating loss and costs
related to the spin-off in 1998. An additional $20 million loss was recorded in
the first quarter of 1999, which relates principally to the Company's decision
to record a further writedown of the wafer fabrication facilities in Colorado
Springs and for related costs of disposal.
Discontinued operations for periods prior to 1999 include the Semiconductor
Systems, Automotive, Aerospace & Defense, and Graphic Systems businesses.
ACQUISITIONS
The Company completed six acquisitions during 1999 that complement the
Company's product offerings, strengthen its technologies, and expand its global
reach. The total cost of these acquisitions was $241 million, of which $214
million was allocated to intangible assets, including developed technology,
patents, assembled workforce and goodwill. The intangible assets are being
amortized on a straight-line basis over periods ranging from six to thirty
years.
Rockwell Automation acquired Anorad Corporation (Anorad), EJA Engineering,
Ltd. (EJA), substantially all of the assets of Enterprise Technology Group, Inc.
(ETG), a software business, and certain assets, principally intellectual
property, of Vancouver-based Dynapro. Anorad is a leading supplier of linear
motor equipment and its acquisition positions Rockwell to address motion control
opportunities in the semiconductor fabrication market. EJA, based in the United
Kingdom, is a market-leading manufacturer of integrated control and safety
systems in the $2 billion industrial safety market. The ETG acquisition enhances
the technological capabilities of our growing Rockwell Software business while
the Dynapro acquisition expands Rockwell Automation's human-machine interface
software and hardware capabilities.
Our Avionics & Communications business acquired Intertrade Limited
(Intertrade) and the remaining 50 percent interest in Flight Dynamics.
Intertrade is an avionics parts supplier that will complement our growing
customer service and support business. Flight Dynamics, the market leader in
Head-Up Guidance Systems, increases Rockwell Collins' aviation electronics
content across multiple platforms.
INCOME TAXES
The Company's effective income tax rate declined to 34.6 percent in 1999
from 36.3 percent, excluding the tax effects of special items in 1998. The lower
tax rate in 1999 is primarily attributable to higher utilization of foreign tax
credits in 1999. Management believes the Company's effective income tax rate
will continue to benefit in 2000 and beyond from ongoing tax planning
initiatives.
BENEFIT PLANS
The Company's pension plan surplus increased to $270 million at September
30, 1999, from $95 million in 1998 due to a higher discount rate and continued
strong investment returns. Assets in the pension plans amounted to approximately
$3 billion at September 30, 1999. The Company is on track for full
implementation of its single simplified medical plan for active employees and
retirees on January 1, 2000.
OUTLOOK FOR 2000
Assuming a continuation of present global economic conditions, we expect
earnings per share growth of approximately 10 percent. We expect higher sales
and earnings at Rockwell Automation and Rockwell Electronic Commerce while
Rockwell Collins' results should be about the same as 1999, with higher sales
and
14
<PAGE> 15
earnings in business and regional systems, government systems, and customer
service and support, offsetting an expected decline in new aircraft production
in the commercial air transport market.
FINANCIAL CONDITION
Rockwell's strong financial position provides substantial flexibility for
acquisitions and investments in new product development and technology. Cash
generated by operations of $940 million in 1999 was up 30 percent from $723
million in 1998. Free cash flow in 1999 was $594 million, an increase of $256
million over the $338 million of free cash flow in 1998. The higher cash
generation in 1999 was driven by improvements in working capital management,
supplier management and cost reductions. The Company defines free cash flow, an
internal performance measurement, as cash provided by operating activities,
including proceeds from dispositions of property and reduced by capital
expenditures. The Company's definition of free cash flow may be different from
definitions used by other companies.
Cash used for investing activities was $420 million in 1999 compared to
$465 million in 1998. Capital expenditures in 1999 were $377 million and
consisted primarily of investments in facilities, machinery and equipment, and
integrated, enterprise-wide information systems to facilitate growth and
increase operating efficiencies. In addition, the Company used $241 million for
the acquisition of six new businesses in 1999. Cash used for acquisitions was
partially offset by $198 million in proceeds received from the sale of property
and businesses, including the Company's railroad electronics business and North
American Transformer business. Capital expenditures in 2000 are expected to
approximate $400 million.
The Company continues to invest heavily in research and new product
development. Investment totaled $422 million in 1999, up five percent from $402
million in 1998. New product development at Rockwell Collins was up 15 percent
over 1998 due to higher investment at our passenger systems business. The
Company expects this level of product development to continue in 2000.
In addition to internally generated cash, the Company has access to
existing financing sources, including the public debt markets and from the
approximately $1.3 billion of unsecured credit facilities with various banks.
The Company's debt-to-total-capital ratio at September 30, 1999, was 29 percent
compared to 25 percent at September 30, 1998.
During 1999, the Company completed the $500 million stock repurchase
program initiated in 1997 and the Board of Directors approved an additional $250
million stock repurchase program. The Company spent approximately $172 million
during 1999 in connection with these programs. At September 30, 1999, there was
approximately $242 million remaining on its current $250 million stock
repurchase program.
Cash dividends to shareowners were $194 million, or $1.02 per share, in
1999, compared to $202 million, or $1.02 per share, in 1998.
YEAR 2000 READINESS DISCLOSURE
The Company has substantially completed a comprehensive, five-phased Year
2000 remediation project. The inventory, assessment, and strategy phases were
completed in early 1999 and the conversion/upgrade and testing phases were
essentially complete by September 30, 1999. The Company's recent efforts have
been focused upon the development of Year 2000 contingency plans to deal with
unanticipated Year 2000 situations and any items that have not been remediated,
in order to minimize the risk of disruption to our customers and our businesses.
Management believes that the Company's products and the mission critical
components of its business systems, infrastructure and supporting systems are
ready for the transition to the Year 2000 and beyond.
Despite the Company's internal state of readiness for the Year 2000,
business operations can still be negatively affected by external Year 2000
failures, especially in the supply chain as it relates to critical manufacturing
suppliers, material suppliers, and infrastructure (utilities, communications,
transportation and other services) suppliers. A Year 2000 failure by a critical
supplier could result in the temporary slowdown or cessation of production by
the Company, the duration of which cannot be reasonably estimated. Where
possible, the Company has attempted to reduce this risk through various means by
assessing the Year 2000 readiness of critical suppliers, including reviewing
their responses to a standard Year 2000 questionnaire, reviewing their public
Year 2000 readiness statements and engaging in follow-up actions, where
necessary, to evaluate Year 2000 readiness. For our top five percent of critical
manufacturing and material suppliers, the
15
<PAGE> 16
Company has conducted on-site reviews and monitored specific Year 2000
milestones to review the supplier's readiness and the compliance of their
products and services.
The current estimate of Year 2000 total project costs is approximately $42
million, which includes the cost of purchasing certain hardware and software.
Purchased hardware and software has been capitalized in accordance with normal
policy. Through September 30, 1999, approximately 95 percent of the total
project cost had been spent.
The varying definitions of "compliance with Year 2000" and the array of
products and services sold by the Company, both today and in the past, may lead
to claims whose effect on the Company is not currently estimable. The Company
has product and general liability insurance policies which provide coverage in
the event of certain product failures. The Company has not, however, purchased
Year 2000 specific insurance because, in management's view, the cost is
prohibitive and likely of little value. In many cases, the Company contractually
limits or disclaims consequential damages in the Company's sales contracts. No
assurance can be given that the aggregate cost of defending and resolving such
claims will not materially adversely affect the Company's results of operations.
Although some of the Company's agreements with manufacturers and others from
whom it purchases products contain provisions requiring such parties to
indemnify the Company under certain circumstances, there can be no assurance
that such indemnification arrangements would cover all of the Company's
potential liabilities and costs related to claims by third parties related to
the Year 2000 issue.
The Company has been developing contingency plans to address potential Year
2000 events. As of September 30, 1999, approximately 85 percent of the Company's
Year 2000 contingency plans have been developed through a process that includes
the identification of key business processes, the assessment of exposure to Year
2000-related incidents, and the outlining of the actions to be taken. These
actions include identifying alternate suppliers, pre-stocking critical inventory
items and forming rapid response teams to ensure that normal business operations
continue unaffected.
With respect to operations under its direct control, management does not
currently expect, in view of its Year 2000 readiness efforts and the diversity
of its suppliers and customers, that occurrences of Year 2000 failures will have
a material adverse effect on the financial position or results of operations of
the Company. However, our evaluation is ongoing and we expect that new and
different information will become available to us. Consequently, there can be no
guarantee that all material elements will be Year 2000 ready in time. In this
environment, there will likely be instances of failure that could cause
disruptions in business processes. The likelihood and effects of such failures
cannot be estimated.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk during the normal course of business
from changes in interest rates and foreign currency exchange rates. The exposure
to these risks is managed through a combination of normal operating and
financing activities, and with respect to foreign currency transactions,
derivative financial instruments in the form of foreign currency forward
exchange contracts.
Interest Rate Risk
In addition to using cash provided by normal operating activities, the
Company utilizes a combination of short-term and long-term debt to finance
operations. The Company is exposed to interest rate risk on these debt
obligations.
The Company had short-term debt obligations consisting of commercial paper
and foreign bank borrowings with carrying values of $187 million and $154
million at September 30, 1999 and 1998, respectively. The Company's results of
operations are affected by changes in market interest rates on these short-term
obligations. If market interest rates would have averaged 10 percent higher than
actual levels in either 1999 or 1998, the effect on the Company's results of
operations would not have been material. The fair values of these obligations
approximated their carrying values at September 30, 1999 and 1998, and would not
have been materially affected by changes in market interest rates.
At September 30, 1999 and 1998, the Company had outstanding fixed rate
long-term debt obligations with carrying values of $913 million and $910
million, respectively. The fair value of this debt was $836
16
<PAGE> 17
million and $962 million at September 30, 1999 and 1998, respectively. The
potential loss in fair value on such fixed-rate debt obligations from a
hypothetical 10 percent increase in market interest rates would not be material
to the overall fair value of the debt. The Company currently has no plans to
repurchase outstanding fixed-rate instruments and, therefore, fluctuations in
market interest rates would not have an effect on the Company's results of
operations or shareowners' equity.
Foreign Currency Risk
The Company is a global electronic controls and communications company and
as such, conducts a significant portion of its business activities outside the
United States in currencies other than the United States dollar. The Company
enters into foreign currency forward exchange contracts (contracts) in the
ordinary course of business to protect itself from adverse currency rate
fluctuations on firm foreign currency transactions. In addition, the Company
enters into contracts to conservatively hedge certain forecasted foreign
currency transactions. These contracts are executed with creditworthy banks and
are denominated in currencies of major industrial countries. It is the policy of
the Company not to enter into derivative financial instruments for speculative
purposes. A substantial majority of these contracts are entered into in order to
hedge firm commitments with the remainder entered into to hedge forecasted
transactions. Under generally accepted accounting principles, gains and losses
on contracts for firm commitments are deferred through accumulated other
comprehensive income (loss) and included in the measurement of the underlying
foreign currency transaction being hedged. Gains and losses on contracts
relating to forecasted transactions are recognized in the current results of
operations.
At September 30, 1999 and 1998, the Company had outstanding foreign
currency forward exchange contracts with notional amounts of $708 million and
$578 million, respectively, primarily consisting of contracts to exchange the
Euro, British pound sterling, Canadian dollar, and Swiss franc. Notional amounts
are stated in the U.S. dollar equivalents at exchange rates in effect at the
time of contract initiation. A hypothetical 10 percent adverse change in
underlying foreign currency exchange rates associated with these contracts would
not be material to the results of operations or financial position of the
Company.
CAUTIONARY STATEMENT
This Annual Report contains statements (including certain projections and
business trends) accompanied by such phrases as "believes," "estimates,"
"expect(s)," "high expectations," "could," "likely," "anticipates," "will" and
other similar expressions, that are "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995. Actual results may differ
materially from those projected as a result of certain risks and uncertainties,
including but not limited to economic and political changes in international
markets where the Company competes, such as currency exchange rates, inflation
rates, recession, foreign ownership restrictions and other external factors over
which the Company has no control; domestic and foreign government spending,
budgetary and trade policies; demand for and market acceptance of new and
existing products; successful development of advanced technologies; competitive
product and pricing pressures; timely completion of Year 2000 software
modifications by the Company, its key suppliers and customers, and governments;
implementation of restructuring actions in accordance with management's plans
and the uncertainties of litigation, as well as other risks and uncertainties,
including but not limited to those detailed from time to time in the Company's
Securities and Exchange Commission filings. These forward-looking statements are
made only as of the date hereof, and the Company undertakes no obligation to
update or revise the forward-looking statements, whether as a result of new
information, future events or otherwise.
