<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1998
0-28988
(Commission file number)
ANSALDO SIGNAL N.V.
(Exact name of registrant as specified in its charter)
The Netherlands
(Jurisdiction of incorporation or organization)
Schiphol Boulevard 267
1118 BH Schiphol, The Netherlands
(Address of principal executive offices)
Securities registered or to be registered pursuant to
Section 12(b) of the Act:
None
(Title of Class)
Securities registered or to be registered pursuant to
Section 12(g) of the Act:
Title of each class
Common Shares with a par value of NLG 0.01 each
Name of each exchange on which registered
NASDAQ
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
(Title of Class)
------------------------
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the
period covered by the annual report.
20,448,750 Common Shares
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 which financial statement item
the registrant has elected to follow.
Item 17 ___ Item 18 X
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TABLE OF CONTENTS
Page
PART I
ITEM 1 Description of Business.......................................... 3
ITEM 2 Description of Property .............................. 15
ITEM 3 Legal Proceedings..................................... 15
ITEM 4 Control of Registrant................................. 16
ITEM 5 Nature of Trading Market.............................. 16
ITEM 6 Exchange Controls and Other Limitations Affecting
Security Holders.................................... 17
ITEM 7 Taxation.............................................. 17
ITEM 8 Selected Consolidated Financial Data.................. 20
ITEM 9 Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 20
ITEM 9A Quantitative and Qualitative Disclosures about
Market Risk......................................... 30
ITEM 10 Directors and Officers of Registrant.................. 31
ITEM 11 Compensation of Directors and Officers................ 33
ITEM 12 Options to Purchase Securities from Registrant
or Subsidiaries..................................... 33
ITEM 13 Interest of Management in Certain Transactions........ 33
PART II
ITEM 14 Description of Securities to be Registered............ 36
PART III
ITEM 15 Defaults Upon Senior Securities....................... 36
ITEM 16 Changes in Securities and Changes in Security
for Registered Securities .......................... 36
PART IV
ITEM 17 Financial Statements.................................. 36
ITEM 18 Financial Statements.................................. 36
ITEM 19 Financial Statements and Exhibits..................... 36
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Ansaldo Signal
PART I
Item 1. Description of Business
General
Ansaldo Signal N.V. ("Ansaldo Signal" or "the Company") is a worldwide
supplier of signaling, automation and control systems, related products and
services. The Company offers a variety of management functions for railroad and
mass transit operations, including:
o Automatic train control ("ATC") and automatic train protection ("ATP")
systems for rail based mass transit and railroads, including high
speed lines, to provide safe train operation;
o Automatic train operation ("ATO") systems for rail based mass transit
and railroads, including high speed lines, to automate non-vital
supplementary processes;
o Centralized traffic control ("CTC") systems, network management
control systems, and other operations management systems to provide
efficient train operations;
o Automatic Train Supervision ("ATS") systems for rail based mass
transit to integrate all supervisory functions of system operation,
including CTC, wayside signaling, automatic vehicle identification and
voice and data communications, and to interface with existing
supervisory control and data acquisition systems;
o Marshalling/classification yard control systems;
o Wayside and onboard instrumentation and other products that are
essential elements of the Company's systems; and Related services such
as engineering design, maintenance and training.
The Company serves customers throughout the world in the railroad and rail
mass transit industries. Its systems, products and services are designed to
enhance the safety, productivity and efficiency of its customers' operations by
providing system-wide control, discrete segment control and management
information. The Company's state-of-the-art technologies incorporate software
and fail-safe design into computerized controllers, workstations and other
devices. These devices measure, monitor and manage numerous variables and
conditions to help customers achieve optimal safety and efficiency. The Company
has developed a large installed base of its systems from which it is able to
derive revenues through additional direct sales and installation, as well as the
sale of upgrades, enhancements, replacement parts and services.
The Company operates primarily through three principal subsidiaries that
accounted for approximately 97% of the Company's revenues in 1998. The three
main subsidiaries are:
o Ansaldo Segnalamento Ferroviario S.p.A. ("ASF"), an Italian
corporation with facilities in Genoa, Naples, Tito and Torino;
o CSEE Transport S.A. ("CSEE"), a French corporation with facilities in
Paris and Riom; and
o Union Switch & Signal Inc. ("US&S"), a Delaware corporation with
facilities in Pittsburgh, Pennsylvania and Batesburg, South Carolina.
The Company's other subsidiaries are Union Switch & Signal Pty. Ltd. ("US&S
PTY"), an Australian corporation with facilities in Brisbane, Perth and Kuala
Lumpur; AT Signal Systems AB ("ATSS"), a Swedish corporation with facilities in
Spanga; AT Signalling (Ireland) Ltd. ("ATI"), an Irish corporation with
facilities in Tralee; and Union Switch & Signal Pvt. Ltd. ("US&S PVT"), an
Indian company with facilities in Bagalore.
Historical Overview
The Company was incorporated on November 13, 1996. The Company's shares
began trading on the NASDAQ National Market on December 11, 1996. The Company
was formed to combine the railway signaling and automation business investments
of Ansaldo Trasporti S.p.A., an Italian corporation ("ATR"). ATR is 55.5% owned
by Finmeccanica S.p.A., an Italian corporation ("Finmeccanica"), which is in
turn 61% owned by the Italian state holding company, Istituto per la
Ricostruzione Industriale-IRI S.p.A. ("IRI"). The publicly held shares of ATR
and Finmeccanica are traded on the Italian automated stock exchange.
The origins of the Company's signaling activities can be traced to the very
beginning of the railway signaling and automation industry. George Westinghouse
founded The Union Switch & Signal Company in 1881 to commercialize the "closed
loop" track circuit technology, which remains the basis for much of today's
railway signaling throughout the world. Since that time, the Company's primary
operating companies -- US&S, ASF and CSEE - each of which has a long history of
involvement in the signaling industry, have played key roles in the evolution of
rail signaling and control technologies, having contributed a number of "firsts"
and other significant developments to the railway signaling and control
industry, such as:
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Ansaldo Signal
o Alternating Current (AC) track circuit (1903)
o Inductive train control (cab signaling)(1923)
o Remote controlled gravity hump yard (1924)
o Coded track circuit (1934)
o Coded carrier CTC (1942)
o Computer aided dispatching ("CAD") (1966)
o Signaling system for the TGV, the high speed French rail line (1981)
o Microprocessor based vital interlocking controller (1985)
o CTC/CAD consolidation (1987)
o Profile Cab Signaling System (1993)
o Digital Signaling System for the TGV (1993)
o Driverless metro (North America) (1995)
o Low Traffic Density Radio Block Signaling (1996)
o High Speed Train Set ATP (USA) (1997)
o Intermittent Plus Continuous Cab Signaling System (1998)
o Consolidated transit operations control center (USA) (1998)
o European Rail Traffic Management System ("ERTMS") Level 1
implementation (1999)
The Company's recent product developments include the TVM(Trademark) 430
family of products, which are the basis for automatic train control systems for
the current generation of France's high-speed TGV (Train a Grande Vitesse) as
well as other high speed lines throughout the world; the ACC/SARA(Trademark)
microprocessor based interlocking technology for large scale and complex
interlockings; and the L12,000 series discontinuous ATP systems. In addition,
the Company has combined intermittent and continuous cab signaling technologies
with balises (transponders) for cost-efficient added functionality in train
control and developed a distributed "central control" non-vital logic
architecture for increased efficiency in overall system control. In 1998, the
Company began the first up-grade to implement the ERTMS.
Complementing the Company's systems capabilities is a broad range of
products that measure, indicate or control variables such as speed, temperature,
location and spacing. In addition, the Company offers a broad, well-established
line of ground equipment such as signals, point machines which route trains from
one track to another and track circuits that detect train presence in a given
section of track. The Company's on-board products, such as its lines of cab
signaling made for both North American and European standards, usually
incorporate software.
Industry Overview
The railway signaling and automation market has traditionally included all
systems, equipment and services used to monitor and manage the safe movement of
railroad and rail mass transit vehicles. In recent years, the market has
expanded to include process automation to move goods and passengers both safely
and efficiently through railroad or rail mass transit systems. Increasingly,
customers request fully integrated control, automation and business solutions
encompassing not only signaling control systems, instrumentation devices and
advanced software applications, but also other disciplines such as data
management systems. Customers are also requiring professional services, such as
those related to predictive diagnostics and system validation requirements.
Markets. Railway signaling equipment, systems and services are used
throughout the world by freight railroads, passenger railroads (conventional and
high speed) and passenger mass transportation systems (trolley or "light" rail
and metro or "heavy" rail). Their railway signaling and automation requirements
vary widely, from a few control functions and only several trains per day to
operations which require thousands of measurement and control points, and
control thousands of train movements per day integrated in one centralized
control system. Multiple or distributed control offices may also be linked via
data communication channels. At the highest level of sophistication, certain
systems or functions may be unmanned; that is, responsibility for the operation
will rest entirely with the signaling and control system. Geographically the
principal markets addressed by the Company are North America (principally the
United States), Europe (principally Italy, France, the United Kingdom, Spain and
Sweden) and Australasia (principally China, Hong Kong and Australia).
Systems Technologies. Traditional railway signaling systems have used the
fixed block track circuit as the basic means for detecting the presence of a
train. Once the train's presence has been detected, a variety of other devices
linked to the basic track circuit system and physically distributed throughout
the network will, through the application of predetermined logic principles,
request certain actions and issue certain commands to enforce safe operation or
maximize efficiency. The track circuit systems, as well as the associated logic,
may be implemented through vital or fail-safe relays and more recently through
microprocessor-based devices. Such track circuit systems may be linked to the
rail vehicles using continuous or discontinuous cab signaling networks, and to
supervisory centers by radio or dedicated phone-line digital communications
systems. In this
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Ansaldo Signal
way, the thousands of controls and the millions of bits of data generated by the
control system can be integrated on-line, on a real-time basis. This information
is typically presented to dispatchers and other supervisory personnel in
easy-to-use graphic displays that enable them to make operational and emergency
decisions as required.
Many control decisions are now made by "smart" devises and/or systems which
have been developed over the past several years by incorporating microprocessor
technology within wayside or on-board field devices or through artificial
intelligence capabilities within supervisory control offices. These devices and
systems permit a faster response to changes in operating conditions because the
communication of certain signals to or from a particular device or a control
room is no longer required or the need for human intervention is eliminated.
Increasingly, railroad and rail transit operators are exploring the
potential of emerging alternatives, such as communication-based signaling
systems, to traditional track circuit based signaling and automation systems.
Communication-based rail signaling and automation systems permit field devices
to be minimized but rely more heavily on high level software. In these systems,
other devices that do not use the rails as a means of train detection implement
the train location function previously provided by the track circuit. A
sophisticated form of radio transmission often provides the medium for data
communication. Two basic approaches have emerged in this trend, one that is
wayside based and one that is vehicle based.
Component Products. Devices such as signals, controllers, switch machines,
vital relays, telemetry equipment and vital and non-vital logic emulators may be
sold as part of a complete railway signaling system or may be marketed and sold
separately as products. This equipment, both on-board and wayside, is typically
incorporated in the signaling system to provide measuring, sensing, analysis,
actuating and regulation of some part of the operation of the network and to
perform internal system control and diagnostics.
Recent trends. An increasingly important portion of virtually every
signaling and automation system is the specialized software needed to drive all
parts of the system. As control systems become more complex and dependent on
software, they also become a more important element in assuring economic
efficiency through overall rail network automation and management. Suppliers
have begun to take advantage of the opportunity to act as their customers'
systems integrators and to provide related services and software that address
efficiency and economic benefits.
Factors driving the demand for rail signaling and automation include
increasing congestion in urban and suburban areas throughout the world,
increasing development by less developed countries, environmental and other
limitations on expansion of highway networks and numerous other factors. To deal
with these forces, improved rail signaling and automation have emerged as the
least expensive method for increasing the capacity ("throughput") of
environmentally friendly rail systems.
Although private funding by the freight railroads is important, the railway
and transit industry is dependent upon the availability of public funding for
infrastructure investment throughout the world: Federal and transit authority
funding in the United States; transit authorities and State-owned railroad
funding in the rest of the world. Whenever public funding declines, there is a
tendency for price competition to increase. Accordingly, a change in government
policies or an adverse economic environment (such as that which has occurred in
Southeast Asia) in any of the regions or principal countries in which the
Company does business can have an adverse effect upon the Company's business.
Business Segment Information
The Company operates principally in one industry: the design, engineering,
production, distribution and after-sale service of integrated rail-based
signaling, automation and control systems and related component products and
services. The Company offers its systems, technologies, products and services
worldwide to two principal customer groups: the mass transit industry and the
railroad industry. Based upon an analysis of competitors' revenues, management
estimates the size of the market in which it presently participates to be, in
the aggregate, approximately $4.8 billion annually. Ten to twelve principal
suppliers normally compete for their share of this business.
In the railroad market, the Company has an established position in Europe
(where passenger railroads are most prevalent) through ASF and CSEE, and in the
United States, where freight railroads are the dominant factor, through US&S. In
the rail-based mass transit market, the Company has sold its equipment and
systems for mass transit networks around the world. In the United States, Italy
and France, most operators of rail-based mass transit systems are customers of
the Company's subsidiaries.
The Company manages its business through its operating subsidiaries, each
of which is strategically located to respond to regional customers'
requirements. Each subsidiary addresses its home market and selected
international markets. The
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Ansaldo Signal
Company has three major operating subsidiaries: US&S in the United States, ASF
in Italy and CSEE in France. The Company's other subsidiaries are located in
Australia, Sweden, Ireland and India.
The European markets for the company's commercial offerings are served
principally by ASF, CSEE and ATSS. The Americas' markets are principally served
by US&S. The Australasian and African markets are generally addressed by CSEE,
US&S and US&S PTY. ATI serves the limited market in Ireland.
Relevant financial information relating to the Company's business segments
is detailed in Note 12 of the Notes to Consolidated Financial Statements.
US&S. In the United States and Canada, the Company, through its largest
subsidiary US&S, offers a broad line of systems and products to the major
operators of heavy and light rail mass transit systems, the Class I freight
railroads and passenger rail systems.
In the metropolitan mass transit market, in 1998 US&S reinforced its
position in the ATC market by winning contracts from the Delaware River Port
Authority, the Metropolitan Atlanta Rapid Transit Authority and the Miami-Dade
County Transit Authority. During 1998, US&S was deeply involved in work for the
New York City Transit ("NYCT") based on the $128.4 million contract it won at
the end of 1997 to provide an automatic train supervision ("ATS") system. In
addition, the Company, in partnership with Matra Transport International, signed
an agreement to design and demonstrate a communications-based train control
("CBTC") system for NYCT, which has announced that it will implement CBTC
technology on its entire system during the early part of the next century.
US&S is a major participant in the market for products and systems
purchased by the Class I railroads. The Class I railroads account for
approximately 91% of North American rail freight revenue according to Railroad
Facts, 1998 Edition. In the passenger rail market, US&S signed a contract in
1998 to provide an ATC system for the commuter railroad lines of New Jersey
Transit that combines the Company's continuous and intermittent cab signaling
technologies. US&S is also active in Amtrak's Northeast Corridor Project,
currently providing high-speed four-quadrant gate crossings and other products.
US&S's enhanced system addressing the new United States' "Advanced Speed
Enforcement System" is being considered for application on the Northeast
Corridor after successful testing and installation on an NJT test track.
The Company's business in the United States depends in part upon government
funding for rail infrastructure investment. The Transportation Equity Act for
the 21st Century ("TEA-21") was signed into law in June 1998. TEA-21 is the
largest infrastructure-funding bill ever enacted in the United States. TEA-21
includes $42 billion for transit projects, of which $36 billion is guaranteed.
Part of this federal funding has been earmarked for capital projects relating to
the Amtrak urban rail transit system.
Although not government owned, the US Class I railroads are influenced by
the availability of government funding. TEA-21 provides for an increase of
approximately 55%, or $50 million, in the amount of funds dedicated annually to
installing grade crossing warning devices on freight railroad lines. In
addition, investment by the Class I Railroads has grown slightly each year over
the past several years.
US&S also serves selected international markets, including the United
Kingdom where the national railroads have been privatized. The Company's
position as the largest non-local signaling supplier in the United Kingdom was
further solidified when US&S was named preferred bidder for network management
centers to control conventional and high speed passenger and freight traffic on
the West Coast Main Line of Railtrack PLC, an infrastructure improvement program
expected to extend over 10 years. The Company was subsequently awarded a
contract, valued at $2.75 million, for the design phase of one such center
system. US&S is also involved in a turn-key project in Copenhagen to provide a
highly sophisticated signaling system which will allow fully automated
driverless operation.
In Asia, US&S has a $22 million contract to provide an automation and
control system (ATP/ATO) for the Shanghai metro line 2. US&S is submitting new
proposals to equip the other lines of this developing subway system with similar
technology. The Company has ATC contracts in Korea for a portion of the Seoul
metro and also markets its systems, products and services in Taiwan.
ASF. ASF is focused on serving the needs of the Italian national railway
("FS") and the major operators of suburban and metro passenger systems within
Italy. In addition, the Company is a major supplier to the consortium that is
currently constructing the Italian high-speed rail system. In Italy, the Company
is capable of supplying a full line of locally designed and manufactured railway
signaling equipment and systems and furnishing related services.
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Ansaldo Signal
ASF has been involved in a number of large turnkey projects where the
Company's majority shareholder, ATR, is the prime contractor. The contracts
require ATR to provide varied rail products and services, including signaling
and automation systems. In connection with the formation of the Company, ATR
entered into formal subcontract agreements with ASF to continue providing these
services on the contracts in process at the time the Company was formed. See
Note 10 of Notes to Consolidated Financial Statements.
During 1998, ASF consolidated its presence in the automatic train control
market in Italy by winning ATC contracts from the FS for its new integrated
on-board system ($23 million), which will bring the FS toward compliance with
emerging ERTMS standards. Through ERTMS standards, the European Union is seeking
to harmonize the standards for all European railroads. In addition, the Company
reinforced its position as the main Italian supplier of large and small
interlockings with contracts for the Naples junction ($33.4 million) and for
local railway at Trento Male ($11.5 million). During 1998, ASF also strengthened
its presence in the CTC market, winning the fifth contract for a
state-of-the-art CTC Grande Rete project related to the Bologna-Brennero line
($21.9 million). The Naples metro also awarded to ASF an ATS contract valued at
$8.6 million.
ASF also focused on several major ongoing contracts in 1998, including
completion of the CTC Grande Rete design phases and prototype construction, the
installation of electronic devices and initial testing for the ACC Roma Termini
project, and the manufacture of station management equipment for the Roma-Napoli
high speed line.
Virtually all of the revenues of ASF are derived from programs that are
dependent, in whole or in part, on public sector funding by various Italian and,
to a lesser extent, European governmental authorities.
CSEE. CSEE serves the needs of the French national railway, the Paris Metro
and other major operators of suburban and metro passenger systems within France
and the European Union as well as selected export markets, primarily in Hong
Kong and China. In addition to offering a full line of rail signaling and
automation equipment, systems and services in France and the European Union,
CSEE is the primary supplier of ATC equipment and systems for the TGV high-speed
passenger lines of France and the Channel Tunnel. In the other parts of Europe
CSEE is also active, including in Spain, in Portugal where it is supplying the
ATP/ATO system to the Lisbon metro, and in the United Kingdom where it is
involved in Railtrack's signaling replacement program.
CSEE is active in China through its joint venture with the Beijing Railway
Signal Factory and has recently won various contracts for the provision of track
circuits which measure and control the variables that affect the safe and
efficient operation of the railroad. CSEE also reinforced its presence in Hong
Kong in 1998, winning a $19.4 million contract to provide the Mass Transit Rail
Corporation with a station management system with supervisory control
capabilities.
Other Units. US&S PTY provides application engineering and integration
services for railway signaling and automation equipment, and in 1998 won
contracts for cab signal systems from Queensland Rail and Hamersley Iron as well
as supporting other initiatives in Asia. Also in 1998, the Company took steps to
expand in Australasia by establishing a subsidiary in India and a collaborative
relationship in Malaysia. The Company's other subsidiaries operate in Europe.
ATSS supplies intermittent ATP systems to its affiliates as well as to customers
in Scandinavia, and ATI serves both Irish Rail and the Dublin Metro.
Principal Products and Services
The Company derives its revenues principally from the sale of the following
systems, products and related services:
Automatic Train Protection Products. The Company's broad line of ATP and
ATC product offerings include its ACC/SARA(TM) interlocking controller-based
system for large-scale interlockings; its TVM(TM) family of products for high
speed and urban and suburban lines; and its Microlok(R) and Microtrax(R)-based
systems for small and medium interlockings and for conventional railroad lines.
These products are designed to be fail-safe, and are used to control traffic at
stations and through crossovers and interlockings to provide positive
enforcement of braking and speed commands, to locate trains with precision and
to provide track occupancy information to other trains and to a central office.
The Company's ATP product offering consists of several important elements
including control and field interaction devices, operator interface consoles,
multi-level communications capability, engineering and configuration tools and
application solutions.
Automatic Train Operation Systems. The Company's ATO systems offerings
provide the automatic control for those functions that occur at speeds below the
maximum safe speed, providing acceleration, deceleration, jerk-control, station
stops and door operations. The ATO subsystems perform on-board non-vital
functions such as speed regulation, programmed stopping and performance level
regulation. The ATO subsystems also report vehicle health status to the central
control offices. These functions are classified as non-vital because they are
not directly responsible for safe train movement.
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Ansaldo Signal
Centralized Traffic Control, Operations Management and Marshalling Yard
Control Office Systems. These systems and related services enhance management's
ability to operate a railroad or transit system effectively and efficiently by
providing supervisory control capabilities. They are non-vital systems that are
capable of being superimposed on an underlying vital system. The most
significant of these products include centralized traffic control systems, which
control traffic along rail lines; supervisory control and data acquisition
("SCADA") systems, which monitor and control ancillary subsystems such as
ventilation, emergency services, lighting, communications, etc.; operations
management systems, which integrate CTC and SCADA with some or all of the
operator's management information database; and marshalling yard control
systems, which allow the fast, efficient, automated assembly of trains.
Wayside and On-board Products. The Company offers a broad line of wayside
and onboard products for the measurement and control of the many variables that
affect the safe and efficient operation of a railroad or rail mass transit
system. These products are often furnished directly to railroads, rail based
mass transit operators and other suppliers of signaling and control systems for
incorporation into systems of their design. These products also may be furnished
as part of the ATC, CTC and other systems supplied by the Company. Examples of
these products include various series of track circuits, fail-safe relays, hot
box detectors, end-of-train monitors, electronic treadles, radar units,
intermittent balises, timers, logic emulators, wheel detectors and optical
signals. In addition, the Company offers various component products that enhance
the efficiency or safety of railroad and rail based transit operations, such as
gate mechanisms and point machines for use in marshalling yards and on mainline
operations.
The Company's product offerings include a variety of microprocessor based
functions such as diagnostics, troubleshooting, and calibration which permit
remote control and monitoring via analog or digital communication links.
Related Services. The Company provides two types of services:
systems-related services and product-related services. Systems-related services
include system design and application engineering, installation and start-up
assistance, ongoing maintenance, repairs and service and training.
Product-related services include product application analysis, ongoing
maintenance, repair, and calibration services. The Company offers a variety of
design and application software packages and services that assist customers in
meeting application-specific needs and demands by government regulators.
Recent Initiatives. The Company has completed its implementation of an
initiative to redesign operating processes at the subsidiary level to reduce
rework and internal cycle times. Subsidiary-level redesign teams examined
Company processes, identified inefficiencies and assigned process action teams
to develop and implement redesign plans. US&S began this process in early 1997;
ASF began the process late in 1997. In 1998, CSEE achieved the downsizing and
refocusing of its marketing and sales structure which resulted in a reduction in
operating expenses of approximately $1.4 million compared to 1997. CSEE also put
in place a new operational organization to improve project management by
optimizing strategic key skills and resources.
Research and Development
The Company invests in research and development and expects to continue to
do so, with the assistance where available of government and customer funding.
The Company is focussing on research and development to upgrade its main product
groupings to "next generation" technologies. Specifically, the Company is
performing research and development relating to the ERTMS standardization
initiative, the Advanced Speed Enforcement System initiative in the United
States, and communications based signaling.
Reflecting the growing trend of cross-migration of advanced technologies
between European and United States customers, the Company is adapting products
of US&S to comply with relevant European standards, such as the CE markings
directive and CENELEC (The European Center for Norms for Electronics). In
addition, system architecture and software are being updated for traffic
control, information processing and automatic traffic planning. The Company is
also adapting technologies developed by its European subsidiaries for
application in the North American markets. In 1998, the Company began the
introduction of its ATSS-developed ASES system into North America with its first
application at New Jersey Transit, and on Amtrak.
To achieve "next generation" products and systems in the most efficient
manner, the Company currently is rationalizing its offerings of various systems.
The implementation of this initiative includes the design of template
architectures, based upon the Company's most advanced hardware platforms, for
the Company's various systems offered worldwide by its subsidiaries.
Consequently, the Company is undertaking research and development to improve
connectivity among its hardware platforms, to modularize them for optimal use in
disparate applications and to standardize software tools for developing those
applications. Implementation of this strategy is managed by the operating
subsidiaries, which are close to their customers and thus able to define the
needs of their local markets.
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Ansaldo Signal
For the years ended December 31, 1998, 1997 and 1996, respectively, the
Company's expenditures for research and development were $7.0 million, $10.0
million and $11.8 million, representing 2.0%, 3.1%, and 3.3% of total revenues,
respectively. In addition, the Company engages in customer and government funded
research and development on a regular basis. In 1998 and 1997 the Company
incurred an additional $5.5 million, and $7.2 million, respectively, of research
and development expenditures not shown on the income statement which were funded
by government grants. Total internal and externally supported research and
development expenditures for 1998 and 1997 were $12.5 million (3.5% of revenues)
and $17.2 million (5.4% of revenues), respectively. In addition, research and
development also may be performed pursuant to contract requirements, in which
case the expenditures are considered cost of revenue.
Sales and Marketing
The Company markets and sells its products and services worldwide according
to its one company / one country strategy. Following this strategy, each
subsidiary is responsible for leading the Company's marketing, bidding and
project management activities in an exclusive designated territory or, in select
countries, in an exclusive market segment. The Company also maintains a network
of over 25 international sales representatives throughout the world in local
markets in which the Company does not directly operate.
The Company's Marketing Committee coordinates the global marketing effort
by identifying market requirements for the Company's systems and products,
quantifying and prioritizing customer needs to guide the Company in its
development and marketing efforts, and facilitating information exchange between
the operating subsidiaries to optimize use of existing products in bids.
Employees
As of May 31, 1999, the Company had 2,373 employees worldwide.
The Company's French and Italian work forces are compensated on the basis
established by certain national and regional agreements between various employer
associations and trade unions. In the North American and Australasian regions,
workers are not covered by any collective bargaining agreements. French workers
participate in a two-tiered Company sponsored profit-sharing plan. The first
tier is mandatory under French law; the second tier is negotiated under a
collective bargaining arrangement. Both plans provide monthly benefits
determined by the employee's length of service. As permitted under applicable
law, such plans are unfunded. Overall, the Company believes that its relations
with its workforce are satisfactory.
Patents and Trademarks
As of December 31, 1998, the Company owned approximately 108 U.S. patents
and 49 non-U.S. patents based thereon; 19 French patents and 172 non-French
patents based thereon; 14 U.S. patent applications pending with 13 non-U.S.
patents pending based thereon; and 2 French patent applications pending with 15
non-French patents pending based thereon. In accordance with the Company's
strategy in regard to these patent assets, many U.S. and foreign patents and
patent applications have been dropped, significantly reducing patent-related
costs such as legal fees and patent maintenance fees. The Company also relies on
a combination of copyright, trade secret and other intellectual property law,
nondisclosure agreements and other protective measures to establish and protect
its proprietary rights in certain of its products and processes. The Company
intends to continue to seek patents on selected inventions used in its products
and manufacturing processes. Although in the aggregate its patents are of
considerable importance in the operation of its business, it is the opinion of
the Company that no patent related to a particular product is of material
importance when judged from the standpoint of the Company's total business.
The name "Union Switch & Signal" and the symbol represented by an
intertwined US&S are registered trademarks in the United States and many other
countries. The names "CSEE Transport" and "Ansaldo" are registered trademarks in
France and Italy, respectively, and in many other countries.
The Company believes that due to the increasing pace of technological
change in the railroad and rail based mass transit signaling, control and
automation industry, the technical expertise and experience of the Company's
personnel, new product development, product performance and market recognition
will be factors as important as legal protection of its proprietary information
in determining the Company's competitive position. Without legal protection,
however, competitors may copy information that the Company regards as
proprietary to develop products competing with the Company's products. In
addition, the laws of some countries where the Company sells its products do not
protect proprietary rights in products and technology to the same extent as do
the laws of the United States. Although the Company continues to implement
protective measures and intends to defend its proprietary rights vigorously,
there can be no assurance that these efforts will be successful.
Significant Contracts
9
<PAGE>
Ansaldo Signal
A material part of the Company's business is its performance of large
systems contracts for both railroad and mass transit customers. The Company has
historically performed many such contracts. However, as these contracts are
fixed price, multi-year obligations and involve extensive customization, they
expose the Company to the risk of cost overruns.
The Company is currently actively engaged in executing several such large
contracts, including notably the following:
CTC Grande Rete (Italy). In early 1998, ASF began work on a $139
million contract for six network management control centers making up a
large network automation project for the FS utilizing both new and existing
communication links.
New York City Transit. In the first quarter of 1998, US&S began work on
a $128.4 million contract to supply NYCT with an automated centralized
signaling and control management system. Approximately $85 million of this
contract has been subcontracted by US&S, including principally installation
and software, but US&S remains liable for the timely and proper performance
of such work.
Copenhagen Mini-metro. In 1997, ATR subcontracted to US&S for $26.6
million the signaling, control and automation system for driverless
operation of the mini-metro.
Competition
The railroad and rail based mass transit signaling, control and automation
industry is highly competitive globally. Several companies compete with all
portions of the Company's product line. Competitors include divisions and
subsidiaries of major international companies with substantial financial
resources, whose primary activities are in other fields, including Siemens AG,
DaimlerChrysler AG (Adtranz), Alcatel SA, Alstom SA, and Invensys plc (formerly
BTR plc and Siebe plc), as well as Harmon Industries, Inc., an independent
company. The Company also competes from time to time in some specific systems
applications with specialized systems suppliers. With respect to sales of most
instrumentation and other component products, competition is fragmented and
includes both full-line and specialty suppliers.
The Company competes principally on the basis of quality and reliability,
its experience and knowledge of its customers' requirements, applications
expertise, technological innovation, ease of system configuration, product
performance, engineering support, availability of after-sale service and
customer training, as well as price. The industry has entered into a period of
consolidation, strengthening the Company's traditional competitors, while
non-traditional competitors, particularly those with software expertise, have
entered the market for certain product lines. The Company believes that
competition in the railroad and rail based mass transit signaling, control and
automation industry will intensify in the future.
Risk Factors Relating to the Company and Cautionary Statement Pursuant to
Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995
---------------------------------------------------------------------------
This document contains "forward-looking" statements within the meaning of
the federal securities laws of the United States. These forward-looking
statements include, among others, statements concerning the Company's
expectation that investment by the Class I Railroads will remain stable or
continue to increase slightly in coming years, the Company's expectation that it
will continue to invest in research and development with the assistance where
available of government and customer funding, the Company's belief that
competition in the railroad and rail-based mass transit signaling control and
automation industry will intensify in the future, the Company's anticipations
regarding capital expenditures for 1999, management's expectation that it will
be able to put new credit facilities in place in 1999, management's expectations
that services, bonding and financial support currently provided by Finmeccanica
and ATR will continue in 1999 and 2000, management's belief that there is only a
remote and non-material risk that the Company will need to replace, at current
market rates, foreign currency exchange contracts due to a default by a
counterparty, the Company's expectation that short-term, floating interest rates
will not vary materially from historical patterns in 1999, the Company's
anticipated completion of a Year 2000 data conversion by the middle of 1999, the
Company's belief that the vast majority of both its IT and its non-IT systems
will be Year 2000 compliant, management's belief that conversion to the Euro
will not have a material effect on the Company's financial conditions or results
of operation and management's belief that the results of adopting SFAS No. 133
will not be material to the Company's financial position or results of
operation. Actual results and performance of the Company could differ materially
from those expressed in or implied by these forward-looking statements as a
result of a number of known and unknown risks.
