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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997. COMMISSION FILE NUMBER 1-13093
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MERITOR AUTOMOTIVE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 38-3354643
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2135 WEST MAPLE ROAD 48084-7186
TROY, MICHIGAN (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (248) 435-1000
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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<CAPTION>
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
------------------------------------ ------------------------------------
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Common Stock, $1 Par Value New York Stock Exchange
(including the associated Preferred
Share Purchase Rights)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant on November 30, 1997 was approximately $1.54
billion.
69,030,380 shares of the registrant's Common Stock, par value $1 per share,
were outstanding on November 30, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Certain information contained in the Annual Report to Shareowners of the
registrant for the fiscal year ended September 30, 1997 is incorporated by
reference into Part I, Part II and Part IV.
(2) Certain information contained in the Proxy Statement for the Annual Meeting
of Shareowners of the registrant to be held on February 11, 1998 is
incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS.
Meritor Automotive, Inc. (the "Company" or "Meritor"), headquartered in
Troy, Michigan, is a leading global supplier of a broad range of components and
systems for use in commercial, specialty and light vehicles. The Company was
incorporated in Delaware in May 1997 in connection with the September 30, 1997
distribution by Rockwell International Corporation, a Delaware corporation and
Meritor's former parent company ("Rockwell"), to Rockwell shareowners on a pro
rata basis of all of the issued and outstanding shares of the Company (the
"Distribution"). In the Distribution, Rockwell shareowners received one share of
Company Common Stock for every three shares of Rockwell Common Stock owned on
September 17, 1997, the record date for the Distribution. Prior to the
Distribution, Rockwell transferred substantially all of its operations, assets
and liabilities related to the automotive businesses then owned and operated by
Rockwell (the "Automotive Business") (including liabilities relating to former
operations) to the Company or to subsidiaries of the Company. As used herein,
the terms "Company" or "Meritor" include subsidiaries and predecessors unless
the context indicates otherwise.
Whenever reference is made in any Item of this Annual Report on Form 10-K
to information under specific captions of the 1997 Annual Report to Shareowners
of the Company (the "1997 Annual Report") or to information in the Proxy
Statement for the Annual Meeting of Shareowners of the Company to be held on
February 11, 1998 (the "1998 Proxy Statement"), such information shall be deemed
to be incorporated into that Item by such reference.
Meritor serves a broad range of original equipment manufacturer ("OEM")
customers worldwide, including truck OEMs, light vehicle OEMs, semi-trailer
producers and off-highway and specialty vehicle manufacturers. Its ten largest
customers accounted for 59% of total fiscal 1997 sales. The Company operates 46
manufacturing facilities around the world. Sales outside North America accounted
for approximately 41% of total sales in fiscal 1997.
The Company serves its customers worldwide through Heavy Vehicle Systems
("HVS") and Light Vehicle Systems ("LVS"). HVS, which had fiscal 1997 sales of
approximately $2.0 billion, supplies drivetrain systems and components,
including axles, brakes, transmissions, clutches and drivelines, for heavy-duty
and medium-duty trucks, trailers, off-highway equipment, buses and coaches, as
well as other specialty and military vehicles. LVS, which had fiscal 1997 sales
of approximately $1.3 billion, supplies electromechanical and other components
and systems, including roof, door, access control and seat adjusting systems, as
well as suspension products and steel wheels, for passenger cars, light trucks
and sport utility vehicles.
The Company's sales by product class for the three fiscal years ended
September 30, 1997 were as follows:
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FISCAL YEAR
ENDED SEPTEMBER 30,
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1997 1996 1995
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(IN MILLIONS)
<S> <C> <C> <C>
Heavy Vehicle Systems:
Truck and Trailer Products............................. $1,441 $1,360 $1,504
Off-Highway, Specialty and Military Vehicle Products... 516 467 433
Light Vehicle Systems.................................... 1,352 1,317 1,188
------ ------ ------
Total.......................................... $3,309 $3,144 $3,125
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The following charts depict HVS sales by product and geographic region for
the fiscal year ended September 30, 1997:
HEAVY VEHICLE SYSTEMS
[PIE CHART] [PIE CHART]
1997 SALES BY PRODUCT 1997 SALES BY GEOGRAPHIC REGION
- TRUCK AND TRAILER 65% - NORTH AMERICA 75%
AXLES AND BRAKES
- EUROPE 17%
- OFF-HIGHWAY, SPECIALTY AND 26%
MILITARY VEHICLE PRODUCTS - SOUTH AMERICA 5%
- TRANSMISSIONS, CLUTCHES, 9% - ASIA-PACIFIC 3%
DRIVELINES AND OTHER
PRODUCTS
MEMO: AFTERMARKET SALES
REPRESENTED 15% OF TOTAL
HEAVY VEHICLES SYSTEMS
SALES.
In fiscal 1997, aftermarket sales represented 15% of total HVS sales and
were made primarily in North America.
The following charts depict LVS sales by product and geographic region for
the fiscal year ended September 30, 1997:
LIGHT VEHICLE SYSTEMS
[PIE CHART] [PIE CHART]
1997 SALES BY PRODUCT 1997 SALES BY GEOGRAPHIC REGION
- - ROOF SYSTEMS 31% - EUROPE 51%
- - DOOR SYSTEMS 29% - NORTH AMERICA 34%
- - ACCESS CONTROL SYSTEMS 14% - SOUTH AMERICA 11%
- - SUSPENSION PRODUCTS 12% - ASIA-PACIFIC 4%
- - STEEL WHEELS 11%
- - SEAT ADJUSTING SYSTEMS 3%
Meritor began operations separate from Rockwell on October 1, 1997 and,
accordingly, does not have an operating history as an independent company. The
financial information included or incorporated by reference in this Annual
Report on Form 10-K reflects the Automotive Business as part of Rockwell, and
may not necessarily reflect the results of operations, financial position and
cash flows of the Automotive Business had the Company been operated
independently during the periods presented.
INDUSTRY TRENDS
The automotive industry is experiencing several significant trends that
present opportunities and challenges to industry suppliers. These trends, which
influence the Company's business strategies, include the globalization of OEMs
and their suppliers, increased outsourcing by OEMs, increased demand for modules
and systems by OEMs and the consolidation of suppliers worldwide.
As OEMs expand geographically to access new markets, they are able to
achieve significant cost savings and enhanced product quality and consistency by
sourcing from the most capable, full-service global suppliers. OEMs and
suppliers also have the opportunity to take advantage of economies of scale
through global sourcing
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of components and systems and by designing platforms that can be used in
different geographic markets, but still be adapted to local preferences.
OEMs are responding to global competitive pressures to improve quality and
reduce manufacturing costs and related capital investments by outsourcing
products which they historically have engineered and manufactured internally.
Outsourcing enables OEMs to focus on their core design, assembly and marketing
capabilities. In markets addressed by LVS, this increased outsourcing trend has
extended not only to components, but to entire modules and systems, requiring
suppliers to provide a higher level of engineering, design, electromechanical
and systems integration expertise in order to remain competitive. Increased
outsourcing by light vehicle OEMs has produced higher overall per vehicle sales
by independent suppliers. Such increased outsourcing can result in supplier
sales growth independent of the overall automotive industry growth trend.
OEMs also are reducing their total number of suppliers and are more
frequently entering into supply arrangements with the most capable global
suppliers. Increasingly, the criteria for selection include not only quality,
cost and responsiveness, but also certain full-service capabilities, including
design and engineering. This trend and the globalization trend described above
have contributed to the consolidation of automotive suppliers into larger, more
efficient and more capable companies.
BUSINESS STRATEGIES
Meritor has developed leadership market positions as it has grown into a
global supplier of a broad range of components and systems for use in
commercial, specialty and light vehicles worldwide. Meritor seeks to enhance its
leadership positions and capitalize on its existing customer, product and
geographic strengths, as well as the industry trends described above, and to
increase its sales, earnings and profitability by employing the following
business strategies:
Continuously Improve Core Business Processes. The Company is continuously
seeking to improve its core business processes through investment in information
technology and capital equipment, rationalization of production among
facilities, deintegration of non-core processes, establishment of flexible
assembly sites and simplification and increased commonality of products in order
to reduce product costs and improve product quality while lowering required
asset investment levels, reducing product development times and increasing
flexibility to meet customer needs.
Capitalize on Customer Outsourcing Activities. A significant growth
strategy of the Company is to provide lower cost and higher quality products to
customers in connection with their increasing outsourcing activities. Management
believes truck and trailer OEMs in Europe will increasingly outsource in order
to achieve cost and efficiency advantages. The Company intends to work closely
with current and prospective customers worldwide to identify and implement
mutually beneficial outsourcing opportunities. The Company has sought and will
continue to seek to utilize its broad product line and design, engineering and
manufacturing expertise by expanding its sales of higher value modules and
systems. The Company will seek to utilize its leadership positions in the supply
of electromechanical systems to light vehicle OEMs and its ability to provide
drivetrain systems to truck and specialty vehicle OEMs to capitalize on this
anticipated customer demand.
Leverage Geographic Strengths. Geographic expansion to meet the global
sourcing needs of customers and to address new markets will continue to be an
important element of the Company's growth strategy. Management believes
opportunities exist to increase further the Company's presence in the North
American light vehicle markets, where its sales of light vehicle products
increased from approximately $415 million in fiscal 1996 ($27.48 content per
light vehicle manufactured in North America) to approximately $466 million in
fiscal 1997 ($30.66 content per light vehicle manufactured in North America).
The Company also believes there are opportunities to increase sales to
heavy-duty and medium-duty commercial vehicle OEMs in Europe, building on
established customer relationships with their North American affiliates and the
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Company's existing manufacturing presence in Europe. Emerging markets such as
the Asia-Pacific region and South America also present growth opportunities as
demand for commercial, specialty and light vehicles increases in these areas.
Introduce New Systems and Technologies. Meritor plans to continue
investing in new technologies, including electronics, and product development
and working closely with its customers to develop and implement design,
engineering, manufacturing and quality improvements. The Company will draw upon
the engineering resources of its Technical Center in Troy, Michigan and its
engineering centers of expertise in the United States, Brazil, Canada, France,
Germany and the United Kingdom, as well as its ongoing relationship with the
Rockwell Science Center. See -- Research and Development.
Management believes that its strategy of continuing to introduce new and
improved systems and technologies will be an important factor in its efforts to
achieve its growth objectives.
Expand Aftermarket Business. Meritor intends to pursue growth of its
aftermarket business, which historically has generated higher profit margins
than those associated with original equipment sales. The Company's fiscal 1997
aftermarket sales were $290 million, representing sales of components and
services principally to HVS North American customers. The Company will seek to
expand its aftermarket business by utilizing its advanced distribution center in
Florence, Kentucky, and leveraging its existing aftermarket channels with new
products, both those manufactured by the Company and those manufactured by
others and sold by the Company under distribution agreements.
Selectively Pursue Strategic Opportunities. The Company regularly
evaluates various strategic and business development opportunities, including
license agreements, marketing arrangements, joint ventures and acquisitions. The
Company intends to continue selectively to pursue alliances and acquisitions
that would allow it to gain access to new customers and technologies, penetrate
new geographic markets and enter new product markets.
PRODUCTS
Meritor designs, develops, manufactures, markets, distributes, sells,
services and supports a broad range of products for use in commercial, specialty
and light vehicles. In addition to sales to the OEM market, the Company provides
its truck and trailer products and off-highway and specialty products to OEMs,
dealers, distributors, fleets and other end-users in the aftermarket. Principal
products of the Company include the following:
HEAVY VEHICLE SYSTEMS
Truck and Trailer Products
Truck Axles. Meritor is the world's leading independent supplier of axles
for heavy-duty commercial vehicles. The Company's five axle manufacturing
facilities located in the United States, Brazil, England and Italy produce axles
for heavy-duty and medium-duty commercial vehicles. The Company's extensive
truck axle product line includes a wide range of drive and non-drive front steer
axles and single and tandem rear drive axles, which can include
driver-controlled differential lock for extra traction, aluminum carriers to
reduce weight and pressurized filtered lubrication systems for longer life. The
Company's front steer and rear drive axles can be equipped with the Company's
cam, wedge or air disc brakes, automatic slack adjusters and anti-lock braking
systems.
Brakes. The Company is a leading independent supplier of air brakes to
heavy-duty and medium-duty commercial vehicle manufacturers. Through four
manufacturing facilities located in the United States, Canada, England and
Italy, the Company manufactures a broad range of foundation air brakes, as well
as automatic slack adjusters for brake systems. The Company's foundation air
brake products include cam drum brakes, which offer improved lining life and
tractor/trailer interchangeability, air disc brakes, which provide fade
resistant braking for demanding applications, and wedge drum brakes, which are
lightweight and provide automatic internal wear adjustment.
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Through its 50%-owned joint venture with WABCO Automotive Products
("WABCO"), a wholly-owned subsidiary of American Standard, Inc., the Company is
the leading supplier of anti-lock braking systems ("ABS") and a supplier of
other electronic and pneumatic control systems for North American heavy-duty
commercial vehicles. Through the joint venture, the Company also supplies
hydraulic ABS to the North American medium-duty truck market.
In 1995, federal regulations were adopted requiring that new heavy-duty and
medium-duty vehicles sold in the United States be equipped with ABS. The first
phase of this regulation requiring truck-tractors to be ABS equipped became
effective in March 1997. ABS also will be required on all trailers, single-unit
trucks and buses with air brakes manufactured after March 1, 1998 and on all
trucks and buses with hydraulic brakes manufactured after March 1, 1999.
Trailer Products. Meritor believes it is the world's leading manufacturer
of heavy-duty trailer axles, with leadership positions in North America and in
Europe. The Company's trailer axles are available in over forty models in
capacities from 20,000 to 30,000 pounds for virtually all heavy trailer
applications, and are available with the Company's broad range of brake
products, including ABS. In addition, the Company supplies trailer air
suspension products, for which it has strong market positions in Europe and
growing market presence in North America.
Transmissions. The Company introduced its transmission product line in
1989, enabling it to supply a complete drivetrain system to heavy-duty
commercial vehicle manufacturers in North America. The Company's range of
transmission models includes its Engine Synchro Shift(TM) transmission for
heavy-duty trucks that is designed to reduce gear shifting effort for drivers
and reduce wear on clutches and other drivetrain components in a cost efficient
manner by synchronizing engine speed to road speed shifts without use of the
clutch. See Item 3, Legal Proceedings.
Clutches, Drivelines and Other Products. Meritor also supplies universal
joints and driveline components, as well as clutches, including diaphragm-spring
clutches. The Company believes that its Permalube(TM) universal joint is
currently the only permanently lubricated universal joint used in the high
mileage on-highway market. The Company also supplies Tripmaster(R) on-board
computers, which provide trip and vehicle diagnostics, to truck OEMs and fleet
operators.
Off-Highway, Specialty and Military Vehicle Products
Off-Highway Vehicle Products. The Company supplies heavy-duty axles,
brakes and drivelines for use in numerous off-highway vehicle applications,
including construction, material handling, agriculture, mining and forestry, in
North America, South America, Europe and China. These products are designed to
tolerate high tonnages and operate under extreme conditions.
Specialty Vehicle Products. The Company supplies axles, brakes and
transfer cases for use in buses, coaches and recreational, fire and other
specialty vehicles in North America and Europe, and is the leading supplier of
bus and coach axles and brakes in North America.
Military Vehicle Products. The Company supplies axles, brakes, brake
system components including ABS, trailer products, transfer cases and drivelines
for use in medium-duty and heavy-duty military tactical wheeled vehicles,
principally in North America.
LIGHT VEHICLE SYSTEMS
Roof Systems. Meritor is one of the world's leading independent suppliers
of sunroofs and roof systems products, including its Golde(R) brand sunroofs,
for use in passenger cars, light trucks and sport utility vehicles. The
Company's roof system manufacturing facilities in North America, Europe and the
Asia-Pacific region supplied approximately 1.7 million sunroofs and sunroof
systems in fiscal 1997.
Door Systems. The Company is the world's leading supplier of manual and
power window regulators and a leading supplier of integrated door modules and
systems. The Company manufactures approximately 23 million window regulators
annually at plants in North America, South America, Europe and the Asia-
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Pacific region for light vehicle and heavy-duty commercial vehicle
manufacturers. The Company's wide range of power and manual door system products
utilize numerous technologies and offer the Company's own electric motors, which
are designed for individual applications and to maximize operating efficiency
and reduce noise levels.
Access Control Systems. Meritor supplies manual and power activated latch
systems to light vehicle and heavy-duty commercial vehicle manufacturers, with
leadership market positions in Europe and a growing market presence in North
America and the Asia-Pacific region. The Company's access control products
include modular and integrated door latches, actuators, trunk and hood latches
and fuel flap locking devices. From its access control systems manufacturing
facilities in North America, Europe and the Asia-Pacific region, the Company
manufactures over 18 million latches and 6 million actuators annually.
Seat Adjusting Systems. The Company supplies manual and power seat
adjusting systems for passenger cars, light trucks and sport utility vehicles,
principally in North America. The Company's seat adjusting system products,
first introduced in 1994, feature systems with integrated electronic memory and
electric motors manufactured by the Company which are designed with speed and
power capabilities to meet the specific requirements of each vehicle platform.
Suspension Products. Through its 57%-owned joint venture with Mitsubishi
Steel Mfg. Co., the Company is one of the leading independent suppliers of
products used in suspension systems for passenger cars, light trucks and sport
utility vehicles in North America. The Company's suspension system products,
which are manufactured at three facilities in the United States and Canada,
include coil springs, stabilizer bars and torsion bars. This business has
experienced significant sales growth over the past five years as light vehicle
OEMs have increased their outsourcing of suspension system products and the
light vehicle market has grown.
Steel Wheels. Meritor is a leading supplier of steel wheels to the light
vehicle OEM market, principally in North and South America. The Company's wheel
manufacturing facility in Brazil, and its recently established facility in
Mexico, combine to produce more than ten million wheels annually.
CUSTOMERS; SALES AND MARKETING
Meritor has numerous customers worldwide and has developed long-standing
business relationships with many of these customers. The Company markets and
sells its products principally to OEMs. In North America, the Company also
markets its truck and trailer products directly to dealers, fleets and other
end-users, who may designate the components and systems of a particular supplier
for installation in the vehicles they purchase from OEMs. Most of the Company's
sales to OEMs, consistent with industry practice, are made through open purchase
orders, which do not require the purchase of a minimum number of products and
typically may be canceled by the customer on reasonable notice without penalty.
The Company also sells products to certain customers under long-term
arrangements that require the Company to provide annual cost reductions (through
price reductions or other cost benefits for the OEMs) by certain percentages
each year. If the Company were unable to generate sufficient production costs
savings in the future to offset such price reductions, the Company's gross
margins could be adversely affected. In addition to sales to the OEM market, the
Company also provides its truck and trailer products and off-highway and
specialty products to OEMs, dealers, distributors, fleets and other end-users in
the aftermarket.
The Company is dependent upon large OEM customers with substantial
bargaining power, including with respect to price and other commercial terms.
Although the Company believes that it generally enjoys good relations with its
OEM customers, loss of all or a substantial portion of the Company's sales to
any of its large volume customers for whatever reason (including, but not
limited to, loss of contracts, reduced or delayed customer requirements or
strikes or other work stoppages affecting production by such customers) could
have a significant adverse effect on the Company's financial results. During
fiscal 1997, Freightliner Corporation and Mercedes-Benz A.G. (each of which is
owned by Daimler-Benz A.G.) together accounted for approximately 11% of total
sales of the Company. In May 1997, Freightliner Corporation entered into a
definitive agreement with Ford Motor Company for the purchase of Ford's heavy
truck business, also a customer of the Company. Freightliner, Mercedes and
Ford's heavy truck business together accounted for approximately 15% of total
fiscal 1997 sales of the Company.
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Except as noted above with respect to the North American market for
heavy-duty trucks, the Company generally competes for new business from OEMs
both at the beginning of the development of new vehicle platforms and upon the
redesign of existing platforms. New platform development generally begins two to
four years prior to start-up of production. Once a supplier has been designated
to supply products to a new platform, an OEM will generally continue to purchase
those products from the supplier for the life of the platform, which typically
lasts four to six years.
COMPETITION
The Company operates in a highly competitive environment. Principal
competitive factors are price, quality, service, product performance, design and
engineering capabilities, new product innovation and timely delivery. The
Company competes worldwide with a number of United States and international
manufacturers that are both larger and smaller than the Company in terms of
resources and market shares. In addition, certain OEMs manufacture for their own
use products of the type supplied by the Company. In North America, the major
competitors of HVS are Eaton Corporation and Dana Corporation. LVS has numerous
competitors across its various product lines worldwide.
RAW MATERIALS AND SUPPLIES
The Company believes it has adequate sources for the supply of raw
materials and components for its manufacturing needs with suppliers located
around the world. The Company does, however, concentrate its purchases of
certain raw materials and parts over a limited number of suppliers and is
dependent upon the ability of its suppliers to meet performance and quality
specifications and delivery schedules. Although the Company historically has not
experienced any significant difficulties in obtaining an adequate supply of raw
materials and components necessary for its manufacturing operations, the loss of
a significant supplier or the inability of a supplier to meet performance and
quality specifications or delivery schedules could have an adverse effect on the
Company.
JOINT VENTURES
As the automotive industry has become more globalized, joint ventures and
other cooperative arrangements have become an important element of the business
strategies of the Company. The Company currently has interests in 14 joint
ventures with operations in the United States, Australia, Brazil, Canada, China,
India, Japan, Mexico and Turkey. In accordance with generally accepted
accounting principles, operating results of the eight joint ventures more than
50% owned are consolidated in the financial statements of the Company. Joint
ventures of the Company include its 50%-owned joint venture with WABCO for the
manufacture and supply of ABS systems for heavy-duty commercial vehicles and its
57%-owned joint venture with Mitsubishi Steel Mfg. Co. for the manufacture and
supply of suspension products for passenger cars, light trucks and sport utility
vehicles.
