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AS FILED WITH THE SECURITIES EXCHANGE COMMISSION ON AUGUST 13, 1997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10
GENERAL FORM FOR
REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------------
WESTINGHOUSE ELECTRIC COMPANY
(Exact name of registrant as specified in its charter)
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PENNSYLVANIA APPLIED FOR
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
11 STANWIX STREET
PITTSBURGH, PA 15222-1384
(Address of principal executive offices) (Zip Code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 244-2000
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE ON
WHICH
TITLE OF EACH CLASS EACH CLASS IS TO BE
TO BE SO REGISTERED REGISTERED
- ---------------------------------------- ------------------------
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COMMON STOCK, PAR VALUE $0.01 PER SHARE NEW YORK STOCK EXCHANGE
</TABLE>
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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WESTINGHOUSE ELECTRIC COMPANY
I. INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED IN FORM 10 BY
REFERENCE
CROSS REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
ITEM 1. BUSINESS
The information required by this item is contained in the sections
"Summary," "Introduction," "The Transactions" and "Business" of the Information
Statement (the "Information Statement").
The registrant, Westinghouse Electric Company, a Pennsylvania corporation,
is presently a wholly-owned subsidiary of Westinghouse Electric Corporation
("Westinghouse"). At the time of the Distribution described in the Information
Statement, the registrant will change its name to "Westinghouse Electric
Corporation" and Westinghouse will change its name to "CBS Corporation."
ITEM 2. FINANCIAL INFORMATION
The information required by this item is contained in the sections
"Summary," "Capitalization," "Selected Historical Combined Financial Data,"
"Selected Unaudited Pro Forma Combined Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of the
Information Statement.
ITEM 3. PROPERTIES
The information required by this item is contained in the section
"Business" of the Information Statement.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the sections
"Security Ownership of Certain Beneficial Owners of Common Stock" and "Executive
Compensation" of the Information Statement.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is contained in the sections
"Management--Directors" and "Management--Executive Officers" of the Information
Statement.
ITEM 6. EXECUTIVE COMPENSATION
The information required by this item is contained in the section
"Executive Compensation" of the Information Statement.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the section
"Relationship and Agreements between the Company and Westinghouse after the
Distribution" of the Information Statement.
ITEM 8. LEGAL PROCEEDINGS
The information required by this item is contained in the section
"Business--Legal Proceedings" of the Information Statement.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The information required by this item is contained in the sections "The
Transactions--Manner of Effecting the Distribution," "Security Ownership of
Certain Beneficial Owners of Common Stock" and "Description of Capital Stock" of
the Information Statement.
2
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ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The information required by this item is contained in the sections
"Description of Capital Stock" and "Purposes and Effects of Certain Provisions
of the Company's Articles of Incorporation, By-Laws and Pennsylvania Law" of the
Information Statement.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The information required by this item is contained in the sections
"Limitation on Liability and Indemnification of Officers and Directors" and
"Purposes and Effects of Certain Provisions of the Company's Articles of
Incorporation, By-Laws and Pennsylvania Law" of the Information Statement.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is identified in "Index to Financial
Statements" of the Information Statement.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS
1. See Index to Financial Statements on page F-1 of the Information
Statement.
2. Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts
All Schedules, other than those indicated above, are inapplicable, and are
therefore omitted.
3
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(2) EXHIBITS
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2.1 Information Statement (attached to this Registration Statement as Annex A)
* 3.1 Articles of Incorporation of the Company
* 3.2 By-Laws of the Company
* 4.1 Specimen form of certificate representing Common Stock of the Company
* 10.1 Form of Distribution Agreement, to be entered into between Westinghouse and the
Company
* 10.2 Form of Tax Sharing Agreement, to be entered into between Westinghouse and the
Company
* 10.3 Form of Employee Benefits Agreement, to be entered into between Westinghouse and
the Company
* 10.4 Form of Interim Services Agreement, to be entered into between Westinghouse and the
Company
* 10.5 Form of Insurance Agreement, to be entered into between Westinghouse and the
Company
* 10.6 Form of Shared Technology Agreement, to be entered into between Westinghouse and
the Company
* 10.7 Form of Intellectual Property Agreement, to be entered into between Westinghouse
and the Company
* 10.8 Form of Credit Agreement
* 10.9 Form of Company 1997 Long-Term Incentive Plan
* 10.10 Form of Company Annual Performance Plan
* 10.11 Form of Company Executive Pension Plan
* 10.12 Form of Company Deferred Stock and Compensation Plan for Directors
* 10.13 Employment Agreement, dated as of June 26, 1997, as amended July 29, 1997, between
Ernest H. Drew and Westinghouse
* 10.14 Employment Agreement, dated as of March 22, 1996, between Joseph T. Doyle and
Westinghouse
* 11.1.. Computation of per share earnings
* 21.1 Subsidiaries of the Company
27 Financial Data Schedule
* 99 Private letter ruling from the Internal Revenue Service
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* To be filed by amendment
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II. INFORMATION NOT INCLUDED IN INFORMATION STATEMENT
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On July 17, 1997, the registrant issued 1,000 shares of its common stock to
Westinghouse, which is and will be the sole shareholder of the registrant until
the Distribution has been completed. The issuance of such 1,000 shares was made
in a transaction exempt from the registration requirements of the Securities Act
of 1933 pursuant to Section 4(2) thereof.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
4
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SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
WESTINGHOUSE ELECTRIC COMPANY
By: /s/ JOSEPH T. DOYLE
------------------------------------
Name: Joseph T. Doyle
Title: Senior Vice President and
Chief Financial Officer
August 13, 1997
5
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT ON FORM 10 RELATING TO THESE SECURITIES HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THIS PRELIMINARY
INFORMATION STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY THESE SECURITIES.
PRELIMINARY COPY, DATED AUGUST 13, 1997
-- FOR INFORMATION ONLY --
INFORMATION STATEMENT
WESTINGHOUSE ELECTRIC COMPANY
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
This Information Statement is being furnished by Westinghouse Electric
Corporation, a Pennsylvania corporation ("Westinghouse"), in connection with the
distribution (the "Distribution") by Westinghouse to its shareholders of all the
outstanding shares of common stock, par value $0.01 per share (the "Company
Common Stock"), of Westinghouse Electric Company, a Pennsylvania corporation
(the "Company"). The Company is currently a wholly-owned subsidiary of
Westinghouse. As a result of the Distribution, each holder of record as of
, 1997 (the "Distribution Record Date") of common stock, par value
$1.00 per share, of Westinghouse (the "Westinghouse Common Stock") will receive
share(s) of Company Common Stock for each share of Westinghouse Common
Stock owned as of the Distribution Record Date (the "Distribution Ratio") and
cash in lieu of any fractional shares. Concurrently with the Distribution,
Westinghouse will change its name to "CBS Corporation" and the Company will
change its name to "Westinghouse Electric Corporation." References herein to
"Westinghouse" include the newly-named CBS Corporation following the
Distribution.
Prior to the Distribution, Westinghouse will be restructured (the
"Restructuring") so that the assets and liabilities of Westinghouse's Industrial
Business (as defined herein) will be transferred to and assumed by the Company.
The Company will also receive and assume responsibility for the assets and
liabilities (including environmental and litigation-related liabilities)
associated with Westinghouse's divested businesses (other than those businesses
classified as discontinued operations (the "Westinghouse Discontinued
Operations") by Westinghouse) and certain asbestos and other toxic tort
litigation-related matters associated with the Westinghouse Discontinued
Operations. Westinghouse will retain pension and postretirement liabilities, as
of the effective date of the Distribution, for certain employees of
Westinghouse's Industrial Business and Divested Businesses (as defined herein)
and certain income tax benefits of the Company.
Subject to the satisfaction of certain conditions, the Distribution will be
effective on or about , 1997 (the "Distribution Date"). No
consideration will be paid by Westinghouse shareholders for Company Common Stock
received by them in the Distribution, nor will they be required to surrender or
exchange Westinghouse Common Stock in order to receive Company Common Stock. No
fractional shares of Company Common Stock will be distributed in the
Distribution. There is no current public market for the Company Common Stock,
although it is expected that a "when-issued" trading market will develop prior
to the Distribution Date. Application will be made to list the Company Common
Stock on the New York Stock Exchange under the symbol "WX."
------------------------
NO VOTE OF SHAREHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION, NO
PROXIES ARE BEING SOLICITED, AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
------------------------
Shareholders of Westinghouse with inquiries related to the Distribution
should contact . After the Distribution Date, shareholders of the
Company with inquiries relating to the Distribution or their investment should
contact .
THE DATE OF THIS INFORMATION STATEMENT IS AUGUST 13, 1997.
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TABLE OF CONTENTS
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ITEM PAGE
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SUMMARY OF CERTAIN INFORMATION....................................................... 1
The Company..................................................................... 1
The Transactions................................................................ 2
The Distribution................................................................ 2
Forward-Looking Statements...................................................... 7
Summary Historical Combined Financial Data...................................... 8
Summary Unaudited Pro Forma Combined Financial Data............................. 9
INTRODUCTION......................................................................... 10
THE TRANSACTIONS..................................................................... 11
Background and Reasons for the Restructuring and the Distribution............... 11
The Restructuring............................................................... 12
Manner of Effecting the Distribution............................................ 12
Investment Considerations....................................................... 13
Certain Federal Income Tax Considerations....................................... 16
Listing and Trading of the Common Stock......................................... 17
Dividend Policy................................................................. 18
Distribution Conditions and Termination......................................... 18
RELATIONSHIP AND AGREEMENTS BETWEEN THE COMPANY AND WESTINGHOUSE AFTER THE
DISTRIBUTION......................................................................... 19
General......................................................................... 19
Distribution Agreement.......................................................... 19
Tax Sharing Agreement........................................................... 20
Interim Services Agreement...................................................... 20
Employee Benefits Agreement..................................................... 20
Shared Technology Agreement..................................................... 22
Intellectual Property Agreement................................................. 22
Insurance Agreement............................................................. 22
Other Agreements................................................................ 22
Relationship between the Company and Westinghouse after the Distribution........ 22
CREDIT FACILITY...................................................................... 23
CAPITALIZATION....................................................................... 24
BUSINESS............................................................................. 25
General......................................................................... 25
Raw Materials................................................................... 30
Intellectual Property Rights.................................................... 30
Backlog......................................................................... 30
Research and Development........................................................ 30
Employees....................................................................... 31
Environmental Matters........................................................... 31
Governmental Regulations........................................................ 31
Properties...................................................................... 32
Legal Proceedings............................................................... 32
SELECTED HISTORICAL COMBINED FINANCIAL DATA.......................................... 34
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA................................. 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS........................................................................... 36
Overview........................................................................ 36
Year Ended December 31, 1996, Compared to Years Ended December 31, 1995 and
1994........................................................................... 36
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ITEM PAGE
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Results of Operations......................................................... 36
Pension and Other Postretirement Benefit Plans................................ 39
Restructuring of Operations................................................... 39
Other Income and Expenses..................................................... 40
Income Taxes.................................................................. 40
Liquidity and Capital Resources............................................... 41
Environmental Matters......................................................... 43
Legal Matters................................................................. 44
Three Months Ended March 31, 1997, Compared to Three Months Ended March 31,
1996........................................................................... 44
Results of Operations......................................................... 44
Pension and Other Postretirement Benefit Plans................................ 46
Restructuring of Operations................................................... 46
Other Income and Expenses..................................................... 47
Income Taxes.................................................................. 47
Liquidity and Capital Resources............................................... 47
Legal, Environmental and Other Matters........................................ 48
MANAGEMENT........................................................................... 49
Directors....................................................................... 49
Directors' Meetings and Committees.............................................. 50
Company Directors' Compensation................................................. 51
Executive Officers.............................................................. 52
EXECUTIVE COMPENSATION............................................................... 53
Historical Compensation......................................................... 53
Employment Agreements........................................................... 56
Company Executive Compensation and Benefit Plans................................ 57
Treatment of Westinghouse Options and Certain Other Benefits Following the
Distribution................................................................... 58
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF COMMON STOCK...................... 60
DESCRIPTION OF CAPITAL STOCK......................................................... 61
Authorized Capital Stock........................................................ 61
Company Common Stock............................................................ 61
Preferred Stock................................................................. 61
No Preemptive Rights............................................................ 61
Transfer Agent and Registrar.................................................... 61
PURPOSES AND EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF
INCORPORATION, BY-LAWS AND PENNSYLVANIA LAW.......................................... 62
General......................................................................... 62
Preferred Stock and Additional Company Common Stock............................. 62
Other........................................................................... 62
Pennsylvania Business Combination Statute....................................... 63
LIMITATION ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS................ 64
Limitation on Liability of Directors............................................ 64
Indemnification and Insurance................................................... 64
ADDITIONAL INFORMATION............................................................... 65
INDEX TO FINANCIAL STATEMENTS........................................................ F-1
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SUMMARY OF CERTAIN INFORMATION
The following is a summary of certain information contained elsewhere in
this Information Statement. Reference is made to, and this summary is qualified
by, the more detailed information and financial statements set forth in this
Information Statement, which should be read in its entirety. In this Information
Statement, (i) all financial information is presented in accordance with
accounting principles generally accepted in the United States ("U.S. GAAP");
(ii) references to the activities of, and financial information with respect to,
the Company prior to the Distribution are to historical activities and combined
historical financial information of the Industrial Business (as defined herein)
and the other assets and liabilities of Westinghouse that will be transferred to
the Company in connection with the Restructuring and the Distribution. The
Restructuring, the Distribution and the other transactions contemplated thereby
are sometimes collectively referred to herein as the "Transactions."
This Information Statement includes trademarks of the Company, such as
Westinghouse(R), Ovation(R) and WDPF(R), as well as other trade names and
product names.
THE COMPANY
Following the Restructuring and the Distribution, the Company will be a
global industrial and technology company which designs, manufactures and
services nuclear and fossil-fueled power generation equipment, supervises the
removal of environmental hazards and the safe decommissioning of sophisticated
nuclear and chemical defense systems and manufactures and services controls for
sophisticated industrial processes. See "Business--General." Upon completion of
the Transactions, the Company will be an independent, publicly held company. In
1996, the Company had net sales of $3,467 million and a net loss of $665
million. At March 31, 1997, the Company had total assets of $4,535 million and
shareholder's equity of $1,417 million. At March 31, 1997, on a pro forma basis,
after giving effect to the Distribution, the Company had total assets of
approximately $3,800 million and shareholder's equity of approximately $682
million.
The Company, after the Restructuring and the Distribution, will be
comprised of the three principal operating businesses described below (the
"Industrial Business"), which are currently part of Westinghouse's Industries
and Technology Group (the "Industries and Technology Group"):
(i) Power Generation, which designs, manufactures, installs and services
steam and combustion turbine generators, as well as constructs
turn-key power plants worldwide;
(ii) Energy Systems, which serves the domestic and international electric
power industry by supplying nuclear power plants, advanced nuclear
plant design technology, nuclear fuel and associated materials,
components and technical services, a broad array of operating plant
services including parts and equipment, and state-of-the-art
instrumentation and control systems through the Process Control
Division ("PCD"); Energy Systems also manufactures reactor coolant
pumps, motors and control rod drive mechanisms ("CRDMs") and is the
sole source provider of this manufactured equipment to the U.S. Navy.
PCD also provides distributed control, communicators, data
acquisition systems and information systems to a variety of other
process and specialty applications; and
(iii) Government Operations, which includes management services for certain
government-owned facilities under contracts with the U.S. Department
of Energy (DOE) and the U.S. Department of Defense (DOD), management
of nuclear reactor programs for the U.S. Navy and management of a
chemical agent destruction program for the DOD.
In addition to the three principal operating businesses, the Company will
also receive and be responsible for liabilities associated with the Industrial
Business, assets and liabilities (including environmental and litigation-related
liabilities) associated with Westinghouse's divested businesses other than the
Westinghouse Discontinued Operations (the "Divested Businesses") and certain
asbestos and other toxic tort litigation-related matters associated with the
Westinghouse Discontinued Operations. Westinghouse will retain pension and
postretirement liabilities, as of the Distribution Date, for certain employees
of the Industrial Business and Divested Businesses and certain income tax
benefits at the Company.
1
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The Company's principal executive office will be located at 11 Stanwix
Street, Pittsburgh, Pennsylvania, and its telephone number at that address will
be (412) 244-2000.
THE TRANSACTIONS
The Restructuring. Prior to the Distribution, Westinghouse will effect a
series of asset and stock transfers and liability assumptions among itself and
its subsidiaries, the purpose and effect of which will be to separate
Westinghouse's Industrial Business from its media businesses and the Thermo King
business unit ("Thermo King"). In connection with the Restructuring, the Company
will receive and assume responsibility for assets and liabilities associated
with the Industrial Business, assets and liabilities (including environmental
and litigation-related liabilities) associated with the Divested Businesses and
certain asbestos and other toxic tort litigation-related matters associated with
the Westinghouse Discontinued Operations. Westinghouse or subsidiaries of
Westinghouse, other than the Company and its subsidiaries, will retain assets
and liabilities related to Westinghouse's media businesses and Thermo King,
certain income tax benefits of the Company, assets and liabilities (except for
certain asbestos and other toxic tort litigation-related matters) of the
Westinghouse Discontinued Operations and liabilities under Westinghouse's
pension and postretirement benefit plans (including those related to certain
employees of the Industrial Business and Divested Businesses) as of the
Distribution Date. As part of the Restructuring, the Company will issue
additional shares of Company Common Stock to Westinghouse such that Westinghouse
will own the number of shares of Company Common Stock necessary to effect the
Distribution.
The Distribution. Upon completion of the Restructuring and subject to the
satisfaction of all the conditions to the Distribution, Westinghouse will effect
the Distribution by distributing to each holder of record of Westinghouse Common
Stock, as of the Distribution Record Date, certificates representing the number
of shares of Company Common Stock held by each holder of record of Westinghouse
Common Stock equal to share(s) of Company Common Stock for each share of
Westinghouse Common Stock and cash in lieu of any fractional shares of Company
Common Stock.
THE DISTRIBUTION
Distributing Company.......... Westinghouse Electric Corporation, a
Pennsylvania corporation. Concurrently with the
Distribution, Westinghouse will change its name
to "CBS Corporation." References to
"Westinghouse" herein include the newly-named
CBS Corporation following the Distribution.
Distributed Company........... Westinghouse Electric Company, a Pennsylvania
corporation and currently a wholly-owned
subsidiary of Westinghouse. Concurrently with
the Distribution, the Company will change its
name to "Westinghouse Electric Corporation."
Shares to be Distributed...... Approximately million shares of Company
Common Stock (based on million shares of
Westinghouse Common Stock outstanding on
, 1997). No fractional shares will
be distributed. The shares to be distributed
will constitute 100% of the outstanding shares
of Company Common Stock.
Distribution Ratio............ Each Westinghouse shareholder will receive
share(s) of Company Common Stock for
every share of Westinghouse Common Stock held
on the Distribution Record Date. No
consideration will be paid by Westinghouse
shareholders for shares of Company Common Stock
to be received in the Distribution. See "The
Transactions--Manner of Effecting the
Distribution."
Distribution Record Date...... Close of business on , 1997.
2
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Distribution Date............. , 1997. On, or as soon as practicable
after the Distribution Date, the Distribution
Agent will commence mailing share certificates
representing the Company Common Stock.
Westinghouse shareholders will not be required
to make any payment or to take any other action
to receive their Company Common Stock. See "The
Transactions--Manner of Effecting the
Distribution."
Federal Income Tax
Consequences of the
Distribution to Westinghouse
and Westinghouse
Shareholders................ Westinghouse has submitted a request for
rulings from the Internal Revenue Service
("IRS") to the effect, among other things, that
receipt of shares of Company Common Stock will
be tax free for federal income tax purposes to
the shareholders of Westinghouse (except with
respect to cash received in lieu of fractional
shares) and that Westinghouse will not
recognize income, gain or loss as a result of
the Distribution, and it is a condition to
completion of the Distribution that
Westinghouse obtain a favorable ruling in
response to this request. Westinghouse
shareholders are urged to consult their own tax
advisors as to the specific tax consequences to
them of the Distribution. See "The
Transactions--Certain Federal Income Tax
Considerations."
Management.................... Following the Distribution, each of the Company
and Westinghouse will have a management
organization with no overlaps and an
independent Board of Directors. It is presently
anticipated that Michael H. Jordan, currently
the Chairman and Chief Executive Officer of
Westinghouse, will serve as Non-Executive
Chairman of the Board of the Company during a
transition period that will expire no later
than the date of the annual meeting of the
Company's shareholders to be held in the spring
of 2000. In addition, two of the current
directors of Westinghouse, Messrs. David T.
McLaughlin and Richard R. Pivirotto, will serve
as directors on the Company's board of
directors (the "Company Board") during the same
transition period. However, Messrs. Jordan,
McLaughlin and Pivirotto will constitute a
minority of each of Westinghouse's board of
directors (the "Westinghouse Board") and the
Company Board, respectively. Furthermore, no
later than the date of the annual meeting of
the Company's shareholders to be held in the
spring of 2000, each of Messrs. Jordan,
McLaughlin and Pivirotto will cease to be a
director of one of the two companies. Messrs.
Frank C. Carlucci, Robert E. Cawthorn, Gary M.
Clark and David K.P. Li, currently directors of
Westinghouse, will resign from the Westinghouse
Board at the time of the Distribution and
become directors of the Company. No member of
Westinghouse's management will serve as an
executive officer of the Company. Dr. Ernest H.
Drew will be the Company's President and Chief
Executive Officer and serve as a director on
the Company Board. Dr. Drew currently serves as
Chief Executive Officer of Westinghouse's
Industries and Technology Group. See
"Relationship and Agreements between the
Company and Westinghouse after the
Distribution--Relationship between the Company
and Westinghouse after the Distribution" and
"Management--Directors."
3
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Credit Facility............... In connection with the Distribution, the
Company expects to arrange a credit facility
(the "Credit Facility") of approximately $
with a syndicate of banks to be effective on
the Distribution Date. The Credit Facility will
be used to provide working capital and other
credit needs of the Company following the
Distribution. See "The Transactions--Investment
Considerations--Lack of Operating History as an
Independent Company; Historical Net Losses" and
"Credit Facility."
Dividend Policy............... It is currently contemplated that the Company
will not pay cash dividends on Company Common
Stock. The declaration of dividends by the
Company will be at the discretion of the
Company Board and will depend upon the
Company's future earnings, financial condition,
capital requirements, and other factors,
including any limitations under then existing
credit agreements. See "The
Transactions--Dividend Policy." In addition,
the agreements to be entered into between
Westinghouse and the Company to effect the
Restructuring and the Distribution will contain
restrictions on the Company's ability to pay
dividends. See "Relationship and Agreements
between the Company and Westinghouse after the
Distribution--Distribution Agreement."
Anti-Takeover Provisions...... The Pennsylvania Business Corporation Law and
certain of the agreements to be entered into
between the Company and Westinghouse to effect
the Restructuring and the Distribution will,
and the Company's Articles of Incorporation and
By-laws are expected to, contain provisions
which could have the effect of discouraging
unsolicited takeover bids from third parties.
See "The Transactions--Investment
Considerations--Certain Anti-Takeover
Provisions," "Relationship and Agreements
between the Company and Westinghouse after the
Distribution" and "Purposes and Effects of
Certain Provisions of the Company's Articles of
Incorporation, By-laws and Pennsylvania Law."
Relationship and Agreements
between the Company and
Westinghouse after the
Distribution................ The Company and Westinghouse and their
respective subsidiaries will enter into a
series of agreements to effect the
Restructuring and the Distribution and to
define their ongoing relationship. These
include a distribution agreement providing for
the transfer of assets to, and the assumption
of liabilities by, the Company and the payment
of the Distribution by Westinghouse (the
"Distribution Agreement"). See "Relationship
and Agreements between the Company and
Westinghouse after the
Distribution--Distribution Agreement."
Westinghouse and the Company expect to enter
into other agreements relating to interim
services, preparation and payment of taxes, the
transfer of certain intellectual property,
employee benefits, litigation, insurance and
certain other matters provided for in the
Distribution Agreement. In connection with the
Company's assumption of liabilities, certain of
these agreements will contain affirmative and
restrictive undertakings by the Company which
will restrict the Company's ability to engage
in certain "extraordinary transactions," pay
dividends or incur indebtedness, subject to
certain exceptions, without Westinghouse's
consent.
4
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Other than the agreements described above, it
is expected that Westinghouse and the Company
will cease to have any material contractual or
other material relationships with each other,
other than on an arm's-length basis. See
"Relationship and Agreements between the
Company and Westinghouse after the
Distribution-- Relationship between the Company
and Westinghouse after the Distribution."
Trading Market and Symbol for
the Company Common Stock...... Currently, there is no public trading market
for the Company Common Stock, although a
"when-issued" trading market (as described
herein) is expected to develop prior to the
Distribution Date. Application will be made to
list the Company Common Stock on The New York
Stock Exchange (the "NYSE") under the symbol
"WX." See "The Transactions--Listing and
Trading of the Common Stock."
Westinghouse Common Stock will continue to be
listed and traded on the NYSE, the Boston Stock
Exchange, the Pacific Stock Exchange, the
Philadelphia Stock Exchange and the Chicago
Stock Exchange after the Distribution, but with
a new symbol "CBS."
Interests in Fractional
Shares........................ Fractional shares of Company Common Stock
("Fractional Shares") will not be distributed
to record holders of Westinghouse Common Stock.
Fractional Shares will be aggregated by the
Distribution Agent, who will then sell or
arrange for the sale of such aggregated
Fractional Shares on the NYSE. The net cash
proceeds of such sales (the "Fractional Share
Proceeds") will be paid ratably to those
shareholders entitled to fractional interests.
See "The Transactions--Manner of Effecting the
Distribution."
Distribution Agent............ . The address and telephone
number of the Distribution Agent are
.
Information Agent............. . The address and telephone
number of the Information Agent are .
Transfer Agent and Registrar
for the Company Common
Stock....................... .
Conditions to the
Distribution.................. The Distribution is conditioned upon, among
other things, (i) the receipt of certain
rulings from the IRS regarding the tax-free
nature of the Distribution, (ii) the Company
Common Stock having been approved for listing
on the NYSE subject to official notice of
issuance, (iii) the Registration Statement on
Form 10, of which this Information Statement is
a part (the "Registration Statement"), having
been declared effective by the Securities and
Exchange Commission (the "Commission") and (iv)
the Credit Facility being in place and all
conditions to borrowing thereunder having been
satisfied or waived. Any of the conditions to
the Distribution may be waived, at any time
prior to the Distribution Date, for any reason,
in the sole discretion of the Westinghouse
Board. Even if all conditions are satisfied,
the Westinghouse Board has reserved the right
to abandon, defer or modify the Distribution
and the related transactions described herein
at any time prior to
5
<PAGE> 14
the Distribution Date. See "Introduction" and
"The Transactions--Distribution Conditions and
Termination."
Principal Business to be
Retained by Westinghouse...... After the Distribution, Westinghouse will
continue to operate in the principal business
areas of television and radio station ownership
and broadcast and cable programming.
Westinghouse will consist primarily of the CBS
Television Network, CBS Television Stations,
CBS Radio, CBS Cable (formerly known as Group W
Satellite Communications ("GWSC")) and EYEMARK
Entertainment. Following completion of the
pending acquisition by Westinghouse of Gaylord
Entertainment Company, CBS Cable will include
the operations of The Nashville Network ("TNN")
and the domestic and Canadian operations of
Country Music Television ("CMT"). In addition,
Westinghouse will continue to own Thermo King
(subject to Westinghouse's publicly announced
intention to consider various options to
enhance Thermo King's value to Westinghouse
shareholders), which designs, manufactures and
distributes a complete line of transport
temperature control equipment, will retain
certain income tax benefits of the Company,
will remain responsible for assets and
liabilities (except for certain asbestos and
other toxic tort litigation-related matters) of
the Westinghouse Discontinued Operations and
liabilities under Westinghouse's pension and
postretirement benefit plans (including those
relating to certain employees of both the
Industrial Business and Divested Businesses) as
of the Distribution Date. See "Introduction"
and "Relationship and Agreements between the
Company and Westinghouse after the
Distribution--Relationship between the Company
and Westinghouse after the Distribution."