Among the important factors that could prevent the Company from achieving
its goals - and cause actual results to differ materially from those expressed
in the forward-looking statements - include, but are not limited to, the
following risk factors: (i) reliance on various financial and other support
provided by Finmeccanica and its affiliates, (ii) uncertainty of the Company's
ability to refinance payments on debt at maturity on terms as favorable as the
terms of its existing indebtedness, or
10
<PAGE>
Ansaldo Signal
at all, (iii) reliance on programs that are dependent, in whole or in part, on
public sector funding by various international, national, regional and local
governmental authorities, (iv) the unpredictability in terms of the cost and
time of software development or customization, including those errors or defects
on new or enhanced versions containing more sophisticated levels of technology,
(v) adverse economic conditions in key markets that could adversely affect sales
by companies in the railway signaling, automation and control sector, including
the company's subsidiaries, (vi) reliance on sales to national railways, (vii)
potential loss of protected markets in Italy and France as a result of various
European Union directives, (viii) the competitive nature of the industry, (ix)
uncertainty of new product development to meet changing, increasingly
sophisticated, customer needs and industry realignment, that anticipate and
respond to technological changes in the automation and control market and that
achieve market acceptance, (x) the risk of foreign exchange rate fluctuations,
(xi) changes in laws and policies affecting trade and investments, (xii)
potential difficulties in protecting shareholder rights and in enforcing civil
liabilities, (xiii) fluctuations in operating results due to the number, size
and timing of long-term contracts awarded during a particular period, (xiv)
uncertainty of protection of proprietary information in certain countries, (xv)
potential conflicts of interest between the Company and ATR, (xvi) the potential
problems associated with the Year 2000, (xvii) the potential problems associated
with introduction of the Euro, (xviii) potential downturns in general economic
conditions, (xix) timely completion within budget of long term fixed-price
contracts, especially those requiring extensive software customization, and (xx)
the instability of foreign economies and governments, particularly in Asia.
These and other risks and uncertainties affecting the Company are also
discussed in other filings by the Company with the United States Securities and
Exchange Commission.
Reliance upon Finmeccanica Resources. As part of the worldwide Finmeccanica
group, the Company, and historically certain of its European subsidiaries and
US&S, have benefited from various financial and other services provided by
Finmeccanica and its affiliates, including ATR. Such services have included
direct borrowings from ATR and arrangement of short-term debt financing
guaranteed or otherwise enhanced. Borrowings from ATR were $26.3 million as of
December 31, 1998. In addition, ATR and Finmeccanica each provided a comfort
letter to Cofiri SpA, a subsidiary of IRI, to provide the Company a line of
credit under which $50 million was outstanding on December 31, 1998. Such
services have also included indemnification of issuers of performance bonds and
letters of credit required under systems contracts. As of December 31, 1998,
Finmeccanica and ATR provided support for outstanding bonds and letters of
credit aggregating $290.5 million. Such arrangements have enabled the Company to
obtain the bonding and financing necessary for the conduct of its business at
the lowest available cost. Finmeccanica and ATR have agreed to provide
sufficient guarantees and financing support for the operation of the Company and
its subsidiaries until March 2000. The repayment of any present or future
indebtedness to ATR or Finmeccanica can be deferred until such date if requested
by the Company. Pursuant to a Bonding Support Agreement dated as of November 13,
1996, Finmeccanica and ATR also have agreed to continue providing bonding
support services through December 31, 1999 at which time the agreement shall be
automatically renewed for another year unless terminated upon 60 days' written
notice prior to such date. After March 2000, Finmeccanica and its affiliates
will have no obligation to continue to provide financial or other assistance to
the Company. No assurance can be given that Finmeccanica or its affiliates will
provide any financial or bonding support beyond these dates. Furthermore, no
assurance can be given that the Company will be able to satisfy its financing
and bonding requirements on terms substantially as favorable as those previously
obtained by the Company with the assistance provided by Finmeccanica and its
affiliates or at all. For a description of such transactions and the agreements
and arrangements governing the services provided by Finmeccanica and its
affiliates to the Company, see Item 13 and Note 10 in the Notes to Consolidated
Financial Statements.
Uncertainty of Ability to Refinance Payments on Debt. The Company is
subject to the risks associated with debt refinancing, including the risk that
its existing borrowings will not be able to be refinanced at maturity on terms
as favorable as the terms of its existing indebtedness, or at all. There can be
no assurance that the Company will be able to refinance its short term
indebtedness at its maturity except with the support of Finmeccanica or ATR, or
to otherwise obtain funds by selling assets or by raising equity. There is no
assurance that ATR will continue to provide credit to the Company at current
levels or that Finmeccanica or ATR will facilitate any refinancing of the
Company's short-term indebtedness after March 2000. See Item 13 and Notes 6, 7
and 10 in the Notes to Consolidated Financial Statements.
Reliance upon Public Funding. Virtually all of the revenues of each of the
European subsidiaries of the Company and a substantial portion of the revenues
of US&S and US&S PTY are derived from programs that are dependent, in whole or
in part, on public sector funding by various international, national, regional
and local governmental authorities. Such government funding can take the form of
national public spending programs designed to enhance public transportation
safety and efficiency through infrastructure improvements, which may be subject
to the annual approval of government budget appropriations, or specific mass
transit projects sponsored by public transit or similar authorities. To the
extent that future funding for proposed public projects is curtailed or
withdrawn altogether as a result of changes in political, economic, fiscal or
11
<PAGE>
Ansaldo Signal
other conditions (including maintaining European Monetary Union economic
targets) beyond the Company's control, such projects may be delayed or canceled,
which would result in a loss of revenue.
Cost Overruns. The Company may experience cost overruns in connection with
its large, multi-year fixed price systems contracts. Systems requiring extensive
customization, such as those provided by the Company, require extensive software
development, time and resources, particularly when more sophisticated levels of
software are involved. The Company may encounter substantial delays and extra
costs in fulfilling a complex systems order which were not anticipated at the
time the contract was bid for such reasons, as well as for other reasons common
to all supply and, where relevant, installation contracts. In addition to the
additional cost, delays in contract execution could result in adverse customer
reactions, negative publicity regarding the Company and its products, harm to
the Company's reputation or loss of or delay in market acceptance of a new
product or system, or could require extensive changes, any of which could have a
material adverse effect upon the Company's business, operating results or
financial condition.
Adverse Economic Conditions. Downturns in general economic conditions or
uncertainties regarding future economic prospects historically have adversely
affected sales by companies in the railway signaling, automation and control
sector, including the Company's subsidiaries. Therefore, such downturns or
uncertainties in the future could have a material adverse effect on Ansaldo
Signal's business, results of operations or financial condition. Because the
Company's subsidiaries distribute their products in various regions, a
significant decline in the general economy or in infrastructure investment in a
particular region could also have a material adverse impact on Ansaldo Signal
Reliance on National Railways. A substantial amount of the Company's
revenues is generated by sales to national railways, principally those of Italy
and France (FS and SNCF, respectively). These two customers accounted for
approximately 18.3% in 1998, approximately 14.4% in 1997 and approximately 10.0%
(including 100% of CSEE on a pro forma basis) in 1996 of the total revenues of
the Company . Accordingly, the Company's European subsidiaries are particularly
susceptible to the financial position of FS and SNCF as well as to the economic
and political factors in Italy and France affecting FS and SNCF, which rely
entirely on state funding for their purchases of the Company's products and
services. Any change in economic or political conditions or purchasing patterns
that materially adversely affects purchases of the Company's products by such
customers could have a material adverse effect on the results of the Company.
Loss of Protected Markets. Within Europe, national markets for railway
signaling and automation have traditionally been protected, with substantially
all of a particular country's requirements being supplied by companies
established in that country. Effective July 1, 1994, Directive 93/38/EEC of the
EU required that tenders by national railroads be open, but such tenders could
nonetheless specify traditional standards of the relevant country, thereby
effectively limiting competition. Pursuant to EU Directive 96/48/EEC, beginning
in 1999, bids for European high-speed rail lines will need to be based on
European standards established by the EU. Products certified as meeting these
standards cannot be rejected by the bidding entity for their functional aspects
(subject to interim compatibility requirements). It is also planned that common
European standards eventually will apply to conventional rail lines as well.
Accordingly, Ansaldo Signal expects increasing competition in its home EU
markets, i.e., France, Italy, Sweden and Ireland, which have traditionally
accounted for a substantial part of its sales.
Competition. The principal factors affecting competition include product
reliability, technological proficiency, ease of system configuration,
applications expertise, engineering support and local presence, as well as
price. Many of the competitors of the Company have substantially greater
financial resources than the Company. In addition, as customers continue to move
from conventional relay-based systems to more sophisticated microprocessor-based
systems, future success in signaling will become more dependent upon the
Company's ability to develop increasingly sophisticated software-driven,
microprocessor-based technologies and product applications. In light of this
trend, the Company's competitors can be expected to continue to improve the
design and performance of their own products and to introduce new technologies.
In addition to a trend toward consolidation which strengthens the Company's
traditional competitors, new competitors, such as software companies have
entered the market.
Uncertainty of New Product Development. The Company's future business
prospects are dependent on its ability to enhance its existing signaling,
automation and control systems and products and develop and market new offerings
that meet changing, increasingly sophisticated, customer needs and industry
realignment, that anticipate and respond to technological changes in the
signaling, automation and control market and that achieve market acceptance. The
enhancement and development of these products and systems will be subject to all
of the risks associated with new product development, including unanticipated
delays, expenses, technical problems with software or hardware or other
difficulties that could result in the abandonment or substantial change in the
commercialization of these enhancements or new offerings. In particular, the
failure of the Company to enhance its signaling, automation and control systems
and products and to keep pace with
12
<PAGE>
Ansaldo Signal
developing computer hardware and software technology could cause customers to
delay their purchase of the Company's systems and products, or decide not to
purchase such systems and products.
Risk of Foreign Exchange Rate Fluctuations. The Company operates in many
parts of the world and competes against companies which price their products and
services in different currencies. As a result, its business can be affected by
fluctuations in exchange rates. Although the Company engages in foreign exchange
hedging activities generally designed to reduce or delay the effects of changes
in exchange rates on contractual commitments, its business and financial results
could be adversely affected by fluctuations in exchange rates, particularly if
any such exchange rate movements persist. The financial statements of Ansaldo
Signal are prepared in U.S. dollars, but a substantial portion of revenues and
costs are denominated in currencies other than U.S. dollars. Under the treaty on
the European Economic and Monetary Union (the "Treaty"), to which Italy, France
and Ireland are signatories, on January 1, 1999, a European single currency (the
"Euro") replaced some of the currencies of the member states of the European
Union (the "EU"), including the Italian Lire, French Franc and Irish Pound.
Following introduction of the Euro, the existing sovereign currencies (the
"Legacy Currencies") of the eleven participating member countries of the EU (the
"Participating Countries") who adopted the Euro as their common legal currency
are scheduled to remain legal tender in the Participating Countries as
denominations of the Euro until January 1, 2002 (the "Transition Period"). The
Euro conversion may impact the Company's competitive position as the Company may
incur increased costs to conduct business in an additional currency during the
Transition Period. Additionally, the Participating Countries' pursuit of a
single monetary policy through the European Central Bank may affect the
economies of significant markets of the Company. The Company will also need to
maintain and in certain circumstances develop information systems software to
(i) convert Legacy Currency amounts to Euro; (ii) convert one Legacy Currency to
another; (iii) perform prescribed rounding calculations to effect currency
conversions; and (iv) permit transactions to take place in both Legacy
Currencies and the Euro during the Transition Period. Since the Company conducts
extensive business operations in, and exports its products to, several of the
Participating Countries, there can be no assurance that the conversion to the
Euro will not have a material adverse effect on the Company's business,
financial condition or results of operations. See "Liquidity and Capital
Resources" under Item 9.
International Nature of Business. As the Company's subsidiaries distribute
their products in many countries, their business is subject to various risks
beyond their control, such as changes in laws and policies affecting trade and
investment (including patent and trademark protection) and the instability of
foreign economies and governments. Ansaldo Signal has taken applicable laws and
regulations into account in seeking to structure its business on a global basis,
including efforts to achieve tax and operational efficiencies. Changes in such
laws or regulations, could adversely affect the Company's operations and
financial results.
Potential Difficulties in Protecting Shareholder Rights and in Enforcing
Civil Liabilities. Under Ansaldo Signal's Articles of Association, adoption of
Ansaldo Signal's annual accounts by its shareholders discharges the members of
the Management Board and the Supervisory Board from liability in respect of the
exercise of their duties during the fiscal year concerned, unless an explicit
reservation is made by such shareholders and subject to certain exceptions
provided under Dutch law, including exceptions relating to the liability of
members of management boards and supervisory boards upon bankruptcy of a company
and general principles of reasonableness and fairness. Under Dutch law, this
discharge does not extend to matters not disclosed to shareholders. Certain of
Ansaldo Signal's executive officers are located outside the United States. In
addition, the principal shareholder and certain of the members of the Management
and Supervisory Boards are residents of jurisdictions outside the United States.
A majority of Ansaldo Signal's assets are located outside the United States. As
a result, it may not be possible for investors to effect service of process
within the United States upon Ansaldo Signal, certain of its executive officers
or members of its Management or Supervisory Boards, or to enforce outside the
United States judgments obtained against such persons in U.S. courts, or to
enforce in U.S. courts judgments obtained against such persons in such courts or
in courts in jurisdictions outside the United States, in each case, in any
action, including actions predicated upon the civil liability provisions of the
U.S. securities laws. In addition, it may not be possible for investors to
enforce, in original actions brought in courts in jurisdictions located outside
the United States, rights predicated upon the U.S. securities laws.
Fluctuations in Operating Results and Cash Flow. Results of operations can
be affected by the number, size and timing of long-term contracts in process
during a particular period. The Company's results of operations may be subject
to fluctuation due to these and other factors within a fiscal year or over a
more prolonged period. In addition, customer invoicing under long-term systems
contracts generally is tied to specified contract milestones rather than
contract activity. Accordingly, the amount of revenue and income recognized is
not necessarily related to the amounts invoiced and collected under such
contracts. As a result, the Company may be required to finance substantial
portions of work on systems contracts out of working capital and credit lines.
13
<PAGE>
Ansaldo Signal
Potential Conflicts of Interest. By virtue of their extensive financial and
business relationships, conflicts of interest between Ansaldo Signal and
Finmeccanica or its affiliates will arise in certain circumstances. In
particular, such potential conflicts of interest are likely to occur in the
negotiation of the terms of any subcontracts between ATR and the Company's
subsidiaries, especially ASF and US&S, in connection with ATR's turnkey projects
to provide mass transit systems where ASF and US&S are capable of supplying the
signaling and automation components of the system being supplied by ATR. In
addition, Ansaldo Signal and Finmeccanica or its affiliates (including ATR) have
entered and may enter into certain other intercompany transactions and
agreements in the future. See Item 13 and Note 10 in the Notes to Consolidated
Financial Statements.
Year 2000. In 1997, the Company commenced, for all of its internal systems,
a Year 2000 data conversion project to address all necessary code changes,
testing, and implementation. Project completion is planned for the middle of
1999. Although the Company expects to complete Year 2000 data conversion on a
timely basis, there can be no assurance that the Company will do so, or that the
systems of other companies on which the Company's systems rely also will be
converted in a timely fashion, or that any such failure to convert by another
company would not have an adverse effect on the Company's systems. Although the
Company's agreements with its customers typically contain provisions designed to
limit the Company's exposure to potential warranty and product liability claims,
it is possible that the limitation of liability provisions contained in the
Company's agreements may not be effective as a result of existing or future
federal, state, or local laws or ordinances or unfavorable judicial decisions.
The sale and support of its products by the Company may entail the risk of such
claims, which could be substantial in light of the use of such products in
resource optimization and systems control applications. A successful claim
brought against the Company could have a material adverse effect upon the
Company's business, operating results and financial condition. See "Year 2000"
under Item 9.
The European single currency. Under the treaty on the European Economic and
Monetary Union (the "Treaty"), to which Italy, France and Ireland are
signatories, on January 1, 1999, a European single currency (the "Euro")
replaced some of the currencies of the member states of the EU, including the
Italian Lire, French Franc and Irish Pound.
Following introduction of the Euro, the existing sovereign currencies (the
"legacy currencies") of the eleven participating member countries of the EU (the
"participating countries") who adopted the Euro as their common legal currency
are scheduled to remain legal tender in the participating countries as
denominations of the Euro until January 1, 2002 (the "transition period"). The
Euro conversion may impact the Company's competitive position as the Company may
incur increased costs to conduct business in an additional currency during the
transition period. Additionally, the participating countries' pursuit of a
single monetary policy through the European Central Bank may affect the
economies of significant markets of the Company. The Company will also need to
maintain and in certain circumstances develop information systems software to
(i) convert legacy currency amounts to Euro; (ii) convert one legacy currency to
another; (iii) perform prescribed rounding calculations to effect currency
conversions; and (iv) permit transactions to take place in both legacy
currencies and the Euro during the transition period. Since the Company conducts
extensive business operations in, and exports its products to, several of the
participating countries, there can be no assurance that the conversion to the
Euro will not have a material adverse effect on the Company's business,
financial condition or results of operations.
Item 2. Description of Property
The Company's corporate administration office is located in Schiphol, The
Netherlands. The Company operates through numerous facilities worldwide. The
Company's principal manufacturing, administration, support, assembly and
engineering facilities are located in the United States (Pittsburgh,
Pennsylvania and Batesburg, South Carolina), France (Paris and Riom), Italy
(Genoa, Naples, Tito and Torino) and Australia (Brisbane, Sidney and Perth). The
Company's largest manufacturing and administrative facilities include:
<TABLE>
LOCATION PRINCIPAL USE APPROXIMATE SQUARE FOOTAGE
<S> <C> <C>
Pittsburgh, Pennsylvania, USA Engineering, Administration 174,000 (1)
Batesburg, South Carolina, USA Manufacturing 170,000 (2)
Paris, France Engineering, Administration 90,000 (1)
Riom, France Manufacturing 50,000 (1)
Genoa, Italy Engineering, Administration 80,000 (1)
Naples, Italy Engineering, Administration, Wiring 86,000 (1)
Tito, Italy Manufacturing 85,000 (2)
Torino, Italy Engineering, Manufacturing 274,000 (2)
(1) Leased.
(2) Owned.
</TABLE>
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<PAGE>
Ansaldo Signal
In the judgment of management, the facilities used by the Company are
adequate and suitable for the purposes they serve and are anticipated to be so
for the foreseeable future.
As of December 31, 1998, the quality control systems of all of the
Company's major subsidiaries (except US&S PTY in Australia) have been certified
as compliant with the requirements of International Standard ISO 9001 ("ISO
9001") promulgated by the International Standards Organization. Although US&S
PTY does not have a manufacturing facility, it has implemented administrative,
engineering and assembly procedures within the overall umbrella of an ISO 9001
quality assurance program. The Company has undertaken appropriate programs at
all its operating units so that ISO 9001 compliance and certification will be
maintained.
Item 3. Legal Proceedings
The Company is party to a number of lawsuits, investigations, disputes and
claims, including those relating to commercial transactions, government
contracts, product liability, intellectual property and employment matters.
Environmental Laws and Proceedings
The Company's operations are subject to environmental regulation by various
regulatory authorities having jurisdiction over its operations.
The Company is conducting groundwater monitoring and remediation at its
Batesburg, South Carolina facility under the supervision of the South Carolina
Department of Health and Environmental Control. The Company intends to conduct a
pilot test of a different remedial technology in the near future that the
Company believes will be more effective than the current system in addressing
the groundwater contamination. In the event the pilot test confirms the
effectiveness of the new remediation system, the Company will likely replace its
current system with the new system. The Company's consultants estimate the
capital cost of the new remedial system to be in the range of $160,000 to
$190,000. Operation and maintenance costs associated with the proposed system
are not expected to be material or substantially different from the costs
associated with the current system. There is no assurance that the proposed
system will be effective in addressing the groundwater contamination.
Accordingly, the Company cannot accurately estimate what additional amounts it
may be required to pay in connection with the remediation of this site.
Item 4. Control of Registrant
Finmeccanica owns 55.5% of the outstanding common stock of ATR, which in
turn owns 14,711,250 common shares, NLG .01 per share ("Common Shares"), or
approximately 72% of the Company's issued and outstanding Common Shares at March
1, 1999. In addition, Compagnie des Signaux SA, which owns 2,000,000 Common
Shares (9.78% of the Company's outstanding Common Shares) has the right to
require ATR to purchase such shares at a fixed price exercisable between
December 30, 1999 and June 30, 2000. Finmeccanica is a corporation organized
under the laws of Italy which has interests and operations principally in the
following areas: aeronautics, space, helicopters, defense, transportation,
energy, service automation and industrial automation. ATR's address is Via Nuova
delle Brecce 260, 80147 Naples, Italy. Finmeccanica's address is Piazza Monte
Grappa 4, 00195 Rome, Italy.
Finmeccanica, approximately 39% of the common shares of which are traded
through the Telematic Market (Mercato Telematico) of the Italian automatic stock
exchange, is controlled by IRI. IRI is wholly owned by the Ministry of the
Treasury of the Republic of Italy. In June 1997, IRI was given the mandate to
complete its privatization by selling or otherwise disposing of its holdings
over the period through 2001. To the extent some of the assets currently owned
by IRI have not been sold or otherwise transferred to third parties by the time
IRI is liquidated, IRI has stated that it expects that such assets would be
transferred to another entity wholly owned by the Italian Government. IRI's
address is Via Vittorio Veneto 89, 00187 Rome, Italy.
The following table sets forth the indicated information, as reflected in
the Company's records at May 31, 1999 with respect to each person who owns 10%
or more of any class of voting securities of the Company and the total amount of
any class of voting securities of the Company owned by the directors and
executive officers of the Company as a group:
<TABLE>
Identity of Person or Group Title of Class Amount Owned Percent of Class
<S> <C> <C> <C>
Ansaldo Trasporti S.p.A. Common Shares 14,711,250 71.94%
Compagnie des Signaux S.A. Common Shares 2,000,000 9.78%
Directors & executive officers of Company Common Shares 1,000 (1) -
(1) Excludes 17,600 Shares issuable pursuant to currently exercisable
options granted under the Company's Stock Incentive Plan.
</TABLE>
15
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Ansaldo Signal
Item 5. Nature of Trading Market
The Company's Common Shares have traded on the NASDAQ National Market
("NASDAQ") since December 11, 1996 under the symbol "ASIGF". The Company's
Common Shares are not traded on any other securities exchange.
The following are the high and low closing prices of the Company's Common
Shares on the NASDAQ.
HIGH LOW
1999 Second Quarter * $4.125 $3.125
First Quarter $4.250 $3.000
1998 Fourth Quarter $4.500 $2.313
Third Quarter $4.500 $2.563
Second Quarter $4.875 $3.625
First Quarter $5.500 $3.125
1997 Fourth Quarter $5.500 $3.125
Third Quarter $5.500 $3.750
Second Quarter $6.750 $4.375
First Quarter $7.750 $6.250
* through June 18, 1999
On May 31, 1999, there were 20,448,750 Common Shares outstanding. As of
that date, there were 3,737,500 Common Shares held of record by 31 shareholders.
As of that date, Common Shares held by the principal depositary in the United
States amounted to 3,723,976 of the issued Common Shares of the Company, which
shares are held for participant's accounts in "street name." Based upon the
number of annual reports and proxy statements requested by such nominees, the
Company estimates that the total number of beneficial holders of Common Shares
at approximately 500 holders
Except for the Common Shares held by ATR and Compagnie des Signaux S.A.,
the Company's Common Shares are believed to be mostly held by record holders and
participants in "street name" accounts in the United States.
Item 6. Exchange Controls and Other Limitations Affecting Security Holders
The Company does not believe that there are any restrictions imposed by
Netherlands law on the export or import of capital or which affect the
remittance of dividend or other payments to nonresident holders of Common Shares
of the Company. There are no limitations imposed by Netherlands law or the
Articles of Association of the Company on the rights of holders of Common Shares
not resident in The Netherlands to hold or vote Common Shares of the Company.
Item 7. Taxation
The following is a summary of certain tax consequences of the acquisition,
ownership and disposition of the Common Shares based on tax laws of The
Netherlands and the United States as in effect on the date of this Annual
Report, and is subject to changes in Netherlands or U.S. law, including changes
that could have a retroactive effect. The following summary does not take into
account or discuss the tax laws of any country other than The Netherlands and
the United States, nor does it take into account the individual circumstances of
an investor. This summary does not purport to be a complete technical analysis
or an examination of all potential tax effects relevant to a decision to
purchase the Common Shares and prospective investors in the Common Shares in all
jurisdictions are advised to consult their own tax advisers as to Netherlands,
U.S. or other tax consequences of the purchase, ownership and disposition of the
Common Shares.
Netherlands Taxation
The following summary of Netherlands tax considerations is based on the tax
laws of The Netherlands currently in force and in effect. Terms and expressions
as used in this section have the meaning attributed to them under Netherlands
tax law. The description is limited to the tax implications for an owner of
Common Shares who is not, or is not deemed to be, a resident of The Netherlands
for purposes of the relevant tax codes (a "non-resident Shareholder" or
"Shareholder").
Dividend Withholding Tax
General. Dividends distributed by the Company generally are subject to a
withholding tax imposed by The Netherlands at a rate of twenty-five percent. The
expression "dividends distributed by the Company" as used herein includes, but
is not limited to:
16
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Ansaldo Signal
(i) distributions in cash or in kind, deemed and constructive
distributions and repayments of paid-in capital not recognized for
Netherlands dividend withholding tax purposes;
(ii) liquidation proceeds, proceeds of redemption of Common Shares or,
as a rule, consideration for the repurchase of Common Shares by
the Company in excess of the average paid-in capital recognized
for Netherlands dividend withholding tax purposes;
(iii) the par value of shares issued to a Shareholder or an increase of
the par value of Common Shares, as the case may be, to the extent
that it does not appear that a contribution, recognized for
Netherlands dividend withholding tax purposes, has been made or
will be made; and
(iv) partial repayment of paid-in capital, recognized for Netherlands
dividend withholding tax purposes, if and to the extent that there
are net profits (zuivere winst), unless the general meeting of
shareholders of the Company has resolved in advance to make such
repayment and provided that the par value of the Common Shares has
been reduced by an equal amount by way of an amendment of the
Articles of Association of the Company.
No withholding tax applies on the sale or disposition of Common Shares to
persons other than the Company and affiliates of the Company.
If a Shareholder is resident in a country other than The Netherlands and if
a double taxation convention is in effect between The Netherlands and such
country, such Shareholder may, depending on the terms of such double taxation
convention, be eligible for a full or partial exemption from, or refund of,
Netherlands dividend withholding tax. Under said conventions, The Netherlands
dividend withholding tax is generally reduced to 15 percent.
Under legislation which became effective on January 1, 1995, the Company
will under certain circumstances be allowed to refrain from transferring to The
Netherlands tax authorities a certain amount of the dividend withholding tax
effectively withheld by the Company with respect to certain dividend
distributions made by the Company on the Common Shares. Such amount is in
principle 3 percent on the dividend distributions made by the Company.
U.S. Shareholders. The Tax Convention of December 18, 1992 concluded
between The Netherlands and the United States (the "Convention") entered into
force on January 1,1994. Under the Convention, the dividend withholding tax rate
on dividends paid by the Company to a shareholder being a resident of the United
States (as defined in the Convention; hereinafter, a "U.S. Shareholder") who is
entitled to the benefits of the Convention under its Article 26 will generally
be reduced to 15 percent pursuant to Article 10 of the Convention. The reduced
dividend withholding tax rate, if any, under the Convention may be applied upon
payment by the Company of a dividend to a U.S. Shareholder provided that the
U.S. Shareholder has previously filed the appropriate Netherlands tax forms with
the Company in accordance with Netherlands regulations under the Convention.
Absent the filing of such forms, the Company generally would be required to
withhold dividend withholding tax at The Netherlands statutory rate of 25
percent.
Consequently, U.S. Shareholders should consult their tax advisers with
respect to procedures for claiming a reduced withholding rate or for obtaining a
refund of excess withholding.
Under the Convention, dividends paid by the Company to U.S. pension funds
and U.S. exempt organizations may be eligible for an exemption from or refund of
dividend withholding tax under Article 35 or Article 36 of the Convention.
Taxes on Income and Capital Gains
General. A Shareholder will not be subject to any Netherlands taxes on
income or capital gains in respect of dividends distributed by the Company or in
respect of any gain realized on the disposal of Common Shares (other than the
withholding tax described under the caption Withholding Tax above), provided
that:
(i) such Shareholder does not have an enterprise or an interest in an
enterprise that is, in whole or in part, carried on through a
permanent establishment or a permanent representative in The
Netherlands and to which enterprise or part of an enterprise, as the
case may be, the Common Shares are attributable; and
(ii) such holder does not have a substantial interest or a deemed
substantial interest in the Company or, if such holder does have such
an interest, it forms part of the assets of an enterprise.
Generally, a holder of Common Shares will not have a substantial interest
if he, his spouse, certain other relatives (including foster children) or
certain persons sharing his household, do not hold, alone or together, whether
directly or indirectly, the ownership of, or certain other rights over, shares
representing five percent or more of the total issued and outstanding capital
(or the issued and outstanding capital of any class of shares) of the Company,
or rights to acquire shares, whether or not already issued, that represent at
any time (and from time to time) five percent or more of the total issued and
outstanding capital (or the issued and outstanding capital of any class of
shares) of the Company or the ownership of certain
17
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Ansaldo Signal
profit participating certificates that relate to five per cent or more of the
annual profit of the Company and/or to five per cent or more of the liquidation
proceeds of the Company. A deemed substantial interest is present if (part of) a
substantial interest has been disposed of, or is deemed to have been disposed
of, on a non-recognition basis.
U.S. Shareholders. Pursuant to the Convention, the gain derived by a U.S.
Shareholder who is an individual from an alienation of the Common Shares
constituting a substantial interest of the U.S. Shareholder in the Company, not
effectively connected with a permanent establishment or fixed base of the U.S.
Shareholder in The Netherlands, is not subject to Netherlands individual income
tax, provided that the gain from the alienation of the Common Shares is not
derived by an individual U.S. Shareholder who has, at any time during the
five-year period preceding such alienation, been a resident of The Netherlands
and who at the time of the alienation owns, either alone or together with close
relatives, at least 25 percent of any class of shares of the Company.
The gain derived by a U.S. Shareholder that is not an alienation of the
Common Shares constituting a substantial interest of the U.S. Shareholder in the
Company not effectively connected with a permanent establishment or fixed base
of the Shareholder in The Netherlands is not subject to Netherlands corporate
income tax.
Net Wealth Tax
An individual Shareholder will not be subject to Netherlands net wealth tax
in respect of the Common Shares, provided that such holder is not an individual
or, if he is an individual, provided that the conditions mentioned under the
caption Taxes on Income and Capital Gains (i) and (ii) above are met.
Corporations are not subject to Netherlands net wealth tax.
Gift and Inheritance Tax
No gift, estate or inheritance taxes will arise in The Netherlands with
respect to an acquisition of Common Shares by way of a gift by, or on the death
of, a Shareholder, unless:
(i) such Shareholder at the time of the gift has or at the time of his
death had an enterprise or an interest in an enterprise that was,
in whole or in part, carried on through a permanent establishment
or a permanent representative in The Netherlands and to which
enterprise or part of an enterprise, as the case may be, the
Common Shares are or were attributable; or
(ii) in the case of a gift of Common Shares by an individual who at the
time of the gift was neither resident nor deemed to be resident in
The Netherlands, such individual dies within 180 days after the
date of the gift, while being resident or deemed to be resident in
The Netherlands.
For purposes of Netherlands gift, estate and inheritance tax, an individual
who holds Netherlands nationality will be deemed to be resident in The
Netherlands if he has been resident in The Netherlands at any time during the
ten years preceding the date of the gift or his death.
For purposes of Netherlands gift tax, an individual not holding Netherlands
nationality will be deemed to be resident in The Netherlands if he has been
resident in The Netherlands at any time during the twelve months preceding the
date of the gift.
United States of America
The following is a summary of certain United States federal income tax
considerations arising from the acquisition, ownership and disposition of Common
Shares by a person that is a United States holder. For purposes of this summary,
the term "United States holder" means a beneficial owner of Common Shares that
(i) is an individual citizen or resident of the United States or a United States
corporation and (ii) holds the Common Shares as a capital asset, within the
meaning of Section 1221 of the United States Internal Revenue Code of 1986, as
amended (the "Code"). This summary is not a complete description of all
potential tax consequences to United States holders; in particular, this summary
does not address the United States federal income tax treatment of United States
holders that may be subject to special tax rules, such as dealers in securities
or currencies, financial institutions, life insurance companies, tax-exempt
organizations, persons that hold Common Shares as part of a straddle or
conversion transaction, persons that have a tax home outside the United States
or persons that have a functional currency other than the United States dollar.
In addition, this summary does not address the application of other United
States taxes, such as the federal estate tax, or state or local tax laws.
This summary is based upon the current provisions of the Code, and upon
regulations, rulings and judicial decisions currently in effect, all of which
are subject to change; any such change could apply on a retroactive basis and
could affect the tax consequences described herein.
Each holder is advised to consult its own tax advisor in determining the
specific tax consequences to such holder of the acquisition, ownership and
disposition of Common Shares, including the application to its particular
situation of the tax considerations discussed below, as well as the application
of state, local or other tax laws.