17
<PAGE> 18
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED BALANCE SHEET
(in millions)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1999 1998
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash (includes time deposits and certificates of deposit:
1999, $260; 1998, $61).................................... $ 356 $ 103
Receivables (less allowance for doubtful accounts: 1999,
$56; 1998, $51)........................................... 1,294 1,223
Inventories, net............................................ 1,339 1,313
Deferred income taxes....................................... 364 258
Other current assets........................................ 229 213
Net assets of Semiconductor Systems......................... -- 986
------- -------
Total current assets................................... 3,582 4,096
------- -------
PROPERTY, NET............................................... 1,581 1,535
------- -------
INTANGIBLE ASSETS, NET...................................... 1,390 1,330
------- -------
OTHER ASSETS................................................ 151 209
------- -------
TOTAL.................................................. $ 6,704 $ 7,170
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES
Short-term debt............................................. $ 189 $ 156
Accounts payable............................................ 843 733
Compensation and benefits................................... 469 547
Income taxes payable........................................ 91 19
Other current liabilities................................... 516 528
------- -------
Total current liabilities.............................. 2,108 1,983
------- -------
LONG-TERM DEBT.............................................. 911 908
------- -------
RETIREMENT BENEFITS......................................... 653 691
------- -------
OTHER LIABILITIES........................................... 395 343
------- -------
SHAREOWNERS' EQUITY
Common stock (shares issued: 216.4)......................... 216 216
Additional paid-in capital.................................. 960 923
Retained earnings........................................... 3,034 3,697
Accumulated other comprehensive loss........................ (153) (135)
Common stock in treasury, at cost (shares held: 1999, 25.5;
1998, 25.8)............................................... (1,420) (1,456)
------- -------
Total shareowners' equity.............................. 2,637 3,245
------- -------
TOTAL.................................................. $ 6,704 $ 7,170
======= =======
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 19
CONSOLIDATED STATEMENT OF OPERATIONS
(in millions, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
REVENUES:
Sales....................................................... $7,043 $6,752 $6,370
Other income, net........................................... 108 88 106
------ ------ ------
Total revenues.............................................. 7,151 6,840 6,476
------ ------ ------
COSTS AND EXPENSES:
Cost of sales (see Note 3).................................. 4,907 5,206 4,456
Selling, general, and administrative (see Note 3)........... 1,270 1,448 1,235
Purchased research and development (see Note 4)............. -- 103 23
Interest.................................................... 84 58 27
------ ------ ------
Total costs and expenses.................................... 6,261 6,815 5,741
------ ------ ------
Income from continuing operations before income taxes....... 890 25 735
Income tax provision........................................ 308 134 298
------ ------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE ACCOUNTING
CHANGE.................................................... 582 (109) 437
(Loss) income from discontinued operations.................. (20) (301) 207
Cumulative effect of accounting change...................... -- (17) --
------ ------ ------
NET INCOME (LOSS)........................................... $ 562 $ (427) $ 644
====== ====== ======
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations before accounting change............ $ 3.06 $(0.55) $ 2.04
Discontinued operations................................... (0.11) (1.52) 0.97
Cumulative effect of accounting change.................... -- (0.09) --
------ ------ ------
Net income (loss)......................................... $ 2.95 $(2.16) $ 3.01
====== ====== ======
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations before accounting change............ $ 3.01 $(0.55) $ 2.01
Discontinued operations................................... (0.11) (1.52) 0.96
Cumulative effect of accounting change.................... -- (0.09) --
------ ------ ------
Net income (loss)......................................... $ 2.90 $(2.16) $ 2.97
====== ====== ======
AVERAGE OUTSTANDING SHARES:
Basic..................................................... 190.5 197.9 213.8
====== ====== ======
Diluted................................................... 193.6 197.9 217.1
====== ====== ======
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 20
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------
1999 1998 1997
----- ----- -------
<S> <C> <C> <C>
CONTINUING OPERATIONS:
OPERATING ACTIVITIES
Income (loss) from continuing operations before accounting
change.................................................... $ 582 $(109) $ 437
Adjustments to arrive at cash provided by operating
activities:
Depreciation.............................................. 258 227 210
Amortization of intangible assets......................... 79 79 83
Deferred income taxes..................................... 12 (44) (38)
Net gain on dispositions of businesses (see Note 15)...... (57) (8) --
Loss on investment (see Note 15).......................... 29 -- --
Special charges (see Note 3).............................. -- 597 --
Purchased research and development (see Note 4)........... -- 103 23
Changes in assets and liabilities, excluding effects of
acquisitions, divestitures, and foreign currency
adjustments:
Receivables............................................ (77) (126) (125)
Inventories............................................ (29) (40) (120)
Accounts payable....................................... 97 79 41
Income taxes........................................... 26 (76) (77)
Other assets and liabilities........................... 20 41 (27)
----- ----- -------
CASH PROVIDED BY OPERATING ACTIVITIES.................. 940 723 407
----- ----- -------
INVESTING ACTIVITIES
Property additions.......................................... (377) (408) (336)
Acquisitions of businesses, net of cash acquired............ (241) (158) (50)
Special payment from Meritor (see Note 2)................... -- -- 445
Proceeds from the dispositions of property and businesses... 198 101 607
----- ----- -------
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES....... (420) (465) 666
----- ----- -------
FINANCING ACTIVITIES
Increase (decrease) in short-term borrowings................ 21 107 (241)
Payments of long-term debt.................................. -- (3) (15)
Long-term borrowings........................................ -- 751 2
----- ----- -------
Net increase (decrease) in debt........................... 21 855 (254)
Purchases of treasury stock................................. (172) (980) (856)
Cash dividends.............................................. (194) (202) (248)
Proceeds from the exercise of stock options................. 125 75 56
----- ----- -------
CASH USED FOR FINANCING ACTIVITIES..................... (220) (252) (1,302)
----- ----- -------
CASH PROVIDED BY (USED FOR) CONTINUING OPERATIONS........... 300 6 (229)
Cash Used for Discontinued Operations....................... (47) (172) (141)
----- ----- -------
INCREASE (DECREASE) IN CASH................................. 253 (166) (370)
CASH AT BEGINNING OF YEAR................................... 103 269 639
----- ----- -------
CASH AT END OF YEAR......................................... $ 356 $ 103 $ 269
===== ===== =======
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 21
CONSOLIDATED STATEMENT OF SHAREOWNERS' EQUITY
(in millions, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
COMMON STOCK
Beginning balance........................................... $ 216 $ 216 $ 210
Conversion of Class A common stock.......................... -- -- 25
Cancellation of treasury stock (see Note 2)................. -- -- (19)
------- ------- ------
Ending balance.............................................. 216 216 216
------- ------- ------
CLASS A COMMON STOCK
Beginning balance........................................... -- -- 28
Conversion into common stock................................ -- -- (28)
------- ------- ------
Ending balance.............................................. -- -- --
------- ------- ------
ADDITIONAL PAID-IN CAPITAL
Beginning balance........................................... 923 901 199
Exercise of stock options................................... 37 22 26
Divestiture of A&D Business (see Note 2).................... -- -- 1,175
Cancellation of treasury stock (see Note 2)................. -- -- (499)
------- ------- ------
Ending balance.............................................. 960 923 901
------- ------- ------
RETAINED EARNINGS
Beginning balance........................................... 3,697 4,409 4,466
Net income (loss)........................................... 562 (427) 644
Cash dividends (per share: 1999 and 1998, $1.02; 1997,
$1.16).................................................... (194) (202) (248)
Treasury stock reissuances.................................. (118) (83) (230)
Spin-off of Conexant (see Note 2)........................... (913) -- --
Spin-off of Meritor (see Note 2)............................ -- -- (223)
------- ------- ------
Ending balance.............................................. 3,034 3,697 4,409
------- ------- ------
ACCUMULATED OTHER COMPREHENSIVE LOSS
Beginning balance........................................... (135) (103) (103)
Other comprehensive loss.................................... (18) (32) (72)
Adjustment for Meritor spin-off (see Note 2)................ -- -- 72
------- ------- ------
Ending balance.............................................. (153) (135) (103)
------- ------- ------
TREASURY STOCK
Beginning balance........................................... (1,456) (612) (544)
Purchases................................................... (172) (980) (856)
Stock option exercises...................................... 208 136 270
Cancellation of treasury stock (see Note 2)................. -- -- 518
------- ------- ------
Ending balance.............................................. (1,420) (1,456) (612)
------- ------- ------
TOTAL SHAREOWNERS' EQUITY................................... $ 2,637 $ 3,245 $4,811
======= ======= ======
</TABLE>
See notes to consolidated financial statements.
21
<PAGE> 22
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(in millions)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1999 1998 1997
----- ------ -----
<S> <C> <C> <C>
Net income (loss)........................................... $562 $(427) $644
Other comprehensive loss:
Foreign currency translation adjustments (net of tax
benefit of $(3), $(2), and $0)......................... (16) (30) (67)
Pension adjustments....................................... (2) (2) (5)
---- ----- ----
Other comprehensive loss.................................... (18) (32) (72)
---- ----- ----
Comprehensive income (loss)................................. $544 $(459) $572
==== ===== ====
</TABLE>
See notes to consolidated financial statements.
22
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Basis of Presentation
Except as indicated, amounts reflected in the consolidated financial
statements or the notes thereto relate to the continuing operations of Rockwell
International Corporation (Rockwell or the Company). Certain prior year amounts
have been reclassified to conform with the current year presentation.
Consolidation
The consolidated financial statements of the Company include the accounts
of the Company and all majority-owned subsidiaries in which the Company has
control. All significant intercompany accounts and transactions are eliminated
in consolidation.
Use of Estimates
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements. Actual results could differ from those estimates.
Revenue Recognition
Sales are generally recorded as products are shipped or services are
rendered, except sales under certain contracts requiring performance over
several periods, which are accounted for under the percentage-of-completion
method of accounting. Anticipated losses on contracts accounted for under the
percentage-of-completion method are recognized in full in the period that the
losses become evident.
Cash
Cash includes time deposits and certificates of deposit with original
maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market using LIFO, FIFO, or
average methods. Market is determined on the basis of estimated realizable
values.
Property
Property is stated at cost. Depreciation of property is provided based on
estimated useful lives generally using accelerated and straight-line methods.
Significant renewals and betterments are capitalized and replaced units are
written off. Maintenance and repairs, as well as renewals of minor amounts, are
charged to expense.
Purchased Intangibles
Goodwill and other intangible assets generally result from business
acquisitions. The Company accounts for business acquisitions under the purchase
method by assigning the purchase price to tangible and intangible assets and
liabilities, including research and development projects which have not yet
reached technological feasibility and have no alternative future use (purchased
research and development). Assets acquired and liabilities assumed are recorded
at their fair values; the appraised value of purchased research and development
is immediately charged to expense, and the excess of the purchase price over the
amounts assigned is recorded as goodwill.
Goodwill is amortized using the straight-line method over periods generally
ranging from 10 to 40 years. Trademarks, patents, product technology, and other
intangibles are amortized on a straight-line basis over their estimated useful
lives, ranging from 5 to 40 years.
23
<PAGE> 24
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment when events or circumstances
indicate that the carrying amount of a long-lived asset may not be recoverable,
and for all assets to be disposed of. Long-lived assets held for use are
reviewed for impairment by assessing their net realizable values based on
estimated undiscounted cash flows over their remaining useful lives. If
impairment is indicated, the carrying amount of the asset is reduced to its fair
value.
Derivative Financial Instruments
The Company enters into foreign currency forward exchange contracts in the
ordinary course of business to protect itself from adverse currency rate
fluctuations on both firm and forecasted foreign currency transactions. These
contracts are executed with creditworthy banks and are denominated in currencies
of major industrial countries. It is the policy of the Company not to enter into
derivative financial instruments for speculative purposes. Accounting policies
for these instruments are based upon the Company's designation of such
instruments as hedging transactions under generally accepted accounting
principles. Criteria used in the designation of an instrument as a hedge include
the effectiveness of the instrument in reducing associated risk of the
underlying position. Gains or losses relating to hedging firm commitments are
deferred through accumulated other comprehensive income (loss) and included in
the measurement of the underlying foreign currency transaction being hedged.
Gains or losses relating to forecasted transactions are recognized in current
period other income, net.
Stock Options
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Environmental Matters
The Company records accruals for environmental matters in the accounting
period in which its responsibility is established and the cost can be reasonably
estimated. Revisions to the accruals are made in the periods in which the
estimated costs of remediation change. At environmental sites in which more than
one potentially responsible party has been identified, the Company records a
liability for its estimated allocable share of costs related to its involvement
with the site as well as an estimated allocable share of costs related to the
involvement of insolvent or unidentified parties. At environmental sites in
which the Company is the only responsible party, the Company records a liability
for the total estimated costs of remediation. Costs of future expenditures for
environmental remediation obligations are not discounted to their present value.
If recovery from insurers or other third parties is determined to be probable,
the Company records a receivable for the estimated recovery.
New Accounting Standards
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income (SFAS 130).
SFAS 130 establishes standards for the reporting and presentation of
comprehensive income (loss) and its components in financial statements. SFAS 130
requires certain equity adjustments to be reported as components of
comprehensive income. The adoption of this statement had no effect on the
Company's results of operations or shareowners' equity.
Effective September 30, 1999, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information (SFAS 131). The adoption
of SFAS 131 changed the composition of the Company's reportable operating
segments, and accordingly, certain segment information reported in prior year
financial statements has been reclassified to conform with the current year
presentation. The adoption of SFAS 131 had no effect on the Company's results of
operations or shareowners' equity.
24
<PAGE> 25
Effective September 30, 1999, the Company adopted SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits (SFAS 132). SFAS
132 establishes new disclosure requirements for pension and other postretirement
benefit information in the notes to the consolidated financial statements. The
adoption of SFAS 132 had no effect on the Company's results of operations or
shareowners' equity.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS
133 will require the Company to record all derivatives on the balance sheet at
fair value. For derivatives that are hedges, changes in fair value will be
offset by the changes in the fair value of the hedged assets, liabilities or
firm commitments. In June 1999, the Financial Accounting Standards Board delayed
the effective date of SFAS 133 to fiscal year 2001, but early adoption continues
to be permitted. The Company believes the effect of adopting this standard will
not be material to its results of operations or shareowners' equity.
In 1998, the Company adopted American Institute of Certified Public
Accountants Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1 requires
the cost of purchased software and certain costs incurred in developing computer
software for internal use to be capitalized and amortized over future periods.
During the year ended September 30, 1998, the Company's continuing businesses
capitalized $46 million of such costs that would have been charged to expense
under its previous accounting policy.
Accounting Change
Effective October 1, 1997, Rockwell changed its method of accounting for
certain general and administrative costs related to government contracts to
expense these costs as incurred. Under the previous accounting method, these
costs were included in inventory. The amount of general and administrative costs
included in inventory as of October 1, 1997 was $27 million ($17 million
after-tax, or nine cents per share) and is presented as the cumulative effect of
an accounting change in the consolidated statement of operations for the year
ended September 30, 1998. The effect of the accounting change on income from
continuing operations in 1997 would not have been material.
25
<PAGE> 26
2. DISCONTINUED OPERATIONS
On December 31, 1998, the Company completed the spin-off of its former
semiconductor systems business (Semiconductor Systems) into an independent,
separately traded, publicly-held company by distributing all of the outstanding
shares of Conexant Systems, Inc. (Conexant) to the Company's shareowners on a
pro-rata basis. Prior to the spin-off, Conexant distributed to Rockwell its
wafer fabrication facilities in Colorado Springs, Colorado with a net book value
of $21 million and a related deferred tax asset of $48 million. Also, prior to
the spin-off, Rockwell paid $64 million into an escrow account to satisfy
Conexant's obligation with respect to a litigation matter. The net assets of
Conexant as of December 31, 1998 of $913 million were recorded as a decrease to
shareowners' equity.
At September 30, 1998, the net assets of Semiconductor Systems consisted of
the following (in millions):
<TABLE>
<S> <C>
Cash........................................................ $ 14
Receivables................................................. 150
Inventories................................................. 201
Other current assets........................................ 157
Net property................................................ 780
Intangible assets........................................... 53
Other assets................................................ 82
------
Total assets.............................................. 1,437
------
Short-term debt............................................. 14
Accounts payable............................................ 151
Other liabilities........................................... 246
Retirement benefits......................................... 40
------
Total liabilities......................................... 451
------
Net assets of Semiconductor Systems......................... $ 986
======
</TABLE>
On September 30, 1997, the Company completed the spin-off of its automotive
component systems businesses (Automotive) into an independent company by
distributing all of the issued and outstanding shares of Meritor Automotive,
Inc. (Meritor) to the Company's shareowners on a pro-rata basis. In connection
with the transaction, Meritor made a special payment of $445 million to the
Company and the net assets of Meritor as of September 30, 1997 of $151 million
were recorded as a decrease to shareowners' equity.
In December 1996, the Company divested its former Aerospace and Defense
businesses (the A&D Business) by merging it with a subsidiary of The Boeing
Company (Boeing) in a tax-free reorganization (the Reorganization). In
connection with the Reorganization, all shares of common stock held in treasury
were canceled and the net liabilities of the A&D Business at the date of the
Reorganization of approximately $1.2 billion were recorded as an increase to
additional paid-in capital.
In October 1996, the Company's graphic systems business (Graphic Systems)
was sold for approximately $600 million.
26
<PAGE> 27
Summarized results of discontinued operations are as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------
1999 1998 1997
---- ------ ------
<S> <C> <C> <C>
Revenues:
Semiconductor Systems..................................... $289 $1,185 $1,392
Automotive................................................ -- -- 3,342
A&D Business.............................................. -- -- 535
---- ------ ------
Total.................................................. $289 $1,185 $5,269
==== ====== ======
(Loss) income before income taxes:
Semiconductor Systems..................................... $(29) $ (496) $ 188
Automotive................................................ -- -- 121
A&D Business.............................................. -- -- --
---- ------ ------
Total....................................................... $(29) $ (496) $ 309
==== ====== ======
Net (loss) income:
Semiconductor Systems..................................... $(20) $ (301) $ 149
Automotive................................................ -- -- 58
A&D Business.............................................. -- -- --
---- ------ ------
Total....................................................... $(20) $ (301) $ 207
==== ====== ======
</TABLE>
The Company accrued for Semiconductor Systems' estimated first quarter 1999
operating loss and costs related to the spin-off in 1998. The additional loss
recorded in the first quarter of 1999 relates principally to the Company's
decision to record a further writedown of the wafer fabrication facilities in
Colorado Springs and for related costs of disposal.
3. SPECIAL CHARGES
In the third quarter of 1998, the Company recorded special charges of $597
million ($508 million after tax, or $2.57 per share) in connection with asset
impairments and the implementation of a comprehensive restructuring program.
These charges, including the effects of adjustments through September 30, 1999,
included $103 million for severance and other employee separation costs
associated with a worldwide workforce reduction of approximately 3,200 employees
and $83 million related to facility closures and consolidations and exiting
non-strategic businesses and product lines. These actions are expected to be
substantially complete by the end of calendar 1999, with the remaining cash
expenditures related to these actions to be made by the end of calendar 2000.
Total cash expenditures in connection with these actions are expected to
approximate $166 million. The Company spent approximately $73 million through
September 30, 1999, of which $46 million related to severance and other employee
separation costs, and expects to spend an additional $49 million through the end
of 2000. As a result of actions taken through September 30, 1999, the workforce
has been reduced by approximately 2,300 employees.
As of September 30, 1999 and 1998, approximately $93 million and $156
million, respectively, is included in the consolidated balance sheet for
remaining activities associated with the third quarter 1998 special charges. Of
the amount at September 30, 1999, $48 million is included in compensation and
benefits, $20 million is included in other liabilities and the remaining $25
million is included in accounts payable or other current liabilities. Of the
amount at September 30, 1998, $83 million is included in compensation and
benefits, $37 million is included in other liabilities and the remaining $36
million is included in accounts payable or other current liabilities.