Investment Considerations..... Westinghouse shareholders should carefully
consider the matters discussed under "The
Transactions--Investment Considerations" of
this Information Statement.
6
<PAGE> 15
FORWARD-LOOKING STATEMENTS
Certain statements in this Information Statement, including those under the
captions "The Transactions," "Relationship and Agreements between the Company
and Westinghouse after the Distribution," "Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties, and other factors that may cause
the actual results, performance, or achievements of the Company to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. When used in this Information
Statement the words "estimate," "project," "intend," "expect," "anticipate," and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements are based on various factors, many of which are
beyond the Company's control, and were derived utilizing numerous assumptions
and other important factors that could cause actual results to differ materially
from those in the forward-looking statements including, but not limited to, the
following: uncertainty as to the Company's future profitability after the
Distribution; the effectiveness of the Company's strategy to grow through
international expansion; competition in the Company's existing and potential
future lines of business; and the accuracy of the Company's estimates of its
requirements for the performance of certain contracts and the timing and funding
for the satisfaction of certain liabilities, including those related to
litigation and environmental matters. Other factors and assumptions not
identified above were also involved in the derivation of these forward-looking
statements, and the failure of such other assumptions to be realized as well as
other factors such as the assertion of unknown litigation or claims against, or
the discovery of presently unknown environmental liabilities by, the Company may
also cause actual results to differ materially from those projected. The Company
assumes no obligation to update these forward-looking statements to reflect
actual results, changes in assumptions, or changes in other factors affecting
such forward-looking statements.
7
<PAGE> 16
SUMMARY HISTORICAL COMBINED FINANCIAL DATA
The summary historical combined financial data at March 31, 1997 and for
the three months ended March 31, 1997 and March 31, 1996 presented below have
been derived from and should be read in conjunction with the unaudited condensed
combined financial statements included elsewhere in this Information Statement.
The unaudited interim data reflects in the opinion of the Company's management
all adjustments considered necessary for a fair presentation of results of such
interim period. Results for unaudited interim periods are not necessarily
indicative of results which may be expected for any other interim or annual
period. The summary historical combined financial data at December 31, 1996 and
1995 and for each of the years in the three-year period ended December 31, 1996
presented below have been derived from and should be read in conjunction with
the audited combined financial statements and notes thereto of the Company
included elsewhere in this Information Statement. The summary historical
combined financial data at December 31, 1994, 1993 and 1992, and for each of the
years in the two-year period ended December 31, 1993, have been derived from
unaudited combined financial statements of the Company.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31 YEAR ENDED DECEMBER 31
--------------- -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----- ------ ------- ------ ------ ------ ------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales of products and services......... $ 650 $ 670 $ 3,467 $3,434 $3,530 $3,775 $3,832
Restructuring, litigation and other
matters.............................. -- (578) (888) (294) (21) (378) --
Operating profit (loss)................ (123) (679) (890) (280) 71 (159) 284
Other income and expenses, net......... (6) (151) (140) (13) (155) (116) (23)
Income (loss) before income taxes and
minority interest.................... (129) (831) (1,031) (295) (92) (284) 249
Income tax benefit (expense)........... 49 299 370 97 19 16 (108)
Cumulative effect of changes in
accounting principles................ -- -- -- -- -- (52) --
Net income (loss)...................... (80) (533) (665) (202) (77) (324) 136
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------------------------------
1996 1995 1994 1883 1992
------ ------ ------ ------ ------
AT MARCH 31, 1997
-----------------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets........................... $ 4,535 $4,541 $3,843 $3,801 $3,574 $3,157
Total debt............................. 5 6 9 12 21 7
Shareholder's equity................... 1,417 1,109 1,541 1,722 1,343 1,460
</TABLE>
8
<PAGE> 17
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following summary unaudited pro forma combined financial data are
derived from the unaudited pro forma combined financial statements included
elsewhere in this Information Statement and should be read in conjunction
therewith and with the related notes thereto. These summary unaudited pro forma
combined financial data were prepared by the Company to illustrate the estimated
effects of the Distribution described in the notes to the pro forma combined
financial statements as if they had occurred as of January 1, 1996 with respect
to the statement of income data and at March 31, 1997 with respect to the
balance sheet data.
These summary unaudited pro forma combined financial data are presented for
illustrative purposes only and are not necessarily indicative of the operating
results or financial position of the Company had the Distribution occurred as of
the dates indicated or of the results that may be obtained in the future. See
"Unaudited Pro Forma Combined Financial Statements."
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
------------------ -----------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C>
PRO FORMA COMBINED STATEMENT OF INCOME DATA:
Sales of products and services.......................... $650 $ 3,467
Restructuring, litigation and other matters............. -- (888)
Operating loss.......................................... (98) (790)
Other income and expenses, net.......................... (6) (140)
Interest expense........................................ (5) (21)
Loss before income taxes and minority interests......... (109) (951)
Income tax expense...................................... (9) (40)
Net loss................................................ (118) (995)
Loss per common share(1)................................ $ $
================ ===============
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1997
-----------------
(IN MILLIONS)
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Total assets............................................................... $ 3,800
Total debt................................................................. 5
Shareholder's equity....................................................... 682
</TABLE>
- ---------
(1) Pro forma loss per share has been calculated assuming shares of
Company Common Stock were outstanding. This is based on the number of
outstanding shares of Westinghouse Common Stock at the close of business on
the Distribution Record Date and the Distribution Ratio.
9
<PAGE> 18
INTRODUCTION
In November 1996, Westinghouse announced that the Westinghouse Board had
conditionally approved a plan whereby Westinghouse would separate its media and
industrial business into two separate publicly-traded companies (the "Separation
Plan"). Under the Separation Plan, Westinghouse after the Distribution would
have consisted primarily of the CBS Television Network, CBS Television Stations,
CBS Radio, CBS Cable (formerly GWSC) and EYEMARK Entertainment; and the Company
would have consisted primarily of the manufacturing and services businesses for
the nuclear and fossil-fueled power generation industry, Thermo King and the
government operations business. Westinghouse also would have retained debt
obligations, a tax net operating loss carry forward ($1.5 billion as of December
31, 1996) and the assets and liabilities (except for certain asbestos and other
toxic tort litigation-related matters) of the Westinghouse Discontinued
Operations, and the Company would have assumed the existing pension and other
postretirement benefit obligations of Westinghouse, obligations of Divested
Businesses and certain asbestos and other toxic tort litigation-related matters
associated with the Westinghouse Discontinued Operations. In June 1997, the
Westinghouse Board modified the Separation Plan (as revised, the "Modified
Separation Plan") to provide that Westinghouse will retain Thermo King along
with Westinghouse's existing pension and other postretirement benefit
obligations (including those related to certain employees of both the Industrial
Business and Divested Businesses). The Modified Separation Plan will be effected
by means of a dividend distribution to Westinghouse shareholders of all the
outstanding Company Common Stock. Prior to the Distribution Date, Westinghouse
will contribute to the Company all of the assets, including the stock of certain
subsidiaries, and liabilities associated with the Industrial Business, assets
and liabilities (including environmental and litigation-related liabilities )
associated with Divested Businesses and certain asbestos and other toxic tort
litigation-related liabilities associated with the Westinghouse Discontinued
Operations.
Prior to the Restructuring and the Distribution, Westinghouse will receive
rulings from the IRS to the effect, among other things, that receipt of shares
of Company Common Stock will be tax free for federal income tax purposes to the
shareholders of Westinghouse (except with respect to Fractional Share Proceeds)
and that Westinghouse will not recognize income, gain or loss as a result of the
Distribution (the "Tax Ruling"). The Distribution is subject to, among other
things, (i) the receipt of the Tax Ruling, (ii) the Company Common Stock being
approved for listing on the NYSE subject to official notice of issuance, (iii)
the Registration Statement having been declared effective by the Commission and
(iv) the Credit Facility being in place and all conditions to borrowing
thereunder having been satisfied or waived. Any of the conditions to the
Distribution may be waived, at any time prior to the Distribution Date, for any
reason, in the sole discretion of the Westinghouse Board. However, even if all
the conditions to the Distribution are satisfied, the Westinghouse Board has
reserved the right to abandon, defer or modify the Restructuring and the
Distribution at any time prior to the Distribution Date. See "The
Transactions--Distribution Conditions and Termination." References to the
"Company" herein for time periods prior to the Distribution are to the
historical activities and combined historical financial information of the
Industrial Business and the other assets and liabilities of Westinghouse that
will be transferred to the Company in connection with the Restructuring and the
Distribution and, for the time periods following the Distribution, mean the
Company as capitalized by Westinghouse.
The Distribution will be effected by distributing all of the outstanding
shares of Company Common Stock to holders of record of Westinghouse Common Stock
on the Distribution Record Date. The Distribution will occur on ,
1997.
NO ACTION IS REQUIRED BY WESTINGHOUSE SHAREHOLDERS IN ORDER TO RECEIVE
COMPANY COMMON STOCK TO WHICH THEY WILL BE ENTITLED IN THE DISTRIBUTION UPON
PAYMENT OF THE DIVIDEND.
Shareholders of Westinghouse with inquiries related to the Distribution
should contact . After the Distribution Date, shareholders of the
Company with inquiries related to the Distribution or their investment should
contact .
This Information Statement is being furnished by Westinghouse solely to
provide information to shareholders of Westinghouse Common Stock in connection
with the Distribution and, subject to the
10
<PAGE> 19
satisfaction of the conditions to the Distribution, the receipt of Company
Common Stock pursuant to the Distribution. This Information Statement is not,
and should not be construed as, an inducement or encouragement to buy or sell
any securities of Westinghouse or the Company. The information contained in this
Information Statement is believed by Westinghouse to be accurate as of the date
set forth on its front cover. Changes may occur after that date, and neither
Westinghouse nor the Company will update the information except in the normal
course of their respective public disclosure practices.
THE TRANSACTIONS
BACKGROUND AND REASONS FOR THE RESTRUCTURING AND THE DISTRIBUTION
Westinghouse is a global company which operates its businesses through the
Westinghouse/CBS Group and the Industries and Technology Group. The
Westinghouse/CBS Group combines the operations of CBS Inc. ("CBS"), which
Westinghouse acquired in 1995, Infinity Broadcasting Corporation ("Infinity"),
which Westinghouse acquired in 1996, and the former Westinghouse Broadcasting
Company, Inc., and includes the CBS Television Network; CBS Television Stations;
CBS Radio; CBS Cable; and EYEMARK Entertainment (the "Media Group"). The
Westinghouse/CBS Group operates in the principal business areas of television
and radio station ownership and broadcast and cable programming. The Industries
and Technology Group designs, manufactures and services nuclear and
fossil-fueled power generation equipment, supervises the removal of
environmental hazards and the safe decommissioning of sophisticated nuclear and
chemical defense systems, and manufactures and services controls for
sophisticated industrial processes. Currently, Westinghouse's Industries and
Technology Group includes Thermo King, which designs, manufactures and
distributes a complete line of transport temperature control equipment. Under
the Modified Separation Plan, Thermo King will remain with Westinghouse (subject
to Westinghouse's publicly announced intention to consider various options to
enhance Thermo King's value to Westinghouse shareholders).
The Westinghouse Board has determined, subject to satisfaction of certain
conditions, that it is in the best interests of Westinghouse and its
shareholders, for the reasons set forth below, to distribute to Westinghouse
shareholders in the Distribution the Industrial Business as a separate publicly
traded company to be known as "Westinghouse Electric Company." Concurrently with
the Distribution, the Company will change its name to "Westinghouse Electric
Corporation." The Company will consist of Westinghouse's Power Generation,
Energy Systems and Government Operations business units. In connection with the
Restructuring and the Distribution, the Company will receive and assume
responsibility for assets and liabilities associated with the Industrial
Business, assets and liabilities (including certain environmental and
litigation-related liabilities) associated with Divested Businesses and certain
toxic tort litigation-related matters associated with the Westinghouse
Discontinued Operations. Westinghouse will retain pension and postretirement
liabilities, as of the Distribution Date, for certain employees of the
Industrial Business and Divested Businesses and certain income tax benefits of
the Company. Concurrently with the Distribution, Westinghouse will change its
name to "CBS Corporation" and after the Distribution will continue to hold
directly and through subsidiaries its Media Group, as well as Thermo King and
certain other interests.
The Westinghouse Board believes that the Media Group and the Industrial
Business are businesses marked by distinct financial and operational
differences. The Westinghouse Board has determined that common ownership of two
businesses with such strikingly disparate financial characteristics limits
Westinghouse's capacity to (i) obtain an optimal capital structure, (ii)
allocate capital internally on an efficient basis and (iii) access the capital
markets at the lowest possible cost. In addition, the Westinghouse Board
believes that fundamental operational differences between the Media Group and
the Industrial Business demand different business strategies, different
management teams and different employee bases.
The Restructuring and the Distribution are intended to address these
concerns through the creation of two separate, stand-alone entities. The
Westinghouse Board believes that as a result of the Restructuring and the
Distribution, each of the Media Group and the Industrial Business will be able
to attain an optimal capital structure, a more efficient allocation of internal
capital and access to the capital markets at the lowest possible cost. In
addition, the Restructuring and the Distribution will permit each of the Media
Group and the
11
<PAGE> 20
Industrial Business to respond to the fundamental operational differences that
exist between them by having a separate management team focusing on its core
businesses, with its own organizational and operational structure. The
Restructuring and the Distribution will also enable each business to be
represented by its own stock and also make it possible for the employees of each
business to be compensated with equity based incentives that properly reflect
their contributions to such business.
THE RESTRUCTURING
Prior to the Distribution, Westinghouse will effect asset and stock
transfers and liability assumptions among itself and its subsidiaries, the
purpose and effect of which will be to separate Westinghouse's Industrial
Business from its Media Group and Thermo King. In connection with the
Restructuring, the Company will receive and assume responsibility for assets and
liabilities associated with the Industrial Business, assets and liabilities
(including environmental and litigation-related liabilities) associated with
Divested Businesses and certain asbestos and other toxic tort litigation-related
matters associated with the Westinghouse Discontinued Operations. Westinghouse
or subsidiaries of Westinghouse, other than the Company and its subsidiaries,
will retain assets and liabilities related to the Media Group and Thermo King,
as well as certain income tax benefits of the Company, assets and liabilities
(except for certain asbestos and other toxic tort litigation-related matters) of
the Westinghouse Discontinued Operations and liabilities under Westinghouse's
pension and postretirement plans (including those relating to certain employees
of the Industrial Business and Divested Businesses as of the Distribution Date).
As part of the Restructuring, the Company will issue additional shares of
Company Common Stock to Westinghouse such that Westinghouse will own the number
of shares of Company Common Stock necessary for the Distribution. Westinghouse
and the Company each will agree to execute and deliver such further assignments,
documents of transfer, deeds and instruments as may be necessary for the more
effective implementation of such transfers.
MANNER OF EFFECTING THE DISTRIBUTION
Following completion of the Restructuring and subject to the satisfaction
of the conditions to the Distribution, the Westinghouse Board will formally
authorize the Distribution by declaring a dividend on the Westinghouse Common
Stock payable in Company Common Stock to holders of record of Westinghouse
Common Stock on the Distribution Record Date.
Westinghouse will effect the Distribution by delivering share certificates
for Company Common Stock to the Distribution Agent, for delivery to the holders
of Westinghouse Common Stock at the close of business on the Distribution Record
Date, without further action by such holders. It is expected that the
Distribution Agent will begin mailing share certificates representing Company
Common Stock as soon as practicable after the Distribution Date. The
Distribution will be deemed effective upon notification by Westinghouse to the
Distribution Agent that the Distribution has been declared and that the
Distribution Agent is authorized to proceed with the distribution of Company
Common Stock. All shares of Company Common Stock to be distributed in the
Distribution will be fully paid and nonassessable. See "Description of Capital
Stock."
No Fractional Shares of Company Common Stock will be distributed in the
Distribution. In lieu of receiving Fractional Shares, each Westinghouse
shareholder of record as of the Distribution Record Date who would otherwise be
entitled to receive a Fractional Share will receive Fractional Share Proceeds
for such fractional interest. All Fractional Shares of Company Common Stock that
otherwise would have been distributed to such holders of Westinghouse Common
Stock will be aggregated and sold in the open market as soon as practicable
after the Distribution and the holders otherwise entitled to such Fractional
Shares will receive their pro rata share of the Fractional Share Proceeds in
lieu of such Fractional Shares.
No holder of Westinghouse Common Stock will be required to pay any cash or
any other consideration for the shares of Company Common Stock to be received in
the Distribution or to surrender or exchange shares of Westinghouse Common Stock
in order to receive shares of Company Common Stock.
12
<PAGE> 21
INVESTMENT CONSIDERATIONS
Readers should be aware of the following factors to which the Company has
been subject in the past, is currently and may in the future be subject, and
which could materially adversely affect the performance of the Company.
LACK OF OPERATING HISTORY AS AN INDEPENDENT COMPANY; HISTORICAL NET LOSSES
The Company does not have an operating history as an independent public
company. The historical financial information included herein may not
necessarily reflect the results of operations, financial position and cash flows
of the Company in the future or what the results of operations, financial
position and cash flows would have been had the Company been a separate,
stand-alone entity during the periods presented. Historically, Westinghouse has
provided the Company with support in several areas, including providing working
capital and standing as the source of credit for performance and surety bonds,
letters of credit and other forms of security which are often required for large
projects in which the Company participates. After the Distribution, the Company
will be required to rely upon its own credit as a stand-alone entity in securing
these items.
The Company reported a net loss of $80 million in the first quarter of 1997
and net losses of $665 million in 1996, $202 million in 1995 and $77 million in
1994. To a large extent, the losses reported for 1996, 1995 and 1994 are
attributable to the Company's efforts to downsize its businesses and resolve
various litigation-related matters. These special charges, net of income tax
benefits, amounted to $676 million in 1996, $191 million in 1995 and $103
million in 1994. As described below under "Industrial Company Risks," the
Company's two largest business units, Power Generation and Energy Systems, have
been impacted in recent years by deregulation of the U.S. domestic utility
industry and price compression globally. The Company's financial performance in
the future as a stand-alone enterprise will be dependent upon various factors,
including those discussed above under "Forward-Looking Statements." The
historical financial information included herein does not reflect many
significant changes that will occur in the funding and operations of the Company
as a result of the Restructuring and the Distribution. See "--Realization of
Deferred Tax Assets," "Unaudited Pro Forma Combined Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
REALIZATION OF DEFERRED TAX ASSETS
Deferred tax assets associated with the Company's net operating loss
carryforwards for U.S. federal income tax purposes totalling $329 million at
March 31, 1997 and $289 million at December 31, 1996 have been recognized in the
Company's combined historical financial statements included elsewhere in this
Information Statement because these benefits are expected to be realized by
Westinghouse. However, in connection with the Distribution, these deferred tax
assets will be retained by Westinghouse. Realization of the remaining net
deferred tax asset of $824 at March 31, 1997 and $813 million at December 31,
1996 will be reevaluated at the time of the Distribution. If this reevaluation
had occurred without relying on future taxable income other than that which
could be generated through tax planning strategies, a valuation allowance of
approximately $500 million would have been required. The aggregate reduction in
the net deferred tax asset and in total shareholder's equity at March 31, 1997
and December 31, 1996 would have been approximately $800 million. If no
incremental deferred tax assets had been recorded in the first quarter of 1997
or in 1996, the net loss for the three months ended March 31, 1997 would have
increased by approximately $50 million and the net loss for the year ended
December 31, 1996 would have increased by approximately $400 million.
INDUSTRIAL COMPANY RISKS
Mature Nuclear Market. Energy Systems operates in a market where there is
relatively weak demand for new nuclear power plants and price competition. While
nuclear power plant construction continues internationally, in the U.S. no new
plant construction is currently anticipated. As a result, the U.S. market has
shifted from new plant design and construction to retrofit-design, service,
fuel, efficiency enhancement, and decommissioning of currently operating plants.
Attempts have been made in several states to hold referenda
13
<PAGE> 22
on closing existing nuclear power plants. In addition, several power companies
have canceled plans for, delayed the construction or operation of, or shut down
operating nuclear power plants. The future operating results of the Company's
Energy Systems operations, and the Company, could be adversely affected if, as a
result of these or other developments, nuclear power plants which are presently
in service are removed from service. In addition, U.S. government restrictions
relating to the export of nuclear technology and equipment may limit Energy
Systems' ability to compete in certain overseas markets, and the international
markets generally have become subject to global price compression.
Deregulation of Utilities. Through Power Generation and Energy Systems, the
Company provides services and equipment for the power generation market. Due to
significant regulatory changes, the U.S. domestic utility sector is
restructuring in response to the new competitive pressures created by this new
regulatory environment, as utilities attempt to reduce spending for capital
improvements and minimize outages for nuclear and fossil-fueled plants. There
can be no assurance that the Company will be able to adapt to the new
competitive environment created by these regulatory changes, and there can be no
assurance that such changes will not have a material adverse effect on the
Company's profitability, financial condition or results of operations.
Government Regulation of the Nuclear Industry. The Company is required to
maintain licenses with the DOE and the NRC and to meet detailed regulatory
requirements and procedures in connection with its nuclear fuel fabrication and
operating nuclear plant services businesses, as well as in connection with its
management services provided through its Government Operations business unit
relating to nuclear reactor programs for the U.S. Navy and DOE sites. In
addition, in some instances, the Company's ability to participate in projects in
foreign countries or export nuclear technology and equipment are limited by U.S.
government restrictions relating to the export and transfer of nuclear
technology. The U.S. government has considerable discretion regarding compliance
with its rules, regulations and procedures. There can be no assurance that any
changes in the regulatory framework applicable to the Company in its
participation in the nuclear industry will not have a material adverse effect on
the Company's future results of operations and financial condition. See
"Business--Energy Systems" and "Business--Government Operations."
Dependence on Government Funding and Government Contracts. A significant
portion of the Company's revenues and operating profit associated with its
Government Operations business unit and certain revenues associated with Energy
Systems' contracts for naval propulsion equipment with the U.S. Navy and Energy
Systems' development of the next generation of light water nuclear reactors is
dependent upon U.S. government funding. Although the Company has experienced a
steady demand for its naval propulsion equipment and its management services
provided through its Government Operations business unit, decreases in the level
of U.S. government spending on the U.S. Navy's nuclear programs or government
site clean-up could have a material adverse effect on the Company's future
results of operations and financial condition. See "Business Energy Systems,"
"Business--Government Operations" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In addition, contracts with
governmental agencies may be conditioned upon the continuing availability of
public funds, which in turn depends upon lengthy and complex budgetary
procedures, and may be subject to certain pricing constraints. Moreover, U.S.
government contracts and those of many international government customers may
generally be terminated for a variety of factors when it is in the best
interests of the government. See "Business Government Regulations."
Complex Technologies. Many of the Company's products incorporate highly
advanced, complex technologies which require sophisticated management and
controls. The Company believes that its technological expertise and experience
provide it with certain competitive advantages in a number of its markets. The
Company's ability to continue the successful innovation and implementation of
technological advances will be an important factor in its ability to compete in
its markets.
IMPACT OF RESTRUCTURING PROGRAMS
During the last three years, as discussed under "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Company has
undertaken restructuring programs at its corporate headquarters as well as at
several of its major businesses. Restructuring actions, including restructuring
at
14
<PAGE> 23
corporate headquarters, have resulted in the recognition of restructuring costs
net of adjustments of prior plans totalling $210 million in 1996, $58 million in
1995, and $21 million in 1994. The Company may implement restructuring
initiatives as competitive conditions dictate. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
ASSUMED LIABILITIES AND COMMITMENTS
Pursuant to the Restructuring and Distribution, the Company will assume
responsibility for certain environmental, litigation and litigation settlements
and contractual liabilities and obligations related to the Industrial Business,
the Divested Businesses and, in certain limited instances, the Westinghouse
Discontinued Operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Legal Proceedings." In
arriving at the liabilities recorded in the Company's historical combined
financial statements, certain estimates and assumptions were made. The Company
believes that it has adequately provided for its known obligations and
liabilities. However, actual results could differ from these estimates, and
changes in facts and circumstances, including the assertion of additional
litigation or claims against, or the discovery of presently unknown
environmental liabilities by, the Company may result in revised estimates and
assumptions.
The Company faces a variety of potential liabilities and lawsuits. There
can be no assurance that the Company will be able to reasonably estimate costs
associated with future claims. Litigation is inherently uncertain and always
difficult to predict. Substantial damages are sought in certain of the lawsuits
currently pending against Westinghouse for which the Company will indemnify
Westinghouse. Although the Company's management believes a significant adverse
judgment relating to existing litigation is unlikely, any such judgment could
have a material adverse effect on the Company's profitability, financial
condition and results of operations for a quarter or a year. Future litigation
against the Company relating to these same areas could also have a material
adverse effect on the Company's profitability, financial condition and results
of operation in the future. See "Business--Legal Proceedings."
COMPLIANCE WITH ENVIRONMENTAL LAWS
Compliance with federal, state and local laws and regulations relating to
the discharge of pollutants into the environment, the disposal of hazardous
wastes and other related activities affecting the environment have had and will
continue to have an impact on the Company. It is difficult to estimate the
timing and ultimate costs to be incurred in the future in relation to these
matters due to uncertainties about the status of laws, regulations and
technology, the adequacy of information available for individual sites, the
extended time periods over which site remediation occurs, and the identification
of new sites. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
RISKS ASSOCIATED WITH INTERNATIONAL GROWTH
The Company intends to continue to pursue growth opportunities in
international markets. See "Business." In many international markets,
long-standing relationships between potential customers of the Company and their
local providers, and protective regulations, including local content
requirements and type approvals, create barriers to entry. In addition, pursuit
of such international growth opportunities may require significant investments
for an extended period before returns on such investments, if any, are realized.
Such projects and investments could be adversely affected by reversals or delays
in the opening of foreign markets to new competitors, exchange controls,
currency fluctuations, investment policies, repatriation of cash,
nationalization, social and political risks, taxation, and other factors,
depending on the country in which such opportunity arises. In addition, U.S.
laws and policies affecting foreign trade, investment and taxation could also
adversely affect such projects and investments. There can be no assurance that
the Company will be able to overcome these barriers.
15
<PAGE> 24
ABSENCE OF TRADING HISTORY FOR THE COMMON STOCK
Application will be made to list the Company Common Stock on the NYSE under
the symbol "WX." Shareholders should note that there has been no prior trading
market for Company Common Stock and there can be no assurance as to the prices
at which Company Common Stock will trade or the degree of volatility in the
trading price. The prices at which Company Common Stock trades will be
determined in the public trading market and may be influenced by many factors,
including the depth and liquidity of the market for Company Common Stock,
investor perceptions of the Company and its businesses, general economic and
market conditions and, at least in the short-term, the investment preferences of
Westinghouse shareholders who will receive shares of Company Common Stock in the
Distribution.