18
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Ansaldo Signal
Tax on Dividends. A United States holder receiving a distribution with
respect to any Common Shares will be required to include such distribution in
gross income as a taxable dividend to the extent such distribution is paid from
the Company's current or accumulated earnings and profits (as determined under
United States federal income tax law). Taxable dividends will be includible as
of the dividend payment date. Distributions in excess of such earnings and
profits of the Company will first be treated as a nontaxable return of capital
to the extent of the United States holder's adjusted tax basis in the Common
Shares and then as gain from the sale or exchange of a capital asset. Dividends
received on the Common Shares will not be eligible for the dividends received
deduction (allowed to U.S. corporations in respect of dividends received from
U.S. corporations). Netherlands withholding tax imposed on dividends paid to a
United States holder by the Company generally will be treated as a foreign
income tax eligible, subject to certain limitations, for credit against such
United States holder's U.S. federal income tax. The amount of such Netherlands
withholding tax on dividends which a United States holder may be entitled to
claim as a credit against such United States holder`s U.S. federal income tax
generally will not exceed the reduced rate, if any, which may be applicable to
such United States holder under the Convention, even if the Company would be
required to withhold such Netherlands withholding tax on dividends at a higher
rate under applicable Netherlands law and regulations. Consequently, United
States holders should consult their tax advisers with respect to procedures for
claiming a reduced withholding rate or for obtaining a refund of excess
withholding, because any amounts withheld in excess of such reduced withholding
rate may not be available as foreign tax credits for U.S. federal income tax
purposes. See 'Netherlands Taxation --Dividend Withholding Tax --U.S.
Shareholders' for further discussion of these issues. Additionally, as a result
of certain Netherlands legislation which became effective on January 1, 1995, it
appears that certain amounts withheld by the Company in respect of payments of
certain dividends (generally not exceeding 3% of the gross amount of the
dividend distributed by the Company) may not be available as foreign tax credits
for U.S. federal income tax purposes.
Capital Gains Tax. Gain or loss on the sale or exchange of the Common
Shares will be treated as capital gain or loss, and as long-term capital gain or
loss if the Common Shares have been held for more than one year.
Item 8. Selected Consolidated Financial Data
The following data has been derived from the audited consolidated financial
statements of Ansaldo Signal N.V. ("the Company" or "Ansaldo Signal"), including
those consolidated financial statements of the Company for the years ended
December 31, 1998, 1997 and 1996, which are included elsewhere herein. The
audited Consolidated Financial Statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States
("US GAAP").
<TABLE>
<CAPTION>
Year Ended December 31
(In thousands, except share and per share data)
Income Statement Data 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Revenues $354,532 $318,225 $353,500 $299,347 $339,193
Cost of sales 277,450 263,274 296,620 236,858 265,044
------- ------- ------- ------- -------
Gross profit 77,082 54,951 56,880 62,489 74,149
Selling, general and administrative expenses 47,685 50,107 47,971 38,829 43,954
Research & development expenses 7,025 9,953 11,804 11,759 8,453
Acquired in process research & development (1) - - 15,144 - -
Reorganization (2) - (1,584) 17,288 - -
------ ------- ------ ------ ------
Operating expenses 54,710 58,476 92,207 50,588 52,407
------ ------ ------ ------ ------
Operating income (loss) $22,372 $(3,525) $(35,327) $11,901 $21,742
======= ======= ======== ====== ======
Net income (loss) $6,522 $(12,678) $(38,895) $6,408 $15,534
====== ======== ======== ===== ======
Basic and diluted net income (loss) per
common share $0.32 $(0.62) $(1.90) $0.36 $0.86
===== ====== ====== ===== =====
Cash dividends per share $ - $ - $ - $ - $ -
===== ===== ===== ===== =====
Weighted average number of common
shares outstanding 20,448,750 20,448,750 20,448,750 17,990,750 17,990,750
========== ========== ========== ========== ==========
</TABLE>
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Ansaldo Signal
<TABLE>
<CAPTION>
December 31
(In thousands)
Balance Sheet Data 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Working capital $120,143 $89,804 $105,751 $98,801 $107,104
Total assets $472,592 $457,166 $487,507 $378,062 $330,707
Borrowings-financial institutions (3) $120,024 $94,132 $71,781 $61,344 $30,598
Borrowings-related parties $26,282 $32,379 $30,202 $3,853 $3,425
Shareholders' equity $112,374 $102,552 $125,670 $151,505 $141,213
</TABLE>
(1) In-process research and development acquired in connection with the
acquisition of 51% of CSEE Transport S.A. in June 1996.
(2) See Note 17 of Notes to Consolidated Financial Statements.
(3) Includes current maturities.
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following management discussion and analysis should be read in
conjunction with the Company's consolidated financial statements and the related
notes thereto appearing elsewhere in this 1998 Annual Report. The financial
statements have been prepared in accordance with US GAAP.
Unless otherwise indicated, all figures for the Company set forth in this
management's discussion and analysis are stated in thousands of US dollars,
except per share amounts. All references to years 1998, 1997 and 1996 mean the
calendar years ended December 31, 1998, December 31, 1997 and December 31, 1996,
respectively.
The Company
Ansaldo Signal N.V. was incorporated on November 13, 1996 in Amsterdam, The
Netherlands. Its corporate headquarters are located in Schiphol, The
Netherlands. Ansaldo Trasporti S.p.A. ("ATR") is the owner of 14,711,250 common
shares, NLG .01 per share ("Common Shares"), or approximately 72% of the
outstanding Common Shares, of the Company. Finmeccanica S.p.A. ("Finmeccanica")
is the owner of approximately 56% of the outstanding shares of ATR and Istituto
per la Ricostruzione Industriale-IRI S.p.A. ("IRI"), the Italian state holding
company, is in turn the owner of approximately 61% of the outstanding shares of
Finmeccanica.
The Company was formed by Union Switch and Signal Inc. ("US&S") to combine
the business of US&S with the other railway signaling and automation business
investments of ATR. See Note 1 of Notes to the Consolidated Financial
Statements.
The Company is a worldwide supplier of signaling, automation and control
systems, related components and services for the global railroad and mass
transit industries.
Overview
The Company's operating segments are managed along geographic divisions
that correspond to the location of its principal subsidiaries: US&S is a
Delaware corporation with facilities located in Pittsburgh, Pennsylvania and
Batesburg, South Carolina; Ansaldo Segnalamento Ferroviario S.p.A. ("ASF") is an
Italian corporation with facilities located in Genoa, Naples, Tito and Torino,
Italy; and CSEE Transport S.A. ("CSEE") is a French corporation with facilities
located in Paris and Riom, France. The Company has other subsidiaries based in
Sweden (AT Signal Systems A.B.), Australia (Union Switch & Signal Pty. Ltd.),
Ireland (AT Signaling (Ireland) Ltd.) and India (Union Switch & Signal Pvt.
Ltd.). While each such subsidiary services its domestic market, it also sells to
specific international markets.
The Company's largest operations are located in the United States, Italy
and France which, including their international sales, accounted for
approximately 97% of revenues in 1998. The Company's operations may be affected
by economic, political and regulatory conditions in the countries where the
Company does business, changes in which could, among other things, result in
currency or exchange controls or other restrictions being imposed on the
operations of the Company.
Systems revenues for all of the Company's operating units are derived from
long-term contracts and are recognized using the percentage-of-completion method
of accounting. Product revenues for all operating units result from the sales of
component products, which are not part of a long-term contract, and are
recognized upon shipment of these products.
20
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Ansaldo Signal
The Company returned to profitability in 1998 as a result of improved and
stabilized markets and greater efficiencies at the operating level. Gross
profits of the Company's two largest subsidiaries, US&S and ASF, increased
during 1998. While benefiting from its large contract entered into in 1997 with
New York City Transit ("NYCT"), US&S also reinforced its presence in the
automatic train control market, winning contracts from the Delaware River Port
Authority, the Metropolitan Atlanta Rapid Transit Authority and the Miami-Dade
County Transit Authority. In addition, US&S won contracts for its
Microlok(Registered) II interlocking control system from AMTRAK for its upgrade
of theNortheast Corridor.
During 1998, US&S also positioned itself favorably to enter two new
markets. In partnership with Matra Transportation International, US&S signed a
demonstration agreement to design and demonstrate a communications-based train
control ("CBTC") system for the NYCT, which has announced that it will implement
CBTC technology on its entire system during the early part of the next century.
In addition, US&S was named preferred bidder for a Network Management Center
System for the West Coast Main Line of Railtrack PLC in the United Kingdom, on
which work is well underway. The system will be designed to manage and control
conventional and high speed passenger and freight traffic traveling as much as
140 miles per hour and is part of an overall infrastructure improvement program
expected to take place over 10 years.
ASF benefited from its existing large contract with the Italian state
railway ("FS"), but also won the second part of the biggest European contract
let in 1998 for centralized traffic control from the FS to upgrade its
infrastructure with technologies to bring it toward compliance with emerging
European Traffic Management System ("ERTMS") standards. ERTMS is being developed
under the auspices of the European Union by a consortium of European signaling
system suppliers ("EUROSIG") whose goal is to achieve harmonious standards for
signaling for all European railroads. In addition to European contracts,
including its hot box detector products, CSEE continued to make sales in Hong
Kong and China in 1998 for a station management system and its UM71(Trademark)
track circuits, respectively.
Orders
The Company's orders for 1998 were $357,488. This was a decrease of
$213,876 (37.4%) from $571,364, received in 1997. This decrease was primarily
caused by the non-recurrence of two large orders totaling $244,000 in 1997: one
in the United States, for the NYCT and another from the FS for the first part of
Grande Rete (the "large network" connecting the major cities in Italy).
Backlog
The Company's backlog has increased $19,158 (2.5%) to $792,220 at December
31, 1998 from $773,062 at December 31, 1997. Included in the backlog is the
major portion of the two large 1997 orders discussed above totaling $244,000
which are expected to be completed over the next three to four years.
Results of Operations
1998 VERSUS 1997
Ansaldo Signal's consolidated results of operations improved in 1998
compared to 1997. Revenue in 1998 increased 11% to $354,532 on the strength of
the year-end 1997 backlog. Gross profit in 1998 increased 40% to $77,082 as a
result of higher volume and better mix of contracts. Operating expenses in 1998
were reduced by 6% to $54,710 as a result of efficiency improvements. The
consolidated net income in 1998 was $6,522 compared to a net loss of $12,678 in
1997. Items contributing to this improved performance in addition to the higher
revenue volume and strong improvement in gross profit include (i) a one-time
pretax gain of $980 from the conversion from a capital lease to an operating
lease of the lease for the Pittsburgh Engineering and Technology Facility; (ii)
the forgiveness by the French government of a pretax $1,400 repayable research
and development grant; and (iii) the net decrease in the valuation allowance of
$2,040, which has reduced the 1998 tax provision and reflects utilization of a
portion of loss carryforwards in 1998 for which a valuation allowance had
previously been established.
21
<PAGE>
Ansaldo Signal
Revenue
The Company's revenue is presented below by major operating unit. Revenues
shown for each unit include revenue for work outside of such unit's own country
boundaries.
Revenue
1998 1997
US&S $150,834 $122,419
ASF 113,314 108,481
CSEE 79,354 75,681
Other 11,030 11,644
-------- --------
Total $354,532 $318,225
======== ========
Company revenues increased by $36,307 (11.4%) to $354,532 for 1998 from
$318,225 for 1997. This net increase in revenue was due to increased volumes for
all major operating units. The Company began to recognize revenues in 1998 on
significant contracts awarded in the later part of 1997. The foreign exchange
effect on revenue was not significant. US&S's and ASF's increases in revenue
were primarily due to increased systems revenue. CSEE's increase in revenue was
due to an increase in component sales partially offset by lower systems sales.
Gross Profit
The Company's gross profit is set forth below:
Gross Profit
1998 1997
US&S $30,786 $13,348
ASF 23,992 19,564
CSEE 16,440 19,821
Other 5,864 2,218
------- -------
Total $77,082 $54,951
======= =======
Gross profit increased by $22,131 (40.3%) to $77,082 (21.7% of revenues) in
1998 from $54,951 (17.3% of revenues) in 1997. US&S completed a major software
contract in 1997 that reduced gross profit in 1997 by $11.0 million, and there
were no similar negative adjustments of that magnitude necessary in 1998.
Increased revenue and a more favorable product mix accounted for the balance of
the increase in gross profit.
Selling, General, and Administrative
Selling, general, and administrative expenses decreased by $2,422 (4.8%) to
$47,685 (13.4% of revenue) in 1998 from $50,107 (15.7% of revenue) in 1997. This
decrease is due to lower spending levels associated with efficiency
improvements. The decrease as a percentage of revenue reflects the combination
of lower expenses and higher 1998 revenue.
Research and Development
Research and development expenses decreased by $2,928 (29.4%) to $7,025
(2.0% of revenue) in 1998 from $9,953 (3.1% of revenue) in 1997, due to lower
spending levels (due to planned cost reductions and completion of existing
projects). In 1998 and 1997 the Company incurred an additional $5,500 and
$7,200, respectively, of research and development expenditures not shown on the
income statement which were funded by government grants. Total internal and
external supported research and development expenditure for 1998 and 1997 was
$12,525 (3.5% of revenue) and $17,153 (5.4% of revenue), respectively. In
addition, the research and development that is performed in accordance with
contract requirements is considered in cost of revenue.
Non-Recurring Charges
In 1998, there were no non-recurring charges. In 1997, $1,584 of accrued
reorganization costs were reversed. See Note 17 of Notes to Consolidated
Financial Statements.
22
<PAGE>
Ansaldo Signal
Interest Expense
Interest expense increased by $1,515 (17.2%) to $10,349 in 1998 from $8,834
in 1997. The increase is due to higher average debt levels in 1998. The higher
average debt is mainly caused by increased working capital requirements related
to larger, more complex contracts with longer cycle time in backlog.
Other Income
Other income increased by $2,216 to $1,868 in 1998 from a net expense of
$348 in 1997. The increase is primarily due a one-time gain of $980 which
resulted from the conversion of the Pittsburgh Engineering and Technology
Facility lease and the forgiveness of a $1,400 research and development grant by
the French government.
Taxes
The Company recorded a $7,300 tax provision in 1998 compared to a $77 tax
provision for 1997. The effective rate was 52.6% in 1998 compared to (0.1%) in
1997. In 1998 the Company recorded a net decrease in the valuation allowance
related to loss carryforwards of $2,040, which has reduced the 1998 tax
provision. The decrease reflects utilization of a portion of loss carry forwards
in 1998 for which a valuation allowance had previously been established and the
Company's improved expectations about the future realizability of certain of the
remaining loss carry forwards before their expiration. The 1997 provision
includes a charge of $2,632 to reflect changes in the tax laws in Italy and a
$3,742 charge for the increase in the valuation allowance relating to loss
carryforwards. See Note 9 of Notes to Consolidated Financial Statements.
1997 Versus 1996
The historical information shown below reflects CSEE's revenues, gross
profit and operating expenses from June 28, 1996, the date on which the
remaining 51% of CSEE was acquired by the Company. Prior to that date, the
Company's 49% share of CSEE's results were included in other (income) expense in
the consolidated statements of income. The pro forma information includes CSEE
on a 100% consolidated basis for each period shown. The changes in amounts
between 1997 and 1996 for the information presented primarily reflect the impact
of the acquisition of the remaining interest in CSEE. Consequently, the
discussion below between 1997 and 1996 focuses on changes from the 1996 pro
forma information.
Revenue
The Company's revenue is presented below by major operating unit. Revenues
shown for each unit include revenue for work outside of such unit's own country
boundaries.
Revenues
Historical Historical Historical Pro Forma
1997 1996 1997 1996
US&S $122,419 $153,183 $122,419 $153,183
ASF 108,481 128,037 108,481 128,037
CSEE 75,681 55,213 75,681 89,747
Other 11,644 17,067 11,644 17,067
-------- -------- -------- --------
Total $318,225 $353,500 $318,225 $388,034
======== ======== ======== ========
Historical Company revenue for 1997 was $318,225 compared to $353,500 for
1996.
Company revenues decreased by $69,809 (18.0%) to $318,225 for 1997 from
$388,034 for pro forma 1996. This net decrease in revenue was due to decreased
volumes for all locations. In part this was due to the fact that the award of
contracts tended to happen in the later part of 1997 and could not be converted
into significant revenues for the year. This decrease includes a $24,127
decrease due to the effect of a stronger dollar that reduces the reported value
of revenue denominated in other currencies. The decrease in US&S and ASF revenue
was primarily due to delay by customers in putting new work out to bid and a
further delay in the release of high speed work in Italy. The decrease in
revenue in CSEE was due to a less favorable French market and to delay in an
Asian project.
23
<PAGE>
Ansaldo Signal
Gross Profit
The Company's gross profit is set forth below:
Gross Profit
Historical Historical Historical Pro Forma
1997 1996 1997 1996
US&S $13,348 $17,670 $13,348 $17,670
ASF 19,564 20,839 19,564 20,839
CSEE 19,821 13,450 19,821 23,822
Other 2,218 4,921 2,218 4,921
------- ------- ------- -------
Total $54,951 $56,880 $54,951 $67,252
======= ======= ======= =======
Historical Company gross profit for 1997 was $54,951 compared to $56,880
for 1996.
Gross profit decreased by $12,301 (18.3%) to $54,951 (17.3% of revenues) in
1997 from $67,252 (17.3% of revenues) for pro forma 1996. This decrease includes
a $5,209 decrease due to the effect of a stronger dollar that reduces the
reported US dollar value of gross profit denominated in other currencies. US&S
completed a major software contract in 1997 that reduced gross profit in 1997
and 1996 by $11.0 million and $7.1 million, respectively. Decreased revenue and
the reactions to the currency devaluation in Asia, which impacted several of the
operations, accounted for the balance of the decrease in gross profit.
Selling, General, and Administrative
Historical selling, general, and administrative expenses increased by
$2,136 (4.4%) to $50,107 in 1997 from $47,971 in 1996.
Selling, general, and administrative expenses decreased by $6,324 (11.2%)
to $50,107 (15.7% of revenue) in 1997 from $56,431 (14.5% of revenue) on a pro
forma basis in 1996. This decrease is primarily due to the effect of the
stronger dollar, which reduces the cost in US dollars of foreign currency
denominated expenditures and to lower overall spending levels. The increase as a
percentage of revenue reflects the sharp decline in 1997 revenue and the
continuation of certain marketing and other costs.
Research and Development
Historical research and development expense decreased by $1,851 (15.7%) to
$9,953 in 1997 from $11,804 in 1996.
Research and development expense decreased by $4,429 (30.8%) to $9,953
(3.1% of revenue) in 1997 from $14,382 (3.7% of revenue) on a pro forma basis in
1996, due to the effect of the stronger dollar, which reduces the cost in US
dollars of foreign currency denominated expenditures) and to lower spending
levels due to planned cost reductions and completion of existing projects. In
1997 the Company incurred an additional $7,200 of research and development
expenditures not shown on the income statement which were funded by government
grants. Total internal and externally supported research and development
expenditure for 1997 was $17,153 (5.4% of revenue).
Non-recurring Charges
In 1996, non-recurring charges consisted of $17,288 relating to
reorganization costs and $15,144 of in process research and development costs
written off in connection with the acquisition of the remaining 51% interest in
CSEE. In 1997, $1,584 of the accrued reorganization provision was reversed. See
Note 17 of Notes to Consolidated Financial Statements included herein.
Interest Expense
Historical interest expense increased by $2,733 (44.8%) to $8,834 in 1997
from $6,101 in 1996.
Interest expense increased by $2,557 (40.7%) to $8,834 in 1997 from $6,277
on a pro forma basis in 1996. The increase is due to higher debt levels in 1997
than 1996 ($3,067) offset in part by the effect of the stronger dollar, which
reduces the cost in US dollars of foreign currency denominated expenditures
($510).
24
<PAGE>
Ansaldo Signal
Taxes
The Company recorded a $77 tax provision in 1997 compared to a ($2,714) tax
benefit for 1996. The effective rate was (0.1%) in 1997 compared to 6.5% in
1996. The 1997 provision includes a charge of $2,632 to reflect changes in the
tax laws in Italy and a $3,742 charge for the increase in the valuation
allowance relating to realization of deferred tax assets. The 1996 provision was
impacted by loss carryovers for which no tax benefit was recognized. See Note 9
of Notes to Consolidated Financial Statements.
Liquidity And Capital Resources
Operating Cash Flow
The Company's operating activities used cash of $20,785 in 1998 compared to
$26,845 used in 1997. Cash was used to support increases in inventories of
$3,616, net increases in contract-related accounts totaling $29,174, and
decreases in accounts payable of $8,377. Major sources of operating cash flow
included net income of $6,522 that included non-cash provisions for depreciation
and amortization of $9,967. The increases in contract-related accounts totaling
$29,174 is due primarily to higher contract work in progress associated with the
beginning of large contracts by US&S and ASF and lower advance payments.
The Company's operating activities used cash of $26,845 in 1997 compared to
$20,801 used in 1996. Cash was used to support increases in receivables of
$12,949, net increases in contract-related accounts totaling $21,144,
reorganization expenditures of $12,440 and a net loss of $12,678. Major sources
of operating cash flow included an increase in accounts payable of $15,245 as
well as non-cash provisions for depreciation and amortization of $11.526. The
increase in receivables of $12,949 is due to higher invoicing in December and an
increase in amounts due from ATR. The increases in contract-related accounts
totaling $21,144 is due primarily to higher contract work in progress and lower
advance payments.
Proceeds from Sale of Fixed Assets
In June 1998, the Company renegotiated the Pittsburgh Engineering and
Technology Facility lease. The conversion from a capital lease to an operating
lease generated cash proceeds of $12,200. See Note 5 of Notes to Consolidated
Financial Statements.
Capital Expenditures
The Company's capital expenditures were $3,152 in 1998, compared to $7,138
in 1997 and $5,218 in 1996. The decrease in the 1998 capital spending levels
from 1997 is due to withholding the authorization to proceed with capital
spending on certain elective projects. The Company anticipates capital
expenditures will be approximately $9,000 for 1999, and that they will be
financed by borrowing facilities.
Borrowings
At December 31, 1998, the Company had total borrowings of $26,282 from ATR,
$50,000 from a related financial institution and $70,024 from unrelated
financial institutions. Short-term borrowings of $75,403 consisted primarily of
a $50,000 loan from Cofiri S.p.A. ("Cofiri"), a subsidiary of IRI, and the
drawings on local lines of credit by subsidiaries to supply cash management
needs and the current portion of obligations under capital leases. Long-term
borrowings due within one year of $4,286 represents the 1999 installment due on
the Senior Notes issued by US&S in 1994 under a private placement (the "US&S
Senior Notes"). Long-term borrowings of $40,336 included $21,429 of US&S Senior
Notes, $16,950 of long-term notes at ASF, and $1,957 in long-term capital lease
obligations.
At December 31, 1997, the Company had total borrowings of $32,379 from ATR,
$13,000 from a related financial institution and $81,132 from unrelated
financial institutions. Short-term borrowings consisted primarily of drawings on
local lines of credit by subsidiaries to supply cash management needs and the
current portion ($4,286) of long-term borrowings. Long-term borrowings included
$25,714 of US&S Senior Notes and $8,289 in capital lease obligations.
Credit Facilities
In 1994, US&S issued senior, unsecured promissory notes to various lenders
in the total amount of $30 million at an 8% fixed rate. The private placement
notes have a ten-year term, and principal repayments began in 1997. US&S was in
compliance with the indenture's covenants at December 31, 1998.
25
<PAGE>
Ansaldo Signal
On December 22, 1997, the Company entered into a $30 million loan agreement
with Cofiri bearing interest at 7% per annum at December 31, 1997. The loan
agreement was increased to $50 million on April 23, 1998. As of December 31,
1998 the total outstanding borrowings amounted to $50 million bearing interest
at 6.63%. This agreement has no restrictive covenants, and borrowings are
unsecured, but with letters of comfort from ATR and Finmeccanica.
ATR / Finmeccanica continues to provide and / or guarantee various
borrowings. At December 31, 1998 total borrowings from ATR were $26,282.
ATR / Finmeccanica has agreed to continue to provide sufficient guarantees
and / or financing support for the operations of Ansaldo Signal N.V. and its
subsidiaries until March 2000. The repayment of any present or future
indebtedness to ATR / Finmeccanica can be deferred until such date if requested
by the Company. Management would request deferral of payment if such payment
would result in the Company violating any of its current debt covenants.
The Company had uncommitted lines of credit available at December 31, 1998
of $127.7 million with various banks. The unused portion of the lines of credit
available at December 31, 1998 totaled $52.3 million, a substantial portion of
which related to a specific commercial arrangement with one customer and
therefore is not available for general corporate use.
The Company had uncommitted lines of credit available at December 31, 1997
of $101.8 million with various banks. The unused portion of the lines of credit
available at December 31, 1997 totaled $35.6 million after a deduction of $11.2
million for commercial and stand-by letters of credit issued under one of the
lines.
Because of the planned growth of the business and the delay in collection
of some of the larger contracts, the Company expects to need to increase its
financing facilities, including committed facilities. Management expects to be
able to put new facilities in place in 1999, with the dependence on credit
enhancement from ATR / Finmeccanica. Management believes that these new
facilities, together with those already in place, will be adequate to meet its
anticipated requirements in 1999.
Dividends
To date the Company has not paid dividends and has no plans to pay any
future dividends.
Bonding Arrangements
The Company is required, in the normal course of its business, to provide
bid, performance and advance payment bonding on certain contracts. The Company
maintains a $100,000 surety bonding facility ($30,004 outstanding at December
31, 1998), in addition to a $300,000 surety-bonding facility ($107,993
outstanding at December 31, 1998) provided by Finmeccanica. US&S also had a
$2,917 letter of credit outstanding at December 31, 1998 that is supported by
ATR. ATR / Finmeccanica is also providing bid, advance payment, performance and
retention bonding of $179,632 for the European subsidiaries. Pursuant to a
Bonding Support Agreement, dated as of November 13, 1996, Finmeccanica and ATR
have agreed to continue providing these services through December 31, 1999 at
which time the agreement shall be automatically renewed for another year unless
terminated upon 60 days' written notice prior to such date.
Foreign Exchange Risk Management
Foreign exchange rates related to significant non-US Dollar operations of
the Company were as follows:
Per US Dollar
French Franc Italian Lire
Year Avg. High Low Avg. High Low
1998 5.896 6.215 5.420 1736.7 1828.0 1589.9
1997 5.832 6.351 4.557 1702.7 1840.0 1517.0
1996 5.139 5.830 4.996 1542.1 1600.0 1494.0
On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
European Union's common currency (the "Euro"). The Euro conversion rates for
Lire and French Francs were fixed at 1936.28 Lire and 6.5596 French Francs for 1
Euro. As of June 17,1999 the US Dollar exchange rate for 1 Euro was $1.034. The
Company conducts business in many of the member countries and the Company is
addressing the issues involved with the introduction of the Euro. The more
important issues facing the Company include converting information technology
systems; reassessing currency risk; and processing tax and accounting records.
See "Euro Conversion."
26
<PAGE>
Ansaldo Signal
The Company has entered into foreign currency exchange contracts to reduce
its foreign currency exchange risk. Because these contracts are intended as, and
effective as, hedges of the underlying assets, liabilities or commitments, any
exchange gains or losses are deferred. The net unrealized gain on open contracts
at December 31, 1998 that was not recognized in the consolidated statements of
income (loss) and comprehensive income (loss) was $118. The fair value of these
contracts approximates the contract value because they are short-term in nature.
The Company's theoretical risk in these transactions is the cost of replacing,
at current market rates, foreign currency exchange contracts in the event of a
default by the counterparty. Management believes the risk of such losses is
remote, and that such losses would not be material.
Interest Rate Risk Management
The Company maintains debt facilities with both fixed and floating interest
rates. As of December 31, 1998, approximately $42, 664 of the Company's
borrowings were at fixed interest rates. Interest rates on the remaining portion
of the debt are generally based on LIBOR or similar short-term interest rate
indices. From time to time, the Company enters into interest rate hedging
contracts to mitigate the impact of interest rate fluctuations on operating
results. The Company does not expect that short-term, floating interest rates
will vary materially from historical patterns in 1999.
Inflation
Although inflation over the last three years has been at reduced levels
compared to prior years, it has nevertheless caused an increase in the Company's
costs. These increased costs are not usually fully recoverable on the Company's
fixed price, multiyear contracts. Because it is very difficult to predict the
rate of inflation in the future, management is unable to predict the effect of
inflation upon the Company's future business. Higher rates of inflation increase
the potential for adverse consequences to the business due to increased costs
and lower infrastructure spending
Year 2000
In 1997, the Company commenced, for all of its internal systems, a Year
2000 ("Y2K") data conversion project to address all necessary code changes,
testing, and implementation. Project completion is planned for the middle of
1999. The Company is re-deploying existing information technology resources to
minimize the risk of potential disruption from the Year 2000 problem. This
problem is a result of computer programs that were written using two digits
(rather than four) to define the applicable year. Any information technology
("IT") systems that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000, which could result in
miscalculations and system failures. The problem also extends to many "non-IT"
systems, i.e., operating and control systems that rely on embedded
microprocessors. In addition, like every other business enterprise, the Company
is at risk from Y2K failures on the part of its major business counterparts,
including suppliers and manufacturers, as well as potential failures in public
and private infrastructure services, including electricity, water, gas,
transportation and communications.
System failures resulting from the Y2K problem could adversely affect
operations and financial results in all of the Company's business segments.
Failures may affect security, payroll operations or employee health and safety,
as well as such routine but important operations as billing and collection.
The Company has developed an approach to resolving the Y2K issues that are
reasonably within its control. The Company's approach to solving the problem is
described below.
In the first phase, all hardware and software (including business and
operations applications, operating systems and third-party products) that may be
at risk are identified. Once each at-risk system has been identified, the Y2K
task forces assess how critical the system is to business operations and the
potential impact of failure, in order to establish priorities for repair or
replacement. This process has been completed for all IT systems, resulting in
the identification of those business systems that are "critical" to continued
functioning. New software has been installed at the French subsidiary and a new
payroll system is being installed in the United States. ASF is relying on the
outsourced systems solutions provided by ATR.
The next phase involves the development of appropriate remedial strategies
for both IT and non-IT systems. These strategies may include repairing, testing
and certifying, replacing or abandoning particular systems (as discussed below).
Selection of appropriate strategies is based upon such factors as the
assessments made in the risk review, the type of system, the availability of a
Y2K-compliant replacement and cost. The development of remedial strategies phase
has been completed for all IT systems. For some non-IT embedded systems,
strategy development is continuing.
The remediation phase involves creating detailed project plans, marshalling
necessary resources and executing the strategies chosen. For IT systems, this
should be completed for critical and important systems by July 31, 1999. For
non-critical systems, most corrections are expected to be completed by December
31, 1999.
Testing includes establishing a test environment, performing systems
testing and using third party consultants to certify the results. Testing for
non-IT systems has been initiated; however, due to the Company's reliance on
many third-party
27
<PAGE>
Ansaldo Signal
vendors for these systems, the Company cannot estimate precisely when this phase
will be completed. The Company's target for all critical and important non-IT
systems is September 1999.
The Company has initiated written and telephonic communications with key
third-party businesses, as well as public and private providers of
infrastructure services, to ascertain and evaluate their efforts in addressing
Y2K compliance. It is anticipated that the majority of testing and certification
with these entities will occur in 1999.
Contingency planning involves addressing any remaining open issues expected
at the close of 1999 and early 2000. As a precautionary measure, the Company is
currently developing contingency plans for all systems that are not expected to
be Y2K compliant by September 1999. A variety of automated as well as manual
plans are under consideration, including the use of electronic spreadsheets and
manual workarounds. The Company estimates that all of these plans will be
completed by December 1999.
A significant portion of the Company's Y2K costs has not been incremental,
but rather reflect redeployment of internal resources from other activities. The
Company does not expect these redeployments to have a material adverse effect on
other ongoing business operations of the Company and its subsidiaries, although
it is possible that certain maintenance and upgrading processes will be delayed
as the result of the priority being given to Y2K remediation. All of the costs
of the Y2K project are being borne out of the Company's existing credit
facilities.
Based upon its efforts to date, the Company believes that the vast majority
of both its IT and its non-IT systems, including all critical and important
systems, will be Y2K compliant. Accordingly, the Company does not currently
anticipate that internal systems failures will result in any material adverse
effect to its operations or financial condition. During 1999, the Company will
also continue and expand its efforts to ensure that major third-party businesses
and public and private providers of infrastructure services, such as utilities,
communications services and transportation, will also be prepared for the Year
2000, and to develop contingency plans to address any failures on their part to
become Y2K compliant. At this time, the Company believes that the most likely
"worst-case" scenario involves potential disruptions in areas in which the
Company's operations must rely on such third parties whose systems may not work
properly after January 1, 2000. In addition, the Company's international
operations may be adversely affected by failures of businesses in other parts of
the world to take adequate steps to address the Y2K problem. While such failures
could affect important operations of the Company and its subsidiaries, either
directly or indirectly, in a significant manner, the Company cannot at present
estimate either the likelihood or the potential cost of such failures.