Included in the special charges is $266 million related to the impairment
of the long-lived assets of the Automation segment's industrial motors business
(Motors). This impairment resulted from a significant
27
<PAGE> 28
decline in operating performance and represents the excess of the carrying value
of the long-lived assets (including goodwill) of Motors over their estimated
fair value as determined by management, with the assistance of outside experts,
utilizing accepted valuation techniques. The Company also recorded impairment
charges of $53 million related to the long-lived assets of businesses that have
been sold or are held for disposition.
The special charges are reflected in the consolidated statement of
operations for the year ended September 30, 1998 in cost of sales and selling,
general and administrative expenses in the amount of $455 million and $142
million, respectively.
Revenues of businesses and product lines which have been or are being
exited were $88 million, $197 million and $211 million for 1999, 1998 and 1997,
respectively. The net operating income in 1999 and net operating losses in 1998
and 1997 related to these businesses and product lines are not material.
4. ACQUISITIONS OF BUSINESSES
In May 1999, the Automation segment acquired certain intellectual property
and other assets of Dynapro, expanding its human-machine interface software and
hardware capabilities, and substantially all of the assets of Enterprise
Technology Group, Inc., a software business. In January 1999, the Automation
segment acquired EJA Engineering Ltd., a market-leading manufacturer of safety
products. In November 1998, the Automation segment acquired Anorad Corporation,
a manufacturer of linear motor equipment.
In August 1999, the Avionics & Communications segment acquired Intertrade
Limited, an avionics parts supplier. In March 1999, the Avionics &
Communications segment acquired the remaining 50 percent interest in Flight
Dynamics, the market leader in Head-Up Guidance Systems for aircraft operations.
Assets acquired and liabilities assumed have been recorded at estimated
fair values determined by the Company's management based on information
currently available. The aggregate purchase price for all acquisitions during
1999 was $241 million of which $214 million was allocated to intangible assets,
including developed technology, patents, assembled workforce and goodwill. The
intangible assets are being amortized on a straight-line basis over periods
ranging from six to thirty years.
In December 1997, the Avionics & Communications segment acquired the
in-flight entertainment business of Hughes-Avicom International, Inc. (Passenger
Systems). In connection with the acquisition, the Company recorded a charge of
$103 million ($63 million after tax) for purchased research and development and
recorded $70 million for other intangible assets, including developed
technology, patents, assembled workforce and goodwill, which are being amortized
on a straight-line basis over 10 years.
These acquisitions were accounted for as purchases and, accordingly, the
results of operations of these businesses have been included in the consolidated
statement of operations since their respective dates of acquisition. Pro forma
financial information is not presented as the combined effect of these
acquisitions was not material to the Company's results of operations or
financial position.
5. INVENTORIES, NET
Inventories, net are summarized as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1999 1998
------ ------
<S> <C> <C>
Finished goods.............................................. $ 415 $ 385
Work in process............................................. 457 459
Raw materials, parts, and supplies.......................... 446 456
------ ------
Total.................................................. 1,318 1,300
Adjustment to the carrying value of certain inventories
(1999, $524; 1998, $551) to a LIFO basis.................. 21 13
------ ------
Inventories, net............................................ $1,339 $1,313
====== ======
</TABLE>
28
<PAGE> 29
6. PROPERTY, NET
Property, net is summarized as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1999 1998
------ ------
<S> <C> <C>
Land........................................................ $ 55 $ 65
Land and leasehold improvements............................. 87 76
Buildings................................................... 569 558
Machinery and equipment..................................... 1,509 1,450
Office and data processing equipment........................ 625 594
Construction in progress.................................... 244 213
------ ------
Total.................................................. 3,089 2,956
Less accumulated depreciation............................... 1,508 1,421
------ ------
Property, net............................................... $1,581 $1,535
====== ======
</TABLE>
7. INTANGIBLE ASSETS, NET
Intangible assets, net are summarized as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1999 1998
------ ------
<S> <C> <C>
Goodwill, less accumulated amortization (1999, $267; 1998,
$227)..................................................... $ 901 $ 846
Trademarks, patents, product technology, and other
intangibles, less accumulated amortization (1999, $247;
1998, $219)................................................. 489 484
------ ------
Intangible assets, net...................................... $1,390 $1,330
====== ======
</TABLE>
8. SHORT-TERM DEBT
Short-term debt consists of the following (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1999 1998
----- -----
<S> <C> <C>
Commercial paper............................................ $150 $ 90
Short-term foreign bank borrowings.......................... 37 64
Current portion of long-term debt........................... 2 2
---- ----
Short-term debt............................................. $189 $156
==== ====
</TABLE>
Weighted average interest rates on short-term borrowings:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1999 1998
----- -----
<S> <C> <C>
Commercial paper............................................ 5.9% 5.6%
Short-term foreign bank borrowings.......................... 2.9% 5.1%
</TABLE>
At September 30, 1999, the Company had $1 billion of unsecured credit
facilities with various banks to support commercial paper borrowings. There were
no significant commitment fees or compensating balance requirements under these
facilities. Short-term credit facilities available to foreign subsidiaries
amounted to $285 million at September 30, 1999 and consisted of arrangements for
which there are no significant commitment fees.
29
<PAGE> 30
9. OTHER CURRENT LIABILITIES
Other current liabilities are summarized as follows (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1999 1998
----- -----
<S> <C> <C>
Contract reserves and advance payments...................... $192 $207
Product warranty costs...................................... 139 117
Taxes other than income taxes............................... 48 44
Other....................................................... 137 160
---- ----
Other current liabilities................................... $516 $528
==== ====
</TABLE>
10. LONG-TERM DEBT
Long-term debt consists of the following (in millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1999 1998
----- -----
<S> <C> <C>
6.8% notes, payable in 2003................................. $150 $150
6.15% notes, payable in 2008................................ 350 350
6.70% debentures, payable in 2028........................... 250 250
5.20% debentures, payable in 2098........................... 200 200
Other obligations........................................... 19 18
Less unamortized discount................................... (56) (58)
---- ----
Total....................................................... 913 910
Less current portion........................................ 2 2
---- ----
Long-term debt.............................................. $911 $908
==== ====
</TABLE>
11. FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, short- and long-term debt
and foreign currency forward exchange contracts. The fair values of cash and
short-term debt approximate the carrying values due to the short-term nature of
these instruments. At September 30, 1999 and 1998, the carrying value of long-
term debt was $913 million and $910 million, respectively. The fair value of
long-term debt, based upon quoted market prices for the same or similar issues,
was $836 million and $962 million at September 30, 1999 and 1998, respectively.
Foreign currency forward exchange contracts provide for the purchase or
sale of foreign currencies at specified future dates at specified exchange
rates. At September 30, 1999 and 1998, the Company had outstanding foreign
currency forward exchange contracts with notional amounts of $708 million and
$578 million, respectively, primarily consisting of contracts for the Euro,
British pound sterling, Canadian dollar, and Swiss franc. Notional amounts are
stated in the U.S. dollar equivalents at exchange rates in effect at the time of
contract initiation. At September 30, 1999 and 1998, the carrying value of
foreign currency forward exchange contracts approximated their fair value based
upon quoted market prices for contracts with similar maturities. The Company
does not anticipate any material adverse effect on its results of operations or
financial position relating to these foreign currency forward exchange
contracts.
12. SHAREOWNERS' EQUITY
Common Stock
At September 30, 1999, the authorized stock of the Company consisted of one
billion shares of common stock, with a $1 par value, and 25 million shares of
preferred stock, without par value. At September 30, 1999,
30
<PAGE> 31
19 million shares of common stock were reserved for various employee incentive
plans. In 1997, all outstanding shares of Class A common stock were converted
into common stock.
Changes in outstanding common shares are summarized as follows (in
millions):
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Beginning balance...................................... 190.6 206.8 218.5
Treasury stock purchases............................... (3.5) (18.5) (13.4)
Stock option exercises................................. 3.8 2.3 1.7
----- ----- -----
Ending balance......................................... 190.9 190.6 206.8
===== ===== =====
</TABLE>
In 1998, there was a loss from continuing operations and stock options were
antidilutive. Therefore, for 1998, diluted and basic earnings per share amounts
are identical. For 1999 and 1997, dilutive stock options resulted in an increase
in average outstanding shares of 3.1 million and 3.3 million, respectively.
Preferred Share Purchase Rights
Each outstanding share of common stock provides the holder with one
Preferred Share Purchase Right (Right). The Rights will become exercisable only
if a person or group acquires, or offers to acquire, 20% or more of the common
stock, although the Company is authorized to reduce the 20% threshold for
triggering the Rights to not less than 10%. Upon exercise, each Right entitles
the holder to 1/100th of a share of Series A Junior Participating Preferred
Stock of the Company (Junior Preferred Stock) at a price of $250, subject to
adjustment.
Upon an acquisition of the Company, each Right (other than Rights held by
the acquiror) will generally be exercisable for $500 worth of common stock or
common stock of the acquiror for $250. In certain circumstances, each Right may
be exchanged by the Company for one share of common stock or 1/100th of a share
of Junior Preferred Stock. The Rights will expire on December 6, 2006, unless
earlier exchanged or redeemed at $0.01 per Right.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consisted of the following (in
millions):
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1999 1998
----- -----
<S> <C> <C>
Foreign currency translation adjustments............... $(144) $(128)
Pension adjustments.................................... (9) (7)
----- -----
Accumulated other comprehensive loss................... $(153) $(135)
===== =====
</TABLE>
13. STOCK OPTIONS
Options to purchase common stock of the Company have been granted under
various incentive plans to directors, officers and other key employees at prices
equal to or above the fair market value of such stock on the dates the options
were granted. The plans provide that the option price for certain options
granted under the plans may be paid in cash, shares of common stock or a
combination thereof.
Under the 1995 Long-Term Incentives Plan, the Company may grant up to 16
million shares of Company common stock as non-qualified options, incentive stock
options, stock appreciation rights and restricted stock. Shares available for
future grant or payment under various incentive plans were seven million at
September 30, 1999. None of the incentive plans presently permits options to be
granted after September 30, 2005. Stock options generally expire ten years from
the date they are granted and vest over three years (time-vesting options) with
the exception of performance-vesting options.
31
<PAGE> 32
During 1999, the Company granted approximately one million
performance-vesting options. These options expire ten years from the date they
are granted and vest at the earlier of (a) the date the market price of the
Company's common stock reaches a specified level for a pre-determined period of
time or certain other financial performance criteria are met or (b) a period of
six to nine years from the date they are granted. During 1999, approximately 0.9
million of the performance options vested.
Information relative to stock options is as follows (shares in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
WTD. AVG. WTD. AVG. WTD. AVG.
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Number of shares under option:
Outstanding at beginning of year...... 13,419 $36.27 12,837 $31.67 10,871 $33.95
Granted:
Time-vesting....................... 2,169 37.05 3,031 47.93 1,592 61.28
Performance-vesting................ 1,023 35.22 -- -- -- --
Adjustments:
Conexant adjustment................ 669 -- -- -- -- --
Conversion to Conexant options..... (1,621) 48.97 -- -- -- --
A&D and Meritor adjustments........ -- -- -- -- 2,260 --
Conversion to Meritor options...... -- -- -- -- (141) 61.84
Exercised............................. (3,750) 23.68 (2,238) 24.59 (1,585) 27.40
Canceled or expired................... (345) 39.60 (211) 47.08 (160) 49.29
------ ------ ------
Outstanding at end of year............ 11,564 31.13 13,419 36.27 12,837 31.67
====== ====== ======
Exercisable at end of year............ 7,419 28.69 8,809 29.80 9,607 26.32
====== ====== ======
</TABLE>
In connection with the spin-off of Semiconductor Systems, for certain of
the outstanding options, the number of options and the exercise prices of such
options were adjusted in order to preserve the intrinsic value of the options
that were outstanding as of the date of the spin-off. For certain other options,
option holders received a combination of Rockwell and Conexant options with
adjustments made to the number of options outstanding and the exercise prices of
those options such that the intrinsic value of the Rockwell and Conexant options
that were outstanding after the date of the spin-off was preserved.
Additionally, Rockwell options granted to Semiconductor Systems employees were
converted into Conexant options.
In connection with the spin-off of Automotive and the divestiture of the
A&D Business, the number of options outstanding and the exercise prices of such
options were adjusted in order to preserve the intrinsic value of the options
that were outstanding as of the date of each divestiture. In connection with the
Automotive spin-off, Rockwell options granted to Automotive employees during
1997 were converted into Meritor options.
The following table summarizes information about stock options outstanding
at September 30, 1999 (shares in thousands; remaining life in years):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE -------------------
--------------------- WTD. AVG.
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
------------------------ ------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C>
$15.33 to $24.41........................ 3,862 3.7 $21.70 3,862 $21.70
$25.78 to $28.93........................ 2,772 9.0 27.30 758 27.27
$32.20 to $42.50........................ 3,171 7.4 36.78 2,000 36.21
$44.13 to $60.81........................ 1,759 8.0 47.67 799 44.99
------ -----
11,564 7,419
====== =====
</TABLE>
32
<PAGE> 33
The Company's net income and earnings per share would have been reduced,
and net loss and loss per share increased, to the following pro forma amounts if
the Company accounted for its stock-based plans using the fair value method
provided by SFAS No. 123, Accounting for Stock-Based Compensation (in millions,
except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ------------------ -----------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- ----- -------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)................ $ 562 $ 481 $ (427) $ (444) $ 644 $ 626
Basic earnings (loss) per
share............................ $2.95 $2.52 $(2.16) $(2.25) $3.01 $2.93
Diluted earnings (loss) per
share.......................... $2.90 $2.48 $(2.16) $(2.25) $2.97 $2.89
</TABLE>
The 1999 pro forma net income includes $87 million ($57 million after tax,
or 29 cents per diluted share) of pro forma compensation expense related to the
spin-off of Semiconductor Systems. The pro forma effect of stock options on net
income for 1999 may not be indicative of the pro forma effect on net income in
future years.
The weighted average fair value of options granted was $9.55, $13.68 and
$15.38 per share in 1999, 1998 and 1997, respectively. The fair value of each
option was estimated on the date of grant or subsequent date of option
adjustment using the Black-Scholes pricing model and the following assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ------ ------------------------------------
CONEXANT MERITOR A&D BUSINESS
SPIN-OFF SPIN-OFF DIVESTITURE
ADJUSTMENT GRANTS GRANTS ADJUSTMENT GRANTS ADJUSTMENT
---------- ------ ------ ---------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Average risk-free interest
rate.................... 4.66% 4.51% 5.68% 5.88% 5.98% 5.74%
Expected dividend yield... -- 2.23% 2.23% 1.87% 2.56% 2.59%
Expected volatility....... 0.44 0.29 0.29 0.27 0.25 0.25
Expected life (years)..... 5 5 5 5 5 5
</TABLE>
14. RETIREMENT BENEFITS
The Company sponsors pension and other postretirement benefit plans for its
employees. The pension plans cover most of the Company's employees and provide
for monthly pension payments to eligible employees upon retirement. Pension
benefits for salaried employees generally are based on years of credited service
and average earnings. Pension benefits for hourly employees generally are based
on specified benefit amounts and years of service. The Company's policy is to
fund its pension obligations in conformity with the funding requirements of
applicable laws and governmental regulations. Other postretirement benefits are
in the form of retirement medical plans and cover most of the Company's United
States employees and provide for the payment of medical costs of eligible
employees and dependents upon retirement.
The components of net periodic benefit cost are as follows (in millions):
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------------- -----------------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Service cost................................. $ 84 $ 65 $ 61 $10 $ 9 $ 8
Interest cost................................ 170 145 136 31 49 48
Expected return on plan assets............... (215) (172) (155) -- -- --
Amortization:
Prior service cost......................... 10 10 9 (26) (6) (8)
Net transition asset....................... (10) (10) (11) -- -- --
Net actuarial loss......................... 16 2 5 -- -- --
----- ----- ----- --- --- ---
Net periodic benefit cost.................... $ 55 $ 40 $ 45 $15 $52 $48
===== ===== ===== === === ===
</TABLE>
33
<PAGE> 34
In 1999, the Company recognized a curtailment gain of $16 million and
special termination benefit charges of $11 million.