CERTAIN COVENANTS
Although the Company and Westinghouse will conduct their respective
businesses independently following the Distribution, the Company and
Westinghouse will enter into several agreements for the purpose of giving effect
to the Distribution and defining their ongoing relationship with respect to such
matters as cross-indemnification against certain liabilities, including
liabilities for taxes, employee benefit matters and the continued provision of
certain services or facilities. In addition, the Distribution Agreement will
contain affirmative and restrictive undertakings by the Company relating to the
Company's operations. In connection with the Company's assumption of
liabilities, certain restrictions will be placed on the Company's ability to
engage in certain "extraordinary transactions," pay dividends or incur
indebtedness, subject to certain exceptions, without Westinghouse's consent. See
"Relationship and Agreements between the Company and Westinghouse after the
Distribution."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company expects to adopt provisions to its Articles of Incorporation
(the "Articles") and By-laws that may discourage other persons from attempting
to acquire control of the Company. These provisions may include a classified
Board of Directors, the authorization of the Board to issue shares of
undesignated preferred stock in one or more series without the specific approval
of the holders of Company Common Stock, the establishment of advance notice
requirements for director nominations and actions to be taken at annual
meetings, a supermajority vote requirement to approve any change to the By-laws
or certain provisions of the Articles and a limitation on the ability of
shareholders to call special meetings, act by written consent or remove
directors. The Company also expects to adopt a shareholder rights plan either
before or after the Distribution. In addition, the undertakings of the Company
contained in the Distribution Agreement may require that any acquiror of the
Company or of all or substantially all of the Company's assets, and such
acquiror's parent entity, assume the Company's obligations under the
Distribution Agreement. Such provisions, as well as the provisions of Chapter 25
of the Pennsylvania Business Corporation Law (to which the Company is subject),
could impede a hostile merger, consolidation, takeover or other business
combination involving the Company or discourage a potential acquiror from making
a tender offer or otherwise attempting to obtain control of the Company. In
certain circumstances, the fact that corporate devices are in place that will
inhibit or discourage takeover attempts could reduce the market value of Company
Common Stock. See "Purposes and Effects of Certain Provisions of the Company's
Articles of Incorporation, By-Laws and Pennsylvania Law" and "Transactions and
Agreements between the Company and Westinghouse after the
Distribution--Distribution Agreement."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The Distribution is conditioned upon receipt by Westinghouse of a private
letter ruling from the IRS substantially to the effect that, among other things,
the Distribution will qualify as a tax-free spin-off to Westinghouse and its
shareholders under Section 355 of the Internal Revenue Code of 1986, as amended
(the "Code"). The following is a summary of the material federal income tax
consequences to Westinghouse and Westinghouse shareholders expected to result
from the Distribution:
16
<PAGE> 25
(i) A Westinghouse shareholder will not recognize any income, gain or loss
as a result of the Distribution, except, as described below, in connection with
Fractional Share Proceeds from Company Common Stock;
(ii) A Westinghouse shareholder will apportion the tax basis for such
shareholder's Westinghouse Common Stock on which Company Common Stock is
distributed between the Westinghouse Common Stock and Company Common Stock
received in the Distribution (including any Fractional Shares of the Company
Common Stock deemed received) in proportion to the relative fair market values
of such Westinghouse Common Stock and Company Common Stock on the Distribution
Date;
(iii) A Westinghouse shareholder's holding period for the Company Common
Stock received in the Distribution will include the period during which such
shareholder held the Westinghouse Common Stock on which Company Common Stock is
distributed, provided that such Westinghouse Common Stock is held as a capital
asset by such shareholder on the Distribution Date;
(iv) A Westinghouse shareholder who receives Fractional Share Proceeds as a
result of the sale of shares of Company Common Stock by the Distribution Agent
will be treated as if such Fractional Share had been received by the shareholder
as part of the Distribution and then sold by such shareholder. Accordingly, such
shareholder will recognize gain or loss equal to the difference between the cash
so received and the portion of the tax basis in Company Common Stock that is
allocable to such Fractional Share. Such gain or loss will be capital gain or
loss, provided that such Fractional Share was held by such shareholder as a
capital asset at the time of the Distribution; and
(v) Westinghouse will not recognize any gain or loss on the Distribution
for federal income tax purposes.
Current Treasury regulations require each Westinghouse shareholder who
receives Company Common Stock pursuant to the Distribution to attach to such
shareholder's federal income tax return for the year in which the Distribution
occurs a detailed statement setting forth such data as may be appropriate in
order to show the applicability of Section 355 of the Code to the Distribution.
Westinghouse will provide the appropriate information to each shareholder of
record as of the Record Date.
THE SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO SHAREHOLDERS WHO RECEIVED
THEIR SHARES OF WESTINGHOUSE COMMON STOCK THROUGH THE EXERCISE OF AN EMPLOYEE
STOCK OPTION OR OTHERWISE AS COMPENSATION OR WHO ARE NOT CITIZENS OR RESIDENTS
OF THE UNITED STATES OR WHO ARE OTHERWISE SUBJECT TO SPECIAL TREATMENT UNDER THE
CODE. ALL SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE DISTRIBUTION, INCLUDING THE
APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
LISTING AND TRADING OF THE COMMON STOCK
Application will be made to list the Company Common Stock on the NYSE under
the symbol "WX." There is no current public trading market for the Company
Common Stock, although it is expected that a "when-issued" trading market will
develop prior to the Distribution Date. The term "when-issued" means trading in
shares prior to the time certificates are actually available or issued. If the
conditions to the Distribution are not satisfied and the Distribution is not
paid, all such when issued trading will become null and void. If the conditions
to the Distribution are satisfied and the Distribution is paid on the
Distribution Date, it is expected that regular way trading in the Company Common
Stock on the NYSE will commence at 9:30 a.m. (New York time) on ,
1997, subject to official notice of issuance.
Westinghouse Common Stock will continue to be listed and traded on the
NYSE, the Boston Stock Exchange, the Pacific Stock Exchange, the Philadelphia
Stock Exchange and the Chicago Stock Exchange, after the Distribution, but with
a new symbol "CBS."
17
<PAGE> 26
The Company Common Stock issued to shareholders of Westinghouse Common
Stock will be freely transferable, except for shares received by persons who may
be deemed to be "affiliates" of the Company under the Securities Act of 1933, as
amended (the "Securities Act"). Persons who may be deemed to be affiliates of
the Company after the Distribution generally include individuals or entities
that control, are controlled by, or are under common control with the Company
and may include certain officers and directors of the Company. Persons who are
affiliates of the Company will be permitted to sell their Company Common Stock
only pursuant to an effective registration statement under the Securities Act or
an exemption from the registration requirements of the Securities Act, such as
the exemptions afforded by Section 4(1) of the Securities Act and Rule 144
thereunder.
For a discussion of certain matters that should be considered in trading in
the Company Common Stock, see "The Transactions--Investment
Considerations--Absence of Trading History for the Common Stock."
DIVIDEND POLICY
It is currently contemplated that the Company will not pay cash dividends
on Company Common Stock. The payment and amount of future dividends will be at
the discretion of the Company Board and will depend upon the Company's future
earnings, financial condition, capital requirements, and other factors,
including any limitations under then existing credit facilities. In addition,
the agreements to be entered into between Westinghouse and the Company to effect
the Restructuring and the Distribution will contain restrictions on the
Company's ability to pay dividends under certain circumstances. See
"Relationship and Agreements between the Company and Westinghouse--Distribution
Agreement."
DISTRIBUTION CONDITIONS AND TERMINATION
The consummation of the Distribution is conditioned upon fulfillment of
each of the following conditions: (i) the receipt from the IRS of the Tax
Ruling; (ii) the Restructuring having been consummated in all material respects
(see "Relationship and Agreements between the Company and
Westinghouse--Distribution Agreement); (iii) the Company Common Stock having
been approved for listing on the NYSE subject to official notice of issuance;
(iv) the Registration Statement having been declared effective by the
Commission; (v) all authorizations, consents, approvals and clearances from all
federal, state, local and foreign governmental agencies required to permit the
valid consummation of the transactions contemplated by the Restructuring and the
Distribution having been obtained, without any conditions being imposed that
would have a material adverse effect on Westinghouse or the Company, and all
statutory requirements for such valid consummation having been fulfilled; (vi)
Westinghouse having provided the NYSE with prior written notice of the Record
Date as required by the Exchange Act and the rules and regulations of the NYSE;
(vii) no preliminary or permanent injunction or other order, decree or ruling
issued by a court of competent jurisdiction or by a government, regulatory or
administrative agency or commission, and no statute, rule, regulation or
executive order promulgated or enacted by any governmental authority, being in
effect preventing the payment of the Distribution; (viii) the Credit Facility
being in place, with all conditions to borrowing thereunder being satisfied or
waived; (ix) the Company having been substituted for Westinghouse in respect of
all material contracts related to the Industrial Business or the other parties
to such contracts consenting to the assignment thereof to the Company on terms
acceptable to the Westinghouse Board; (x) the Westinghouse Board being satisfied
that, after giving effect to the Restructuring and the Distribution,
Westinghouse will not be insolvent and will not have unreasonably small capital
with which to engage in its business; and (xi) Westinghouse being able to pay
the Distribution in accordance with applicable law.
Any of the conditions to the Distribution may be waived at any time prior
to the Distribution Date, for any reason, in the sole discretion of the
Westinghouse Board. In addition, even if all the above conditions are satisfied,
the Distribution Agreement may be amended or terminated, and the Restructuring
and the Distribution may be abandoned, at any time prior to the Distribution
Date for any reason, in the sole discretion of the Westinghouse Board.
18
<PAGE> 27
RELATIONSHIP AND AGREEMENTS BETWEEN THE COMPANY
AND WESTINGHOUSE AFTER THE DISTRIBUTION
GENERAL
In connection with the Distribution, the Company and Westinghouse and their
respective subsidiaries will enter into a series of agreements for the purpose
of giving effect to certain transactions necessary for the Distribution and
defining their ongoing relationship. These agreements will be executed at a time
when the Company is a wholly-owned subsidiary of Westinghouse, and there can be
no assurance that each of such agreements, or that each of the transactions
provided for therein, will be effected on terms at least as favorable to the
Company or to Westinghouse as could have been obtained from unaffiliated third
parties.
Following the Distribution, additional or modified agreements, arrangements
and transactions may be entered into by the Company, Westinghouse and/or their
respective subsidiaries. Any such future agreements, arrangements and
transactions will be determined, at such time, through arm's-length negotiations
between the parties.
The following is a summary of certain agreements, arrangements and
transactions to be entered into between the Company and Westinghouse at the time
of the Distribution. Certain of these agreements have been filed as exhibits to
the Registration Statement and, accordingly, the following descriptions do not
purport to be complete and are qualified in their entirety by reference to such
exhibits.
DISTRIBUTION AGREEMENT
Westinghouse and the Company will enter into the Distribution Agreement
providing for, among other things, certain corporate transactions required to
effect the Restructuring and the Distribution and other arrangements between
Westinghouse and the Company subsequent to the Distribution.
In particular, the Distribution Agreement will allocate generally,
effective as of the Distribution Date, financial responsibility for the
liabilities relating to the assets and businesses being transferred to the
Company and the assets and businesses being retained by Westinghouse. Pursuant
to the Distribution Agreement, Westinghouse will transfer or cause to be
transferred the assets associated with, and the Company will assume
responsibility for the liabilities associated with, the Industrial Business,
assets and liabilities (including certain environmental and litigation-related
liabilities) associated with Divested Businesses and certain toxic tort
litigation-related matters associated with the Discontinued Operations. The
pension and postretirement liabilities, as of the Distribution Date, for certain
employees of both the Industrial Business and Divested Businesses as well as
certain income tax benefits of the Company will be retained by Westinghouse.
Westinghouse also will transfer to the Company all rights associated with the
Westinghouse(R) name and logo.
All assets will be transferred without any representation or warranty, "as
is-where is." Westinghouse and the Company each will agree to execute and
deliver such further assignments, documents of transfer, deeds and instruments
as may be necessary for the more effective implementation of such transfers.
Some assignments and transfers may require prior consent by third parties
and various filings or recordings with governmental entities. Some contracts,
permits or licenses may require reapplication by, and reissuance in the name of,
the Company. If consent to the assignment or reissuance of any contract, license
or permit being transferred is not obtained, Westinghouse and the Company will
develop alternative approaches so that, to the maximum extent possible, the
Company will receive the benefits of such contract, license or permit and will
discharge the duties and bear the costs and risks thereunder. The Company will
bear the risk that such alternative arrangements will not provide the Company
with full benefits of such contract, license or permit. Westinghouse and the
Company, however, believe that they will be able to obtain all necessary
consents and reissuances that are material to the Company's business.
In addition, in the Distribution Agreement, the Company will undertake not
to engage in certain "extraordinary transactions" such as mergers,
consolidations, liquidations and sales of all or substantially all of its
assets, pay dividends or incur indebtedness, subject to certain exceptions,
without Westinghouse's consent.
19
<PAGE> 28
TAX SHARING AGREEMENT
Westinghouse, the Company and their respective subsidiaries will enter into
a tax sharing agreement (the "Tax Sharing Agreement") that governs the
allocation between Westinghouse and the Company of federal, state, local and
foreign tax liabilities for taxable periods before and after the Distribution,
and related matters such as the preparation and filing of tax returns and the
conduct of audits and other tax proceedings. Generally, the Tax Sharing
Agreement will provide that the Company will be responsible for, and will
indemnify Westinghouse against, tax liabilities relating to the Industrial
Business for taxable periods ending after the Distribution as well as tax
liabilities, other than federal, state, local and foreign income taxes and
transaction taxes resulting from the Restructuring, relating to the Industrial
Business, including its assets, for taxable periods ending on or prior to the
Distribution. Under the Tax Sharing Agreement, Westinghouse will generally
receive the benefit from net operating loss carryforwards and will be
responsible for, and will indemnify the Company against, federal, state, local
and foreign income tax liabilities as well as transaction taxes resulting from
the Restructuring for taxable periods ending on or prior to the Distribution.
In addition, the Tax Sharing Agreement will provide that if, as a result of
any event that is within the control of the Company or any of its subsidiaries
or any other event related to the acquisition of the Company Common Stock, any
taxes or other liability, costs or expenses are imposed on Westinghouse, any of
its subsidiaries or any Westinghouse shareholder who receives Company Common
Stock pursuant to the Distribution, which in either case, arises from the
Distribution or transactions related to the Distribution, then the Company will
be obligated to indemnify and hold harmless, on an after-tax basis, Westinghouse
and the Westinghouse shareholders, as the case may be, with respect to any such
taxes or other liability, costs or expenses.
The Tax Sharing Agreement will also prohibit the Company from entering into
certain transactions, undertaking certain issuances or redemptions of Company
Common Stock, or disposing of certain of its businesses for a period of two
years from the date of the Distribution in the absence of a prior opinion of
counsel to Westinghouse or receipt of a ruling from the IRS, in either case to
the effect that such act or event will not adversely affect the federal income
tax consequences of the Distribution to Westinghouse, its shareholders who
receive Company Common Stock pursuant to the Distribution, or the Company.
INTERIM SERVICES AGREEMENT
Westinghouse and the Company will enter into an interim services agreement
(the "Interim Services Agreement") prior to the Distribution Date under which
each of Westinghouse and the Company will provide certain services on an interim
basis to the other. The principal services to be provided by the Company to
Westinghouse include: accounting, human resource administration, management
information services and management support in the administration of
environmental and litigation-related matters. The services will be provided for
a term beginning on the Distribution Date and expiring on the earlier,
generally, of years from the Distribution Date or days following the
date on which the recipient of such services notifies the provider that no
further services will be required. Each of Westinghouse and the Company will
charge a fee for services provided to the other.
EMPLOYEE BENEFITS AGREEMENT
General. Westinghouse and the Company will enter into an employee benefits
agreement (the "Employee Benefits Agreement") prior to the Distribution Date
that will allocate responsibility between the Company and Westinghouse for
employee benefit liabilities relating to current and former employees and
directors.
In general, the Company will be responsible for employee benefit
liabilities and obligations relating to the period before the Distribution Date
with respect to Company employees, other than certain pension and postretirement
liabilities. Westinghouse will retain responsibility for pension and
postretirement liabilities relating to the period prior to the Distribution Date
with respect to Company employees. Liabilities and obligations relating to the
period after the Distribution Date with respect to active employees and
directors, and their eligible dependents, generally will be the responsibility
of the employing company.
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<PAGE> 29
Notwithstanding this general allocation, the Company will be responsible
for pre- and post-Distribution employee benefit liabilities and obligations
relating to certain stand-alone employee pension and welfare benefit plans
sponsored and maintained by subsidiaries or divisions that will be part of the
Company. The Company is also considering, as part of the transfer of certain
government contracts to the Company, assuming certain employee benefits
liabilities and obligations for certain employees associated with Government
Operations who currently participate in Westinghouse plans. Costs associated
with these programs would continue to be reimbursed under government contracts.
The Company will also assume responsibility for the Westinghouse Savings
Program, as described below.
It is anticipated that the Company will take, or cause to be taken, all
necessary action to establish or assume on or about the Distribution Date plans
to provide certain benefits to employees and/or directors as described below.
Each such plan will be established subject to the Company's right to amend,
terminate or suspend any such plan, or any of the benefits thereunder, at any
time. The Company is currently evaluating alternative plan designs and
structures for periods after the Distribution Date.
Qualified Pension and Savings Plans. The Company will establish a
qualified defined benefit pension plan for eligible Company employees. For an
undetermined transition period, the benefits are expected generally to mirror
those under the Westinghouse Pension Plan.
The Company will take, or cause to be taken, all action necessary to assume
the Westinghouse Savings Program effective on the Distribution Date. On or about
January 1, 1998, account balances attributable to certain Westinghouse employees
will be transferred to an appropriate savings program designated by
Westinghouse.
Executive Pension Plan. The Employee Benefits Agreement will also provide
that the Company will take, or cause to be taken, all action necessary to
establish and administer an executive pension plan to provide benefits to
Company employees who, immediately prior to the Distribution Date, were
participants in the Westinghouse Executive Pension Plan. For an undetermined
transition period, benefits under the Company executive pension plan are
expected generally to mirror those under the Westinghouse Executive Pension
Plan.
Health and Welfare Plans. The Company will take, or cause to be taken, all
actions necessary to establish employee welfare benefit plans to provide
benefits to eligible active Company employees. The Company generally will be
responsible for all obligations and liabilities incurred by active employees and
their dependents under these new plans after the Distribution Date. With certain
exceptions, these plans are generally unfunded and, except for funds
specifically related to plans for Company employees, Westinghouse will transfer
no cash or other assets to the Company in connection with the Company's adoption
of these plans, except for reserves and similar amounts specifically allocable
to Company employees.
Certain Executive and Director Benefits. For information regarding certain
other executive and director benefits, see "Management--Company Directors'
Compensation and Benefits," and "Executive Compensation--Company Compensation
and Benefit Plans" and "--Treatment of Westinghouse Options and Other Benefits
Following the Distribution."
Employee Stock Plan. Under the Employee Benefits Agreement, it is
anticipated that the Company will establish a plan pursuant to which after the
Distribution Date, eligible employees of the Company and certain subsidiaries
may purchase Company Common Stock from the Company through payroll deductions.
Recognition of Service. In the Employee Benefits Agreement, Westinghouse
and the Company will agree that with respect to individuals who, in connection
with the Distribution, cease to be employees of Westinghouse or one of its
retained subsidiaries, or directors of Westinghouse, and become employees of the
Company or one of its subsidiaries, or directors of the Company, such cessation
will not (including for benefit accrual purposes), in and of itself be deemed a
termination of employment and service and, for purposes of Westinghouse employee
and director plans, service will be deemed to cease when the individual ceases
service with the Company. However, after the Distribution Date, Company
Employees who were Westinghouse employees will be treated as having been
separated from Westinghouse for purposes of initiating payouts of
pre-Distribution deferrals under the Westinghouse deferral program, such Company
Employees will not be
21
<PAGE> 30
eligible for reload options with respect to their Westinghouse stock options,
and Westinghouse Employees will not be eligible for reload options with respect
to their Company adjustment options. Also, for directors, such cessation of
service on the Westinghouse Board on the Distribution Date will be deemed a
termination of service for purposes of initiating payouts of directors'
Westinghouse deferral accounts and payout of any Westinghouse Common Stock
Equivalent account the director may have in the January following the
Distribution Date.
SHARED TECHNOLOGY AGREEMENT
Westinghouse and the Company will enter into a shared technology agreement
(the "Shared Technology Agreement") providing for, among other things, the use
of all know-how, inventions, discoveries, improvements, processes, trade
secrets, licenses, confidential information, all computer software, programs,
systems and codes and documentation relating thereto, and all databases,
reference material and other material related thereto, by both Westinghouse and
the Company which are utilized in both the Industrial Business and the Media
Group. The Shared Technology Agreement will also provide for the use by each of
the Company and Westinghouse of certain other shared assets relating to such
shared technology.
INTELLECTUAL PROPERTY AGREEMENT
Westinghouse and the Company will enter into an intellectual property
agreement (the "Intellectual Property Agreement") providing for, among other
things, the use of the Westinghouse(R) trademark and tradename, for a period of
up to five years, by Westinghouse in connection with the Westinghouse
Discontinued Operations.
INSURANCE AGREEMENT
Westinghouse and the Company will enter into an insurance agreement (the
"Insurance Agreement") providing for, among other things, appropriate
independent coverage for both Westinghouse and the Company, each for its own
account. Under the Insurance Agreement, the Company will be entitled to the
benefit of certain insurance coverage under Westinghouse's historical policies,
to the extent such insurance coverage existed, for claims relating to the
ownership or operation of the Industrial Business, claims related to Divested
Businesses prior to the Distribution Date and certain claims associated with the
Westinghouse Discontinued Operations. The Insurance Agreement will also provide
for procedures for the assertion and management of such claims, including
provisions for reimbursement of costs and expenses.
OTHER AGREEMENTS
The Company and Westinghouse also are expected to enter into certain other
agreements that will serve to define various aspects of the relationship that
will exist between the parties after the Distribution. None of these agreements,
either alone or in the aggregate, is expected to materially affect the Company
or its results of operations.
RELATIONSHIP BETWEEN THE COMPANY AND WESTINGHOUSE AFTER THE DISTRIBUTION
After the Restructuring and Distribution, the Company and Westinghouse will
operate independently of each other as separate public companies. Neither the
Company nor Westinghouse will have any beneficial stock ownership interest in
the other (although employee benefit plan trusts sponsored by Westinghouse and/
or certain of its subsidiaries will, in the near term hold Company Common
Stock). Following the Distribution, each of Westinghouse and the Company will
have a management organization with no overlaps and an independent Board of
Directors. It is presently anticipated that Michael H. Jordan, currently the
Chairman and Chief Executive Officer of Westinghouse, will serve as
Non-Executive Chairman of the Company Board during a transition period that will
expire no later than the date of the annual meeting of the Company's
shareholders to be held in the spring of 2000. In addition, two of
Westinghouse's current directors, Messrs. David T. McLaughlin and Richard R.
Pivirotto, will serve as directors on the Company Board during the same
transition period. However, Messrs. Jordan, McLaughlin and Pivirotto will
constitute a minority of
22
<PAGE> 31
each of the Westinghouse Board and Company Board, respectively. Furthermore, no
later than the date of the annual meeting of the Company's shareholders to be
held in the spring of 2000, each of Messrs. Jordan, McLaughlin and Pivirotto
will cease to be a director of one of the two companies. Messrs. Frank C.
Carlucci, Robert E. Cawthorn, Gary M. Clark and David K.P. Li, currently
directors of Westinghouse, will resign from the Westinghouse Board at the time
of the Distribution and become directors of the Company. No member of
Westinghouse's management will serve as an executive officer of the Company. Dr.
Ernest H. Drew will be the Company's President and Chief Executive Officer and a
director on the Company Board. Dr. Drew currently serves as the Chief Executive
Officer of Westinghouse's Industries and Technology Group.
Although Westinghouse and the Company will conduct their respective
businesses independently following the Distribution, Westinghouse and the
Company will enter into the agreements discussed above and certain other
agreements to give effect to the Restructuring and Distribution and to define
their ongoing relationship. Certain of these agreements will contain affirmative
and restrictive undertakings by the Company with respect to its operations,
including restrictions on the Company's ability to engage in certain
"extraordinary transactions," pay dividends or incur indebtedness, subject to
certain exceptions, without Westinghouse's consent. See "--Distribution
Agreement."
CREDIT FACILITY
Prior to the Distribution, the Company will enter into a credit facility
(the "Credit Facility") in the amount of $ . The Credit Facility will
be effective on the Distribution Date. The Credit Facility will be used to
provide for working capital and other credit needs of the Company. The Credit
Facility will be entered into pursuant to a credit agreement (the "Credit
Agreement"), a copy of the form of which will be filed as an exhibit to the
Registration Statement.
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<PAGE> 32
CAPITALIZATION
The following table, which is unaudited, sets forth, at March 31, 1997, the
capitalization of the Company, as adjusted to reflect the Distribution and other
pro forma adjustments, as if they occurred as of March 31, 1997. This data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations", the Condensed Combined Financial
Statements and notes thereto of the Company and the Unaudited Pro Forma
Financial Statements included elsewhere herein. See "Index to Combined Financial
Statements."
<TABLE>
<CAPTION>
AT MARCH 31, 1997
----------------------------------------------
ACTUAL ADJUSTMENTS AS ADJUSTED
-------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Total Assets....................................... $ 4,535 $ (735)(1)(2) $ 3,800
======== ========= =========
Short-term debt:
Credit Facility.................................. $ 5 $ -- $ 5
Other............................................ -- -- --
-------- ----------- -----------
Total Short-term debt......................... $ 5 $ -- $ 5
======== ========= =========
Long-term debt:
Credit Facility.................................. $ -- $ -- $ --
Other............................................ -- -- --
-------- ----------- -----------
Total Long-term debt.......................... $ -- $ -- $ --
======== ========= =========
Shareholder's equity:
Common Stock, shares, par value $0.01
per share authorized, shares issued
and outstanding (as adjusted)(3).............. $ $ $
Paid-in capital..................................
Invested Equity.................................. 1,417 (735)(1)(2) 682
-------- ----------- -----------
Total Shareholder's equity.................... $ 1,417 $ (735) $ 682
======== ========= =========
</TABLE>
- ---------
(1) Accrued Restructuring. Pursuant to the terms of the Distribution Agreement,
the Company will be reimbursed by Westinghouse for accrued liabilities
associated with restructuring programs initiated prior to the Distribution
Date that are unpaid at the Distribution Date. This entry recognizes an
asset for the reimbursement of these accrued liabilities.
(2) Valuation Allowance. Income taxes recognized in the Company's Combined
Financial Statements were prepared as if the Company continued to file a
consolidated tax return with Westinghouse. However, subsequent to the
Distribution, the Company will not be permitted to file a consolidated tax
return with Westinghouse and Westinghouse will retain the U.S. federal net
operating loss carryforwards generated by the Company. Therefore, the
deferred tax assets associated with these net operating loss carryforwards
will not be retained by the Company. Management has evaluated the potential
for the Company to realize the remaining net deferred tax assets as a
stand-alone entity on the basis of the criteria of SFAS No. 109, "Accounting
for Income Taxes." Without relying on future taxable income, other than that
which could be generated through tax planning strategies, management has
determined that a valuation allowance may be required.
(3) See "Description of Capital Stock--Authorized Capital Stock."
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<PAGE> 33
BUSINESS
GENERAL
Following the Distribution, the Company will consist of the following
operating businesses: Power Generation, Energy Systems and Government
Operations. These businesses design, manufacture and service nuclear and
fossil-fueled power generation equipment, supervise the removal of environmental
hazards and the safe decommissioning of sophisticated nuclear and chemical
defense systems, and manufacture and service controls for sophisticated
industrial processes. The Company's long-term strategy will be to maintain its
position as a technological leader in providing its products and services in its
key market segments and to integrate the competitive strengths the Company has
developed in each of these industrial business units to better serve its
customers and to further develop new and emerging customer bases.
POWER GENERATION
The Company's Power Generation business unit designs, manufactures and
services steam turbine-generators for nuclear and fossil-fueled power plants,
combustion turbine-generators for natural gas and oil-fired power plants and
constructs turn-key power plants worldwide. In addition to serving the electric
utility industry, the business unit supplies, services and operates power plants
for independent power producers and supplies power generation equipment and
services to other non-utility customers. Growing demand for electrical energy
has contributed to the business unit's growth. In 1996, the business unit was
awarded orders for approximately 5,300 megawatts of new power generating
capacity. In addition, Power Generation shipped more than 37 new combustion and
steam turbine generators and 12 new power plants achieved commercial operation
in 1996. The global market for new generating equipment over the next ten years
is expected to be approximately 990 gigawatts, of which the domestic part is
expected to be about 130 gigawatts, or 13%. Power Generation is an active
participant in the development of emerging technologies which could impact the
future power generation business.