The nature and focus of the Company's efforts to address the Y2K problem
may be revised periodically as interim goals are achieved or new issues are
identified. In addition, it is important to note that the description of the
Company's efforts necessarily involves estimates and projections with respect to
activities required in the future. These estimates and projections are subject
to change as work continues, and such changes may be substantial.
The Company's agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential warranty and product
liability claims. The Company has also communicated with its customers as to
their concerns with the Company's products as relating to the Y2K problem. It is
possible, however, that the limitation of liability provisions contained in the
Company's agreements may not be effective as a result of existing or future
federal, state, or local laws or ordinances or unfavorable judicial decisions.
The sale and support of its products by the Company may entail the risk of such
claims, which could be substantial in light of the use of such products in
system management, resource optimization and overall systems control
applications. The Company is aware of the potential for such claims against it
and other companies for damages from products and services that were not Y2K
ready. A successful claim brought against the Company could have a material
adverse effect upon the Company's business, operating results and financial
condition. Management believes, however, that the Company will not be exposed to
material liability for Y2K claims of third parties.
Euro Conversion
On January 1, 1999, certain member countries of the European Union,
including Italy, France and Ireland, established fixed conversion rates between
their existing currencies and the Euro. The Company conducts business in several
European Union member countries and is in the process of addressing the issues
involved with the introduction of the Euro. The more important issues facing the
Company include converting information technology systems, reassessing currency
risk, and processing tax and accounting records.
Based upon progress to date the Company believes that use of the Euro will
not have a significant impact on the manner in which it conducts its business
affairs and processes its business and accounting records. Accordingly,
conversion to the Euro is not expected to have a material effect on the
Company's financial condition or results of operations.
However, there can be no assurance that the systems of other companies on
which the Company's systems rely also will be converted in a timely fashion, or
that any such failure to convert by another company would not have an adverse
effect on the Company's systems.
28
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Ansaldo Signal
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), which the Company is required to adopt no later than January 1,
2000. SFAS 133 will require the Company to record all derivatives on the balance
sheet at fair value. Changes in derivative fair values will either be recognized
in earnings contemporaneously with the changes in fair value of related hedged
assets, liabilities and firm commitments or, for forecasted transactions,
recorded as a component of other comprehensive income within stockholders'
equity. The ineffective portion of a hedging derivative's change in fair value
will be immediately recognized in earnings. The Company does not believe the
effect of adopting SFAS 133 will be material to its financial position or
results of operations.
Outlook
The Company's backlog provides a base of business over the next several
years. The Company expects to benefit from the substantial number of contracts
to be bid in North America compared to recent prior years and from an expected
increase in high-speed train work in Europe. However, the Asian markets other
than China may continue to defer infrastructure spending in light of their
current economic condition. In addition the Company's industry has been
experiencing consolidation and thus increased competition, particularly from new
firms entering into the software sector of the business.
Item 9A. Quantitative and Qualitative Disclosures about Market Risk
Foreign Exchange Risk
The operations of the Company are conducted by entities in many countries,
and accordingly, the results of operations of the Company are subject to
currency translation risk and currency transaction risk. With respect to
currency translation risk, the financial condition and results of operations of
each of these entities is measured and recorded in the relevant local currency
and then translated into US Dollars ("USD") for inclusion in the consolidated
financial statements. The entities translate the balance sheets of the
respective non-USD denominated operations into USD at the prevailing exchange
rates on the balance sheet date. Income and cash flow statements are translated
at the average exchange rate for the period.
The Company generally attempts to hedge a portion of its currency
translation risk by financing its operations in subsidiaries through borrowings
denominated in local currencies, wherever possible. The lending entity will then
hedge the USD / local currency foreign currency exposure on the intercompany
financing using foreign exchange forward contracts.
In addition to currency translation risk, the Company incurs currency
transaction risk whenever one of its operating subsidiaries enters into either a
sales or purchase transaction using a currency other than its functional
currency. Currency transaction risk is reduced by matching sales revenue and
costs in the same currency, which is generally the practice in the railway
industry.
Currency hedging is generally used by businesses to protect against
contract risk. The Company incurs currency risk primarily from loans to its
subsidiaries. Given the volatility of currency exchange rates, there can be no
assurance that the Company will be able to effectively manage its currency
transaction risks or that any volatility in currency exchange rates will not
have a material adverse effect on the Company's financial conditions or results
of operations.
The Company uses forward foreign exchange contracts to manage foreign
currency risk. The premium or discount on a forward foreign exchange contract
(or on the forward element of a foreign currency swap) is amortized to the
income statement over the life of the contract.
The following table summarizes, by major currency, the amounts to be
received and paid under forward foreign exchange contracts and currency swaps as
of December 31, 1998 (in thousands of US dollars):
29
<PAGE>
Ansaldo Signal
Receivable Payable
U.S. Dollar $15,580 $6,286
Australian Dollar 4,126 4,418
Canadian Dollar - 56
French Franc 6,539 12,132
Irish Pound 178 -
Italian Lire 1,974 5,352
Hong Kong Dollar 3,285 3,285
Swedish Krona 3,453 3,628
Pound Sterling 1,137 1,137
------- -------
Balance at December 31, 1998 $36,272 $36,294
======= =======
INTEREST RATE RISK
The Company maintains debt facilities with both fixed and floating interest
rates. As of December 31, 1998, approximately $42,664 of the Company's
borrowings were at fixed interest rates. Interest rates on the remaining portion
of the debt are generally based on LIBOR or similar short-term interest rate
indices. From time to time, the Company enters into interest rate hedging
contracts to mitigate the impact of interest rate fluctuations on operating
results; however, no such instruments were outstanding as of December 31, 1998.
The Company does not expect that short-term, floating interest rates will vary
materially from historical patterns in 1999.
The following table details the fixed rate debt obligations of the Company
at December 31, 1998.
<TABLE>
<CAPTION>
Currency December 31,1998
Payable in Carrying Amount Fair Value
<S> <C> <C> <C>
Ansaldo Segnalamento Ferroviario S.p.A.
Notes (unsecured) due 2002 with a
fixed interest rate of 4.10% (1) Lire $16,949 $16,059
Union Switch & Signal Inc.
Senior Notes (unsecured) due 2004, with a
fixed interest rate of 8.00% (2) USD $25,715 $26,587
</TABLE>
(1) For determination of fair market value an interest rate of 5.875%
was used.
(2) For determination of fair market value an interest rate of 6.85%
was used.
Item 10. Directors and Officers of Registrant
The members of the Supervisory Board of the Company are as follows:
Alberto Rosania, Chairman, has served as First Vice President of Strategic
Finance for Finmeccanica since 1992. Mr. Rosania also has served as a director
and Chairman of the Supervisory Board of the Company since its formation in
1996.
Claudio Artusi has served as the Systems Business Unit Manager for ATR
since 1995. Mr. Artusi previously served from 1992 to 1995 as the Vice President
of ATR in charge of Strategies, Development and Marketing.
Bruno Bigliardo has served as the Vice President-Taxation for Finmeccanica
since 1992. He is also a member of the Board of Directors of various
Finmeccanica subsidiaries and is Secretary to the Board of ATR.
Luigi Liccardo has served as the Senior Vice President-Finance and
Administration for Finmeccanica since 1998. Mr. Liccardo served from 1995 to
1998 as Co-Managing Director of Coinfra S.p.A. and as the Senior Vice
President-Finance and Administration of Italimpianti S.p.A. from 1994 to 1996,
both of which are companies controlled by IRI. IRI, the Italian state holding
company, is the owner of approximately 61% of the outstanding shares of
Finmeccanica.
Vitaliano Pappaianni has served as an officer of Finmeccanica since 1986
and currently serves as Senior Vice President-Corporate Planning and Control as
well as a director of several Finmeccanica subsidiaries.
30
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Ansaldo Signal
Lawrence W. Rosenfeld currently serves as the Executive Director of Team
Adventure USA. He was the founder of Concentra Corporation ("Concentra"), a
publicly traded company listed on the Nasdaq National Market until it was
acquired by Oracle Corporation in December 1998. From 1984 to December 1998, Mr.
Rosenfeld held various positions at Concentra, including Chief Executive
Officer, President and Chairman of the Board.
Yazid Sabeg currently serves as the Chairman of the Board of Directors of
CSEE. Since 1991, he also has served as Chief Executive Officer and a director
of Compagnie des Signaux S.A., which company owns 2,000,000 Common Shares, or
9.8% of the outstanding Common Shares, of the Company. Mr. Sabeg also has served
as director of the Company since its formation in 1996.
Mark V. Santo is an attorney who served until 1999 as Group Vice President
and General Counsel of Elsag Bailey Process Automation N.V., a New York Stock
Exchange listed company in which Finmeccanica held a majority share ownership
until its recent sale. Mr. Santo previously served from 1990 to 1993 as the
general counsel of its predecessor, Elsag Bailey, Inc., and before that
practiced law in Pittsburgh, Pennsylvania.
Costantino Savoia currently serves as Executive Vice President of ATR. Mr.
Savoia previously served as Executive Vice President of ILVA S.p.A. and, until
1998, as the executive responsible for the winding-up of IRITECHNA S.p.A., both
of which are companies controlled by IRI.
Messrs. Bigliardo, Rosenfeld and Santo serve on the Audit Committee.
The term of service for all the current members of the Supervisory Board
expires at the Annual General Meeting of Shareholders to be held in 2002.
The Management Board of the Company.
The Management Board of the Company is comprised of two persons:
James N. Sanders is President and Chief Executive Officer, as well as a
Managing Director, of the Company. He has been Managing Director and Chief
Executive Officer since December 12, 1996. From 1985 to December 1996, he was
with Alcatel-SEL, most recently President, Transport Automation Products.
Dr. Bruno Tufari is Executive Vice President and Chief Financial Officer,
as well as a Managing Director, of the Company. He was the Deputy Managing
Director and Chief Financial Officer from November 1998 until April 1999, when
he was appointed Managing Director, Executive Vice President and Chief Financial
Officer. From 1992 to 1998, he served as Chief Financial Officer for ATR.
The Management Board is supported in its management of the Company by the
following executives:
Paolo Bianchi is Vice President, Scandinavian Region, and has served in
this capacity since June 1998. From 1990 to 1998, he served as Chief Financial
Officer of AT Signal System AB.
Georges Dubot is Vice President, French Region, and has served as the Chief
Executive Officer of CSEE since January 1, 1991.
Lyle K. Jackson is Vice President, Australasian Region, and has served as
Managing Director of US&S PTY since April 1, 1995. From 1991 to 1995, he was
Managing Director of Ventura Projects, predecessor to US&S PTY.
Sergio DeLuca is Vice President, Italian Region, and has served as Managing
Director and Chief Executive Officer of ASF since September 1998. From 1996 to
1998, he was Manager of the Sales & Operations Group of the Company. From 1994
to 1996, he served as Manager of R&D and as Technical Manager for the Signaling
Business Unit of ATR.
John Mandelli is Vice President, North American Region, and has served in
this capacity and as President and Chief Operating Officer of US&S since his
appointment in August 1998. From 1992 to 1998, he served in various management
positions within Alcatel Canada, including service as Director of Project
Implementation in the SEL Division, General Manager of the Transport Automation
Division, Vice President of Alcatel Canada Inc., and President of Alcatel
Transport Automation (USA) Inc.
31
<PAGE>
Ansaldo Signal
Ferdinando Camurri is Vice President, European Infrastructure Projects , in
which capacity he has served since the formation of the Company in November
1996. He previously served as Vice President, Automation and Signaling Business
Unit, of ATR from 1991 to 1996.
Anthony A. Florence is Vice President, External and Investor Relations, in
which capacity he has served since formation of the Company in November 1996,
and is a member of the Office of the Chairman. From February 1990 to November
1996 he was the chief communications and investor relations officer for US&S.
Peter Hovingh is Corporate Treasurer of the Company and has served in this
capacity since December 1998. From October 1997 to December 1998, he served as
the Company's European Treasury Manager. From December 1993 to October 1997, he
worked both as Cash-Manager and Treasurer for TOTAL OIL and Gas International BV
in The Netherlands, with responsibility for the international treasury and
finance activities of the holding company and its subsidiaries in Europe, Latin
America and Asia.
Robert Pascoe is Vice President, Technology for the Company. Prior to
taking this position in 1997, he served since 1975 in a variety of positions at
US&S, most recently as Manager, Standards and as Director, Signal and Train
Control Technology.
Item 11. Compensation of Directors and Officers
Members of the Supervisory Board who are affiliated with Finmeccanica are
compensated by Finmeccanica. Members of the Supervisory Board who are not
affiliated with Finmeccanica, or who are not otherwise compensated by
Finmeccanica or one of its affiliates, are paid an annual remuneration of
$20,000 for their services plus reimbursement of reasonable expenses in
connection with such services.
In 1998, the aggregate cash compensation of the Managing Directors and
executives identified above, as a group, paid or accrued by the Company and its
subsidiaries was $1,713,740. Of this amount, $294,060 was paid as bonuses under
subsidiary variable compensation programs that provided for the payment of
short-term bonuses based upon incentive targets established by the applicable
subsidiary Board of Directors.
In addition to a tax qualified retirement savings plan (the "401K Plan"),
the Company contributes to pension, retirement or similar benefit plans for the
Managing Directors and executives identified above in accordance with the
requirements of the country of their employment and the terms of their
employment contracts. In 1998, the aggregate amount set aside by the Company,
through one or more of its subsidiaries, for this purpose for the Managing
Directors and the executives identified above was $185,841.
The Company's 401K Plan covers all of the salaried employees of US&S and
its subsidiaries. Participating employees may elect to reduce their current
compensation on a pretax basis by up to the statutorily prescribed annual limit
($10,000 in 1998) and have the amount of such reduction contributed to the 401K
Plan. The Company makes 50% matching contributions up to 6% of each
participating employee's compensation for the year. The Company also contributes
2% of the employee's base salary for the year to the fund. In addition, the
Company in its discretion may each year make a "performance incentive
contribution" with respect to all or any group of participating employees as are
designated by the Company, which it determines on the basis of the Company's or
specific operating unit's financial performance and success in meeting its
business commitments for the year. In 1998, US&S. made matching and basic (but
no discretionary) contributions of $14,491 to the accounts of the US&S employees
who are among the executives identified above.
The Managing Directors and executives identified above were also covered in
1998 under certain group life and medical insurance programs provided by the
particular company by which they were employed. The aggregate value of such
programs was $47,296.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
The Company has reserved 1,000,000 Common Shares for issuance of stock
options that may be granted under its 1996 Long-Term Stock Incentive Plan ("the
Stock Incentive Plan"), of which 136,500 Common Shares are subject to currently
outstanding options granted under such plan. The Company has filed a
registration statement on Form S-8 with regard to the Common Shares issuable
under its Stock Incentive Plan, by virtue of which Common Shares issued
thereunder generally will be transferable without restriction. For further
discussion concerning the grant dates, exercise prices and expiration dates of
such options, see Note 15 of Notes to Consolidated Financial Statements.
32
<PAGE>
Ansaldo Signal
As of May 31, 1997, the Managing Directors and the executives identified
above have been granted options to purchase 136,500 Common Shares under the
Company's Stock Incentive Plan, of which options for 17,600 Common Shares became
exercisable in 1997. The remaining 118,900 will become exercisable in 1999. The
date of grant, purchase price and expiration dates of the options granted to
date are summarized in the table below:
<TABLE>
<CAPTION>
Number of Exercise Expiration
Date Options Price Date
---- ------- ----- ----
<S> <C> <C> <C>
Granted December 11, 1996 294,000 $7.50 December 15, 2006
Granted July 22, 1997 20,000 $7.50 December 15, 2006
Forfeited (177,500) $7.50 December 15, 2006
---------
Outstanding 136,500 $7.50 December 15, 2006
</TABLE>
Item 13. Interest of Management in Certain Transactions
In the ordinary course of business, the Company and Finmeccanica or ATR
have from time to time entered into various business transactions and
agreements, and the Company and Finmeccanica or ATR may from time to time enter
into additional transactions and agreements in the future. See Note 10 of the
Notes to the Consolidated Financial Statements. Since December 11, 1996, the
Company has used, and plans to continue to use, certain Finmeccanica or ATR
facilities and personnel for certain administrative and financial functions, for
which the Company has reimbursed or will reimburse Finmeccanica or ATR. These
transactions, agreements and arrangements have been and are expected to be
continued on terms which in the aggregate are not materially different from
those which generally could be obtained from unrelated third parties through
negotiations on an arm's-length basis. It is possible that other potential
conflicts of interest could arise between the Company and Finmeccanica or ATR in
the future. The following is a summary of the material agreements, arrangements
and transactions between the Company and Finmeccanica or its affiliates.
Products. Each of US&S, ASF (previously being wholly owned by and a
division of ATR), ATSS and ATI has provided certain products and related
services to ATR. Such transactions, which generally were effected on terms
comparable to those available in transactions with unaffiliated parties, have
ranged from sales of discrete component products for use by ATR in railroad and
transit applications to acting as a subcontractor for ATR on certain systems
contracts, principally in Europe. Revenue from such transactions amounted to
approximately $17.0 million and $10.5 million for ASF and US&S, respectively,
for the year ended December 31, 1998. In addition, the Company's subsidiaries
have occasionally purchased certain products from ATR and other affiliates of
Finmeccanica for use in domestic or export sales. Such purchases were
insignificant in the fiscal year ended December 31, 1998. Ansaldo Signal,
including ASF in particular, expects to engage in similar affiliated party
transactions involving products and related services in the future on generally
the same basis as it would engage in transactions with unaffiliated third
parties.
Facilities. ASF has leased from ATR the space it currently occupies in
Naples and Genoa. Such leases are for a term expiring December 31, 1999, which
is renewable on an annual basis unless terminated by either party. The aggregate
annual rental for 1998 was ITL 1.6 billion ($1.0 million). The cost will be
subject to annual adjustment based on an Italian consumer price index to
determine the 1999 cost. The lease also provides for certain services related to
the premises, including management information services, for an annual cost of
ITL 6.5 billion ($3.9 million) for 1998. This cost will be subject to an annual
agreed adjustment (up or down) based on external factors to determine the cost
of providing these services in 1999. Management of ASF believes that the terms
of such agreements are no less favorable than those it would obtain from
unaffiliated third parties.
Head Office Services. ASF, as a division of ATR, obtained virtually all of
its head office services, including centralized administrative staff functions,
human relations, legal, planning, accounting and central purchasing, from ATR.
ATR has agreed to provide such services on the basis of its traditional
allocations to ASF through the end of 1999, which term can be extended on an
annual basis unless terminated by either party. The annual cost for 1998 was ITL
5.9 billion ($3.6 million). The 1999 cost will be based upon the 1998 cost and
an adjustment to reflect changes in cost levels based on an Italian consumer
price. Management of ASF believes that the terms of such agreements are no less
favorable than those it would obtain from unaffiliated third parties.
Credit Support and Credit Facilities. Finmeccanica and ATR have
historically provided certain financial support to US&S, ASF, ATSS, ATI and,
since June 28, 1996, CSEE, and, since its formation, the Company. Such services
have included arranging for certain letters of credit and short-term credit
facilities guaranteed or otherwise enhanced by Finmeccanica or ATR. For the year
ended December 31, 1998 fees for such credit enhancement were less than $0.1
million. Finmeccanica has agreed to continue such financial support through 1999
at a fee of 1.0% and 0.5% per annum of the
33
<PAGE>
Ansaldo Signal
principal amount of any borrowing and of any letter of credit facility enhanced,
respectively. The Company expects to continue to use such ATR or Finmeccanica
support through 1999. Thereafter, such financing might be on terms less
favorable to the Company than the financing previously arranged through
Finmeccanica and its affiliates. See Item 9, Management's Discussion and
Analysis of Financial Condition and Results of Operations, "Credit Facilities."
In addition, the Company has substantial borrowings from ATR and Cofiri, a
subsidiary of IRI, whose loans were supported by a comfort letter from each of
ATR and Finmeccanica. See Note 10 of the Notes to Consolidated Financial
Statements. In 1998, the Company has paid interest to ATR (7% per annum at year
end) aggregating $ 0.5 million. Also in 1998, the Company paid interest to
Cofiri (6.6% per annum at year end) aggregating $ 2.7 million. Through March
2000, Finmeccanica and ATR have agreed to provide sufficient support for the
operations of the Company and further agreed that the repayment of any present
or future indebtedness to ATR or Finmeccanica can be deferred if requested by
the Company. Management intends to request deferral of payment if such payment
would result in the Company violating any of its current debt covenants.
Bonding Support. Finmeccanica has agreed to continue to provide
indemnification to issuers of performance bonds or letters of credit for the
benefit of Ansaldo Signal in connection with major contracts through 1999. It
will continue to charge its current fee of 0.5% per annum of the amount of any
such bond or letter of credit. For the year ended December 31, 1998 fees for
this service were $0.6 million. In the event that Finmeccanica's support were
not available to Ansaldo Signal for its bonding requirements, Ansaldo Signal's
ability to enter into large contracts could be restricted and the Company
might be required to change its current method of doing business as a prime
contractor for most projects. As prime contractor, the Company can control
(while also assuming the responsibility for and the risk of) all aspects of an
entire project, including installation. While Ansaldo Signal anticipates that it
could provide a portion of its projected bonding requirements without the
support of Finmeccanica, it would be required to increase its use of joint
ventures and undertake more projects as a subcontractor, in each case with
parties capable of providing bonding for all or a portion of the project being
bid. Since the Company would lose flexibility in the way it can now approach
obtaining and executing major projects, no assurance can be given that any such
change would not have a material adverse effect on Ansaldo Signal's financial
position or result of operations.
Option Agreement
Ansaldo Signal has entered into an agreement with ATR (the "Option
Agreement") pursuant to which it has granted to ATR an option to purchase all of
the authorized Priority Shares of Ansaldo Signal for a purchase price equal to
the aggregate nominal value of such shares. Such option may be exercised in the
event that an unrelated third party acquires or announces a tender offer seeking
20% or more of the outstanding Common Shares. In the event that ATR acquires the
Priority Shares, ATR would be entitled to nominate the members of the
Supervisory Board and the Management Board. Although such nominations would not
be binding on the holders of Common Shares, a resolution appointing a different
candidate would require the approval of a majority of at least two-thirds of the
votes cast at a General Meeting of Ansaldo Signal shareholders, which majority
represents more than one-half of the issued share capital. If ATR acquires the
Priority Shares and still holds at least one-third of the outstanding Common
Shares, it would be able to make nominations of the members of the Supervisory
Board and the Management Board. ATR has agreed that, in the event that it
acquires the Priority Shares and, subsequently, its holdings of Common Shares
fall below 25% of the outstanding Common Shares, Ansaldo Signal may repurchase
the Priority Shares for no consideration.
Preemptive Rights Agreement
Pursuant to the terms of a Preemptive Rights Agreement (the "Preemptive
Rights Agreement") entered into between Ansaldo Signal and ATR, ATR shall be
granted the right, notwithstanding any shareholder directive to the contrary, to
purchase its pro rata share (based upon ATR's then current level of equity
ownership in Ansaldo Signal) of any issuances of Common Shares or other equity
securities, or securities convertible into or granting a right to purchase any
such equity securities, to third parties in the future. Such purchases shall be
made on the same terms and conditions as any third-party transaction that gives
rise to ATR's right to make such purchase. The Preemptive Rights Agreement will
expire at such time as ATR beneficially owns securities representing less than
30% of the combined voting power of all issued and outstanding Common Shares and
other voting securities of Ansaldo Signal. By virtue of such Agreement, ATR will
be able to maintain a controlling interest in Ansaldo Signal. ATR's rights under
the Preemptive Rights Agreement are transferable to any affiliate of ATR,
including Finmeccanica.
Registration Rights Agreement
Pursuant to the terms of a registration rights agreement (the "Registration
Rights Agreement") entered into between the Company and ATR, ATR will have the
right to require the Company to register for public offering and sale all or a
portion of the Company's common shares held by ATR from time to time (subject to
certain limitations) on a maximum of three occasions until such time as ATR
beneficially owns less than 5% of the issued and outstanding common shares of
the Company. In addition, during the term of the Registration Rights Agreement,
ATR will have the right to participate in any
34
<PAGE>
Ansaldo Signal
registration of common shares initiated by Ansaldo Signal, subject to certain
limitations. Ansaldo Signal will pay all out-of-pocket expenses of any such
registrations, other than fees and expenses of ATR's counsel, and will indemnify
ATR and its officers and directors against certain liabilities, including
liabilities under the federal securities laws (other than resulting from
material misstatements or omissions made in reliance on and in conformity with
information furnished by ATR or its affiliates expressly for use in connection
with such registration). ATR will pay all underwriting discounts and commissions
applicable to common shares of the Company sold pursuant to any such
registrations. The rights of ATR under the Registration Rights Agreement are
transferable to any affiliate of ATR, including Finmeccanica.
35
<PAGE>
Ansaldo Signal
PART II
Item 14. Description of Securities to be Registered
Not applicable.
PART III
Item 15. Defaults Upon Senior Securities
Reference is made to Item 9, under the heading "Borrowings," which is
incorporated herein.
Item 16. Changes in Securities and Changes in Security for Registered
Securities
None.
PART IV
Item 17. Financial Statements
The Company has responded to Item 18 in lieu of responding to Item 17.
Item 18. Financial Statements
Reference is made to Item 19(a) for a list of all financial statements
filed as part of this annual report.
Item 19. Financial Statements and Exhibits
The following Consolidated Financial Statements, including the notes
thereto, which immediately follow, are included herein as referenced below.
<TABLE>
<CAPTION>
Page(s) in this
Annual Report
on Form 20F
<S> <C>
(a) Index of Financial Statements, Financial Statement Schedules
Report of Independent Accountants 36-38
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997 39
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
for the Years Ended December 31, 1998, 1997, and 1996 40
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996 41-42
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 1998, 1997, and 1996 43
Notes to Consolidated Financial Statements 44-59
(b) Index to Exhibits 60
Exhibits 1.1, 1.2 and 2.1 through 2.9 identified on the Index to Exhibits
(page 60 hereof) are incorporated herein by reference.
Other Exhibits filed herewith:
Amendments to Put-Call Option Agreement, dated October 1998 and E-2.10
February 9, 1999.
Agreement, dated December 22, 1997, between Compagnia Finanziamenti E-2.11
e Rifinanziamenti-Cofiri SpA and Ansaldo Signal, as amended
April 23, 1998.
Lease, dated as of September 14, 1993, by and between Regional E-2.12
Industrial Development Corporation of Southwestern Pennsylvania
and Union Switch and Signal Inc., as amended by Subordination,
Attornment and Lease Amendment Agreement, dated as of November 30,
1993 and Second Amendment of Lease, dated as of May 31, 1998.
Consent of Independent Auditors. E-2.13
</TABLE>
36
<PAGE>
Ansaldo Signal
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Ansaldo Signal N.V.
(Registrant)
By: /s/ Bruno Tufari
Bruno Tufari, Managing Director,
Executive Vice President and Chief Financial Officer
By: /s/ James Sanders
James N. Sanders, Managing Director,
President and Chief Executive Officer
<PAGE>
Ansaldo Signal
Report of Independent Accountants
To the Supervisory Board
and Shareholders of
Ansaldo Signal N.V.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income (loss) and comprehensive income
(loss), of cash flows and of changes in shareholders' equity present fairly, in
all material respects, the financial position of Ansaldo Signal N.V. and its
subsidiaries (the Company), a majority-owned subsidiary of Ansaldo Trasporti
S.p.A., at December 31, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
March 5, 1999
<PAGE>
Ansaldo Signal
1998 Management Board Report to Shareholders
ANSALDO SIGNAL N.V.
CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31
-------------------------
1998 1997
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents............................................................... $ 12,913 $ 4,530
Receivables - net of allowance for doubtful accounts of $3,657 and $1,735............... 104,647 95,689
Receivables from parent and affiliates (Note 10)........................................ 10,051 15,761
Inventory (Note 3)...................................................................... 49,305 44,771
Costs and estimated earnings in excess of billings
on uncompleted contracts (Note 4)................................................... 182,253 157,008
Deferred income taxes (Note 9).......................................................... 6,844 8,059
Prepaid expenses and other current assets .............................................. 13,763 17,587
----------- -----------
Total current assets:.......................................................... 379,776 343,405
Contract retentions receivable............................................................... 11,275 13,370
Property, plant and equipment - net (Note 5)................................................. 33,735 54,302
Intangible assets - net (Note 16)............................................................ 33,658 33,118
Deferred income taxes (Note 9)............................................................... 9,320 9,653
Other assets ............................................................................... 4,828 3,318
----------- -----------
Total assets........................................................................ $ 472,592 $ 457,166
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Short term borrowings and current
obligations under capital leases (Note 6)........................................... $ 75,403 $ 55,843
Accounts payable........................................................................ 91,593 97,844
Accounts payable - parent and affiliates (Note 10)...................................... 4,956 4,465
Accrued liabilities..................................................................... 27,982 24,331
Accrued reorganization costs (Note 17).................................................. 2,276 4,160
Billings in excess of costs and estimated earnings
on uncompleted contracts (Note 4)................................................... 53,137 62,672
Long-term borrowings due within one year (Note 7)....................................... 4,286 4,286
------------ -----------
Total current liabilities...................................................... 259,633 253,601
Employee benefit obligations (Note 8)........................................................ 22,477 21,304
Deferred income taxes (Note 9)............................................................... 647 606
Other liabilities............................................................................ 10,844 12,721
Long-term borrowings and obligations under capital leases (Note 7)........................... 40,335 34,003
Long-term borrowings from parent (Note 10)................................................... 26,282 32,379
------------ -----------
Total liabilities.............................................................. 360,218 354,614
------------ -----------
Commitments and contingencies (Note 13)...................................................... - -
Shareholders' equity:
Priority shares, NLG 0.01 par value, 100 shares authorized,
no shares issued or outstanding..................................................... - -
Common shares, NLG 0.01 par value, 50,000,000 shares authorized,
20,448,750 and 20,448,750 issued and outstanding.................................... 120 120
Additional paid-in capital.............................................................. 139,999 139,999
Accumulated other comprehensive loss - foreign currency translation adjustments......... (7,262) (10,562)
Accumulated deficit..................................................................... (20,483) (27,005)
------------ ------------
Total shareholders' equity..................................................... 112,374 102,552
------------ -----------
Total liabilities and shareholders' equity..................................... $ 472,592 $ 457,166
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
39
<PAGE>
Ansaldo Signal
1998 Management Board Report to Shareholders
ANSALDO SIGNAL N.V.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Revenue ................................................................... $ 354,532 $ 318,225 $ 353,500
Cost of revenue ........................................................... 277,450 263,274 296,620
------------ ------------ ------------
Gross profit ..................................................... 77,082 54,951 56,880
------------ ------------ ------------
Operating expenses:
Selling, general and administrative .................................. 47,685 50,107 47,971
Research and development - net ....................................... 7,025 9,953 11,804
Acquired in process research and development (Note 1) ................ - - 15,144
Reorganization costs (Notes 1 and 17) ................................ - (1,584) 17,288
------------ ------------ ------------
Operating expenses ............................................... 54,710 58,476 92,207
------------ ------------ ------------
Operating income (loss) .......................................... 22,372 (3,525) (35,327)
Interest expense .......................................................... 10,349 8,834 6,101
Other (income) expense .................................................... (1,868) 348 57
------------ ------------ ------------
Income (loss) before income taxes and
minority interest in subsidiaries ........................... 13,891 (12,707) (41,485)
Provision for (benefit from) income taxes (Note 9) ........................ 7,300 77 (2,714)
Minority interest in net (income) loss of subsidiaries .................... (69) 106 (124)
------------ ------------ ------------
Net income (loss)..................................................... 6,522 (12,678) (38,895)
Other comprehensive income (loss):
Foreign currency translation adjustment .............................. 3,300 (10,350) (362)
------------ ------------ ------------
Comprehensive income (loss) .......................................... $ 9,822 $ (23,028) $ (39,257)
============ ============ ============
Earnings Per Share:
Basic and diluted net income (loss) per common share ................. $ 0.32 $ (0.62) $ (1.90)
============ ============ ============
Basic and diluted weighted average number of
common shares outstanding ........................................ 20,448,750 20,448,750 20,448,750
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
40
<PAGE>
Ansaldo Signal
1998 Management Board Report to Shareholders
ANSALDO SIGNAL N.V
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)........................................................ $ 6,522 $ (12,678) $ (38,895)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization:........................................... 9,967 11,526 11,370
Deferred income taxes.................................................... 3,388 3,878 (2,310)
Gain on sale of fixed assets............................................. (980) - -
Acquired in process research and development.................................. - - 15,144
Changes in:
Receivables.......................................................... 1,411 (12,949) (234)
Inventory............................................................ (3,616) 2,943 (1,696)
Contracts - net (a).................................................. (29,174) (21,144) (13,537)
Other assets......................................................... 1,231 (5,485) 865
Accounts payable..................................................... (8,377) 15,245 (8,336)
Accrued liabilities.................................................. 727 4,259 228
Accrued reorganization costs......................................... (1,884) (12,440) 16,600
------------ ------------ -----------
Net cash used in operating activities........................... (20,785) (26,845) (20,801)
------------ ------------ ------------
Cash Flows From Investing Activities:
Proceeds from sale of fixed assets....................................... 12,200 - -
Proceeds from sale of investments in affiliates.......................... 506 - -
Capital expenditures .................................................... (3,152) (7,138) (5,218)
Acquisition of CSEE - Transport S.A. (c)................................. - - 2,581
Purchase of intangibles and other noncurrent assets...................... (3,501) (344) (578)
------------ ------------ ------------
Net cash provided by (used in) investing activities............. 6,053 (7,482) (3,215)
------------ ------------ ------------
Cash Flows From Financing Activities:
Net proceeds from short term borrowings.................................. 18,475 15,108 16,366
Financing by parent company.............................................. 17,893 19,475 26,175
Proceeds from long term borrowings....................................... 16,117 - 12,000
Payments on long term borrowings......................................... (28,799) (5,316) (22,137)
Payments on capital leases............................................... (295) (468) (476)
------------ ------------ ------------
Net cash provided by financing activities....................... 23,391 28,799 31,928
------------ ------------ -----------
Effects of exchange rate changes on cash...................................... (276) (1,039) (74)
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents.......................... 8,383 (6,567) 7,838
Cash and cash equivalents at beginning of period.............................. 4,530 11,097 3,259
------------ ------------ -----------
Cash and cash equivalents at end of period............................... $ 12,913 $4,530 $ 11,097
============ ============ ===========
Interest paid during period................................................... $ 9,580 $8,586 $ 4,487
============ ============ ===========
Income taxes paid (refunded) during period (b)................................ $ 2,831 $1,562 $(1,107)
============ ============ ==========
</TABLE>
(a), (b), (c) See notes on continuation page following.