ACQUISITIONS AND DISPOSITIONS
Meritor intends regularly to consider various strategic and business
opportunities, including license agreements, marketing arrangements and
acquisitions, and to review the prospects of its existing businesses to
determine whether any of them should be modified, sold or otherwise
discontinued.
The industry in which the Company operates has recently experienced
significant consolidation among suppliers, due in part to globalization and
increased outsourcing of product engineering and manufacturing by OEMs, and in
part to OEMs more frequently awarding long-term, sole-source or preferred
supplier contracts to the most capable global suppliers, thereby reducing the
total number of suppliers from whom components and systems are purchased. While
the Company will consider acquisitions as a means of further expansion, there
can be no assurance that the Company will participate in this industry
consolidation, or that any such consolidation by the Company with other
suppliers will ultimately be advantageous to the Company or that the Company
will not be disadvantaged as a result of consolidation by other suppliers.
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RESEARCH AND DEVELOPMENT
The Company has significant research, development, engineering and product
design capabilities. The Company spent approximately $54 million, $51 million
and $58 million in fiscal 1997, 1996 and 1995, respectively, on research and
development. At September 30, 1997, the Company employed approximately 570
professional engineers and scientists. Pursuant to a transitional services
agreement entered into with Rockwell in connection with the Distribution,
Rockwell's Science Center continues to provide assistance to the Company in the
development of various technological and product advancements.
PATENTS AND TRADEMARKS
Numerous United States and foreign patents and patent applications are
owned or licensed by the Company in its manufacturing operations and other
activities. While in the aggregate the patents and licenses of the Company are
considered important to the operation of its business, management does not
consider them of such importance that the loss or termination of any one of them
would materially affect the Company. See Item 3, Legal Proceedings.
The Company's name, its registered trademark "Meritor" and its symbol are
important to its business. Other significant trademarks owned by the Company
include Golde(R) (sunroofs), Fumagalli(TM) (wheels) and ROR(TM) (trailer axles).
Under the terms of the Distribution Agreement (the "Distribution Agreement")
entered into with Rockwell in connection with the Distribution, the Company may
continue to apply the "Rockwell" brand name to its products for a period of ten
years after the Distribution.
EMPLOYEES
At September 30, 1997, the Company had more than 16,000 full-time
employees. Approximately 3,400 Company employees (including employees referred
to in the following paragraph) in the United States and Canada are covered by
collective bargaining agreements. The Company believes its relationship with
unionized employees is satisfactory. No significant work stoppages have occurred
in the past five years.
ENVIRONMENTAL MATTERS
In connection with the Distribution, the Company assumed all liabilities in
respect of environmental matters related to current and former operations of the
Automotive Business.
Federal, state and local requirements relating to the discharge of
substances into the environment, the disposal of hazardous wastes, and other
activities affecting the environment have had and will continue to have an
impact on the manufacturing operations of the Company. Thus far, compliance with
environmental requirements and resolution of environmental claims have been
accomplished without material effect on the Company's liquidity and capital
resources, competitive position or financial statements.
Meritor has been designated as a potentially responsible party at three
Superfund sites, excluding sites as to which the Company's records disclose no
involvement or as to which the Company's potential liability has been fully
determined. Management estimates the total reasonably possible costs the Company
could incur for the remediation of Superfund sites at September 30, 1997 to be
about $19 million, of which $12 million has been accrued.
Various other lawsuits, claims, and proceedings have been asserted against
the Company alleging violation of federal, state and local environmental
protection requirements, or seeking remediation of alleged environmental
impairments, principally at previously disposed of properties. For these
matters, management has estimated the total reasonably possible costs the
Company could incur at September 30, 1997 to be about $28 million. The Company
has recorded environmental accruals for these matters of $13 million.
At September 30, 1997, the Company had no receivables recorded from third
parties related to environmental matters.
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Based on its assessment and after consulting with David W. Greenfield,
Esq., General Counsel of the Company, management believes that the Company's
expenditures for environmental capital investment and remediation necessary to
comply with present regulations governing environmental protection and other
expenditures for the resolution of environmental claims will not have a material
adverse effect on the Company's liquidity and capital resources, competitive
position or financial statements. Management cannot assess the possible effect
of compliance with future requirements.
GEOGRAPHIC INFORMATION
The Company conducts operations in the United States and in 15 foreign
countries. Selected financial information by major geographic area for the three
years ended September 30, 1997 is contained in Note 19 of the Notes to
Consolidated Financial Statements in the 1997 Annual Report.
For the fiscal year ended September 30, 1997, nearly one-half of the
Company's total assets and 41% of sales were outside North America, primarily in
Brazil, France, Germany, Italy and the United Kingdom.
The Company's international operations are subject to a number of risks
inherent in operating abroad, including, but not limited to, risks with respect
to currency exchange rate fluctuations, local economic and political conditions,
disruptions of capital and trading markets, restrictive governmental actions
(such as restrictions on transfer of funds and trade protection measures,
including export duties and quotas and customs duties and tariffs), changes in
legal or regulatory requirements, import or export licensing requirements,
limitations on the repatriation of funds, difficulty in obtaining distribution
and support, nationalization, the laws and policies of the United States
affecting trade, foreign investment and loans, and tax laws. There can be no
assurance that these factors will not have a material adverse impact on the
Company's ability to increase or maintain its foreign sales or on its financial
condition or results of operations.
The Company enters into foreign currency forward exchange contracts to
minimize risk of loss from currency exchange rate fluctuations on firm and
identifiable foreign currency commitments entered into in the ordinary course of
business. The Company has not experienced nor does it anticipate any material
adverse effect on its results of operations or financial condition related to
these foreign currency forward exchange contracts. The Company has not entered
into foreign currency forward exchange contracts for other purposes, and the
Company's financial condition and results of operations could be affected
(negatively or positively) by currency fluctuations.
SEASONALITY; CYCLICALITY
The Company may experience seasonal variations in the demand for its
products to the extent automotive vehicle production fluctuates. Historically,
such demand has been somewhat lower in the Company's first and fourth fiscal
quarters (the fourth and third calendar quarters, respectively) when OEM plants
may close during model changeovers and vacation and holiday periods.
In addition, the industry in which the Company operates has been
characterized historically by periodic fluctuations in overall demand for
trucks, passenger cars and other vehicles for which the Company supplies
products, resulting in corresponding fluctuations in demand for products of the
Company. Cycles in the major automotive industry markets of North America and
Europe are not necessarily concurrent or related. The cyclical nature of the
automotive industry is outside the control of the Company and cannot be
predicted with certainty. The Company has sought and will continue to seek to
expand its operations globally to mitigate the effect of periodic fluctuations
in demand of the automotive industry in one or more particular countries.
9
<PAGE> 11
The following table sets forth vehicle production in principal markets
served by the Company for the last five fiscal years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Heavy Vehicles (In thousands):
North America, Heavy-Duty Trucks.............. 179 214 248 204 201
North America, Medium-Duty Trucks............. 109 125 147 126 138
North America, Trailers....................... 211 270 327 266 248
Europe, Trailers.............................. 79 75 95 94 84
Light Vehicles (In millions):
North America................................. 13.0 14.6 15.1 15.1 15.2
Europe........................................ 11.5 12.1 12.9 13.0 13.0
Asia-Pacific (calendar year data)............. 15.5 15.6 15.6 16.8 17.6
</TABLE>
- ---------------
Source: Automotive industry publications and management estimates.
CAUTIONARY STATEMENT
This Annual Report on Form 10-K contains statements relating to future
results of the Company (including certain projections and business trends) that
are "forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected as
a result of various risks and uncertainties, including but not limited to global
economic and market conditions, such as the demand for commercial, specialty and
light vehicles for which the Company supplies products; risks inherent in
operating abroad; OEM program delays; demand for and market acceptance of new
and existing products; successful development of new products; reliance on major
OEM customers; labor relations of the Company, its customers and suppliers; and
competitive product and pricing pressures, as well as other risks and
uncertainties, including those detailed herein and from time to time in other
filings of the Company with the Commission. See also -- Customers; Sales and
Marketing, -- Competition, -- Raw Materials and Supplies, -- Acquisitions and
Dispositions, -- Geographic Information and -- Seasonality; Cyclicality herein
and Chief Financial Officer's Review -- Management's Discussion and Analysis in
the 1997 Annual Report.
ITEM 2. PROPERTIES.
At September 30, 1997, the Company operated 46 manufacturing facilities
throughout the United States and in Europe, Brazil, Canada, Mexico, Australia
and the Far East. It also had 19 engineering facilities, sales offices,
warehouses and service centers. These facilities had an aggregate floor space of
approximately 11 million square feet, substantially all of which is in use. Of
this floor space, approximately 91% was owned by the Company and approximately
9% was leased. There are no major encumbrances (other than financing
arrangements which in the aggregate are not material) on any of the Company's
plants or equipment. In the opinion of management, the Company's properties have
been well maintained, are in sound operating condition and contain all equipment
and facilities necessary to operate at present levels. A summary of floor space
of these facilities at September 30, 1997 is as follows:
<TABLE>
<CAPTION>
OWNED LEASED
LOCATION FACILITIES FACILITIES TOTAL
-------------------------------------------------------- ---------- ---------- ------
(IN THOUSANDS OF SQUARE FEET)
<S> <C> <C> <C>
United States........................................... 4,431 256 4,687
Canada.................................................. 691 38 729
Europe.................................................. 2,956 276 3,232
Asia-Pacific............................................ 406 391 797
Latin America........................................... 1,441 15 1,456
----- --- ------
Total......................................... 9,925 976 10,901
===== === ======
</TABLE>
10
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS.
On July 17, 1997 Eaton Corporation filed suit against Rockwell in the U.S.
District Court in Wilmington, Delaware asserting infringement of Eaton's U.S.
Patent No. 4850236, which covers certain aspects of heavy-duty truck
transmissions, by the Company's Engine Synchro Shift(TM) transmission for
heavy-duty trucks. Eaton seeks preliminary and permanent injunctions and
unspecified damages. On October 30, 1997, the Company filed a motion for summary
judgment. On November 4, 1997, the court denied Eaton's request for a
preliminary injunction. Based on advice of M. Lee Murrah, Esq., Assistant
General Counsel of the Company, management believes the Company's truck
transmissions do not infringe Eaton's patent. The Company intends to defend the
suit vigorously.
Various other lawsuits, claims and proceedings have been or may be
instituted or asserted against Rockwell or the Company or their respective
subsidiaries relating to the conduct of the Company's business, including those
pertaining to product liability, intellectual property, environmental, safety
and health, and employment matters.
Although the outcome of litigation cannot be predicted with certainty and
some lawsuits, claims or proceedings may be disposed of unfavorably to the
Company, based on its evaluation of matters which are pending or asserted and
after consulting with David W. Greenfield, Esq., General Counsel of the Company,
management believes the disposition of such matters will not have a material
adverse effect on the Company's financial statements.
Pursuant to the terms of the Distribution Agreement, the Company assumed
responsibility for all litigation (including environmental proceedings) against
Rockwell or its subsidiaries in respect of the Automotive Business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Prior to the Distribution, Rockwell, as sole shareowner of the Company and
acting by written consent as permitted by Delaware law, approved the following
matters on the dates indicated: (1) on August 12, 1997, amendment of the
Company's certificate of incorporation to reflect a change in the Company's name
from 111 Holdings, Inc. to Meritor Automotive, Inc.; and (2) on August 20, 1997,
adoption by the Company of various benefit plans for the Company's board of
directors and employees and amendment and restatement of the Company's
certificate of incorporation.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The name, age, positions and offices held with the Company and principal
occupations and employment during the past five years of each of the executive
officers of the Company as of December 19, 1997 are as follows:
<TABLE>
<CAPTION>
NAME, OFFICE AND POSITION, AND PRINCIPAL OCCUPATIONS AND EMPLOYMENT AGE
- --------------------------------------------------------------------------------------- ---
<S> <C>
LARRY D. YOST -- Chairman of the Board and Chief Executive Officer of Meritor since May
1997. Senior Vice President, President, Automotive and Acting President, Heavy
Vehicle Systems of Rockwell (electronic controls and communications) from March 1997
to September 1997; President, Heavy Vehicle Systems of Rockwell from November 1994 to
March 1997; Senior Vice President, Operations of Allen-Bradley Company, Inc.
(automation), a subsidiary of Rockwell, prior thereto................................ 59
ROBERT A. CALDER -- Senior Vice President and President, Light Vehicle Systems of
Meritor since September 1997. President, Light Vehicle Systems of Rockwell from
November 1994 to September 1997; Executive Vice President, Automotive Body and
Chassis Systems of Rockwell from November 1992 to November 1994; Vice President and
General Manager, Automotive Body Systems of Rockwell prior thereto................... 62
GARY L. COLLINS -- Senior Vice President, Human Resources of Meritor since August 1997.
Vice President -- Human Resources and Government Relations, Automotive of Rockwell
from September 1991 to September 1997................................................ 51
</TABLE>
11
<PAGE> 13
<TABLE>
<CAPTION>
NAME, OFFICE AND POSITION, AND PRINCIPAL OCCUPATIONS AND EMPLOYMENT AGE
- --------------------------------------------------------------------------------------- ---
<S> <C>
DAVID W. GREENFIELD -- Senior Vice President, General Counsel and Secretary of Meritor
since May 1997. Associate General Counsel of Rockwell from July 1995 to September
1997; Assistant General Counsel of Rockwell prior thereto............................ 47
THOMAS J. JOYCE -- Vice President and Treasurer of Meritor since May 1997. Vice
President, Investor and Community Relations of Rockwell from May 1989 to September
1997................................................................................. 50
SUSAN P. KAMPE -- Senior Vice President and Chief Information Officer of Meritor since
September 1997. Vice President -- Information Technology, Heavy Vehicle Systems of
Rockwell from August 1996 to September 1997; Director of Global Information Systems
and Services, Safety Restraints Business of Allied-Signal Automotive (automotive
component supplier) from August 1994 to August 1996; Manager, Manufacturing Systems,
North America of ITT Automotive (automotive component supplier) prior thereto........ 40
LAWRENCE J. LOCKWOOD -- Vice President and Controller of Meritor since September 1997.
Vice President and Controller, Automotive of Rockwell from August 1997 to September
1997; Vice President, Finance of Industrial Control Group of Allen-Bradley Company,
Inc., a subsidiary of Rockwell, from April 1995 to August 1997; Vice President,
Finance and Administration of Operations Group of Allen-Bradley Company, Inc. prior
thereto.............................................................................. 44
THOMAS A. MADDEN -- Senior Vice President and Chief Financial Officer of Meritor since
May 1997. Vice President and Senior Vice President -- Finance, Automotive of Rockwell
from March 1997 to September 1997; Vice President, Corporate Development of Rockwell
from September 1996 to March 1997; Vice President -- Finance & Administration, Light
Vehicle Systems of Rockwell from May 1996 to September 1996; Vice
President -- Finance & Administration, Automotive of Rockwell from October 1994 to
May 1996; Assistant Controller of Rockwell prior thereto............................. 44
PRAKASH R. MULCHANDANI -- Senior Vice President and President, Worldwide Truck and
Trailer Systems of Meritor since September 1997. President -- Worldwide Truck and
Trailer Systems, Heavy Vehicle Systems of Rockwell from April 1996 to September 1997;
President -- North American Truck Systems, Automotive of Rockwell from June 1994 to
April 1996; General Manager -- Trailer Products, Automotive of Rockwell prior
thereto.............................................................................. 53
RICHARD C. QUAID -- Senior Vice President and President, Off-Highway and Specialty
Products of Meritor since September 1997. President -- Off-Highway and Specialty
Products, Heavy Vehicle Systems of Rockwell from April 1996 to September 1997;
President -- Off-Highway Products, Automotive of Rockwell prior thereto.............. 55
RODNEY J. WALTER -- Senior Vice President, Business Development and Communications of
Meritor since September 1997. Vice President -- Business Development, Heavy Vehicle
Systems of Rockwell from June 1995 to September 1997; Director -- Business
Development of Rockwell prior thereto................................................ 46
</TABLE>
There are no family relationships, as defined, between any of the above
executive officers. No officer of the Company was selected pursuant to any
arrangement or understanding between him and any person other than the Company.
All executive officers are elected annually.
Mr. Calder will retire from his current positions with the Company
effective December 31, 1997.
Effective January 1, 1998, Mr. Mulchandani will be Senior Vice President
and President, Heavy Vehicle Systems of Meritor.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock, par value $1 per share, is listed on the New
York Stock Exchange and trades under the symbol "MRA". On December 15, 1997,
there were 55,971 shareowners of record of the Company's Common Stock. The
Company's Common Stock began trading "regular way" on the New York Stock
Exchange on October 1, 1997. Prior to the Distribution, the Company's Common
Stock traded on a "when-issued" basis from September 15, 1997 to September 30,
1997.
12
<PAGE> 14
Prior to the Distribution, on September 24, 1997, the Company paid a cash
dividend to Rockwell, then the Company's sole shareowner, in the amount of
$359.4 million. On November 12, 1997, the Board of Directors of Meritor declared
a quarterly dividend of 10.5 cents per share, payable on December 15, 1997 to
shareowners of record on November 24, 1997.
On September 30, 1997 the Company issued 500 shares of Common Stock to each
of the six non-employee directors of the Company pursuant to the terms of the
Company's Directors Stock Plan and subject to approval of that Plan at the 1998
Annual Meeting of Shareowners of the Company. The issuance was exempt from
registration under the Securities Act of 1933, as amended, as a transaction not
involving a public offering under Section 4(2).
ITEM 6. SELECTED FINANCIAL DATA.
See the information in the table captioned SELECTED FINANCIAL DATA in the
1997 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See the discussion and analysis under the caption CHIEF FINANCIAL OFFICER'S
REVIEW -- MANAGEMENT'S DISCUSSION AND ANALYSIS in the 1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See STATEMENT OF CONSOLIDATED INCOME, CONSOLIDATED BALANCE SHEET, STATEMENT
OF CONSOLIDATED CASH FLOWS, STATEMENT OF CONSOLIDATED SHAREOWNERS' EQUITY, NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS, and INDEPENDENT AUDITORS' REPORT in the
1997 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
See the information under the captions ELECTION OF DIRECTORS and
INFORMATION AS TO NOMINEES FOR DIRECTORS AND CONTINUING DIRECTORS in the 1998
Proxy Statement. No nominee for director was selected pursuant to any
arrangement or understanding between the nominee and any person other than the
Company pursuant to which such person is or was to be selected as a director or
nominee. See also the information with respect to executive officers of the
Company under Item 4a of Part I.
ITEM 11. EXECUTIVE COMPENSATION.
See the information under the captions EXECUTIVE COMPENSATION and
RETIREMENT BENEFITS in the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the information under the captions VOTING SECURITIES and OWNERSHIP BY
MANAGEMENT OF EQUITY SECURITIES in the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information under the caption CERTAIN TRANSACTIONS AND OTHER
RELATIONSHIPS in the 1998 Proxy Statement.
13
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) Financial Statements (all financial statements listed below are
those of the Company and its consolidated subsidiaries and are incorporated
by reference in Item 8 from the 1997 Annual Report).
Statement of Consolidated Income, years ended September 30, 1997, 1996
and 1995.
Consolidated Balance Sheet, September 30, 1997 and 1996.
Statement of Consolidated Cash Flows, years ended September 30, 1997,
1996 and 1995.
Statement of Consolidated Shareowners' Equity, years ended September
30, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
(2) Financial Statement Schedule for the years ended September 30,
1997, 1996 and 1995.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report.................................. S-1
Schedule II -- Valuation and Qualifying Accounts.............. S-2
</TABLE>
Schedules not filed herewith are omitted because of the absence of
conditions under which they are required or because the information called for
is shown in the financial statements or notes thereto.
(3) Exhibits
<TABLE>
<C> <S>
3-a-1 Restated Certificate of Incorporation of the Company, filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (Registration No. 333-35403), is
hereby incorporated by reference.
3-b-1 By-Laws of the Company, filed as Exhibit 4.2 to the Company's Registration
Statement on Form S-8 (Registration No. 333-35403), is hereby incorporated by
reference.
4-a-1 Rights Agreement dated as of September 8, 1997 by and between the Company and First
Chicago Trust Company of New York, as Rights Agent, filed as Exhibit 4.3 to the
Company's Registration Statement on Form S-8 (Registration No. 333-35403), is
hereby incorporated by reference.
*10-a-1 The Company's 1997 Long-Term Incentives Plan, adopted by the Company's Board of
Directors on August 20, 1997, to be submitted for approval by the Company's
shareowners at the 1998 Annual Meeting of Shareowners.
*10-a-2 Form of Restricted Stock Agreement under the Company's 1997 Long-Term Incentives
Plan.
*10-b-1 The Company's Directors Stock Plan, adopted by the Company's Board of Directors on
August 20, 1997, to be submitted for approval by the Company's shareowners at the
1998 Annual Meeting of Shareowners.
*10-b-2 Form of Restricted Stock Agreement under the Company's Directors Stock Plan.
*10-c-1 The Company's Incentive Compensation Plan, adopted by the Company's Board of
Directors on August 20, 1997, to be submitted for approval by the Company's
shareowners at the 1998 Annual Meeting of Shareowners.
*10-d-1 Copy of resolution of the Board of Directors of the Company, adopted on September
8, 1997, providing for its Deferred Compensation Policy for Non-Employee Directors.