Power Generation designs and produces two basic power generation
technologies. The first is a boiler/ steam plant, where fuel is burned in a
boiler to create steam, which is then channelled to a steam turbine which in
turn drives a generator. The fuel in this system is typically coal or oil, or
the entire system may consist of a nuclear steam supply system to generate
power. The Company provides steam turbines and generators for this type of
plant. The second is known as a combustion turbine plant, where fuel is burned
in a combustion turbine (or gas turbine) which drives a generator directly. The
fuel used in this system is typically natural gas or light oil. The combustion
and steam technologies come together in the combined cycle plant, whose high
efficiency makes it the system of choice in many parts of the world. This power
generation technology uses the heat exhaust from the combustion turbine captured
in a boiler to generate steam which in turn drives a steam turbine and generator
(creating a "combined" cycle). The Company supplies equipment for this type of
plant and also supplies them on a full turn-key basis. The final power
generation technology is the hydroelectric power plant, which captures energy
from falling water to drive a generator. Currently, Power Generation only
provides maintenance to generators for hydroelectric plants.
The small units in the Power Generation product line are air-cooled;
intermediate generators are hydrogen inner-cooled and the largest units consist
of water inner-cooled stator coils and hydrogen inner-cooled rotor and ancillary
components. Each generator line produced by Power Generation covers a megawatt
range as a continuum rather than by individual steps, allowing a large number of
turbine combinations to be accommodated in its present product line.
At 300,000 megawatts, the Company's installed fleet is one of the largest
in the world. Westinghouse provides extensive services to its customers in the
areas of power plant maintenance, service and operation. During 1996, Power
Generation provided complete operations and maintenance services to six power
plants, earning performance-based bonuses at all six. A wide range of individual
services are typically provided to the customer as a commercially or
operationally bundled package. Individual services which are provided alone or
in combination with others include, modernization and upgrade services,
installation services, scheduled or unscheduled maintenance, plant operation,
electrical systems services, electrical equipment field installation and repair,
electrical and mechanical shop repair services, and energy management. Energy
management
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<PAGE> 34
refers to a range of new power electronics based products, whose aim is to
improve significantly the capability of the bulk electricity transmission system
and to improve power quality. The Company believes that the demand for these
products will grow as the current series of technology demonstrators prove their
worth.
In 1996, in excess of 80% of Power Generation's new plant sales were
outside of the United States, and over 65% of its dollar sales volume was
outside the U.S. The Power Generation business unit conducts business in more
than 50 different countries. In 1996, Power Generation's revenue breakdown was
as follows: (i) 47% for services; (ii) 21% for new generation equipment; and
(iii) 32% for power plant projects. Approximately 85% of Power Generation's
revenues are generated from sales to approximately 200 customers that purchase a
significant amount of Power Generation products and services. Although in a
single year an individual new plant customer order may account for 10% or more
of sales, on a multi-year basis, no individual customer accounts for more than
4%.
The U.S. electric utility industry is restructuring in response to a new
competitive environment brought on by regulatory changes. The Company has a
number of domestic and foreign competitors in the power generation industry,
including General Electric Company, ABB Asea Brown Boveri Ltd. ("ABB"), Siemens
A.G., GEC Alsthom and Mitsubishi Heavy Industries. Competitors with respect to
service include those listed above, as well as smaller niche service providers.
Power Generation attempts to distinguish itself from its competition on the
basis of its enhanced competitive position in technology, product reliability,
service capability, and worldwide presence. However, Power Generation is faced
with risks in the markets in which it competes, including such risks as reduced
opportunities for operating fleet products and services, continued softness in
the domestic electric utility sector, and intense competition for new unit sales
worldwide. The principal methods of competition are technology, product
development and performance, responsiveness, customer service, pricing and
financing.
The Company's strategy for competing in the power generation industry is to
strengthen its position as a multinational competitor by optimizing its leverage
in the markets where it has a significant presence, to anticipate and adjust to
the dynamic transitions occurring with the deregulation of the U.S. energy
market and to identify and develop selected areas where emerging technologies
will improve the Company's position in the current and future power generation
markets. The Company will also continue its efforts to improve execution and
cost effectiveness by manufacturing low-cost, on-time quality products and by
instilling a performance-based culture at all the Power Generation facilities.
The Company, through its four joint ventures with Shanghai Electric
Corporation, the leading supplier of power generation equipment in China, plans
to capitalize on its technological expertise and experience in the world's
largest and fastest growing market. The Company's unique service joint venture
with China's Ministry of Electric Power successfully completed its first plant
modernization, opening opportunities for the Company to compete for additional
projects throughout China. In addition to serving the domestic Chinese power
generation market, the Company plans to make these Chinese joint ventures an
important part of its global sourcing strategy, which may help the Company
achieve cost improvements.
At January 1, 1997, Power Generation had 8,343 full-time employees, 1,176
of which were affiliated with unions (386 in the U.S., 100 in Australia and 690
in Canada). The Power Generation business unit considers its relationship with
its employees and these unions to be good.
ENERGY SYSTEMS
The Company's Energy Systems business unit serves the domestic and
international electric power industry by supplying nuclear power plants,
advanced nuclear plant designs and equipment, fuel and a wide range of other
products and services to the owners and operators of commercial nuclear power
plants. In addition, Energy Systems develops next generation nuclear plant
designs which are expected to be applied to the new plant market in Asia, as
well as managing major projects for nuclear plants upgrades and modernizations.
The annual market which Energy Systems serves is $25 billion globally.
Approximately 40% of the world's operating commercial nuclear power plants
incorporate Energy Systems' technology.
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Through Energy Systems' Process Control Division ("PCD"), the Company
provides distributed control, communications, data acquisition and information
systems to power generation facilities (fossil and nuclear fueled), both to its
Energy Systems and Power Generation customers, and to chemical processors, water
and wastewater treatment facilities and the steel industry, as well as for other
industrial applications. PCD's principal distributed control system, WDPF(R),
allows operators of sophisticated industrial facilities to, on a real-time
basis, monitor, evaluate and control the various stages of production or
processing at such facilities. The Company has recently begun offering for
distribution in 1998, the Ovation(TM) system, which is a state-of-the art
distributed control system that makes process automation a transparent component
of the customer's business information system and leverages rapid changes in
information technology to provide customers with closer control of production
processes and access to process data for economic decisions.
In addition, through its Electromechanical Division ("EMD"), the Energy
Systems business unit designs and manufacturers naval propulsion equipment for
the U.S. Navy. EMD is the single source of supply to the U.S. Navy for reactor
coolant pumps in all classes of its nuclear powered ships and for ship service
electric generators in two classes of naval vessels.
Energy Systems is also completing detailed design certification (final
design approval is expected in the first quarter of 1998) and first of a kind
engineering in the joint development of the next generation of light water
nuclear reactors, known as the AP600 (the "AP600 Project"), with the DOE
providing the major portion of the funding. In addition to the DOE, The Electric
Power Research Institute, sixteen domestic utilities and 22 foreign countries
support the design efforts of the AP600 Project.
Energy Systems is the original designer of 50 of the 109 operating nuclear
power plants in the U.S. and 82 of the 432 operating nuclear power plants around
the world. In addition, licensees of Energy Systems' nuclear power plant designs
have built an additional 83 nuclear power plants worldwide. Energy System's
status as the original designer and its technological knowledge and problem
solving capabilities (related to its role as plant designer and original
equipment designer) gives the business unit a competitive advantage in providing
fuel fabrication and operating power plant services with respect to these
nuclear power plants.
In the market for operating nuclear power plant services, Energy Systems
supplies a wide range of operating plant services, ranging from
performance-based maintenance programs, including operational and safety
upgrades (primarily for units originally designed by the Company) to new
products and services that enhance plant performance. Energy Systems also sells
project management and engineering services, field repair and maintenance
services, replacement equipment and spare parts to operators of existing nuclear
power plants (typically electric utility companies) on a worldwide basis.
In the nuclear fuel fabrication market, Energy Systems provides nuclear
fuel assemblies for use in pressurized water reactors to operators of existing
nuclear power plants, where it believes it is the second largest global supplier
in terms of annual production volume. Energy Systems has active technology and
manufacturing licenses with several other manufacturers, including British
Nuclear Fuels, Ltd.("BNFL"), Mitsubishi Heavy Industries, Mitsubishi Nuclear
Fuel and ENUSA (Spain), and provides fuel components and manufacturing
technology to other manufacturers such as Korea Nuclear Fuel. Furthermore,
Energy Systems participates in the European nuclear fuel market through an
alliance known as the European Fuel Group, which includes both BNFL and ENUSA.
The Company's strategy is to use its technological expertise and experience
to maintain its market share in the domestic nuclear fuel and operating nuclear
power plant service markets and to focus on specific international opportunities
that offer Energy Systems an opportunity to exploit its technical expertise and
service strengths in the fuel and operating nuclear power plant service markets.
For example, the Company was the first U.S. company to provide upgrade services
to a nuclear power plant designed by the former Soviet Union, and continues to
provide these services with a view to expanding its operating plant services in
this market by providing fuel upgrades and maintenance to additional
Soviet-designed plants in Eastern Europe and the former Soviet republics. In
addition, the Company anticipates receiving final design approval of the AP600
Program in 1998 and, if permitted under U.S. law, plans to aggressively market
this new passive light water reactor in favorable overseas markets such as China
and Hungary. In addition to the AP600, the Company has developed both the
Advanced Pressurized Water Reactor ("APWR") and the Chinese
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<PAGE> 36
Pressurized Water Reactor ("CPWR") 1000 nuclear plant models. Discussions are
active in Japan and China respectively, for these models. An APWR nuclear plant
is planned to be built in Japan with a target startup date of 2007. The Company
expects have a major role in the supply of components and engineering to this
project. The CPWR 1000 nuclear plant design is positioned for implementation in
China, subject to the listing of U.S. government restrictioins relating to the
export of nuclear technology equipment. In some instances, the business unit's
ability to participate in these markets is limited by U.S. government
restrictions relating to the export of nuclear technology equipment. See "The
Transactions--Investment Considerations--Industrial Company Risks--Government
Regulation of the Nuclear Industry."
The Company's strategy with respect to the PCD is to leverage the
capabilities of its new Ovation(TM) control system to increase its
competitiveness and the scope of system capability that PCD offers; to expand
the service business by offering a full range of contract services for the
installed base and new systems; and to increase the emphasis on the fast-growing
market for process control software. The Company also plans to expand its strong
competitive position in the rapidly expanding Asian power markets, where the
Company has been providing its products and service for over 30 years, and where
it recently entered into a strategic joint venture (with the approval of the
government of the People's Republic of China) in Shanghai ("Shanghai
Westinghouse Control Systems Company Ltd.") in which it holds a 50%
non-controlling interest, and a joint venture in India ("Westinghouse Electric
Private Ltd."). In addition, the Company plans to extend PCD's strong
competitive position in Europe and the Middle East.
Energy Systems' products and equipment are highly engineered and serve
critical safety and operational missions in its customers' nuclear power plants.
Additionally, the value associated with maintaining high power plant capacity
factors make the engineering, field maintenance and repair services provided by
Energy Systems important to nuclear power plant economics. Thus, Energy Systems
attempts to compete on the basis of product performance, service, net value to
the customer, and best match to customer needs, rather than directly on price.
The Company's major competitors in the market for operating nuclear power
plant services are nuclear power plant designers and builders such as Siemens
A.G., Framatome, S.A., ABB, General Electric and large engineering and
construction firms such as Bechtel. Competitors in the market for nuclear fuel
fabrication services include the pressurized water reactors' nuclear plant
designers and builders mentioned above, as well as other countries' indigenous
nuclear fuel manufacturers such as Japan Nuclear Fuel and NFI (Japan).
The Company believes it is the largest single supplier in the U.S. for
operating nuclear power plant services. In addition, the worldwide nuclear
industry is a mature business with intense competition. Other broad scale
competitors have protected home markets and can use that advantage to penetrate
the U.S. market and to prevent the Company from entering their home markets. The
absence of a market for new nuclear plants in the U.S. makes competing in the
non U.S. new-plant market more challenging. See "The Transactions--Investment
Considerations--Industrial Company Risks."
Competitors of the Company in the distributed control systems market
include Honeywell, Elsag Bailey, Siebe plc (Foxboro), ABB and Siemens, as well
as several smaller niche providers. The top five suppliers mentioned above
account for approximately 75% of the total domestic business for distributed
control systems.
The Company has an installed base of over 1,000 control systems worldwide.
PCD currently has contracts with approximately 200 different customers, with
projects ranging from the design and installation of control systems valued at
well over $50 million to numerous smaller aftermarket service and upgrade
contracts.
Energy Systems also engages in two businesses that are highly dependent
upon U.S. government revenues. EMD designs and manufactures machinery such as
electrical motors and pumps under contract with the U.S. Navy, providing a
significant portion of EMD's revenues. EMD has maintained a contractual
relationship with the U.S. Navy for over 40 years, is one of a limited number of
manufacturers with the capability and experience to fulfill these orders and has
a strong backlog of orders under several different contracts. Additionally, the
DOE provides a significant amount of external funding to support the AP600
Program. The AP600 Program has been under way since 1990 and is scheduled for
completion in 1999. The funding for the AP600 Program has been appropriated for
fiscal year 1997. See "The Transac-
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tions--Investment Considerations--Industrial Company Risks--Dependence on
Government Funding and Government Contracts."
The Company's fuel fabrication and operating nuclear plant services that it
provides to operating nuclear power plants are both largely dependent on
scheduled "outages" at operating nuclear power plants, which typically occur
every 12 to 18 months, during which time these nuclear power plants replace fuel
assembles and perform ordinary operational service and maintenance. Most of
Energy System's business in the nuclear power plant service market is seasonal,
as most of the outages are scheduled at operating nuclear power plants in the
spring and fall during the utility's low demand period.
At January 1, 1997, Energy Systems had 6,849 full-time employees, 950 of
which were affiliated with unions. The Energy Systems business unit believes its
relationship with its employees and these unions are good.
GOVERNMENT OPERATIONS
The Company's Government Operations business unit provides management
services for certain government-owned facilities under contracts with the DOE
and DOD, management of nuclear reactor programs for the U.S. Navy and management
of a chemical agent destruction program for the DOD.
Government Operations manages three government-owned facilities under
contracts with the DOE: the Savannah River site, the West Valley Demonstration
Project, and the Waste Isolation Pilot Plant. These contracts typically have a
five-year term, including a five-year renewal option at the discretion of the
DOE. The contracts for the West Valley Demonstration Project, Waste Isolation
Pilot Plant and Savannah River are up for renewal in 1999, 2000 and 2001,
respectively. In addition, Safe Sites of Colorado, LLC, an entity in which the
Company owns a 65% interest, performs environmental cleanup and nuclear waste
management services under a major subcontract with Kaiser-Hill at the DOE Rocky
Flats facility. This subcontract was awarded in May 1995 and has a three-year
term with two one-year renewal options. The principal mission at these sites is
waste management, environmental cleanup and the safe management of the nation's
nuclear materials inventory. In March 1996, the Company was awarded a nine-year
DOD contract to destroy chemical weapons at the Anniston Chemical Agent Disposal
Facility in Anniston, Alabama. In addition, the Company recently entered the DOE
National Laboratories market when it was awarded a contract for nuclear
maintenance planning and control at the Los Alamos National Laboratory in New
Mexico. The federal government reserves the right to terminate these contracts
for convenience.
Government Operations' work for the U.S. Navy includes new ship reactor
plants and advanced designs, training and fleet support. Government Operations
also provides nuclear and technical support services to the government-funded
U.S. naval nuclear reactors programs through the Bettis Atomic Power Laboratory,
the Plant Apparatus Division and the Machinery Apparatus Operation Division. The
contract at the Bettis Atomic Power Laboratory is up for renewal in 1998. The
U.S. Navy has made a recommendation to the DOE that Government Operations
continue as the sole source of management services for the U.S. Navy at this
facility. In December 1995, Westinghouse announced the closing of its Machinery
Technology Division due to the loss of the prime contract with the U.S. Navy.
Governmental Operations also provides canisters to store fissile material,
chemical agents and spent nuclear fuel. In May 1997, Government Operations, in
coordination with the Energy Systems business unit, was awarded a contract with
Consumers Energy Company to supply canister-based spent nuclear fuel dry storage
and transportation systems. The Company believes that the market for cannisters
for storage of fissile material, chemical agents and spent nuclear fuel is
growing and that opportunities exist for additional business. Government
Operations is also manufacturing 24,000 canisters to store and transport
dismantled Russian nuclear weapons components. In addition, Government
Operations, along with Energy Systems, participates in the emerging reactor
decommissioning market.
The Company plans to continue its strategy of providing high-quality
service at these government-owned facilities where it has traditionally
maintained a strong competitive position due to its technological expertise and
superior safety and service record. In addition, the Company is exploring
strategic opportunities at
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privately owned facilities where the Company's technology and government
remediation management experience provide a competitive advantage.
Competition for services provided by businesses in the Government
Operations segment is based on safety, price, technology preference,
environmental experience and performance reputation. The Company primarily
competes in the market for DOE operation and management contracts with companies
such as Lockheed Martin, Bechtel, Fluor/Daniel, Babcock and Wilcox, Duke Power
Company, Allied-Signal Inc., Mason Hanger, as well as other smaller competitors.
The Company's competition in the chemical demilitarization projects with the DOD
include Raytheon Corporation and EG&G.
At January 1, 1997, Government Operations managed government sites where
approximately 16,825 people were employed. Salary, benefits and other costs for
substantially all of these employees are fully reimbursed through the
appropriate government contact. Of these employees, approximately 564 had union
affiliations (primarily non-exempt salaried employees). The Government
Operations business unit believes its relationship with these unions is good.
RAW MATERIALS
The Company has experienced no significant difficulty with respect to
sources and availability of raw materials essential to its businesses.
INTELLECTUAL PROPERTY RIGHTS
In connection with the Distribution, Westinghouse will transfer to the
Company all patents and patent applications, all trademarks and tradenames and
all rights under intellectual property licensing agreements in the United States
and other countries that, taken together, are of material importance to the
Industrial Business. Such intellectual property rights, in the judgment of the
Company, will be adequate for the conduct of its business.
BACKLOG
Customer backlog of firm orders for the Company was $5,464 million and
$5,291 million at December 31, 1996 and 1995, respectively. Of the 1996 backlog
$3,218 million is expected to be liquidated after 1997.
Backlog by business segment is as follows:
Backlog for Power Generation at December 31, 1996 and 1995 was $2,788
million and $2,610 million, respectively. Backlog of $1,105 million is expected
to be liquidated after 1997.
Backlog for Energy Systems at December 31, 1996 and 1995 was $2,626 million
and $2,595 million, respectively. Backlog of $2,108 million is expected to be
liquidated after 1997.
Backlog for Government Operations at December 31, 1996 and 1995 was $16
million and $39 million, respectively. Backlog of $2 million is expected to be
liquidated after 1997.
Also included in backlog at December 31, 1996 and 1995 was $34 million and
$47 million, respectively, attributable to Corporate & Other. This backlog
primarily relate to research activities for outside customers.
RESEARCH AND DEVELOPMENT
See Note 18 to the Combined Financial Statements included in this
Information Statement for information with respect to research and development.
EMPLOYEES
At January 1, 1997, the Company employed approximately 16,643 employees and
managed approximately 16,825 employees at sites operated for the U.S.
government.
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ENVIRONMENTAL MATTERS
Compliance with federal, state and local laws and regulations relating to
the discharge of pollutants into the environment, the disposal of hazardous
wastes and other related activities affecting the environment have had and will
continue to have an impact on the Company. It is difficult to estimate the
timing and ultimate costs to be incurred in the future due to uncertainties
about the status of laws, regulations and technology, the adequacy of
information available for individual sites, the extended time periods over which
site remediation occurs, and the identification of new sites.
In connection with the Distribution, the Company will assume responsibility
for Westinghouse's obligations at sites located throughout the country with
regard to remedial actions under federal and state Superfund laws, where
Westinghouse has been named a potentially responsible party (PRP). At many of
these sites, the Company is either not a responsible party or its site
involvement is very limited. However, the Company may have varying degrees of
cleanup responsibilities at approximately 75 sites. Management believes that any
liability incurred for cleanup at these sites will be satisfied over a number of
years and, in many cases, the costs will be shared with other responsible
parties. These sites include certain sites for which the Company, as part of an
agreement for sale, has retained obligations for remediation of environmental
contamination and for other Comprehensive Environmental Response Compensation
and Liability Act issues. The Company also has or will have responsibilities for
environmental closure activities or decommissioning of nuclear licensed sites.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Management reasonably believes, based on its best estimate, that the
Company has adequately provided for its present environmental obligations and
that complying with existing government regulations will not materially impact
the Company's financial position, liquidity or results of operations. However,
there can be no assurance that the Company's present environmental obligations
and compliance with existing government regulations will not have a material
adverse effect on the Company's profitability, financial position or results of
operations. See "The Transactions--Investment Considerations--Environmental
Matters."
GOVERNMENTAL REGULATIONS
In addition to environmental laws and regulations, federal government
contractors, including the Company, are subject to extensive regulation under
the Federal Acquisition Regulation and numerous statutes which deal with the
accuracy of cost and pricing information furnished to the government, the
allocability of costs charged to the government, the conditions under which
contracts may be modified or terminated, and other similar matters. Various
aspects of the Company's operations are subject to audit by agencies of the
federal government in connection with its performance of work under such
contracts as well as its submission of bids or proposals to the government.
Failure to comply with contract provisions or other applicable requirements may
result in termination of the contract, the imposition of civil and criminal
penalties against the Company, or the suspension or debarment of all or a part
of the Company from federal government work, which could have a material adverse
impact upon the Company's future financial condition and results of operations.
Among the reasons for debarment are violations of various statutes, including
those related to employment practices, the protection of the environment, the
accuracy of records and the recording of costs. Some state and local governments
have similar suspension and debarment laws or regulations.
The operating nuclear plant and fuel fabrication businesses, as well as the
management services the Company provides through Government Operations are also
subject to the extensive governmental regulation. Regulations applicable to the
Company's operations include those dealing with packaging, handling, labeling
and routing of radioactive materials, and prescribe detailed safety and
equipment standards and requirements for training, quality control and
insurance, among other matters. Employee safety and health standards under the
Occupational Safety & Health Act of 1970 are also applicable.
In general, nuclear incidents at nuclear power plants are covered under
insurance carried by and provided for operators of the nuclear plants. Nuclear
incidents are those, defined under the Price Anderson Amendments to the Atomic
Energy Act of 1954 ("Price Anderson"), in which third party injury and/or
off-site property damage caused by radiation exposure is potentially created.
Under the nuclear "facility form"
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insurance policy, carried by all U.S. commercial nuclear utilities as required
by Price Anderson, coverage for such nuclear incidents is extended to
contractors, such as the Company, performing work at the nuclear plants under
the omnibus insured provisions of the policy. The existing nuclear insurance
carriers, comprised of a pool of domestic and mutual insurers, currently provide
coverage for up to $200 million per site in claims. Also pursuant to Price
Anderson, additional coverage for a potential nuclear incident at a nuclear
plant is provided through a secondary level resource pool contributed to by all
nuclear utilities, resulting in approximately $9 billion in additional coverage
per nuclear incident. The Company also maintains its own "facility form"
insurance coverage, currently in an amount of up to $160 million, for its
facilities at which activities involving radioactive materials are conducted.
Under the laws of certain foreign countries in which the Company conducts
business, the operator of a nuclear reactor is exclusively liable, irrespective
of fault, for damages caused as a result of operation of a nuclear reactor.
Contractors of the reactor operator are generally not liable for damages under
the laws of these countries.
PROPERTIES
The Company's headquarters is located in Pittsburgh, Pennsylvania at a site
owned by the Company. The Company and its operating subsidiaries own
approximately 95 operating plants and other properties with a total approximate
area of 14 million square feet and lease approximately 200 facilities with a
total approximate area of 5 million square feet, which include other
manufacturing facilities, warehouses, stores and offices. The Company believes
that the properties material to its operations are well maintained and are in
good operating condition.
LEGAL PROCEEDINGS
The Company will assume responsibility for a number of lawsuits brought
against Westinghouse including the legal proceedings described below.
Westinghouse has been defending various lawsuits brought by utilities
claiming a substantial amount of damages in connection with alleged tube
degradation in steam generators sold by Energy Systems as components of nuclear
steam supply systems. In connection with the Restructuring and Distribution, the
Company will indemnify Westinghouse against any losses arising out of the
settlement agreements and litigation relating to these steam generator lawsuits.
Since 1993, settlement agreements have been entered resolving ten litigation
claims. These agreements generally will require the Company to provide certain
products and services at prices discounted at varying rates. In addition, there
are currently six tolling agreements with utilities or utility plant owners'
groups.
In connection with the Restructuring and the Distribution, the Company will
assume responsibility for a lawsuit brought in February 1996, against
Westinghouse in the United States District Court for the District of New Jersey
by Public Service Electric & Gas Company, PECO Energy Company, Atlantic City
Electric Company and Delaware Power & Light Company, the owners of the Salem
Generating Station. This lawsuit alleges counts under the Racketeer Influenced
and Corrupt Organization Act for fraud and negligent misrepresentation and for
breach of contract in connection with the Company's supply of steam generators
and for service orders in 1993 and 1995 related to these steam generators. The
parties are currently engaged in discovery.
In connection with the Restructuring and Distribution, the Company will
assume responsibility for numerous lawsuits in which Westinghouse is named as a
defendant claiming various asbestos-related personal injuries, which allegedly
occurred from use or inclusion of asbestos in certain of Westinghouse's
products, generally in the pre-1970 time period. Typically, these lawsuits are
brought against multiple defendants. Westinghouse was neither a manufacturer nor
a producer of asbestos and often times these lawsuits are dismissed on this
basis. At March 31, 1997, approximately 101,000 claims were outstanding. In
court actions that have been resolved, Westinghouse has prevailed in the vast
majority of asbestos claims and has resolved others through settlement. As a
result of insurance settlements entered into by Westinghouse relating to toxic
tort matters, the Company will be reimbursed from but only to the extent of, the
proceeds of such insurance settlements. Currently the Company is reimbursed for
a substantial portion of its costs and settlements. There
32
<PAGE> 41
can be no assurance that the Company will be able to reasonably estimate costs
associated with future unasserted asbestos-related claims.
In addition, the Company will assume responsibility for Westinghouse's
obligations in connection with an August 1988 complaint filed by the
Pennsylvania Department of Environmental Protection (the "PADEP") alleging
violations of the Pennsylvania Clean Streams Law at the Company's former
Gettysburg, Pennsylvania elevator plant. The PADEP requested that the
Environmental Hearing Board assess a penalty in the amount of $9 million. In
November 1996, the Environmental Hearing Board assessed a civil penalty of
approximately $5.5 million. Westinghouse timely filed an appeal with the
Commonwealth Court.
Litigation is inherently uncertain and always difficult to predict.
Substantial damages are sought in certain pending cases and although management
believes a significant adverse judgment is unlikely, any such judgment could
have a material adverse effect on the Company's results of operations for a
quarter or a year. However, based on its understanding and evaluation of the
relevant facts and circumstances, management believes that the Company has
meritorious defenses to the litigation and that the Company has adequately
provided for costs arising from potential settlement of these matters when in
the best interest of the Company. Management believes that the existing
litigation should not have a material adverse effect on the financial condition
of the Company. See "--Environmental Matters."
33
<PAGE> 42
SELECTED HISTORICAL COMBINED FINANCIAL DATA
The selected historical combined financial data at March 31, 1997 and for
the three months ended March 31, 1997 and March 31, 1996 presented below have
been derived from and should be read in conjunction with the unaudited condensed
combined financial statements included elsewhere in this Information Statement.