Benefit obligation, plan asset, funded status, and net asset (liability)
information is summarized as follows (in millions):
<TABLE>
<CAPTION>
OTHER
POSTRETIREMENT
PENSION BENEFITS BENEFITS
---------------- --------------
1999 1998 1999 1998
------ ------ ----- -----
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year................ $2,716 $2,204 $ 493 $ 671
Service cost........................................... 84 65 10 9
Interest cost.......................................... 170 145 31 49
Discount rate change................................... (262) 350 (46) 53
Actuarial losses (gains)............................... 57 44 82 (24)
Plan amendments........................................ 5 8 22 (204)
Curtailment............................................ -- (69) -- --
Benefits paid.......................................... (89) (55) (63) (61)
Other.................................................. -- 24 2 --
------ ------ ----- -----
Benefit obligation at end of year...................... 2,681 2,716 531 493
------ ------ ----- -----
Plan assets at beginning of year....................... 2,811 2,437 14 8
Actual return on plan assets........................... 227 421 2 1
Company contributions.................................. 15 10 63 66
Benefits paid.......................................... (89) (55) (66) (63)
Other.................................................. (13) (2) 3 2
------ ------ ----- -----
Plan assets at end of year............................. 2,951 2,811 16 14
------ ------ ----- -----
Funded status of plans................................. 270 95 (515) (479)
Unamortized amounts:
Prior service cost................................... 37 43 (200) (248)
Net transition asset................................. (20) (29) -- --
Net actuarial (gain) loss............................ (287) (96) 122 88
------ ------ ----- -----
Net asset (liability) on balance sheet................. $ -- $ 13 $(593) $(639)
====== ====== ===== =====
Net asset (liability) on balance sheet consists of:
Prepaid benefit cost................................... $ 95 $ 99 $ -- $ --
Accrued benefit liability.............................. (123) (115) (593) (639)
Deferred tax asset..................................... 4 3 -- --
Intangible asset....................................... 15 19 -- --
Accumulated other comprehensive loss................... 9 7 -- --
------ ------ ----- -----
Net asset (liability) on balance sheet................. $ -- $ 13 $(593) $(639)
====== ====== ===== =====
</TABLE>
34
<PAGE> 35
The Company uses an actuarial measurement date of June 30 to measure its
benefit obligations. Significant assumptions used in determining these benefit
obligations are summarized as follows (in weighted averages):
<TABLE>
<CAPTION>
OTHER
PENSION POSTRETIREMENT
BENEFITS BENEFITS
------------ --------------
1999 1998 1999 1998
---- ---- ----- -----
<S> <C> <C> <C> <C>
Discount rate............................................... 7.5% 6.75% 7.5% 6.75%
Compensation increase rate.................................. 4.5% 4.5% -- --
Expected return on plan assets.............................. 9.5% 9.5% 9.5% 9.5%
Health care cost trend rate*................................ -- -- 7.0% 7.0%
</TABLE>
* Decreasing to 5.5% after 2015.
Pension Benefits
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of the fair value of plan assets (underfunded plans) were $145
million, $130 million and $7 million, respectively, as of September 30, 1999 and
$151 million, $122 million and $7 million, respectively, as of September 30,
1998.
Other Postretirement Benefits
Assumed health care cost trend rates have a significant effect on amounts
reported for the retiree medical plans. A one percentage point change in assumed
health care cost trend rates would have the following effect (in millions):
<TABLE>
<CAPTION>
ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Increase (decrease) to total of service and interest cost
components............................................... $ 5 $ 6 $ (5) $ (6)
Increase (decrease) to postretirement benefit obligation... 38 35 (33) (31)
</TABLE>
Defined Contribution Savings Plans
The Company also sponsors certain defined contribution savings plans for
eligible employees. Expense related to these plans was $43 million, $42 million,
and $43 million for 1999, 1998, and 1997, respectively.
15. OTHER INCOME, NET
The components of other income, net are as follows (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net gain on dispositions of businesses...................... $ 57 $ 8 $ --
Loss on investment.......................................... (29) -- --
Gain on dispositions of property............................ 7 7 27
Interest income............................................. 10 13 26
Royalty income.............................................. 11 6 6
Other....................................................... 52 54 47
---- --- ----
Other income, net........................................... $108 $88 $106
==== === ====
</TABLE>
Included in the $57 million gain on dispositions of businesses in 1999 is a
$32 million gain related to the sale of the Avionics & Communications segment's
railroad electronics business in October 1998 and a $28 million gain related to
the sale of the Automation segment's North American Transformer business in
September 1999.
35
<PAGE> 36
In September 1999, the Company recorded a loss of $29 million associated
with the write-off of its investment in Goss Graphic Systems, Inc. (Goss)
preferred stock, which the Company received in connection with the sale of
Graphic Systems in October 1996. Goss filed for bankruptcy in the fourth quarter
of 1999.
16. INCOME TAXES
The components of the income tax provision are as follows (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Current:
United States............................................. $221 $140 $243
Foreign................................................... 32 20 44
State and local........................................... 43 21 44
---- ---- ----
Total current............................................... 296 181 331
---- ---- ----
Deferred:
United States............................................. (2) (41) (7)
Foreign................................................... 11 (3) (21)
State and local........................................... 3 (3) (5)
---- ---- ----
Total deferred.............................................. 12 (47) (33)
---- ---- ----
Income tax provision........................................ $308 $134 $298
==== ==== ====
</TABLE>
Net current deferred income tax benefits at September 30, 1999 and 1998
consist of the tax effects of temporary differences related to the following (in
millions):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Compensation and benefits........................................... $ 61 $ 98
Product warranty costs.............................................. 46 42
Assets held for sale................................................ 48 --
Inventory........................................................... 4 9
Allowance for doubtful accounts..................................... 32 19
Contract loss reserves.............................................. 29 31
Other -- net........................................................ 144 59
---- ----
Current deferred income taxes....................................... $364 $258
==== ====
</TABLE>
Net long-term deferred income taxes included in Other Liabilities in the
balance sheet at September 30, 1999 and 1998 consist of the tax effects of
temporary differences related to the following (in millions):
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Retirement benefits................................................. $(230) $(247)
Property............................................................ 161 162
Intangible assets................................................... 107 109
Loss carryforwards.................................................. (24) (37)
Foreign tax credit carryforwards.................................... (95) (113)
Other -- net........................................................ 77 78
----- -----
Subtotal............................................................ (4) (48)
Valuation allowance................................................. 119 150
----- -----
Long-term deferred income taxes..................................... $ 115 $ 102
===== =====
</TABLE>
Management believes it is more likely than not that current and long-term
tax assets will be realized through the reduction of future taxable income.
Significant factors considered by management in its
36
<PAGE> 37
determination of the probability of the realization of the deferred tax assets
include: (a) the historical operating results of the Company ($1.8 billion of
United States taxable income over the past three years), (b) expectations of
future earnings, and (c) the extended period of time over which the retirement
medical liability will be paid. The valuation allowance represents the amount of
tax benefits related to net operating loss, capital loss and foreign tax credit
carryforwards that have not yet been recognized. The carryforward period for net
operating and capital losses expires between 2000 and 2006. The carryforward
period for foreign tax credits expires between 2000 and 2002.
The consolidated income tax provision differed from income tax at the
United States statutory tax rate for the reasons set forth below (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income tax expense at thirty-five percent................... $312 $ 9 $257
State and local income taxes................................ 30 1 26
Foreign income taxes........................................ (18) 3 10
Non-deductible goodwill write-off........................... -- 136 --
Non-deductible goodwill amortization........................ 9 11 12
Property donation........................................... -- (16) --
Foreign sales corporation benefit........................... (12) (6) (9)
Utilization of foreign loss carryforwards................... (4) (3) (6)
Other....................................................... (9) (1) 8
---- ---- ----
Income tax provision........................................ $308 $134 $298
==== ==== ====
</TABLE>
In September 1998, the Company donated a trisonic wind tunnel, valued at
$49 million, to a university.
The income tax provisions were calculated based upon the following
components of income (loss) from continuing operations before income taxes (in
millions):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
United States income (loss)................................. $776 $(27) $669
Foreign income.............................................. 114 52 66
---- ---- ----
Total....................................................... $890 $ 25 $735
==== ==== ====
</TABLE>
No provision has been made for United States, state, or additional foreign
income taxes related to approximately $172 million of undistributed earnings of
foreign subsidiaries which have been or are intended to be permanently
reinvested.
The Company's United States income tax returns for the years 1989 through
1997 are currently under examination. In connection with the divestiture of the
A&D Business, the Automotive spin-off and the Semiconductor Systems spin-off,
the Company has retained all tax liabilities and the right to all tax refunds
related to United States and certain non-U.S. operations of the A&D Business,
Automotive and Semiconductor Systems for periods prior to the respective
divestiture dates. Management believes that adequate provision for income taxes
has been made for all years through 1999.
37
<PAGE> 38
17. SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statement of cash flows information (in millions):
Income taxes paid........................................... $111 $ 59 $449
Interest payments........................................... 85 55 27
Statement of operations information (in millions):
Research and development:
Company-initiated......................................... 422 402 377
Customer-funded........................................... 161 165 152
Rental expense.............................................. 106 104 98
</TABLE>
Income taxes paid and interest payments related to discontinued operations
were (in millions) $25 and $56 in 1997, respectively, and are included in the
determination of the cash flows of discontinued operations. The amounts for 1999
and 1998 were not significant.
Minimum future rental commitments under operating leases having
noncancelable lease terms in excess of one year aggregated $223 million as of
September 30, 1999 and are payable as follows (in millions): 2000, $52; 2001,
$43; 2002, $33; 2003, $22; 2004, $19; and after 2005, $54. Commitments from
third parties under sublease agreements having noncancelable lease terms in
excess of one year aggregated $41 million as of September 30, 1999 and are
receivable through 2008 at approximately $5 million per year.
18. CONTINGENT LIABILITIES
Federal, state and local requirements relating to the discharge of
substances into the environment, the disposal of hazardous wastes and other
activities affecting the environment have and will continue to have an effect on
the manufacturing operations of the Company. Thus far, compliance with
environmental requirements and resolution of environmental claims have been
accomplished without material effect on the Company's liquidity and capital
resources, competitive position or financial condition.
The Company has been designated as a potentially responsible party at 19
Superfund sites, excluding sites as to which the Company's records disclose no
involvement or as to which the Company's potential liability has been finally
determined. Management estimates the total reasonably possible costs the Company
could incur for the remediation of Superfund sites at September 30, 1999 to be
about $19 million, of which $16 million has been accrued.
Various other lawsuits, claims and proceedings have been asserted against
the Company alleging violations of federal, state and local environmental
protection requirements, or seeking remediation of alleged environmental
impairments, principally at previously owned properties. As of September 30,
1999, management has estimated the total reasonably possible costs the Company
could incur from these matters to be about $90 million. The Company has recorded
environmental accruals for these matters of $61 million. In addition to the
above matters, the Company assumed certain other environmental liabilities in
connection with the 1995 acquisition of Reliance Electric Company (Reliance).
The Company is indemnified by Exxon Corporation (Exxon) for substantially all
costs associated with these Reliance matters. At September 30, 1999, the Company
has recorded a $29 million liability and a $28 million receivable for these
Reliance matters. Management estimates the total reasonably possible costs for
these matters to be approximately $43 million for which the Company is
substantially indemnified by Exxon.
Based on its assessment, management believes that the Company's
expenditures for environmental capital investment and remediation necessary to
comply with present regulations governing environmental protection and other
expenditures for the resolution of environmental claims will not have a material
adverse effect on the Company's liquidity and capital resources, competitive
position or financial condition. Management cannot assess the possible effect of
compliance with future requirements.
38
<PAGE> 39
Various lawsuits, claims and proceedings have been or may be instituted or
asserted against the Company relating to the conduct of its business, including
those pertaining to product liability, intellectual property, safety and health
and employment matters. Pursuant to the Reorganization, Rockwell has agreed to
indemnify Boeing for certain government contract and environmental matters
related to operations of the A&D Business for periods prior to the
Reorganization. In connection with the Automotive spin-off, Meritor has agreed
to indemnify the Company for substantially all contingent liabilities related to
Automotive. In connection with the Semiconductor Systems spin-off, Conexant
assumed all contingent liabilities related to its business, including
environmental and intellectual property matters. Although the outcome of
litigation cannot be predicted with certainty and some lawsuits, claims, or
proceedings may be disposed of unfavorably to the Company, management believes
the disposition of matters which are pending or asserted will not have a
material adverse effect on the Company's financial statements.
In the ordinary course of business, the Company has divested certain of its
businesses. As a result of such divestitures, there may be lawsuits, claims or
proceedings instituted or asserted against the Company related to the period
that the businesses were owned by the Company. Management believes that any
judgments against the Company related to such matters would not have a material
adverse effect on the Company's financial statements.
19. BUSINESS SEGMENT INFORMATION
Rockwell is an electronics and communications company with global
leadership positions in industrial automation, avionics and communications, and
automated call distribution systems. The Company is organized based upon
products and services and has three operating segments consisting of Automation,
Avionics & Communications, and Electronic Commerce.
The Automation segment is a supplier of industrial automation products,
systems, software and services focused on helping customers control and power
manufacturing processes. Products include controllers, I/O (input/output)
systems, drives, sensors, power devices, packaged control products, operator
interface devices, software products and services, gear reducers, mounted
bearings, power transmission components, network monitoring products and motors.
These products are primarily marketed under the Rockwell Automation,
Allen-Bradley, Rockwell Software, Dodge, and Reliance Electric brand names.
Major markets served include consumer products, food and beverage,
transportation, metals, mining, cement, pulp and paper, petroleum, specialty
chemicals, pharmaceutical, electric power, water treatment, infrastructure and
semiconductor fabrication.
The Avionics & Communications segment is a supplier of electronic products
and systems, service and support solutions to the commercial aerospace and
defense industries. Products include electronic equipment for flight control,
cockpit display, navigation, voice and data communication, cockpit management,
in-flight cabin management, communications and passenger entertainment, radar,
global positioning and other command, control and communications devices
marketed primarily under the Rockwell Collins brand name. Major customers
include airframe manufacturers, the United States government, and most of the
world's airlines.
The Electronic Commerce segment, which is engaged in the research,
development, and manufacture of technologies used in telephony and Internet
applications, has been combined with the Science Center, a research and
development facility, in "Other Businesses."
39
<PAGE> 40
The following tables reflect the sales and operating results of the
Company's reportable segments for the years ended September 30 (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Sales:
Automation................................................ $4,411 $4,546 $4,494
Avionics & Communications................................. 2,395 1,980 1,674
Other Businesses.......................................... 237 226 202
------ ------ ------
Total.................................................. $7,043 $6,752 $6,370
====== ====== ======
Segment operating earnings:
Automation................................................ $ 661 $ 594 $ 598
Avionics & Communications................................. 448 272 253
Other Businesses.......................................... 30 13 13
------ ------ ------
Total.................................................. 1,139 879 864
Special charges............................................. -- (597) --
Purchased research and development.......................... -- (103) (23)
General corporate -- net.................................... (165) (96) (79)
Interest expense............................................ (84) (58) (27)
------ ------ ------
Income from continuing operations before income taxes....... $ 890 $ 25 $ 735
====== ====== ======
</TABLE>
Intersegment sales are not material and have been eliminated. Among other
considerations, the Company evaluates performance and allocates resources based
upon segment operating earnings before income taxes, interest expense, costs
related to the corporate offices, foreign currency translation gains and losses,
nonrecurring special charges and purchased research and development charges. The
accounting policies used in preparing the segment information are consistent
with those described in Note 1. Special charges are discussed in Note 3 and the
purchased research and development charge is discussed in Note 4.
The following tables summarize the identifiable assets at September 30, the
provision for depreciation and amortization and the amount of capital
expenditures for property for the years ended September 30 for each of the
reportable segments and Corporate (in millions):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Identifiable assets:
Automation................................................ $3,857 $3,852 $4,435
Avionics & Communications................................. 1,668 1,446 1,067
Other Businesses.......................................... 152 151 133
Corporate................................................. 1,027 735 892
Net assets of discontinued operations..................... -- 986 1,115
------ ------ ------
Total.................................................. $6,704 $7,170 $7,642
====== ====== ======
Depreciation and amortization:
Automation................................................ $ 230 $ 220 $ 219
Avionics & Communications................................. 86 67 58
Other Businesses.......................................... 15 14 11
Corporate................................................. 6 5 5
------ ------ ------
Total.................................................. $ 337 $ 306 $ 293
====== ====== ======
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Capital expenditures for property:
Automation................................................ $ 220 $ 223 $ 221
Avionics & Communications................................. 127 143 72
Other Businesses.......................................... 15 17 16
Corporate................................................. 15 25 27
------ ------ ------
Total.................................................. $ 377 $ 408 $ 336
====== ====== ======
</TABLE>
Identifiable assets at Corporate consist principally of cash, net deferred
income tax assets, and property.