</TABLE>
14
<PAGE> 16
<TABLE>
<C> <S>
10-e-1 Credit Agreement dated as of August 21, 1997 among the Company, the lenders from
time to time party thereto, Morgan Guaranty Trust Company of New York, as
Administrative Agent and NBD Bank, as Documentation Agent, filed as Exhibit 10.5 to
the Company's Registration Statement on Form 10 (File No. 1-13093), is hereby
incorporated by reference.
10-f-1 Distribution Agreement dated as of September 30, 1997 by and between Rockwell
International Corporation and the Company, filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K dated October 10, 1997, is hereby incorporated by
reference.
10-g-1 Employee Matters Agreement dated as of September 30, 1997 by and between Rockwell
International Corporation and the Company, filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated October 10, 1997, is hereby incorporated by
reference.
10-h-1 Tax Allocation Agreement dated as of September 30, 1997 by and between Rockwell
International Corporation and the Company, filed as Exhibit 2.3 to the Company's
Current Report on Form 8-K dated October 10, 1997, is hereby incorporated by
reference.
13 Portions of the 1997 Annual Report to Shareowners of the Company.
21 List of Subsidiaries of the Company.
23-a Consent of M. Lee Murrah, Esq., Assistant General Counsel of the Company.
23-b Consent of David W. Greenfield, Esq., Senior Vice President, General Counsel and
Secretary of the Company.
23-c Independent Auditors' Consent.
24 Power of Attorney authorizing certain persons to sign this Annual Report on Form
10-K on behalf of certain directors and officers of the Company.
27 Financial Data Schedule for this Annual Report on Form 10-K.
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of the period
covered by this Report.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MERITOR AUTOMOTIVE, INC.
By /s/ DAVID W. GREENFIELD
------------------------------------
David W. Greenfield
Senior Vice President, General
Counsel and Secretary
Dated: December 19, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the 19th day of December 1997 by the following
persons on behalf of the registrant and in the capacities indicated.
<TABLE>
<S> <C>
Larry D. Yost* Chairman of the Board and Chief
Executive Officer (principal
executive officer) and Director
Joseph B. Anderson, Jr.* Director
Donald R. Beall* Director
John J. Creedon* Director
Charles H. Harff* Director
Harold A. Poling* Director
Martin D. Walker* Director
Thomas A. Madden* Senior Vice President and Chief
Financial Officer (principal
financial officer)
Lawrence J. Lockwood* Vice President and Controller
(principal accounting officer)
</TABLE>
*By: /s/ DAVID W. GREENFIELD
----------------------------------
David W. Greenfield,
Attorney-in-fact**
** By authority of powers of attorney filed herewith.
16
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareowners
of Meritor Automotive, Inc.
Troy, Michigan
We have audited the consolidated and combined financial statements of
Meritor Automotive, Inc. and subsidiaries (formerly the Automotive Business of
Rockwell International Corporation -- see Note 1) as of September 30, 1997 and
1996, and for each of the three years in the period ended September 30, 1997,
and have issued our report thereon dated November 12, 1997; such financial
statements and report are included in your 1997 Annual Report to Shareowners,
and are incorporated herein by reference. Our audits also included the financial
statement schedule of Meritor Automotive, Inc. and subsidiaries, listed in Item
14(a)(2). This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Detroit, Michigan
November 12, 1997
S-1
<PAGE> 19
SCHEDULE II
MERITOR AUTOMOTIVE, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE AT
BEGINNING TO COSTS END OF
DESCRIPTION OF YEAR(A) AND EXPENSES DEDUCTIONS YEAR(A)
- ------------------------------------------------ ---------- ------------ ---------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Year ended September 30, 1997:
Allowance for doubtful accounts............... $ 16.9 $ 2.3 $7.6(b) $ 11.6
Year ended September 30, 1996:
Allowance for doubtful accounts............... 10.1 10.5 3.7(b) 16.9
Year ended September 30, 1995:
Allowance for doubtful accounts............... 9.6 1.7 1.2(b) 10.1
</TABLE>
- ---------------
(a) Includes allowances for trade and other long-term receivables.
(b) Uncollectible accounts written off.
S-2
<PAGE> 1
EXHIBIT 10-a-1
MERITOR AUTOMOTIVE, INC.
1997 LONG-TERM INCENTIVES PLAN
1. PURPOSE
The purpose of the 1997 Long-Term Incentives Plan is to foster creation
of and enhance Meritor Automotive, Inc. (Meritor) shareowner value by linking
the compensation of officers and other key employees of the Corporation to
increases in the price of Meritor stock or by offering the incentives of
long-term monetary rewards to key employees of Meritor or its business units
directly linked to their contribution to the creation of Meritor shareowner
value, thus providing means by which persons of outstanding abilities can be
attracted, motivated and retained.
2. DEFINITIONS
For the purpose of the Plan, the following terms shall have the
meanings set forth below:
(a) Assumed Rockwell Options. Options granted under the Rockwell Plan
on or after December 9, 1996 to persons who were Employees (as herein defined)
on the Distribution Date which (i) by action of the board of directors of
Rockwell under Section 11 of the Rockwell Plan have been adjusted as of the
Distribution Date to entitle the grantee thereof to purchase Shares; (ii) as so
adjusted, have been assigned to Meritor; and (iii) by action of the Board of
Directors have been assumed by Meritor under Section 5 of this Plan.
(b) Board of Directors. The Board of Directors of Meritor.
(c) Committee. The Compensation and Management Development Committee
designated by the Board of Directors from among its members who are not eligible
to receive a Grant under the Plan.
(d) Corporation. Meritor and those of its subsidiary corporations or
affiliates designated by the Committee to participate in the Plan.
(e) Distribution Date. The date of the pro-rata distribution by
Rockwell to its shareowners of all the issued and outstanding stock of Meritor.
(f) Employees. Officers and other key employees of the Corporation, but
not directors who are not also employees of the Corporation.
<PAGE> 2
(g) Executive Officer. An Employee who is an executive officer of
Meritor as defined in Rule 3b-7 under the Securities Exchange Act of 1934, as
amended, or any successor provision.
(h) Fair Market Value. The closing price of Shares as reported in the
New York Stock Exchange--Composite Transactions on the date of a determination
(or on the next preceding day Shares were traded if not traded on the date of a
determination).
(i) Grant. A grant made pursuant to the Plan by the Grant Committee to
an Employee in the form of Options, Stock Appreciation Rights or Restricted
Shares or a grant made pursuant to the Rockwell Plan of Assumed Rockwell
Options.
(j) Grant Committee. The Committee excluding those members of the
Committee who are not at the time any Grant is made both "outside directors" as
defined for purposes of Section 162(m) and the regulations thereunder and
"Non-Employee Directors" as defined in rule 16b- 3(b)(3)(i) under the Securities
Exchange Act of 1934, as amended, for purposes of Section 16 of that Act and the
rules thereunder.
(k) Meritor. Meritor Automotive, Inc.
(l) Option. An option to purchase Shares granted to an Employee by the
Grant Committee pursuant to Section 5 or 8 of the Plan or an Assumed Rockwell
Option.
(m) Participant. Any Employee to whom a Grant is made.
(n) Performance Cycle. Any period of three or more consecutive fiscal
years of Meritor established for Meritor or a designated business component
under a Performance Plan.
(o) Performance Measure. Criteria established to serve as a measure of
performance of Meritor or a designated business component during a Performance
Cycle under a Performance Plan.
(p) Performance Objectives. Levels of achievement, related to the
Performance Measure, established as goals for a Performance Cycle to be used in
determining whether and to what extent grants under a Performance Plan shall be
deemed to be earned.
(q) Performance Plan. A performance plan applicable to Meritor or one
or more business components of the Corporation authorized pursuant to Section 4
of the Plan.
(r) Plan. This 1997 Long-Term Incentives Plan.
(s) Restricted Period. The period (i) not less than three years or (ii)
until achievement of performance goals specified at the time of Grant by the
Grant Committee with respect to a Grant
-2-
<PAGE> 3
of Restricted Shares during which the Shares are subject to forfeiture if the
grantee does not continue as an Employee.
(t) Restricted Shares. Shares subject to conditions prescribed by the
Committee under Section 7 of the Plan.
(u) Rockwell. Rockwell International Corporation.
(v) Rockwell Plan. The 1995 Long-Term Incentives Plan of Rockwell
International Corporation.
(w) Section 162(m). Section 162(m) of the Internal Revenue Code, as
amended, or any successor provision.
(x) Shares. Shares of Common Stock of Meritor.
(y) Stock Appreciation Right. A right granted to an Employee by the
Grant Committee pursuant to Section 6 or 8 of the Plan (i) in conjunction with
all or any part of any Option, which entitles the Employee, upon exercise of
such right, to surrender such Option, or any part thereof, and to receive a
payment equal to the excess of the Fair Market Value, on the date of such
exercise, of the Shares covered by such Option, or part thereof, over the
purchase price of such Shares pursuant to the Option (a Tandem Stock
Appreciation Right) or (ii) separate and apart from any Option, which entitles
the Employee, upon exercise of such right, to receive a payment measured by the
increase in the Fair Market Value of a number of Shares designated by such right
from the date of grant of such right to the date on which the Employee exercises
such right (a Freestanding Stock Appreciation Right).
(z) Supplementary Stock Plan. A supplementary stock plan applicable to
Employees subject to the tax laws of one or more countries other than the United
States authorized pursuant to Section 8 of the Plan.
3. PLAN ADMINISTRATION
(a) The Grant Committee shall determine the Employees to whom Grants
are made, the number of Shares or Stock Appreciation Rights to be subject to
each Grant and the Restricted Period for any Grant of Restricted Shares.
(b) The Committee shall exercise all other responsibilities, powers and
authority relating to the administration of the Plan not reserved to the Board
of Directors.
-3-
<PAGE> 4
(c) The Board of Directors reserves the right, in its sole discretion,
to exercise or authorize another committee or person to exercise some of or all
the responsibilities, powers and authority vested in the Committee and the Grant
Committee under the Plan.
(d) In making their determinations with respect to Grants under the
Plan or grants under any Performance Plan, the Grant Committee and the Committee
may consider recommendations of the Chief Executive Officer of Meritor and shall
take into account such factors as the Employee's level of responsibility,
performance, performance potential, level and type of compensation and potential
value of Grants.
4. PERFORMANCE PLANS
(a) The Committee may authorize Performance Plans applicable to Meritor
or one or more business components of the Corporation on such terms and
conditions, not inconsistent with the Plan, and applicable to such Employees or
categories of Employees as the Committee shall determine. In connection with its
authorization of any Performance Plan, the Committee may authorize Meritor's
Chief Executive Officer to approve the definitive terms and conditions of that
Performance Plan, including but not limited to the Employees or categories of
Employees to which that Performance Plan shall apply and the committee or person
who shall be delegated authority to administer that Performance Plan, except
that authorization by the Committee shall be required for participation by any
Executive Officer in any Performance Plan. Each Performance Plan shall include
provision for: (i) establishment of Performance Cycles of not less than three
consecutive fiscal years for Meritor (if a Performance Plan applicable to it
should be authorized), and each designated business component, provided that no
Performance Cycle shall begin later than September 30, 2007 and only one
Performance Cycle for Meritor or any designated business component shall begin
with any one fiscal year; (ii) establishment of a Performance Measure and
Performance Objectives for each Performance Cycle established for Meritor and
each designated business component; and (iii) approval by the Committee of any
grants thereunder to any Executive Officer. In addition, a Performance Plan may
but need not provide for (x) grants under such Performance Plan with respect to
a Performance Cycle to be made at any time during the Performance Cycle,
provided that any grant made after the first fiscal year of the Performance
Cycle shall provide for a pro-rated award; (y) adjustment (up or down) of the
Performance
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<PAGE> 5
Objectives or modification of the Performance Measure (or both) for a
Performance Cycle for Meritor or any designated business component if the
Committee (or with the Committee's approval, the committee or person delegated
to administer the Performance Plan except insofar as it relates to any Executive
Officer) determines that conditions, including but not limited to changes in the
economy, changes in laws or government regulations, changes in generally
accepted accounting principles, or acquisitions or dispositions determined by
the Committee to be material, so warrant; and (z) a Change-of-Control
contingency similar to Section 13(f) of the Plan.
(b) Potential awards granted to participating Employees under
Performance Plans shall be expressed as cash amounts (whether in currency or in
units having a currency equivalent) and shall be paid in accordance with
determinations of the Committee. Payments shall be in cash unless the Committee
determines to make payment to one or more named participating Employees in
Shares (which may be Restricted Shares) or a combination of cash and Shares. Any
payment which is made in cash may be made in a lump sum, in installments or on a
deferred basis. Any payment which is made in Shares shall be valued at the Fair
Market Value on the last trading day of the week preceding the day of the
Committee's determination to make payment in Shares. No award under a
Performance Plan shall bear interest except as may be determined by the
Committee in respect of payments made in installments or on a deferred basis.
(c) If and to the extent an award under a Performance Plan for any
Performance Cycle becomes payable to a participating Employee whose compensation
is subject to the limitation on deductibility under Section 162(m) for the
applicable year and the amount of that award when combined with all base,
incentive or other compensation of such Employee for the applicable year which
constitutes "applicable employee remuneration," as defined for purposes of
Section 162(m), would exceed the limitation of Section 162(m)(1), the amount
payable pursuant to the Performance Plan in excess of that limitation, whether
payable in cash, Shares or a combination of both, may in the sole discretion of
the Grant Committee be deferred until and paid on the first business day of the
calendar year following the Corporation's fiscal year in which such Employee's
employment by the Corporation terminates. Any Shares to which a participating
Employee will become entitled in respect of a payment deferred pursuant to this
paragraph shall be held in book-entry accounts subject to the direction of
Meritor (or if Meritor elects, certificates therefor may be issued in the
Employee's name but delivered to and held by Meritor) and any dividends that may
be paid in cash
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<PAGE> 6
or otherwise on those Shares shall be delivered to and held by Meritor until the
end of the period for which such payment is deferred unless the Grant Committee
determines at the time it determines to defer any payment pursuant to this
paragraph that the Employee shall be entitled to receive when paid dividends on
Shares the delivery of which has been so deferred. At the end of the deferral
period under this paragraph, the restrictions on the book-entry accounts for
those Shares shall be released (or any certificates issued shall be delivered),
and any dividends and any cash payment deferred pursuant to this paragraph shall
be delivered, to the Employee, together with interest on the amount of any cash
dividends and any such cash payment so delivered computed at the same rate and
in the same manner as interest credited from time to time under Meritor's
Deferred Compensation Plan.
5. OPTIONS
As of the Distribution Date, the Assumed Rockwell Options are assumed
by Meritor as Options under this Plan with the terms and conditions specified on
the respective dates of grant thereof under the Rockwell Plan as adjusted
pursuant to Section 11 of the Rockwell Plan. Thereafter, the Grant Committee may
grant from time to time to Employees, Options which may be incentive stock
options (as defined in Section 422 of the Internal Revenue Code), nonqualified
stock options, or both, to purchase Shares on terms and conditions determined by
the Grant Committee, consistent with the provisions of the Plan, including the
following:
(a) The purchase price of the Shares subject to any Option shall not be
less than the Fair Market Value on the date the Option is granted.
(b) Each Option may be exercised in whole or in part from time to time
during such period as the Option shall specify; provided, however, that if the
Grant Committee does not establish a different exercise schedule at or before
the date of grant of an Option, the Option shall become exercisable in three
approximately equal installments on each of the first, second and third
anniversaries of the date the Option is granted; and provided, further, that no
Option shall be exercisable prior to one year (except as provided in Section
9(c) or 13(f)) nor after ten years from the date of the grant thereof.
(c) Each Option may provide for related Stock Appreciation Rights.
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<PAGE> 7
(d) The aggregate Fair Market Value (determined as of the date the
Option is granted) of the Shares for which any Employee may be granted incentive
stock options which are exercisable for the first time in any calendar year
under all plans of the Corporation and any parent or subsidiary of the
Corporation shall not exceed $100,000 (or such other amount as may be fixed as
the maximum amount permitted by Section 422(d) of the Internal Revenue Code, as
amended, or any successor provision). The Grant Committee shall grant incentive
stock options only to employees of Meritor or a corporation which is a
subsidiary of Meritor within the meaning of Section 425(f) of the Internal
Revenue Code.
(e) The purchase price of the Shares with respect to which an Option or
portion thereof is exercised shall be payable in full in cash or in Shares or in
a combination of cash and Shares. The value of any Share delivered in payment of
the purchase price shall be its Fair Market Value on the date the Option is
exercised.
6. STOCK APPRECIATION RIGHTS
(a) The Grant Committee may grant Tandem Stock Appreciation Rights to
an Employee either at the time of grant of an Option or at any time thereafter
during the term of an Option. A Tandem Stock Appreciation Right shall be
exercisable only when and to the extent that the related Option is exercisable.
(b) The Grant Committee may grant from time to time to Employees,
Freestanding Stock Appreciation Rights on terms and conditions determined by the
Grant Committee, consistent with the provisions of the Plan.
(c) The payment to which the grantee of a Stock Appreciation Right is
entitled upon exercise thereof may be made in Shares valued at Fair Market Value
on the date of exercise, or in cash or partly in cash and partly in Shares, as
the Grant Committee may determine.
(d) Upon exercise of a Tandem Stock Appreciation Right and surrender of
the related Option or part thereof, such Option, to the extent surrendered,
shall not thereafter be exercisable, and the Shares covered by the surrendered
Option shall not again be available for Grants pursuant to the Plan, or awards
under a Performance Plan.
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<PAGE> 8
(e) Upon exercise of a Freestanding Stock Appreciation Right, any
Shares delivered in payment thereof shall not again be available for Grants
pursuant to the Plan, or awards under a Performance Plan.
7. RESTRICTED SHARES
The Grant Committee may grant from time to time to Employees,
Restricted Shares on terms determined by the Grant Committee, consistent with
the provisions of the Plan, including the following:
(a) The Grant Committee shall specify a Restricted Period and may
specify performance or other criteria for each Grant of Restricted Shares, and
the Restricted Shares granted shall be forfeited if the grantee does not
continue as an Employee throughout the Restricted Period, or if and to the
extent the specified performance or other criteria are not met during the
Restricted Period, except as otherwise provided in Section 9(a), 9(b) or 13(f).
(b) Restricted Shares granted to an Employee shall have all the
attributes of outstanding Shares, except that the registered owner shall have no
right to direct the transfer thereof. Restricted Shares shall be held in
book-entry accounts subject to the direction of Meritor (or if Meritor elects,
certificates therefor may be issued in the Employee's name but delivered to and
held by Meritor), and, unless the Grant Committee determines otherwise at time
of grant, any dividends that may be paid in cash or otherwise on Restricted
Shares shall be delivered to and held by Meritor, so long as the Restricted
Shares remain subject to forfeiture. As and to the extent that Restricted Shares
are no longer subject to forfeiture, the Employee shall have the right to direct
the transfer thereof, the restrictions on the book-entry accounts for those
Restricted Shares shall be released, and certificates that may have been issued
for those Restricted Shares and any dividends thereon held by Meritor shall be
delivered to the Employee. There shall also be paid to the Employee at such time
interest on the amount of cash dividends so delivered computed at the same rate
and in the same manner as interest credited from time to time under Meritor's
Deferred Compensation Plan.
8. SUPPLEMENTARY STOCK PLANS
(a) The Committee may authorize Supplementary Stock Plans applicable to
Employees subject to the tax laws of one or more countries other than the United
States and providing for the
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<PAGE> 9
grant of Options, Stock Appreciation Rights, Restricted Shares or any
combination thereof to such Employees on terms and conditions, consistent with
the Plan, determined by the Committee which may differ from the terms and
conditions of Grants pursuant to Sections 5, 6 and 7 of the Plan for the purpose
of complying with the conditions for qualification of Options, Stock
Appreciation Rights or Restricted Shares for favorable treatment under foreign
tax laws.
(b) Notwithstanding any other provision hereof, Options granted under
any Supplementary Stock Plan shall include provisions that conform with Sections
5(a), (b), (c) and (e) and 6(d); Restricted Shares granted under any
Supplementary Stock Plan shall include provisions that conform with Sections
7(a) and (b); and subject to Section 3(c), only the Grant Committee shall have
authority to grant Options, Stock Appreciation Rights or Restricted Shares under
any Supplementary Stock Plan.
9. EFFECT OF DEATH OR TERMINATION OF EMPLOYMENT
(a) If a participating Employee's employment by the Corporation
terminates prior to the end of a Performance Cycle under a Performance Plan or
the Restricted Period applicable to any Grant of Restricted Shares because of
the Employee's (i) death or (ii) retirement under a retirement plan of the
Corporation not less than one year after the beginning of that Performance Cycle
or the date of that Grant, the amount of the award under the Performance Plan or
the number of Restricted Shares such Employee shall be deemed to have earned
shall be the amount or number thereof determined as though such Employee's
employment had not terminated prior to the end of the Performance Cycle or
Restricted Period.
(b) If a participating Employee's employment by the Corporation
terminates prior to the end of a Performance Cycle under a Performance Plan or
the Restricted Period applicable to any Grant of Restricted Shares, for any
reason other than (i) death or (ii) retirement under a retirement plan of the
Corporation not less than one year after the beginning of that Performance Cycle
or the date of that Grant, such Employee shall be deemed not to have earned any
award for purposes of the Performance Plan or Restricted Shares except as and to
the extent the Committee (or with the Committee's approval, the committee or
person delegated to administer a Performance Plan except insofar as it relates
to any Executive Officer), taking into account the purpose of the Plan and such
other factors as in its sole discretion it deems appropriate, may determine,
provided that the amount
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<PAGE> 10
of the award or the number of Restricted Shares which may be so determined by
the Committee to have been earned shall not exceed the amount or number which
would have been earned had the provisions of paragraph (a) above been
applicable.