The unaudited interim data reflects in the opinion of the Company's management
all adjustments considered necessary for a fair presentation of results of such
interim period. Results for unaudited interim periods are not necessarily
indicative of results which may be expected for any other interim or annual
period. The selected historical combined financial data at December 31, 1996 and
1995 and for each of the years in the three-year period ended December 31, 1996
presented below have been derived from and should be read in conjunction with
the audited combined financial statements and notes thereto of the Company
included elsewhere in this Information Statement. The selected historical
combined financial data at December 31, 1994, 1993 and 1992, and for each of the
years in the two-year period ended December 31, 1993, have been derived from
unaudited combined financial statements of the Company.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31 YEAR ENDED DECEMBER 31
-------------- ---------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----- ----- ------- ------- ------- ------- -------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales of products and services...... $ 650 $ 670 $ 3,467 $ 3,434 $ 3,530 $ 3,775 $ 3,832
Restructuring, litigation and other
matters........................... -- (578) (888) (294) (21) (378) --
Operating profit (loss)............. (123) (679) (890) (280) 71 (159) 284
Other income and expenses, net...... (6) (151) (140) (13) (155) (116) (23)
Income (loss) before income taxes
and minority interest............. (129) (831) (1,031) (295) (92) (284) 249
Income tax benefit (expense)........ 49 299 370 97 19 16 (108)
Cumulative effect of changes in
accounting principles............. -- -- -- -- -- (52) --
Net income (loss)................... (80) (533) (665) (202) (77) (324) 136
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
AT MARCH 31, 1997
--------------------
(UNAUDITED) (IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets..................... $4,535 $ 4,541 $ 3,843 $ 3,801 $ 3,574 $ 3,157
Total debt....................... 5 6 9 12 21 7
Shareholder's equity............. 1,417 1,109 1,541 1,722 1,343 1,460
</TABLE>
34
<PAGE> 43
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following selected unaudited pro forma combined financial data are
derived from the unaudited pro forma combined financial statements included
elsewhere in this Information Statement and should be read in conjunction
therewith and with the related notes thereto. These selected unaudited pro forma
combined financial data were prepared by the Company to illustrate the estimated
effects of the Distribution described in the notes to the pro forma combined
financial statements as if they had occurred as of January 1, 1996 with respect
to the statement of income data and at March 31, 1997 with respect to the
balance sheet data.
These selected unaudited pro forma combined financial data are presented
for illustrative purposes only and are not necessarily indicative of the
operating results or financial position of the Company had the Distribution
occurred as of the dates indicated or of the results that may be obtained in the
future. See "Unaudited Pro Forma Combined Financial Statements."
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
------------------ -----------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C>
PRO FORMA COMBINED STATEMENT OF INCOME DATA:
Sales of products and services............................. $650 $ 3,467
Restructuring, litigation and other matters................ -- (888)
Operating loss............................................. (98) (790)
Other income and expenses, net............................. (6) (140)
Interest expense........................................... (5) (21)
Loss before income taxes and minority interests............ (109) (951)
Income tax expense......................................... (9) (40)
Net loss................................................... (118) (995)
------ -------
Loss per common share(1)................................... $ $
=============== =============
</TABLE>
<TABLE>
<CAPTION>
AT
MARCH 31, 1997
--------------
(IN MILLIONS)
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Total assets.................................................................. $3,800
Total debt.................................................................... 5
Shareholder's equity.......................................................... 682
</TABLE>
- ---------
(1) Pro forma loss per share has been calculated assuming shares of
Company Common Stock were outstanding. This is based on the number of
outstanding shares of Westinghouse Common Stock at the close of business on
the Distribution Record Date and the Distribution Ratio.
35
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In November 1996, Westinghouse Electric Corporation ("Westinghouse")
announced that its Board of Directors had conditionally approved a plan for a
strategic restructuring whereby Westinghouse would separate its media and
industrial businesses into two separate publicly traded companies. The
Westinghouse Board of Directors modified the separation plan in June 1997 such
that the industrial businesses would consist primarily of the manufacturing and
services businesses for the nuclear and fossil-fueled power generation industry
and the government operations business.
Westinghouse plans to separate its industrial businesses by way of a
tax-free dividend to shareholders (the "Distribution"), forming a publicly
traded company called Westinghouse Electric Company (the "Company"). The
Company, currently a wholly owned subsidiary of Westinghouse, was incorporated
in 1997.
Westinghouse will effect a series of asset and stock transfers and
liability assumptions among itself and its subsidiaries (the "Restructuring") in
order to separate Westinghouse's industrial business from its media businesses
and Thermo King business unit. In connection with the Restructuring,
Westinghouse and its subsidiaries will transfer to the Company all of the assets
and liabilities related to the Power Generation, Energy Systems, and Government
Operations business units. Additionally, the Company will receive and assume
responsibility for assets and liabilities, including environmental and
litigation-related liabilities, associated with Westinghouse's divested
businesses, other than those businesses classified as discontinued operations by
Westinghouse (the "Divested Businesses"), and asbestos and other toxic tort
litigation-related liabilities. Westinghouse will retain pension and
postretirement liabilities, as of the date of the Distribution (the
"Distribution Date"), for certain employees of both Westinghouse's industrial
business and Divested Businesses as well as certain income tax benefits of the
Company.
Upon completion of the Restructuring and subject to the satisfaction of all
the conditions to the Distribution, Westinghouse will distribute to each holder
of record of Westinghouse common stock at the Distribution record date,
certificates representing a specific number of shares of Company common stock
based on a ratio to be determined, and cash in lieu of any fractional shares of
Company common stock.
Completion of the Restructuring and Distribution is subject to a number of
conditions, including receipt of a favorable ruling from the Internal Revenue
Service that the transaction will not be taxable for U.S. federal income tax
purposes to Westinghouse or its shareholders, a credit facility being in place,
and the registration statement of which this Information Statement is a part
being declared effective.
The Company conducts its operations through three major business
segments--Power Generation, Energy Systems, and Government Operations. The
Company's two largest segments, Power Generation and Energy Systems, have been
unfavorably affected in recent years by the uncertainties caused by deregulation
of the U.S. utility industry and price compression globally. Sixty-two percent
of the Company's sales in 1996 were to the utility segment. In the United
States, new power generation capacity additions have been modest. In addition,
pressures on utilities to reduce spending for capital improvements and minimize
outages for nuclear and fossil-fueled plants have adversely impacted the U.S.
market. Internationally, new capacity additions are growing, but price
compression continues to impact profitability.
YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEARS ENDED DECEMBER 31, 1995 AND 1994
RESULTS OF OPERATIONS
The Company reported net losses of $665 million in 1996, $202 million in
1995, and $77 million in 1994. On a pro forma basis the net loss for 1996 would
have been $995 million. See Unaudited Pro Forma Combined Statement of Income and
Notes thereto. To a large extent, the Company's losses are attributable to its
efforts to streamline its businesses and resolve various litigation and other
matters. Excluding these special charges, the Company's three major business
segments reported operating profit of $90 million in 1996
36
<PAGE> 45
compared to $113 million in 1995 and $215 million in 1994. Operating profit
generated by the businesses was also offset by corporate headquarters costs.
The special charges included in the Company's results of operations are
summarized in the following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
IMPACT OF SPECIAL CHARGES (IN MILLIONS) 1996 1995 1994
------ ---- ----
<S> <C> <C> <C>
Restructuring....................................................... $ 210 $ 58 $ 21
Litigation matters.................................................. 458 236 --
Impairment of assets................................................ 15 -- --
Environmental remediation activities................................ 175 -- --
Other............................................................... 30 -- --
------ ---- ----
Total impact on operating profit.................................. 888 294 21
------ ---- ----
Pension settlement loss............................................. -- -- 138
Loss on assets held for sale........................................ 152 -- --
------ ---- ----
Total impact on other income and expenses......................... 152 -- 138
------ ---- ----
Total pre-tax impact................................................ $1,040 $294 $159
====== ==== ====
After-tax impact.................................................... $ 676 $191 $103
====== ==== ====
</TABLE>
Summarized below are the Company's results for the last three years by
business segment.
<TABLE>
<CAPTION>
OPERATING PROFIT (LOSS)
EXCLUDING
SALES OF PRODUCTS SPECIAL CHARGES
AND SERVICES OPERATING PROFIT (LOSS) -----------------------
-------------------------- -----------------------
YEAR ENDED DECEMBER 31
YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31
-------------------------- ----------------------- -----------------------
SEGMENT RESULTS (IN MILLIONS) 1996 1995 1994 1996 1995 1994 1996 1995 1994
------ ------ ------ ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Power Generation.................. $2,172 $1,718 $1,630 $ (75) $ (57) $ 82 $ (2) $(29) $ 77
------ ------ ------ ----- ----- ----- ----- ----- -----
Energy Systems.................... 1,234 1,369 1,364 (30) 114 114 94 130 140
Other Energy Systems.............. (172) (138) (149) (362) (305) (79) (73) (69) (79)
------ ------ ------ ----- ----- ----- ----- ----- -----
Energy Systems, net............... 1,062 1,231 1,215 (392) (191) 35 21 61 61
------ ------ ------ ----- ----- ----- ----- ----- -----
Government Operations............. 121 155 133 63 81 77 71 81 77
Corporate & Other................. 149 360 598 (486) (113) (123) (92) (99) (123)
Intersegment sales................ (37) (30) (46) -- -- -- -- -- --
------ ------ ------ ----- ----- ----- ----- ----- -----
Total............................. $3,467 $3,434 $3,530 $(890) $(280) $ 71 $ (2) $ 14 $ 92
====== ====== ====== ====== ====== ====== ===== ===== =====
</TABLE>
POWER GENERATION
Power Generation sales were $2,172 million in 1996, a 26% increase from
1995. This sales increase resulted primarily from greater volume for combustion
and steam turbines and large projects, particularly in the international market.
In addition, slightly higher service volume contributed to the sales increase.
Sales for 1995 increased 5% over 1994 levels due to increased volume for
combustion and steam turbines.
Power Generation's operating loss for 1996 included $68 million for
restructuring costs related to the separation of approximately 900 employees and
the closing of a manufacturing plant and $5 million for litigation matters. The
operating loss for 1995 included $28 million for restructuring activities while
1994's results included a favorable adjustment of $5 million for a modification
of previous restructuring plans.
Excluding the impact of these special items, the 1996 operating loss
improved $27 million to a loss of $2 million; the operating loss in 1995
represents a profit decline of $106 million to a loss of $29 million compared to
1994. A shift in product mix from higher margin service and parts sales to lower
margin new apparatus and project sales has depressed profits in recent years.
Service and parts sales were unfavorably affected by a combination of improved
equipment reliability and deferral of maintenance by utilities. The
37
<PAGE> 46
severe price compression experienced in 1995 in the new apparatus business
moderated in 1996. The reduced service and parts volume combined with the price
compression on new apparatus more than offset the cost improvements made as a
result of restructuring activities. Power Generation continues to respond to
these significant market pressures through aggressive cost reduction measures in
both direct product cost and overhead.
Power Generation orders of $2.5 billion for 1996 were slightly higher than
1995. The focus on international orders has grown dramatically over the last
several years. In 1996, nearly 65% of new orders originated outside the United
States. Backlog was $2.8 billion at the end of 1996 compared to $2.5 billion at
year-end 1995.
ENERGY SYSTEMS
Energy Systems sales were $1,234 million in 1996, a 10% decrease from 1995.
Sales remained constant from 1994 to 1995. The decrease in sales in 1996 was due
primarily to lower parts and service volume associated with utilities' spring
power plant outages and a decline in simulator sales.
The operating loss for 1996 included $113 million for restructuring
activities, including the separation of approximately 1,200 employees, and $11
million for environmental remediation activities. Operating profit for 1995 and
1994 included $16 million and $26 million, respectively, for restructuring
activities. Excluding restructuring and other special charges in all years, 1996
operating profit of $94 million declined 28%, or $36 million, from 1995. This
decrease in 1996 operating profit was primarily the result of the lower volume
from power plant outages and a reduced level of income from new plant project
completions. Operating profit decreased 7% to $130 million in 1995 compared to
1994, primarily due to lower licensee income. Cost savings from restructuring
activities have been partially offset by price compression.
Energy Systems orders were approximately $1.2 billion for both 1996 and
1995 and $1.3 billion in 1994 reflecting continued strong demand despite
operating in a declining market. Year-end backlog remained stable at
approximately $2.6 billion for both 1996 and 1995.
In the first quarter of 1997, the Company recognized a $49 million
adjustment to both sales and operating profit following a comprehensive
reevaluation of the work scope and costs to complete a complex international
nuclear project begun in 1993. Although this $352 million contract remains
profitable, management determined that the Company's profit on the contract will
be less than originally estimated.
OTHER ENERGY SYSTEMS
Other Energy Systems reflects activities related to uranium, steam
generator, and certain other litigation matters involving products sold by
Energy Systems and includes legal fees, estimated losses for settlements, and
customer discounts. The results for Energy Systems and any other business
supplying products or services under settlement agreements are presented as if
the sales had been made at normal commercial rates. Other Energy Systems
operating losses excluding special charges primarily represent discounts from
commercial prices on goods and services supplied under previous settlement
arrangements when discounted prices exceed costs These discounts in 1996, 1995,
and 1994 totalled $73 million, $69 million, and $79 million, respectively.
Settlements in recent years are anticipated to increase the amount of these
discounts for the next five years, with the peak expected in 1997. Special
charges for litigation matters reflect estimated losses on settlements in which
the discounts exceed profit margins. In 1996 and 1995, special charges of $289
million and $236 million, respectively, were recognized for estimated costs in
excess of discounted prices related to these litigation matters.
GOVERNMENT OPERATIONS
Government Operations supplies nuclear services to the U.S. Department of
Energy (DOE), U.S. Army, and the U.S. Navy nuclear reactors program. Sales in
1996 decreased 22% from 1995 due to the loss of a U.S. Navy engineering contract
and reduced government spending. The lost revenue from the U.S. Navy engineering
contract was partially replaced by a new five-year contract with the U.S. Army
for a chemical
38
<PAGE> 47
demilitarization project and a one-year contract for the nuclear maintenance
planning and control activities at a DOE laboratory. In August 1996, Government
Operations was also awarded the DOE's Savannah River contract for an additional
five-year period. The loss of the maintenance and operations contract for the
DOE's Hanford, Washington, site did not materially impact results in 1996
although future results will be adversely affected.
Sales for the management of government sites were strong for 1995, with
sales up 17% compared to 1994. Benefits from the DOE's new performance based
contracts were partially offset by the loss of a management contract at a DOE
facility in Idaho.
The Company intends to aggressively pursue retention of its current
government contracts and to bid for sites not currently managed by the Company.
This has resulted in increased bid and proposal costs, particularly in 1996.
The 1996 operating profit included $8 million for restructuring activities
related to the separation of approximately 30 employees associated with
terminated contracts. Excluding the restructuring charge, operating profit
decreased 12% to $71 million in 1996 compared to 1995. Operating profit for 1995
increased 5% to $81 million compared to 1994 as a result of the new DOE
performance based contracts, partially offset by the loss of operating profit
from the Idaho DOE facility.
CORPORATE & OTHER
Corporate & Other includes corporate activities that are managed for the
benefit of the entire Company and the results of operations for the Company's
non-strategic and divested businesses. The decline in revenues over the last
three years generally reflects divestitures of non-strategic businesses. During
1996, the Company completed the sale of Wittnauer International, Inc., a
previously identified non-strategic business. In 1995, several other
non-strategic businesses were sold and a plant in Virginia was closed. Two other
non-strategic businesses were divested in 1994.
Included in the operating loss for 1996 is $21 million for restructuring
costs, $164 million for environmental remediation activities related primarily
to businesses previously divested, $164 million for litigation contingencies,
$15 million for asset impairment, and $30 million for other matters. Included in
the 1995 operating loss was $14 million for restructuring.
Corporate costs excluding special charges decreased over the last three
years reflecting the benefits of the Company's restructuring activities. Further
downsizing of the corporate functions is expected prior to the Distribution to
size the headquarters activities appropriately for the new company. The
magnitude of this restructuring has not yet been determined.
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
At the time of the Distribution, the Company will establish defined benefit
pension and postretirement benefit plans for U.S. employees who previously
participated in plans sponsored by Westinghouse. For an undetermined transition
period, the benefits under the Company's plans are expected generally to mirror
those under the Westinghouse plans. Although the benefits would generally be the
same, the Company's net periodic pension and postretirement benefit costs
following the Distribution are expected to decrease by approximately $100
million per year generally to the level of the current service cost. Any
payments for benefits earned through the Distribution Date under the
Westinghouse U.S. pension and postretirement benefit plans, including those for
the Company's active employees, will remain the financial responsibility of
Westinghouse. The Company will be responsible for the payment of benefits earned
after the Distribution Date.
RESTRUCTURING OF OPERATIONS
The Company is committed to strengthening its businesses and improving its
profitability through restructuring actions ranging from changes in business and
product-line strategies to downsizing for process
39
<PAGE> 48
reengineering and productivity improvements. To the extent possible, the Company
is committed to reducing its workforce through normal attrition. See Note 17 to
the Combined Financial Statements.
During the last three years, restructuring programs were initiated at
several of the Company's major businesses as well as at the Westinghouse
corporate headquarters. The corporate restructuring costs included in the
financial statements reflect the Company's share of the total cost incurred by
Westinghouse for the corporate downsizing programs. Both the Energy Systems and
Power Generation businesses have identified initiatives in an effort to remain
competitive in light of a reduction in the demand for services and intense
pricing pressures. Restructuring actions, including downsizing the corporate
headquarters, have resulted in the recognition of restructuring costs net of
adjustments of prior plans totaling $210 million in 1996, $58 million in 1995,
and $21 million in 1994. In addition, the Company's restructuring activities
contributed to a high level of lump sum distributions from the Westinghouse
pension fund during 1994, which resulted in a pension settlement charge to the
Company that year of $138 million.
The most significant cost component of the Company's restructuring plans
generally involves the elimination of positions and the separation of employees.
Approximately 3,600 positions were eliminated during the last three years
resulting in employee separation costs totaling $267 million, including pension
and postretirement curtailment costs. Other cost elements of these plans
consisted of asset writedowns of $24 million and costs for facility closure or
rationalization of $16 million. As of December 31, 1996, cash expenditures
totalled $88 million for implementation of these plans. Cash expenditures of
$125 million and $6 million are projected for 1997 and 1998, respectively.
Employee separation costs generally are paid over a period of up to two years
following their separation. The Company will be reimbursed by Westinghouse for
accrued liabilities associated with restructuring programs initiated prior to
the Distribution that are unpaid at the Distribution Date.
The annual savings expected from these restructuring initiatives
approximates $76 million for the 1996 plan, $28 million for the 1995 plan, and
$35 million for the 1994 plan. Cost savings realized approximated $70 million in
1996 and $40 million in 1995. The previously announced closing of a major plant
included in the plans is scheduled to occur later in 1997; therefore, the full
benefit from these plans will not be realized until 1998. Competitive pressures
causing price compression in certain of the Company's markets have absorbed a
significant portion of the savings achieved through restructuring actions,
particularly at its Power Generation and Energy Systems businesses.
Cost reduction initiatives are undertaken when the expected benefits are
substantial in relation to the cost of the programs and are realizable in the
near term. The Company expects to continue to implement restructuring
initiatives as competitive conditions dictate in an ongoing effort to reduce its
overall cost structure and improve its competitiveness and profitability.
OTHER INCOME AND EXPENSES
Year-to-year fluctuations in other income and expenses reflect various
one-time events. Other expense, net of other income, of $140 million was
recorded in 1996 compared to $13 million in 1995 and $155 million in 1994.
In 1996, the net expense included an estimated loss of $152 million
resulting from a decision to sell certain miscellaneous non-strategic assets. A
$5 million gain from the sale of equity investments partially offset this loss.
For 1994, the net expense of $155 million consisted primarily of the $138
million charge for settlement of a portion of the Company's pension obligation
as discussed in Note 3 to the Combined Financial Statements. The Company also
recorded a $17 million provision for the estimated loss on disposition of
non-strategic businesses to reflect changes in estimates related to previous
divestiture decisions.
INCOME TAXES
The Company recognized income tax benefits of $370 million in 1996, $97
million in 1995, and $19 million in 1994. The Company's effective tax rate was
35.9% in 1996, 32.9% in 1995, and 20.7% in 1994
40
<PAGE> 49
which differs from the statutory tax rate of 35% as set forth in the
reconciliation included in Note 5 to the Combined Financial Statements.
The net deferred tax asset at December 31, 1996, totalled $1,102 million.
The temporary differences that give rise to deferred income taxes are shown in
the Deferred Income Taxes by Source table in Note 5 to the Combined Financial
Statements.
The two significant sources of the net deferred tax asset are (i) the tax
effect of net operating loss carryforwards of $826 million and (ii) the tax
effect of cumulative net temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes representing future net income tax deductions. Of the net
temporary difference of $2,457 million, approximately $2,396 million relates to
reserves for restructuring, litigation, and other matters, $109 million relates
to long-term contracts, and $73 million relates to obligations for
postretirement and postemployment benefits. These are partially offset by
temporary differences of approximately $232 million related to tax depreciation
in excess of book depreciation and $32 million related to a net pension asset.
Deferred tax assets associated with the Company's net operating loss
carryforwards for U.S. federal income tax purposes totalling $289 million have
been recognized in the balance sheet because these benefits are expected to be
realized by Westinghouse. However, in connection with the Distribution, these
deferred tax assets will be retained by Westinghouse. Realization of the
remaining net deferred tax asset of $813 million will be reevaluated at the time
of the Distribution. If this reevaluation had occurred at December 31, 1996,
without relying on future taxable income other than that which could be
generated through tax planning strategies, a valuation allowance of
approximately $500 million would have been required. In the aggregate these
adjustments would have reduced the net deferred tax asset and total
shareholder's equity at December 31, 1996 by approximately $800 million. If no
incremental deferred tax assets had been recorded in 1996, the net loss would
have increased by approximately $400 million.
The following table shows a reconciliation of the loss before income taxes
to the taxable loss:
Reconciliation of Pre-Tax Loss to U.S. Federal Taxable Loss (in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
1996 1995 1994
------- ----- -----
<S> <C> <C> <C>
Pre-tax loss................................................. $(1,031) $(295) $ (92)
------- ----- -----
Permanent differences:
Foreign and Puerto Rico.................................... (67) (87) (48)
State income tax........................................... 110 30 12
Other...................................................... (70) (3) (19)
------- ----- -----
Net permanent differences.................................... (27) (60) (55)
------- ----- -----
Temporary differences:
Long-term contracts........................................ (117) (25) (73)
Depreciation............................................... (26) 34 39
Provision for restructuring and other actions.............. 737 14 6
Other...................................................... 312 (48) 37
------- ----- -----
Net temporary differences.................................... 906 (25) 9
------- ----- -----
U.S. federal taxable loss.................................... $ (152) $(380) $(138)
======= ===== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The Company's liquidity has been managed by Westinghouse on a consolidated
basis with its other businesses. The discussion below focuses on the impact of
the Company's transactions as reflected in the combined financial statements.
41
<PAGE> 50
The Company's operating businesses have in the past and are expected to
continue to generate cash that can be used for growth of those businesses as
well as to satisfy the non-debt obligations assumed by the Company, including
environmental and litigation liabilities. Certain non-strategic assets, such as
surplus properties, will continue to be monetized. As of the Distribution Date,
the Company will be essentially debt free. Future cash requirements in excess
cash generated by the operating businesses and by sales of non-strategic assets
are expected to be provided by bank borrowings. The reduction of the non-debt
obligations over the next several years will enable the Company to focus on
additional business opportunities.
Management expects that the Company will have sufficient liquidity to meet
ordinary future business needs and meet requirements to satisfy non-debt
obligations. Sources of liquidity generally available to the Company will
include cash from operations, cash and cash equivalents, cash from sales of
non-strategic assets, availability under its credit facility, borrowings from
other sources, including funds from the capital markets, and the issuance of
additional capital stock. Historically, Westinghouse has provided the Company
with support in several areas, including standing as the source of credit for
performance and surety bonds, letters of credit and other forms of security
which are often required for large projects in which the Company participates.
After the Distribution, the Company will have to rely upon its own credit as a
stand-alone entity in securing these items.
Following the Distribution, Westinghouse and the Company will conduct their
respective businesses independently. However, Westinghouse and the Company will
enter into certain agreements to give effect to the Restructuring and
Distribution and to define their ongoing relationship. In connection with the
Company's assumption of liabilities, certain of these agreements will contain
affirmative and restrictive undertakings by the Company which will restrict the
Company's ability to engage in certain "extraordinary transactions," pay
dividends or incur indebtedness, subject to certain exceptions, without
Westinghouse's consent.
OPERATING ACTIVITIES
The Company's operating activities used $75 million of cash in 1996
compared to $12 million of cash generated in 1995. In 1994, operating activities
used $331 million.
Working capital requirements, particularly for the Power Generation
business unit, have increased in recent years. In the last two years, the
Company has been successful in its efforts to reduce customer receivables.
However, customers continue to demand more favorable payment terms under major
contracts, particularly for power generation equipment. As a result, a
significant use of operating cash in the last three years involved an increase
in the Company's investment in long-term contracts. The Company continues to
focus on minimizing its investment in long-term contracts.
Reported earnings in recent years reflect a variety of special charges as
the Company took actions to streamline its businesses and address litigation and
other matters. Significant timing differences can result between when the costs
are recognized as a charge to income and when cash outflows are required. The
Company's operating cash flows have been unfavorably affected by cash outflows
for restructuring programs, environmental obligations, and litigation
settlements, and this unfavorable impact will continue in future years.
In connection with the Restructuring and Distribution, the Company will
assume various environmental, litigation, and other obligations related to its
current businesses and to certain previously divested businesses. One of these
obligations arose from customer claims in connection with products sold by the
Company's Energy Systems business. Settlement agreements with customers
generally provide for sales of products and services at discounted prices. These
discounts are expected to reduce the Company's operating cash flows primarily
over the next nine years by an amount of less than $200 million in 1997 and by a
declining amount in subsequent years. This amount includes discounts that exceed
profit margins as well as those that provide for some amount of profit, although
at a reduced level. Environmental and other non-debt obligations assumed by the
Company, which totalled approximately $800 million at December 31, 1996, are
expected to be paid over periods up to 30 years, with the majority of the cash
expenditures occurring over the next ten years.
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<PAGE> 51
INVESTING ACTIVITIES
Investing activities used $117 million of cash in 1996, $82 million in
1995, and $68 million in 1994. Capital expenditures generally represent the
primary requirement for cash investment and approximate $100 million per year
depending on specific business needs. Actual capital expenditures totalled $75
million in 1996, $124 million in 1995, and $110 million in 1994. Business
acquisitions required the use of $71 million in 1996 and $40 million in 1995 as
the Company invested in various smaller businesses and several joint ventures,
primarily in China, to enhance the Company's market penetration. Business
divestitures and monetization of other non-strategic assets generated $29
million in 1996, $82 million in 1995, and $42 million in 1994. Monetization of
non-strategic assets is expected to continue as the Company focuses its business
strategies and liquidates surplus properties.
FINANCING ACTIVITIES
Financing activities generally consisted of cash transfers between the
Company and Westinghouse. In 1996 and 1995, Westinghouse provided $199 million
and $21 million, respectively, to the Company. A net transfer to the Company in
1994 of $473 million reflects the additional working capital requirements of the
Company's businesses as well as expenditures for prior-year restructuring
programs.
Immediately after the Distribution, the Company will be essentially debt
free. Following the Distribution, cash requirements in excess of cash generated
by the Company's businesses are expected to be provided by bank borrowings. The
Company does not currently anticipate paying cash dividends on common stock.
REVOLVING CREDIT FACILITY
In connection with the Distribution, the Company expects to arrange a
credit facility to be effective as of the Distribution Date. The credit facility
will be used to meet the Company's working capital and other credit needs
following the Distribution.
HEDGING ACTIVITIES
The Company continually monitors its economic exposure to changes in
foreign exchange rates and enters into foreign exchange forward or option
contracts to hedge its transaction exposure when appropriate. As a result, the
Company's unhedged foreign exchange exposure is not significant. See note 14 to
the financial statements. Furthermore, changes in foreign exchange rates,
whether favorable or unfavorable, are not expected to have a significant impact
on the Company's financial results or operating activities.
With respect to the Company's operations in highly inflationary and
unstable economies that are accounted for in accordance with SFAS No. 52,
"Foreign Currency Translation," the combined total sales for those operations
were less than 0.5% of the Company's sales for 1996.