The Company is a global electronic controls and communications company and
as such, conducts a significant portion of its business activities outside the
United States. The following tables reflect geographic sales and long-lived
assets by geographic region (in millions):
<TABLE>
<CAPTION>
SALES PROPERTY, NET
-------------------------- --------------------------
1999 1998 1997 1999 1998 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
United States........................ $5,614 $5,357 $5,001 $1,401 $1,367 $1,257
Europe............................... 762 748 712 106 113 114
Canada............................... 290 297 310 22 20 21
Asia-Pacific......................... 236 194 222 36 19 25
Latin America........................ 141 156 125 16 16 13
------ ------ ------ ------ ------ ------
Total................................ $7,043 $6,752 $6,370 $1,581 $1,535 $1,430
====== ====== ====== ====== ====== ======
</TABLE>
Sales are attributed to the geographic regions based on their location of
origin. United States sales include export sales to unaffiliated customers of
$762 million in 1999, $660 million in 1998, and $581 million in 1997.
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1999 QUARTERS
------------------------------------
FIRST SECOND THIRD FOURTH 1999
------ ------ ------ ------ ------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Sales......................................... $1,608 $1,701 $1,808 $1,926 $7,043
Cost of sales................................. 1,135 1,183 1,245 1,344 4,907
Income from continuing operations............. 134 143 150 155 582
Net income.................................... 114 143 150 155 562
Basic earnings per share:
Continuing operations....................... 0.71 0.75 0.79 0.81 3.06
Net income.................................. 0.60 0.75 0.79 0.81 2.95
Diluted earnings per share:
Continuing operations....................... 0.70 0.74 0.77 0.80 3.01
Net income.................................. 0.59 0.74 0.77 0.80 2.90
</TABLE>
Net income for 1999 includes: (a) a gain of $36 million ($24 million after
tax, or 12 cents per diluted share) on the sale of the Company's railroad
electronics business in the first quarter, (b) a gain of $28 million ($18
million after tax, or nine cents per diluted share) on the sale of the Company's
North American Transformer business in the fourth quarter, and (c) a loss of $29
million ($19 million after tax, or 10 cents per diluted share) associated with
the write-off of its investment in Goss preferred stock, which the Company
received in connection with the sale of Graphic Systems in October 1996. Goss
filed for bankruptcy in the fourth quarter of 1999.
41
<PAGE> 42
<TABLE>
<CAPTION>
1998 QUARTERS
------------------------------------
FIRST SECOND THIRD FOURTH 1998
------ ------ ------ ------ ------
(in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Sales......................................... $1,602 $1,674 $1,664 $1,812 $6,752
Cost of sales................................. 1,116 1,170 1,657 1,263 5,206
Income (loss) from continuing operations
before accounting change.................... 60 122 (420) 129 (109)
Net income (loss)............................. 72 109 (482) (126) (427)
Basic earnings (loss) per share:
Continuing operations before accounting
change................................... 0.29 0.61 (2.15) 0.67 (0.55)
Net income (loss)........................... 0.35 0.54 (2.47) (0.66) (2.16)
Diluted earnings (loss) per share:
Continuing operations before accounting
change................................... 0.29 0.60 (2.15) 0.67 (0.55)
Net income (loss)........................... 0.35 0.54 (2.47) (0.65) (2.16)
</TABLE>
Per share information is calculated for each quarterly and annual period
using average outstanding shares for that period. Therefore, the sum of the
quarterly per share amounts will not necessarily equal the annual per share
amounts presented.
First quarter and full year net income (loss) for 1998 includes a $27
million charge ($17 million after tax, or nine cents per diluted share) related
to the cumulative effect of a change in accounting principle.
Income (loss) from continuing operations before accounting change for 1998
includes: (a) the write-off of purchased research and development of $63 million
after tax, or 31 cents per diluted share, related to the acquisition of
Passenger Systems in the first quarter, and (b) the effects of special charges
recorded in the third quarter of $508 million after tax, or $2.57 per diluted
share.
42
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareowners of
Rockwell International Corporation:
We have audited the accompanying consolidated balance sheet of Rockwell
International Corporation and subsidiaries as of September 30, 1999 and 1998,
and the related consolidated statements of operations, shareowners' equity, cash
flows, and comprehensive income (loss) for each of the three years in the period
ended September 30, 1999. Our audits also included the financial statement
schedule listed at Item 14(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule 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 financial statements present fairly, in
all material respects, the financial position of Rockwell International
Corporation and subsidiaries at September 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for certain inventoriable general and
administrative costs related to government contracts in 1998.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
November 3, 1999
43
<PAGE> 44
See also the table under the caption Summary of Results of Operations in
the MD&A on page 12 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
See the information under the captions ELECTION OF DIRECTORS and
INFORMATION AS TO NOMINEE FOR DIRECTOR AND CONTINUING DIRECTORS on pages 3-6 of
the 2000 Proxy Statement.
No nominee for director was selected pursuant to any arrangement or
understanding between the nominee and any person other than the Company pursuant
to which such person is or was to be selected as a director or nominee. See also
the information with respect to executive officers of the Company under Item 4a
of Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION.
See the information under the captions EXECUTIVE COMPENSATION, OPTION
GRANTS and AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES on pages 10-12
and RETIREMENT PLANS on page 17 of the 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information under the captions VOTING SECURITIES and OWNERSHIP BY
MANAGEMENT OF EQUITY SECURITIES on pages 3 and 9, respectively, of the 2000
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information under the caption BOARD OF DIRECTORS AND COMMITTEES on
pages 6-8 of the 2000 Proxy Statement.
44
<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statement Schedule and Exhibits.
(1) Financial Statements (all financial statements listed below are
those of the Company and its consolidated subsidiaries).
Consolidated Balance Sheet, September 30, 1999 and 1998.
Consolidated Statement of Operations, years ended September 30,
1999, 1998 and 1997.
Consolidated Statement of Cash Flows, years ended September 30,
1999, 1998 and 1997.
Consolidated Statement of Shareowners' Equity, years ended September
30, 1999, 1998 and 1997.
Consolidated Statement of Comprehensive Income (Loss), years ended
September 30, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
(2) Financial Statement Schedule for the years ended September 30, 1999,
1998 and 1997.
Page
----
Schedule II--Valuation and Qualifying Accounts........... S-1
Schedules not filed herewith are omitted because of the absence of
conditions under which they are required or because the information
called for is shown in the consolidated financial statements or
notes thereto.
(3) Exhibits.
<TABLE>
<S> <C>
3-a-1 Restated Certificate of Incorporation of the Company, as
amended, filed as Exhibit 3-a-1 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1996,
is hereby incorporated by reference.
3-b-1 By-Laws of the Company, filed as Exhibit 3-b-2 to the
Company's Annual Report on Form 10-K for the year ended
September 30, 1998, are hereby incorporated by reference.
4-a-1 Rights Agreement, dated as of November 30, 1996, between the
Company and ChaseMellon Shareholder Services, L.L.C., as
rights agent, filed as Exhibit 4-c to Registration Statement
No. 333-17031, is hereby incorporated by reference.
4-b-1 Indenture dated as of April 1, 1993 between Reliance
Electric Company and Bankers Trust Company, as Trustee,
pursuant to which the 6.8% Notes of Reliance Electric
Company due April 15, 2003 have been issued, filed as
Exhibit 4.7 to Registration Statement No. 33-60066, is
hereby incorporated by reference.
4-b-2 First Supplemental Indenture dated April 14, 1993 to the
Indenture listed as Exhibit 4-b-1 above, filed as Exhibit
4.1 to Current Report on Form 8-K of Reliance Electric
Company dated April 19, 1993, is hereby incorporated by
reference.
4-b-3 Form of the 6.8% Notes of Reliance Electric Company due
April 15, 2003, filed as Exhibit 4-8 to Registration
Statement No. 33-60066, is hereby incorporated by reference.
4-c-1 Indenture dated as of December 1, 1996 between the Company
and The Chase Manhattan Bank (successor to Mellon Bank,
N.A.), as Trustee, filed as Exhibit 4-a to Registration
Statement No. 333-43071, is hereby incorporated by
reference.
</TABLE>
45
<PAGE> 46
<TABLE>
<S> <C>
4-c-2 Form of certificate for the Company's 6.15% Notes due January 15, 2008, filed as Exhibit
4-a to the Company's Current Report on Form 8-K dated January 26, 1998, is hereby
incorporated by reference.
4-c-3 Form of certificate for the Company's 6.70% Debentures due January 15, 2028, filed as
Exhibit 4-b to the Company's Current Report on Form 8-K dated January 26, 1998, is
hereby incorporated by reference.
4-c-4 Form of certificate for the Company's 5.20% Debentures due January 15, 2098, filed as
Exhibit 4-c to the Company's Current Report on Form 8-K dated January 26, 1998, is
hereby incorporated by reference.
*10-a-1 Copy of the Company's 1988 Long-Term Incentives Plan, as amended through November 30,
1994, filed as Exhibit 10-d-1 to the Company's Annual Report on Form 10-K for the year
ended September 30, 1994 (File No. 1-1035), is hereby incorporated by reference.
*10-a-2 Copy of resolution of the Board of Directors of the Company, adopted November 6, 1996,
amending the Company's 1988 Long-Term Incentives Plan, filed as Exhibit 4-g-1 to
Registration Statement No. 333-17055, is hereby incorporated by reference.
*10-a-3 Copy of resolution of the Board of Directors of the Company, adopted November 5, 1997,
increasing the number of shares authorized for issuance under the Company's 1988
Long-Term Incentives Plan, filed as Exhibit 10-b-2 to the Company's Annual Report on
Form 10-K for the year ended September 30, 1997, is hereby incorporated by reference.
*10-a-4 Forms of Stock Option Agreements under the Company's 1988 Long-Term Incentives Plan for
options granted prior to May 1, 1992, filed as Exhibit 10-d-2 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1988 (File No. 1-1035), are hereby
incorporated by reference.
*10-a-5 Forms of Stock Option and Stock Appreciation Rights Agreements under the Company's 1988
Long-Term Incentives Plan for options and stock appreciation rights granted prior to May
1, 1992, filed as Exhibit 10-d-3 to the Company's Annual Report on Form 10-K for the
year ended September 30, 1988 (File No. 1-1035), are hereby incorporated by reference.
*10-a-6 Form of Stock Option Agreement under the Company's 1988 Long-Term Incentives Plan for
options granted after May 1, 1992 and prior to March 1, 1993, filed as Exhibit 28-a-1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 (File
No. 1-1035), is hereby incorporated by reference.
*10-a-7 Forms of Stock Option Agreements under the Company's 1988 Long-Term Incentives Plan for
options granted after March 1, 1993 and prior to November 1, 1993, filed as Exhibit 28-a
to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993
(File No. 1-1035), are hereby incorporated by reference.
*10-a-8 Forms of Stock Option Agreements under the Company's 1988 Long-Term Incentives Plan for
options granted after November 1, 1993 and prior to December 1, 1994, filed as Exhibit
10-d-6 to the Company's Annual Report on Form 10-K for the year ended September 30, 1993
(File No. 1-1035), are hereby incorporated by reference.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement.
46
<PAGE> 47
<TABLE>
<S> <C>
*10-a-9 Forms of Stock Option Agreements under the Company's 1988
Long-Term Incentives Plan for options granted after December
1, 1994, filed as Exhibit 10-d-7 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1994
(File No. 1-1035), are hereby incorporated by reference.
*10-b-1 Copy of the Company's 1995 Long-Term Incentives Plan, as
amended, filed as Exhibit 10-b-1 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1998,
is hereby incorporated by reference.
*10-b-2 Forms of Stock Option Agreements under the Company's 1995
Long-Term Incentives Plan for options granted prior to
December 3, 1997, filed as Exhibit 10-e-2 to the Company's
Annual Report on Form 10-K for the year ended September 30,
1994 (File No. 1-1035), are hereby incorporated by
reference.
*10-b-3 Forms of Stock Option Agreements under the Company's 1995
Long-Term Incentives Plan for options granted between
December 3, 1997 and August 31, 1998, filed as Exhibit
10-b-3 to the Company's Annual Report on Form 10-K for the
year ended September 30, 1998, is hereby incorporated by
reference.
*10-b-4 Form of Stock Option Agreement under the Company's 1995
Long-Term Incentives Plan for options granted on April 23,
1998, filed as Exhibit 10-b-4 to the Company's Annual Report
on Form 10-K for the year ended September 30, 1998, is
hereby incorporated by reference.
*10-b-5 Form of Stock Option Agreement under the Company's 1995
Long-Term Incentives Plan for options granted after August
31, 1998, filed as Exhibit 10-b-5 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1998,
is hereby incorporated by reference.
*10-b-6 Form of Restricted Stock Agreement under the Company's 1995
Long-Term Incentives Plan, filed as Exhibit 10-e to the
Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996, is hereby incorporated by
reference.
*10-b-7 Copy of Restricted Stock Agreement dated December 3, 1997
between the Company and Don H. Davis, Jr., filed as Exhibit
10-c-5 to the Company's Annual Report on Form 10-K for the
year ended September 30, 1997, is hereby incorporated by
reference.
*10-c-1 Copy of the Company's Directors Stock Plan, as amended.
*10-c-2 Form of Stock Option Agreement under the Company's Directors
Stock Plan, filed as Exhibit 10-d to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996
(File No. 1-1035), is hereby incorporated by reference.
*10-c-3 Forms of Restricted Stock Agreements under the Company's
Directors Stock Plan between the Company and each of George
L. Argyros, William H. Gray, III, James Clayburn La Force,
Jr., William T. McCormick, Jr., John D. Nichols and Joseph
F. Toot, Jr., filed as Exhibit 10-f to the Company's
Quarterly Report on Form 10-Q for the quarter ended December
31, 1996, are hereby incorporated by reference.
*10-d-1 Copy of resolution of the Board of Directors of the Company,
adopted November 6, 1996, adjusting outstanding awards under
the Company's (i) 1988 Long-Term Incentives Plan, (ii) 1995
Long-Term Incentives Plan and (iii) Directors Stock Plan,
filed as Exhibit 4-g-2 to Registration Statement No.
333-17055, is hereby incorporated by reference.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement.
47
<PAGE> 48
<TABLE>
<S> <C>
*10-d-2 Copy of resolution of the Board of Directors of the Company,
adopted September 3, 1997, adjusting outstanding awards
under the Company's (i) 1988 Long-Term Incentives Plan, (ii)
1995 Long-Term Incentives Plan and (iii) Directors Stock
Plan, filed as Exhibit 10-e-3 to the Company's Annual Report
on Form 10-K for the year ended September 30, 1997, is
hereby incorporated by reference.
*10-d-3 Memorandum of Adjustments to Outstanding Options Under
Rockwell International Corporation's 1988 Long-Term
Incentives Plan, 1995 Long-Term Incentives Plan and
Directors Stock Plan approved and adopted by the Board of
Directors of the Company in connection with the spin-off of
Conexant.
*10-e-1 Copy of the Company's Incentive Compensation Plan, amended
and restated as of July 1, 1997, filed as Exhibit 10-f-1 to
the Company's Annual Report on Form 10-K for the year ended
September 30, 1997, is hereby incorporated by reference.
*10-f-1 Copy of the Company's Deferred Compensation Plan, as amended
effective as of October 1, 1992, filed as Exhibit 10-g-1 to
the Company's Annual Report on Form 10-K for the year ended
September 30, 1993 (File No. 1-1035), is hereby incorporated
by reference.
*10-g-1 Copy of resolution of the Board of Directors of the Company,
adopted November 6, 1996, authorizing the assignment of
certain compensation and employee benefit plans to New
Rockwell International Corporation, including the Company's
(i) 1988 Long-Term Incentives Plan, (ii) 1995 Long-Term
Incentives Plan, (iii) Directors Stock Plan, (iv) Incentive
Compensation Plan, (v) Deferred Compensation Plan and (vi)
Annual Incentive Compensation Plan for Senior Executive
Officers, filed as Exhibit 4-g-3 to Registration Statement
No. 333-17055, is hereby incorporated by reference.