41
<PAGE>
Ansaldo Signal
1998 Management Board Report to Shareholders
ANSALDO SIGNAL N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
($ in thousands)
(a) Includes costs and estimated earnings in excess of billings on uncompleted
contracts, contract retentions receivable, billings in excess of costs and
estimated earnings on uncompleted contracts and contract retentions
payable.
(b) The line item "Income taxes paid (refunded)" for 1996 includes an estimate
of taxes that have been paid by the ATR signaling business unit; these
payments were allocated to ASF as if it were a separate taxpayer. (See
Notes 9 and 10).
(c) Supplemental cash flow information regarding acquisition of CSEE-Transport
S.A.
Fair value of net assets acquired.................. $ 77,644
Fair value of stock issued......................... (18,912)
Reduction in parent receivables.................... (58,732)
------------
Cash paid.......................................... $ -
===========
Cash acquired...................................... $ 2,581
===========
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE>
Ansaldo Signal
1998 Management Board Report to Shareholders
ANSALDO SIGNAL N.V.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
($ in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Share paid-in comprehensive Retained shareholders
Capital capital income/(loss) earnings equity
------- ------- ------------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996............$ 108 $ 126,589 $ 150 $ 24,658 $ 151,505
Net loss............................ - - - (38,895) (38,895)
CSEE acquisition.................... 12 18,900 - - 18,912
Other (1)........................... - (5,490) - - (5,490)
Foreign currency translation........ - - (362) - (362)
------------ --------- ------------ --------- ----------
Balance, December 31, 1996.......... 120 139,999 (212) (14,237) 125,670
Net loss............................ - - - (12,678) (12,678)
Foreign currency translation........ - - (10,350) (90) (10,440)
------------ --------- ------------ --------- ----------
Balance, December 31, 1997.......... 120 139,999 (10,562) (27,005) 102,552
Net income.......................... - - - 6,522 6,522
Foreign currency translation........ - - 3,300 - 3,300
------------ --------- ------------ --------- ----------
Balance, December 31, 1998..........$ 120 $ 139,999 $ (7,262) $ (20,483) $ 112,374
============ ========= ============ ========= ==========
</TABLE>
(1) Relates to the contribution of the Signaling Business Unit of Ansaldo
Trasporti S.p.A (SBU) discussed at Note 1. The adjustment represents net
assets at September 30, 1996 that were not ceded to SBU by ATR on October
1, 1996.
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE>
Ansaldo Signal N.V.
Notes to Consolidated Financial Statements
1. Description of the Business and Capitalization
Ansaldo Signal N.V. ("the Company," "the Company," or "Ansaldo Signal") was
incorporated on November 13, 1996, in Amsterdam, The Netherlands and is a
majority-owned subsidiary of Ansaldo Trasporti S.p.A. ("ATR"). ATR is a member
of a group of companies controlled by Finmeccanica S.p.A., which is in turn
controlled by the Italian state holding company, Istituto per la Ricostruzione
Industriale-IRI S.p.A.
The Company was formed upon the merger of Union Switch & Signal Inc.
("US&S") (at the time, a majority owned subsidiary of ATR) with a direct
wholly-owned subsidiary of the Company. As a result of the merger, US&S ceased
to exist as a separate publicly traded entity and each outstanding share of US&S
common stock (9,737,500 shares) was exchanged on a one-for-one basis for common
shares of the Company. Immediately after the merger described above, ATR
contributed the outstanding capital stock of its other railway signaling and
automation businesses to the Company in exchange for 10,711,250 common shares of
the Company.
The transactions noted above have been treated as a reorganization of
companies under common control and, accordingly, have been reflected within the
consolidated financial statements as a pooling of interests. As required under
the pooling of interests method of accounting, the Company's historical results
reflect the historical results of the companies merged with and contributed to
the Company. The Company's results of operations for the first six-months of
1996 reflect the combined operating results of: (i) 100% of US&S; (ii) 100% of
Ansaldo Segnalamento Ferroviario S.p.A. ("ASF") - an Italian corporation; (iii)
49% of CSEE - Transport S.A. ("CSEE") - a French corporation; (iv) 75% of AT
Signal Systems AB ("ATSS") - a Swedish corporation and (v) 100% of Ansaldo
Trasporti Signaling (Ireland) Ltd. ("ATI") - an Irish limited liability company.
Results of operations for the remaining six months of 1996 and for the years
ended December 31, 1997 and December 31, 1998 reflect 100% of CSEE, as the
remaining 51% was acquired by the Company on June 28, 1996.
The Company markets its products and services to customers in the
international rail transportation and mass transit industry. The Company is
primarily engaged in the design, engineering, production, distribution and
after-sale service of integrated railway signaling, automation and control
systems and related component products. The Company's headquarters are in
Schiphol, The Netherlands.
Signaling Business Unit Contribution
On October 1, 1996, ATR contributed all of its wholly owned signaling
business unit ("SBU") to ASF with the exception of certain contracts and
liabilities, thus consolidating all of ATR's railway signaling business and
assets in Italy. Under the terms of the contribution, ASF received substantially
all of the assets and liabilities under the supervision of SBU at the date of
the contribution.
The consolidated statements of income (loss) and comprehensive income
(loss) for 1996 include all revenues and costs directly attributed to SBU
including costs for facilities, functions and services used by the business at
shared sites and costs for certain functions and services performed by ATR that
were directly charged to SBU based upon usage.
Acquisition of CSEE - Transport S.A.
Prior to June 28, 1996, ATR owned 49% of CSEE and accounted for its
investment under the equity method. On June 28, 1996, pursuant to an agreement
between ATR and Compagnie des Signaux S.A. ("CS"), CSEE repurchased 604,340
shares of its outstanding shares from CS for $58.7 million As a result of this
transaction, ATR increased its interest in CSEE to approximately 80% and,
contemporaneously with this transaction, CS placed in escrow its remaining
shares (201,460 shares) in anticipation of exchanging such shares for a certain
number of shares in the Company. These shares were exchanged for 2,000,000 the
Company common shares in December 1996. The CSEE shares which were held in
escrow were considered to be under the control of ATR. The June 28 transactions
were accounted for as a purchase. Accordingly, 100% of the results of operations
of CSEE have been included in the combined results of the Company since June 28,
1996.
44
<PAGE>
Ansaldo Signal N.V.
Notes to Consolidated Financial Statements
The total cost of the transaction to acquire the remaining 51% interest in
CSEE was valued at approximately $77.6 million. The net tangible assets acquired
from CSEE had a fair value at the time of acquisition of $28.8 million, as well
as goodwill and identified intangibles of $48.8 million, of which $15.1 million
represents acquired in process research and development. Immediately following
the acquisition, the Company wrote-off the acquired in process research and
development. The residual goodwill and intangibles are being amortized over 20
years.
2. Summary of Significant Accounting Policies
Basis of Accounting
The consolidated financial statements are expressed in US dollars and have
been prepared in accordance with United States Generally Accepted Accounting
Principles (US GAAP).
Consolidation
The Company's majority-owned subsidiaries are consolidated. All significant
intercompany transactions and balances have been eliminated in the consolidated
financial statements. Investments representing a 20% to 50% interest in the
voting shares of affiliated companies in which the Company exercises significant
influence over operating and financial policies are accounted for using the
equity method.
Foreign Currencies
Transactions in foreign currencies are translated into each entity's
functional currency at the exchange rate in effect on the transaction dates.
Exchange differences arising from translating foreign currency receivables or
payables at year-end exchange rates are charged or credited to current period
net income.
The Company's results of operations and financial position are reported in
US dollars. When translating local currency financial statements to US dollars,
assets and liabilities are translated at the year-end rate, while income and
expenses are translated using the average rate for the year. Translation
differences are included as a component of shareholders' equity.
Use of Estimates
The preparation of consolidated financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingencies at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates. The use of estimates is an integral part of applying
percentage-of-completion accounting for long-term contracts.
Revenue Recognition - Contracts
Revenue and costs of revenue on long-term contracts are recognized using
the percentage-of-completion method of accounting. Under this method, income is
recognized as work progresses on the contracts based on the relationship between
total contract revenues and total estimated contract costs. The percentage of
work completed is determined principally by comparing the accumulated costs
incurred to date with management's current estimate of total costs to be
incurred at contract completion. Revenue is recognized on the basis of actual
costs incurred plus the portion of income earned.
Contract costs include all direct material, subcontractor costs, and labor
costs and those indirect costs related to contract performance. Revisions in
profit estimates during the period of a contract are reflected in the accounting
period in which the revised estimates are made on the basis of the stage of
completion at that time. If estimated total costs on a contract indicate a loss,
the entire amount of the estimated loss is provided for currently.
45
<PAGE>
Ansaldo Signal N.V.
Notes to Consolidated Financial Statements
Revenue related to unsigned change orders is recognized when it is
determined that collection under the change order is probable. Revenue related
to claims is recognized only to the extent of costs incurred when recovery under
the claims is considered probable.
Contracts are considered complete upon completion of all essential contract
work, including support to integrated testing and customer acceptance.
Costs and estimated earnings in excess of billings on uncompleted contracts
represent revenue recognized in excess of amounts billed to customers. These
amounts are not yet billable under the terms of the contracts and are
recoverable from customers upon various measures of performance.
Billings in excess of costs and estimated earnings on uncompleted contracts
represents billings to customers in excess of earned revenue and advances on
contracts.
Revenue Recognition - Components
Sales of component parts, which are not part of a long-term contract, are
recognized upon shipment of products.
Inventory
Inventory is stated at the lower of cost or market, with cost being
determined using standard costs, which approximate weighted average actual
costs.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
provided based on estimated useful asset lives and is computed on a
straight-line method for financial reporting purposes. Maintenance and repairs
are charged to expense as incurred. At the time property, plant and equipment is
retired or otherwise disposed of, the cost and related accumulated depreciation
are adjusted and any profit or loss on dispositions is included in the
consolidated statement of income (loss).
Intangible Assets
Intangible assets represent goodwill, purchased research and development
and proprietary technology, which comprises patents, drawings and other
proprietary information. Intangible assets other than goodwill are being
amortized over the economic lives of the assets, generally 8 to 20 years.
Goodwill, which represents the excess of purchase price over the fair value of
the net identifiable tangible and intangible assets purchased, is being
amortized over 10 to 20 years.
Earnings Per Share
Earnings per share is calculated in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 128 - "Earnings per
Share". Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
earnings per share is calculated by dividing net income by the weighted average
number of common shares outstanding during the year plus common equivalent
shares outstanding if the common equivalent shares are dilutive. Common
equivalent shares include dilutive stock options as if the options were
exercised and the proceeds used by the Company to acquire common stock (i.e.,
the treasury stock method).
Basic and diluted earnings per share for the years ended December 31, 1998
and December 31, 1997 are based upon 20,448,750 common shares outstanding. Basic
and diluted earnings per share for the year ended December 31, 1996, are based
upon 20,448,750 common shares outstanding which reflects the one-for-one
exchange of 9,737,500 shares with US&S shareholders and the issuance of
10,711,250 additional shares, in exchange for 100% of ASF, CSEE, ATI and 75% of
ATSS.
46
<PAGE>
Ansaldo Signal N.V.
Notes to Consolidated Financial Statements
Cash and Cash Equivalents
Cash and cash equivalents represent funds held in interest-bearing money
market accounts with original maturities of 3 months or less.
Credit Risks
Financial instruments that potentially subject the Company to
concentrations of credit risks consist primarily of billed and unbilled
receivables. Concentrations of credit risk with respect to billed and unbilled
accounts receivable are limited due to the Company's credit evaluation process
and obtaining letters of credit to ensure payment from international customers.
Historically, the Company has not incurred any significant credit-related
losses.
Financial Instruments
In managing interest rate exposure, the Company at times enters into
interest rate swap agreements. Net receipts or payments under the agreements are
recognized as an adjustment to interest expense. In order to hedge exposures
from firm commitments in foreign currencies, the Company at times enters into
forward foreign exchange contracts primarily related to long-term contracts
which are settled in currencies other than the currency in which the costs are
incurred. Gains and losses resulting from these instruments are recognized in
the same period as the underlying hedged transaction. The fair values of the
Company's financial instruments are estimated based on quoted market prices for
the same or similar issues.
Research and Development
Research and development expense is presented net of government grant
reimbursements. Research and development efforts that are performed in
accordance with contract requirements are included in cost of revenue. Certain
government research grants which are repayable in the event that the related
research project proves to be successful are recognized in the income statement
when the research project has been determined to be unsuccessful and all other
conditions for non-repayment of the grants have been met.
Income Taxes
The Company accounts for certain income and expense items differently for
financial reporting and income tax purposes. In accordance with SFAS No. 109,
"Accounting for Income Taxes," deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
return bases of assets and liabilities applying enacted statutory tax rates in
effect for the year in which the differences are expected to reverse.
Reclassifications
Certain amounts from prior periods have been reclassified for comparative
purposes.
47
<PAGE>
Ansaldo Signal N.V.
Notes to Consolidated Financial Statements
3. Inventory
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
<S> <C> <C>
Raw materials................................................................ $27,435 $25,005
Work-in-process.............................................................. 13,893 14,028
Finished components.......................................................... 7,977 5,738
------- -------
$49,305 $44,771
======= =======
<CAPTION>
4. Long-term Contract Balances
December 31,
-----------------------------
1998 1997
<S> <C> <C>
Costs incurred on uncompleted contracts...................................... $ 1,382,798 $1,206,219
Estimated earnings........................................................... 239,552 190,081
------------ -----------
1,622,350 1,396,300
Less billings-to-date and advances on contracts.............................. (1,493,234) (1,301,964)
----------- ----------
$ 129,116 $ 94,336
=========== ==========
<CAPTION>
The net amount in the preceding table is included in the consolidated
balance sheet under the following captions:
December 31,
------------------------------
1998 1997
<S> <C> <C>
Costs and estimated earnings in excess of billings
on uncompleted contracts................................................. $182,253 $157,008
Billings in excess of costs and estimated earnings
on uncompleted contracts................................................. (53,137) (62,672)
-------- --------
$129,116 $ 94,336
======== =========
</TABLE>
At December 31, 1998, there were $2,800 of claims and unsigned change
orders that are included in costs and estimated earnings in excess of billings
on uncompleted contracts. At December 31, 1997, there were $15,554 of claims and
unsigned change orders that are included in costs and estimated earnings in
excess of billings on uncompleted contracts.
All amounts included in unbilled costs and estimated earnings on
uncompleted contracts at December 31, 1998, are expected to be collected within
one year.
Contract retentions receivable and payable arise from the performance of
long-term contracts. Approximately $6,476 of retentions receivable and $1,173 of
retentions payable are estimated to be collected or paid, respectively, in 1999.
5. Property, Plant and Equipment
December 31,
-------------------------
1998 1997
Land................................. $ 2,467 $ 3,350
Buildings............................ 24,276 44,829
Machinery and equipment.............. 81,014 64,628
Construction-in-progress............. 3,331 11,495
--------- ---------
$111,088 $ 124,302
Less accumulated depreciation........ (77,353) (70,000)
--------- ---------
$ 33,735 $ 54,302
========= =========
48
<PAGE>
Ansaldo Signal N.V.
Notes to Consolidated Financial Statements
Depreciation expense for the years ended December 31, 1998, 1997, and 1996,
was $6,641, $8,446, and $6,819, respectively. Depreciable lives average 39 years
for building, and range between3 and 7 years for machinery and equipment.
In June 1998 the Company renegotiated the Pittsburgh Engineering and
Technology Facility lease. The conversion from a capital lease to an operating
lease generated a nonrecurring gain of $980. Land and buildings having a net
book value of approximately $18,090 were removed from the balance sheet. Net
cash proceeds received at the time of closing were $12,200.
6. Short-term Borrowings and Capital Lease Obligations
<TABLE>
<CAPTION>
Currency December 31,
Payable in 1998 1997
<S> <C> <C> <C>
Borrowings (unsecured but with letters of comfort from ATR and
Finmeccanica), by Ansaldo Signal from Cofiri S.p.A., a related party (see
Note 10). The interest rate in effect on December 31, 1998 was
6.63% (1997: 7.00%). USD $50,000 $13,000
Borrowings (unsecured) under various lines of credit expiring within one
year with interest payable at least quarterly. The interest rate in effect
on December 31, 1997 was between 7.88% and 8.375% USD - 21,987
Borrowings (unsecured), in Italy by ASF under various agreements with
several banks, expiring within one year. The interest rate in effect at
December 31,1998 was between 6.88% and 7.88% (1997: 8.01%). Lira 14,713 8,945
Borrowings (unsecured) under various lines of credit expiring within one
year with interest payable at least quarterly. The interest rate in effect
on December 31, 1998 was between 3.56% and 5.30% (1997: between 3.88% and
5.91%). Various 10,534 11,433
Current portion of obligations under capital leases 156 478
-------- ---------
Total short-term borrowings and current
portion of obligations under capital leases $75,403 $55,843
======= =======
</TABLE>
The Company had committed and uncommitted lines of credit available at
December 31, 1998, of $127.7 million with various banks. The unused portion of
the committed and uncommitted lines of credit available at
49
<PAGE>
Ansaldo Signal N.V.
Notes to Consolidated Financial Statements
December 31, 1998, totaled $52.3 million. US&S also has a $2,917 letter of
credit line available and fully utilized from a bank at December 31, 1998.
Certain of these lines are guaranteed by ATR.
7. Long Term Borrowings and Capital Leases
The carrying value of the Company's long-term debt approximates fair value
based on the borrowing rates currently available to the Company for loans with
similar terms and maturities.
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
<S> <C> <C>
Ansaldo Segnalamento Ferroviario S.p.A.
Notes (unsecured) due 2002 with a
fixed interest rate of 4.10%............................................. $ 16,949 $ -
Union Switch & Signal
Senior Notes (unsecured) due 2004, with a
fixed interest rate of 8.00%............................................. 25,715 30,000
Long term obligations under capital leases............................... 1,957 8,289
---------- ---------
Subtotal ........................................................... 44,621 38,289
Less current portion of senior notes..................................... 4,286 4,286
---------- ---------
Total long term borrowings and obligations
under capital leases................................................ $ 40,335 $ 34,003
========== =========
</TABLE>
The aggregate principal maturities of debt under the present credit
arrangements for the periods subsequent to December 31, 1998:
1999 .......................................................$ 4,286
2000 ........................................................ 6,102
2001 ........................................................ 11,550
2002 ........................................................ 12,155
2003 ........................................................ 4,286
Thereafter....................................................... 4,285
-----
$ 42,664
Future minimum lease payments under, non-cancelable operating leases and
capital leases, as of December 31, 1998, are primarily for buildings machinery
and equipment as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
<S> <C> <C>
1999......................................................................... $ 4,623 $ 391
2000......................................................................... 3,533 392
2001......................................................................... 3,200 391
2002......................................................................... 3,055 392
2003......................................................................... 2,787 393
Thereafter................................................................... 34,759 1,099
---------- ---------
Total minimum lease payments................................................. $ 51,957 3,058
==========
Amount representing imputed interest......................................... (945)
---------
Present value of future minimum lease payments............................... 2,113
Less current portion......................................................... (156)
---------
$ 1,957
=========
</TABLE>
50
<PAGE>
Ansaldo Signal N.V.
Notes to Consolidated Financial Statements
In 1994, US&S issued senior, unsecured promissory notes to various lenders
in the total amount of $30,000 at a fixed rate of 8 percent. The private
placement notes have a ten-year term; principal repayments began in 1998. Under
this agreement, the Company is subject to certain financial covenants. US&S is
in compliance with the financial covenants included in the note agreement as of
December 31, 1998.
ATR and Finmeccanica have agreed to continue to provide sufficient
guarantees and/or financing support for the operations of Ansaldo Signal NV and
its subsidiaries until March 2000. The repayment of any present or future
indebtedness to ATR and/or Finmeccanica will not be required if the Company
requests deferral of repayment. Management intends to request deferral of
repayment if such repayment would result in the Company violating any of its
current debt covenants.
US&S maintains a $100 million surety bonding facility ($30.0 million
outstanding at December 31, 1998) in addition to a $300 million surety bonding
facility provided by Finmeccanica (see Note 10).
8. Employee Benefit Obligations
Retirement benefits
Substantially all employees are covered by Government sponsored retirement
plans or Company sponsored defined contribution retirement plans which are
provided for through charges to income by the Company during the employees'
working careers. In some cases, employees may also contribute to the cost of the
plan. The Company has no significant obligations for pension or similar
postretirement income benefits.
Other postemployment benefits
The following other postemployment and postretirement benefits other than
pension are included in the consolidated financial statements:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
<S> <C> <C>
Severance.................................................................... $ 16,644 $ 15,299
Profit Sharing............................................................... 3,074 3,366
Other........................................................................ 2,759 2,639
---------- ----------
$ 22,477 $ 21,304
========== ==========
</TABLE>
The following is a description of the more significant post-employment
benefit plans:
Severance
ASF has an unfunded severance plan in accordance with Italian government
regulations. The Italian government requires the employer to provide severance
pay (Trattamento di fine rapporto - TFR) in amounts equal to annual
contributions of 7-8% of a worker's annual salary. The amounts accrued become
payable upon termination of the individual employee, for any reason, e.g.,
retirement, dismissal or reduction in work force. Employees are fully vested in
TFR benefits after their first year of service.
51
<PAGE>
Ansaldo Signal N.V.
Notes to Consolidated Financial Statements
Profit Sharing
CSEE operates a two-tier employee profit sharing plan. The first tier of
the plan is mandatory under French law and CSEE is required to make an annual
provision of a certain amount of profit after tax based upon a formula. A
discretionary second tier to the profit-sharing plan is negotiated under a
collective bargaining arrangement.
Other
The Company's other unfunded plans, include CSEE's pension plan and the
US&S postretirement benefit plan which pays a fixed amount toward the cost of
medical insurance and provides life insurance benefits. The liabilities and
costs related to these plans are determined on an actuarial basis appropriate to
the circumstances.
The approximate cost of providing all of the above benefits for the years
ended December 31, 1998, 1997 and 1996 was $2,515, $4,000 and $4,079,
respectively.
9. Provision for Income Taxes
Generally, each subsidiary of the Company is a tax paying entity within its
own country. The tax returns of ASF, pre-contribution of SBU to ASF on October
1, 1996, were filed on a separate basis with the government of Italy; however,
SBU as a unit of ATR did not have separate income tax returns filed on its
behalf, and an estimated provision was calculated based upon the operating
results of SBU.
For the nine-month period ended September 30, 1996, tax expense has been
allocated to SBU by applying the liability approach set forth in SFAS No. 109 as
if it were a separate taxpayer. Under this approach, a tax benefit for income
taxes currently refundable is recognized only if a refund could have been
realized by SBU had SBU been a separate taxpayer. A tax benefit for future
deductible amounts and carry forwards is recognized when it is more likely than
not that such future tax benefit would be realized if SBU were a separate
taxpayer.
The components of the provision for (benefit from) income taxes were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
<S> <C> <C> <C>
Current:
Netherlands................................................ $ - $ - $ -
Other...................................................... 3,912 (3,801) (404)
------- ---------- ---------
Total current provision (benefit)...................... 3,912 (3,801) (404)
------- ---------- ---------
Deferred:
Netherlands............................................ - - -
Other.................................................. 3,388 3,878 (2,310)
------- --------- ---------
Total deferred provision (benefit)................ 3,388 3,878 (2,310)
------- --------- ---------
Total provision (benefit)......................... $ 7,300 $ 77 $ (2,714)
======= ========= =========
</TABLE>
52
<PAGE>
Ansaldo Signal N.V.
Notes to Consolidated Financial Statements
The provision for (benefit from) income taxes differs from the amount of
income tax determined by applying the applicable Netherlands statutory rate to
pretax income as a result of the following differences:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Expected tax at the statutory rate of 35%................... $ 4,860 $ (4,448) $ (14,346)
Earnings of subsidiaries at rates over 35%.................. 367 121 191
Other foreign taxes......................................... 1,605 - -
In process research and development......................... - - 5,178
Loss carryover with no tax benefit.......................... 21 206 3,834
Non-deductible goodwill..................................... 730 1,614 1,301
Non-deductible reorganization costs......................... 588 431 2,520
Change in tax rates......................................... - 2,632 -
Change in valuation reserve................................. (2,040) 3,742 -
Other....................................................... 1,169 (4,221) (1,392)
------------- ------------- ----------------
Total income tax........................................ $ 7,300 $ 77 $ (2,714)
============= ============= ================
<CAPTION>
Deferred taxes were comprised of the following:
December 31,
--------------------------
1998 1997
<S> <C> <C>
Deferred tax assets:
Reserves for contract losses................................................. $ 1,019 $ 1,797
Employee benefit obligations................................................. 2,030 2,335
Accrued expenses and reserves................................................ 4,265 3,867
Goodwill..................................................................... 4,087 4,647
Research and development..................................................... 1,663 2,936
Revaluation of assets........................................................ 2,237 2,206
Net operating loss carryforwards............................................. 3,340 6,639
Tax credit carryforwards..................................................... 1,063 780
Other........................................................................ 646 419
------ ------
Deferred tax assets...................................................... 20,350 25,626
Valuation allowance.......................................................... (1,707) (3,625)
------- -------
18,643 22,001
------ ------
Deferred tax liabilities:
Property, plant and equipment................................................ (990) (2,924)
Leveraged lease.............................................................. (903) (714)
Intangibles ................................................................ (235) (295)
Other........................................................................ (998) (962)
------- -----
Total deferred tax liabilities........................................... (3,126) (4,895)
------- -------
Net deferred tax asset................................................... $ 15,517 $ 17,106
======= ======
</TABLE>
During 1998, the Company released into taxable income certain government
grants whose recognition had been previously deferred. The recognition of income
had the effect of reducing the NOL carryforward by $732. For income tax
reporting purposes, the Company has net operating loss carryforwards that
aggregate $9,800 at
53
<PAGE>
Ansaldo Signal N.V.
Notes to Consolidated Financial Statements
December 31, 1998. NOL carryforward periods vary from five years to indefinite,
and the first NOL carryforwards begin to expire in 2002.
Also during 1998 the Company recorded a net decrease in the valuation
allowance of $2,040, which has reduced the 1998 tax provision. The decrease
reflects utilization of a portion of NOL carryforwards in 1998 for which a
valuation allowance had previously been established and the Company's improved
expectations about the future realizability of certain of the remaining NOL
carryforwards before their expiration. Management believes that it will have
sufficient taxable income in the future to make it more likely than not that the
deferred assets net of the valuation allowance at December 31, 1998 will be
realized.
During 1997, the Company recorded an adjustment to reduce the net deferred
tax balance at December 31, 1997 by $2,632 based principally on changes in the
tax laws of Italy. These changes reduced the expected tax benefit to be received
in the future relating to net deductions already reported for financial
statement purposes but not yet taken for tax purposes.
Also during 1997 the Company recorded a net increase in the valuation
allowance of $3,742, which was charged to the 1997 tax provision which reflected
the Company's expectations about the utilization of certain of its NOL
carryforwards before their expiration.
10. RELATED-PARTY TRANSACTIONS
The Company's borrowings from its controlling shareholder (ATR) are as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
<S> <C> <C>
Borrowings by the Company (unsecured); interest rate in
effect at December 31, 1998 was 7.00%.................................... $ 17,893 $ -
Borrowings by ASF (unsecured); interest rate in
effect at December 31, 1998 was 6.375% (1997: 12%)...................... 5,245 29,154
Borrowings by ATSS (subordinated); non-interest bearing...................... 1,911 1,960
Borrowings by ATSS; floating interest rate tied to
official discount rate in Sweden......................................... 1,233 1,265
-------- --------
Total borrowings from parent Company......................................... $ 26,282 $ 32,379
======== ========
</TABLE>
The Company's borrowings from Cofiri, a related financial institution
majority-owned by IRI, were $50 million at December 31, 1998 (interest at 6.63%)
and $13 million at December 31, 1997 (interest at 7.00%). See Note 6.
Borrowings by ASF and by the Company from ATR are for an indefinite period
of time.
The subordinated ATSS loan from the parent company is interest free and is
classified in the Swedish statutory financial statements as a conditional
Shareholders Contribution to be repaid upon demand from future available
earnings. According to statutory legislation, this loan can be repaid to the
parent company under certain conditions after a decision at the Annual General
Meeting of Shareholders. For US GAAP purposes, this amount is considered
subordinated debt.
US&S, as well as the other subsidiaries of the Company, relies on ATR /
Finmeccanica for certain financial and management services. Such services for
US&S include guaranteeing a $300,000 performance bonding facility (of which
$107,993 was utilized at December 31, 1998). US&S pays fees to ATR /
Finmeccanica for these services. The fees paid are calculated on the basis of
the value of credit enhancement. The fee equals 1.0
54
<PAGE>
Ansaldo Signal N.V.
Notes to Consolidated Financial Statements
percent per annum of the aggregate principal amount of credit enhanced by
Finmeccanica and 0.50 percent per annum of any bond or letter of credit for
which Finmeccanica provides an indemnity. For the years ended December 31, 1998,
1997 and 1996, fees were $593, $204 and $271, respectively.
ATR / Finmeccanica has provided bid, advance payment, performance and
retentions bonding of $179,632 for all subsidiaries of the Company.
Management expects ATR / Finmeccanica to continue to provide these
services, to the extent required, at least through March 2000.
SBU, as a division of ATR, obtained virtually all of its head office
services, including centralized administrative staff functions, human relations,
legal, planning, accounting and central purchasing, from ATR through September
30, 1996. Effective October 1, 1996, ASF entered into agreements with ATR to
continue to provide these services as well as to lease space at ATR's facilities
through 1998, which term is extended on an annual basis unless terminated by
either party. The cost of these services during the three month period ended
December 31, 1996, and the years ended December 31, 1997 and 1998, was $3,200,
$9,989 and $8,463, respectively.
All of the allocations and estimates in the consolidated statement of
operations are based on assumptions that management believes are reasonable
under the circumstances. These allocations and estimates are not necessarily
indicative of the costs and expenses that would have resulted if ASF had been
operated as a separate entity; however, management believes the differences, if
any, would not be material.
ASF has been involved in a number of large turnkey projects with ATR. ATR
acted as a prime contractor on such projects. The contracts require ATR to
provide varied rail products and services, including signaling and automation of
the signaling systems. In connection with the SBU contribution, ATR entered into
formal subcontract agreements with ASF to continue providing these services on
the incomplete contracts. For the years ended December 31, 1998 and 1997, ASF
received revenues on these contracts of some $17,047 and $17,125, respectively.
US&S has been a subcontractor to ATR. ATR is the prime contractor on such
projects and has agreements with US&S for US&S to provide goods and services on
these contracts. For the years ended December 31, 1998, 1997 and 1996 US&S's
revenue included $10,492, $3,425 and $1,556, respectively, on these contracts.
In addition, pursuant to an agreement effective as of November 1, 1995
through December 10, 1997, US&S provided management consulting services to ATR.
For said services, US&S received a fee of $643 plus reimbursement of expenses.
11. Financial Instruments and Risk Management
The Company has entered into foreign currency exchange contracts to reduce
its foreign currency exchange risk. Because these contracts are intended as, and
effective as, hedges of the underlying assets, liabilities or commitments, any
exchange gains or losses are deferred. The net unrealized gain on open contracts
at December 31, 1998, not recognized in the income statement, amounts to $118.