ENVIRONMENTAL MATTERS
Compliance with federal, state and local laws and regulations relating to
the discharge of pollutants into the environment, the disposal of hazardous
wastes, and other related activities affecting the environment have had and will
continue to have an impact on the Company. It is difficult to estimate the
timing and ultimate costs to be incurred in the future due to uncertainties
about the status of laws, regulations and technology, the adequacy of
information available for individual sites, the extended time periods over which
site remediation occurs, and the identification of new sites. See Note 14 to the
Combined Financial Statements. In connection with the Distribution, the Company
will assume all of the environmental liabilities associated with its current
businesses as well as those related to certain Westinghouse businesses that were
previously divested.
In the second quarter of 1996, the Company and its external consultants
completed a study to evaluate the environmental remediation strategies. Based on
the costs associated with the most probable alternative remediation strategy for
each of its approximately 75 sites, the Company has an accrued liability of $359
million. This amount includes $175 million that was recognized in the second
quarter of 1996. Depending on the remediation alternatives ultimately selected,
the costs related to these sites could differ from
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<PAGE> 52
the amounts currently accrued. The accrued liability, measured in current
dollars, includes $261 million for site investigation and remediation and $98
million for post-closure and monitoring activities. Management anticipates that
the majority of expenditures for site investigation and remediation will occur
during the next five to ten years. Expenditures for post-closure and monitoring
activities will be made over periods up to 30 years. The Company recognizes
changes in estimates as new remediation requirements are defined or as more
information becomes available.
Annual environmental costs include approximately $6 million for estimated
future environmental closure costs at operating sites and approximately $5
million related to current management of hazardous waste and pollutants. Capital
expenditures for environmental compliance, which totalled $5 million in 1996,
may vary from year to year.
Management believes, based on its best estimate, that the Company has
adequately provided for its present environmental obligations and that complying
with existing government regulations will not materially impact the Company's
financial position, liquidity or results of operations.
LEGAL MATTERS
In connection with the Restructuring and Distribution, the Company will
assume responsibility for legal matters associated with its current businesses
as well as those related to various Westinghouse industrial businesses that were
previously divested. The Company is defending a number of lawsuits on various
matters. See Note 14 to the Combined Financial Statements. The Company recorded
special charges for litigation matters during 1996 and 1995 of $458 million and
$236 million, respectively. These amounts represent management's best estimate
of incremental costs associated with potential settlements.
Since 1993, agreements have been reached to resolve ten litigation claims
in connection with alleged tube degradation in steam generators sold by Energy
Systems as components for nuclear steam supply systems. These agreements
generally require the Company to provide certain products and services at prices
discounted at varying rates. Certain of these discounts will impact future
operating results primarily over the next nine years.
The Company will assume responsibility for numerous lawsuits claiming
various asbestos-related personal injuries. Westinghouse was neither a
manufacturer nor a producer of asbestos and oftentimes these lawsuits are
dismissed on this basis. In previous court actions resolved, Westinghouse has
prevailed in the vast majority of these claims and has resolved others through
settlement. A substantial portion of the current costs and settlements are
reimbursed through insurance carriers. The Company has provided for its share of
estimated costs associated with outstanding claims; however, it cannot
reasonably estimate costs for unasserted asbestos claims.
Litigation is inherently uncertain and always difficult to predict.
Substantial damages are sought in certain of the pending cases assumed by the
Company and, although management believes a significant adverse judgment is
unlikely, any such judgment could have a material adverse effect on the
Company's results of operations for a quarter or a year. However, based on its
understanding and evaluation of the relevant facts and circumstances, management
believes that the Company has meritorious defenses to the litigation referenced
in Note 14 to the Combined Financial Statements and that the Company has
adequately provided for costs arising from potential settlement of these matters
when in the best interest of the Company. Management believes that the existing
litigation should not have a material adverse effect on the financial condition
of the Company.
THREE MONTHS ENDED MARCH 31, 1997, COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
RESULTS OF OPERATIONS
The Company reported a net loss of $80 million for the first quarter of
1997, compared to a net loss of $533 million for the 1996 first quarter. On a
pro forma basis the net loss for the first quarter of 1997 would have been $118
million. See Unaudited Pro Forma Combined Statement of Income and Notes thereto.
Results for the 1996 quarter included a number of special charges: $75 million
for restructuring, $458 for
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<PAGE> 53
litigation matters, and $45 million for impairment of assets and other matters,
all of which were included in operating profit, and $152 million for the
anticipated loss on assets held for sale which was included in other income and
expense. No special charges were recognized in the first quarter of 1997.
Excluding the 1996 special charges, the first quarter 1996 net loss was $65
million.
The Company's sales decreased $20 million, or 3%, for the first quarter of
1997 compared to the 1996 first quarter. The improvements achieved by Power
Generation were essentially offset by lower sales from Energy Systems,
Government Operations and certain miscellaneous non-strategic businesses that
were divested in 1996. The operating loss for the Company for the first quarter
of 1997 increased from the first quarter of 1996 excluding special charges in
the 1996 first quarter. The Company's first quarter 1997 sales and operating
profit for Energy Systems were both reduced by $49 million for a change in the
estimated cost to complete a complex international power project, as discussed
below. Government Operations' results declined for the first quarter of 1997
compared to 1996 due to the loss of a DOE contract in 1996.
Summarized below are the Company's results for the three months ended March
31, 1997 and 1996 by business segment.
Segment Results (in millions) (unaudited)
<TABLE>
<CAPTION>
OPERATING
SALES OF PROFIT (LOSS)
PRODUCTS AND OPERATING EXCLUDING
SERVICES PROFIT (LOSS) SPECIAL CHARGES
--------------- --------------- ---------------
THREE MONTHS THREE MONTHS THREE MONTHS
ENDED MARCH 31 ENDED MARCH 31 ENDED MARCH 31
--------------- --------------- ---------------
1997 1996 1997 1996 1997 1996
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Power Generation.......................... $474 $433 $ (39) $(117) $ (39) $ (62)
----- ----- ----- ----- ----- -----
Energy Systems............................ 187 231 (60) (26) (60) (5)
Other Energy Systems...................... (51) (50) (17) (306) (17) (17)
----- ----- ----- ----- ----- -----
Energy Systems, net....................... 136 181 (77) (332) (77) (22)
----- ----- ----- ----- ----- -----
Government Operations..................... 23 25 10 18 10 18
Corporate & Other......................... 23 39 (17) (248) (17) (35)
Intersegment Sales........................ (6) (8) -- -- -- --
----- ----- ----- ----- ----- -----
Total..................................... $650 $670 $(123) $(679) $(123) $(101)
===== ===== ====== ====== ====== ======
</TABLE>
POWER GENERATION
Power Generation's orders for the first quarter of 1997 decreased $269
million, or 55%, compared to the first quarter of 1996. Delays in the closing of
certain international project orders was the primary cause of the decreased
order level. Also, the 1996 first quarter contained a number of large
international and domestic orders.
Revenues in Power Generation increased $41 million, or 9%, for the first
quarter of 1997 compared to the same period last year. Higher service sales was
the primary reason for this revenue increase. The operating loss declined 37%
excluding a $50 million restructuring charge and a $5 million litigation charge
recognized in the first quarter of 1996. This improvement reflects higher
service revenues and cost reductions from restructuring activities.
ENERGY SYSTEMS
Energy Systems' sales and operating profit decreased for the first quarter
of 1997 compared to the first quarter of 1996. Sales decreased $44 million, or
19%, for the first quarter of 1997 compared to the same period last year, while
the operating loss increased $55 million for the same period excluding last
year's $21 million restructuring charge. The primary reason for the decrease in
sales and operating profit for the period was a $49 million adjustment to both
sales and operating profit following a comprehensive reevaluation of the work
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<PAGE> 54
scope and costs to complete a complex international nuclear project begun in
1993. Although this $352 million contract remains profitable, management has
determined that the Company's profit will be less than originally estimated.
Orders for the quarter were down 24%, primarily due to a large fuel reload order
in the first quarter of 1996.
OTHER ENERGY SYSTEMS
Discounts on prior litigation settlements, which are reflected in the Other
Energy Systems operating loss excluding special charges, were flat for first
quarters of 1997 and 1996. A special charge of $289 million was recognized in
the first quarter of 1996 for estimated losses associated with potential
litigation settlements.
GOVERNMENT OPERATIONS
Revenues for the first quarter of 1997 were down 8% and operating profit
was down $8 million, or 44%, compared to the first quarter of 1996. The decline
in sales and operating profit reflects the loss of a DOE contract at Hanford,
Washington, in late 1996. The decline in sales was partially offset by increased
sales with no profit mark-up to a partner at the DOE Savannah River site.
CORPORATE & OTHER
Sales for the first quarter of 1997 were down 41% due primarily to the 1996
sale of several non-strategic businesses. The operating loss excluding the first
quarter 1996 special charges of $213 million for restructuring, litigation and
other matters decreased, reflecting reduced operating costs for corporate
headquarters. Some benefits from past restructuring activities are apparent
although further downsizing is expected prior to the Distribution to size the
headquarters appropriately for the new company.
PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
At the time of the Distribution, the Company will establish defined benefit
pension and postretirement benefit plans for U.S. employees who previously
participated in plans sponsored by Westinghouse. For an undetermined transition
period, the benefits under the Company's plans are expected generally to mirror
those under the Westinghouse plans. Although the benefits would generally be the
same, the Company's net periodic pension and postretirement benefit costs
following the Distribution are expected to decrease by approximately $100
million per year generally to the level of the current service cost. Any
payments for benefits earned through the Distribution Date under the
Westinghouse U.S. pension and postretirement benefit plans, including those for
the Company's active employees, will remain the financial responsibility of
Westinghouse. The Company will be responsible for the payment of benefits earned
after the Distribution Date.
RESTRUCTURING OF OPERATIONS
In recent years, restructuring programs were initiated at several of the
Company's major businesses as well as at the Westinghouse corporate headquarters
in an effort to reduce costs and remain competitive. Restructuring activities
primarily involve the separation of employees, the closing of facilities, the
termination of leases, and the exiting of product lines. Costs for restructuring
activities are limited to incremental costs that directly result from the
restructuring activities and that provide no future benefit to the Company.
In 1996, management approved new restructuring projects with costs totaling
$210 million primarily for consolidation of facilities and the separation of
employees. As of March 31, 1997, $117 million had been expended on the 1996
programs, $85 million of which was cash. Future cash expenditures for these
programs are estimated to approximate $68 million for the remainder of 1997, and
$7 million for 1998 and beyond. The Company will be reimbursed by Westinghouse
for accrued liabilities associated with restructuring programs initiated prior
to the Distribution that are unpaid at the Distribution Date.
In addition to the reserves established in 1996, restructuring reserves
were established in 1994 and 1995. The employee separations included in the 1994
plan are complete. The employee separations included in the
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<PAGE> 55
1995 plan, which generally are tied to a plant closing, are 85% complete with
the remainder of separations to occur during 1997. Remaining total costs under
this plan of approximately $7 million represent primarily cash expenditures, all
of which will occur in 1997.
Cost reduction initiatives are undertaken when the expected benefits are
substantial in relation to the cost of the programs and are realizable in the
near term. The Company expects to continue to identify restructuring initiatives
at its business units and its corporate headquarters in an ongoing effort to
reduce its overall cost structure and improve competitiveness and profitability.
Further actions are anticipated later in 1997.
OTHER INCOME AND EXPENSES
Other income and expenses for the first quarter of 1997 was net expense of
$6 million compared to net expense of $151 million for the first quarter of
1996. During the first quarter of 1996, a comprehensive review was undertaken to
identify non-strategic assets. A charge of $152 million was recognized during
the quarter for losses expected to be realized upon sale of those assets.
INCOME TAXES
The Company's effective income tax rate for the first quarter of 1997 and
1996 was a benefit of 38.0% and 36.0%, respectively.
At March 31, 1997, the Company had recorded net deferred income tax
benefits totaling $1,153 million compared to $1,102 million at December 31,
1996. As a result of these net deferred income tax benefits, cash payments for
federal income taxes are minimal. Deferred tax assets associated with the
Company's net operating loss carryforwards for U.S. federal income tax purposes
totalling $329 million have been recognized in the balance sheet because these
benefits are expected to be realized by Westinghouse. However, in connection
with the Distribution, these deferred tax assets will be retained by
Westinghouse. Realization of the remaining net deferred tax asset of $824
million will be reevaluated at the time of the Distribution. If this
reevaluation had occurred at March 31, 1997, without relying on future taxable
income other than that which could be generated through tax planning strategies,
a valuation allowance of approximately $500 million would have been required. In
the aggregate these adjustments would have reduced the net deferred tax asset
and total shareholder's equity at March 31, 1997 by approximately $800 million.
If no incremental deferred tax assets had been recorded in the first quarter of
1994, the net loss for the three months ended on March 31, 1997 would have
increased by approximately $50 million.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The Company's liquidity has been managed by Westinghouse on a consolidated
basis with its other businesses. The discussion below focuses on the impact of
the Company's transactions as reflected in the condensed combined financial
statements.
OPERATING ACTIVITIES
The Company's operating activities used $416 million during the first three
months of 1997 compared to $414 million during the first three months of 1996.
Generally, the first quarter cash flows reflect increased investments in
long-term contracts, including higher inventory levels, as well as reductions in
accounts payable. Operating cash flows for the first quarter of both years
include cash outflows for restructuring costs and to satisfy non-debt
obligations primarily related to litigation and environmental matters.
INVESTING ACTIVITIES
Investing activities used $14 million of cash during the first quarter of
1997 compared to $26 million during the first quarter of 1996. Capital
expenditures, which approximate $100 million per year, were $14 million in the
1997 quarter compared to $16 million in the 1996 quarter. The 1996 first quarter
also included $10 million for the Company's investment in its Chinese joint
ventures.
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<PAGE> 56
FINANCING ACTIVITIES
Cash to support the Company's operating and investing activities generally
has been provided by Westinghouse. During the first quarter of 1997,
Westinghouse provided $391 million compared to $384 million during the first
quarter of 1996. The Company's cash requirements generally peak at the end of
the first quarter and decline later in the year. Following the Distribution,
these cash requirements are expected to be provided through a bank credit
facility.
LEGAL, ENVIRONMENTAL AND OTHER MATTERS
Over the past several years, Westinghouse has addressed a variety of legal,
environmental, and other matters related to the Company's current operations as
well as to previously divested businesses. In connection with the Restructuring
and Distribution, the Company will assume various litigation and environmental
liabilities See Note 8 to the Condensed Combined Financial Statements. The costs
associated with resolving these matters are recognized in the period in which
the costs are deemed probable and can be reasonably estimated. Management
believes that the Company has adequately provided for the estimated costs of
resolving these matters.
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<PAGE> 57
MANAGEMENT
DIRECTORS
Upon completion of the Distribution, it is anticipated that the Company
Board will consist of the following persons. Additional individuals may be
identified who will join the Company Board after the Distribution. The following
table sets forth information as to those persons who are currently expected to
become directors of the Company at the time of the Distribution.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- --- -------------------------------------------
<S> <C> <C>
Michael H. Jordan 61 Non-Executive Chairman
Director, President and Chief Executive
Ernest H. Drew 60 Officer
Frank C. Carlucci 66 Director
Robert E. Cawthorn 61 Director
Gary M. Clark 61 Director
David K.P. Li 58 Director
David T. McLaughlin 65 Director
Richard R. Pivirotto 67 Director
</TABLE>
MICHAEL H. JORDAN. Since 1993, Mr. Jordan has been the chairman and chief
executive officer of Westinghouse. From 1974 to 1992, Mr. Jordan held various
management positions with PepsiCo, Inc., a beverage, snack food and restaurant
company, retiring as chairman of the PepsiCo International Foods and Beverages
Division in 1992. From 1992 until June 1993, he was a partner with Clayton,
Dubilier & Rice, Inc., a private investment firm. In addition to being a member
of the Westinghouse Board, Mr. Jordan is a director of Dell Computer
Corporation, The College Fund/UNCF and Aetna Life and Casualty Company. He also
serves as a member of President Clinton's Export Council and, in May 1996, was
elected chairman of the U.S.-Japan Business Council. He is also a member of the
Board of Trustees for the Museum of Television and Radio.
ERNEST H. DREW. Dr. Drew became the chief executive officer of
Westinghouse's Industries and Technology Group in July of 1997, and will be the
president and chief executive officer of the Company upon consummation of the
Distribution. Prior to joining Westinghouse, Dr. Drew served as a member of the
Board of Management of Hoechst AG, a chemical and pharmaceutical company, from
January 1995 to June 1997. From 1988 to December 1994, Dr. Drew was president
and chief executive officer of Hoechst Celanese Corporation. Dr. Drew is a
director of Public Service Enterprise Group and Thomas & Betts Corporation. He
also is a member of the Board of Trustees of Drew University, Hampton University
and the Woodrow Wilson Foundation.
FRANK C. CARLUCCI. In 1989, Mr. Carlucci joined The Carlyle Group, a
Washington-based merchant bank, as vice chairman and became its chairman in
1993. He served the United States government in various capacities, including
Secretary of Defense from 1987 to 1989 and Assistant to the President for
National Security Affairs from 1986 to 1987. Mr. Carlucci is a director of
Ashland Oil, Inc., BDM International, Inc., Kaman Corporation, Neurogen
Corporation, Quaker Oats Company, Northern Telecom, Ltd., Pharmacia & Upjohn
Inc., General Dynamics Corporation, SunResorts Ltd., N.V. and Texas
Biotechnology Corporation. Mr. Carlucci, currently a director of Westinghouse,
will resign from the Westinghouse Board at the time of the Distribution.
ROBERT E. CAWTHORN. Mr. Cawthorn was chief executive officer of
Rhone-Poulenc Rorer Inc. from 1985 to 1995 and chairman from 1989 to 1996. Upon
his retirement as chairman in May 1996, Mr. Cawthorn was elected chairman
emeritus of Rhone-Poulenc Rorer Inc. In January 1997, Mr. Cawthorn joined DLJ
Merchant Banking Partners, L.P. as managing director, Global Health Care
Partners. Mr. Cawthorn is a director of Rhone-Poulenc Rorer Inc., Sun Company
and the Vanguard Group of Investment Companies. Mr. Cawthorn, currently a
director of Westinghouse, will resign from the Westinghouse Board at the time of
the Distribution.
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<PAGE> 58
GARY M. CLARK. Mr. Clark, who joined Westinghouse in 1957, served as
president from January 1993 to September 1997 and as a director of Westinghouse
since 1993. In addition, he was named vice chairman of Westinghouse in November
1996. From January 1993 to June 1993, Mr. Clark served as interim chief
executive officer of Westinghouse. After holding various management posts with
Westinghouse, he was named executive vice president of the industries group in
1988, and appointed executive vice president of industries and corporate
resources in 1991. Mr. Clark is a director of The Western Pennsylvania
Healthcare Systems, Inc., the Manufacturers' Alliance for Productivity and
Innovation, Inc. and the National Association of Manufacturers. Mr. Clark,
currently a director of Westinghouse, will resign from the Westinghouse Board at
the time of the Distribution.
DAVID K.P. LI. Dr. Li joined The Bank of East Asia, Limited in 1969 as
chief accountant. He held a number of management positions and was appointed
chief executive in 1981. In January 1995, Dr. Li was named deputy chairman and
chief executive and in April 1997, he was named chairman and chief executive.
Dr. Li is a director of The Bank of East Asia, Limited, Campbell Soup Company,
Dow Jones & Company, Inc., Hong Kong Telecommunications Limited, South China
Morning Post (Holdings) Limited and Sime Darby Berhad. Dr. Li, currently a
director of Westinghouse, will resign from the Westinghouse Board at the time of
the Distribution.
DAVID T. MCLAUGHLIN. From 1987 until July 1997, Mr. McLaughlin served as
chairman of The Aspen Institute and, from 1988 to July 1997 also served as its
president and chief executive officer. Upon his retirement from the Aspen
Institute in July 1997, Mr. McLaughlin was named president emeritus. From 1970
to 1981, Mr. McLaughlin served in various management roles at The Toro Company,
being named chairman and chief executive officer in 1977. From 1981 to 1987, he
was president of Dartmouth College. Mr. McLaughlin is a director of Atlantic
Richfield Company, PartnerRe Services, Ltd., Standard Fusee Corporation, Atlas
Air Inc. and Westinghouse.
RICHARD R. PIVIROTTO. Mr. Pivirotto is president of Richard R. Pivirotto
Co., Inc., a management consulting firm. Mr. Pivirotto served as chairman of
Associated Dry Goods Corporation from 1976 until his retirement in 1981. He
continued to serve on the board of Associated Dry Goods until its acquisition by
May Department Stores in 1986. Mr. Pivirotto is a director of General American
Investors Company, Inc., The Gillette Company, New York Life Insurance Company,
Immunomedics, Inc. and Westinghouse. He is also a trustee emeritus of Princeton
University, a trustee of the General Theological Seminary, and a trustee and
past chairman of the Greenwich Hospital Association.
DIRECTORS' MEETINGS AND COMMITTEES
Following the Distribution, the Company Board is expected to establish four
standing committees, as follows: an Audit Review Committee, a Compensation
Committee, a Nominating and Governance Committee and a Committee on Environment
and Health. Directors who are not considered to be independent under the
Company's By-Laws will not be permitted to serve on the Audit Review,
Compensation or Nominating and Governance Committees. The functions of these
standing committees will be as follows:
AUDIT REVIEW COMMITTEE. The Audit Review Committee will assist the
Company Board in fulfilling its responsibilities concerning the Company's
accounting and financial reporting practices and the ethical conduct of the
Company and its employees. This committee will make recommendations to the
Company Board regarding the selection, retention or termination of the
Company's independent accountants and review the professional services,
proposed fees and independence of such accountants. This committee also
will review with management and the independent accountants both the
controls established to protect the integrity of the quarterly reporting
process and the Company's annual financial statements.
COMPENSATION COMMITTEE. The Compensation Committee will assist the
Company Board in the establishment of appropriate compensation and benefits
for the Company's directors, officers and employees. This committee's
general responsibilities will include advising the Company Board on certain
compensation matters, evaluating and approving the chief executive
officer's compensation, reporting to shareholders on executive
compensation, and evaluating new and existing executive compensation and
benefit programs. This committee will also review and make recommendations
concerning outside
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<PAGE> 59
director compensation and administer annual incentives for key employees
and the Company's long-term incentive plans. All of the members of the
Compensation Committee will be "non-employee directors" within the meaning
of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and "outside directors" within the meaning of Section
162(m) of the Code.
NOMINATING AND GOVERNANCE COMMITTEE. The Nominating and Governance
Committee will make recommendations to the Company Board concerning the
recruitment and selection of the chief executive officer and Company Board
candidates. This committee will also review the Company's position on all
significant corporate governance issues, assess the performance of the
Company Board and review the size and composition of the Company Board.
COMMITTEE ON ENVIRONMENT AND HEALTH. The Committee on Environment and
Health will oversee the Company's environment and health policies. This
committee will review with management the Company's policies and plans
concerning activities which affect the environment, review health and
safety issues, and review the Company's compliance with laws and
regulations relating to the environment and health and safety issues.
COMPANY DIRECTORS' COMPENSATION
The Company is currently in the process of reviewing its director
compensation. If the Company adopts a compensation arrangement for directors
similar to that currently in place at Westinghouse, the benefits would be as
follows. Non-employee directors of the Company will receive an annual director's
fee of $60,000 paid as follows: one-half in cash; one-fourth in shares of
Company Common Stock; and one-fourth in Company stock options. The annual
director's fee will be subject to forfeiture on a pro rata basis in the event a
75% attendance requirement is not met. The stock-based portion of the annual
director's fee will have a mandatory holding period, and the exercise price on
one-third of the stock options will be set at 125% of the fair market value of
the Company Common Stock on the grant date, with the remainder set at 100% of
such market value. Committee chairs, upon election, will receive a committee
chair's fee of $5,000 paid in shares of Company Common Stock. Non-employee
directors will also be eligible to receive a $1,200 per diem fee in cash for
special services outside the scope of normal Company Board and committee
activities. It is anticipated that the Company will have a deferral program for
director cash compensation, but that the program will provide for interest only
and will not have a stock component. Upon termination of service as a director
of the Company, deferred amounts will be received in five annual installments.
The Company will assume responsibility for the Westinghouse Director's
Charitable Giving Program as to those participating directors who leave the
Westinghouse Board and become Company directors in connection with the
Distribution. No other Company directors will be eligible to participate in this
program. Under this program, upon the death of an eligible director, the Company
will make a donation of $500,000 to a single qualifying charitable or other
non-profit organization, or a donation of $250,000 to each of two such
organizations, selected by that director. The donations are funded with the
proceeds of life insurance maintained on the directors. Individual directors
derive no financial benefit from this program since all charitable deductions
accrue solely to the Company. In the event of a change in control of the
Company, donations may be made as of the date of such change in control and paid
on such basis and in such form as the committee administering this program may
prescribe.
The Company will provide each non-employee Company director with accidental
death and dismemberment insurance in the principal amount of $500,000. Benefits
will generally be paid under this insurance if a covered event occurs while the
director is on Company business.
It is anticipated that the Company directors will participate in any
charitable gift matching program that may be maintained from time to time for
Company employees.
For 1997, other than any special per diem fees that may become payable by
the Company to its directors after the Distribution Date, director compensation
is the responsibility of Westinghouse, and, in general, has already been paid by
Westinghouse subject to the attendance requirement described above. The
attendance requirement for 1997 director compensation will be measured against
attendance at meetings of the
51
<PAGE> 60
Westinghouse Board and the Company Board and committees of which the director
was a member during 1997 as applicable. Payment of any deferral of 1997 cash
director compensation will also be the responsibility of Westinghouse.
Individuals who are non-employee directors of both Westinghouse and the
Company after the Distribution Date will be eligible to receive director
compensation from both companies.
EXECUTIVE OFFICERS
The following individuals are expected to serve as executive officers of
the Company after the Distribution.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- --- ---------------------------------------------------------------
<S> <C> <C>
Ernest H. Drew 60 President and Chief Executive Officer and Director
Joseph T. Doyle 50 Senior Vice President and Chief Financial Officer
James L. Gallagher 60 President, Westinghouse Government and Environmental Services
Company
Charles W. Pryor, Jr. 52 President, Energy Systems
Randy H. Zwirn 43 President, Power Generation
</TABLE>
ERNEST H. DREW. For a description of Dr. Drew's background, See
"--Directors."
JOSEPH T. DOYLE. Mr. Doyle has served as Senior Vice President, Finance
and Chief Financial Officer of Westinghouse's Industries and Technology Group
since April 1996. Prior to joining Westinghouse, Mr. Doyle served as Executive
Vice President and Chief Financial Officer of Allison Engine Company from
January 1994 to March 1996. Mr. Doyle also previously held financial posts at
General Dynamics and KPMG Peat Marwick LLP.
JAMES L. GALLAGHER. Mr. Gallagher has served as President of Westinghouse
Government and Environmental Services Company since November 1996. Mr. Gallagher
served as Executive Vice President of Westinghouse Government and Environmental
Services Company from February 1994 until November 1996 and as Vice President
and General Manager of Westinghouse's Government Operations business unit from
January 1992 to February 1994. Mr. Gallagher first joined Westinghouse in 1963
as a systems design engineer and has served in numerous capacities in various
Westinghouse divisions.
CHARLES W. PRYOR, JR. Mr. Pryor has served as President of Westinghouse's
Energy Systems business unit since March 1997. Prior to joining Westinghouse,
Mr. Pryor was a management consultant within his own company in Lynchburg,
Virginia from March 1996 to March 1997. In addition, Mr. Pryor served as
President and Chief Executive Officer of B&W Nuclear Technologies (which became
a subsidiary of Framatome S.A. in 1993) from 1983 to March 1996.
RANDY H. ZWIRN. Mr. Zwirn has served as President of Westinghouse's Power
Generation business since December 1996. From January 1996 to December 1996, Mr.
Zwirn served as Executive Vice President and Chief Operating Officer of Power
Generation. From March 1995 to January 1996, Mr. Zwirn served as General Manager
of Power Generation's Systems Division and from December 1990 to March 1995,
served as General Manager of Power Generation's Projects Division.