(c) If the employment by the Corporation of a Participant who (or whose
permitted transferee) holds an outstanding Grant of Options or Stock
Appreciation Rights terminates by reason of the death of the Participant, the
Options or Stock Appreciation Rights subject to that Grant and not theretofore
exercised may be exercised from and after the date of the death of the
Participant for a period of three years (or until the expiration date specified
in the Grant if earlier) even if any of them was not exercisable at the date of
death.
(d) If a Participant who (or whose permitted transferee) holds an
outstanding Grant of Options or Stock Appreciation Rights retires under a
retirement plan of the Corporation, at any time after a portion of the Options
or Stock Appreciation Rights subject to a particular Grant has become
exercisable, the Options or Stock Appreciation Rights subject to that Grant and
not theretofore exercised may be exercised from and after the date upon which
they are first exercisable under that Grant for a period of five years from the
date of retirement (or until the expiration date specified in the Grant if
earlier) even if any of them was not exercisable at the date of retirement.
(e) If the employment by the Corporation of a Participant who (or whose
permitted transferee) holds an outstanding Grant of Options or Stock
Appreciation Rights is terminated for any reason other than death or retirement
under a retirement plan of the Corporation, the Options or Stock Appreciation
Rights subject to that Grant and not theretofore exercised may be exercised only
within three months after the termination of such employment (or until the
expiration date specified in the Grant if earlier) and only to the extent the
grantee thereof (or a permitted transferee) was entitled to exercise the Options
or Stock Appreciation Rights at the time of termination of such employment,
unless and except to the extent the Committee may otherwise determine; provided,
however, that the Committee shall not in any event permit a longer period of
exercise than would have been applicable had the provisions of paragraph (d)
above been applicable.
10. SHARES AVAILABLE
(a) The total number of Shares which may be delivered in payment and
upon exercise of Grants and in payments of awards under Performance Plans shall
not exceed 7 million, as
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<PAGE> 11
adjusted from time to time as herein provided, and the total number of Shares as
to which Grants may be made in any one fiscal year of Meritor beginning after
September 30, 1998 shall not exceed 1 1/2% of the total number of Shares
outstanding (including for this purpose Shares held in Treasury) as of the date
of determination. Shares which may be delivered in payment or upon exercise of
Grants or in payment of awards under Performance Plans may consist in whole or
in part of unissued or reacquired Shares; provided, however, that unless
otherwise determined by the Committee, Shares which may be granted as Restricted
Shares shall consist only of reacquired Shares. Subject to Sections 6(d) and
(e), if for any reason Shares as to which an Option has been granted cease to be
subject to purchase thereunder or Shares granted as Restricted Shares are
forfeited to the Corporation, then such Shares shall again be available under
the Plan.
(b) The total number of Shares subject to Options and Stock
Appreciation Rights granted to any one Employee in any one fiscal year of
Meritor under all plans of Meritor and any parent or subsidiary of Meritor shall
in no event exceed 500,000, as adjusted from time to time as herein provided.
(c) No Option, Freestanding Stock Appreciation Right or Restricted
Shares shall be granted under the Plan or any Supplementary Stock Plan after
September 30, 2007, but Options or Stock Appreciation Rights and Restricted
Shares granted theretofore may extend beyond that date, and Tandem Stock
Appreciation Rights may be granted after that date with respect to Options
outstanding on that date.
11. ADJUSTMENTS
If there shall be any change in or affecting Shares on account of any
merger, consolidation, reorganization, recapitalization, reclassification, stock
dividend, stock split or combination, or other distribution to holders of Shares
(other than a cash dividend), there shall be made or taken such amendments to
the Plan and such adjustments and actions thereunder as the Board of Directors
may deem appropriate under the circumstances. Such amendments, adjustments and
actions may include, without limitation, changes in the number of Shares which
may be issued or transferred, in the aggregate or to any one Employee, pursuant
to the Plan, the number of Shares subject to outstanding Options and Stock
Appreciation Rights and the related price per share; provided, however, that no
such amendment, adjustment or action may change the limitation prescribed by
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<PAGE> 12
Section 10(b) to a number of Shares that is a greater proportion of the total
number of Shares outstanding and held in Treasury as of the effective date of
that amendment, adjustment or action than the proportion of the number of Shares
prescribed by Section 10(b) to the total number of Shares outstanding and held
in Treasury immediately prior thereto.
12. AMENDMENT AND TERMINATION
The Committee shall have the power in its discretion to amend, suspend
or terminate the Plan or Grants thereunder at any time except that, subject to
the provisions of Section 11, (a) without the consent of the person affected, no
such action shall cancel or reduce a Grant theretofore made other than as
provided for or contemplated in the agreement evidencing the Grant and (b)
without the approval of the shareowners of Meritor, the Committee may not (i)
change the class of persons eligible to receive incentive stock options, (ii)
increase the number of Shares provided in Section 10(a) or 10(b), (iii) reduce
the Option exercise price of any Option below the Fair Market Value on the date
such Option was granted or decrease the forfeiture period for any Grant below
that permitted under the Plan.
13. MISCELLANEOUS
(a) Except as determined by the Committee, no person shall have any
claim to receive a Grant or any payment under a Performance Plan, to receive
payment in respect of a Grant or under a Performance Plan in any form other than
the Committee shall approve or, in circumstances where Section 9 is applicable,
to be deemed to have earned any award under a Performance Plan or Restricted
Shares or to be entitled to exercise Options or Stock Appreciation Rights for
any particular period after termination of employment. There is no obligation
for uniformity of treatment of Employees under the Plan or any Performance Plan.
No Employee shall have any right as a Participant or a participant under any
Performance Plan to continue in the employ of the Corporation for any period of
time or to a continuation of any particular rate of compensation, and the
Corporation expressly reserves the right to discharge or change the assignment
of any Employee at any time.
(b) No Option, Stock Appreciation Right or right related to Restricted
Shares granted pursuant to the Plan or right to payment of an award under any
Performance Plan may be assigned,
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<PAGE> 13
pledged or transferred except (i) by will or by the laws of descent and
distribution; or (ii) in the case of any Grant (other than an Option granted as
an incentive stock option) or any right to payment of an award under a
Performance Plan, by gift to any member of the Employee's immediate family or to
a trust for the benefit of one or more members of the Employee's immediate
family, if permitted in the applicable agreement governing that Grant or right
to payment; or (iii) as otherwise determined by the Committee. Each Option,
Stock Appreciation Right or right related to Restricted Shares shall be
exercisable, and each payment of an award under a Performance Plan shall be
payable, during the lifetime of the Employee to whom granted or awarded only by
or to such Employee, and any payment of an award under a Performance Plan made
after the death of a participating Employee entitled thereto shall be paid to
the legal representative of the estate or to the designated beneficiary of such
Employee, unless in any such case, the Grant or right to payment has been
transferred in accordance with the provisions of the applicable agreement
governing that Grant or right to payment, to a member of the Employee's
immediate family or a trust for the benefit of one or more members of the
Employee's immediate family, in which case it shall be exercisable or payable
only by or to such transferee (or to the legal representative of the estate or
to the heirs or legatees of such transferee). For purposes of this provision, an
Employee's "immediate family" shall mean the Employee's spouse and natural,
adopted or step- children and grandchildren.
(c) No person shall have the rights or privileges of a shareowner with
respect to Shares subject to an Option or deliverable as a payment upon exercise
of a Stock Appreciation Right or under a Performance Plan until exercise of the
Option or Stock Appreciation Right or delivery as a payment under the
Performance Plan.
(d) No fractional Shares shall be issued or transferred pursuant to the
Plan. If the portion of any payment pursuant to the Plan or a Performance Plan
to be made in Shares is not equal to the value of a whole number of Shares, the
person entitled thereto shall be paid an amount equal to the Fair Market Value
as of the date of exercise of any fractional Share deliverable in respect of
exercise of a Stock Appreciation Right and the Fair Market Value as of the date
of payment of any fractional Share deliverable in respect of any payment under a
Performance Plan.
(e) The Corporation, the Board of Directors, the Committee, the Grant
Committee and the officers of Meritor shall be fully protected in relying in
good faith on the computations and reports made pursuant to or in connection
with the Plan by the independent certified public
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<PAGE> 14
accountants who audit the Corporation's accounts or others (who may include
Employees) whose services are used by the Board of Directors, Committee or Grant
Committee in its administration of the Plan.
(f) Notwithstanding any other provision of the Plan, if a Change of
Control (as defined in Article III, Section 13(I)(1) of Meritor's By-Laws) shall
occur, then unless prior to the occurrence thereof, the Board of Directors shall
have determined otherwise by vote of at least two-thirds of its members, (i) all
Performance Cycles (except those under Performance Plans that do not provide for
a Change-of-Control contingency) not then complete shall be deemed completed
forthwith, the Performance Objectives therefor shall be deemed to have been
attained, and each participating Employee shall be deemed to have earned the
maximum amount that could have been earned thereunder; (ii) all Options and any
Stock Appreciation Rights then outstanding pursuant to the Plan shall forthwith
become fully exercisable whether or not otherwise then exercisable; and (iii)
the restrictions on all Restricted Shares granted under the Plan shall forthwith
lapse.
(g) The Corporation shall have the right in connection with the
delivery of any Shares in payment of a Grant or a payment under a Performance
Plan or upon exercise of an Option to require as a condition of such delivery
that the recipient represent that such Shares are being acquired for investment
and not with a view to the distribution thereof.
(h) The Corporation shall have the right in connection with any payment
under a Performance Plan, exercise of any Option or Stock Appreciation Right or
termination of the Restricted Period for any Restricted Shares, to deduct from
any such payment or any other payment by the Corporation, an amount equal to any
taxes required by law to be withheld with respect thereto or to require the
Employee or other person receiving such payment, effecting such exercise or
entitled to Shares and related payments on termination of such Restricted
Period, as a condition of and prior to such payment or exercise or delivery of
Shares on such termination, to pay to the Corporation an amount sufficient to
provide for any such taxes so required to be withheld.
(i) Unless otherwise determined by the Committee or provided in an
agreement between any Employee and the Corporation, for purposes of the Plan an
Employee on authorized leave of absence will be considered as being in the
employ of the Corporation.
(j) The Corporation shall bear all expenses and costs in connection
with the operation of the Plan, including costs related to the purchase, issue
or transfer of Shares, but excluding taxes
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<PAGE> 15
imposed on any person receiving a payment or delivery of Shares under the Plan
or a Performance Plan.
14. INTERPRETATIONS AND DETERMINATIONS
The Committee shall have the power from time to time to interpret the
Plan, to adopt, amend and rescind rules, regulations and procedures relating to
the Plan, to make, amend and rescind determinations under the Plan and to take
all other actions that the Committee shall deem necessary or appropriate for the
implementation and administration of the Plan. All interpretations,
determinations and other actions by the Committee not revoked or modified by the
Board of Directors shall be final, conclusive and binding upon all parties.
15. EFFECTIVE DATE
Upon approval by the shareowners of Meritor, the Plan shall become
effective as of September 30, 1997.
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<PAGE> 1
EXHIBIT 10-a-2
MERITOR AUTOMOTIVE, INC.
RESTRICTED STOCK AGREEMENT
TO: [Name]
In accordance with Section 7 of the 1997 Long-Term Incentives Plan
("1997 LTIP") of Meritor Automotive, Inc. (the "Company"), __ shares of Common
Stock of the Company have been granted to you today [(subject to the approval of
the 1997 LTIP by the shareowners of the Company at the 1998 Annual Meeting)] as
restricted shares ("Restricted Shares"), valued at the closing price on the New
York Stock Exchange-Composite Transactions ("Closing Price") on [insert date of
grant]. The Restricted Shares have been granted to you upon the following terms
and conditions:
1. Restricted Period
The Restricted Shares are subject to forfeiture in accordance with the
terms of the 1997 LTIP and this agreement if you do not continue as an employee
of the Company for the period until [insert expiration date] (the "Restricted
Period").
2. Earning of Restricted Shares
(a) If you die prior to the end of the Restricted Period or retire
under a retirement plan of the Corporation (as defined in the 1997 LTIP) after
[insert date one year after date of grant] and prior to the end of the
Restricted Period, you shall be deemed to have fully earned all the Restricted
Shares subject to this agreement.
(b) If your employment with the Company terminates prior to the end of
the Restricted Period for any other reason, you shall be deemed not to have
earned any of the Restricted Shares and shall have no further rights with
respect thereto, except as and to the extent that the Compensation and
Management Development Committee of the Board of Directors, taking into account
the purpose of the 1997 LTIP and such other factors as in its sole discretion it
deems appropriate, may determine.
3. Retention of Certificates for Restricted Shares
Certificates for the Restricted Shares and any dividends or
distributions thereon or in respect thereof that may be paid in additional
shares of Common Stock, other securities of the Company or securities of another
entity ("Stock Dividends"), shall be delivered to and held by the Company, or
such Restricted Shares or Stock Dividends shall be registered in book entry
form, subject to the Company's instructions, until you shall have earned the
Restricted Shares in accordance with the provisions of paragraph 2. To
<PAGE> 2
facilitate implementation of the provisions of this agreement, you undertake to
sign and deposit with the Company's Office of the Secretary a Stock Transfer
Power in the form of Attachment 1 hereto with respect to the Restricted Shares
and any Stock Dividends thereon.
[4. Cash Dividends
Any dividends that may be paid in cash on the Restricted Shares ("Cash
Dividends") shall be delivered to and held by the Company, so long as the
Restricted Shares remain subject to forfeiture.]
5. Voting Rights
Notwithstanding the retention by the Company of certificates (or the
right to give instructions with respect to shares held in book entry form) for
the Restricted Shares and any Stock Dividends, you shall be entitled to vote the
Restricted Shares and any Stock Dividends held by the Company (or subject to its
instructions) in accordance with paragraph 3, unless and until such shares have
been forfeited in accordance with paragraph 7.
6. Delivery of Earned Restricted Shares
As promptly as practicable after you shall have been deemed to have
earned the Restricted Shares in accordance with paragraph 2, the Company shall
deliver to you (or in the event of your death, to your estate or any person who
acquires your interest in the Restricted Shares by bequest or inheritance) the
Restricted Shares, together with (a) any Stock Dividends then held by the
Company (or subject to its instructions), and (b) any Cash Dividends then held
by the Company, together with interest on the amount of Cash Dividends so
delivered, computed at the rate specified in the 1997 LTIP.
7. Forfeiture of Unearned Restricted Shares
Notwithstanding any other provision of this agreement, if at any time
it shall become impossible for you to earn any of the Restricted Shares in
accordance with this agreement, all the Restricted Shares, together with any
Stock Dividends then being held by the Company (or subject to its instructions)
in accordance with paragraph 3 and any Cash Dividends held by the Company in
accordance with paragraph 4, shall be forfeited, and you shall have no further
rights of any kind or nature with respect thereto. Upon any such forfeiture, the
Restricted Shares, together with any Stock Dividends and any Cash Dividends,
shall be transferred to the Company.
2
<PAGE> 3
8. Transferability
This grant is not transferable by you otherwise than by will or by the
laws of descent and distribution, and the Restricted Shares, and any Stock
Dividends and Cash Dividends shall be deliverable, during your lifetime, only to
you.
9. Withholding
The Company shall have the right, in connection with the delivery of
the Restricted Shares and any Stock Dividends and Cash Dividends subject to this
agreement, (i) to deduct from the Cash Dividends or from any payment otherwise
due by the Company to you or any other person receiving delivery of the
Restricted Shares and any Stock Dividends and Cash Dividends an amount equal to
any taxes required to be withheld by law with respect to such delivery, (ii) to
require you or any other person receiving such delivery to pay to it an amount
sufficient to provide for any such taxes so required to be withheld or (iii) to
sell such number of the Restricted Shares and any Stock Dividends as may be
necessary so that the net proceeds of such sale shall be an amount sufficient to
provide for any such taxes so required to be withheld.
10. Applicable Law
This agreement and the Company's obligation to deliver Restricted
Shares and any Stock Dividends and Cash Dividends hereunder shall be governed by
and construed and enforced in accordance with the laws of Delaware and the
Federal law of the United States.
MERITOR AUTOMOTIVE, INC.
By:______________________________
Attachment 1 - Stock Transfer Power
Dated: [insert date of grant]
Agreed to this ____ day of ___________, ____
___________________________________
[Name]
Social Security Number:
Address:
3
<PAGE> 4
Attachment 1
STOCK TRANSFER POWER SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, I, ______________, hereby sell, assign and transfer
unto Meritor Automotive, Inc. (the "Company") (i) the ___ shares of the Common
Stock of the Company standing in my name on the books of the Company evidenced
by certificates or by book entry, granted to me on [insert date of grant] as
Restricted Shares pursuant to the Company's 1997 Long-Term Incentives Plan (the
"Shares"); and (ii) any additional shares of the Company's Common Stock, other
securities issued by the Company or securities of another entity ("Stock
Dividends") distributed, paid or payable on or in respect of the Shares and
Stock Dividends during the period the Shares are held by the Company pursuant to
a certain Restricted Stock Agreement dated [insert date of grant] with respect
to the Shares; and I do hereby irrevocably constitute and appoint
_________________________________________ attorney with full power of
substitution in the premises to transfer the Shares on the books of the Company.
Dated:
___________________________
(Signature)
WITNESS:
_____________________
<PAGE> 1
EXHIBIT 10-b-1
DIRECTORS STOCK PLAN
OF
MERITOR AUTOMOTIVE, INC.
1. PURPOSE OF THE PLAN.
The purpose of the Directors Stock Plan (the Plan) is to link the
compensation of non-employee directors of Meritor Automotive, Inc.
(Meritor) directly with the interests of the shareowners.
2. PARTICIPANTS.
Participants in the Plan shall consist of directors of Meritor who are
not employees of Meritor or any of its subsidiaries (Non-Employee
Director). The term "subsidiary" as used in the Plan means a
corporation more than 50% of the voting stock of which, or an
unincorporated business entity more than 50% of the equity interest in
which, shall at the time be owned directly or indirectly by Meritor.
3. SHARES RESERVED UNDER THE PLAN.
Subject to the provisions of Section 10 of the Plan, there shall be
reserved for delivery under the Plan 350,000 shares of Common Stock of
Meritor (Shares). Shares to be delivered under the Plan may be
authorized and unissued Shares, Shares held in treasury or any
combination thereof.
<PAGE> 2
4. ADMINISTRATION OF THE PLAN.
The Plan shall be administered by the Compensation and
Management Development Committee of the Board of Directors of
Meritor (the Committee). The Committee shall have authority to
interpret the Plan, and to prescribe, amend and rescind rules
and regulations relating to the administration of the Plan,
and all such interpretations, rules and regulations shall be
conclusive and binding on all persons.
5. EFFECTIVE DATE OF THE PLAN.
The Plan shall be submitted to the shareowners of Meritor for
approval at the Annual Meeting of Shareowners to be held on
February 11, 1998, or any adjournment thereof, and, if
approved by the shareowners, shall become effective as of
September 30, 1997.
6. AWARD OF SHARES.
Each Non-Employee Director who is in office on the date (the
Distribution Date) of the pro-rata distribution (the
Distribution) by Rockwell International Corporation to its
shareowners of all the issued and outstanding stock of Meritor
shall receive an award of 500 Shares effective immediately
after the Distribution. Thereafter, each Non-Employee Director
who is elected a director at, or who was previously elected
and continues as a director after, any Annual Meeting of
Shareowners of Meritor shall receive an award of 1,000 Shares
effective immediately after that Annual Meeting. Each
Non-Employee Director who is elected a director at any meeting
of the Board shall receive effective
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<PAGE> 3
immediately after that meeting an award of 1,000 Shares if elected
after the annual meeting and prior to May 1; an award of 750 Shares if
elected between May 1 and July 31; an award of 500 Shares if elected
between August 1 and October 31; and an award of 250 Shares if elected
between November 1 and the next annual meeting. A participant shall not
be required to make any payment for any Shares delivered under the
Plan. Upon the delivery of Shares under the Plan, the recipient shall
have the entire beneficial ownership interest in, and all rights and
privileges of a shareowner as to those Shares, including the right to
vote the Shares and to receive dividends thereon.
Each Non-Employee Director may elect each year, not later than
December 31 of the year preceding the year in which the annual award
of Shares is to be made, to receive the annual grant in the form of
Shares of restricted stock (Restricted Shares). Upon receipt of
Restricted Shares, the recipient shall have the right to vote the
Shares and to receive dividends thereon, and the Shares shall have all
the attributes of outstanding Shares except that the registered owner
shall have no right to direct the transfer thereof. Restricted Shares
shall be held in book-entry accounts subject to the direction of
Meritor (or if Meritor elects, certificates therefor may be issued in
the recipient's name but delivered to and held by Meritor) until ten
days after (i) the recipient retires from the Board after reaching age
72 and having served at least three years as a director or (ii) the
recipient resigns from the Board or ceases to be a director by reason
of the antitrust laws, compliance with Meritor's conflict of interest
policies, death, disability or other circumstances the Board
determines not to be adverse to the best interests of Meritor, when
the restrictions on such book-entry accounts shall be released (or
any certificates
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<PAGE> 4
issued shall be delivered to the director) and such Shares shall cease
to be Restricted Shares.
7. RESTRICTION ON TRANSFER OF SHARES.
No Shares received by a participant under Section 6 or 9 of the Plan
may be sold, assigned, transferred, pledged or otherwise encumbered or
disposed of for a period of six months after receipt of those Shares,
except in the case of the participant's death or disability during that
six-month period.