*10-g-2 Copy of resolution of the Board of Directors of New Rockwell
International Corporation, adopted December 4, 1996,
assuming and adopting the Company's (i) 1988 Long-Term
Incentives Plan, (ii) 1995 Long-Term Incentives Plan, (iii)
Directors Stock Plan, (iv) Incentive Compensation Plan, (v)
Deferred Compensation Plan and (vi) Annual Incentive
Compensation Plan for Senior Executive Officers, filed as
Exhibit 10-h-2 to the Company's Annual Report on Form 10-K
for the year ended September 30, 1996, is hereby
incorporated by reference.
*10-h-1 Copy of resolutions of the Board of Directors of the
Company, adopted November 3, 1993, providing for the
Company's Deferred Compensation Policy for Non-Employee
Directors, filed as Exhibit 10-h-1 to the Company's Annual
Report on Form 10-K for the year ended September 30, 1994
(File No. 1-1035), is hereby incorporated by reference.
*10-h-2 Copy of resolutions of the Compensation Committee of the
Board of Directors of the Company, adopted July 6, 1994,
modifying the Company's Deferred Compensation Policy for
Non-Employee Directors, filed as Exhibit 10-h-2 to the
Company's Annual Report on Form 10-K for the year ended
September 30, 1994 (File No. 1-1035), is hereby incorporated
by reference.
*10-h-3 Copy of resolutions of the Board of Directors of New
Rockwell International Corporation, adopted December 4,
1996, providing for its Deferred Compensation Policy for
Non-Employee Directors, filed as Exhibit 10-i-3 to the
Company's Annual Report on Form 10-K for the year ended
September 30, 1996, is hereby incorporated by reference.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement.
48
<PAGE> 49
<TABLE>
<S> <C>
*10-i-1 Copy of resolutions of the Board of Directors of the Company, adopted November 2, 1994,
providing for the Company's Retirement Policy for Non-Employee Directors, filed as
Exhibit 10-j-1 to the Company's Annual Report on Form 10-K for the year ended September
30, 1994 (File No. 1-1035), is hereby incorporated by reference.
*10-i-2 Copy of resolutions of the Board of Directors of the Company, adopted December 6, 1995,
rescinding the Company's Retirement Policy for Non-Employee Directors (except to the
extent applicable to Directors then age 67 or older and former Directors then retired),
filed as Exhibit 10-j-2 to the Company's Annual Report on Form 10-K for the year ended
September 30, 1995 (File No. 1-1035), is hereby incorporated by reference.
*10-i-3 Copy of resolution of the Board of Directors of New Rockwell International Corporation,
adopted December 4, 1996, assuming and adopting the Company's Retirement Policy for
Non-Employee Directors (applicable to Directors of the Company who were age 67 or older
on December 6, 1995 and former Directors then retired), filed as Exhibit 10-j-3 to the
Company's Annual Report on Form 10-K for the year ended September 30, 1996, is hereby
incorporated by reference.
*10-j-1 Copy of the Company's Annual Incentive Compensation Plan for Senior Executive Officers,
filed as Exhibit A to the Company's Proxy Statement for its 1996 Annual Meeting of
Shareowners (File No. 1-1035), is hereby incorporated by reference.
*10-k-1 Restricted Stock Agreement dated December 6, 1995 between the Company and Don H. Davis,
Jr., filed as Exhibit 10-l-1 to the Company's Annual Report on Form 10-K for the year
ended September 30, 1995 (File No. 1-1035), is hereby incorporated by reference.
*10-l-1 Consulting Agreement dated as of November 25, 1997 between the Company and Donald R.
Beall, filed as Exhibit 10-n-1 to the Company's Annual Report on Form 10-K for year
ended September 30, 1997, is hereby incorporated by reference.
*10-l-2 Consulting Agreement dated September 30, 1999 between the Company and Donald R. Beall.
*10-m-1 Form of Change of Control Agreements between the Company and each of D.H. Davis, Jr.,
W.M. Barnes, W.J. Calise, Jr., J.D. Cohn, C.M. Jones, K.D. Nosbusch, J.R. Stone and J.D.
Swann, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, is hereby incorporated by reference.
*10-m-2 Form of Change of Control Agreements between the Company and certain other officers of
the Company, filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999, is hereby incorporated by reference.
*10-m-3 Agreement and General Release dated as of March 2, 1999, with E.S. Washington, filed as
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, is hereby incorporated by reference.
10-n-1 Agreement and Plan of Distribution dated as of December 6, 1996, among Rockwell
International Corporation (now named Boeing North American, Inc.), the Company (formerly
named New Rockwell International Corporation), Allen-Bradley Company, Inc., Rockwell
Collins, Inc., Rockwell Semiconductor Systems, Inc., Rockwell Light Vehicle Systems,
Inc. and Rockwell Heavy Vehicle Systems, Inc., filed as Exhibit 10-b to the Company's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1996, is hereby
incorporated by reference.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement.
49
<PAGE> 50
<TABLE>
<S> <C>
10-n-2 Post-Closing Covenants Agreement dated as of December 6,
1996, among Rockwell International Corporation (now named
Boeing North American, Inc.), The Boeing Company, Boeing NA,
Inc. and the Company (formerly named New Rockwell
International Corporation), filed as Exhibit 10-c to the
Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996, is hereby incorporated by
reference.
10-n-3 Tax Allocation Agreement dated as of December 6, 1996, among
Rockwell International Corporation (now named Boeing North
American, Inc.), the Company (formerly named New Rockwell
International Corporation) and The Boeing Company, filed as
Exhibit 10-d to the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1996, is hereby
incorporated by reference.
10-o-1 Distribution Agreement dated as of September 30, 1997 by and
between the Company and Meritor Automotive, Inc., filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K
dated October 10, 1997, is hereby incorporated by reference.
10-o-2 Employee Matters Agreement dated as of September 30, 1997 by
and between the Company and Meritor Automotive, Inc., filed
as Exhibit 2.2 to the Company's Current Report on Form 8-K
dated October 10, 1997, is hereby incorporated by reference.
10-o-3 Tax Allocation Agreement dated as of September 30, 1997 by
and between the Company and Meritor Automotive, Inc., filed
as Exhibit 2.3 to the Company's Current Report on Form 8-K
dated October 10, 1997, is hereby incorporated by reference.
10-p-1 Distribution Agreement dated as of December 31, 1998 by and
between the Company and Conexant Systems, Inc., filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K
dated January 12, 1999, is hereby incorporated by reference.
10-p-2 Amended and Restated Employee Matters Agreement dated as of
December 31, 1998 by and between the Company and Conexant
Systems, Inc., filed as Exhibit 2.2 to the Company's Current
Report on Form 8-K dated January 12, 1999, is hereby
incorporated by reference.
10-p-3 Tax Allocation Agreement dated as of December 31, 1998 by
and between the Company and Conexant Systems, Inc., filed as
Exhibit 2.3 to the Company's Current Report on Form 8-K
dated January 12, 1999, is hereby incorporated by reference.
12 Computation of Ratio of Earnings to Fixed Charges for the
Five Years Ended September 30, 1999.
21 List of Subsidiaries of the Company.
23 Independent Auditors' Consent.
24 Powers of Attorney authorizing certain persons to sign this
Annual Report on Form 10-K on behalf of certain directors
and officers of the Company.
27 Financial Data Schedule for this Annual Report on Form 10-K.
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the period
covered by this Report.
- ---------------
* Management contract or compensatory plan or arrangement.
50
<PAGE> 51
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.
ROCKWELL INTERNATIONAL CORPORATION
By /s/ WILLIAM J. CALISE, JR.
---------------------------------------
WILLIAM J. CALISE, JR.
SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
Dated: December 1, 1999
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW ON THE 1ST DAY OF DECEMBER 1999 BY THE FOLLOWING
PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
DON H. DAVIS, JR.*
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
GEORGE L. ARGYROS*
DIRECTOR
DONALD R. BEALL*
DIRECTOR
WILLIAM H. GRAY, III*
DIRECTOR
JAMES CLAYBURN LA FORCE, JR.*
DIRECTOR
WILLIAM T. MCCORMICK, JR.*
DIRECTOR
JOHN D. NICHOLS*
DIRECTOR
BRUCE M. ROCKWELL*
DIRECTOR
ROBERT B. SHAPIRO*
DIRECTOR
WILLIAM S. SNEATH*
DIRECTOR
JOSEPH F. TOOT, JR.*
DIRECTOR
W. MICHAEL BARNES*
SENIOR VICE PRESIDENT, FINANCE & PLANNING
AND
CHIEF FINANCIAL OFFICER (PRINCIPAL
FINANCIAL OFFICER)
WILLIAM E. SANDERS*
VICE PRESIDENT AND CONTROLLER (PRINCIPAL
ACCOUNTING OFFICER)
*By /s/ WILLIAM J. CALISE, JR.
--------------------------------------------------------------
WILLIAM J. CALISE, JR., ATTORNEY-IN-FACT**
** BY AUTHORITY OF POWERS OF ATTORNEY FILED HEREWITH.
51
<PAGE> 52
SCHEDULE II
ROCKWELL INTERNATIONAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING NET CHARGE TO BALANCE AT
OF COSTS AND END OF
DESCRIPTION YEAR(a) EXPENSES DEDUCTIONS YEAR(a)
----------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended September 30, 1999:
Allowance for doubtful accounts.............. $55 $16 $12 (b) $60
(1)(c)
Year ended September 30, 1998:
Allowance for doubtful accounts.............. 56 7 8 (b) 55
Year ended September 30, 1997:
Allowance for doubtful accounts.............. 62 3 6 (b) 56
3 (c)
</TABLE>
- ---------------
(a) Includes allowances for commercial and other long-term receivables.
(b) Uncollectible accounts written off.
(c) Consists principally of amounts relating to businesses acquired, businesses
sold and foreign currency translation adjustments.
S-1
<PAGE> 1
Exhibit 10-c-1
DIRECTORS STOCK PLAN
OF
ROCKWELL INTERNATIONAL CORPORATION
As Amended February 5, 1997
1. PURPOSE OF THE PLAN.
The purpose of the Directors Stock Plan (the Plan) is to strengthen the
link of the compensation of non-employee directors of Rockwell
International Corporation (Rockwell) directly with the interests of the
shareowners.
2. PARTICIPANTS.
Participants in the Plan shall consist of directors of Rockwell who are
not employees of Rockwell or any of its subsidiaries (Non-Employee
Director). The term "subsidiary" as used in the Plan means a
corporation more than 50% of the voting stock of which, or an
unincorporated business entity more than 50% of the equity interest in
which, shall at the time be owned directly or indirectly by Rockwell.
3. SHARES RESERVED UNDER THE PLAN.
Subject to the provisions of Section 10 of the Plan, there shall be
reserved for delivery under the Plan shares of Common Stock of Rockwell
(Shares) in the following aggregate amounts: 75,000 Shares under
Section 6; 150,000 Shares under Section 8; and 75,000
<PAGE> 2
Shares under Section 9. Shares to be delivered under the Plan may be
authorized and unissued Shares, Shares held in treasury or any
combination thereof.
4. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Compensation and Management
Development Committee of the Board of Directors of Rockwell (the
Committee). The Committee shall have authority to interpret the Plan,
and to prescribe, amend and rescind rules and regulations relating to
the administration of the Plan, and all such interpretations, rules and
regulations shall be conclusive and binding on all persons.
5. EFFECTIVE DATE OF THE PLAN.
The Plan, as amended on December 6, 1995, shall be submitted to the
shareowners of Rockwell for approval at the Annual Meeting of
Shareowners to be held on February 7, 1996, or any adjournment thereof,
and, if approved by the shareowners, shall become effective on the date
and at the time of such approval. The Plan approved at the Annual
Meeting of Shareowners held February 1, 1995 shall be in full force and
effect if the Plan, as amended, is not so approved.
6. AWARD OF SHARES.
Each Non-Employee Director who is elected a director at, or who was
previously elected and continues as a director after, any Annual
Meeting of Shareowners of Rockwell shall receive an award of 400
Shares effective immediately after that Annual Meeting. Each
2
<PAGE> 3
Non-Employee Director who is elected a director at any meeting of the
Board shall receive effective immediately after that meeting an award
of 400 Shares if elected after the annual meeting and prior to May 1;
an award of 300 Shares if elected between May 1 and July 31; an award
of 200 Shares if elected between August 1 and October 31; and an award
of 100 Shares if elected between November 1 and the next annual
meeting. A participant shall not be required to make any payment for
any Shares delivered under the Plan. Upon the delivery of Shares under
the Plan, the recipient shall have the entire beneficial ownership
interest in, and all rights and privileges of a shareowner as to those
Shares, including the right to vote the Shares and to receive
dividends thereon.
Each Non-Employee Director may elect each year, not later than December
31 of the year preceding the year in which the annual award of Shares
is to be made, to receive the annual grant in the form of restricted
stock (Restricted Shares). Upon receipt of Restricted Shares, the
recipient shall have the right to vote the Shares and to receive
dividends thereon, and the Shares shall have all the attributes of
outstanding shares, except that certificates for such Shares shall be
delivered to and held by Rockwell until ten days after the recipient
retires from the Board under the Board's retirement policy or if the
recipient resigns from the Board or ceases to be a Director by reason
of the antitrust laws, compliance with Rockwell's conflict of interest
policies, death, disability or other circumstances the Board
determines not to be adverse to the best interests of Rockwell, when
certificates so held shall be delivered to the Director and cease to be
Restricted Shares.
3
<PAGE> 4
7. RESTRICTION ON TRANSFER OF SHARES.
No Shares received by a participant under Section 6 or 9 of the Plan
may be sold, assigned, transferred, pledged or otherwise encumbered or
disposed of for a period of six months after receipt of those Shares,
except in the case of the participant's death or disability during that
six-month period.
8. STOCK OPTIONS.
Each Non-Employee Director who is elected a director at, or who was
previously elected and continues as a director after, any Annual
Meeting of Shareowners of Rockwell shall receive an option to purchase
1,000 Shares immediately after that Annual Meeting; provided, however,
that if R. M. Bressler, J. D. Nichols and J. F. Toot are reelected
directors at the Corporation's 1996 Annual Meeting, options to purchase
9,000, 9,000 and 5,000 Shares, respectively, shall be granted to them
immediately thereafter. Each Non-Employee Director who is elected a
director at any meeting of the Board shall receive immediately after
that meeting an option to purchase 1,000 Shares if elected after the
annual meeting and prior to May 1; an option to purchase 750 Shares if
elected between May 1 and July 31; an option to purchase 500 Shares if
elected between August 1 and October 31; and an option to purchase 250
Shares if elected between November 1 and the next annual meeting. The
exercise price for each option so granted shall be one-hundred percent
(100%) of the closing price (the fair market value) of the Common
Stock of Rockwell on the date of grant as reported in the New York
Stock Exchange -- Composite
4
<PAGE> 5
Transactions (or on the next preceding day such stock was traded if it
was not traded on the date of grant).
The purchase price of the Shares with respect to which an option or
portion thereof is exercised shall be payable in full in cash, shares
of Common Stock of Rockwell valued at their fair market value on the
date of exercise, or a combination thereof. Each option may be
exercised in whole or in part at any time after it becomes exercisable;
and each option shall become exercisable in approximately three equal
installments on each of the first, second and third anniversaries of
the date the option is granted. No option shall be exercisable prior to
one year nor after ten years from the date of the grant thereof;
provided, however, that if the holder of an option dies, the option may
be exercised from and after the date of the optionee's death for a
period of three years (or until the expiration date specified in the
option if earlier) even if it was not exercisable at the date of death.
Moreover, if an optionee retires at age 72 or prior thereto with at
least ten years service, all options then held by such optionee shall
be exercisable even if they were not exercisable at such retirement
date; provided, however, that each such option shall expire at the
earlier of five years from the date of the optionee's retirement or the
expiration date specified in the option. If a Change of Control as
defined in Article III, Section 15(l)(1) of Rockwell's By-Laws shall
occur, then, unless prior to the occurrence thereof the Board of
Directors shall determine otherwise by vote of at least two-thirds of
its members, all options then outstanding pursuant to the Plan shall
forthwith become fully exercisable whether or not then exercisable.