52
<PAGE> 61
EXECUTIVE COMPENSATION
HISTORICAL COMPENSATION
The following table sets forth certain information with respect to the
annual and long-term compensation of the Company's three most highly compensated
executive officers at the end of 1996 and the Company's Chief Executive Officer,
who was not employed by the Company until July 1997. During the periods
presented, the individuals were compensated in accordance with Westinghouse's
plans and policies. All references in the following tables to stock options
relate to awards of options to purchase shares of Westinghouse Common Stock.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------- ----------------------------------------
AWARDS PAYOUTS
----------------------------- -------
RESTRICTED SECURITIES LTIP ALL OTHER
FISCAL STOCK UNDERLYING PAYOUTS COMPENSATION(3)
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) AWARD(S) OPTIONS(#)(2) $ $
- ----------------------------- ------ --------- -------- ---------- ------------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ernest H. Drew............... 1996 N/A N/A N/A N/A N/A N/A
President and
Chief Executive Officer(1)
Joseph T. Doyle.............. 1996 $ 187,515(4) $200,000(5) $ 56,250(6) 75,000 0 $39,446
Senior Vice President and
Chief Financial Officer
James L. Gallagher........... 1996 $ 255,833 $300,000(5) N/A 40,051 0 $10,492
President, Government and 1995 230,004 190,000 N/A 30,000 0 10,022
Environmental Services
Company 1994 220,004 145,000 N/A 35,000 $44,400 8,311
Randy H. Zwirn............... 1996 $ 248,202 $325,000(5) N/A 100,000 0 $ 4,500
President, Power Generation 1995 186,000 60,000 N/A 27,000 0 4,500
1994 166,500 130,000 N/A 24,000 $14,800 6,975
</TABLE>
- ------------
(1) Dr. Drew, President and Chief Executive Officer of the Company, was not
employed by the Company until July 1997 and had no income from the Company
or Westinghouse for 1996.
(2) Represents grants of standard non-qualified stock options. Mr. Gallagher
received 10,051 reload options as described in footnote (3) to the Option
Grants in Fiscal 1996 table.
(3) The amounts shown in this column consist of (i) contributions by
Westinghouse to the account of the named executive officer pursuant to the
contributory provisions of the Westinghouse Savings Program; (ii) moving and
relocation expenses; (iii) interest earned during 1996 on deferred amounts
of long-term incentive compensation; (iv) executive life insurance premiums;
and (v) with respect to Mr. Doyle, a signing bonus at the commencement of
his employment of $25,000.
(4) Mr. Doyle began employment in April of 1996. The $187,515 of salary shown in
the table represents his earnings for the portion of 1996 he was employed by
Westinghouse. If Mr. Doyle had been employed for the full year, his annual
base salary would have been $250,000.
(5) Represents incentive compensation awarded for 1996. Up to 100% of these
awards were deferable, to be paid either (i) in one installment in any
future year not later than the year of normal retirement, or (ii) in a lump
sum or annual installments after termination of service. The deferred amount
is treated as if it were invested in putative convertible debentures with a
fixed interest rate, compounded annually, equal to the ten-year U.S.
Treasury Bond rate for the week preceding the regular January Westinghouse
Board meeting. Each debenture is deemed to have a face value of $100 and is
deemed to be convertible into shares of Westinghouse Common Stock at a
conversion rate determined by dividing $100 by the mean of the high and low
prices of Westinghouse Common Stock as reported by the NYSE composite tape
on the last trading day preceding the regular January Westinghouse Board
meeting. At the time a deferred installment is paid, the employee receives
the greater value of (i) the cash amount equal to the face value of such
debentures due for such installment, plus cash equal to accrued interest on
such installment, or (ii) shares of common stock equalling the number of
shares into which the debentures due for such installment are convertible at
the above conversion rate, plus cash equal to accrued interest on such
installment. In the event of a change in control of Westinghouse, shares are
valued based upon the highest price of the common stock during the 30 days
preceding such change in control of Westinghouse. A participant who has
deferred compensation until after termination of service may elect, after
attaining age 57 1/2 and prior to ceasing to be an employee, to establish
the ultimate payable value of each putative debenture based on the fair
market value of the Westinghouse Common Stock as of the day on which notice
of the election is received by Westinghouse.
(6) At the commencement of his employment, Mr. Doyle received a restricted stock
award of 3,000 shares with a value of $56,250.
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<PAGE> 62
OPTION GRANTS IN FISCAL 1996
The following table sets forth information with respect to option grants
during fiscal 1996 to the individuals named in the Summary Compensation Table
pursuant to Westinghouse plans.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------
% OF TOTAL GRANT DATE
NUMBER OF OPTIONS GRANTED EXERCISE PRESENT VALUE($)(2)
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED(1) FISCAL YEAR ($/SHARE) DATE PER SHARE TOTAL
- ---------------------------- --------- ---------------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Joseph T. Doyle............. 75,000 0.7% $ 18.75 4/22/06 $ 10.24 $ 768,000
James L. Gallagher.......... 30,000 0.3% $ 18.88 3/01/06 $ 10.31 $ 309,300
10,051(3) 0.1% $ 18.82 4/25/04 $ 9.19 $ 92,318
Randy H. Zwirn.............. 100,000 0.9% $ 18.88 3/01/06 $ 10.31 $1,031,000
</TABLE>
- ---------
(1) Except for the options granted to Mr. Doyle on April 22, 1996 and the reload
option to Mr. Gallagher, these Westinghouse Options were granted to the
named executive officers on February 28, 1996. All of the options were
granted in tandem with limited rights. Westinghouse Options are granted for
a term of ten years from the date of award, or such lesser term as may be
determined by the Westinghouse Compensation Committee. The exercise price
under each Westinghouse Option may not be less than the fair market value of
the Westinghouse Common Stock on the option grant date. Except in the event
of a change in control of Westinghouse, generally a Westinghouse Option is
exercisable in whole or in part after the commencement of the second year of
its term and until the Westinghouse Option terminates. Limited rights are
exercisable only in the event of a change in control of Westinghouse and
during the 30 days immediately following such change and only when the fair
market value on the exercise date exceeds the exercise price. When a limited
right is exercised, the employee is entitled to receive the difference
between the exercise price of the related Westinghouse Option and the
greater of (i) the highest closing sales price of the Westinghouse Common
Stock on the NYSE during the 60 days prior to exercise, or (ii) the highest
price paid for the Westinghouse Common Stock in the change in control
transaction during such period. Reload options are granted to employees at
the time of an exercise of a Westinghouse Option through a stock swap
(payment of the exercise price by surrender of previously owned shares of
Westinghouse Common Stock), unless the Westinghouse Compensation Committee
cancels the reload feature before such exercise. The reload option is
granted for the number of shares the employee tenders to pay the exercise
price of the related Westinghouse Option.
(2) These values were derived using the following common assumptions: stock
price volatility .3060; dividend yield 1.22%; interest rate 7.5%; reload
premium 10%; and for each Westinghouse Option, its full term and exercise
price. There were no adjustments made for non-transferability or risk of
forfeiture except where noted. The values and assumptions presented here
were provided by Frederic W. Cook & Co., Inc. and were based on the
Black-Scholes option pricing model. The actual value, if any, that an
executive officer may realize from his or her Westinghouse Options (assuming
that they are exercised) will depend solely on the gain in Westinghouse
Common Stock price over the exercise price when the shares are sold.
(3) These Westinghouse Options are grants of reload options resulting from the
exercise of an initial Westinghouse Option containing a reload option
feature. The reload option was granted in connection with the exercise of an
existing Westinghouse Option by surrender of Westinghouse Common Stock then
owned by the executive in payment of the exercise price of the existing
Westinghouse Option ("Stock Swap"). Such reload option may be exercised
immediately (i) for the number of shares of Westinghouse Common Stock shown,
(ii) at the fair market value of such shares on the date of the Stock Swap,
and (iii) then only for the remaining term of the original Westinghouse
Option. Reload options are also subject to early termination if the shares
acquired on exercise of the original Westinghouse Option are sold within the
first year. These values were derived using the following common
assumptions: stock price volatility .3099; dividend yield 1.10%; interest
rate 6.4%; reload premium 10%, and for each Westinghouse Option, a remaining
term of 8.3 years and its exercise price.
OPTION EXERCISES IN FISCAL 1996
The following table sets forth the number of shares of Westinghouse Common
Stock covered by both exercisable and unexercisable stock options held by each
of the individuals named in the Summary Compensation Table on December 31, 1996,
if any. Also reported are the values for unexercised
54
<PAGE> 63
"in-the-money" options, calculated as the excess of the value of shares of
Westinghouse Common Stock as of December 31, 1996 over the respective exercise
prices of outstanding stock options.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY WESTINGHOUSE OPTIONS
WESTINGHOUSE OPTIONS AT AT
SHARES FISCAL YEAR-END FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE ---------------------------------- ----------------------------------
NAME EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE(2)(3) EXERCISABLE UNEXERCISABLE(2)(3)
- --------------------- ----------- ----------- ----------- ------------------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Joseph T. Doyle...... 0 0 0 75,000 0 $ 84,375
James L. Gallagher... 16,265 $116,905 158,952 39,000 $ 636,672 $ 84,563
Randy H. Zwirn....... 0 0 75,200 108,100 $ 457,663 $ 149,106
</TABLE>
- ---------
(1) Based on the closing price of Westinghouse Common Stock as reported by the
NYSE composite tape on December 31, 1996 -$19.8750.
(2) These Westinghouse Options are unexercisable because they have not vested
under their terms.
(3) This column includes the following Westinghouse Options and values, all of
which were contingent on attaining a 1996 stretch performance target:
Gallagher 9,000 for $54,563; and Zwirn 8,100 for $49,106. The 1996 stretch
performance target was not met and these Westinghouse Options have since
terminated.
PENSION BENEFITS
All of the individuals named in the Summary Compensation Table are
participants, up until the time of the Distribution, in the Westinghouse Pension
Plan, which is a defined benefit pension plan.
The Westinghouse Pension Plan provides retirement income related to an
employee's salary and years of active service. The cost of the Westinghouse
Pension Plan is paid by both Westinghouse and employee contributions. All
Westinghouse contributions are actuarially determined. Westinghouse's
contributions to the pension plan with respect to the individuals named in the
Summary Compensation Table cannot readily be separated or individually
calculated by the actuaries for the Westinghouse Pension Plan.
In addition to the benefits provided by the Westinghouse Pension Plan, the
Westinghouse Executive Pension Plan provides for supplemental pension payments
to a group of executives, including those named in the Summary Compensation
Table. Upon retirement, such individuals who have at least five continuous years
of service as an executive immediately prior to retirement, meet the age and
service requirements for retirement under the Westinghouse Executive Pension
Plan, and contribute to the Westinghouse Pension Plan are entitled to receive
supplemental payments under the Westinghouse Executive Pension Plan. Such
payments, when added to their pensions under the Westinghouse Pension Plan,
result in a total annual pension equal to 1.47% for each year of service
multiplied by their average annual compensation as defined by the Westinghouse
Executive Pension Plan. Average annual compensation is equal to the sum of the
average of the five highest annualized December base salaries and the average of
the five highest annual incentive awards, each in the last ten years of
employment. In the event of retirement prior to age 60, the total annual pension
will be reduced by an amount equal to the reduction in the benefits payable
under the Westinghouse Pension Plan. Participants become vested in the event of
a change in control of Westinghouse and benefits under the Westinghouse
Executive Pension Plan may be valued on a present value or other basis.
For purposes of illustration, the following table indicates the approximate
amounts of annual retirement income that would be payable at the present time
under various assumptions as to average annual compensation and years of service
to employees who participate in the Westinghouse Pension Plan and are eligible
for supplemental payments pursuant to the Westinghouse Executive Pension Plan.
55
<PAGE> 64
WESTINGHOUSE PENSION PLAN TABLE
<TABLE>
<CAPTION>
FIVE YEAR
AVERAGE ANNUAL
COMPENSATION ESTIMATED ANNUAL PENSION FOR SPECIFIED YEARS OF CREDITED SERVICE
INCLUDING -----------------------------------------------------------------------------
INCENTIVE AWARD 15 20 25 30 35 40
- --------------- -------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 100,000 $ 22,050 $ 29,400 $ 36,750 $ 44,100 $ 51,450 $ 58,800
$ 300,000 66,150 88,200 110,250 132,300 154,350 176,400
$ 500,000 110,250 147,000 183,750 220,500 257,250 294,000
$ 700,000 154,350 205,800 257,250 308,700 360,150 411,600
$ 900,000 198,450 264,600 330,750 396,900 463,050 529,200
$ 1,100,000 242,550 323,400 404,250 485,100 565,950 646,800
$ 1,500,000 330,750 441,000 551,250 661,500 771,750 882,000
$ 2,000,000 441,000 588,000 735,000 882,000 1,029,000 1,176,000
</TABLE>
The amounts presented in the above table are based upon straight life
annuity amounts and are not subject to any reduction for Social Security
benefits or other offset amounts. As of December 31, 1996, Messrs. Drew, Doyle,
Gallagher and Zwirn had the following credited full years of service under the
Pension plan, respectively: 0 years, 1 year, 31 years and 21 years.
EMPLOYMENT AGREEMENTS
Ernest H. Drew. On July 1, 1997, Westinghouse retained the services of Dr.
Ernest H. Drew as President and Chief Executive Officer of its Industries and
Technology Group. Under the terms of Dr. Drew's employment agreement, he will
receive an annual base salary of $700,000, subject to periodic review and
adjustment. Dr. Drew is eligible for annual incentive awards based on
performance measures set by the Compensation Committee of the Westinghouse
Board, with a guaranteed minimum annual incentive for 1997 of $500,000.
Under the agreement, Dr. Drew received a grant of stock options to purchase
an aggregate of 450,000 shares of Westinghouse Common Stock at an exercise price
of $24.3125, the fair market value of the Westinghouse Common Stock on July 1,
1997. The Westinghouse stock options vest in increments from the grant date
through the third anniversary of the grant date, provided he is still an
employee on the vesting date. On the Distribution Date, the stock options will
be adjusted such that they become options for Company Common Stock. Dr. Drew
will be eligible, beginning in 1998, to participate in applicable long-term
incentive programs of Westinghouse or the Company, as applicable, as in effect
from time to time.
The agreement further provides that Dr. Drew will participate in the
Westinghouse Executive Pension Plan and specifically waives the requirements
that he complete five years of continuous executive service and that he satisfy
the retirement eligibility requirements of the Westinghouse Executive Pension
Plan.
In the event of termination by Westinghouse without cause (other than by
reason of incapacity or death or in the circumstances described in the following
sentence), Dr. Drew is entitled to certain relocation benefits and to severance
pay in accordance with Westinghouse's then current policy or, if the termination
occurs before July 1, 1999 and if greater than the severance pay, to amounts
equal to 12 months of base salary and his target annual incentive award
opportunity for the year in which his employment is so terminated. If there is a
change in control of Westinghouse prior to July 1, 2000 and if, within one year
after such change in control, Dr. Drew's employment is terminated by
Westinghouse without cause or if he resigns after there has been a failure to
continue him in the position of Chief Executive Officer of Westinghouse's
Industries and Technology Group or the Company or similar position, then Dr.
Drew is entitled to a lump sum payment equal to the present value of 36 months
of base salary and three times the amount of his target annual incentive award
opportunity for the year in which his employment so terminates and to certain
relocation benefits and his remaining unvested stock options will become
exercisable and continue to term, all subject to reduction to the maximum amount
which, taken together with all other payments and benefits to him, would not, if
paid, result in any of such payments or benefits being deemed an "excess
parachute payment" pursuant to
56
<PAGE> 65
Section 280G of the Internal Revenue Code of 1986, as amended. Benefits under
Dr. Drew's employment agreement would cease if he were to be terminated for
cause or during any period when he is employed elsewhere, other than consulting
work on a casual basis. Dr. Drew's employment agreement will be assumed by the
Company as of the Distribution Date, whereupon the Company will be substituted
for Westinghouse as the employer under this agreement. None of the severance
benefits described above will become due in connection with the Distribution and
the assumption of Dr. Drew's employment agreement by the Company.
Joseph T. Doyle. In April 1996, Westinghouse retained the services of
Joseph T. Doyle as Senior Vice President, Finance of its Industries and
Technology Group. Under the terms of Mr. Doyle's employment agreement, he
received an annual base salary of $250,000, subject to periodic review and
adjustment, which was adjusted to $267,516 as of February 1997. Mr. Doyle is
eligible for annual incentive awards based on performance measures set by the
Compensation Committee of the Westinghouse Board, with a guaranteed minimum
annual incentive for 1997 of $175,000.
Under the agreement, Mr. Doyle received a grant of stock options to
purchase an aggregate of 75,000 shares of Westinghouse Common Stock at an
exercise price of $18.75, the fair market value of the Westinghouse Common Stock
on April 22, 1996, a grant of 3,000 shares of restricted Westinghouse Common
Stock, one third of which vests on each of the first three anniversaries of the
grant as long as he is still an employee on the vesting date, and a signing
bonus of $25,000. Beginning in 1997, Mr. Doyle participates in applicable
long-term incentive programs of Westinghouse or the Company, as applicable, as
in effect from time to time and received a Westinghouse stock option grant for
35,000 shares of Westinghouse Common Stock in January 1997.
In the event Mr. Doyle's position is eliminated as a result of a
restructuring of the organization, he will receive his guaranteed 1997 annual
incentive in lieu of any other separation payment and any other Westinghouse
salary continuation program.
The Company will assume Westinghouse's obligations under these employment
contracts in connection with the Distribution.
COMPANY EXECUTIVE COMPENSATION AND BENEFIT PLANS
It is anticipated that total compensation for the Company's executive
officers after the Distribution will include base salary, annual and long-term
incentives and other benefits as described below. The Company's executive
compensation program is expected to be a performance and rewards compensation
system that pays executives for the achievement of levels of performance
designed to increase the shareholder value of the Company and that enables the
Company to hire, retain and motivate high-quality executives who meet the
immediate business challenges and improve the long-term performance of the
Company. It is anticipated that base salaries and total compensation
opportunities will be competitive as measured against industry norms.
Set forth below is a summary of the components of executive compensation
following the Distribution.
Base Salary. Each year a Company executive's performance will be
evaluated, and it is anticipated that any base salary adjustments will be based
on an evaluation of competitive market adjustments and the individual's
performance and contribution. The Company executives named in the Summary
Compensation Table above received salary increases for 1997 on this basis.
Annual Incentives. Under the Westinghouse incentive plans, early in the
year the Westinghouse Compensation Committee approved a target annual award
opportunity for 1997 for each executive officer of Westinghouse based on
competitive data and established a range of 1997 financial objectives and other
key performance indicators for Westinghouse and for individual businesses of
Westinghouse, including those businesses which will become the Company after the
Distribution. It is anticipated that the Company Compensation Committee will
review and, in its discretion, approve 1997 annual incentive awards, if any, for
the Company's executive officers based on the relevant financial and other key
business performance indicators so established earlier in the year, with
appropriate adjustments to reflect the Distribution, and on individual
performance for the entire year against objectives, subject to the terms of
individual employment agreements where applicable. It is anticipated that annual
incentive compensation for future years would be
57
<PAGE> 66
awarded pursuant to similar incentive plans reflecting award opportunities and
performance objectives established each year by the Company Compensation
Committee.
It is anticipated that the Company will establish a deferral program for
incentive award payments, to the extent deferral is permitted by the Company
Compensation Committee at the time of award. Any deferral would be subject to
such terms and conditions as the Company Compensation Committee may from time to
time determine. It is anticipated that the initial deferral program will provide
for interest only and will not have a stock component. The Company may also,
from time to time, make payments on a deferred basis, on such terms and
conditions as the Company Compensation Committee may from time to time
determine, in order to preserve federal tax deductions by the Company.
Long-Term Incentives. The Company will have a long-term incentive plan or
plans similar to the current Westinghouse long-term incentive plans which
authorize the grant of non-statutory and incentive stock options (with or
without reload options and/or tandem limited rights), tandem or stand-alone
stock appreciation rights, performance awards (payable in stock, cash or a
combination thereof on attainment of performance goals), and restricted stock
and the deferral of award payments.
In January 1997, the Westinghouse Compensation Committee granted the
Company executives non-statutory options for Westinghouse Common Stock
substantially similar in form to grants set forth in the "Option Grants in
Fiscal 1996" table set forth above as 1997 long-term incentives. It is
anticipated that Company Common Stock option grants under a Company long-term
incentive plan will also be a component of 1998 long-term incentives.
Compensation Arrangements. It is anticipated that the Company may from
time to time enter into employment contracts or other compensation arrangements
with executives when appropriate for competitive or other business reasons, for
example, in connection with attracting new executives. See "--Employment
Agreements."
Pension Benefits. It is anticipated that the Company will establish a
qualified defined benefit pension plan for eligible Company Employees, including
executives. For an undetermined transition period, the benefits under the
Company's pension plan are expected generally to mirror those under the
Westinghouse Pension Plan. It is anticipated that the Company will also have a
nonqualified defined benefit executive pension plan for eligible Company
executives. For an undetermined transition period, the benefits under the
Company's executive pension plan are expected generally to mirror those under
the Westinghouse Executive Pension Plan. Each such plan will be established
subject to the Company's right to amend, terminate or suspend any such plan, or
any of the benefits thereunder, at any time. The Company is currently evaluating
alternate plan designs and structures for periods after the Distribution Date.
TREATMENT OF WESTINGHOUSE OPTIONS AND CERTAIN OTHER BENEFITS FOLLOWING THE
DISTRIBUTION
Set forth below is a summary of adjustments that will be made to certain
outstanding Westinghouse awards as a result of the Distribution.
Stock Options. Under the Employee Benefits Agreement, the Westinghouse
Board will exercise its authority under various long-term incentive and director
plans to adjust the authorized shares and the outstanding stock options under
various plans in number and kind to reflect the Distribution. With respect to
Company Employees, generally pre-1997 option grants will be adjusted to reflect
a combination of separate options for Westinghouse Common Stock and Company
Common Stock, with the total number of shares and exercise prices adjusted with
the intention to preserve the aggregate value of the spread between market value
and exercise price at or about the Distribution Date. The formula for
determining the number of shares and exercise prices will depend on the
respective market values of Westinghouse Common Stock and Company Common Stock
for a certain period prior to the Distribution Date. With respect to 1997 option
grants, the intention would be to preserve aggregate value as for the pre-1997
options, but for Company Employees, the options will generally be adjusted
solely into Company options. The post-Distribution Westinghouse and Company
options will generally have the same features, after the above-described
adjustments, as the original options. Company executives will not be eligible to
receive reload options with respect to otherwise qualifying
58
<PAGE> 67
exercises of their Westinghouse Common Stock options after the Distribution, but
will be eligible to receive reload options with respect to qualified exercises
of their Company options.
Director stock options will generally be adjusted in the same way as
employee options, with the attendance requirement for 1997 option grants still
applicable as discussed above. See "Management-- Company Directors'
Compensation." For directors who remain on both the Westinghouse and Company
Boards, all stock options will be adjusted on the same basis as pre-1997
options.
Under the Employee Benefits Agreement, the Company will assume
responsibility for the Company options resulting from the adjustments described
above ("Company Adjustment Options"). The Company Compensation Committee will
administer these options as a Company Adjustment Option plan or plans.
Restricted Stock. Under the Employee Benefits Agreement, transfer of
employment (or a directorship) from Westinghouse to the Company in connection
with the Distribution will not be a termination of service with respect to
grants of restricted Westinghouse Common Stock until termination of service from
the Company. The Company Common Stock received as a distribution on shares of
restricted Westinghouse Common Stock will be subject to the same restrictions as
the shares of restricted Westinghouse Common Stock. For directors, the
attendance requirement restriction, where applicable, will be applied as
discussed above under "Company Directors' Compensation."
Deferred Compensation. The deferral programs for both executives and
directors as to amounts already in deferral accounts as of the Distribution
Date, including director deferrals of 1997 cash compensation, will, under the
Employee Benefits Agreement, remain the responsibility of Westinghouse. The
putative convertible debentures under the programs will continue to be
convertible into shares of Westinghouse Common Stock but the conversion rate
will be adjusted to reflect the Distribution. For purposes of the executive and
director deferral programs, executives and directors who do not remain with
Westinghouse will be treated as terminated employees or directors and will begin
to receive payouts from their deferral accounts in accordance with the terms and
conditions of the applicable deferral program.
Director Common Stock Equivalents. Westinghouse Directors who have
Westinghouse Common Stock Equivalent accounts from a former deferred stock
program will receive a hypothetical, reinvested dividend on the Westinghouse
Common Stock Equivalents in their accounts based on the value of the
distribution of Company Common Stock in the Distribution. Westinghouse directors
who leave the Westinghouse Board to become members of the Company Board will be
treated as separated Westinghouse directors for purposes of their Common Stock
Equivalent accounts, if any, and will receive distribution of these accounts in
Westinghouse Common Stock in the January following the Distribution.
59
<PAGE> 68
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF COMMON STOCK
The following table sets forth the projected beneficial ownership of
Company Common Stock immediately following the Distribution Date by each of the
Company's directors, the Company's chief executive officer and the executive
officers who were the Company's three most highly compensated executive officers
in fiscal 1996 and all directors and executive officers as a group, based upon
information available to Westinghouse concerning ownership of shares of
Westinghouse Common Stock at , 1997. THE PROJECTIONS DO NOT TAKE
INTO ACCOUNT (I) ANY SHARES OF COMPANY COMMON STOCK THAT MAY BE ISSUED WITH
RESPECT TO SHARES OF WESTINGHOUSE COMMON STOCK ACQUIRED PURSUANT TO THE EXERCISE
OF OPTIONS TO PURCHASE SHARES OF WESTINGHOUSE COMMON STOCK PREVIOUSLY GRANTED
UNDER WESTINGHOUSE COMPENSATION PROGRAMS BUT NOT EXERCISED AS OF ,
1997 OR (II) ANY SHARES OF RESTRICTED COMPANY COMMON STOCK OR SHARES OF COMPANY
COMMON STOCK UNDERLYING STOCK OPTIONS THAT MAY BE GRANTED TO EXECUTIVE OFFICERS
AND OTHER KEY EMPLOYEES OF THE COMPANY BY THE COMPENSATION COMMITTEE PURSUANT TO
THE COMPANY PLANS SUBSEQUENT TO THE DISTRIBUTION DATE. See "Executive
Compensation--Company Compensation and Benefit Plans."
<TABLE>
<CAPTION>
NUMBER OF SHARES PROJECTED % OF SHARES
NAME TO BE BENEFICIALLY OWNED OUTSTANDING
-------------------------------------------------- -------------------------- -----------
<S> <C> <C>
Frank C. Carlucci.................................
Robert E. Cawthorn................................
Gary M. Clark.....................................
Ernest H. Drew....................................
Michael H. Jordan.................................
David K.P. Li.....................................
David T. McLaughlin...............................
Richard R. Pivirotto..............................
Joseph T. Doyle...................................
James L. Gallagher................................
Randy H. Zwirn....................................
All directors and executive officers as a group...
</TABLE>
Based upon information available to Westinghouse concerning the ownership
of shares of Westinghouse Common Stock as of June 1, 1997, no person is
projected to own beneficially more than 5% of the outstanding Company Common
Stock on the Distribution Date except as follows:
<TABLE>
<CAPTION>
SHARES OF COMPANY COMMON
NAME AND ADDRESS OF STOCK TO BE RECEIVED IN PERCENT OF
BENEFICIAL OWNER THE DISTRIBUTION CLASS*
--------------------------------------------- ------------------------ ----------
<S> <C> <C>
FMR Corp. 10.33%
82 Devonshire Street
Boston, MA 02109
</TABLE>
- ---------
* These percentages are based on the shares of Westinghouse Common Stock
reported as being beneficially owned in a statement on Schedule 13G filed by
the beneficial owner.
60
<PAGE> 69
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The total number of shares of all classes of stock that the Company
presently has authority to issue is 1,000 shares of Company Common Stock. Under
the Articles that will be in effect on the Distribution Date, the Company will
have authority to issue a total of shares of all classes of stock, of
which may be shares of preferred stock ("Preferred Stock") and
may be shares of Common Stock.