8. STOCK OPTIONS.
Each Non-Employee Director who is in office on the Distribution Date
shall be granted an option to purchase 1,500 Shares effective
concurrently with the first grant of stock options under Meritor's 1997
Long-Term Incentives Plan after the Distribution Date. Thereafter, each
Non-Employee Director who is elected a director at, or was previously
elected and continues as a director after, any Annual Meeting of
Shareowners of Meritor shall receive an option to purchase 3,000 Shares
immediately after that Annual Meeting. Each Non-Employee Director who
is elected a director at any meeting of the Board shall be granted
effective immediately after that meeting an option to purchase 3,000
Shares if elected after the annual meeting and prior to May 1; an
option to purchase 2,250 Shares if elected between May 1 and July 31;
an option to purchase 1,500 Shares if elected between August 1 and
October 31; and an option to purchase 750 Shares if elected between
November 1 and the next annual meeting. The exercise price for each
option so
-4-
<PAGE> 5
granted shall be one-hundred percent (100%) of the closing price (the
fair market value) of the Shares on the date of grant as reported in
the New York Stock Exchange -- Composite Transactions (or on the next
preceding day Shares were traded if not traded on the date of grant).
The purchase price of the Shares with respect to which an option or
portion thereof is exercised shall be payable in full in cash, Shares
valued at their fair market value on the date of exercise, or a
combination thereof. Each option may be exercised in whole or in part
at any time after it becomes exercisable; and each option shall become
exercisable in approximately three equal installments on each of the
first, second and third anniversaries of the date the option is
granted. No option shall be exercisable prior to one year nor after ten
years from the date of the grant thereof; provided, however, that if
the holder of an option dies, the option may be exercised from and
after the date of the optionee's death for a period of three years (or
until the expiration date specified in the option if earlier) even if
it was not exercisable at the date of death. Moreover, if an optionee
retires after reaching age 72 and having served at least three years as
a director, all options then held by that optionee shall be exercisable
even if they were not exercisable at the optionee's retirement date;
provided, however, that each such option shall expire at the earlier of
five years from the date of the optionee's retirement or the expiration
date specified in the option.
Options granted under the Plan are not transferable other than (i) by
will or by the laws of descent and distribution; or (ii) by gift to the
grantee's spouse or natural, adopted or step-children or grandchildren
(immediate family members) or to a trust for the benefit of one
-5-
<PAGE> 6
or more of the grantee's immediate family members or to a family
charitable trust established by the grantee or a member of the
grantee's family. If an optionee ceases to be a director while holding
unexercised options, such options are then void, except in the case of
(i) death, (ii) disability, (iii) retirement after reaching age 72 and
having served at least three years as a director, (iv) resignation from
the Board for reasons of the antitrust laws, compliance with Meritor's
conflict of interest policies or other circumstances that the Committee
may determine as serving the best interests of Meritor or (v)
resignation or removal from the Board in connection with a change of
control as defined in Article III, Section 13(I)(1) of Meritor's
By-Laws (Change of Control).
9. SHARES IN LIEU OF CASH COMPENSATION.
Each Non-Employee Director may elect each year, not later than December
31 of the year preceding the year as to which deferral of fees is to be
applicable, to defer all or any portion of the cash retainer to be paid
for board or other service in the following calendar year through the
issuance or transfer of Restricted Shares, valued at the closing price
on the New York Stock Exchange -- Composite Transactions on the date
when each payment of such retainer amount would otherwise be made in
cash. Such Restricted Shares shall be the same as and subject to the
same provisions as are applicable to the Restricted Shares issued or
delivered pursuant to Section 6 of the Plan.
-6-
<PAGE> 7
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
If there shall be any change in or affecting Shares on account of any
merger, consolidation, reorganization, recapitalization,
reclassification, stock dividend, stock split or combination, or other
distribution to holders of Shares (other than a cash dividend), there
shall be made or taken such amendments to the Plan and such adjustments
and actions thereunder as the Board may deem appropriate under the
circumstances.
11. GOVERNMENT AND OTHER REGULATIONS.
Meritor shall have the right in connection with the delivery of any
Shares under Section 6 or 9 of the Plan or upon exercise of options
granted under Section 8 of the Plan to require as a condition of such
delivery that the recipient represent that such shares are being
acquired for investment and not with a view to the distribution
thereof.
12. AMENDMENT AND TERMINATION OF THE PLAN.
The Plan may be amended by the Board in any respect, provided that,
without shareowner approval, no amendment shall (i) materially increase
the maximum number of Shares available for delivery under the Plan
(other than adjustments pursuant to Section 10 hereof), (ii) materially
increase the benefits accruing to participants under the Plan, or (iii)
materially modify the requirements as to eligibility for participation
in the Plan. The Plan may also be terminated at any time by the Board.
-7-
<PAGE> 8
13. MISCELLANEOUS.
(a) Nothing contained in the Plan shall be deemed to confer upon
any person any right to continue as a director of or to be
associated in any other way with Meritor.
(b) Notwithstanding any other provision of the Plan, if a Change
of Control shall occur, then, unless prior to the occurrence
thereof the Board of Directors shall determine otherwise by
vote of at least two-thirds of its members, (i) all options
then outstanding pursuant to the Plan shall forthwith become
fully exercisable whether or not then exercisable and (ii) the
restrictions on all Restricted Shares granted under Section 6
or 9 of the Plan shall forthwith lapse.
(c) To the extent that Federal laws do not otherwise control, the
Plan and all determinations made and actions taken pursuant
hereto shall be governed by the law of the State of Delaware.
-8-
<PAGE> 1
EXHIBIT 10-b-2
MERITOR AUTOMOTIVE, INC.
RESTRICTED STOCK AGREEMENT
TO: [Name]
In accordance with Section 9 of the Directors Stock Plan of Meritor
Automotive, Inc. (the "Company"), and your election pursuant thereto dated
[insert date of election], __ shares of Common Stock of the Company have been
granted to you today [(subject to the approval of the Directors Stock Plan by
the shareowners of the Company at the 1998 Annual Meeting)] as restricted shares
of the Company's common stock, in lieu of [___% of] the retainer fee payable to
you on January 1, [____], in respect of your service on the Board of Directors
(the "Board") of the Company. The Restricted Shares were valued at the closing
price on the New York Stock Exchange - Composite Transactions ("Closing Price")
on [insert date when retainer would be payable]. Additional such shares will be
granted to you as restricted shares of common stock in lieu of [__% of] the
retainer fees payable to you on April 1, ____, July 1, ____ and October 1, ____,
valued at the Closing Price on the date when each such payment of a retainer fee
would otherwise be made in cash (such shares together with the shares granted
today being herein called "Restricted Shares").
The Restricted Shares have been granted to you upon the following terms
and conditions:
1. Earning of Restricted Shares
(a) If you (i) retire from the Board after reaching age 72 and having
served at least three years as a director, or (ii) resign from the Board or
cease to be a director of the Company by reason of the antitrust laws,
compliance with the Company's conflict of interest policies, death, disability
or other circumstances the Board determines not to be adverse to the best
interests of the Company, you shall be deemed to have fully earned all the
Restricted Shares subject to this agreement.
(b) If you resign from the Board or cease to be a director of the
Company for any other reason, you shall be deemed not to have earned any of the
Restricted Shares and shall have no further rights with respect thereto.
2. Retention of Certificates for Restricted Shares
Certificates for the Restricted Shares and any dividends or
distributions thereon or in respect thereof that may be paid in additional
shares of Common Stock, other securities of the Company or securities of another
entity ("Stock Dividends"), shall be delivered to and held by the Company, or
such Restricted Shares or Stock Dividends shall be registered in book entry
form, subject to the Company's instructions, until you shall have
<PAGE> 2
earned the Restricted Shares in accordance with the provisions of paragraph 1.
To facilitate implementation of the provisions of this agreement, you undertake
to sign and deposit with the Company's Office of the Secretary a Stock Transfer
Power in the form of Attachment 1 hereto with respect to the Restricted Shares
and any Stock Dividends thereon.
3. Dividends and Voting Rights
Notwithstanding the retention by the Company of certificates (or the
right to give instructions with respect to shares held in book entry form) for
the Restricted Shares and any Stock Dividends, you shall be entitled to receive
any dividends that may be paid in cash on, and to vote, the Restricted Shares
and any Stock Dividends held by the Company (or subject to its instructions) in
accordance with paragraph 2, unless and until such shares have been forfeited in
accordance with paragraph 5.
4. Delivery of Earned Restricted Shares
As promptly as practicable after you shall have been deemed to have
earned the Restricted Shares in accordance with paragraph 1, the Company shall
deliver to you (or in the event of your death, to your estate or any person who
acquires your interest in the Restricted Shares by bequest or inheritance) the
Restricted Shares, together with any Stock Dividends then held by the company
(or subject to its instructions).
5. Forfeiture of Unearned Restricted Shares
Notwithstanding any other provision of this agreement, if at any time
it shall become impossible for you to earn any of the Restricted Shares in
accordance with this agreement, all the Restricted Shares, together with any
Stock Dividends, then being held by the Company (or subject to its instructions)
in accordance with paragraph 2 shall be forfeited, and you shall have no further
rights of any kind or nature with respect thereto. Upon any such forfeiture, the
Restricted Shares, together with any Stock Dividends, shall be transferred to
the Company.
6. Transferability
This grant is not transferable by you otherwise than by will or by the
laws of descent and distribution, and the Restricted Shares, and any Stock
Dividends shall be deliverable, during your lifetime, only to you.
7. Withholding
The Company shall have the right, in connection with the delivery of
the Restricted Shares and any Stock Dividends subject to this agreement, (i) to
deduct from any payment otherwise due by the Company to you or any other person
receiving delivery of the Restricted Shares and any Stock Dividends an amount
equal to any taxes required
2
<PAGE> 3
to be withheld by law with respect to such delivery, (ii) to require you or any
other person receiving such delivery to pay to it an amount sufficient to
provide for any such taxes so required to be withheld or (iii) to sell such
number of the Restricted Shares and any Stock Dividends as may be necessary so
that the net proceeds of such sale shall be an amount sufficient to provide for
any such taxes so required to be withheld.
8. Applicable Law
This agreement and the Company's obligation to deliver Restricted
Shares and any Stock Dividends hereunder shall be governed by and construed and
enforced in accordance with the laws of Delaware and the Federal law of the
United States.
MERITOR AUTOMOTIVE, INC.
By:______________________________
Attachment 1 - Stock Transfer Power
Dated: January __, ____
Agreed to this __ day of January, ___
________________________________
[Name]
Address:
Social Security Number:
3
<PAGE> 4
Attachment 1
STOCK TRANSFER POWER SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, I, ______________, hereby sell, assign and transfer
unto Meritor Automotive, Inc. (the "Company") (i) the ___ shares of the Common
Stock of the Company standing in my name on the books of the Company evidenced
by certificates or by book entry, granted to me on January __, ____ as
Restricted Shares pursuant to the Company's Directors Stock Plan; (ii) the
additional shares (together with the shares granted on January __, ____, the
"Shares") of the Common Stock of the Company to be granted to me, in lieu of
[__% of] the retainer fees payable to me on April 1, ____, July 1, ____ and
October 1, ____, pursuant to the Directors Stock Plan and to be registered in my
name on the books of the Company and evidenced by certificates or by book
entries dated on or about those dates; and (iii) any additional shares of the
Company's Common Stock, other securities issued by the Company or securities of
another entity ("Stock Dividends") distributed, paid or payable on or in respect
of the Shares and Stock Dividends during the period the Shares are held by the
Company pursuant to a certain Restricted Stock Agreement dated January __, ____,
with respect to the Shares; and I do hereby irrevocably constitute and appoint
____________________________________________________ attorney with full power of
substitution in the premises to transfer the Shares on the books of the Company.
Dated: January __, ____
_____________________________
(Signature)
WITNESS:_____________________
4
<PAGE> 1
EXHIBIT 10-c-1
MERITOR AUTOMOTIVE, INC.
INCENTIVE COMPENSATION PLAN
1. PURPOSES.
The purposes of the Incentive Compensation Plan (the "Plan")
are to provide a reward and an incentive to employees in managerial,
staff or technical capacities who have contributed in the then-current
fiscal year and, in the future, are likely to contribute to the success
of the Corporation and to enhance the Corporation's ability to attract
and retain outstanding employees to serve in such capacities.
2. DEFINITIONS.
For the purpose of the Plan, the following terms shall have
the meanings shown:
(a) Board of Directors. The Board of Directors of Meritor.
(b) Committee. The Compensation and Management Development
Committee, designated by the Board of Directors, consisting of three or
more members of the Board of Directors who are not eligible to
participate in the Plan.
(c) Corporation. Meritor and such of its subsidiaries and
affiliates as may be designated by the Board of Directors.
(d) Employees. Persons in the salaried employ of the
Corporation (including those on authorized leave of absence) during
some part of the fiscal year for which an award is made. Unless also an
employee of the Corporation, no member of the Board of Directors shall
be eligible to participate in the Plan.
(e) Meritor. Meritor Automotive, Inc.
(f) Stock. Common stock of Meritor.
<PAGE> 2
3. AWARDS.
(a) The Chief Executive Officer of Meritor shall submit to the
Committee, within 35 days after the end of each fiscal year,
recommendations concerning awards for that fiscal year.
(b) The Committee, in its discretion, shall annually following
the close of the immediately preceding fiscal year, determine (i) the
extent to which awards, if any, shall be made; (ii) the employees to
whom any such awards shall be made; (iii) the amount of any award; and
(iv) the form, terms and conditions of awards. The Committee may
determine, among other things, whether and to what extent awards shall
be paid in installments and in cash or in Stock or partly in cash and
partly in Stock. Any Stock delivered in payment, in whole or in part,
of an award may, at the Committee's discretion, be subject to such
restrictions as the Committee deems appropriate.
(c) The Corporation shall promptly notify each person to whom
an award has been made and pay the award in accordance with the
determinations of the Committee.
(d) A cash award may be made with respect to an employee who
has died. Any such award shall be paid to the legal representative or
representatives of the estate of such employee.
4. AWARDS IN STOCK.
(a) Meritor shall make available, as required, Stock to meet
the needs of the Plan. The total number of shares of Stock which may be
awarded under the Plan shall not exceed 300,000, except as provided in
paragraph (b) below. Such shares may consist in whole or in part of
unissued or reacquired shares. Stock subject to an award which lapses
or is forfeited, for any reason, shall be available for further awards
under the Plan.
(b) If any change shall occur in or affect Stock subject to or
awarded under the Plan on account of a merger, consolidation,
reorganization, recapitalization, reclassification, stock dividend,
stock split or combination, or other distribution to common shareowners
(other than a cash dividend), the Board of Directors may make such
adjustments in the total number of shares subject to or awarded under
the Plan as may be reasonably appropriate in the circumstances.
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<PAGE> 3
5. FINALITY OF DETERMINATIONS.
The Committee shall have the power to administer and interpret
the Plan. All determinations, interpretations and actions of the
Committee and all actions of the Board of Directors under or in
connection with the Plan shall be final, conclusive and binding upon
all concerned.
6. AMENDMENT OF THE PLAN.
The Board of Directors shall have the power, in its sole
discretion, to amend, suspend or terminate the Plan at any time, except
that:
(a) No such action shall adversely affect rights under an
award already made, without the consent of the person affected; and
(b) Without approval of the shareowners of Meritor, the Board
of Directors shall not increase the total number of shares of Stock
subject to the Plan (except as provided in paragraph 4(b)).
7. MISCELLANEOUS.
(a) A majority of the members of the Committee shall
constitute a quorum. The Committee may act by the vote of a majority of
a quorum at a meeting, or by a writing or writings signed by a majority
of the members of the Committee.
(b) Notwithstanding any other provision of the Plan, if a
Change of Control (as defined in Article III, Section 13 (I)(1) of
Meritor's By-Laws) shall occur, then, unless prior to the occurrence
thereof the Board of Directors shall determine otherwise by vote of at
least two-thirds of its members, (i) all unpaid installments of any
awards made under the Plan prior to such Change of Control shall
forthwith become due and payable and (ii) any restrictions on any Stock
delivered in payment, in whole or in part, of any awards made under the
Plan prior to such Change of Control shall forthwith lapse.
(c) The Corporation shall bear all expenses and costs in
connection with the operation of the Plan.
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<PAGE> 1
EXHIBIT 10-d-1
MERITOR AUTOMOTIVE, INC.
EXCERPT FROM THE MINUTES OF A MEETING OF THE BOARD OF
DIRECTORS HELD ON SEPTEMBER 8, 1997
* * *
DEFERRAL ARRANGEMENTS FOR ANNUAL RETAINER FEE
RESOLVED, that any Director of this Corporation may elect to
defer all or any part of the retainer fees paid in cash which such
Director will be entitled to receive from this Corporation beginning
January 1 of the following year by delivering to the Secretary of this
Corporation a written notice, specifying the percentage of such future
fees paid in cash to be deferred and the time when, or period during
which, such deferred fees shall be paid to him or her or, in the event
of his or her death, to his or her estate or beneficiary; that any such
election shall continue in effect for successive periods of one
calendar year each so long as the Director continues as a member of
this Board of Directors unless and until such Director shall elect to
terminate such deferral with respect to future fees by delivering a
written notice to that effect to the Secretary of this Corporation,
with such termination to be effective as to fees paid on or after the
January 1 next following the date of receipt by the Secretary of this
Corporation of such Director's written notice of termination of
deferral; that there shall be credited to the total amount deferred by
each Director at the end of each calendar quarter an additional amount
equal to the amount then deferred and owing multiplied by one-fourth of
the annual rate for quarterly compounding that is 120% of the
"applicable Federal long-term rate" determined by the Secretary of the
Treasury pursuant to Section 1274(d) of the Internal Revenue Code, as
amended, or any successor provision, for the last month in such
calendar quarter, such additional amount to be paid at the same time
and in the same proportion as the payments of the fees so deferred;
that this Board of Directors may terminate any such deferral at any
time and may change the period of payment of any deferred amounts or
cause any deferred amounts to be paid in a lump sum regardless of a
Director's instructions with respect thereto; that no deferred fees or
additional amounts credited thereon may be assigned or otherwise
transferred; and that deferral pursuant to this resolution shall be
available in addition to or as an alternative to the election available
pursuant to Section 9 of this Corporation's Directors Stock Plan;
provided, however, that the total of the portions of a Director's
retainer fees paid in cash deferred under that Section and under this
resolution shall in no event exceed the total amount of such fees to
which such Director may be entitled for any calendar year; and further
* * *
<PAGE> 1
Exhibit 13
Meritor Automotive, Inc. 1997 Annual Report 16
[PICTURE OF
THOMAS A. MADDEN]
Thomas A. Madden
Senior Vice President
and Chief Financial Officer
CHIEF FINANCIAL OFFICER'S REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS(1)
OVERVIEW AND OUTLOOK
For Meritor and our shareowners, 1997 was an exciting year. The successful
spin-off from Rockwell and the strong financial results contribute to the
establishment of Meritor as a leading independent global supplier of a broad
range of components and systems for use in commercial, specialty and light
vehicles. With sales of $3.3 billion in fiscal 1997, the year provides strong
momentum for the achievement of our long-term financial goals of average annual
sales growth of 8 percent, average annual earnings per share growth of 15
percent and long-term debt to capitalization ratio of 45 percent, with a strong
emphasis on cash generation. The long-term average annual goals have been
established with the recognition that the industry in which the company operates
has been characterized historically by periodic fluctuations in overall demand
for commercial, specialty and light vehicles for which the company supplies
products, resulting in corresponding fluctuations in demand for products of the
company. Accordingly, the company will measure its performance against these
goals over a multi-year period.
The achievement of these goals is supported by our strong balance sheet
which includes, at September 30, 1997, $2 billion in assets, cash of $133
million (which includes approximately $58 million relating to Canadian income
tax liabilities), as well as the $1 billion unsecured revolving Credit Facility
which the company entered into in August 1997 and was partially used to fund the
$445 million Pre-Distribution Payment to Rockwell. We believe this Credit
Facility and the cash flows provided by operations will provide an adequate
source of funds and liquidity to support the future growth of Meritor and the
achievement of our long-term goals. Pro forma pre-tax interest coverage,
excluding the 1997 restructuring and spin-off costs of $29 million, would have
been 6.5x for the year ended September 30, 1997, based on the initial interest
rate on the borrowings. Borrowings under the Credit Facility are subject to
interest based on quoted market rates, principally LIBOR (London Interbank
Offered Rate) and eurocurrency rates, at the date of borrowing plus an
applicable margin. While the company's debt has not yet been rated, the initial
margin over the LIBOR-based and eurocurrency rates was 20 basis points, and the
facility fee on the committed amount was 10 basis points. This interest rate is
consistent with interest rates for BBB and Baa2 ratings under our Credit
Facility. EBITDA (defined as income before income taxes plus interest expense,
depreciation and amortization) was $296 million for fiscal 1997.
On November 12, 1997, the Board of Directors declared a quarterly cash
dividend of $.105 per share, payable on December 15, 1997, to shareowners of
record on November 24, 1997. This first quarterly dividend reflects our
confidence in the leadership position of Meritor for global growth, based on a
diverse product, market and customer balance and strong financial condition.
Meritor expects to continue to declare quarterly dividends throughout fiscal
1998.
Looking ahead, assuming generally favorable economic conditions and the
anticipated benefits of our restructuring programs, our long-term average annual
sales and earnings per share growth objectives should be achievable in fiscal
1998. Meritor's envisioned future is to be the best developer of quality
automotive systems and technology solutions worldwide and the partner of choice
to those customers who value outstanding service.