The fair value of these contracts approximates the contract value because they
are short-term in nature. The Company's theoretical risk in these transactions
is the cost of replacing, at current market rates, these foreign currency
exchange contracts in the event of a default by the counterparty. Management
believes the risk of such losses is remote and that such losses would not be
material.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
standard requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge which permits, in some cases, deferral of the effects of gains and losses
on current net income. If the conditions for hedging are not met, changes in
value will be recognized in current net income. Regardless of whether the
derivative qualifies as a hedge, all changes in value will be recognized in
comprehensive income. The Company is required to adopt
55
<PAGE>
Ansaldo Signal N.V.
Notes to Consolidated Financial Statements
this standard in 2000. Management does not expect the adoption of this standard
to have a material impact on the Company's results of operations or financial
position.
12. Segment Information
The Company operates principally in one industry: the design, engineering,
production, distribution and after-sale service of integrated railway signaling,
automation and control systems and related component products.
The Company's operating segments are managed along geographic divisions
which correspond to the locations of its subsidiaries. ASF is in Italy. CSEE is
in France. US&S is in the United States. Other subsidiaries are located in
Sweden, Australia, Ireland and India.
Disclosures of operating segment information as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998 is
provided in the following table.
<TABLE>
<CAPTION>
As of and for the year ended December 31, 1998
ASF CSEE US&S Other Total
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues...................................... $113,314 $79,354 $150,834 $11,030 $354,532
Gross profit.................................. 23,992 16,440 30,786 5,864 77,082
Depreciation ................................. 1,409 1,794 3,376 62 6,641
Amortization.................................. 268 1,941 218 899 3,326
Operating expenses............................ 14,941 14,606 20,638 4,525 54,710
Operating income.............................. 9,051 1,834 10,148 1,339 22,372
Balance Sheet Data:
Total current assets.......................... $162,975 $64,930 $135,621 $16,250 $379,776
Property, plant and equipment - net........... 11,994 5,252 15,632 857 33,735
Intangible assets - net....................... 299 30,794 351 2,214 33,658
Total assets.................................. 192,657 102,923 161,164 15,848 472,592
Other Data:
Capital expenditures.......................... $535 $590 $1,844 $183 $3,152
<CAPTION>
As of and for the year ended December 31, 1997
ASF CSEE US&S Other Total
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues...................................... $108,481 $75,681 $122,419 $11,644 $318,225
Gross profit.................................. 19,564 19,821 13,348 2,218 54,951
Depreciation ................................. 2,556 1,715 3,974 201 8,446
Amortization.................................. - 2,003 116 961 3,080
Operating expenses............................ 15,160 18,522 20,404 4,390 58,476
Operating income.............................. 4,403 1,299 (7,056) (2,171) (3,525)
Balance Sheet Data:
Total current assets.......................... $157,417 $65,122 $103,627 $17,239 $343,405
Property, plant and equipment - net........... 12,038 6,058 35,492 714 54,302
Intangible assets - net....................... 478 29,414 219 3,007 33,118
Total assets.................................. 188,324 102,656 151,259 14,927 457,166
Other Data:
Capital expenditures.......................... $3,039 $1,585 $2,299 $215 $7,138
</TABLE>
56
<PAGE>
Ansaldo Signal N.V.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
As of and for the year ended December 31, 1996
ASF CSEE US&S Other Total
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues...................................... $128,037 $55,213 $153,183 $17,067 $353,500
Gross profit.................................. 20,839 13,450 17,670 4,921 56,880
Depreciation ................................. 1,381 1,156 3,934 348 6,819
Amortization.................................. 1,429 1,271 836 1,015 4,551
Operating expenses............................ 20,552 12,017 27,810 31,828 92,207
Operating income.............................. 287 1,433 (10,139) (26,908) (35,327)
</TABLE>
In 1996, operating income included nonrecurring charges of $32,432 related
to reorganization costs ($17,288) and the write off of in process research and
development costs ($15,144).
13. Commitments and Contingencies
In the normal course of business, the Company is a party to claims related
to work performed for certain transit authorities and railroads. In the opinion
of management, ultimate settlement of these claims will not have a material
adverse effect on the results of operations or the financial position of the
Company.
14. Priority Shares and Option Agreement
The Company and ATR have entered into an Option Agreement (the "Option
Agreement") pursuant to which the Company has granted ATR an option to purchase
all of the authorized Priority Shares of the Company for a price equal to the
aggregate par value of such shares. The option granted to ATR pursuant to the
Option Agreement may only be exercised in the event that an unrelated party
acquires or announces a tender offer for 20% or more of the Company's
outstanding common shares.
In the event that ATR acquires the Priority Shares, ATR would be entitled
under the Company's Articles of Association to nominate the members of the
Supervisory Board and the Management Board. Such nominations would bind the
holders of common shares unless the holders of two-thirds or more of the common
shares voted to make nominations non-binding. If ATR acquires the Priority
Shares and still holds at least one-third of the outstanding common shares, it
will be able to make a binding nomination of the members of the Supervisory
Board and the Management Board. Pursuant to the Option Agreement ATR has agreed
that in the event it acquires the Priority Shares and subsequently its holdings
of common shares fall below 25% of the outstanding common shares, the Company
may repurchase the Priority Shares for no consideration.
15. Stock Option Plan
In 1996, the Management and Supervisory Boards of the Company approved a
Long-Term Stock Incentive Plan (the Incentive Plan). The Incentive Plan is
intended to (i) provide incentives and rewards to selected employees of the
Company; (ii) assist the Company in attracting, retaining and motivating
employees with experience and ability; and (iii) make the Company's compensation
program competitive with those of other employers. An aggregate of 1,000,000
common shares has been reserved for issuance under the Incentive Plan.
57
<PAGE>
Ansaldo Signal N.V.
Notes to Consolidated Financial Statements
The following table summarizes all stock option activity in 1998, 1997, and
1996.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- -------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year....... 168,500 $7.50 294,000 $7.50 - -
Granted ............................. - - 20,000 $7.50 294,000 $7.50
Forfeited ............................. (32,000) $7.50 (145,500) $7.50 - -
--------- --------- ---------
Outstanding at end of year............. 136,500 $7.50 168,500 $7.50 294,000 $7.50
========== ========== ==========
Options exercisable at year end........ 17,600 $7.50 17,600 $7.50 - -
========== ========== ==========
Weighted-average fair value of each
option granted during the year.... $ - $0.95 $3.92
========= ===== =====
</TABLE>
Of these options, 17,600 became exercisable in 1997 and 118,900 will become
exercisable in 1999.
In 1997, the Company adopted SFAS No. 123,"Accounting for Stock-Based
Compensation", and elected to account for compensation expense related to stock
options under the recognition and measurement provisions of Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees", (APB
25). Therefore, no compensation expense has been recognized for these options
since the options' exercise prices are greater than or equal to the market price
of the shares on the dates of grant. Had the Company elected to account for
stock-based compensation under the provisions of SFAS 123, net income would have
been a reduced by $178, $194 and $21 for the years ended December 31, 1998, 1997
and 1996, respectively. The corresponding effect on basic earnings per share and
diluted earnings per share would have been a reduction of $0.01, $0.01 and $0.00
for the years ended December 31, 1998, 1997 and 1996, respectively.
16. Goodwill, Technology And Other Intangible Assets
Goodwill, technology and other intangibles net of accumulated amortization
consisted of the following:
December 31,
-----------------------
1998 1997
Goodwill..................................... $ 30,297 $ 28,785
Technology................................... 12,487 11,675
Other........................................ 5,407 3,424
---------- ---------
48,191 43,884
Less Accumulated amortization............ (14,533) (10,766)
---------- ---------
$ 33,658 $ 33,118
========== =========
The amortization expense for the years ended December 31, 1998, 1997 and
1996 was $3,326, $3,080 and $4,551, respectively.
58
<PAGE>
Ansaldo Signal N.V.
Notes to Consolidated Financial Statements
17. Reorganization Costs
The Company recorded restructuring charges of $10,095 in December, 1996
related to the rationalization of certain of the operations of the individual
companies to take advantage of the Company's new world-wide organization. As of
December 31, 1998, $2,276 of this reserve remains for specific expenditures
which will occur in the first half of 1999. The original charge related
primarily to involuntary separation and severance benefits for displaced
employees. The involuntary separation and severance benefits principally related
to (i) US&S's management employees whose positions were eliminated and / or
chose not to relocate from US&S's former headquarters in Columbia, South
Carolina to Pittsburgh, Pennsylvania; and (ii) employees of ASF working at the
Company's facilities in Italy. Also included in the charge were costs related to
the elimination of redundant product lines.
Costs of $7,193 accrued and incurred in 1996 to effect a combination
accounted for by the pooling of interests method are also included as
reorganization charges. (See Note 1). During 1997 costs of $1,584 were reversed,
related to estimated costs which never materialized or were overestimated, (no
such costs remained as of December 31, 1997) which resulted in net cost of
$5,609 to effect the combination accounted for by the pooling of interests
method.
59
<PAGE>
Ansaldo Signal
<TABLE>
<CAPTION>
Exhibit
<S> <C>
1.1* Articles of Association of Ansaldo Signal, incorporated by reference to
Exhibit 3 of the Registrant's Registration No. 333-6034 on Form F4.
1.2* Specimen Common Share Certificate of Ansaldo Signal, incorporated by
reference to Exhibit 4 of the Registrant's Registration No. 333-6034 on Form F4.
2.1* Agreement and Plan of Merger, dated as of November 13, 1996, among Ansaldo
Signal, US&S, US&S Merger Sub and ATR (included as Annex A to the Proxy
Statement/Prospectus), incorporated by reference to Exhibit 2.1 of the
Registrant's Registration No. 333-6034 on Form F4. (Schedules to the
Agreement and Plan of Merger have been omitted in accordance with
Item 601(b)(2) of Regulation S-K and a summary of such schedules provided in
lieu thereof. The registrant undertakes to furnish supplementally to the
Commission, copies of any omitted schedule on the request of the Commission)
2.2* Escrow Agreement between CS, ATR and Paribas dated June 28, 1996 (English
translation), incorporated by reference to Exhibit 2.2 of the Registrant's
Registration No. 333-6034 on Form F4.
2.3* Put-Call Option Agreement between CS and ATR, incorporated by reference
to Exhibit 2.3 of the Registrant's Registration No. 333-6034 on Form F4.
2.4* Registration Rights Agreement, dated as of November 13, 1996, between
Ansaldo Signal and ATR, incorporated by reference to Exhibit 10.1 of the
Registrant's Registration No. 333-6034 on Form F4.
2.5* Preemptive Rights Agreement, dated as of November 13, 1996, between
Ansaldo Signal and ATR, incorporated by reference to Exhibit 10.2 of the
Registrant's Registration No. 333-6034 on Form F4.
2.6* Option Agreement, dated as of November 13, 1996, between Ansaldo Signal
and ATR, incorporated by reference to Exhibit 10.3 of the Registrant's
Registration No. 333-6034 on Form F4.
2.7* Services Agreement, dated as of October 1, 1996, between ATR and ASF
(English translation), incorporated by reference to Exhibit 10.4 of the
Registrant's Registration No. 333-6034 on Form F4.
2.8* Bonding Support Agreement, dated as of November 13, 1996, among
Finmeccanica, ATR and Ansaldo Signal, incorporated by reference to
Exhibit 10.5 of the Registrant's Registration No. 333-6034 on Form F4.
2.9* Credit Support Agreement, dated as of November 13, 1996, among
Finmeccanica, ATR and Ansaldo Signal, incorporated by reference to
Exhibit 10.6 of the Registrant's Registration No. 333-6034 on Form F4.
2.10 Amendments to Put-Call Option Agreement included as Exhibit 2.3 above
dated October 1998 and February 9, 1999.
2.11 Agreement, dated December 22, 1997, between Compagnia Finanziamenti e
Rifinanziamenti--Cofiri SpA and Ansaldo Signal, as amended April 23, 1998.
2.12 Lease, dated as of September 14, 1993, by and between Regional Industrial
Development Corporation of Southwestern Pennsylvania and Union
Switch & Signal Inc., as amended by Subordination, Attornment and Lease
Amendment Agreement, dated as of November 30, 1993 and Second Amendment of
Lease, dated as of May 31, 1998.
2.13 Consent of PricewaterhouseCoopers LLP.
3.0 The Registrant agrees to furnish a list of its subsidiaries including, as to
each subsidiary, its country or other jurisdiction of
incorporation or organization, its relationship to the Company
and the percentage of voting securities owned or other basis
of control by its immediate parent, if any, to the Securities
and Exchange Commission.
</TABLE>
* Previously filed, incorporated herein by reference.
60
<PAGE>
EXHIBIT 2.10
[LETTERHEAD OF ANSALDO TRASPORTI SpA]
AFC/98/246/BT/sb
Messrs.
LA COMPAGNIE DES SIGNAUX
29, Rue Galilee
75116 PARIS
FRANCE
Attention: M. Yazid Sabeg
Subject: Put-Call Option Agreement (Interest Version)
Gentlemen:
As you know, we have entered into a Put-Call Option Agreement (Interest Version)
on or about 11 December 1996 in conjunction with our exchange of shares of CS
Transport S.A. from you, under which you currently hold 2,000,000 shares in
Ansaldo Signal N.V. Such agreement gives you the right to require us to purchase
such shares from you at any time after June 30, 1998 until the "Expiration Date"
which is defined as June 30, 1999. You have agreed to extend the date when you
may first exercise such put until January 31, 1999. In consideration of your so
agreeing, we agreed that the "Exercise Price" in such agreement of FF
111.302.500 for all the shares covered by the put should be increased by FF
3.278.100 (being 5% interest on the Exercise Price multiplied by 215/365
representing the extended period).
To effect the foregoing agreement, the following amendments are hereby made to
our Put-Call Option Agreement (Interest Version):
Section 1:
In the definition of "Exercise Price", "the amount equal to FF 111.302.500" is
changed to "the amount equal to FF 114.580.600".
Section 3.1(a):
Is amended to read in full as follows: "At any time and from time to time from
and after January 31, 1999 and until 11:59 p.m., Paris time, on the Expiration
Date, Signaux may exercise Options, on any Business Day, for all or any part of
the shares of Common Stock subject hereto".
<PAGE>
All the dispositions and conditions existing in the Put-Call Option Agreement
(Interest Version) which are not modified directly or indirectly by the present
amendment remain unchanged.
Ansaldo Trasporti shall be liable for any necessary fiscal registration
Procedure and/or fiscal notification (if any) to be made in compliance with the
substantive laws of the State of New York or any other applicable law related to
the present amendment and shall pay all documentary, stamp or similar issue or
taxes, if any, that may be imposed with respect to the issue or delivery for
this amendment and shall indemnify and hold Signaux and its affiliates harmless
form any taxes, interest and penalties (except taxes, interest or penalties
imposed in France on the payment or accrual of the "Exercise Price") as a result
of the failure or delay by Ansaldo to omit any obligation of fiscal registration
or fiscal filing or to pay taxes.
To confirm that this letter accurately sets forth our mutual understanding,
please sign and return the enclosed copy.
Very truly yours,
Ansaldo Trasporti S.p.A.
By /s/ Illegible
-------------
Naples, October 6, 1998
Accepted and agreed:
LA COMPAGNIE DES SIGNAUX
By /s/ Illegible
-------------
Paris, October , 1998
<PAGE>
[LETTERHEAD OF ANSALDO TRASPORTI SpA]
Messrs.
LA COMPAGNIE DES SIGNAUX
29, Rue Galilee
75116 PARIS
FRANCE
Attention: M. Yazid Sabeg
Subject: Put-Call Option Agreement (Interest Version)
Gentlemen:
As you know, we have entered into a Put-Call Option Agreement (Interest Version)
on or about 11 December 1996 in conjunction with our exchange of shares of CS
Transport S.A. from you, under which you currently hold 2,000,000 shares in
Ansaldo Signal N.V. Such agreement gave you the right to require us to purchase
such shares from you at any time after June 30, 1998 until the "Expiration Date"
which is defined as June 30, 1999. As per our letter of October 6, 1998,
accepted by you, you have agreed to extend the date when you may first exercise
such put until January 31, 1999. In consideration of your so agreeing, we agreed
that the "Exercise Price" in such agreement of FF 111.302.500 for all the shares
covered by the put should be increased by FF 3.278.100 (being 5% interest on the
Exercise Price multiplied by 215/365 representing the extended period).
Further to our recent discussions, you have agreed to extend the date for the
first exercise of such put until December 30, 1999 and the Expiration Date to
June 30, 2000. In consideration of your so agreeing, we agree that the "Exercise
Price" as above increased to FF 114.580.600 for all the shares covered by the
put, shall be further increased by FF 5.242.455 (being 5% interest on the
Exercise Price as modified on October 6, 1998 multiplied by 334/365 representing
the extended period).
To effect the foregoing agreement, the following amendments are hereby made to
our Put-Call Option Agreement (Interest Version):
Section 1:
In the definition of "Exercise Price", "the amount equal to FF 111.302.500" ,
subsequently changed to the amount equal to FF 114.580.600, is changed to "the
amount equal to FF 119.823.055".
In the definition of "Expiration Date" Expiration Date shall mean June 30, 2000.
<PAGE>
Section 3.1(a):
Is amended to read in full as follows: "At any time and from time to time from
and after December 30, 1999 and until 11:59 p.m., Paris time, on the Expiration
Date, Compagnie des Signaux may exercise Options, on any Business Day, for all
or any part of the shares of Common Stock subject hereto".
All the dispositions and conditions existing in the Put-Call Option Agreement
(Interest Version) which are not modified directly or indirectly by the present
amendment remain unchanged.
However, we commit ourselves to request Finmeccanica to provide Compagnie des
Signaux with a new guarantee in the form of the existing guarantee for the
Exercise Price, and modified as per the terms and conditions of the present
letter, up to the Expiration Date, namely June 30, 2000.
The renewal of the existing guarantee to be given by Finmecanica shall be
provided to Compagnie des Signaux on or before the 28th of February 1999. In the
event such guarantee has not been issued at this latter date, Ansaldo
Trasporti's letter dated October 6, 1998 will remain in full effect and
Compagnie des Signaux will have the right to exercise its put option as per such
letter at any time from February 28, 1999, at an exercise price equal to FF
114.580.600, to be increased with 5% interest from January 31, 1999 until the
date of the exercise by Compagnie des Signaux of its put option.
Ansaldo Trasporti shall be liable for any necessary fiscal registration
procedure and/or fiscal notification (if any) to be made in compliance with the
substantive laws of the State of New York or any other applicable law related to
the present amendment and shall pay all documentary, stamp or similar issue or
taxes, if any, that may be imposed with respect to the issue or delivery for
this amendment and shall indemnify and hold Signaux and its affiliates harmless
form any taxes, interest and penalties (except taxes, interest or penalties
imposed in France on the payment or accrual of the "Exercise Price") as a result
of the failure or delay by Ansaldo to omit any obligation of fiscal registration
or fiscal filing or to pay taxes.
Ansaldo Trasporti represents that no filing or registration procedure is
necessary under the United States Securities Act of 1933 in connection with this
letter agreement extending the Put-Call Option Agreement (Interest Version). In
addition, Ansaldo Trasporti shall continue to be fully liable as set forth in
the Put-Call Option Agreement (Interest Version) for filing and/or registration
procedures to be made in compliance with the United States Securities Act of
1933.
In the event that evidence in support of the foregoing representation has not
been given to Compagnie des Signaux by April 30, 1999, Compagnie des Signaux
will have the right to exercise its put option at any time from April 30, 1999
at an exercise price equal to FF 114.580.600, to be increased with 5% interest
from January 31, 1999 until the date of the exercise by Compagnie des Signaux of
its put option.
<PAGE>
To confirm that this letter accurately sets forth our mutual understanding,
please sign and return the enclosed copy.
Very truly yours,
Ansaldo Trasporti S.p.A.
By /s/ Illegible
-------------
Naples, 27.01.1999
Accepted and agreed:
LA COMPAGNIE DES SIGNAUX
By /s/ Illegible
-------------
Paris, 9.02.1999
<PAGE>
EXHIBIT 2.11
[LETTERHEAD OF COFIRI]
22nd December 1997
To:
Ansaldo Signal N.V.
Strawinskylaan 3051
1077 ZX Amsterdam
The Netherlands
Dear Sirs,
We are pleased to confirm that we are prepared to place the following facility
at your disposal on the terms and conditions contained herein.
1) Lender
Compagnia Finanziamenti e Rifinanziamenti - Cofiri SpA- Amsterdam
Branch.
2) Borrower
Ansaldo Signal N.V.
3) Amount
The principal amount outstanding hereunder shall be USD 30,000,000 (the
"Facility Amount")
4) Drawings
Upon the satisfaction of conditions contained in article 8) of this
Agreement, the facility may be drawn down in one or more instalments
(the "Advances"), by you giving us not less than two business days
notice prior to the date on which the Advance is to be made (in this
Facility Agreement, business day shall mean a day on which the London
and New York financial markets are open for business and additionally,
when a payment is to be effected, the banks in Amsterdam and in the
centre where such payment is to be made are also open for business).
The notice of drawing shall be confirmed immediately by telex and shall
specify the amount of such Advance (not less than USD 10,000,000) and
the first interest period selected, which may be of one, two, or three
months and precise disposal instructions in respect thereof.
<PAGE>
5) Interest and interest period
Each Advance shall have successive interest periods. Each interest
period for each Advance will commence on its Drawdown Date or on the
expiry of the preceding interest period relative thereto. The Borrowers
may select the duration of each interest period which may be of one,
two, or three months, with three working days prior written notice. If
the Borrower fails to select a duration for any interest period, such
interest period shall be of one month. No interest period shall expire
after June 30th, 1998. Interest will be calculated on each interest
period at a rate per annum determined by the Lender to be the aggregate
of (i) the margin of 1,00 per cent annum and (ii) the offered rate in
the London Interbank Market (LIBOR) (rounded off to the fifth decimal,
if necessary) for deposits in USD, for a duration equal to the length
of the relevant interest period selected, at or about 11.00 a.m.
(London time) on the second business day before the beginning of such
interest period, as displayed on page "FRBD" on the Reuters Service (or
such other page as may replace page "FRBD" on that service or such
other service as may be nominated by the British Bankers' Association
as the information vendor for the purpose of displaying British
Bankers' Association Interest Settlements Rates for deposits in USD).
Forthwith upon the determination by the Lender of the rate of interest
applicable to any Interest Period the Lender shall notify the Borrower
thereof and the certificate of the Lender as to the rate of interest
applicable to any Interest Period shall be conclusive in the absence of
manifest error. Interest will be payable, without deduction of any
nature, at the end of each interest period.
Interest will accrue on the actual number of days elapsed and shall be
calculated on the basis of a year of 360 days.
If any interest payment date would otherwise fall on a day which is not
a business day in New York City, London or Amsterdam it shall be
postponed to the next day which is a business day in New York City,
London and Amsterdam.
6) Payments
All payments shall be made without set-off or counterclaim and free of
and without deduction for any taxes, levies, imposts, duties, charges,
fees, withholdings, restrictions or conditions of any nature. If at any
time any applicable law, regulation or regulatory requirement of any
governmental authority, monetary agency or central bank requires any
such deduction to be made from any such payment, then the sum due from
the Borrower to the Lender in respect of such payment shall be
increased to the extent necessary to ensure that, after the making of
such deduction, the Lender receives a net sum equal to the sum which it
would have received had no such deduction required to be made.
Furthermore, the Borrower will indemnify the Lender against any loss or
cost incurred by reason of any failure on its part to make any such
deduction or withholding.
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<PAGE>
7) Repayment
Advances under the present Facility Agreement shall be repaid on the
earlier of the two following dates:
- the date on which the medium long term Facility of USD 80 million
(see under clause 8 below) is drawn down,
- June 30th, 1998.
8) Condition Precedent
The Facility under this Agreement shall become available to the
Borrower upon receipt:
a) by the Lender of the copy of the present letter duly signed on
behalf of the Borrower for agreement;
b) by the Lender of a Comfort Letter - a copy of which is
attached hereto as Annex 1 - released by Ansaldo Trasporti
SpA; the Borrower shall provide the Lender with a Comfort
Letter - in the form attached hereto as Annex 2 - released by
Finmeccanica SpA;
c) by Cofiri SpA Rome of an irrevocable appointment as Arranger
for a 3/5 years committed Facility up to an aggregate amount
of USD 80 million, including a USD 60 million multicurrency
credit line and a line of USD 20 million for issuance of
stand-by and commercial letters of credit.
9) Undertakings
The Borrower undertakes with the Lender that, from the date of this
Agreement and so long as any monies are owing thereunder, it will:
a. promptly inform the Lender of any occurrence of which it
becomes aware which might adversely affect its ability to
perform its obligations under this Agreement and, without
limiting the generality of the foregoing, will inform the
Lender of any Event of Default or any event which with the
giving of notice or lapse of time or both would constitute an
Event of Default forthwith upon becoming aware thereof;
b. send to the Lender a copy of every balance sheet, profit and
loss account, report, notice or public document of the kind,
in each case at the time of issue thereof or (in the case of
audited financial statements) as soon as practicable.
10) Events of Default
There shall be an Event of Default if:
a. the Borrower fails to pay any sum payable by it under this
Agreement on its due date; or
b. the Borrower commits any breach of or omits to observe any of
its obligations or undertakings under this Agreement (other
than failure to pay any sum when due) and in respect of any
such breach or omission which in the opinion of the Lender is
capable of remedy, such action as the Lender may require shall
not have been
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<PAGE>
taken within 15 days of the Lender notifying the Borrower of
such default and of such required action; or
c. any representation or warranty made or deemed to be made by or
in respect of the Borrower pursuant to this Agreement or in
any notice, certificate or statement referred to in or
delivered under this Agreement is or proves to have been
incorrect in any material respect; or
d. any indebtedness of the Borrower is not paid when due or, by
reason of breach or default under the terms of any instrument
evidencing or guaranteeing the same on the part of the
Borrower, becomes due or capable of being declared due prior
to the date when it would otherwise have become due whether or
not such breach or default shall be waived by the person to
whom the same is payable, or any guarantee or indemnity given
by the Borrower in respect of indebtedness is not honoured
when due and called upon; or
e. the Borrower suspends or ceases or threatens to suspend or
cease to carry on its business as at the date of this
Agreement or enters into any unrelated business; or
f. any other event occurs or circumstance arises which, in the
opinion of the Lender, is likely materially and adversely to
affect the ability of the Borrower to perform all or any of
its respective obligations under or otherwise to comply with
the terms of this Agreement; or
g. it becomes unlawful for the Borrower to perform any or all of
its obligations under this Agreement; or
h. Ansaldo Trasporti SpA ceases to own (directly or indirectly)
at least 51% of the issued share capital of the Borrower.
The Lender may, at any time after the occurrence of an Event of Default
by notice to the Borrower declare that the Advances and all interest
and all other sums payable under this Agreement have become due and
payable, whereupon the same shall immediately, or in accordance with
such notice, become due and payable.
11) Indemnities
The Borrower shall pay to the Lender on demand an amount sufficient to
indemnify the Lender, without prejudice to any of its other rights
under this Agreement, against any loss or expense which the Lender
shall certify as sustained or incurred by it as a consequence of (i)
any default in payment by the Borrower of any sum under this Agreement
when due, (ii) the occurrence of any Event of Default.
The Borrower shall pay all stamp, documentary, registration or other
duties of the kind (including any duties payable by the Lender) imposed
on or in connection with this Agreement and shall indemnify the Lender
against any liability arising by reason of any delay or omission by the
Borrower to pay such duties.
12) Increased Costs
If, by reason of (a) any change in law or in its interpretation or
administration and/or (b)
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<PAGE>
compliance with any request from or requirement of any monetary of
fiscal agency or central bank or authority of any nature without
limitation, the Lender incurs a cost as a result of its having entered
into and/or performing its obligations under this Agreement, then such
increase in costs as the Lender shall certify to the Borrower shall be
for the Borrower's account.
The Lender will forthwith, after having been aware of such costs,
advise the Borrower of the application of any such increase.
The Lender retains the option, in the occurrence of any of the above
and upon its first written demand, to request the repayment of the full
amount of the principal, interest and any other cost incurred by us
under the Facility.
13) Law and jurisdiction
This Agreement shall be governed by and construed in accordance with
the laws of the Netherlands.
Nothing contained in this Clause shall limit the right of the Lender to
take proceedings against the Borrower in any other court of competent
jurisdiction, nor shall the taking of proceedings in any one or more
jurisdictions preclude the taking of proceedings in any other
jurisdiction, whether concurrently or not.
14) Miscellaneous
Every notice, request, demand or other communication shall be sent:
1. to the Borrower at:
Ansaldo Signal N.V.
Strawinskylaan 3051
1077 ZX Amsterdam
2. to the Lender at:
Cofiri SpA
Amsterdam Branch
Strawinskylaan 3105 7th floor
1077 ZX Amsterdam
or such other address or telex number as is notified by one party to
the other party under this Agreement.
No failure or delay on the part of the Lender to exercise any power,
right or remedy under this Agreement shall operate as a waiver thereof,
nor shall any single or partial exercise by the Lender of any power,
right or remedy preclude any other or further exercise thereof or the
exercise of any other power, right or remedy. The remedies provided in
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<PAGE>
this Agreement are cumulative and are not exclusive of any remedies
provided by law.
All certificates, instruments and other documents to be delivered under
or supplied in connection with this Agreement shall be in English or
Italian.
No amendment to this Agreement shall be effective unless and until made
in writing and signed by the Lender and the Borrower.
Yours faithfully;
Agreed by Ansaldo Signal N.V.: COMPAGNIA FINANZIAMENTI E
RIFINANZIAMENTI COFIRI SpA
Amsterdam Branch
/s/James Sanders /s/ Illegible
ABM Trustcompany (Nederland) B.V.
/s/ Illegible
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<PAGE>
[Letterhead of COFIRI]
23 April 1998
0528/CH
Ansaldo Signal N.V.
Schiphol Boulevard 267
1118 DW Schiphol
The Netherlands
Re: USD 30,000,000 Credit Facility Agreement (the "Loan Agreement") dated
22nd December 1997; Ansaldo Signal N.V. - Borrower; Cofiri S.p.A.
Amsterdam Branch
- - Lender
Dear Sirs:
With reference to the captioned Facility and following your letter dated 7th
April 1998, we are pleased to confirm you that the "Facility Amount", as defined
in Clause 3 of the Loan Agreement, is increased from USD 30 million to USD 50
million, subject to receipt by the Lender of:
a) a copy of this letter duly signed by the Borrower;
b) a letter of Acknowledgment released by Ansaldo Trasporti S.p.A., in the
form attached hereto as annex 1.
All other terms and conditions stated in the Loan Agreement remain in full force
and effect.
Yours faithfully,
COMPAGNIA FINANZIAMENTI ABN Trustcompany (Nederland) B.V.
E REFINANZIAMENTI COFIRI S.p.A.
Amsterdam Branch
/s/ Illegible /s/ Illegible
Encl. /s/ James N. Sanders
23/4/98
<PAGE>
09/07/93 EXHIBIT 2.12
LEASE
THIS LEASE, made as of the 14th day of September 1993, by and between
REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA, a
Pennsylvania nonprofit corporation having its principal office in the city of
Pittsburgh, Allegheny County, Pennsylvania, hereinafter called "Lessor", and
UNION SWITCH & SIGNAL INC., a Delaware corporation, having its principal office
in the City of Columbia, South Carolina, hereafter called the "Lessee."
WHEREAS, Lessor is the owner of the Building and Property hereinafter
described, which are located in the Pittsburgh Technology Center in the 4th Ward
of the City of Pittsburgh; and
WHEREAS, Lessee desires to lease said Building and Property from
Lessor, to be operated as a Systems and Research Center;
NOW THEREFORE, WITNESSETH THAT, Lessor and Lessee, intending to be
legally bound, do hereby agree as follows:
SECTION 1
PREMISES AND TERM
That in consideration of the rents hereinafter agreed to be paid by
Lessee to Lessor, and in consideration of the covenants of the respective
parties hereto to be performed at the time and in
<PAGE>
the manner hereinafter provided, Lessor does hereby lease and demise unto
Lessee, and Lessee does hereby hire and take from Lessor, a building containing
173,316 square feet of space (the "Building"), and all mechanical, electrical,
lighting, plumbing and HVAC systems and fixtures attached thereto (the
"Fixtures") and the real property (the "Property") on which the Building is
located in the 4th Ward of the City of Pittsburgh, Allegheny County,
Pennsylvania, and more particularly described on Exhibit "A" attached hereto
(the Building, the Fixtures and the Property are hereinafter collectively
referred to as the "Premises"). In addition to the Premises, this Lease shall
also cover, a parking garage, surface parking and related facilities (the
"Parking Facilities) all as leased to Lessor by Urban Redevelopment Authority of
Pittsburgh ("URA") pursuant to a Lease substantially in the form attached hereto
as Exhibit B and made a part hereof (the "Parking Lease"). The use of the
Parking Facilities and other matters relating to the Parking Facilities shall be
as set forth in the Parking Lease.