5
<PAGE> 6
Options granted under the Plan are not transferable other than (i) by
will or by the laws of descent and distribution; or (ii) by gift to the
grantee's spouse or natural, adopted or step-children or grandchildren
(immediate family members) or to a trust for the benefit of one or more
of the grantee's immediate family members or to a family charitable
trust established by the grantee or a member of the grantee's family.
If an optionee ceases to be a director while holding unexercised
options, such options are then void, except in the case of (i) death,
(ii) disability, (iii) retirement after attaining the age of 72 or
having completed ten years service as a director, or (iv) resignation
from the Board for reasons of the antitrust laws, compliance with the
Corporation's conflict of interest policies or other circumstances that
the Committee may determine as serving the best interests of Rockwell.
9. SHARES IN LIEU OF CASH COMPENSATION.
Each Non-Employee Director may elect each year, not later than December
31 of the year preceding the year as to which deferral of fees is to be
applicable, to defer all or any portion of the cash retainer to be paid
for board, committee or other service in the following calendar year
through the issuance or transfer of Restricted Shares, valued at the
closing price on the New York Stock Exchange -- Composite Transactions
on the date when each payment of such retainer amount would otherwise
be made in cash. Such Restricted Shares shall be the same as and
subject to the same provisions as are applicable to the Restricted
Shares issued or delivered pursuant to Section 6 of the Plan.
6
<PAGE> 7
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
If there shall be any change in or affecting Shares on account of any
merger, consolidation, reorganization, recapitalization,
reclassification, stock dividend, stock split or combination, or other
distribution to holders of Shares (other than a cash dividend), there
shall be made or taken such amendments to the Plan and such adjustments
and actions thereunder as the Board may deem appropriate under the
circumstances.
11. GOVERNMENT AND OTHER REGULATIONS.
The obligations of Rockwell to deliver Shares under Section 6 of the
Plan or upon exercise of options granted under Section 8 of the Plan
shall be subject to (i) all applicable laws, rules and regulations and
such approvals by any governmental agencies as may be required,
including, without limitation, compliance with the Securities Act of
1933, as amended, and (ii) the condition that such shares shall have
been duly listed on the New York Stock Exchange.
12. AMENDMENT AND TERMINATION OF THE PLAN.
The Plan may be amended by the Board in any respect, provided that,
without shareowner approval, no amendment shall (i) materially increase
the maximum number of shares of Common Stock available for delivery
under the Plan (other than adjustments pursuant to Section 10 hereof),
(ii) materially increase the benefits accruing to participants under
the Plan, or (iii) materially modify the requirements as to eligibility
for participation in the Plan, and provided, further, that Section 6 of
the Plan may not be amended more than
7
<PAGE> 8
once every six months except to comport with the changes in the
Internal Revenue Code of 1986, as amended, the Employee Retirement
Income Securities Act of 1974, as amended, or the regulations under
either thereof. The Plan may also be terminated at any time by the
Board.
13. MISCELLANEOUS.
(a) Nothing contained in this Plan shall be deemed to confer upon
any person any right to continue as a director of or to be
associated in any other way with Rockwell.
(b) To the extent that Federal laws do not otherwise control, the
Plan and all determinations made and actions taken pursuant
hereto shall be governed by the law of the State of Delaware.
8
<PAGE> 1
Exhibit 10-d-3
MEMORANDUM OF ADJUSTMENTS TO OUTSTANDING OPTIONS
UNDER ROCKWELL INTERNATIONAL CORPORATION'S
1988 LONG-TERM INCENTIVES PLAN, 1995 LONG-TERM
INCENTIVES PLAN AND DIRECTORS STOCK PLAN
Effective upon consummation of the distribution (the
"Distribution") by Rockwell International Corporation ("Rockwell") to each
holder of shares of Common Stock, par value $1 per share, of Rockwell ("Rockwell
Common Stock"), as of the close of business on December 11, 1998 (or, if the
conditions set forth in the Distribution Agreement to be entered into between
Rockwell and Conexant Systems, Inc. ("Conexant") prior to the Distribution (the
"Distribution Agreement") shall not have been satisfied on or before that date,
such later date as may be determined by the Rockwell Executive Committee (the
"Distribution Record Date")), of one share of Common Stock, par value $1 per
share ("Conexant Common Stock"), and one associated preferred share purchase
right ("Right"), of Conexant for every two shares of Rockwell Common Stock held
by such holder on the Distribution Record Date (subject to satisfaction or
waiver of the conditions set forth in the Distribution Agreement), all
outstanding options under the Rockwell International Corporation 1988 Long-Term
Incentives Plan (the "1988 Plan"), 1995 Long-Term Incentives Plan (the "1995
Plan") and Directors Stock Plan (the "Directors Plan", and, together with the
1988 Plan and the 1995 Plan, the "Rockwell Stock Plans"), pursuant to the
equitable adjustment provisions of the applicable Rockwell Stock Plan, shall be
adjusted as set forth in this memorandum.
As used in this memorandum, the following terms shall have the
following meanings (such meanings to be equally applicable to both the singular
and plural forms of the terms defined):
"Average Price of Conexant Common Stock" means the average of
the daily closing prices per share of Conexant Common Stock as reported
on Nasdaq for the five consecutive Nasdaq trading days ending on and
including the Distribution Date (the "Nasdaq Pre-Distribution Period"),
assuming that "when-issued" trading in Conexant Common Stock occurs
during the Nasdaq Pre-Distribution Period in daily volume of not less
than 1,000 shares (and if on any day (a "Conexant
<PAGE> 2
Excluded Day") during the Nasdaq Pre-Distribution Period (i) such
trading does not occur in such volume or (ii) such day is a Rockwell
Excluded Day, then trading on each Conexant Excluded Day shall not be
considered and trading on up to five Substitute Nasdaq Trading Days
shall be included so that a total of five trading days are included in
the averaging period); provided, that if the Committee shall determine
on or before 2:00 p.m. (New York City time) on the first Nasdaq
trading day following the Distribution Date that, notwithstanding
satisfaction of the 1,000 share per day minimum trading volume
requirement, "when-issued" trading on one or more days during the
Nasdaq Pre-Distribution Period does not fairly represent the value of
Conexant Common Stock, then each such day so determined shall be
treated as a Conexant Excluded Day, trading on each Conexant Excluded
Day shall not be considered and trading on up to five Substitute
Nasdaq Trading Days shall be included so that a total of five trading
days are included in the averaging period.
"Committee" means the committee appointed by the Rockwell
Board of Directors on December 2, 1998 for certain purposes in respect
of the option adjustments described in this memorandum.
"Conexant Employee" means any individual who, as of the Time
of Distribution, (i) will be employed by a member of the Conexant Group
or (ii) is a director of Conexant who is not also a director of
Rockwell.
"Conexant Group" means Conexant Systems, Inc. and its
subsidiaries.
"Conexant Option" means an option to purchase from Conexant
shares of Conexant Common Stock provided to a holder of a Rockwell
Option.
"Conexant Option Ratio" means the amount obtained by dividing
(i) the Average Price of Conexant Common Stock by (ii) the
Pre-Distribution Average Price of Rockwell Common Stock.
"Conexant Option Spread" means (i) with respect to any
Conexant Option received by a holder of a Rockwell Split Option
pursuant to paragraph (c) of this memorandum that is not subject to
paragraph (d) of this memorandum, the Pre-Distribution Rockwell Option
Spread
2
<PAGE> 3
of the corresponding Rockwell Split Option minus the Ex-Distribution
Rockwell Option Spread of such Rockwell Split Option or (ii) with
respect to any Conexant Option received by a holder of a Rockwell
Split Option pursuant to paragraph (c) of this memorandum that is
subject to the provisions of paragraph (d) of this memorandum, (A) the
Average Price of Conexant Common Stock minus $1.00, multiplied by (B)
the number of shares of Conexant Common Stock subject to such Conexant
Option.
"Distribution Date" means the date determined by the Rockwell
Board of Directors as the date as of which the Distribution will be
effected.
"Ex-Distribution Average Price of Rockwell Common Stock" means
the average of the daily closing prices per share of Rockwell Common
Stock trading on an "ex-distribution when-issued" basis as reported on
the NYSE Composite Transactions reporting system for the five
consecutive NYSE trading days ending on and including the Distribution
Date (the "NYSE Pre-Distribution Period"), assuming that
"ex-distribution when-issued" trading in Rockwell Common Stock occurs
during the NYSE Pre-Distribution Period in daily volume of not less
than 1,000 shares (and if on any day (a "Rockwell Excluded Day") during
the NYSE Pre-Distribution Period (i) such trading does not occur in
such volume or (ii) such day is a Conexant Excluded Day, then trading
on each Rockwell Excluded Day shall not be considered and trading on up
to five Substitute NYSE Trading Days shall be included so that a total
of five trading days are included in the averaging period); provided,
that if the Committee shall determine on or before 2:00 p.m. (New York
City time) on the first NYSE trading day following the Distribution
Date that, notwithstanding satisfaction of the 1,000 share per day
minimum trading volume requirement, "ex-distribution when-issued"
trading on one or more days during the NYSE Pre-Distribution Period
does not fairly represent the value of Rockwell Common Stock
(excluding the value of the Conexant Common Stock to be distributed in
respect thereof), then each such day so determined shall be treated as
a Rockwell Excluded Day, trading on each Rockwell Excluded Day shall
not be considered and trading on up to five Substitute NYSE Trading
Days shall be included so that a total of five trading days are
included in the averaging period.
3
<PAGE> 4
"Ex-Distribution Rockwell Option Spread" means, (i) with
respect to any Rockwell Split Option (after its being adjusted pursuant
to paragraph (c) of this memorandum) that is not subject to paragraph
(d) of this memorandum, (A) the Ex-Distribution Average Price of
Rockwell Common Stock minus the per-share exercise price of such
adjusted Rockwell Split Option, multiplied by (B) the number of shares
of Rockwell Common Stock subject to such Rockwell Split Option or (ii)
with respect to any Rockwell Split Option that is subject to paragraph
(d) of this memorandum, the Pre-Distribution Rockwell Option Spread of
the Rockwell Split Option minus the Conexant Option Spread of the
corresponding Conexant Option.
"Nasdaq" means the Nasdaq Stock Market, Inc. National Market
System.
"NYSE" means the New York Stock Exchange.
"Pre-Distribution Average Price of Rockwell Common Stock"
means the average of the daily closing prices per share of Rockwell
Common Stock trading on a "regular way" basis (i.e., including the
value of the Conexant Common Stock to be distributed in respect
thereof) as reported on the NYSE Composite Transactions reporting
system for the NYSE Pre-Distribution Period; provided, that if any day
during such period (an "Old Rockwell Excluded Day") is either a
Conexant Excluded Day or a Rockwell Excluded Day, then trading on such
Old Rockwell Excluded Day shall not be considered and trading on up to
five Substitute Old Rockwell Trading Days shall be included so that a
total of five trading days are included in the averaging period.
"Pre-Distribution Rockwell Option Spread" means, with respect
to any Rockwell Split Option (prior to its being adjusted pursuant to
paragraph (c) or (d) of this memorandum), (i) the Pre-Distribution
Average Price of Rockwell Common Stock minus the per-share exercise
price of such unadjusted Rockwell Split Option, multiplied by (ii) the
number of shares of Rockwell Common Stock subject to such Rockwell
Split Option.
"Rockwell Non-Split Option" means a Rockwell Option that was
granted prior to January 1, 1990 or after August 31, 1998 and that is
not held by a Conexant Employee at the Time of Distribution.
4
<PAGE> 5
"Rockwell Option" means an option to purchase from Rockwell
shares of Rockwell Common Stock granted pursuant to one of the Rockwell
Stock Plans.
"Rockwell Option Ratio" means the amount obtained by dividing
(i) the Ex-Distribution Average Price of Rockwell Common Stock by (ii)
the Pre-Distribution Average Price of Rockwell Common Stock.
"Rockwell Split Option" means a Rockwell Option that was
granted between January 1, 1990 and August 31, 1998.
"Substitute Nasdaq Trading Day" means the first immediately
preceding Nasdaq trading day in the five Nasdaq trading day period
immediately preceding the Nasdaq Pre-Distribution Period (the "Nasdaq
Earlier Period") that is not already a Substitute Nasdaq Trading Day or
an Excluded Nasdaq Trading Day (as defined below), assuming that
"when-issued" trading in Conexant Common Stock occurs during the Nasdaq
Earlier Period in daily volume of not less than 1,000 shares (and if on
any day during the Nasdaq Earlier Period (an "Excluded Nasdaq Trading
Day") (i) such trading does not occur in such volume or (ii) such day
is an Excluded NYSE Trading Day, then trading on that day shall not be
considered a Substitute Nasdaq Trading Day and the next immediately
preceding Nasdaq trading day in the Nasdaq Earlier Period shall be
considered for purposes of this definition); provided, that if the
Committee shall determine on or before 2:00 p.m. (New York City time)
on the first Nasdaq trading day following the Distribution Date that,
notwithstanding satisfaction of the 1,000 share per day minimum trading
volume requirement, "when-issued" trading on such Substitute Nasdaq
Trading Day does not fairly represent the value of Conexant Common
Stock, then each such day so determined shall be treated as an Excluded
Nasdaq Trading Day and shall not be considered as a Substitute Nasdaq
Trading Day and the next immediately preceding Nasdaq trading day in
the Nasdaq Earlier Period shall be considered for purposes of this
definition; provided, further, that if there are an insufficient number
of Substitute Nasdaq Trading Days available in the Nasdaq Earlier
Period for a total of five trading days to be included in the averaging
period for the Average Price of Conexant Common Stock, then up to five
Nasdaq trading days (as determined by the Committee)
5
<PAGE> 6
immediately following the Distribution Date shall be included as a
Substitute Nasdaq Trading Day so that a total of five trading days are
included in the averaging period.
"Substitute NYSE Trading Day" means the first immediately
preceding NYSE trading day in the five NYSE trading day period
immediately preceding the NYSE Pre-Distribution Period (the "NYSE
Earlier Period") that is not already a Substitute NYSE Trading Day or
an Excluded NYSE Trading Day (as defined below), assuming that
"ex-distribution when-issued" trading in Rockwell Common Stock occurs
during the NYSE Earlier Period in daily volume of not less than 1,000
shares (and if on any day during the NYSE Earlier Period (an "Excluded
NYSE Trading Day") (i) such trading does not occur in such volume or
(ii) such day is an Excluded Nasdaq Trading Day, then trading on that
day shall not be considered a Substitute NYSE Trading Day and the next
immediately preceding NYSE trading day in the NYSE Earlier Period shall
be considered for purposes of this definition); provided, that if the
Committee shall determine on or before 2:00 p.m. (New York City time)
on the first NYSE trading day following the Distribution Date that,
notwithstanding satisfaction of the 1,000 share per day minimum trading
volume requirement, "ex-distribution when-issued" trading on such
Substitute NYSE Trading Day does not fairly represent the value of
Rockwell Common Stock (i.e., without the value of the Conexant Common
Stock to be distributed in respect thereof), then each such day so
determined shall be treated as an Excluded NYSE Trading Day and shall
not be considered as a Substitute NYSE Trading Day and the next
immediately preceding NYSE trading day in the NYSE Earlier Period shall
be considered for purposes of this definition; provided, further, that
if there are an insufficient number of Substitute NYSE Trading Days
available in the NYSE Earlier Period for a total of five trading days
to be included in the averaging period for the Average Price of
Rockwell Common Stock, then up to five NYSE trading days (as determined
by the Committee) immediately following the Distribution Date shall be
included as a Substitute NYSE Trading Day so that a total of five
trading days are included in the averaging period.
"Substitute Old Rockwell Trading Day" means the first
immediately preceding NYSE trading day in the
6
<PAGE> 7
NYSE Earlier Period that is not already a Substitute Old Rockwell
Trading Day, an Excluded Nasdaq Trading Day or an Excluded NYSE Trading
Day; provided, that if there are an insufficient number of Substitute
Old Rockwell Trading Days available in the NYSE Earlier Period for a
total of five trading days to be included in the averaging period for
the Pre-Distribution Average Price of Rockwell Common Stock, then
notwithstanding any other provision of this memorandum up to five NYSE
trading days (as determined by the Committee) that would otherwise have
been excluded during the NYSE Pre-Distribution Period or the NYSE
Earlier Period shall be included as Substitute Old Rockwell Trading
Days so that a total of five trading days are included in the averaging
period.