Meritor began operations separate from Rockwell on September 30, 1997 and,
accordingly, does not have an operating history as an independent company. The
(1) See Note 1 to Notes to Consolidated Financial Statements for the definitions
of capitalized terms used and not otherwise defined in this section.
<PAGE> 2
17 Meritor Automotive, Inc. 1997 Annual Report
financial information included in this annual report reflects the Automotive
Business as part of Rockwell, and may not necessarily reflect the results of
operations, financial position and cash flows of the Automotive Business had the
company been operated independently during the periods presented. While the
Automotive Business was profitable as part of Rockwell, there is no assurance
that profits will continue at a similar level for periods subsequent to the
Distribution.
FINANCIAL CONDITION
Historically, Meritor's operations have provided strong cash flows, as
demonstrated by cash provided by operating activities of $201 million in fiscal
1997, $197 million in fiscal 1996 and $203 million in fiscal 1995. Sales growth
related to both Heavy Vehicle Systems and Light Vehicle Systems products
resulted in an increase in commercial accounts receivables and payables at the
end of each fiscal year. The inventory levels at the end of fiscal 1997
increased primarily due to the increased level of business.
These cash flows have allowed the company to fund capital expenditures of
$119 million for fiscal 1997, $144 million for fiscal 1996 and $119 million for
fiscal 1995, as the company continued to invest in the property, plant and
equipment needed for future business requirements. Capital expenditures included
equipment to support new product introductions (roof systems, door systems, seat
adjusting systems and the Permalube(TM) driveline products), capacity expansion
(wheels and electric motors) and new production processes. The company expects
to spend approximately $140 million for capital expenditures in fiscal 1998.
In fiscal 1997, the $16 million in acquisitions of businesses and
investments consisted primarily of further investments in its Chinese heavy axle
joint venture with Xuzhou Construction Machinery Axle and Case Co. In fiscal
1996, the $101 million of net cash used for investing activities included, in
addition to capital expenditures, proceeds of $58 million from the disposition
of property and businesses, primarily due to the sale of Brazilian assets, and
$15 million used for investments in joint ventures. In fiscal 1995, the $127
million of net cash used for investing activities included $19 million in cash
used for acquisitions and investments, relating primarily to the acquisition of
a window regulator business.
Net cash used for financing activities for fiscal 1997 was $15 million.
This was comprised primarily of the $445 million proceeds from borrowings under
the Credit Facility used to fund the Pre-Distribution Payment to Rockwell. In
addition, $58 million in cash was provided
<TABLE>
<CAPTION>
CASH PROVIDED BY
OPERATING ACTIVITIES CAPITAL EXPENDITURES SALES PER EMPLOYEE
($ in millions) ($ in millions) ($ in thousands)
<S> <C> <C>
[BAR GRAPH] [BAR GRAPH] [BAR GRAPH]
</TABLE>
<PAGE> 3
Meritor Automotive, Inc. 1997 Annual Report 18
CHIEF FINANCIAL OFFICER'S REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT'D)
by Rockwell to fund certain Canadian tax obligations incurred in connection with
the transfer of assets prior to the Distribution. This amount partially offset
$84 million in cash distributions to Rockwell from the company. Net cash used
for financing activities was $84 million in fiscal 1996, and $80 million in
fiscal 1995, primarily related to cash distributions to Rockwell.
The company's debt to capitalization ratio at September 30, 1997 was 71
percent. Management anticipates an improvement of about 10 percentage points in
our fiscal 1998 year-end debt to capitalization ratio. Based on the October 1,
1997 stock price of $23.875, the debt to capitalization ratio on a market value
basis was 28 percent at September 30, 1997.
Meritor has retirement medical and pension plans which cover most of its
United States and certain non-United States employees (see Notes 13 and 14 to
Notes to Consolidated Financial Statements). Retirement medical plan cash
payments aggregated $36 million in fiscal 1997, $35 million in fiscal 1996 and
$30 million in fiscal 1995 and are expected to approximate $36 million in fiscal
1998. The Automotive Business, as a participant in Rockwell pension plans, made
pension plan contributions of $5 million in fiscal 1997, $2 million in fiscal
1996 and $3 million in fiscal 1995. The company has established a U.S. pension
plan and will continue existing non-U.S. pension plans. Management expects to
fund at least the minimum pension plan contributions required by government
regulations for the various plans in fiscal 1998 and anticipates that pension
plan funding will increase in the future to approximately $25 million per year.
RESULTS OF OPERATIONS
The following sets forth the sales, operating earnings and net income of the
company for the years ended September 30, 1997, 1996 and 1995, as well as pro
forma amounts for the year ended September 30, 1997 (dollars in millions, except
per share amounts):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
PRO FORMA(1) YEAR ENDED
YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, ------------------------------------------------
1997 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales
Heavy Vehicle Systems $ 1,957 $ 1,957 $ 1,827 $ 1,937
Light Vehicle Systems 1,352 1,352 1,317 1,188
- ----------------------------------------------------------------------------------------------------------------------------
Total sales $ 3,309 $ 3,309 $ 3,144 $ 3,125
============================================================================================================================
Gross margin $ 438 $ 438 $ 397 $ 381
============================================================================================================================
Operating earnings $ 192(2) 181(2) $ 146(2) $ 178
Other income-net 15 15 46 18
Interest expense (38) (10) (10) (11)
Provision for income taxes (70) (77) (68) (62)
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 99 $ 109 $ 114 $ 123
===========================================================================================================================
Pro Forma Earnings Per Share $ 1.44(2)
Pro Forma Earnings Per Share Before Restructuring
and Spin-Off Costs $ 1.74
Shares Outstanding (in millions) 68.9
===========================================================================================================================
</TABLE>
(1) Pro forma information reflects (a) the 68.9 million shares of common stock
issued at the date of the spin-off, (b) management's estimate that corporate
costs would have been $11 million lower on a stand-alone basis than those
allocated to the Automotive Business by Rockwell and (c) $28 million of interest
expense at 6 percent for the year ended September 30, 1997 related to the debt
incurred by the company in connection with the $445 million Pre-Distribution
Payment to Rockwell.
(2) Operating earnings for pro forma and actual fiscal 1997 includes
restructuring and spin-off costs of $29 million ($21 million after-tax or $.30
per share on a pro-forma basis) and for fiscal 1996 include restructuring costs
of $36 million ($24 million after-tax).
<PAGE> 4
19 Meritor Automotive, Inc. 1997 Annual Report
The following charts depict Heavy Vehicle Systems and Light Vehicle Systems
sales by product and geographic region for the fiscal year ended September 30,
1997:
HEAVY VEHICLE SYSTEMS
<TABLE>
<S> <C> <C>
[PIE CHART] - TRUCK AND TRAILER 65%
AXLES AND BRAKES
- OFF-HIGHWAY, SPECIALTY AND 26%
MILITARY VEHICLE PRODUCTS
- TRANSMISSIONS, CLUTCHES, 9%
DRIVELINES AND OTHER
PRODUCTS
MEMO: AFTERMARKET SALES
REPRESENTED 15% OF TOTAL
HEAVY VEHICLES SYSTEMS
SALES.
1997 SALES BY PRODUCT
</TABLE>
<TABLE>
<S> <C> <C>
[PIE CHART] - NORTH AMERICA 75%
- EUROPE 17%
- SOUTH AMERICA 5%
- ASIA-PACIFIC 3%
1997 SALES BY
GEOGRAPHIC REGION
</TABLE>
LIGHT VEHICLE SYSTEMS
<TABLE>
<S> <C> <C>
[PIE CHART] - ROOF SYSTEMS 31%
- DOOR SYSTEMS 29%
- ACCESS CONTROL SYSTEMS 14%
- SUSPENSION PRODUCTS 12%
- STEEL WHEELS 11%
- SEAT ADJUSTING SYSTEMS 3%
1997 SALES BY PRODUCT
</TABLE>
<TABLE>
<S> <C> <C>
[PIE CHART] - EUROPE 51%
- NORTH AMERICA 34%
- SOUTH AMERICA 11%
- ASIA-PACIFIC 4%
1997 SALES BY
GEOGRAPHIC REGION
</TABLE>
1997 COMPARED TO 1996
Sales for fiscal 1997 were up by $165 million, or 5 percent, above fiscal 1996.
Heavy Vehicle Systems product sales grew to nearly $2 billion in fiscal
1997, an increase of $130 million, or 7 percent, over fiscal 1996. This sales
growth was driven largely by increased sales in North America which benefited
from higher sales in the aftermarket as well as greater market penetration by
our truck drivetrain products and trailer axle and brake products. Sales also
increased in emerging markets including Brazil and China, while sales declined
in Europe, where industry volumes were lower.
Light Vehicle Systems product sales in fiscal 1997 increased $35 million,
or 3 percent, over fiscal 1996. The sales performance is linked to ongoing
growth in North America, offset somewhat by a decline in European sales, due
principally to the currency translation impact of a strong U. S. dollar in
fiscal 1997 and decreased sunroof demand. North American sales growth of 13
percent in generally flat light vehicle markets was chiefly the result of
stronger market penetration in steel wheels and door, suspension and seat
adjusting systems products.
Gross margin for fiscal 1997 improved $41 million, or 10 percent, over
fiscal 1996. Operating earnings for fiscal
<PAGE> 5
Meritor Automotive, Inc. 1997 Annual Report 20
CHIEF FINANCIAL OFFICER'S REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT'D)
1997, before restructuring and spin-off costs of $29 million in fiscal 1997 and
restructuring costs of $36 million in fiscal 1996, increased $28 million, or 15
percent, over fiscal 1996. This growth in gross margin and operating earnings is
due principally to the fiscal 1996 restructuring program as well as other
productivity and cost improvement programs. The company expects that the ongoing
cost reduction and productivity improvement programs, together with global plans
to launch new products, will further strengthen its ability to achieve its sales
growth and profitability goals.
In fiscal 1997, the company recorded a $21 million ($16 million after-tax)
restructuring charge related to workforce reductions and other manufacturing
cost reduction programs, mostly outside the United States. The provision
includes severance and other employee costs of $16 million and other
facility-related costs of $5 million. These actions, which are already in
process, are expected to reduce ongoing operating costs by an estimated $10
million per year, beginning in fiscal 1998. The company also recorded an $8
million ($5 million after-tax) charge in fiscal 1997 related to costs associated
with its spin-off from Rockwell including costs for communications, brand
advertising, recruitment and other professional services. Operating margins
before the restructuring and spin-off costs were 6.3 percent in fiscal 1997, as
compared to 5.8 percent in fiscal 1996, principally due to higher sales of
higher margin aftermarket products, continued improvement in production
processes and cost improvements from the 1996 restructuring, which offset
investments in new product development, continuing launch costs related to seat
adjusting systems products and higher engineering costs. Selling, general and
administrative expenses in fiscal 1997 increased $13 million, or 6 percent, over
fiscal 1996, due to increased sales volume and increased spending on information
technology projects.
Other income in fiscal 1997 decreased $31 million from fiscal 1996,
primarily due to one-time gains in fiscal 1996 which included a $14 million ($10
million after-tax) gain on the sale of Brazilian assets and $15 million ($9
million after-tax) from the settlement of certain environmental insurance
claims.
On a pro forma basis, operating earnings for fiscal 1997 would have been
$11 million higher than actual fiscal 1997 results, due to a reduction in
corporate costs from those allocated by Rockwell compared to management's
estimate of stand-alone corporate costs. Pro forma interest expense for fiscal
1997 would have been $28 million higher than actual fiscal 1997 interest
expense, due to additional annual interest expense of approximately 6 percent
on the borrowings under the Credit Facility related to the Pre-Distribution
Payment to Rockwell.
1996 COMPARED TO 1995
Sales for fiscal 1996 were slightly higher than fiscal 1995 principally due to
an 11 percent sales increase in Light Vehicle Systems products, which offset a 6
percent decrease in Heavy Vehicle Systems product sales. The increased sales of
Light Vehicle Systems products resulted primarily from the expansion of our
customer base in the light truck and sport utility vehicle markets in North
America. This expansion was fueled by product placement on new vehicle
platforms, a strong vehicle market and new product introductions.
The decrease in sales of Heavy Vehicle Systems products was due to lower
vehicle production levels, principally in the North and South American markets.
North American heavy truck and trailer production decreased approximately 18
percent from the high levels achieved in 1995. The Brazilian medium-duty and
heavy-duty vehicle markets experienced a 38 percent decline due to depressed
economic conditions.
Gross margin for the fiscal 1996 period improved $16 million, or 4 percent,
in comparison to the fiscal 1995 period as a result of continued product cost
reductions. Operating earnings for fiscal 1996 decreased by 18 percent after
restructuring charges of $36 million. The $36 million restructuring charges
related to manufacturing cost reduction programs at several locations, mostly
outside the United States. The restructuring charges included severance and
other employee costs of $22 million, asset impairments of $8 million and other
costs of $6 million. Operating earnings before the restructuring charges
<PAGE> 6
21 Meritor Automotive, Inc. 1997 Annual Report
increased $4 million, or 2 percent, from 1995, principally due to continued
product cost reductions which were offset by launch costs related to the
introduction of door systems and seat adjusting systems products in the North
American market and an increase in selling, general and administrative expenses.
Selling, general and administrative expenses in fiscal 1996 increased $12
million, or 6 percent, over fiscal 1995, primarily due to higher marketing costs
and increased reserves for uncollectible receivables. The increased reserves for
uncollectible receivables were established for certain trailer OEM customers,
due to the downturn in the trailer industry and such customers' financial
condition.
Other income in fiscal 1996 increased by $28 million as compared to fiscal
1995 primarily due to a $14 million gain on the sale of Brazilian assets and $15
million of proceeds from the settlement of certain environmental insurance
claims.
INCOME TAXES
The company's effective income tax rate in fiscal 1997 was 41.3 percent compared
to 37.6 percent in fiscal 1996 and 33.4 percent in fiscal 1995. The higher tax
rate in fiscal 1997 was due primarily to a lower level of foreign net operating
loss utilization in fiscal 1997 and a refund of certain foreign income taxes in
fiscal 1996 (see Note 16 to Notes to Consolidated Financial Statements). The
lower tax rate in 1995 was due principally to the realization of foreign net
operating loss carryforwards combined with relatively higher levels of U.S.
taxable income related to improved sales in the North American truck markets.
ENVIRONMENTAL MATTERS
Federal, state and local requirements relating to the discharge of substances
into the environment, the disposal of hazardous wastes and other activities
affecting the environment have had and will continue to have an impact on the
manufacturing operations of Meritor. Thus far, compliance with environmental
requirements and resolution of environmental claims have been accomplished
without material effect on the company's liquidity and capital resources,
competitive position or financial statements. In connection with the
Distribution, the company assumed all liabilities in respect of environmental
matters related to current and former operations of the Automotive Business.
Meritor has been designated as a potentially responsible party at three
Superfund sites, excluding sites as to which Meritor's records disclose no
involvement or as to which Meritor's potential liability has been fully
determined. Management estimates the total reasonably possible costs Meritor
could incur for the remediation of Superfund sites at September 30, 1997, to be
about $19 million, of which $12 million has been accrued.
Various other lawsuits, claims and proceedings have been asserted against
Meritor alleging violation of federal, state and local environmental protection
requirements, or seeking remediation of alleged environmental impairments,
principally at previously disposed of properties. For these matters, management
has estimated the total reasonably possible costs Meritor could incur at
September 30, 1997, to be about $28 million. The company has recorded
environmental accruals for these matters of $13 million.
At September 30, 1997, Meritor had no receivables recorded from third
parties related to environmental matters.
Based on its assessment and after consulting with the general counsel of
the company, management believes that the company's expenditures for
environmental capital investment and remediation necessary to comply with
present regulations governing environmental protection and other expenditures
for the resolution of environmental claims will not have a material adverse
effect on the company's liquidity and capital resources, competitive position or
financial statements. Management cannot assess the possible effect of compliance
with future requirements.
INTERNATIONAL OPERATIONS
Nearly one-half of Meritor's total assets and 41 percent of sales for the year
ended September 30, 1997, were outside North America, primarily in France, the
United Kingdom, Germany, Brazil and Italy. The borrowings utilized to
<PAGE> 7
Meritor Automotive, Inc. 1997 Annual Report 22
CHIEF FINANCIAL OFFICER'S REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONT'D)
finance the Pre-Distribution Payment to Rockwell have been incurred primarily in
the United States, Canada, Italy and the United Kingdom. Management believes
that international operations have significantly benefited the financial
performance of the company.
The company's international operations are subject to a number of risks
inherent in operating abroad, including risks with respect to currency exchange
rate fluctuations, local economic and political conditions, disruptions of
capital and trading markets, restrictive governmental actions, changes in legal
or regulatory requirements, import or export licensing requirements, limitations
on the repatriation of funds, difficulty in obtaining distribution and support,
nationalization, the laws and policies of the United States affecting trade,
foreign investment and loans and tax laws. There can be no assurance that these
factors will not have a material adverse impact on the company's ability to
increase or maintain its foreign sales or on its financial condition or results
of operations.
The company enters into foreign currency forward exchange contracts to
minimize risk of loss from currency exchange rate fluctuations on firm and
identifiable foreign currency commitments entered into in the ordinary course of
business. The company has not experienced nor does it anticipate any material
adverse effect on its results of operations or financial condition related to
these foreign currency forward exchange contracts. The company has not entered
into foreign currency forward exchange contracts for other purposes, and the
company's financial condition and results of operations could be affected
(negatively or positively) by currency fluctuations.
YEAR 2000
The company has developed plans to address issues related to the impact of the
year 2000 on its computer systems. Financial and operational systems have been
assessed and plans are being developed to address systems modification
requirements. The financial impact of making the required systems changes is not
expected to be material to the company's consolidated financial position,
results of operations or cash flows.
CAUTIONARY STATEMENT
This Management's Discussion and Analysis as well as other sections of this
Annual Report contain statements relating to future results of the company
(including certain projections and business trends) that are "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those projected as a result of certain
risks and uncertainties, including but not limited to global economic and market
conditions; the demand for commercial, specialty and light vehicles for which
the company supplies products; risks inherent in operating abroad; OEM program
delays; demand for and market acceptance of new and existing products;
successful development of new products; reliance on major OEM customers; labor
relations of the company, its customers and suppliers; and competitive product
and pricing pressures, as well as other risks and uncertainties, such as those
described under International Operations and those detailed herein and from time
to time in the filings of the company with the Securities and Exchange
Commission.
<PAGE> 8
23 MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREOWNERS OF MERITOR AUTOMOTIVE, INC.:
We have audited the accompanying consolidated and combined balance sheets of
Meritor Automotive, Inc. and subsidiaries (formerly the Automotive Business of
Rockwell International Corporation -- see Note 1) as of September 30, 1997 and
1996, and the related consolidated and combined statements of income,
shareowners' equity and cash flows for each of the three years in the period
ended September 30, 1997. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated and combined financial statements present
fairly, in all material respects, the financial position of Meritor Automotive,
Inc. and subsidiaries at September 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Detroit, Michigan
November 12, 1997
<PAGE> 9
MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT 24
MERITOR AUTOMOTIVE, INC.
STATEMENT OF CONSOLIDATED INCOME
(Dollars In Millions)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 3,309 $ 3,144 $ 3,125
Cost of sales 2,871 2,747 2,744
GROSS MARGIN 438 397 381
Selling, general and administrative 228 215 203
Restructuring and spin-off costs 29 36 --
OPERATING EARNINGS 181 146 178
Other income-net 15 46 18
Interest expense (10) (10) (11)
INCOME BEFORE INCOME TAXES 186 182 185
Provision for income taxes 77 68 62
- --------------------------------------------------------------------------------
NET INCOME $ 109 $ 114 $ 123
================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 10
25 MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT
MERITOR AUTOMOTIVE, INC.
CONSOLIDATED BALANCE SHEET
(Dollars In Millions)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
SEPTEMBER 30,
ASSETS 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 133 $ 74
Receivables (less allowance for doubtful accounts: 1997, $9; 1996, $14) 563 485
Inventories 327 294
Other current assets 128 129
- ----------------------------------------------------------------------------------------------
Total current assets 1,151 982
- ----------------------------------------------------------------------------------------------
NET PROPERTY 635 643
- ----------------------------------------------------------------------------------------------
OTHER ASSETS 216 205
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,002 $ 1,830
==============================================================================================
LIABILITIES AND SHAREOWNERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 21 $ 8
Accounts payable 501 441
Accrued compensation and benefits 129 124
Accrued income taxes 88 3
Other current liabilities 177 166
- ----------------------------------------------------------------------------------------------
Total current liabilities 916 742
- ----------------------------------------------------------------------------------------------
LONG-TERM DEBT 465 24
ACCRUED RETIREMENT BENEFITS 387 391
OTHER LIABILITIES 46 45
MINORITY INTERESTS 37 29
SHAREOWNERS' EQUITY
Rockwell's net investment -- 643
Common Stock (68.9 million shares issued and outstanding) 69 --
Additional paid-in capital 154 --
Cumulative currency translation adjustments (72) (44)
- ----------------------------------------------------------------------------------------------
Total shareowners' equity 151 599
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 2,002 $ 1,830
==============================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 11
MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT 26
MERITOR AUTOMOTIVE, INC.