The term of this Lease (the "Term") shall extend for a twenty (20) year
period which period shall commence the date upon which the Building is completed
and a certificate of occupancy is issued (the "Commencement Date"). Lessor shall
use its best efforts to cause the Commencement Date to be on or before January
1, 1995. Lessor and Lessee agree that following determination of the
Commencement Date, they will enter into a written agreement evidencing the
Commencement Date. Lessee shall be entitled to occupancy on the Commencement
Date.
Any holdover by Lessee following the Term of this Lease for any renewal
term shall, unless Lessor agrees otherwise in writing, be a holdover on a
month-to-month basis only at the same rental paid in the last month of the Term.
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<PAGE>
SECTION 2
RENT AND ADDITIONAL RENT
A. RENT
As annual fixed rental for the Premises, Lessee shall pay to Lessor at
its office in the City of Duquesne at One Library Place, Duquesne, Pennsylvania
15110, a sum equal to the monthly mortgage debt service related to the Premises
multiplied by 1.1 (the excess of said sum over the monthly mortgage debt service
is hereinafter called the "Debt Service Coverage") plus the sum of $7,559 (the
"Parking Rent") payable in advance on the first business day of each calendar
month beginning on the 1st day of the fifth full month following the
Commencement Date (the "Fixed Rent") . The Debt Service Coverage shall be fixed
as of the Commencement Date and remain the same throughout the Term or any
renewal Term. Notwithstanding the foregoing, the Parking Rent will not be
payable unless and until a certificate of occupancy has been issued for the
Parking Facilities.
Lessee hereby covenants and agrees to pay the Fixed Rent hereby
reserved as and when due. Lessee further covenants and agrees to pay all sums of
money, charges or other amounts required to be paid by the Lessee to the Lessor
or to another person under this Lease (the "Additional Rent") in addition to the
Fixed Rent provided for herein. Additional Rent shall also include the
assumption by Lessee of all obligations including the maintenance obligations
imposed on the lessee by URA pursuant to the Parking Lease and all costs of
operating the parking facilities. The Fixed Rent and Additional Rent are
sometimes hereinafter collectively referred to as the "Rent." Lessee shall be in
compliance with this Lease if, being directed in writing to do so, it pays the
Rent, exclusive of the Parking Rent, directly to Dollar Bank, the
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<PAGE>
holder of the first mortgage on the Premises, as and when due. Further,
Lessee shall be in compliance with this Lease if it pays the Parking Rent to URA
or its designee as may be directed in writing by URA.
B. REAL ESTATE TAXES
Lessee shall pay when due and before the same become delinquent, all
real estate taxes attributable to the Premises that may be assessed and levied
during theTerm hereof. Lessor will cooperate with Lessee should Lessee desire to
contest any future assessment or any such taxes at Lessee's cost and expense.
Real estate taxes for the first year of the Term hereof and the last year of the
Term, and for any year in which this Lease is prematurely terminated, as
permitted herein, shall be prorated between Lessor and Lessee. If Lessee fails
to pay such real estate taxes when due, Lessor may pay the taxes and interest
and penalties due thereon, provided however, Lessor shall, only have the right
to pay such taxes when Lessee is contesting the taxes if (i) Lessee has not paid
such taxes under protest; (ii) Lessor, in its sole discretion, finds that the
Premises or any part thereof is in danger of being sold, forfeited, lost or
interfered with; or (iii) Lessee has not provided any security required under
its contest proceedings. In such event, Lessee shall reimburse Lessor for the
amount of such taxes, interest and penalties thereon, and Lessor's expenses
relating thereto, as Additional Rent with interest thereon at the prime rate
announced from time to time by Pittsburgh National Bank plus two percent (2%)
(the "Late Rate") until payment is fully made to Lessor. Notwithstanding
anything else contained in this Lease or any related documents, Lessee will not
seek an assessment of the Premises for tax purposes in an amount less than
$3,916,600.
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<PAGE>
If at any time during the Term hereof the methods of taxation
prevailing at the commencement of the Term hereof shall be altered so that in
lieu of or as a supplement to or a substitute for the whole or any part of the
real estate taxes or assessments now levied, assessed, or imposed upon the
Premises, there shall be levied, assessed, or imposed any form of assessment,
tax, license fee, license tax, business license fee, business license tax,
excise tax, commercial rental tax, levy, charge, penalty, or other imposition by
the federal or state government, any political subdivision, municipality, school
district, or other taxing body, then Lessee shall pay, as the case may be, all
such taxes, assessments, levies, impositions and charges or the part thereof so
measured or based, which are in lieu of or a substitute for, the whole or any
part of the real estate taxes or assessments now levied, assessed or imposed on
the Premises. Upon failure of the Lessee to pay the same when due, Lessor shall
have the right to pay the same and to collect the amount thereof from Lessee as
Additional Rent with interest thereon at the Late Rate. Lessor shall promptly
submit to Lessee all real estate or other applicable tax notices when they are
received from, the taxing bodies. Lessee shall pay all taxes or, or before the
payment due date, and at Lessor's request shall provide the Lessor with evidence
of payment's ten (10) days prior to the date on which they would become
delinquent.
C. ESCALATION OF FIXED RENT
Commencing January 1, 1998 and thereafter, the Fixed Rent may be
increased or decreased based on actual increases or decreases in variable
interest rate mortgage loans obtained to finance the construction of the
Premises. At the beginning of each calendar year commencing January 1, 1998 and
at January 1 of each succeeding year throughout the Term, Lessor will calculate
the Fixed Rent based on the variable interest rates of the preceding calendar
year, ie.
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<PAGE>
January 1 to December 31. At the end of each lease year, the Fixed Rate shall be
adjusted upward or downward depending upon the actual interest charged during
the year, and Lessor and Lessee shall pay to the other, as appropriate, any
excess rent paid or any shortage due within fifteen (15) days of Lessor's notice
to Lessee. Lessor shall provide written notice to Lessee within fifteen days of
the end of the lease year and will provide to Lessee sufficient evidence of the
interest paid. Pursuant to the loan documents given to evidence and secure the
first mortgage loan to Dollar Bank, Lessee is given the option to elect, from
time to time, a fixed rate or a variable rate. Lessee hereby agrees to give
Lessor notice of any such elections at the same time said elections are
forwarded to Dollar Bank.
SECTION 3
UTILITIES
Lessee shall pay as the same become due and payable all charges for
gas, electric, water and other utilities used by it or in connection with the
Premises. Upon failure of the Lessee to pay the same when due, Lessor shall have
the right to pay the same and collect the amount thereof from Lessee as
Additional Rent with interest thereon at the Late Rate.
SECTION 4
USE
Lessee shall use and occupy the Building as a Systems and Research
Center for research, development and education activities as well as related
support activities, all in connection with its business of designing,
manufacturing, installing and servicing signaling and control
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<PAGE>
equipment and systems for all branches of the transportation industry. The
Building is not to be used for retail sales or displays for such purposes.
Lessee shall not use or occupy the Building for any other purpose without prior
written consent of Lessor.
Lessee will, at Lessee's expense, observe and comply with all laws,
orders, regulations, rules and requirements of Federal, State and local
governments or any subdivision, agency or authority thereof, applicable to the
Premises and Lessee's business contained therein. Lessee will indemnify and save
harmless Lessor from any liability, damage or expense (including attorneys' fees
and expenses) arising from Lessee's failure to comply with this Section 4.
Lessee acknowledges and agrees that, except as expressly set forth in
this Lease, there have been no representations or warranties made by or on
behalf of Lessor with respect to the Premises or the Building. The taking of
possession of the Building by Lessee shall establish that the Premises and the
Building were at such time in satisfactory condition, order and repair.
SECTION 5
ALTERATIONS
Prior to commencement of any material alterations or additions to any
portion of the Premises, Lessee shall furnish to Lessor plans and specifications
of the work to be undertaken and information as to the equipment to be
installed, and obtain Lessor's prior written approval of the work and equipment,
which approval will not be unreasonably withheld or delayed. Lessee shall
endeavor to cause any interior work undertaken by Lessee to be accomplished by
such labor as will not given rise to labor disputes affecting the Building or
the Pittsburgh Technology Center.
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<PAGE>
Lessee shall make no modifications to any parts of the structure of the
Building without the prior written approval by Lessor, which approval will not
be unreasonably withheld or delayed. This shall be deemed to include the floor
slabs, perimeter walls interior fire barrier walls and the roof of the Building.
Suspensions on or from the roof structure are prohibited Without an engineering
report showing adequate capacity.
Prior to Lessee performing any construction or other work on or about
the Premises for which a lien could be filed, Lessee shall enter into a written
"no lien" agreement with the general contractor who is to perform such work, and
such written agreement shall be filed and recorded, in accordance with the
Mechanics' Lien Law of Pennsylvania, prior to the commencement of such work.
Notwithstanding the foregoing, if any mechanics' or other lien shall be filed
against the Premises or the Building purporting to be for labor or material
furnished or to be furnished at the request of the Lessee, then Lessee shall at
its expense cause such lien to be discharged of record by payment, bond or such
other indemnity reasonably satisfactory to Lessor, within ten (10) days after
the filing thereof. If Lessee shall fail to cause such lien to be discharged of
record within such ten (10) day period, or, if such lien is contested by Lessee,
and Lessee fails to bond such lien or provide adequate indemnity reasonably
satisfactory to Lessor, Lessor may cause such lien to be discharged by payment,
bond or otherwise, without investigation as to the validity thereof or as to any
offsets or defenses thereto, and Lessee shall reimburse Lessor for all amounts
paid and costs incurred, including reasonable attorneys, fees, in having such
lien discharged of record as Additional Rent with interest thereon at the Late
Rate.
All alterations, additions or improvements to the Building made by
Lessee pursuant to this Section 5 hereof, shall become a part of the Building
when made and shall remain upon and
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<PAGE>
be surrendered with the Building at the end of the Term or any renewal thereof
unless Lessor, at the time of approval of the installation of such alterations,
additions and improvements, directed Lessee, at the end of the Term, to remove
such alterations, additions and improvements, in which case the Lessee shall
promptly remove the same. If Lessee fails to notify Lessor of its intention to
install alterations, additions and improvements, Lessee shall be obligated to
remove the same at the end of the Term or any renewal thereof. Lessee shall
repair, at its own expense, any damage to the Premises caused by the removal
thereof and shall restore the Premises to at least as good condition as prior to
the installation of such alterations, additions or improvements, ordinary wear
and tear excepted.
Lessee may bring such equipment, furniture, trade fixtures or other
personal property into the Building as may be necessary for its business
provided, however, Lessee shall repair any physical damage occasioned by
installation of any such property. Should Lessee's personal property be of an
unusual size, type, weight or with installation characteristics so as to
adversely affect the Building, Lessor reserves the right to restrict the use of
the same in said Building. Lessor will rely on Lessee's engineering data in
determining whether or not the Building will be adversely affected by the
personal property, and said engineering data shall in delivered to Lessor prior
to the installation of any personal property that may adversely affect the
Building. If not then in default, Lessee shall have the right at the end of the
Term to remove any equipment, furniture, trade fixtures or other personal
property placed in the Building by Lessee, provided that Lessee promptly repairs
any physical damage to the Premises caused by such removal. Any personal
property remaining on the Premises after the expiration of the Term of this
Lease shall
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<PAGE>
be deemed to be abandoned by Lessee, and may be disposed of by Lessor without
liability to Lessee.
In every such instance where Lessee (i) removes alterations,
improvement or additions, (ii) installs trade fixtures, furniture, equipment or
other personal property, (iii) removes any trade fixtures, furniture, equipment
or personal property, or (iv) fails to remove any personal property at the end
of the Term or the earlier termination of this Lease, Lessee shall repair any
physical damage occasioned by such activity. In every instance that Lessee does
not so repair the Premises, Lessor may repair the same and Lessee will
immediately reimburse Lessor for such costs with interest at the Late Rate.
SECTION 6
SIGNAGE
Lessor hereby agrees that Lessee May install or post any exterior signs
on or over the Premises as permitted in the Final Land Development Plan or other
rules of the Pittsburgh Technology Center.
Lessee may also install at Lessee's own cost and expense an appropriate
sign on the Premises or Building referring to Lessee's business or services;
provided that the size, type and location of said sign or signs shall be in
compliance with all applicable laws; rules and regulations affecting the
Property and Building including any rules, regulations or restrictive covenants
applicable to the Pittsburgh Technology Center.
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<PAGE>
SECTION 7
MAINTENANCE
Lessee shall make all repairs to the Premises, including repairs to and
replacement of, if necessary, air conditioners and heating units, plumbing and
electrical fixtures, roof, floors and walls, doors, locks and windows,
maintenance of the sidewalks, driveways, parking areas and other areas of the
Property including grass and landscape maintenance and snow removal, as well as
all repairs and replacement, if necessary, of any nature to any part of the
Building necessitated by the use, act or neglect of Lessee. Lessee shall be
responsible to develop and to implement a program of regular inspection and
maintenance as required of the plumbing and electrical fixtures that is
satisfactory to Lessor. Lessee shall be responsible for all HVAC equipment
maintenance and will contract with a reputable firm in the area for such
purpose, such firm to he mutually satisfactory to Lessor and Lessee. Lessee
shall obtain the written consent of Lessor prior to making any repairs to the
roof, walls or other structural elements of the building, except in case of
emergency repairs required to prevent property loss or personal injury, in which
case, Lessee shall promptly notify Lessor of such repairs, and Lessor shall have
the right to inspect such repairs to insure that they are performed properly and
to require correction by Lessee if necessary.
The Pittsburgh Technology Center Association shall assume
responsibility for maintenance of the sidewalks, driveways, parking areas and
other areas of the Property including grass and landscape maintenance and snow
removal, and the employees and agents of the
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<PAGE>
Association shall have access to the Property for said purposes. To the extent
the Association performs said maintenance, Lessee is relieved of doing so.
If Lessee refuses or neglects to make such repairs, or fails to
diligently prosecute the same to completion, after written notice from Lessor of
the need therefor, and after the expiration of a reasonable time thereafter in
which to make the same, except in the event of emergency, in which case no
notice and cure period shall be required, Lessor may make such repairs at the
expense of Lessee and such expense shall be collectible as Additional Rent with
interest thereon at the Late Rate.
Lessee shall keep the property and the exterior and interior of the
Building in an orderly, clean and safe condition, and shall provide for its own
janitorial services and rubbish disposal. Lessee will keep the Premises in such
condition as the Board of Health and the Board of Fire Underwriters having
authority in such matters may lawfully require.
SECTION 8
ASSIGNMENT AND SUBLETTING
Lessee shall not, either voluntarily or by operation of law, assign,
transfer, mortgage or otherwise encumber this Lease or sublet the Building or
permit any part thereof to be used or occupied by anyone other than Lessee or
`Lessee's employees, or invitees without prior written consent of Lessor in each
instance.
SECTION 9
RIGHT OF ENTRY
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Lessor, its employees and agents, shall have the right to enter the
Premises at all reasonable business hours with prior reasonable notice (except
for emergencies) for the purpose of examining or inspecting the same, showing
the same to prospective purchasers, mortgagees or tenants of the Premises, or
making repairs, alterations or additions that Lessee fails to make in accordance
with the terms of this Lease. If representatives of Lessee shall not be present
to open and permit entry into the Premises in an emergency, Lessor may enter by
means of a master key or forcibly without liability to Lessee and without such
entry constituting an eviction of Lessee or termination of this Lease.
SECTION 10
SURRENDER
Lessee shall surrender the Premises to Lessor at the end of the Term
hereof, without notice of any kind, and Lessee waives all right to any such
notice as may be provided under any laws now or hereafter in effect in
Pennsylvania, including the Landlord and Tenant Act of 1951, as amended. At the
end of the Term of this Lease, Lessee shall surrender the Premises to Lessor,
together with all alterations, additions and improvements thereto that Lessor
has not designated to be removed, in broom clean condition and in good order and
repair except for ordinary wear and tear.
SECTION 11
INDEMNIFICATION
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Lessee shall indemnify, hold harmless and defend Lessor from and
against any and all costs, expenses (including reasonable counsel fees),
liabilities, losses, damages, suits, actions, fines, penalties, claims or
demands of any kind and asserted by or on behalf of any person or governmental
authority, arising in connection with the Premises or out of Lessee's use and
occupancy thereof (except those arising out of or related to conditions existing
at, on or under the Premises prior to the Commencement Date and/or the
negligence or wilful misconduct of Lessor).
SECTION 12
INSURANCE
Lessee will, at Lessee's cost and expense, maintain with financially
responsible insurance companies reasonably acceptable to Lessor during the Term
of this Lease, comprehensive public liability insurance with minimum combined
single limits of at least $10,000,000 for bodily injury liability and property
damage liability or such other amounts as Lessor may from time to tine require.
Lessee shall, at Lessee's sole cost and expense, keep the insurable portions of
the Premises insured against loss or damage on an "all risk" basis with all
standard extended coverages including vandalism and malicious mischief in such
qualified insurance company or companies reasonably acceptable to Lessor. Such
insurance policy or policies shall cover insurable portions of the Premises in
an amount not less than the full current replacement value of the insurable
portions of the Premises including increased cost of construction to comply with
governmental regulations and requirements without deduction for depreciation.
All of the said insurance policies shall name Lessor as additional insured and
as loss payee. Holders of all
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mortgages on the Premises (the "Mortgagees") shall be listed as mortgagees as
well as additional insureds as their interests may appear.
All such policies shall be procured or caused to be procured for
periods of not less than one (1) year. Each such policy shall provide that the
policy cannot be canceled or the coverage thereunder reduced without thirty (30)
days' prior written notice to Lessor. Lessee shall deliver to Lessor
certificates of insurance evidencing the insurance maintained or caused to be
maintained by Lessee pursuant hereto immediately upon receipt from the insurance
company or companies, and all new and renewal certificates replacing any such
policies that expire during the Term shall be delivered to Lessor by the
insurance company pursuant to the terms of each insurance policy at least thirty
(30) days before the date of expiration of any such policy. The Lessee does
hereby covenant for itself and its assigns, that it will not carry on upon the
Premises, or permit to be carried on, any business or trade, or do or permit to
be done anything which may increase the fire or public health hazard above that
incidental to the ordinary conduct of the business specified herein. Upon
request of Lessor or any of the Mortgagees, Lessee will provide copies of any or
all insurance policies affecting the Premises.
SECTION 13
DAMAGE, DESTRUCTION OR CONDEMNATION OF LEASED PREMISES
If the Premises are partially damaged by fire or other casualty whether
or not caused by Lessee's negligence or intentional act, the damage shall be
promptly repaired by and at the expense of Lessee and there will be no
apportionment of Rent. Lessee agrees to repair such
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damage within a reasonable period of time, provided that insurance proceeds
collected by Lessor on account of such fire or casualty are made available to
Lessee for such repairs.
If the Building is totally damaged or is rendered wholly untenantable
by fire or other casualty, and the Mortgagees will not permit proceeds of
insurance to be used to rebuild, then this Lease shall terminate on the third
day after notice is given to Lessee that the insurance proceeds will be used to
reduce the principal of the mortgages. Otherwise, Lessor shall, as soon as
reasonably possible, but within thirty (30) days after such fire or other
casualty, give Lessee written notice of whether Lessor intends to rebuild the
Building. If Lessor decides not to rebuild, Lessee, if permitted by the
Mortgagees, may elect to rebuild and may use the proceeds of insurance to do so.
In such event, Lessee shall notify Lessor within thirty (30) days after Lessee's
receipt of notice from Lessor regarding the state of reconstruction whether
intends to rebuild. If Lessee does not intend to rebuild, all insurance proceeds
shall be used to repay the mortgages and any balance shall be paid to Lessor,
and thereupon the Term of the Lease shall expire by lapse of time upon the third
day after such notice is given by Lessee, and Lessee shall vacate the Premises
and surrender the same to Lessor. If Lessee elects to rebuild, such rebuilding
shall comply with all requirements of the Mortgagees and such other requirements
as Lessor may establish including an escrow fund of the insurance proceeds to be
controlled by Lessor during construction and procurement of builders risk and
general liability insurance by Lessee in amounts determined by Lessor.
Additionally, Lessee shall comply with all requirements under Section 5.
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In no event will Lessor be liable for damage to Lessee's personal
property, equipment, trade fixtures and leasehold improvements on the Premises
or for loss suffered by the business of Lessee.
If the whole of the Premises shall be condemned or taken either
permanently or temporarily for any public or quasi public use or purpose, then
in that event, the Term of the Lease shall cease and terminate from the date of
title vesting in such proceeding or purchase and Lessee shall have no claim
against Lessor for the value of the unexpired Term of said Lease, and shall
release unto Lessor any such claim it may have against the condemnor for such
value. In the event only a portion of the Building be so taken, Lessor may
terminate this Lease from the date of title vesting in such proceeding or
purchase, or Lessor may elect to repair and restore, at its own expense, the
portion not taken and thereafter the Rent shall be reduced proportionately to
the portion of the Building taken, provided, however, the rent is always
sufficient for Lessor to pay the Mortgagees. If Lessor elects not to rebuild,
Lessee may elect, by providing thirty (30) days' written notice to Lessor of its
intention to rebuild following receipt of notice from Lessor, to rebuild in
accordance with the provisions set forth above relating to damage and
destruction, if the Mortgagees permit Lessee to use the proceeds of condemnation
to rebuild. If Lessor or Lessee elect to repair and restore the Building, Rent
shall not abate during the reconstruction.
SECTION 14
DEFAULT
A. The occurrence of any of the following shall constitute a
material default and breach of this Lease by Lessee:
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(i) A failure by Lessee to pay the Rent reserved herein,
or to make any other payment required to be made by
Lessee hereunder, where such failure continues for
ten (10) days after written notice thereof. Any Rent
payable to Lessor which is not paid when due shall
bear interest at the Late Rate until paid;
(ii) A failure by Lessee to observe and perform any other
provisions or covenants of this Lease or the Parking
Lease to be observed or performed by Lessee, where
such failure continues for thirty (30) days after
written notice thereof from Lessor to Lessee
provided, however, that if the nature of the default
is such that the same cannot reasonably be cured
within such thirty (30) day period, Lessee shall not
be deemed to be in default if Lessee shall within
such period commence such cure and thereafter
diligently prosecute the same to completion;
(iii) The making by Lessee of any assignment for the
benefit of creditors; the adjudication that Lessee is
bankrupt or insolvent; the filing by or against
Lessee of a petition to have Lessee adjudged bankrupt
or a petition for reorganization or arrangement under
any law relating to bankruptcy; the appointment of a
trustee or receiver to take possession of
substantially all of Lessee's assets located in the
Building or of Lessee's interest in this Lease; or
the attachment, execution or levy against, or other
judicial seizure of, substantially all of Lessee's
assets located in the Building or of Lessee's
interest in this Lease.
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B. Lessor shall not be deemed to be in default in the performance of
any obligation required to be performed by Lessor hereunder unless and until it
has failed to perform such obligation within thirty (30) days after written
notice thereof from Lessee to Lessor; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days are required for its
performance, then Lessor shall not be deemed to be in default if it shall
commence such performance within such thirty (30) day period and thereafter
diligently prosecute the same to completion.
SECTION 15
REMEDIES
In the event of any default or breach of this Lease by Lessee as set
forth in Section 14 hereof, Lessor, at its option, following all applicable
notice and grace periods, may (i) terminate this Lease upon and by giving
written notice of termination to Lessee, and (ii) declare such of the Rent as is
required to pay in full the outstanding mortgages, including principal, interest
and penalties, if any, to be immediately due and payable, or (iii) without
terminating this Lease, at any time after such default or breach, without notice
or demand additional to that provided in Section 14 hereof, and without limiting
Lessor in the exercise of any other right or remedy which Lessor may have by
reason of such default or breach (other than the aforesaid right of
termination), exercise any one or more of the remedies hereinafter provided in
this Section or as otherwise provided by law, all of such remedies (whether
provided herein or by law) being cumulative and riot exclusive. Lessor may enter
the Premises (with or without process of law and without thereby incurring any
liability to Lessee and without such entry constituting an
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eviction of Lessee or termination of this Lease) and take possession of the
Premises and all personal property of every kind in or on the Premises, and
Lessor may (i) apply against the Rent and the expenses, including reasonable
attorneys' fees, which Lessor may have incurred in connection with such
repossession, either the value of such personal property or the proceeds, after
selling expenses, from the sale of such personal property, whichever Lessor
chooses to do, and (ii) at any time and from time to time relet the Premises or
any part thereof for the account of Lessee, for such terms, upon such conditions
and at such rental as Lessor may deem proper. In the event of such reletting,
(i) Lessor shall receive and collect the rent therefrom and shall first apply
such rent against such expenses as Lessor may have incurred in recovering
possession of the Premises, placing the same in good order and condition,
repairing the same for reletting, and such other expenses, commissions, and
charges, including reasonable attorneys' fees, which Lessor may have paid or
incurred in connection with such repossession and reletting, and then shall
apply such rent against the Rent, and (ii) the tenant of such reletting shall be
under no obligation to see to the application by Lessor of any rent collected by
Lessor, nor shall Lessee have any right to collect any rent under such
reletting. No re-entry by Lessor shall be deemed to be an acceptance of a
surrender by Lessee of this Lease or of the Premises.
SECTION 16
FORCE MAJEURE
Except to the extent provided to the contrary, in the event that either
party shall be delayed or hindered in, or prevented from, the performance of any
work, service or other acts required under this Lease to be performed by the
party and such delay or hindrance is due to
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strikes, lockouts, acts of God, governmental restrictions, enemy act, civil
commotion, unavoidable fire or other casualty, or other causes of a like nature
beyond the control of the party so delayed or hindered, then performance of such
work, service or other act shall be excused for a period of such delay and the
period for the performance of such work, service or other act shall be extended
for a period equivalent to the period of such delay. In no event shall such
delay constitute a termination of this Lease. The provisions of this Section
shall not operate to excuse Lessee from the prompt payment of Rent. Written
notice of any such delays, other than temporary or emergency interruptions,
shall be given to the other party as well as written notice of the cessation of
the same.
SECTION 17
QUIET ENJOYMENT
If and so long as Lessee pays the Rent reserved hereunder, and observes
and performs all of the covenants, conditions and provisions on Lessee's part to
be observed and performed hereunder, Lessee shall and may peaceably and quietly
have, hold and enjoy the Premises for the entire Term hereof, subject to all of
the provisions of this Lease.
SECTION 18
SUBORDINATION OF LEASE
Lessee hereby acknowledges that this Lease and all the rights Lessee
has hereunder shall be and forever remain junior, subordinate and inferior to
any mortgage or mortgages which Lessor may cause to be recorded against the
Premises. Lessee shall, on request, execute,
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acknowledge and deliver to the holder of any such mortgage, from time to time,
any documents that may be required by such holder to evidence and acknowledge
the subordination of the Lease to such mortgage. In the event of a foreclosure
of such mortgage, Lessee hereby agrees that this Lease shall not terminate by
reason thereof, and Lessee further agrees to attorn to and to recognize as
lessor hereunder the mortgagee, or any purchaser at a foreclosure sale or any
purchaser of the Premises in lieu thereof, for the balance of the Term of this
Lease, provided, however, any such mortgagee or purchaser which shall become the
lessor hereunder shall not be:
(a) Liable for any act or omission of Lessor;
(b) subject to any offsets or defenses which Lessee
might, have against Lessor;
(c) bound by any Rent or Additional Rent which Lessee may
have paid to Lessor for more than the current month;
or,
(d) bound by any amendment or modifications of said Lease
without its consent, which consent will not be
unreasonably withheld or delayed.
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SECTION 19
NOTICES
All notices required or permitted hereunder shall be deemed
sufficiently given if sent by certified or registered mail, return receipt
requested, addressed to the Lessor or Lessee, as the case may be, as follows:
To Lessor: REGIONAL INDUSTRIAL DEVELOPMENT
CORPORATION OF SOUTHWESTERN PENNSYLVANIA
1220 Frick Building
Pittsburgh, Pennsylvania 15219
Attention: President
To Lessee: UNION SWITCH & SIGNAL INC.
1901 Main Street
Suite 1150, Mail Code 701
Columbia, South Carolina 29201
Attention: Secretary
with copy to: UNION SWITCH & SIGNAL INC.
Pittsburgh Tecnology Center
Pittsburgh, Pennsylvania 15219
Attention: Facility Manager
Either party may change its address by notice so given to the other.
SECTION 20
ENVIRONMENTAL MATTERS
A. For purposes of this Lease:
(1) As used herein, the term "Environmental Laws" shall mean
any and all federal, state, or local laws, statutes, rules, regulations,
ordinances, interstate compacts, or judicial or administrative decrees, orders,
decisions, or permits relating to emissions, discharges,
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releases or threatened releases of pollutants, contaminants or Hazardous
Substances into the environment (including, without limitation, ambient air,
surface water, ground water or subsurface strata); or otherwise relating to the
use, storage, treatment, transportation, manufacture, refinement, handling,
production or disposal of such pollutants, contaminants or Hazardous Substances,
including, without limitation, the following statutes, as amended and judicially
and administratively interpreted through the date hereof, and all regulations
promulgated thereunder as of such date, including without limitation all
comparable statutes, regulations, and interpretations by the Commonwealth of
Pennsylvania: the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S. C. 9601 et seq. ("CERCLA"); the Superfund Amendments and
Reauthorization Act of 1986, 42 USA ("SARA") the Federal Water Pollution Control
Act, U. S.C. 1251 et seq. ("FWPCA"); the Clean Air Act, 42 U.S. C. 7401 et seq.;
the Resource Conservation and Recovery Act, 42 U.S.C. 4901 et seq. ("RCRA"); the
Safe Drinking Water Act, 42 U.S.C. 300 et seq.; the "Toxic Substance Control
Act, 15 U.S.C. 2 601 et seq.; the Clean Water ACT, 33 U.S.C. 1251 et seq.; the
National Environmental Policy Act 42 U.S. C. 4321 et seq. the Hazardous
Substances Cleanup Act, 35 Pa. C.S.A. 6020.101 et seq. ("HSCA"); the Clean
Streams Law, 35 Pa. C.S.A. 691.1 et seq.; the Solid Waste Management Act, 35 Pa.
C. S.A. 6018. 101 et seq.; and the Pennsylvania Storage Tank and Spill
Prevention Act, Pa Act No. 1989-32; and the Infections and Chemotherapeutic
Waste Act, 35, Pa. C.S.A. 6019 et seq.
(2) As used herein, the term "Hazardous Substance" shall mean
any and all elements, compounds, chemical mixtures, contaminants, pollutants, or
other substances identified as "Hazardous Substances" under CERCLA, SARA, or
HSCA and all comparable
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statutes and regulations, Infections or Chemotherapeutic Waste and any used or
unused petroleum products.
B. Lessee shall:
(1) Not cause or permit any Hazardous Substance to be placed,
held, located, released, spilled, transported or, disposed of on, under, at or
from the Premises or any real estate contiguous thereto in contravention of any
Environmental Laws;
(2) Contain at or remove from the Premises or perform any
other remedial action regarding any Hazardous Substance, at Lessee's sole cost
and expense, if, as and when such containment, removal or other remedial action
is required under any legal requirement and, whether or not so required, perform
any containment removal or remediation of any kind of any Hazardous Substance in
compliance with all legal requirements; (except for any Hazardous Substance
introduced to the Premises prior to the Commencement Date).
(3) Not permit any subtenant or occupant of the Premises to
engage in any activity that could result in any liability, cost or expense to
any such subtenant, or occupant, lessee, Lessor or any other owner of the
Premises or any portion thereof or the creation of a lien on the Premises under
any Environmental Laws or under any similar applicable law or regulation;
(4) Provide Lessor with written notice (and a copy as may be
applicable) of any of the following within ten (10) days thereof; (a) Lessee's
obtaining actual knowledge or notice of any kind of the presence, or any actual
or threatened release, of any Hazardous Substance on, under, at or from the
Premises not authorized or permitted under Environmental Laws; b) Lessee's
receipt or submission, or Lessee's obtaining actual knowledge or notice of any
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kind, of any report, citation, notice or other communication from or to any
federal, state or local government or quasiovernmental authority regarding any
Hazardous Substance in any way materially adversely affecting the Premises; or
(c) Lessee's obtaining actual knowledge or notice of any kind of the incurrence
of any cost or expense by any federal, state or local governmental or quasi
governmental authority or any private party in connection with the assessment,
monitoring, containment, removal or remediation of any kind of any Hazardous
Substance on, under, at or from the Premises, or of the recording of any lien on
the Premises in connection with any such action or Hazardous Substance on, under
or at the Premises; and
(5) Defend all actions against the Lessor and pay, protect,
indemnify and save harmless the Lessor from and against. any and all
liabilities, losses, damages, costs, expenses (including, without limitation,
reasonable attorneys' fees and expenses), causes of action, suits, claims,
demands or judgments of any nature arising from Lessee's failure to comply with
this Section 20. The indemnity contained in this Section 20 shall survive the
expiration or earlier termination of this Lease with respect to the obligations
and liabilities of Lessee hereunder, actual or contingent, which have arisen on
or prior to such expiration or earlier termination.