"Time of Distribution" means the close of business on the
Distribution Date.
The adjustments shall be made as follows:
(a) Each Rockwell Non-Split Option that is
outstanding as of the Time of Distribution shall be adjusted so that
the per-share exercise price of such Rockwell Non-Split Option will
equal the per-share exercise price of such Rockwell Non-Split Option
immediately prior to the Time of Distribution and prior to such
adjustment, multiplied by the Rockwell Option Ratio. The number of
shares of Rockwell Common Stock subject to such Rockwell Non-Split
Option shall be adjusted by multiplying the number of shares of
Rockwell Common Stock subject thereto immediately prior to the Time of
Distribution by the reciprocal of the Rockwell Option Ratio and, if any
resultant fractional share exists, rounded down to the nearest whole
share. Such Rockwell Non-Split Option will otherwise have the same
terms and conditions as those in effect prior to the adjustment, except
as provided in paragraph (f) below.
(b) Each Rockwell Option held by a Conexant Employee
that is outstanding as of the Time of Distribution shall be and become
a Conexant Option. The per-share exercise price of such Conexant Option
will equal the per-share exercise price of such Rockwell Option being
replaced immediately prior to the Time of Distribution, multiplied by
the Conexant Option
7
<PAGE> 8
Ratio. The number of shares of Conexant Common Stock subject to the
Conexant Option will equal the number of shares subject to such
Rockwell Option being replaced immediately prior to the Time of
Distribution, multiplied by the reciprocal of the Conexant Option
Ratio, and, if any resultant fractional share of Conexant Common Stock
exists, rounded down to the nearest whole share, without any payment
for such fractional share. Such Conexant Option will otherwise have
substantially the same terms and conditions as the corresponding
Rockwell Option being replaced, except as provided in paragraph (e)
below and except that references to Rockwell will be changed to refer
to Conexant and references to any of the Rockwell Stock Plans will be
changed to refer to the Conexant 1998 Stock Option Plan.
(c) Each Rockwell Split Option held by any person
(other than a Conexant Employee) that is outstanding as of the Time of
Distribution shall be adjusted so that the per-share exercise price of
such Rockwell Split Option will equal the per-share exercise price of
such Rockwell Split Option immediately prior to the Time of
Distribution and prior to such adjustment, multiplied by the Rockwell
Option Ratio, subject to the provisions of paragraph (d) below. The
number of shares subject to the adjusted Rockwell Split Option will
equal the number of shares subject to such Rockwell Split Option
immediately prior to the Time of Distribution. Such adjusted Rockwell
Split Option will otherwise have the same terms and conditions as those
in effect prior to the adjustment, except as provided in paragraph (f)
below. In addition, each person (other than a Conexant Employee)
holding a Rockwell Split Option will receive a Conexant Option. The
number of shares of Conexant Common Stock subject to such Conexant
Option will equal one-half the number of shares subject to such
Rockwell Split Option immediately prior to the Time of Distribution,
and, if any resultant fractional share of Conexant Common Stock exists,
rounded down to the nearest whole share, without any payment for such
fractional share. Subject to the provisions of paragraph (d) below, the
Conexant Option will have a per-share exercise price equal to (i) the
Average Price of Conexant Common Stock, minus (ii) the amount obtained
by dividing the Conexant Option Spread of such Conexant Option by the
number of shares of Conexant Common Stock subject to such
8
<PAGE> 9
Conexant Option. Such Conexant Option will otherwise have substantially
the same terms and conditions as the corresponding Rockwell Split
Option being adjusted, except as provided in paragraph (e) below and
except that references to Rockwell will be changed to refer to Conexant
and references to any of the Rockwell Stock Plans will be changed to
refer to the Conexant 1998 Stock Option Plan.
(d) Notwithstanding anything to the contrary
contained herein, if the per-share exercise price of the Conexant
Option determined in accordance with paragraph (c) above results in a
price less than $1.00, the per-share exercise price of such Conexant
Option shall be deemed to be $1.00 and the per-share exercise price of
the corresponding Rockwell Split Option shall be determined in
accordance with this paragraph (d). In such case, the per-share
exercise price of the Rockwell Split Option will be adjusted to equal
(i) the Ex-Distribution Average Price of Rockwell Common Stock, minus
(ii) the amount obtained by dividing the Ex-Distribution Rockwell
Option Spread of such Rockwell Split Option by the number of shares of
Rockwell Common Stock subject to such Rockwell Split Option.
(e) Any Conexant Option received by a holder pursuant
to the adjustments to such holder's Rockwell Option provided for in
this memorandum that would otherwise by its terms expire after the Time
of Distribution and on or before March 31, 1999 shall not expire until
April 30, 1999.
(f) Any Rockwell Option (as adjusted pursuant to the
provisions of this memorandum) granted after March 1, 1989 that would
otherwise by its terms expire after the Time of Distribution and before
January 31, 1999 shall not expire until January 31, 1999.
(g) For purposes of determining the exercisability of
any Rockwell Non-Split Option granted effective on or after October 5,
1998 and designated as subject to performance vesting, the adjusted
exercise price determined as provided for in this memorandum shall be
substituted for the original exercise price of such Rockwell Non-Split
Option prior to adjustment, and such options shall become exercisable
as to the total number of shares of Rockwell Common Stock covered
9
<PAGE> 10
thereby then outstanding on the date on which the closing price of
Rockwell Common Stock as reported on the NYSE Composite Transactions
reporting system shall have been at least 150% of such adjusted
exercise price for at least twenty consecutive trading days or, if
earlier, on October 5, 2007.
10
<PAGE> 1
Exhibit 10-l-2
September 30, 1999
Mr. Donald R. Beall
Retired Chairman and Chief Executive Officer
Rockwell International Corporation
5 Civic Plaza, Suite 320
Newport Beach, CA 92660-5956
Dear Don:
This confirms the arrangements which have been agreed upon under which you will
continue to act as a consultant to the Corporation for the period beginning
October 1, 1999 and ending September 30, 2000.
It is understood that your responsibilities as a consultant will require you to
devote a reasonable portion of your time to this work, but you will not be
otherwise restricted in your business activities so long as they do not
interfere with your reasonable availability to the Corporation. It is agreed,
however, that you will not engage in any activity which presents a conflict of
interest in the light of your relationship with the Corporation.
You will be treated as an employee of the Corporation for purposes of payment of
compensation, income tax withholding and employment taxes, but as an independent
contractor for all other purposes. Without limiting the generality of the
foregoing, you shall not by reason of your services to the Corporation under
this agreement be eligible for participation in or be entitled to benefits under
any employee benefit plans or programs sponsored by the Corporation or any of
its affiliates.
The Corporation will pay you a fee at the rate of $300,000 per year, payable in
monthly installments on the first day of each month during the period of this
agreement. In addition, the Corporation will reimburse you for the reasonable
expenses of maintaining an office and for reasonable travel expenses and
out-of-pocket expenditures which you may incur in serving as a consultant to the
Corporation.
<PAGE> 2
Donald R. Beall
September 30, 1999
Page 2
In order to facilitate your providing the contemplated services you shall also,
during the term of this agreement:
- - Have available full-time secretarial service at your office;
- - Continue to have the use of the automobile the Corporation presently
provides you, including maintenance and insurance, until October 31,
1999, after which you will be eligible for the Executive Auto Cash
Allowance Program through September 30, 2000;
- - Be authorized to use the Corporation's aircraft, subject to
availability, for business travel related to your services as a
consultant and for travel to attend meetings of the boards of directors
of other companies on which you presently serve;
- - Continue to be eligible for the dental and vision care benefits
presently provided you; and
- - Continue to be reimbursed through the term of this agreement for the
membership costs for the Los Angeles Country Club, Big Canyon Country
Club, Balboa Bay Club, the Center Club and the Pacific Club (with the
understanding that you will be entitled to purchase the Corporation's
equity interest in the Big Canyon Country Club and the Los Angeles
Country Club memberships at the end of the term of this agreement).
If this correctly sets forth our understanding, please sign the duplicate
original of this letter and return it to me.
Sincerely,
ROCKWELL INTERNATIONAL CORPORATION
/s/ Don H. Davis, Jr.
- --------------------
Don H. Davis, Jr.
Chairman and Chief Executive Officer
ACCEPTED:
/s/ Donald R. Beall
- -------------------
Donald R. Beall
<PAGE> 1
Exhibit 12
ROCKWELL INTERNATIONAL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
--------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(in millions, except ratios)
<S> <C> <C> <C> <C> <C>
Earnings Available for Fixed Charges:
Income from continuing operations before income
taxes............................................ $ 890 $ 25 $ 735 $ 532 $ 538
Adjustments:
Undistributed income of affiliates.................. (4) (8) (9) (3) --
Minority interest in loss of subsidiaries........... 2 -- 2 -- 3
------ ----- ----- ----- -----
888 17 728 529 541
------ ----- ----- ----- -----
Add fixed charges included in earnings:
Interest expense.................................... 84 58 27 22 14
Interest element of rentals......................... 51 50 47 49 41
------ ----- ----- ----- -----
Total.......................................... 135 108 74 71 55
------ ----- ----- ----- -----
Total earnings available for fixed charges.......... $1,023 $ 125 $ 802 $ 600 $ 596
====== ===== ===== ===== =====
Fixed charges:
Fixed charges included in earnings.................. $ 135 $ 108 $ 74 $ 71 $ 55
Capitalized interest................................ 4 10 9 2 1
------ ----- ----- ----- -----
Total fixed charges................................. $ 139 $ 118 $ 83 $ 73 $ 56
====== ===== ===== ===== =====
Ratio of Earnings to Fixed Charges(1)................. 7.4 1.1 9.7 8.2 10.6
====== ===== ===== ===== =====
</TABLE>
- ---------------
(1) In computing the ratio of earnings to fixed charges, earnings are defined as
income from continuing operations before income taxes, adjusted for minority
interest in income or loss of subsidiaries, undistributed earnings of
affiliates, and fixed charges exclusive of capitalized interest. Fixed
charges consist of interest on borrowings and that portion of rentals deemed
representative of the interest factor.
<PAGE> 1
Exhibit 21
ROCKWELL INTERNATIONAL CORPORATION
LIST OF SUBSIDIARIES OF THE COMPANY
AS OF NOVEMBER 30, 1999
<TABLE>
<CAPTION>
PERCENTAGE OF VOTING
SECURITIES OWNED BY
------------------------
NAME AND JURISDICTION REGISTRANT SUBSIDIARY
- --------------------- ---------- ----------
<S> <C> <C>
Allen-Bradley Company, LLC (Delaware)....................... 100%
Reliance Electric Industrial Company (Delaware)........... 100%
Rockwell Collins, Inc. (Delaware)........................... 100%
</TABLE>
Listed above are certain consolidated subsidiaries included in the consolidated
financial statements of the Company. Unlisted subsidiaries, considered in the
aggregate, do not constitute a significant subsidiary.
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-17031, 333-17055, 333-17405 and 333-89219 on Form S-8 and Nos. 333-24685 and
333-43071 on Form S-3 of Rockwell International Corporation of our report dated
November 3, 1999, appearing in the Annual Report on Form 10-K of Rockwell
International Corporation for the year ended September 30, 1999 and to the
reference to us under the heading "Experts" in the Prospectuses which are part
of the Registration Statements.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
December 1, 1999
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
I, the undersigned Director and/or Officer of Rockwell International
Corporation, a Delaware corporation (the Company), hereby constitute WILLIAM J.
CALISE, JR., EDWARD T. MOEN, II and PETER R. KOLYER, and each of them singly, my
true and lawful attorneys with full power to them and each of them to sign for
me, and in my name and in the capacity or capacities indicated below, (1) the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1999 and any amendments thereto; (2) any and all amendments (including
supplements and post-effective amendments) to the Registration Statement on Form
S-3 (Registration No. 333-43071) registering debt securities of the Company in
an aggregate principal amount of up to $1,000,000,000 and any shares of Common
Stock, par value $1 per share, of the Company (including the associated
Preferred Share Purchase Rights) (collectively, the Common Stock) issuable or
deliverable upon conversion or exchange of any such debt securities that are
convertible into or exchangeable for Common Stock; (3) any and all amendments
(including supplements and post-effective amendments) to (a) the Registration
Statement on Form S-8 registering securities to be sold under the Company's 1995
Long-Term Incentives Plan and 1988 Long-Term Incentives Plan (Registration No.
333-17055); (b) the Registration Statement on Form S-8 registering securities to
be sold pursuant to the Company's Salaried Retirement Savings Plan, as amended,
the Company's Retirement Savings Plan for Certain Employees, as amended, and the
Company's Non-Represented Hourly Retirement Savings Plan, as amended
(Registration No. 333-17031); (c) the Registration Statement on Form S-8
registering securities to be sold pursuant to the Rockwell Employee Savings and
Investment Plan for Represented Hourly Employees, as amended (Registration No.
333-17405); and (d) the Registration Statement on Form S-8 registering
securities to be sold pursuant to the Company's Retirement Savings Plan for
Represented Hourly Employees, as amended (Registration No. 333-89219); (4) any
and all amendments (including supplements and post-effective amendments) to the
Registration Statement on Form S-3 (Registration No. 333-24685) registering (a)
certain shares of Common Stock acquired or which may be acquired by permitted
transferees upon the exercise of transferable options assigned or to be assigned
to them by certain participants in the Company's 1988 Long-Term Incentives Plan
in accordance with that Plan and (b) the offer and resale by any such permitted
transferee who may be deemed to be an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act of 1933, as amended (an Affiliate
Selling Shareowner), of Common Stock so acquired or which may be acquired by
such Affiliate Selling Shareowner upon
<PAGE> 2
exercise of any such transferable option; and (5) a Registration Statement on
Form S-8 and any and all amendments (including supplements and post-effective
amendments) thereto for the purpose of registering under the Securities Act of
1933, as amended, securities to be sold pursuant to the Company's Directors
Stock Plan.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Don H. Davis, Jr. Chairman of the Board and Chief November 3, 1999
- ----------------------------- Executive Officer (principal
Don H. Davis, Jr. executive officer)
/s/ George L. Argyros Director November 3, 1999
- -----------------------------
George L. Argyros
/s/ Donald R. Beall Director November 3, 1999
- -----------------------------
Donald R. Beall
/s/ William H. Gray, III Director November 3, 1999
- -----------------------------
William H. Gray, III
/s/ J. Clayburn La Force, Jr. Director November 3, 1999
- -----------------------------
J. Clayburn La Force, Jr.
/s/ William T. McCormick, Jr. Director November 3, 1999
- -----------------------------
William T. McCormick, Jr.
/s/ John D. Nichols Director November 3, 1999
- -----------------------------
John D. Nichols
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Bruce M. Rockwell Director November 3, 1999
- -----------------------------
Bruce M. Rockwell
/s/ Robert B. Shapiro Director November 3, 1999
- -----------------------------
Robert B. Shapiro
/s/ William S. Sneath Director November 3, 1999
- -----------------------------
William S. Sneath
/s/ Joseph F. Toot, Jr. Director November 3, 1999
- -----------------------------
Joseph F. Toot, Jr.
/s/ W. Michael Barnes Senior Vice President, November 3, 1999
- ----------------------------- Finance & Planning and Chief
W. Michael Barnes Financial Officer (principal
financial officer)
/s/ William E. Sanders Vice President and Controller November 3, 1999
- ----------------------------- (principal accounting officer)
William E. Sanders
</TABLE>
3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1999 CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1999 AND NOTES TO THE FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 356
<SECURITIES> 0
<RECEIVABLES> 1,294
<ALLOWANCES> 56
<INVENTORY> 1,339
<CURRENT-ASSETS> 3,582
<PP&E> 3,089
<DEPRECIATION> 1,508
<TOTAL-ASSETS> 6,704
<CURRENT-LIABILITIES> 2,108
<BONDS> 911
0
0
<COMMON> 216
<OTHER-SE> 2,421
<TOTAL-LIABILITY-AND-EQUITY> 6,704
<SALES> 7,043
<TOTAL-REVENUES> 7,151
<CGS> 4,907
<TOTAL-COSTS> 6,261
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84
<INCOME-PRETAX> 890
<INCOME-TAX> (308)
<INCOME-CONTINUING> 582
<DISCONTINUED> (20)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 562
<EPS-BASIC> 2.95
<EPS-DILUTED> 2.90
</TABLE>