STATEMENT OF CONSOLIDATED CASH FLOWS
(Dollars In Millions)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 109 $ 114 $ 123
Adjustments to net income to arrive at cash
provided by operating activities:
Depreciation and amortization 100 102 97
Gain on sale of property and businesses (3) (19) (5)
Restructuring, net of expenditures 20 26 --
Deferred income taxes (4) (18) (9)
Net pension expense, net of contributions 19 23 26
Changes in assets and liabilities, excluding effects of acquisitions,
divestitures and foreign currency adjustments:
Receivables (103) (32) (33)
Inventories (40) 19 (39)
Accounts payable 80 24 56
Other assets and liabilities 23 (42) (13)
- -------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 201 197 203
- -------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (119) (144) (119)
Acquisitions of businesses and investments (16) (15) (19)
Proceeds from the disposition of property and businesses 8 58 11
- -------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (127) (101) (127)
- -------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in short-term borrowings 17 (3) --
Payments of long-term debt (6) (7) (11)
Long-term borrowings 445 -- 2
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in debt 456 (10) (9)
Pre-Distribution Payment to Rockwell (445) -- --
Transfer from Rockwell -- Distribution tax obligation 58 -- --
Net transfers to Rockwell (84) (74) (71)
- -------------------------------------------------------------------------------------------------------
CASH USED FOR FINANCING ACTIVITIES (15) (84) (80)
- -------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 59 12 (4)
CASH AT BEGINNING OF YEAR 74 62 66
- -------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 133 $ 74 $ 62
=======================================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 12
27 MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT
MERITOR AUTOMOTIVE, INC.
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
(Dollars In Millions)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK
Beginning balance $ -- $ -- $ --
Distribution of Meritor shares 69 -- --
- --------------------------------------------------------------------------------
Ending balance 69 -- --
- --------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Beginning balance -- -- --
Distribution of Meritor shares 154 -- --
- --------------------------------------------------------------------------------
Ending balance 154 -- --
- --------------------------------------------------------------------------------
CUMULATIVE CURRENCY TRANSLATION ADJUSTMENTS
Beginning balance (44) (42) (42)
Net translation adjustments (28) (2) --
- --------------------------------------------------------------------------------
Ending balance (72) (44) (42)
- --------------------------------------------------------------------------------
ROCKWELL'S NET INVESTMENT
Beginning balance 643 603 551
Net income 109 114 123
Net transfers to Rockwell (84) (74) (71)
Pre-Distribution Payment to Rockwell (445) -- --
Distribution of Meritor shares (223) -- --
- --------------------------------------------------------------------------------
Ending balance -- 643 603
- --------------------------------------------------------------------------------
TOTAL SHAREOWNERS' EQUITY $ 151 $ 599 $ 561
================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE> 13
MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT 28
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Meritor Automotive, Inc. (the company or Meritor) is a leading global supplier
of a broad range of components and systems for use in commercial, specialty and
light vehicles. The company (formerly named 111 Holdings, Inc.) became an
independent, publicly-held company on September 30, 1997 (the Distribution
Date), when Rockwell International Corporation (Rockwell) spun off its
automotive businesses as an independent publicly-traded company by distributing
all of the issued and outstanding shares of the company to Rockwell's
shareowners on the basis of one share of the company's common stock for every
three shares of Rockwell common stock outstanding (the Distribution). Prior to
the Distribution Date, the company made a payment of approximately $445 million
in cash to Rockwell through a combination of dividends and other payments,
including repayments of intercompany indebtedness (collectively, the
Pre-Distribution Payment). The Pre-Distribution Payment was funded through
borrowings under the new revolving Credit Facility (see Note 9) that the company
has entered into with a group of banks. Rockwell and the company have entered
into a number of agreements to facilitate the transition of Meritor to an
independent company.
The accompanying financial statements present the consolidated financial
position of Meritor and its consolidated subsidiaries as of September 30, 1997.
For all periods prior to the Distribution Date, the consolidated financial
statements present the combined historical financial position, results of
operations and cash flows of the ongoing automotive businesses of Rockwell (the
Automotive Business) that were spun off, and are not necessarily indicative of
what the financial position, results of operations or cash flows would have been
had the company been an independent public company during the periods presented.
The financial statements of Meritor have been prepared in accordance with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates. Certain prior year
amounts have been reclassified to conform with current year presentation.
Rockwell provides certain services to Meritor's United States businesses,
including payroll and employee benefits administration, data processing, and
telecommunications services. Rockwell administers certain programs in which the
company's United States operations participate, including active medical and
insurance programs. Costs for these services and programs are billed to Meritor
based on actual usage and are included in Meritor's statement of income. These
costs totaled $21 million, $25 million and $27 million in fiscal years 1997,
1996 and 1995, respectively. Management believes that the methods of billing
those costs are reasonable and that the costs charged to Meritor are
approximately that which would be incurred on a stand-alone basis.
Rockwell also provided management services to Meritor, including corporate
oversight, financial, legal, tax, corporate communications and human resources.
The costs of providing these services are included in selling, general, and
administrative expense on the statement of income and were $28 million, $27
million and $34 million in fiscal years 1997, 1996 and 1995, respectively. These
costs have been allocated to Meritor based on Meritor's sales in proportion to
total Rockwell sales. Management believes that the method of allocating these
costs to Meritor is reasonable. Management estimates the cost of providing these
services on a stand-alone basis to be approximately $17 million per year (see
Note 21).
Meritor's United States and certain of its non-U.S. operations participated
in Rockwell's centralized cash management systems wherein receipts are centrally
deposited and disbursements are centrally funded. Accordingly, the financial
statements exclude cash, debt and interest income and expense for operations in
countries that participated in Rockwell's centralized cash management systems.
The
<PAGE> 14
29 MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT
balance sheet includes cash for those locations that did not participate in
Rockwell's cash management systems, principally non-U.S. operations and
non-wholly owned subsidiaries, and approximately $60 million related to Canadian
income tax liabilities (see Note 16). Accounts payable includes $11 million and
$22 million as of September 30, 1997 and 1996, respectively, related to
outstanding checks drawn on centralized disbursement accounts.
2. ACCOUNTING POLICIES
JOINT VENTURES AND INTERCOMPANY TRANSACTIONS
Investments in affiliates which are not majority-owned are reported using the
equity method. The accounts and results of operations of majority-owned
subsidiaries where ownership is greater than 50 percent are included in the
consolidated results and are offset by a related minority interest expense and
liability recorded for the minority interest ownership where ownership is less
than 100 percent. All significant accounts and transactions between Meritor
locations have been eliminated. Intercompany accounts receivable and payable
between Meritor and Rockwell or its subsidiaries as of the Distribution Date
have been canceled or otherwise eliminated.
FOREIGN CURRENCY
Local currencies are considered the functional currencies outside the United
States except for subsidiaries located in countries with highly inflationary
economies. For operations reporting in local currencies, assets and liabilities
are translated at year-end exchange rates with cumulative translation
adjustments included as a component of shareowners' equity. Income and expense
items are translated at average rates of exchange during the year. For
operations in countries with highly inflationary economies in which the U.S.
dollar is considered the functional currency, certain financial statement
amounts are translated at historic exchange rates with all other assets and
liabilities translated at year-end exchange rates. These translation adjustments
are reflected in the Statement of Consolidated Income.
INVENTORIES
Inventories are stated at the lower of cost (using LIFO, FIFO, or average
methods) or market (determined on the basis of estimated realizable values).
TOOLING
Costs incurred by the company for certain engineering and tooling projects,
principally for passenger car and light truck products, for which customer
reimbursement is anticipated are classified as other current assets on the
accompanying balance sheet. Provisions for losses are provided at the time
management anticipates costs to exceed anticipated customer reimbursement.
Company-owned tooling is classified as property and depreciated over its
expected life or the life of the related vehicle platform, whichever is shorter.
PROPERTY
Property is stated at cost. Depreciation of property is based on estimated
useful lives generally using the straight-line method. Significant renewals and
betterments are capitalized and replaced units are written off. Maintenance and
repairs, as well as renewals of minor amounts, are charged to expense.
INTANGIBLE ASSETS
Goodwill represents the excess of the cost of purchased businesses over the fair
value of their net assets at the date of acquisition and is amortized using the
straight-line method over periods ranging from 5 to 40 years.
IMPAIRMENT OF LONG-LIVED ASSETS
Meritor evaluates the carrying value of long-lived assets for possible
impairment in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of."
Management reviews periodically the realizability of goodwill and other
intangible assets based on an evaluation of remaining useful lives, cash flows
and profitability projections and has determined that there is no impairment at
September 30, 1997.
<PAGE> 15
MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT 30
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONT'D)
REVENUE RECOGNITION
Revenues are generally recognized upon shipment of products to customers.
ENVIRONMENTAL MATTERS
Meritor records accruals for environmental issues in the accounting period in
which its responsibility is established and the cost can be reasonably
estimated. At environmental sites in which more than one potentially responsible
party has been identified, the company records a liability for its allocable
share of costs related to its involvement with the site as well as an allocable
share of costs related to insolvent parties or unidentified shares. At
environmental sites in which Meritor is the only responsible party, the company
records a liability for the total estimated costs of remediation before
consideration of recovery from insurers or other third parties. If recovery from
a third party is determined to be probable, the company records a receivable for
the estimated recovery.
NEW ACCOUNTING STANDARDS
The company adopted Statement of Financial Accounting Standards No. 123 (SFAS
123), "Accounting for Stock-Based Compensation," in 1997. This standard gives
entities the choice of recognizing stock-based compensation by adopting the new
fair value method or continuing to measure compensation expense using the
intrinsic value approach under Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees." The company has chosen to account
for stock-based compensation under APB No. 25 and adopt the disclosure-only
provisions of SFAS 123 (see Note 12).
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position No. 96-1, "Environmental Remediation Liabilities,"
which is effective for fiscal year 1998. Management does not expect adoption of
this statement to have a material effect on the financial statements.
3. RESTRUCTURING AND SPIN-OFF COSTS
In 1997, the company recorded restructuring charges of $21 million ($16 million
after-tax) related to workforce reductions and other manufacturing cost
reduction programs, mostly outside the United States. The provision includes
severance and other employee costs of $16 million related to 640 employees and
other facility-related costs of $5 million. Approximately $1 million had been
paid by September 30, 1997 and the remaining restructuring actions are expected
to be substantially completed by the end of the 1998 fiscal year.
The company also recorded spin-off costs of $8 million ($5 million after-tax)
associated with start-up activities of the new company. These activities
included communications, brand advertising, recruitment and other professional
services.
In 1996, the company recorded restructuring charges of $36 million ($24
million after-tax) for manufacturing cost reduction programs, mostly outside the
United States. The provision includes severance and other employee costs of $22
million related to 1,400 employees, asset impairments of $8 million and other
costs of $6 million. The restructuring actions had been substantially completed
at September 30, 1997.
4. INVENTORIES
Inventories are summarized as follows (in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SEPTEMBER 30,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Finished goods $117 $114
Work in process 146 146
Raw materials, parts, and supplies 116 88
- --------------------------------------------------------------------------------
Total 379 348
Less allowance to adjust the carrying
value of certain inventories (1997,
$150; 1996, $125) to a LIFO basis 52 54
Inventories $327 $294
================================================================================
</TABLE>
<PAGE> 16
31 MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT
5. OTHER CURRENT ASSETS
Other current assets are summarized as follows (in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SEPTEMBER 30,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Current deferred income
taxes (see Note 16) $ 85 $ 84
Customer tooling 20 21
Prepaid expenses 13 11
Other 10 13
- --------------------------------------------------------------------------------
Other current assets $128 $129
================================================================================
</TABLE>
6. PROPERTY
Property is summarized as follows (in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SEPTEMBER 30,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Property at cost:
Land and land improvements $ 31 $ 32
Buildings 278 282
Machinery and equipment 985 950
Company-owned tooling 195 188
Construction in progress 93 106
- --------------------------------------------------------------------------------
Total 1,582 1,558
Less accumulated depreciation 947 915
- --------------------------------------------------------------------------------
Property, net $ 635 $ 643
================================================================================
</TABLE>
7. OTHER ASSETS
Other assets are summarized as follows (in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SEPTEMBER 30,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Net deferred income taxes
(see Note 16) $ 71 $ 77
Goodwill (net of accumulated
amortization of: 1997, $22;
1996, $18) 42 45
Investments in affiliates 43 38
Prepaid pension costs (see Note 14) 29 26
Other 31 19
- --------------------------------------------------------------------------------
Other assets $216 $205
================================================================================
</TABLE>
8. OTHER CURRENT LIABILITIES
Other current liabilities are summarized as follows (in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SEPTEMBER 30,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accrued product warranties $ 95 $ 96
Accrued taxes other than
income taxes 28 24
Accrued restructuring 26 19
Other 28 27
- --------------------------------------------------------------------------------
Other current liabilities $177 $166
================================================================================
</TABLE>
<PAGE> 17
MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT 32
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONT'D)
9. LONG-TERM DEBT
Long-term debt is summarized as follows (in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SEPTEMBER 30,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Bank revolving Credit Facility $447 $ --
Other 18 24
- --------------------------------------------------------------------------------
Long-term debt $465 $ 24
================================================================================
</TABLE>
In August 1997, the company entered into a $1 billion five-year unsecured
revolving Credit Facility with a group of banks. The bank borrowings were used
to fund the $445 million Pre-Distribution Payment to Rockwell. Borrowings are
subject to interest based on quoted market rates, principally LIBOR and
eurocurrency rates, at the date of borrowing plus an applicable margin which is
based on the company's credit rating or financial ratios. In addition, a
facility fee, which also varies based upon the company's credit rating or
financial ratios, is required on the $1 billion committed amount. At September
30, 1997, the margin over the LIBOR-based and eurocurrency rates was 20 basis
points, and the facility fee on the committed amount was 10 basis points. At
September 30, 1997, the company was in compliance with all covenants included in
the Credit Facility and there were no events of default. Up to $500 million of
the Credit Facility is available for eurocurrency loans and up to $100 million
is available for the issuance of standby letters of credit.
10. FINANCIAL INSTRUMENTS
Meritor's financial instruments include cash, short- and long-term debt, and
foreign currency forward exchange contracts. As of September 30, 1997 and 1996,
the carrying values of the company's financial instruments approximated their
fair values based on prevailing market prices and rates. It is the policy of
Meritor not to enter into derivative financial instruments for speculative
purposes. Meritor does enter into foreign currency forward exchange contracts to
minimize risk of loss from currency rate fluctuations on foreign currency
commitments entered into in the ordinary course of business. These commitments
related to purchase and sales transactions are generally for terms of less than
one year. The foreign currency forward exchange contracts are executed with
creditworthy banks and are denominated in currencies of major industrial
countries. The notional amount of outstanding foreign currency forward exchange
contracts aggregated $194 million and $85 million at September 30, 1997 and
1996, respectively. Meritor does not anticipate any material adverse effect on
its results of operations or financial position relating to these foreign
currency forward exchange contracts.
<PAGE> 18
33 MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT
11. CAPITAL STOCK
The company is authorized to issue 350,000,000 shares of Common Stock, par value
$1 per share, and 25 million shares of Preferred Stock, without par value, of
which 1 million shares are designated as Series A Junior Participating Preferred
Stock (Junior Preferred Stock). Under the Company Rights Plan, a Preferred Share
Purchase Right (Right) is attached to each share of Common Stock pursuant to
which the holder may, in certain takeover-related circumstances, become entitled
to purchase from the company 1/100th of a share of Junior Preferred Stock at a
price of $112.50, subject to adjustment. Also, in certain takeover-related
circumstances, each Right (other than those held by an acquiring person) will
generally be exercisable for shares of Common Stock or stock of the acquiring
person having a market value of twice the exercise price. In certain events,
each Right may be exchanged by the company for one share of Common Stock or
1/100th of a share of Junior Preferred Stock. The Rights will expire on
September 30, 2007, unless earlier exchanged or redeemed at a redemption price
of $.01 per Right. Until a Right is exercised, the holder, as such, will have no
voting, dividend or other rights as a shareowner of the company.
The company has reserved 7.7 million shares of Common Stock in connection
with its 1997 Long-Term Incentives Plan, Directors Stock Plan and Incentive
Compensation Plan.
12. EMPLOYEE STOCK OPTIONS
Under the 1997 Long-Term Incentives Plan (the 1997 LTIP) the company may grant
up to 7 million shares of company Common Stock as nonqualified stock options,
incentive stock options, stock appreciation rights and restricted stock to key
employees. Stock options are exercisable at prices equal to the fair market
value of such stock on the dates the options are granted, expire ten years from
the date they are granted and generally have a vesting period of three years.
Pursuant to the 1997 LTIP, effective as of November 19, 1997, the
Compensation and Management Development Committee of the Board of Directors
approved the grant to employees of stock options to purchase 2.8 million shares
at an exercise price of $22.31 per share.
Options granted under Rockwell's stock option plans during fiscal 1997 to
persons who are now Meritor employees have been converted to options to acquire
Meritor Common Stock. The conversion was designed to maintain the same aggregate
spread between exercise price and market value of the underlying shares
immediately before and after the Distribution. At September 30, 1997, converted
options for 367,640 Meritor shares were outstanding with a weighted average
exercise price of $23.78. None of these options were exercisable at September
30, 1997.
Under the 1997 LTIP, 3.8 million shares are available for future grant or
payments.
In 1997, the company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation expense has been recognized for the
stock option plans. If the fair value of options granted had been recognized as
compensation expense on a straight-line basis over the vesting periods in
accordance with the provisions of SFAS 123, pro forma net income would have been
$1.1 million lower in 1997 and $.3 million lower in 1996. The fair values of
options issued at date of grant were estimated using the Black-Scholes options
pricing model utilizing an expected volatility of 26 percent, risk free interest
rate of 5.9 percent, expected life of 5 years and an expected dividend yield of
2 percent.
<PAGE> 19
MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT 34
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONT'D)
13. RETIREMENT MEDICAL PLANS
Meritor has retirement medical plans which cover most of its U.S. and certain
non-U.S. employees and provide for medical payments to eligible employees and
dependents upon retirement.
The components of retirement medical expense are as follows (in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 2 $ 2 $ 2
Interest cost 28 27 27
Amortization of
unrecognized amounts (1) (1) (3)
- --------------------------------------------------------------------------------
Retirement medical expense $ 29 $ 28 $ 26
================================================================================
</TABLE>
The retirement medical obligation at September 30, 1997 and 1996 is comprised of
the following (in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated retirement medical obligation:
Retirees $ 346 $ 336
Employees eligible to retire 21 20
Employees not eligible to retire 34 35
- --------------------------------------------------------------------------------
Total 401 391
Items not yet recognized
in the balance sheet:
Plan amendments 27 22
Actuarial (losses) gains:
Discount rate (54) (35)
Health care cost trend 11 30
Demographic and other (86) (104)
Recorded liability $ 299 $ 304
================================================================================
Assumptions used
(June 30 measurement date):
Discount rate 7.5% 7.75%
Health care cost trend rates 8.0%* 8.0%*
</TABLE>
*decreasing to 5.5% after 2015
The actuarial losses relating to demographics are due principally to earlier
than assumed retirements resulting from plant closures and restructuring
actions. The net actuarial losses will be considered in the determination of
retirement medical expense in the future.
Changing the health care cost trend rates by one percentage point would
change the accumulated retirement medical obligation at September 30, 1997 by
approximately $30 million and would change retirement medical expense by
approximately $2 million. Retirement medical payments totaled $36 million, $35
million and $30 million for 1997, 1996 and 1995, respectively.
14. RETIREMENT PENSION PLANS
Prior to the Distribution, Meritor employees participated in a Rockwell pension
plan which provides for monthly pension payments to eligible U.S. employees upon
retirement. Pension benefits for U.S. salaried employees are based on years of
credited service and compensation. Pension benefits for certain U.S. hourly
employees are based on years of service and specified benefit amounts.
In connection with the previous divestiture of its Aerospace and Defense
businesses to The Boeing Company (Boeing), Rockwell transferred to Boeing all
United States pension plan obligations attributable to retirees of Rockwell,
including the Automotive Business, as of January 1, 1996 and a proportionate
share of pension plan assets. Rockwell has retained the remaining obligation for
vested benefits earned by Meritor participants in the U.S. pension plan and all
related assets through the Distribution Date.
Meritor established a pension plan with substantially similar benefits and
which credits participants for service earned with Rockwell. The benefits
payable under the Meritor plan will be equal to the difference between the total
benefit earned with both companies and the vested benefit obligation retained by
Rockwell.
Certain non-U.S. pension plans, which relate solely to employees and retirees
of the Automotive Business, were assumed by Meritor.
<PAGE> 20
35 MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT
Net pension expense consisted of the following (in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 14 $ 16 $ 14
Interest cost 17 17 16
Assumed return
on plan assets (13) (12) (12)
Amortization of
unrecognized amounts 6 4 11
- --------------------------------------------------------------------------------
Net pension expense $ 24 $ 25 $ 29
================================================================================
</TABLE>
The following table reconciles the funded status of the pension assets and
liabilities assumed by Meritor to amounts included in the balance sheet (in
millions):
<TABLE>
<CAPTION>
-----------------------------------------------------
1997 1996
------------------------- -------------------------
PLANS WITH PLANS WITH PLANS WITH PLANS WITH
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEEDING BENEFITS EXCEEDING BENEFITS
ACCUMULATED EXCEEDING ACCUMULATED EXCEEDING
BENEFITS ASSETS BENEFITS ASSETS
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated
benefit obligation,
principally vested $ 103 $ 105 $ 94 $ 96
Effects of projected
compensation
increases 8 47 7 41
- -------------------------------------------------------------------------------------
Projected benefit
obligation 111 152 101 137
Fair value of plan assets 153 31 136 25
- -------------------------------------------------------------------------------------
Plan assets in excess
of (less than)
projected benefit
obligation 42 (121) 35 (112)
Items not yet recognized
in the balance sheet:
Net actuarial
(gains) losses (11) 12 (5) 10
Prior service cost 13 3 14 3
Remaining initial
net asset (15) (3) (18) (4)
Unfunded pension
adjustment -- (1) -- (4)
Prepaid (accrued)
pension costs at
September 30 $ 29 $(110) $ 26 $(107)
=====================================================================================
</TABLE>
Assumptions used (June 30 measurement date):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 7.0-7.75% 7.75-8.0%
Compensation increase rate 3.5-4.5% 4.0-4.5%
Long-term rate of return
on plan assets 9.0% 9.0%
</TABLE>
Meritor employees also participated in certain Rockwell defined contribution
savings plans for eligible employees. Expense related to these plans was $5
million for 1997 and $6 million each for 1996 and 1995.