SECTION 21
OPTIONS TO RENEW
Lessee shall have the right and option to renew this Lease for four (4)
additional terms of five (5) years each commencing immediately following
termination of the Term provided (i) that this Lease is in full force and effect
immediately prior to the date of the commencement of such renewal term; (ii)
that Lessee is not in material default under any of the provisions herein; and
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(iii) that Lessee is in full occupancy of the Premises for its own use and
intends to continue such occupancy. Such options shall be exercised by Lessee
serving on Lessor written notice to that effect at least six months in advance
of the expiration of the Term or any renewal term. Such renewal shall be upon
the same terms, covenants, conditions and limitations as in this Lease, except
that the monthly Fixed Rent shall be the total of: (i) the monthly mortgage debt
service, if any; (ii) the Debt Service Coverage; (iii) the sum of $7,559; and
any escalations that have occurred and were in effect for the preceding Term or
renewal Term. The notice of election to take the renewal term when given by
Lessee shall be irrevocable and shall constitute an agreement between the
parties for a renewal of this Lease as herein stated. If this Lease or the term
of the Lessee hereunder shall be terminated or come to an end pursuant to any of
the provisions of this Lease, all rights of Lessee to renew shall be deemed
terminated automatically.
SECTION 22
OPTION TO PURCHASE.
Commencing on the eleventh anniversary of the Commencement Date and on
each anniversary of the Commencement Date thereafter, Lessee shall have the
option to purchase the Premises at a purchase price equal to the outstanding
balance of the mortgage indebtedness against the Premises plus the sum of
$1,000,000. Lessee may exercise this option to purchase by giving written notice
of its desire to do so sixty (60) days prior to the applicable anniversary date.
A mutually convenient closing date shall be fixed not less than sixty (60) days
nor more than ninety (90) days following the date of said notice.
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On the closing date, Lessor will convey the Premises to Lessee by deed
of special warranty free and clear of all liens, encumbrances, reservations and
other title matters except for those existing on the Commencement Date (other
than mortgage liens) and except for any easements or rights of way granted to
utility companies to service the Premises or any other easement, reservation or
restriction granted by Lessor with Lessee's written approval.
SECTION 23
MISCELLANEOUS
A. The failure or delay on the part of either party to enforce or
exercise at any time any of the provisions, rights or remedies in this Lease
shall in no way be construed to be a waiver thereof, nor in any way to affect
the validity of this Lease or any part hereof, or the right of the party to
thereafter enforce each and every such provision, right or remedy. No waiver of
any breach of this Lease shall be held to be a waiver of any other or subsequent
breach. The receipt by Lessor of Rent at a time when the Rent is in default
under this Lease shall not be construed as a waiver of such default. Except as
otherwise agreed by Lessor, the receipt by Lessor of a lesser amount than the
Rent due shall not be construed to be other than a payment on account of the
Rent then due, nor shall any statement on Lessee's check or any letter
accompanying Lessee's check be deemed an accord and satisfaction, and Lessor may
accept such payment without prejudice to Lessor's right to recover the balance
of the Rent due or to pursue any other remedies provided in this Lease. No act
or thing done by Lessor or Lessor's agents or employees during the Term of this
Lease shall be deemed an acceptance of a surrender of the Premises, and no
agreement to accent such a surrender shall be valid unless in writing and signed
by Lessor.
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<PAGE>
B. Lessee shall, at any time and from time to time, within ten (10)
days following written request from Lessor, execute, acknowledge and deliver to
Lessor a written statement certifying that this Lease is in full force and
effect and unmodified (or if modified, stating the nature of such modification),
certifying the date to which the Rent reserved hereunder has been paid, and
certifying that there are not, to Lessee's knowledge, any defaults on the part
of Lessor hereunder, or specifying such defaults if any are claimed. Any such
statement may be relied upon by any prospective purchaser or mortgagee of all or
any part of the Premises. Lessee's failure to deliver such statement within said
ten (10) day period shall be conclusive upon Lessee that this Lease is in full
force and effect and unmodified, and that there are no defaults in Lessor's
performance hereunder.
C. The respective rights and obligations provided in this Lease shall
bind and shall inure to the benefit of the parties hereto, their successors and
assigns; provided, however, that no rights shall inure to the benefit of any
successor of Lessee unless Lessor's written consent for the transfer to such
successor has first been obtained.
D. This Lease shall be construed, governed and enforced in accordance
with the laws of the Commonwealth of Pennsylvania.
E. If any provisions of this Lease shall be held to be invalid, void or
unenforceable, the remaining provisions hereof shall in no way be affected or
impaired and such remaining provisions shall remain in full force and effect.
F. As used in this Lease, the word "person" shall mean and include,
where appropriate, an individual, corporation, partnership or other entity; the
plural shall be substituted
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for the singular, and the singular for the plural, where appropriate; and words
of any gender shall mean to include the other gender.
G. This Lease has been executed and delivered pursuant to a Development
Agreement, dated September __, 1993, by and among Lessor, Lessee and URA (the
"Development Agreement"). This Lease and the Development Agreement, including
the Exhibits and any attachments to each, contain all the agreements,
conditions, understandings, representations and warranties made among the
parties hereto with respect to the subject matter hereof, which is the lease of
the Premises hereinbefore mentioned, and may not be modified orally or in any
manner other than by an agreement in writing signed by all parties hereto or
their respective successors in interest. The relationship of the parties hereto
under this Lease shall be as Lessor and Lessee only, and said relationship shall
not be affected by other matters or agreements.
H. Upon request of Lessee, Lessor and Lessee will execute and record a
Memorandum of this Lease. Such Memorandum shall contain a provision appointing
Lessor as Lessee's attorney-in-fact to execute and record a Termination of Lease
document if Lessee shall fail to do so within ten (10) days after the Lease has
terminated. All preparation, recording, filing and like charges and any stamp
charge for recording transfer or other tax shall be payable by Lessee whether in
connection with recording or otherwise under this Lease.
I. This Lease shall be deemed and construed to be a "triple net lease"
and notwithstanding anything to the contrary, Lessee shall pay to Lessor
absolutely net throughout the Term all Rent free of any charges, assessments,
impositions or deductions of any kind and without abatement, deduction or
set-off.
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IN WITNESS WHEREOF, the parties have duly executed this Lease and have
initialed the Exhibits and attachments the day and year first above written,
intending to be legally bound hereby.
ATTEST: REGIONAL INDUSTRIAL DEVELOPMENT
CORPORATION OF SOUTHWESTERN
PENNSYLVANIA
/s/ Illegible By /s/ Francis B. Robinson
- --------------------- -----------------------
Secretary President
(Corporate Seal)
ATTEST: UNION SWITCH & SIGNAL. INC.
/s/ M.P. Rivera By /s/ Walter Alessandrini
- --------------------- -----------------------
Secretary President
(Corporate Seal)
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SUBORDINATION, ATTORNMENT
AND LEASE AMENDMENT AGREEMENT
THIS SUBORDINATION, ATTORNMENT AND LEASE AMENDMENT AGREEMENT (this
"Agreement") is made as of this 30th day of November, 1993, by and among DOLLAR
BANK, FEDERAL SAVINGS BANK, (hereinafter referred to as the "Mortgagee"), UNION
SWITCH & SIGNAL INC., a Delaware corporation, ("Tenant") and REGIONAL INDUSTRIAL
DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA, a Pennsylvania non-profit
corporation, ("Landlord").
WITNESSETH:
WHEREAS, Landlord is the owner of certain real property together with
the improvements situate thereon (the "Property") located in tho Pittsburgh
Technology Center in the 4th ward of the City of Pittsburgh, Allegheny County,
Pennsylvania, and more particularly described on Exhibit A attached hereto and
made a part hereof; and
WHEREAS, the Landlord and Tenant entered into a certain lease dated
September 14, 1993 (hereinafter referred to as the "Lease"), covering the
Property;
WHEREAS, the Mortgagee is the holder of a certain Open-End Mortgage and
Security Agreement granted by the Urban Redevelopment Authority of Pittsburgh
and Landlord, which is dated September 20, 1993 and recorded in the Office of
the Recorder of Deeds of Allegheny County, Pennsylvania at Mortgage Book Volume
13480, page 568 and which encumbers the Property, as modified by Assumption,
Affirmation and Amendment of Open-End Mortgage and Security Agreement entered
into by and between Landlord and Mortgagee dated as of November
<PAGE>
30, 1993 and which was recorded in the Office of the Recorder of Deeds of
Allegheny County, Pennsylvania at Mortgage Book Volume 13718, page 622
(hereinafter referred to as the "Mortgage");
WHEREAS, the parties hereto are willing to agree that the Lease shall
be subordinate to the Mortgage; and
WHEREAS, the Landlord and the Tenant desire to amend the Lease as an
inducement to Mortgagee to enter into the financing arrangements contemplated by
the Mortgagee.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
contained herein and Ten Dollars ($10.00) and other good and valuable
consideration each to the other in hand paid, the receipt of which is hereby
acknowledged, the Mortgagee, the Landlord and the Tenant, intending to be
legally bound hereby, covenant and agree as follows:
SECTION I. RECITALS
Landlord, Tenant and Mortgagee acknowledge and agree that the
recitals set forth above are incorporated into and made a part of this Agreement
by reference.
SECTION II. SUBORDINATION AND ATTORNMENT AGREEMENT
A. The Lease and all estates, rights, options, liens, and
charges therein contained or created thereunder are and shall be subject and
subordinate to the lien and effect of the Mortgage insofar as it affects the
Property and to all renewals, modifications, consolidations, replacements, and
extensions thereof, to the full extent of the principal sum secured thereby and
interest thereon, with the same force and effect as if the Mortgage had been
executed, delivered, and duly recorded in the above-mentioned public records,
prior to the execution and delivery of the Lease.
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<PAGE>
B. In the event that the Mortgagee (a) succeeds to the
interest of the Landlord under the Lease, and/or (b) acquires title to tho
Property, the Tenant hereby agrees to be bound to Mortgagee under all of the
terms, covenants, and conditions of the Lease; accordingly, from and after such
event, the Mortgagee shall have the same remedies against Tenant for the breach
of an agreement contained in the Lease as the Landlord had before the Mortgagee
succeeded to the interest of the Landlord and/or obtained title to the Property;
provided, however, that the Mortgagee shall not be:
(a) liable for any previous act or omission of the
Landlord; or
(b) subject to any offsets or defenses related to the
Premises which the Tenant might have against the Landlord; or
(c) bound by any rent or additional rent which the
Tenant might have paid to the Landlord; or
(d) bound by any material amendment or modification
of the Lease made without its written consent; or
(e) liable for any obligations, as landlord under the
Lease, which occurred or accrued either prior to the date the Mortgagee
succeeded to the interest of the Landlord under the Lease or acquired title to
the Property, or after the Mortgagee sold, assigned, conveyed or otherwise
disposed of its interest in the Lease and the Property.
C. In the event that anyone else acquires title to or the
right to possession of the Property upon the foreclosure of the Mortgage or upon
the sale of the Property by the Mortgagee or its successors or assigns after
foreclosure or acquisition of title in lieu thereof or otherwise, the Tenant
agrees not to seek to terminate the Lease by reason thereof, but shall
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<PAGE>
remain bound to the new owner so long as the new owner agrees to be bound to the
Tenant under all of the terms, covenants and conditions of the Lease.
D. The Tenant hereby warrants, represents, covenants, and
agrees to and with the Mortgagee:
(a) except for a termination of the Lease effected by
the exercise by Tenant of its purchase option contained in the Lease after the
obligations secured by the Mortgage have been paid in full, not to alter or
modify the Lease in any respect or terminate the Lease without the prior written
consent of the Mortgagee and the Tenant further agrees that any such attempted
alteration, modification or termination shall be null and void and of absolutely
no effect whatsoever unless the Mortgagee has given its written consent thereto;
(b) to deliver to the Mortgagee a duplicate of each
notice of default delivered to the Landlord at the same time as such notice is
given to the Landlord; and
(c) that the Tenant is now the sole owner of the
leasehold estate created by the Lease and shall not hereafter assign or sublet
the Lease without the prior written consent of the Mortgagee.
SECTION III. LEASE AMENDMENT
A. Amendment of Section 2 of the Lease. (a)
Subsection A of Section 2 of the Lease is deleted in its entirety and is
replaced as follows:
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<PAGE>
(A) RENT
As annual fixed rental for the Premises, Lessee shall
pay a sum equal to the monthly mortgage debt service related to the
Premises multiplied by 1.1 (the excess of said sum over the monthly
mortgage debt service is hereinafter called the "Debt Service
Coverage") plus the sum of $7,559 (the "Parking Rent") payable in
advance on the first business day of each calendar month beginning on
the earlier of (i) July 1, 1995 or (ii) 1st day of the fifth full month
following the Commencement Date (the "Fixed Rent"). The Debt Service
Coverage shall be fixed as of the Commencement Date and remain the same
throughout the Term or any renewal Term; provided, however, that in the
event that the Commencement Date falls on a date other than the first
business day of the month, such Fixed Rent shall be prorated for the
balance of that first calendar month of the Term. Notwithstanding the
foregoing, the Parking Rent will not be payable unless and until a
certificate of occupancy has been issued for the Parking Facilities.
For so long as any amounts remain owing to Dollar
Bank, Federal Savings Bank in connection with its construction and term
loan for the Premises, Lessee shall pay all Rent (as hereinafter
defined), exclusive of Parking Rent, directly to Dollar Bank, Federal
Savings Bank (the "Bank") at the following address:
Dollar Bank, Federal Savings Bank
Three Gateway Center, 10 West
Pittsburgh, PA 15222
All checks shall be made payable to Dollar Bank, Federal Savings Bank and shall
reference Loan No.__________ on the front of each check. Lessee hereby covenants
and agrees that Lessee shall not pay Rent, except for Parking Rent, to anyone
other than the Bank unless directed to do so in a writing signed by the Bank.
Lessee's obligation to pay Rent, exclusive of Parking Rent, directly to the Bank
is and shall be absolute.
Lessee hereby covenants and agrees to pay the Fixed Rent
hereby reserved as and when due. Lessee further covenants and agrees to pay all
sums of money, charges or other amounts required to be paid by the Lessee to the
Lessor or to another person under this Lease (the "Additional Rent") in addition
to the Fixed Rent provided for herein. Additional Rent shall also include the
assumption by Lessee of all obligations including the maintenance obligations
imposed on the lessee by URA pursuant to the Parking Lease and all costs of
operating the parking facilities. The Fixed Rent and Additional Rent are
sometimes hereinafter collectively referred to as the "Rent." Lessee shall be in
compliance with this Lease if it pays the Parking Rent to URA or its designee as
may be directed in writing by URA.
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<PAGE>
(b) The third sentence in Subsection C of Section 2
of the Lease is deleted in its entirety and is replaced as follows:
At the end of each lease year, the Debt Service Coverage
portion of the Fixed Rent shall be adjusted upward or downward
depending upon the actual interest charged during the year,
and Lessee shall pay to the Bank any shortage due within
fifteen days of Lessor's notice to Lessee and Bank, and, in
the event of any excess rent paid which has not been
previously applied to the Loan or released to the Lessor by
the Bank, Lessee and Lessor agree that so long as an event of
default has not occurred under the documentation evidencing
the Bank's construction and term loan for the Premises the
Bank shall pay such excess to Lessee.
B. Amendment of Section 8 of the Lease. Section 8 of tho Lease
is amended by adding the following language after the first sentence of Section
8:
Notwithstanding the immediately preceding sentence, Lessor
shall consent to and join in a leasehold mortgage of Lessee's
interest in the Premises and an assignment of Lessee's
interest in this Lease in favor of the Bank if the Bank
desires such a leasehold mortgage and/or assignment.
C. Amendment of Section 14 of the Lease. Section 14 of the
Lease is amended by adding the following new subsection after Subsection 5:
C. Lessor and Lessee agree that prior to taking any action
with respect to a breach or a default under this Lease, the party
seeking to take action shall give the Bank at least 60 days written
notice of the default or breach under this Lease and that the Bank
shall have the right, but not the obligation, to cure any default or
breach by Lessee or Lessor under this Lease (without releasing Lessee
or Lessor from any obligation) and the nondefaulting party agrees to
accept any such cure made by Bank as though such cure was made by the
defaulting party. The defaulting party agrees to pay to Bank upon
demand all sums expended by Bank in connection with such cure,
including reasonable counsel fees, and (x) in the case of Lessee,
together with interest thereon at the Late Rate as Additional Rent, and
(y) in the case of Lessor, together with interest thereon at the rate
provided for in the loan documents executed in connection with the
Open-End Mortgage and Security Agreement dated September 20, 1993,
executed and delivered by Lessor in favor of the Bank (the "Mortgage"),
and, if such sums are not paid to the Bank, the same shall be added to
the indebtedness secured by, inter alia, the Mortgage.
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<PAGE>
D. Amendment of Section 18 of the Lease. Section 18 of the
Lease is deleted in its entirety and is replaced with the following language:
SECTION 18.
SUBORDINATION OF LEASE
Lessee hereby acknowledges that this Lease and all the
rights Lessee has hereunder shall be and forever remain junior, subordinate and
inferior to any mortgage or mortgages which Lessor may cause to be recorded
against the Premises. Lessee shall, on request, execute, acknowledge and deliver
to the holder of any such mortgage, from time to time, any documents that may be
required by such holder to evidence and acknowledge the subordination of the
Lease to such mortgage. In the event of a foreclosure of such mortgage, Lessee
hereby agrees that this Lease shall not terminate by reason thereof. Bank shall
have the option to assign the rights of Lessor (and of Lessee if Bank desires in
the event that Bank is assigned Lessee's rights under this Lease) under this
Lease and Lessee further agrees to attorn to and to recognize as lessor
hereunder any such assignee, mortgagee, or any purchaser at a foreclosure sale
or any purchaser of the Premises in lieu thereof for the balance of the Term of
this Lease, all of which may occur without the requirement of obtaining the
consent of Lessee; provided, however, any such assignee, mortgagee or purchaser
which shall become the Lessor hereunder shall not be:
(a) Liable for any act or omission of Lessor;
(b) subject to any offsets or defenses which Lessee might
have against Lessor.
(c) bound by any Rent or Additional Rent which Lessee may
have paid to Bank or Lessor for more than the current
month; or
(d) bound by any amendment or modifications of said Lease
without its consent, which consent will not be
unreasonably withheld or delayed.
E. Amendment of Section 23 of the Lease. Section 23 of the
Lease is amended by adding the following language after subsection I:
J. Lessor and Lessee acknowledge and agree that the Bank is
intended to be and is a third party beneficiary of this Lease.
K. Lessee and Lessor acknowledge and agree that Bank shall
not be obligated by reason of its collection of the Rents under this
Lease or any assignment in
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<PAGE>
favor of the Bank of either the Lessor's or the Lessee's interest under
this Lease to perform or undertake any obligation of Lessor as landlord
hereunder, including, but not limited to, Lessor's obligation to (i)
enforce the collection of any and all Rents due under this Lease, (ii)
provide services or maintain the Premises, (iii) pay the Parking Rent
under the Parking Lease or undertake or fulfill any of the obligations
of the Lessor or Lessee in connection with the Parking Lease, (iv) pay
or cause to be paid out of the Rent any debt service obligations of
Lessor in connection with any obligations for borrowed money of the
Lessor incurred in connection with the Premises, including, without
limitation, obligations in connection with loans for the Premises made
by the Pennsylvania Industrial Development Authority, the Pennsylvania
Economic Development Partnership (Sunny Day Fund), Pittsburgh-County
Wide Corporation, Inc. or the Urban Redevelopment Authority of
Pittsburgh or (v) complete the construction of any improvements
contemplated by this Lease. In addition, Bank's collection of the Rents
under this Lease shall not place responsibility, on Bank for the
control, care, management or repair of the Premises or make Bank
responsible or liable for any injury or death to any person or property
arising from any negligence in the management, operation, upkeep,
repair or control of the Premises.
F. General Amendment to the Lease. Lessor and Lessee agree
that in addition to all Rent, all other amounts due to or collectible by Lessor
under the Lease (except for Parking Rent) shall be paid directly to the
Mortgagee.
SECTION IV. EFFECT.
This Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective heirs, administrators, executors,
successors, assigns and sublessees.
SECTION V. LIABILITY OF THE MORTGAGEE.
Anything herein or in the Lease to the contrary
notwithstanding, in the event that Mortgagee shall acquire title to the
Property, Mortgagee shall incur no liability, beyond Mortgagee's then interest,
if any, in the Property and Lessee and anyone claiming through Lessee shall look
exclusively to such interest of Mortgagee, if any, in the Property for the
payment and discharge of any obligations imposed upon Mortgagee under the Lease.
Lessee agrees that with respect to any money judgment which may be obtained or
secured by Lessee or anyone claiming
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<PAGE>
through Lessee against Mortgagee in connection with or arising from the loan
secured by the Mortgage, the Lease or the Property, Lessee and any such claimant
shall look solely to the estate or interest owned by the Mortgagee in the
Property or any portion thereof, or interest therein and Lessee will not collect
or attempt to collect any such judgment out of any other assets of Mortgagee.
SECTION VI. COUNTERPARTS.
This Agreement may be executed in counterparts and all such
counterparts shall be considered as one integrated writing upon execution.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement by their duly authorized officers the day and year first above
written.
ATTEST: TENANT: UNION SWITCH & SIGNAL INC.
/s/ M. P. Rivera By: /s/Walter Alessandrini
- ----------------------------- ---------------------------------
Its: President
---------------------------------
ATTEST: MORTGAGEE: DOLLAR BANK, FEDERAL
SAVINGS BANK
/s/Nancy P. Butler By: /s/Illegible
- ----------------------------- ---------------------------------
Asst. Secretary Its: Assistant Vice President
---------------------------------
ATTEST: LANDLORD: REGIONAL INDUSTRIAL
DEVELOPMENT CORPORATION OF
SOUTHWESTERN PENNSYLVANIA
/s/Colleen B. Poremski By: /s/Francis B. Robinson
- ----------------------------- ---------------------------------
Its: President
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<PAGE>
SECOND AMENDMENT OF LEASE
THIS AMENDMENT, made as of the 31st day of May, 1998, by and between REGIONAL
INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA, a Pennsylvania
nonprofit corporation having its principal office at 907 Penn Avenue, 7th Floor,
Pittsburgh, Pennsylvania 15222 (hereinafter called "Lessor"), and UNION SWITCH &
SIGNAL INC., a Delaware Corporation, having an office at 1000 Technology Drive,
Pittsburgh, Pennsylvania 15219, (hereinafter called the "Lessee");
WHEREAS, the parties hereto entered into a Lease, dated September 14, 1993, as
amended November 30, 1993 (collectively, the "Lease") covering the Premises
known and numbered as 1000 Technology Drive in the Pittsburgh Technology Center;
and
WHEREAS, the parties hereto now wish to restructure the financing of the
project and to amend the Lease;
NOW THEREFORE, in connection of the mutual covenants hereinafter expressed and
intending to be legally bound hereby, the parties hereto agree as follows:
Section 1. The foregoing preamble clauses are incorporated herein by
reference thereto, and this Amendment shall be construed in accordance with the
laws of the Commonwealth of Pennsylvania.
<PAGE>
Terms defined in the Lease, including those set forth in portions of the Lease
deleted by this Amendment, shall have the same meanings in this Amendment.
Section 2. The parties hereto agree that the Commencement Date of the
Lease was determined to be July 1, 1995, and that the Term of the Lease is for
twenty (20) years from the Commencement Date. The financing related to the
Premises and the debt service requirements as of the date of this Amendment are
set forth on Schedule I attached hereto and made a part hereof.
Section 3. Paragraph A. of Section 2 of the Lease is hereby deleted and
in lieu thereof, the following is inserted:
"A. As annual fixed rental for the Premises (the "Fixed Rent"),
Lessee shall pay to Lessor a sum equal to the following items:
(1) The total annual debt service plus all fees required by
the lenders as shown on Schedule I, as the same may be
adjusted as required by the loan documents, from time to time;
(2) The total annual real estate taxes assessed by all
governmental entities having jurisdiction as paid into the tax
escrow in accordance with Section 4 of this Amendment;
(3) The total annual Parking Rent of $90,708; and
(4) The total Annual Debt Service Coverage of $120,000.
The Debt Service Coverage mentioned in item (4) above shall be fixed as
of the date of this Amendment and shall remain the same throughout the
Term.
2
<PAGE>
Lessee agrees to pay the Fixed Rent in monthly installments on the first day of
each month commencing on July 1, 1998 and continuing throughout the Term or any
renewal Term. Lessee shall pay the Fixed Rent to Lessor on the first day of each
month by wire transfer to Dollar Bank at the following address and wire
instructions:
Account Number: 2663058901
Address: Dollar Bank
Three Gateway Center
Ten West
Pittsburgh, PA 15222
(412) 261-8165
ABA Number: 243074385
Type Code: 10
Attention: Corporate Banking
Account Name: RIDC
Lessee further covenants and agrees to pay all sums of money, charges or other
amounts required to be paid by the Lessee to the Lessor or to another person or
entity under the Lease, as amended hereby (the "Additional Rent") in addition to
the Fixed Rent provided for herein. Additional Rent shall also include the
assumption by Lessee of all obligations including maintenance obligations
imposed on Lessor or Lessee by URA pursuant to the Parking Lease and all costs
of operating the Parking Facilities. The Fixed Rent and the Additional Rent are
sometimes hereinafter collectively referred to as the "Rent". The Additional
Rent shall be payable to Dollar Bank in the same manner as provided for the
Fixed Rent.
When changes occur in the Fixed Rent or the Additional Rent, Lessor will invoice
Lessee and the amounts due shall be paid by the date stated on the invoice.
Thereafter, the monthly payments of
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<PAGE>
Fixed Rent and Additional Rent will be appropriately adjusted. For convenience,
Lessor, at its option, may make said adjustments quarterly, and Lessee shall
immediately pay any amounts incurred during the interim."
Section 4. Paragraph C. of Section 2 is hereby deleted, and in lieu
thereof the following is inserted:
"C. As long as may be required by Dollar Bank, a tax escrow
shall be established with Dollar Bank, and payments into the tax escrow shall be
made monthly as part of the Fixed Rent. Upon execution and delivery of this
Amendment and upon notice of any increase in real estate taxes, Lessee shall
pay, by wire transfer to Dollar Bank, a sum of money which together with ensuing
monthly installments will provide sufficient funds in the tax escrow to pay the
real estate taxes to the taxing bodies at the discount rate thirty (30) days
prior to the expiration of the discount period."
Section 5. Section 19 of the Lease is hereby amended to delete the
addresses shown therein and to insert the following in lieu thereof.
"To Lessor" REGIONAL INDUSTRIAL DEVELOPMENT
CORPORATION OF SOUTHWESTERN
PENNSYLVANIA
907 Penn Avenue, 7th Floor
Pittsburgh, PA 16222-3805
Attention: President
To Lessee: UNION SWITCH & SIGNAL INC.
1000 Technology Drive
Pittsburgh, PA 15219-3120
Attention: Facilities Manager"
4
<PAGE>
Section 6. The third sentence of Section 21 of the Lease is hereby
deleted and the following sentences are inserted in lieu thereof.
"Any such renewal shall be upon the same terms, covenants, conditions and
limitations as in the Lease, except that the annual Fixed Rent shall be Lessors
direct and indirect expenses including taxes, debt service payments plus any
related fees, insurance, management fee, accounting fees and other costs
associated with the land and building and the Parking Rent as determined by
Lessor and URA pursuant to the terms of the Parking Lease attached as Exhibit B
to the Lease.
Section 7. Section 22 of the Lease is hereby deleted and is replaced by
the following section:
"Section 22.
A. RIGHT OF FIRST OFFER TO PURCHASE.
The Lessee is hereby given the right of first refusal to purchase the Premises
during the initial term of the Lease and any renewal thereof. If a written bona
fide offer to purchase the property is received by Lessor from a third party,
Lessee shall have the right to purchase the property upon the same terms and
conditions at the same purchase price as found in said offer. Lessee shall have
30 days to determine if Lessee desires to purchase the property based on such
offer. If Lessee exercises such right to purchase the property, said purchase
shall occur within 120 days after Lessee's receipt of a copy of such offer. A
mutually convenient closing date shall be fixed upon Lessor receiving written
confirmation of Lessee's intent to purchase the Premises on the same terms and
conditions of the third parry offer and the rent shall be appropriately adjusted
for the last month of the lease as may be necessary.
5
<PAGE>
On the Closing Date, Lessor will convey the Premises to Lessee by deed of
special warranty free and clear of all liens, encumbrances, reservations and
other title matters except for those existing on the Commencement Date (other
than mortgage liens) and except for easements granted to utility companies to
serve the Premises or any other easement, reservation or restriction granted by
Lessor with Lessee's written approval. To the extent Lessor holds such rights
and subject to the written approval of URA, contemporaneously with conveying the
Premises to Lessee, Lessor will assign to Lessee such of its interest in the
Parking Lease to provide Lessee 640 parking spaces in the Parking Facilities,
the surface lot or any surface lot on any related, adjoining lot.
B. OPTION PARCEL.
Lessee hereby relinquishes and forever terminates its option, right of first
refusal or any other rights relating to the Option Parcel referred to in the
Development Agreement, dated September 14, 1993, by and among Lessor, URA and
Lessee. During the Term Of the Lease, however, Lessee shall have the right of
first offer to lease space in any building constructed on the Option Parcel by
Lessor. When Lessor develops preliminary plans to construct a building on the
Option Parcel, it will give notice to Lessee and provide to Lessee preliminary
site, designs, and floor plans and the proposed rental rates. Thereafter, Lessee
shall have sixty (60) days to commit to a specified amount of square footage in
the new building on the terms offered by Lessor. Lessor or its agents may market
the new building while Lessee is considering its needs but will not commit any
square footage in the building until the sixty (60) day period has expired. If,
at the expiration of said sixty (60) day period, Lessee has not elected to
commit to square footage in the building or has elected to commit to a portion
of
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<PAGE>
the building, Lessor may thereafter commit to lease the building or portions of
the building not committed by Lessee to third parties upon terms not more
favorable than those offered to Lessee.
Section 8. As contained in this Lease and the Parking Lease, Lessor
will make available to Lessee a minimum of 640 parking spaces. Said parking
spaces shall be made available first in the Parking Facilities; next in the
surface lot adjacent to the Parking Facilities; and then, to the extent
necessary, in any temporary surface lot on any related adjoining property.
Section 9. Lessee hereby agrees to pay all costs and expenses incurred
by Lessor or otherwise incurred with respect to this Amendment and the mortgage
restructuring contemplated hereby including, but not limited to, legal fees,
financing fees and costs, title insurance fees and other fees required by the
lenders or incurred in order to consummate the transactions contemplated by, or
related to, this Amendment.
Section 10. The provisions set forth in the First Amendment of Lease
entitled Subordination, Attornment and Lease Amendment Agreement, dated November
30, 1993, shall apply to any new mortgage loan obtained from Dollar Bank with
the same force and effect, except to the extent any of said provisions are
amended or changed by the provisions of this Amendment.
Section 11. Except as amended hereby, the terms and conditions of the
Lease shall remain in full force and effect.
7
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment to be executed by the
undersigned duly authorized officers as of the day and year first above written.
ATTEST: REGIONAL INDUSTRIAL DEVELOPMENT
CORPORATION OF SOUTHWESTERN
PENNSYLVANIA
/s/Colleen B. Poremski By /s/ Francis B Robinson
- ----------------------- -------------------------
Secretary President
(Corporate Seal)
ATTEST: UNION SWITCH & SIGNAL INC.
/s/Richard D. Moss By /s/ Gary Ryker
- ---------------------- --------------------------
Asst. Secretary President
(Corporate Seal)
8
<PAGE>
Regional Industrial Development Corporation
of Southwestern Pennsylvania
Rent Calculation Effective July 1, 1998
Union Switch & Signal
Debt Service
Dollar Bank $1,257,468
PIDA 180,972
PEDP 278,348
PCW 46,350
URA 0
Real Estate Taxes
Allegheny County 107,100
City of Pittsburgh 170,313
School District of Pittsburgh 253,725
Parking Rent 90,708
Debt Service 120,000
-------
Annual Estimated Rent $2,504,984
----------
----------
Monthly Estimated Rent $208,749
--------
--------
The monthly rent, as calculated above, needs to be wired to Dollar Bank per the
lease documents, as amended, to have available funds in the RIDC Dollar Bank
account on the first of each month for which Dollar Bank will remove on that day
for debt service purposes.
This monthly estimated rent will remain in effect until any changes in the
lease, as amended, or any component piece of the rent calculation as outlined
above changes.
[SCHEDULE I]
<PAGE>
Exhibit 2.13
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-6224) of Ansaldo Signal N.V. of our report dated
March 5, 1999, appearing on page 38 of this Annual Report on Form 20-F.
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
June 29, 1999