15. OTHER INCOME-NET
Other income-net is comprised of the following (in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gain on the sale of property
and businesses $ 3 $ 19 $ 5
Equity in earnings of affiliates 15 11 6
Minority interests (11) (11) (8)
Interest income 2 4 4
Insurance settlement 5 15 --
Other 1 8 11
- --------------------------------------------------------------------------------
Other income-net $ 15 $ 46 $ 18
================================================================================
</TABLE>
16. INCOME TAXES
A substantial portion of Meritor's results of operations for 1997 and prior
years are being included in the consolidated U.S. and combined non-U.S. income
tax returns of Rockwell. The remaining results of operations for Meritor will be
included in separate Meritor income tax returns. Rockwell has agreed to
indemnify Meritor for income tax liabilities and retained the rights to tax
refunds relating to any operations included in such consolidated or combined tax
returns. Accordingly, the balance sheet does not include
<PAGE> 21
MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT 36
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONT'D)
current or prior period income tax receivables or payables related to Meritor
operations which are included in the consolidated or combined Rockwell income
tax returns. The income tax provisions included in the Statement of Consolidated
Income have been determined as if Meritor was a separate taxpayer.
At September 30, 1997, Accrued Income Taxes are primarily comprised of
Canadian income taxes incurred in connection with the transfer of assets prior
to the Distribution. Rockwell has agreed to indemnify the company for such
Canadian income taxes and has provided approximately $60 million of cash for
that purpose.
Prior to the Distribution, Rockwell received a ruling from the United States
Internal Revenue Service that the spin-off of the Automotive Business will be
tax-free to Rockwell shareowners. The company is responsible for any taxes
imposed on Rockwell, the company or Rockwell shareowners if certain actions by
or in respect of the company or its shareowners result in the disqualification
of the Distribution as a tax-free transaction.
The components of the provision for income taxes are summarized as follows
(in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
United States $ 23 $ 30 $ 19
Foreign 53 48 47
State and local 5 8 5
- --------------------------------------------------------------------------------
Total current tax expense 81 86 71
- --------------------------------------------------------------------------------
Deferred tax (benefit) expense:
United States (3) (13) (12)
Foreign -- (2) 5
State and local (1) (3) (2)
- --------------------------------------------------------------------------------
Total deferred tax benefit (4) (18) (9)
- --------------------------------------------------------------------------------
Provision for income taxes $ 77 $ 68 $ 62
================================================================================
</TABLE>
The deferred tax benefit represents the tax impact related to certain accrued
expenses, principally restructuring and warranty, that have been recorded for
financial statement purposes but are not deductible for income tax purposes
until paid. Net deferred income tax benefits included in Other Current Assets in
the accompanying balance sheet consist of the tax effects of temporary
differences related to the following (in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SEPTEMBER 30,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accrued product warranties $35 $36
Accrued compensation and benefits 25 26
Restructuring 7 7
Other-net 18 15
- --------------------------------------------------------------------------------
Current deferred income taxes $85 $84
================================================================================
</TABLE>
Net deferred income tax benefits included in Other Assets in the accompanying
balance sheet consist of the tax effects of temporary differences related to the
following (in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SEPTEMBER 30,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accrued retirement medical costs $ 103 $ 106
Property (61) (65)
Pensions 18 14
Loss and credit carryforwards 21 19
Other-net 5 18
- --------------------------------------------------------------------------------
Subtotal 86 92
Valuation allowance (15) (15)
- --------------------------------------------------------------------------------
Long-term deferred income taxes $ 71 $ 77
================================================================================
</TABLE>
<PAGE> 22
37 MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT
Management believes it is more likely than not that current and long-term
deferred tax benefits will reduce future current income tax expense and
payments. Significant factors considered by management in its determination of
the probability of the realization of the deferred tax benefits included: (a)
the historical operating results of the Automotive Business, (b) expectations of
future earnings and (c) the extended period of time over which the retirement
medical liability will be paid. The valuation allowance represents the amount of
tax benefits related to net operating loss carryforwards that management does
not believe it is more likely than not that these benefits will be realized in
the future. The carryforward periods for $10 million of net operating losses
expire between 1998 and 2002, virtually all of which are subject to the
valuation allowance. The carryforward period for the remaining net operating
losses and for the tax credits is indefinite.
Meritor's effective tax rate was different from the U.S. statutory rate for the
reasons set forth below:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
State and local income taxes 1.2 2.0 1.2
Foreign income taxes 3.7 2.3 2.2
Recognition of foreign loss
carryforwards (1.9) (2.1) (6.6)
Tax on undistributed
foreign earnings 2.0 1.0 1.0
Other 1.3 (.6) .6
- --------------------------------------------------------------------------------
Effective tax rate 41.3% 37.6% 33.4%
================================================================================
</TABLE>
The foreign income tax component of the effective tax rate for 1997 includes the
impact (1.4 percent) of higher foreign operating losses for which no tax
benefits were recognized. Included in Other for 1996 is the benefit (2.2
percent) from a refund of certain foreign income taxes.
The income tax provisions were calculated based upon the following components of
income before income taxes (in millions):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
United States income $ 53 $ 43 $ 21
Foreign income 133 139 164
- --------------------------------------------------------------------------------
Total $186 $182 $185
================================================================================
</TABLE>
No provision has been made for U.S., state or additional foreign income taxes
related to approximately $124 million of undistributed earnings of foreign
subsidiaries which have been or are intended to be permanently reinvested.
17. SUPPLEMENTAL FINANCIAL INFORMATION
<TABLE>
- --------------------------------------------------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statement of income data:
Maintenance and repairs $70 $64 $65
Research and development 54 51 58
Rental expense 18 17 19
Statement of cash flows data:
Interest payments $10 $10 $12
Income tax payments 16 7 6
</TABLE>
18. CONTINGENT LIABILITIES
Federal, state and local requirements relating to the discharge of substances
into the environment, the disposal of hazardous wastes, and other activities
affecting the environment have had and will continue to have an impact on the
manufacturing operations of Meritor. Thus far, compliance with environmental
requirements and resolution of environmental claims have been accomplished
without material effect on Meritor's liquidity and capital resources,
competitive position or financial statements.
<PAGE> 23
MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT 38
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONT'D)
Meritor has been designated as a potentially responsible party at three
Superfund sites, excluding sites as to which Meritor's records disclose no
involvement or as to which Meritor's potential liability has been finally
determined. Management estimates the total reasonably possible costs Meritor
could incur for the remediation of Superfund sites at September 30, 1997, to be
about $19 million, of which $12 million has been accrued.
Various other lawsuits, claims, and proceedings have been asserted against
Meritor alleging violations of federal, state and local environmental protection
requirements, or seeking remediation of alleged environmental impairments,
principally at previously disposed of properties. For these matters, management
has estimated the total reasonably possible costs Meritor could incur at
September 30, 1997, to be about $28 million. Meritor has recorded environmental
accruals for these matters of $13 million.
At September 30, 1997, Meritor had no receivables recorded from third parties
related to environmental matters.
Based on its assessment, management believes that Meritor's expenditures for
environmental capital investment and remediation necessary to comply with
present regulations governing environmental protection and other expenditures
for the resolution of environmental claims will not have a material adverse
effect on the company's liquidity and capital resources, competitive position or
financial statements. Management cannot assess the possible effect of compliance
with future requirements.
Various other lawsuits, claims and proceedings have been or may be instituted
or asserted against Meritor relating to the conduct of its business, including
those pertaining to product liability, intellectual property, safety and health
and employment matters. Although the outcome of litigation cannot be predicted
with certainty and some lawsuits, claims, or proceedings may be disposed of
unfavorably to Meritor, management believes the disposition of matters which are
pending or asserted will not have a material adverse effect on Meritor's
financial statements.
In connection with the Distribution, the company assumed all contingent
liabilities (including those in respect of environmental matters) related to
current and former operations of the Automotive Business.
19. BUSINESS SEGMENT INFORMATION
Meritor operates in one industry segment, the supply of automotive components
and systems for use in commercial, specialty and light vehicles, including:
HEAVY VEHICLE SYSTEMS -- Drivetrain systems and components, including axles,
brakes, transmissions, clutches and drivelines, for heavy-duty and medium-duty
trucks, trailers, off-highway equipment, buses and coaches, as well as specialty
and military vehicles.
LIGHT VEHICLE SYSTEMS -- Electromechanical and other components and systems,
including roof, door, access control and seat adjusting systems, as well as
suspension components and steel wheels, for passenger cars, light trucks and
sport utility vehicles.
<TABLE>
<CAPTION>
SALES BY GEOGRAPHIC AREA
- --------------------------------------------------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
North America $1,948 $1,758 $1,712
Europe 1,022 1,094 1,042
South America 236 206 270
Asia-Pacific 103 86 101
- --------------------------------------------------------------------------------
Total sales $3,309 $3,144 $3,125
================================================================================
</TABLE>
<PAGE> 24
39 MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT
There were sales to one original equipment manufacturer in 1997 and 1996 and
sales to two original equipment manufacturers in 1995 that represented 10
percent or more of the company's total sales. Sales to customer A were 11
percent in 1997 and 1996 and 10 percent in 1995. Sales to customer B were 10
percent in 1995.
<TABLE>
<CAPTION>
EARNINGS BY GEOGRAPHIC AREA
- --------------------------------------------------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
North America $ 141 $ 102 $ 74
Europe 56 73 81
South America 7 1 16
Asia-Pacific 6 6 7
Restructuring and
spin-off costs (29) (36) --
- --------------------------------------------------------------------------------
Operating earnings 181 146 178
Other income-net 15 46 18
Interest expense (10) (10) (11)
Provision for income taxes (77) (68) (62)
Net income $ 109 $ 114 $ 123
================================================================================
</TABLE>
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS BY GEOGRAPHIC AREA
- --------------------------------------------------------------------------------
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
North America $1,131 $ 962 $ 912
Europe 566 590 569
South America 192 188 209
Asia-Pacific 113 90 76
- --------------------------------------------------------------------------------
Total $2,002 $1,830 $1,766
================================================================================
</TABLE>
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1997 FISCAL QUARTERS
- --------------------------------------------------------------------------------
(In millions) FIRST SECOND THIRD FOURTH 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 756 $ 822 $ 889 $ 842 $3,309
Cost of sales 663 708 764 736 2,871
Net income 28 34 38 9 109
</TABLE>
Fourth quarter 1997 net income was reduced by a $29 million ($21 million
after-tax) charge related to restructuring and spin-off costs.
<TABLE>
<CAPTION>
1996 FISCAL QUARTERS
- --------------------------------------------------------------------------------
(In millions) FIRST SECOND THIRD FOURTH 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 756 $ 837 $ 804 $ 747 $3,144
Cost of sales 675 724 699 649 2,747
Net income 22 43 29 20 114
</TABLE>
Fourth quarter 1996 net income was reduced by a $30 million ($20 million
after-tax) charge related to restructuring and increased by $15 million ($9
million after-tax) of proceeds from the settlement of certain environmental
insurance claims arising in years prior to 1986.
Third quarter 1996 net income was reduced by a $6 million ($4 million
after-tax) charge related to restructuring.
Second quarter 1996 net income was increased by an $11 million ($8 million
after-tax) gain on the sale of a product line.
<PAGE> 25
MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT 40
MERITOR AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONT'D)
21. PRO FORMA SALES AND EARNINGS (UNAUDITED)
The following unaudited pro forma financial data is presented as though the
Distribution occurred as of October 1, 1996. Pro forma information reflects (a)
the 68.9 million shares of common stock issued at the date of the spin-off, (b)
management's estimate that corporate costs would have been $11 million lower on
a stand-alone basis than those allocated to the Automotive Business by Rockwell
and (c) $28 million of interest expense at 6 percent for the year ended
September 30, 1997, related to the debt incurred by the company in connection
with the $445 million Pre-Distribution Payment to Rockwell. The unaudited pro
forma financial data is not necessarily indicative of the financial results of
the company had the Distribution occurred on October 1, 1996.
<TABLE>
<CAPTION>
1997 QUARTERS
- --------------------------------------------------------------------------------------------
(In millions, except per share amounts) FIRST SECOND THIRD FOURTH TOTAL
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 756 $ 822 $ 889 $ 842 $3,309
Pro Forma Operating Earnings 42 61 69 20(1) 192(1)
Pro Forma Net Income 25 33 35 6 99
Pro Forma Earnings Per Share $ .36 $ .48 $ .51 $ .09 $ 1.44
============================================================================================
Pro Forma Earnings Per Share Before
Restructuring and Spin-Off Costs $ .36 $ .48 $ .51 $ .39 $ 1.74
============================================================================================
</TABLE>
(1) Includes restructuring and spin-off costs of $29 million ($21 million
after-tax).
<PAGE> 26
41 MERITOR AUTOMOTIVE, INC. 1997 ANNUAL REPORT
MERITOR AUTOMOTIVE, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
(Dollars In Millions) FISCAL YEAR ENDED SEPTEMBER 30,
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Sales $ 3,309 $ 3,144 $ 3,125 $ 2,653 $ 2,358
Gross margin 438 397 381 282 282
Selling, general, and administrative 228 215 203 191 182
Operating earnings 181(1) 146(1) 178 91 100
As a percent of sales:
Gross margin 13.2% 12.6% 12.2% 10.6% 12.0%
Selling, general, and administrative 6.9% 6.8% 6.5% 7.2% 7.7%
Operating earnings 5.5% 4.6% 5.7% 3.4% 4.2%
Interest expense 10 10 11 12 13
Income before income taxes 186 182 185 88 102
Net income 109 114 123 51 57
FINANCIAL POSITION AT SEPTEMBER 30
Working capital(2) $ 235 $ 240 $ 216 $ 204 $ 185
Property-net 635 643 647 617 588
Goodwill 42 45 40 30 25
Total assets 2,002 1,830 1,766 1,638 1,488
Short-term debt 21 8 14 17 28
Long-term debt 465 24 31 35 9
Minority interests 37 29 24 21 21
Equity 151 599 561 509 468
OTHER DATA
EBITDA(3) $ 296 $ 294 $ 293 $ 193 $ 207
Depreciation and amortization 100 102 97 93 92
Cash provided by operating activities 201 197 203 156 162
Cash used for investing activities 127 101 127 99 90
Cash used for financing activities 15 84 80 41 64
Capital expenditures 119 144 119 102 100
Employees at year end 16,900 15,300 16,700 17,200 16,300
Annual sales per employee (in thousands)(4) $ 203 $ 198 $ 182 $ 159 $ 150
</TABLE>
(1) Operating earnings for fiscal year 1997 and fiscal year 1996 includes
restructuring and spin-off costs of $29 million and restructuring costs of $36
million, respectively.
(2) Working capital consists of all current assets and liabilities, including
cash and short-term debt.
(3) EBITDA is defined as income before income taxes, plus interest expense,
depreciation and amortization. EBITDA should not be considered as a substitute
for operating earnings, net income, cash flow or other statement of consolidated
income or cash flow data computed in accordance with generally accepted
accounting principles or as a measure of a company's results of operations or
liquidity. Although EBITDA is not defined in generally accepted accounting
principles, it is widely used as a measure of a company's operating performance
and its ability to service its indebtedness because it assists in comparing
performance on a consistent basis across companies without regard to
depreciation and amortization, which can vary significantly depending on
accounting methods (particularly where acquisitions are involved) or
non-operating factors such as historical cost bases and capital structure.
(4) Annual sales per employee is based on the average of the monthly ending
number of employees during the year.
<PAGE> 1
EXHIBIT 21
MERITOR AUTOMOTIVE, INC.
LIST OF SUBSIDIARIES OF THE COMPANY
AS OF DECEMBER 15, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF VOTING
SECURITIES OWNED BY
-----------------------
NAME AND JURISDICTION REGISTRANT SUBSIDIARY
- ------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Meritor Heavy Vehicle Systems LLC (Delaware)............................. 100%
Meritor Light Vehicle Systems, Inc. (Delaware)........................... 100%
Meritor Automotive Canada Inc. (Canada).................................. 100%
Meritor Automotive Limited (England)..................................... 100%
Meritor France S.A. (France)........................................ 100%
Meritor Automotive GmbH (Germany)........................................ 99% 1% *
Meritor do Brasil Ltda. (Brazil)......................................... 100% **
</TABLE>
- ---------------
* 1% of the voting securities of Meritor Automotive GmbH is owned by Meritor
Heavy Vehicle Systems Limited.
** 100% of the voting securities of Meritor do Brasil Ltda. is owned by Meritor
Participacoes Ltda., a holding company all of the voting securities of which
are owned by Meritor Automotive, Inc.
Listed above are certain consolidated subsidiaries included in the
financial statements of the Company. Unlisted subsidiaries, considered in the
aggregate, do not constitute a significant subsidiary.
<PAGE> 1
EXHIBIT 23-a
CONSENT OF EXPERT
I consent to the reference to me under the heading "Item 3. Legal
Proceedings" in the Annual Report on Form 10-K of Meritor Automotive, Inc.
("Meritor") for the year ended September 30, 1997, and to the incorporation by
reference of such reference into Meritor's Registration Statement on Form S-8
(Registration No. 333-35403) pertaining to the Meritor Savings Plan and
Meritor's Registration Statement on Form S-8 (Registration No. 333-35407)
pertaining to the Meritor 1997 Long-Term Incentives Plan.
/s/ M. Lee Murrah
-----------------------
M. Lee Murrah
Assistant General Counsel of
Meritor Automotive, Inc.
Date: December 19, 1997
<PAGE> 1
EXHIBIT 23-b
CONSENT OF EXPERT
I consent to the references to me under the headings "Item 1. Business-
Environmental Matters" and "Item 3. Legal Proceedings" in the Annual Report on
Form 10-K of Meritor Automotive, Inc. ("Meritor") for the year ended September
30, 1997, and under the heading "Chief Financial Officer's Review - Management's
Discussion and Analysis - Environmental Matters" in Meritor's Annual Report to
Shareowners, incorporated by reference in the Form 10-K. I also consent to the
incorporation by reference of such references into Meritor's Registration
Statement on Form S-8 (Registration No. 333-35403) pertaining to the Meritor
Savings Plan and Meritor's Registration Statement on Form S-8 (Registration No.
333-35407) pertaining to the Meritor 1997 Long-Term Incentives Plan.
/s/ David W. Greenfield
--------------------------------
David W. Greenfield
Senior Vice President,
General Counsel and Secretary of
Meritor Automotive, Inc.
Date: December 19, 1997
<PAGE> 1
EXHIBIT 23-c
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
Meritor Automotive, Inc. Savings Plan on Form S-8 (registration number
333-35403) and the Registration Statement of Meritor Automotive, Inc. Long Term
Incentives Plan on Form S-8 (registration number 333-35407) of our reports
dated November 12, 1997, appearing in and incorporated by reference in the
Annual Report on Form 10-K of Meritor Automotive, Inc. for the year ended
September 30, 1997.
DELOITTE & TOUCHE
Detroit, Michigan
December 17, 1997
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
I, the undersigned Director and/or Officer of Meritor Automotive, Inc.,
a Delaware corporation (the "Company"), hereby constitute DAVID W. GREENFIELD,
BONNIE WILKINSON AND PETER R. KOLYER, and each of them singly, my true and
lawful attorneys with full power to them and each of them to sign for me, and in
my name and in the capacity or capacities indicated below, the Annual Report on
Form 10-K for the fiscal year ended September 30, 1997, and any amendments and
supplements thereto, to be filed by the Company with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Larry D. Yost Chairman of the Board and November 12, 1997
- ---------------------------- Chief Executive Officer
Larry D. Yost (principal executive officer)
and Director
/s/ Joseph B. Anderson, Jr. Director November 12, 1997
- ----------------------------
Joseph B. Anderson, Jr.
/s/ Donald R. Beall Director November 12, 1997
- ----------------------------
Donald R. Beall
/s/ John J. Creedon Director November 12, 1997
- ----------------------------
John J. Creedon
/s/ Charles H. Harff Director November 12, 1997
- ----------------------------
Charles H. Harff
/s/ Harold A. Poling Director November 12, 1997
- ----------------------------
Harold A. Poling
/s/ Martin D. Walker Director November 12, 1997
- ----------------------------
Martin D. Walker
/s/ Thomas A. Madden Senior Vice President, Finance, November 12, 1997
- ---------------------------- and Chief Financial Officer
Thomas A. Madden (principal financial officer)
/s/ Lawrence J. Lockwood Vice President and Controller November 12, 1997
- ---------------------------- (principal accounting officer)
Lawrence J. Lockwood
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 133
<SECURITIES> 0
<RECEIVABLES> 563
<ALLOWANCES> 9
<INVENTORY> 327
<CURRENT-ASSETS> 128
<PP&E> 635
<DEPRECIATION> 947
<TOTAL-ASSETS> 2,002
<CURRENT-LIABILITIES> 916
<BONDS> 465
0
0
<COMMON> 69
<OTHER-SE> 82
<TOTAL-LIABILITY-AND-EQUITY> 2,002
<SALES> 3,309
<TOTAL-REVENUES> 3,324
<CGS> 2,871
<TOTAL-COSTS> 3,128
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 186
<INCOME-TAX> 77
<INCOME-CONTINUING> 109
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