Based on the number of shares of Westinghouse Common Stock outstanding as
of , 1997 and the Distribution Ratio, it is expected that
shares of Company Common Stock will be distributed to Westinghouse
Shareholders in the Distribution. All the shares of Company Common Stock to be
distributed to Westinghouse Shareholders in the Distribution will be fully paid
and non-assessable. The Company Common Stock to be distributed will constitute
all the shares of capital stock of the Company that will be outstanding
immediately after the Distribution.
COMPANY COMMON STOCK
Holders of Common Stock are entitled to one vote for each share on all
matters voted on by shareholders. Holders of Company Common Stock do not have
cumulative voting rights in the election of directors. The first annual meeting
of shareholders is expected to be held during 1998.
Holders of Company Common Stock do not have subscription, redemption or
conversion privileges. Subject to the preferences or other rights of any
Preferred Stock that may be issued from time to time, holders of Company Common
Stock are entitled to participate ratably in dividends on the Company Common
Stock as declared by the Company Board. Holders of Company Common Stock are
entitled to share ratably in all assets available for distribution to
shareholders in the event of liquidation or dissolution of the Company, subject
to distribution of the preferential amount, if any, to be distributed to holders
of Preferred Stock.
PREFERRED STOCK
The Articles that will be in effect on the Distribution Date will authorize
the Company Board, without any vote or action by the holders of Company Common
Stock, to issue up to shares of Preferred Stock from time to time in
one or more series. The Company Board is authorized to determine the number of
shares and designation of any series of Preferred Stock and the dividend rights,
dividend rate, conversion rights and terms, voting rights (full or limited, if
any), redemption rights and terms, liquidation preferences and sinking fund
terms of any series of Preferred Stock. Issuances of Preferred Stock would be
subject to the applicable rules of the NYSE or other organizations on whose
systems the stock of the Company may then be quoted or listed. Depending upon
the terms of Preferred Stock established by the Company Board, any or all series
of Preferred Stock could have preference over the Company Common Stock with
respect to dividends and other distributions and upon liquidation of the
Company. Issuance of any such shares with voting powers, or issuance of
additional shares of Company Common Stock, would dilute the voting power of the
outstanding Company Common Stock. The Company has no present plans to issue any
Preferred Stock.
NO PREEMPTIVE RIGHTS
No holder of any capital stock of the Company authorized at the
Distribution Date will have any preemptive right to subscribe for or purchase
any securities of any class or kind of the Company.
TRANSFER AGENT AND REGISTRAR
will be the transfer agent and registrar for the Company
Common Stock commencing upon the Distribution Date.
61
<PAGE> 70
PURPOSES AND EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S
ARTICLES OF INCORPORATION, BY-LAWS AND PENNSYLVANIA LAW
GENERAL
The provisions of the Articles, the Company's By-Laws and Pennsylvania
statutory law described in this section may delay or make more difficult
acquisitions or changes of control of the Company not approved by the Company
Board. Such provisions could have the effect of discouraging third parties from
making proposals involving an acquisition or change of control of the Company,
although such proposals, if made, might be considered desirable by a majority of
the Company's shareholders. Such provisions may also have the effect of making
it more difficult for third parties to cause the replacement of the current
management of the Company without the concurrence of the Company Board. In
addition, the undertakings of the Company contained in the Distribution
Agreement may require, among other things, that any acquiror of the Company or
all or substantially all of the Company's assets, and such acquiror's parent
entity, assume the Company's obligations under such agreement. See "Transactions
and Agreements between the Company and Westinghouse--Distribution Agreement."
Copies of the Articles and the By-Laws will be filed as exhibits to the
Registration Statement. The following description of certain provisions of the
Articles and the By-Laws does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, such exhibits.
PREFERRED STOCK AND ADDITIONAL COMPANY COMMON STOCK
Under the Articles of Incorporation, the Company Board will have the
authority to provide by Board resolution for the issuance of shares of one or
more series of Preferred Stock. The Company Board is authorized to fix by
resolution the terms and conditions of each such other series. See "Description
of Capital Stock--Preferred Stock."
The Company believes that the availability of the Company's Preferred
Stock, in each case issuable in series, and additional shares of Common Stock
could facilitate certain financings and acquisitions and provide a means for
meeting other corporate needs which might arise. The authorized shares of the
Company's Preferred Stock, as well as authorized but unissued shares of Company
Common Stock will be available for issuance without further action by the
Company's stockholders, unless stockholder action is required by applicable law
or the rules of any stock exchange on which any series of the Company's capital
stock may then be listed.
These provisions give the Company Board the power to approve the issuance
of a series of Preferred Stock, or an additional series of Company Common Stock,
of the Company that could, depending on its terms, either impede or facilitate
the completion of a merger, tender offer or other takeover attempt. For example,
the issuance of new shares of Preferred Stock might impede a business
combination if the terms of those shares include voting rights which would
enable a holder to block business combinations; the issuance of new shares might
facilitate a business combination if those shares have general voting rights
sufficient to cause an applicable percentage vote requirements to be satisfied.
OTHER
The Company expects to adopt a shareholder rights plan either before or
after the Distribution. In addition, the Company expects to adopt other
provisions of its Articles and By-Laws that may also have an anti-takeover
effect. Such provisions may include, among others, a classified board of
directors, the establishment of advance notice requirement for director
nominations and actions to be taken at annual meetings, supermajority vote
requirements to approve changes to the Articles or By-Laws, limitations on the
ability of shareholders to remove directors, to take action by written consent
or to call special meetings of shareholders.
62
<PAGE> 71
PENNSYLVANIA BUSINESS COMBINATION STATUTE
Chapter 25 of the Pennsylvania Business Corporation Law ("PBCL") contains
several anti-takeover provisions which apply to "registered" corporations,
including the Company.
Transactions with Interested Shareholders. Section 2538 of the PBCL
provides that if (i) an "interested shareholder" (as such term is defined in the
PBCL) of a "registered" corporation (together with others acting jointly or in
concert therewith and affiliates thereof) is to be a party to a merger or
consolidation, a share exchange or certain sales of assets involving such
corporation or a subsidiary thereof, (ii) such interested shareholder is to
receive a disproportionate amount of any of the securities of any corporation
surviving or resulting from a division of such corporation; (iii) such
interested shareholder is to be treated differently from others holding shares
of the same class in a voluntary dissolution of such corporation; or (iv) such
interested shareholder's percentage of voting or economic share interest in such
corporation is materially increased relative to substantially all other
shareholders in a reclassification; then the transactions being proposed must be
approved by the affirmative vote of the holders of shares representing at least
a majority of the votes that all shareholders (other than the interested
shareholder) are entitled to cast with respect to such transaction, excluding
all such voting shares beneficially owned by such interested shareholder. Such
special voting requirement does not apply if the transaction being proposed has
been approved in a prescribed manner by such corporation's board of directors or
certain other conditions (including the amount of consideration to be paid to
certain shareholders) are satisfied or the transaction involves certain
subsidiaries.
Section 2555 of the PBCL may apply to a transaction between a registered
corporation and an interested shareholder thereof, notwithstanding that Section
2538 is also applicable. Section 2555 prohibits such a corporation from engaging
in a "business combination" (as such term is defined in the PBCL) with an
interested shareholder unless: (i) the board of directors of such corporation
gives prior approval to the proposed transaction or gives prior approval to the
interested shareholder's acquisition of 20% of the shares entitled to vote in an
election of directors of such corporation, (ii) the interested shareholder owns
at least 80% of the stock of such corporation entitled to vote in an election of
directors and, no earlier than three months after such interested shareholder
reaches such 80% level, the majority of the remaining shareholders approve the
proposed transaction and shareholders receive a minimum "fair price" for their
shares in the transaction, and the other conditions of Section 2556 of the PBCL
are met, (iii) holders of all outstanding common stock approve the transaction,
(iv) no earlier than 5 years after the interested shareholder acquired the 20%,
a majority of the remaining shares entitled to vote in an election of directors
approve the transaction, or (v) no earlier than 5 years after the interested
shareholder acquired the 20%, a majority of all the shares approve the
transaction, all shareholders receive a minimum "fair price" for their shares
(as set forth in Section 2556 of the PBCL), and certain other conditions are
met.
Stockholder "Put" in Control Transactions. Under Sections 2542 through 2548
of the PBCL, when a person or group of persons acting in concert holds 20% of
the shares of a registered corporation entitled to vote in the election of
directors (a "control group"), on the occurrence of the transaction that makes
the group a control group, any other stockholder of the registered corporation
who objects can, under procedures set forth in the statute, require the control
group to purchase his or her shares at "fair value" as defined in the PBCL.
Certain Share Acquisitions. The PBCL also contains certain provisions
applicable to a "registered" corporation such as the Company which, under
certain circumstances, permit a corporation to redeem Control Shares (as defined
in the PBCL), remove the voting rights of Control Shares and require the
disgorgement of profits by a Controlling Person (as defined in the PBCL).
63
<PAGE> 72
LIMITATION ON LIABILITY AND INDEMNIFICATION
OF OFFICERS AND DIRECTORS
LIMITATION ON LIABILITY OF DIRECTORS
Pursuant to authority conferred by Section 1741 of the PBCL, Article VII of
the Company's Articles ("Article VII") will eliminate the personal liability of
the Company's directors to the Company or its shareholders for monetary damages
for breach of fiduciary duty, including without limitation directors serving on
committees of the Company Board. Directors would remain liable unless (i) such
directors have breached or failed to perform their duties as directors and (ii)
the breach or failure to perform constitutes self-dealing, willful misconduct or
recklessness. However, a Pennsylvania corporation is not empowered to eliminate
personal liability where the responsibility or liability of a director is
pursuant to any criminal statute or is for the payment of taxes pursuant to any
federal, state or local law.
Article VII further provides that any future repeal or amendment of its
terms will not adversely affect any rights of directors existing thereunder with
respect to acts or omissions occurring prior to such repeal or amendment.
Article VII also incorporates any future amendments to Pennsylvania law which
further eliminate or limit the liability of directors.
INDEMNIFICATION AND INSURANCE
In accordance with Chapter 17 of the PBCL, which provides for the
indemnification of directors, officers and employees under certain
circumstances, Article XIV ("Article XIV") of the By-Laws and certain reslutions
grant the Company's directors and officers and employees a right to
indemnification for all expenses, liabilities and losses relating to civil,
criminal, administrative or investigative proceedings to which they are a party
(i) by reason of the fact that they are or were directors, officers of the
Company or (ii) by reason of the fact that, while they are or were directors, or
officers or employees of the Company, they are or were serving at the request of
the Company as directors, officers, members, employees, fiduciaries or agents of
another corporation, partnership, joint venture, trust or enterprise. Article
XIV of the By-Laws further provides for the mandatory advancement of expenses
incurred by officers and directors in defending such proceedings in advance of
their final disposition upon delivery to the Company by the indemnitee of an
undertaking to repay all amounts so advanced if it is ultimately determined that
such indemnitee is not entitled to be indemnified under Article XIV. The Company
may not indemnify or make advance payments to any person in connection with
proceedings initiated against the Company by such person without the
authorization of the Company Board, except with respect to counterclaims,
cross-claims, third-party claims or as otherwise ordered by a court of competent
jurisdiction.
In addition, Article XIV provides that directors and officers shall be
indemnified to the fullest extent permitted by Chapter 17 of the PBCL, or any
successor provisions or amendments thereunder. In the event that any such
successor provisions or amendments provide indemnification rights broader than
permitted prior thereto, Article XIV allows such broader indemnification rights
to apply retroactively with respect to any predating alleged action or inaction
and also allows the indemnification to continue after an indemnitee has ceased
to be a director or officer of the Company and to inure to the benefit of the
indemnitee's heirs, executors and administrators.
Article XIV further provides that the right to indemnification is not
exclusive of any other right which any indemnitee may have or thereafter acquire
under any statute, the Articles or By-Laws, any agreement or vote of
shareholders or disinterested directors or otherwise, and allows the Company to
indemnify and advance expenses to any person whom the Company has the power to
indemnify under the PBCL or otherwise.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted for directors and officers and controlling persons pursuant to
the foregoing provisions, the Company has been advised that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
64
<PAGE> 73
The By-Laws authorize the Company to purchase insurance for directors,
officers and employees of the Company, and persons who serve at the request of
the Company as directors, officers, members, employees, fiduciaries or agents of
other enterprises against any expense, liability or loss incurred in such
capacity, whether or not the Company would have the power to indemnify such
persons against such expense or liability under the By-Laws. The Company intends
to maintain insurance coverage for its officers and directors as well as
insurance coverage to reimburse the Company for potential costs of its corporate
indemnification of directors and officers.
ADDITIONAL INFORMATION
The Company has filed with the Commission the Registration Statement under
the Exchange Act with respect to the Company Common Stock being received by the
shareholders of Westinghouse Common Stock in the Distribution. This Information
Statement does not contain all of the information set forth in the Registration
Statement and the exhibits thereto, to which reference is hereby made.
Statements made in this Information Statement as to the contents of any
contract, agreement or other documents referred to herein are not necessarily
complete. With respect to each such contract, agreement or other documents filed
as an exhibit to the Registration Statement, reference is made to such exhibit
for more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. The Registration
Statement and the exhibits thereto filed by the Company with the Commission may
be inspected at the public reference facilities of the Commission listed below.
After the Distribution, the Company will be subject to the information
requirements of the Exchange Act, and in accordance therewith will file reports,
proxy statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at its principal offices at
450 Fifth Street, N.W., Washington, D.C. 10549, and at its regional offices at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material may be obtained at prescribed rates from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. Such material may also be accessed electronically by means of the
Commission's home page on the Internet at http://www.sec.gov. Application has
been made to list the shares of Company Common Stock on the NYSE and, if and
when such shares of Company Common Stock commence trading on the NYSE, such
reports, proxy statements and other information concerning the Company will be
available for inspection at the NYSE, 20 Broad Street, New York, New York 10005.
------------------------
The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements (beginning with fiscal year 1997)
audited by independent accountants.
NO PERSON IS AUTHORIZED BY WESTINGHOUSE OR THE COMPANY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
INFORMATION STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
65
<PAGE> 74
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WESTINGHOUSE ELECTRIC COMPANY COMBINED FINANCIAL STATEMENTS
Independent Auditors' Report......................................................... F-2
Report of Independent Accountants.................................................... F-2
Combined Statement of Income for the years ended December 31, 1996, 1995 and 1994.... F-3
Combined Balance Sheet at December 31, 1996 and 1995................................. F-4
Combined Statement of Cash Flows for the years ended December 31, 1996, 1995 and
1994............................................................................... F-5
Notes to the Combined Financial Statements........................................... F-6
WESTINGHOUSE ELECTRIC COMPANY CONDENSED COMBINED FINANCIAL STATEMENTS
Condensed Combined Statement of Income for the three months ended
March 31, 1997 and 1996............................................................ F-28
Condensed Combined Balance Sheet at March 31, 1997 and December 31, 1996............. F-29
Condensed Combined Statement of Cash Flows for the three months ended
March 31, 1997 and 1996............................................................ F-30
Notes to the Condensed Combined Financial Statements................................. F-31
WESTINGHOUSE ELECTRIC COMPANY UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Balance Sheet at March 31, 1997......................... F-38
Unaudited Pro Forma Combined Statement of Income for the Three Months
Ended March 31, 1997............................................................... F-39
Unaudited Pro Forma Combined Statement of Income for the Year Ended December 31,
1996............................................................................... F-39
Notes to the Unaudited Pro Forma Combined Financial Statements....................... F-40
</TABLE>
F-1
<PAGE> 75
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
WESTINGHOUSE ELECTRIC COMPANY
We have audited the accompanying combined balance sheet of Westinghouse
Electric Company and subsidiaries as of December 31, 1996, and the related
combined statements of income and cash flows for the year then ended. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1996 combined financial statements referred to above
present fairly, in all material respects, the financial position of Westinghouse
Electric Company and subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Pittsburgh, Pennsylvania
January 29, 1997
------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
WESTINGHOUSE ELECTRIC COMPANY
In our opinion, the accompanying combined financial statements appearing on
pages F-3 through F-27 of this Information Statement present fairly, in all
material respects, the financial position of Westinghouse Electric Company and
its subsidiaries at December 31, 1995, and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the combined financial statements of the Company and
its subsidiaries for any period subsequent to December 31, 1995.
The Company has recognized income taxes on the assumption that the Company
was eligible to be included in the consolidated tax returns of Westinghouse
Electric Corporation. For a description of the effects on the tax benefit and
the net deferred tax asset of recognizing such taxes as if the Company were a
stand alone entity, see note 5 to the combined financial statements.
Price Waterhouse LLP
Pittsburgh, Pennsylvania
February 12, 1997
F-2
<PAGE> 76
WESTINGHOUSE ELECTRIC COMPANY
COMBINED STATEMENT OF INCOME
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Product sales................................................. $ 2,417 $ 2,472 $ 2,542
Service sales................................................. 1,050 962 988
------- ------- -------
Sales of products and services.............................. 3,467 3,434 3,530
------- ------- -------
Cost of products sold......................................... (2,076) (2,150) (2,105)
Cost of services sold......................................... (779) (716) (702)
------- ------- -------
Costs of products and services sold......................... (2,855) (2,866) (2,807)
------- ------- -------
Restructuring, litigation and other matters (notes 14 and
17)......................................................... (888) (294) (21)
Marketing, administration and general expenses (note 1)....... (614) (554) (631)
------- ------- -------
Operating profit (loss)....................................... (890) (280) 71
Other income and expenses, net (note 16)...................... (140) (13) (155)
Interest expense.............................................. (1) (2) (8)
------- ------- -------
Loss before income taxes and minority interest in income of
subsidiaries................................................ (1,031) (295) (92)
Income tax benefit (note 5)................................... 370 97 19
Minority interest in income of subsidiaries................... (4) (4) (4)
------- ------- -------
Net loss...................................................... $ (665) $ (202) $ (77)
======= ======= =======
Unaudited pro forma net loss per common share (note 1)........
=======
</TABLE>
See Notes to Combined Financial Statements.
F-3
<PAGE> 77
WESTINGHOUSE ELECTRIC COMPANY
COMBINED BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------
1996 1995
------ ------
<S> <C> <C>
ASSETS:
Cash and cash equivalents (note 2)...................................... $ 87 $ 83
Customer receivables (note 6)........................................... 643 725
Inventories (note 7).................................................... 617 540
Uncompleted contracts costs over related billings (note 7).............. 686 542
Deferred income taxes (note 5).......................................... 354 372
Prepaid and other current assets........................................ 122 110
------ ------
Total current assets.................................................... 2,509 2,372
Plant and equipment, net (note 8)....................................... 752 827
Deferred income taxes, noncurrent (note 5).............................. 748 348
Intangible and noncurrent assets (note 9)............................... 532 296
------ ------
Total assets......................................................... $4,541 $3,843
====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY:
Accounts payable........................................................ $ 610 $ 618
Uncompleted contracts billings over related costs (note 7).............. 331 315
Other current liabilities (note 10)..................................... 956 758
------ ------
Total current liabilities............................................... 1,897 1,691
Settlements and other accrued liabilities............................... 959 286
Environmental liabilities............................................... 304 141
Other noncurrent liabilities (note 11).................................. 268 178
------ ------
Total liabilities.................................................... 3,428 2,296
------ ------
Contingent liabilities and commitments (note 14)........................
Minority interest in equity of subsidiaries............................. 4 6
Shareholder's equity (note 12):
Minimum pension liability adjustment (note 3)........................ -- (21)
Cumulative foreign currency translation adjustments.................. (4) (17)
Invested equity...................................................... 1,113 1,579
------ ------
Total shareholder's equity.............................................. 1,109 1,541
------ ------
Total liabilities and shareholder's equity.............................. $4,541 $3,843
====== ======
</TABLE>
See Notes to Combined Financial Statements.
F-4
<PAGE> 78
WESTINGHOUSE ELECTRIC COMPANY
COMBINED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $(665) $(202) $ (77)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Depreciation and amortization................................ 113 120 127
Pension settlement loss...................................... -- -- 138
Losses on asset dispositions................................. 147 -- 17
Changes in assets and liabilities, net of effects of
acquisitions and divestitures of businesses:
Receivables, current and noncurrent........................ 71 73 (123)
Inventories................................................ (229) 76 51
Progress payments net of costs on uncompleted contracts.... (129) (283) (217)
Deferred and current income taxes.......................... (358) (123) (134)
Accounts payable........................................... (3) 122 104
Settlements and other accrued costs........................ 724 182 (56)
Environmental liabilities.................................. 179 9 10
Accrued restructuring...................................... 107 (22) (109)
Other assets and liabilities............................... (32) 60 (62)
----- ----- -----
Cash provided (used) by operating activities...................... (75) 12 (331)
----- ----- -----
Cash flows from investing activities:
Business acquisitions........................................... (71) (40) --
Business divestitures........................................... 29 67 20
Capital expenditures............................................ (75) (124) (110)
Other........................................................... -- 15 22
----- ----- -----
Cash used by investing activities................................. (117) (82) (68)
----- ----- -----
Cash flows from financing activities:
Net increase (reduction) in short-term debt..................... 1 (5) (9)
Repayments of long-term debt.................................... (4) -- --
Long-term borrowings............................................ -- 4 --
Net transfer from Westinghouse.................................. 199 21 473
----- ----- -----
Cash provided by financing activities............................. 196 20 464
----- ----- -----
Increase (decrease) in cash and cash equivalents.................. 4 (50) 65
Cash and cash equivalents at beginning of period (note 2)......... 83 133 68
----- ----- -----
Cash and cash equivalents at end of period (note 2)............... $ 87 $ 83 $ 133
===== ===== =====
Supplemental disclosure of cash flow information:
Interest paid................................................... $ 1 $ 2 $ 7
===== ===== =====
Income taxes paid............................................... $ 35 $ 48 $ 41
===== ===== =====
</TABLE>
See Notes to Combined Financial Statements.
F-5
<PAGE> 79
NOTES TO THE COMBINED FINANCIAL STATEMENTS
NOTE 1: OVERVIEW
BACKGROUND
In November 1996, Westinghouse Electric Corporation (Westinghouse)
announced that its Board of Directors had conditionally approved a plan for a
strategic restructuring whereby Westinghouse would separate its media and
industrial businesses into two separate publicly traded companies. The
Westinghouse Board of Directors modified the separation plan in June 1997 such
that the industrial businesses would consist primarily of the manufacturing and
services businesses for the nuclear and fossil-fueled power generation industry
and the government operations business.
Westinghouse plans to separate its industrial businesses by way of a
tax-free dividend to shareholders (the "Distribution"), forming a publicly
traded company called Westinghouse Electric Company (the "Company"). The
Company, currently a wholly owned subsidiary of Westinghouse, was incorporated
in 1997.
Westinghouse will effect a series of asset and stock transfers, and
liability assumptions among itself and its subsidiaries (the "Restructuring") in
order to separate Westinghouse's industrial business from its media businesses
and Thermo King business unit. In connection with the Restructuring,
Westinghouse and its subsidiaries will transfer to the Company all of the assets
and liabilities related to the Power Generation, Energy Systems, and Government
Operations business units. Additionally, the Company will receive and assume
responsibility for assets and liabilities, including environmental and
litigation-related liabilities, associated with Westinghouse's divested
businesses, other than those businesses classified as discontinued operations by
Westinghouse (the "Divested Businesses"), and asbestos and other toxic tort
litigation-related liabilities. The pension and postretirement liabilities, as
of the date of the Distribution (the "Distribution Date"), for certain employees
of both Westinghouse's industrial business and Divested Businesses certain
income tax benefits of the Company (see Note 5 to the Combined Financial
Statements) will be retained by Westinghouse.
Upon completion of the Restructuring and subject to the satisfaction of all
the conditions to the Distribution, Westinghouse will distribute to each holder
of record of Westinghouse common stock at the Distribution record date,
certificates representing a specific number of shares of Company common stock
based on a ratio to be determined, and cash in lieu of any fractional shares of
Company common stock.
Completion of the Restructuring and Distribution is subject to a number of
conditions, including receipt of a favorable ruling from the Internal Revenue
Service that the transaction will not be taxable for U.S. federal income tax
purposes to Westinghouse or its shareholders, a credit facility being in place,
and the registration statement being declared effective.
BASIS OF PRESENTATION
The combined financial statements reflect the results of operations,
financial position, changes in shareholder's equity, and cash flows of the
businesses that will be transferred to the Company from Westinghouse in the
Distribution. The combined financial statements have been prepared using the
historical bases in the assets and liabilities and historical results of
operations related to the Company's businesses. Changes in shareholder's equity
represent the net loss of the Company and net cash transfers to or from
Westinghouse. Additionally, the combined financial statements include
allocations of certain other assets, liabilities, and expenses that will be
transferred to the Company from Westinghouse. All material intercompany
transactions and balances among the Company's businesses have been eliminated.
General corporate overhead expenses related to Westinghouse's corporate
headquarters and common support functions have been allocated to the Company
based on the ratio of the Company's sales to those of Westinghouse, including
sales of those businesses classified as discontinued operations by Westinghouse.
Subsequent to the Distribution, the Company will perform these functions using
its own resources or will purchase services and will be responsible for the
costs and expenses associated with the management of a public corporation.
Various interim services will be provided by both Westinghouse and the Company.
F-6
<PAGE> 80
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: OVERVIEW (CONTINUED)
The Company's financial statements include an estimate of the costs
experienced by the Westinghouse pension and postretirement benefit plans for
employees and retirees of the Company. Plan obligations accrued through the
Distribution Date will be retained by Westinghouse.
Management believes that the allocations made are reasonable. However, the
financial information included herein may not necessarily reflect the combined
results of operations, financial position, changes in shareholder's equity and
cash flows of the Company in the future or what they would have been had it been
a separate, stand-alone entity during the periods presented.
EARNINGS (LOSS) PER COMMON SHARE
Historical earnings (loss) per share have not been presented because it
would not be meaningful. Pro forma earnings (loss) per common share is
calculated by dividing the net earnings (loss) by the number of shares of common
stock to be outstanding after the Distribution. [Because the number of shares of
common stock to be issued in the Distribution has not yet been determined,
unaudited pro forma earnings (loss) per share is not presented. These
determinations will be made prior to the effective date of this Information
Statement and unaudited pro forma earnings (loss) per share will be furnished by
amendment and reflected in the definitive Information Statement.]
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The combined financial statements include the accounts of the Energy
Systems, Power Generation, and Government Operations business units along with
certain other specified assets and liabilities after elimination of intercompany
accounts and transactions. Investments in joint ventures and other companies in
which the Company does not control but has the ability to exercise significant
management influence over operating and financial policies are accounted for by
the equity method.
REVENUE RECOGNITION
Sales are recorded primarily as products are shipped and services are
rendered. The percentage-of-completion method of accounting is used for major
power generation projects with cycle times in excess of one year and major
nuclear fuel and related equipment orders.
Costs to obtain contracts are expensed as incurred. Estimates of costs to
complete projects are reviewed periodically throughout the lives of the
contracts as events occur and as uncertainties are resolved. When current
contract estimates indicate a loss, provision is made for the entire loss, which
is charged against operations in the period in which such loss is determined.
AMORTIZATION OF INTANGIBLE ASSETS
Goodwill and other acquired intangible assets are amortized using the
straight-line method over their estimated lives but not in excess of 40 years
for assets acquired prior to January 1, 1994, and not in excess of 15 years for
assets acquired after December 31, 1993.
INCOME TAXES
Historically, the results of the Company's domestic operations have been
included in the consolidated U.S. income tax return of Westinghouse. The results
of the Company's foreign operations have been reported in their respective
taxing jurisdictions along with the operations of other Westinghouse affiliates.
The income tax benefit in the income statement is presented as if the Company
had been eligible to be included in the consolidated tax returns of Westinghouse
or other affiliates. Deferred tax assets associated with the net operating loss
carryforwards for U.S. federal tax purposes have been recorded in the combined
balance sheet. However, in connection with the Distribution, these benefits will
be retained by Westinghouse. Current income tax liabilities are recorded through
the invested equity account with Westinghouse.
F-7
<PAGE> 81
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The recognition and measurement of income tax expense and deferred income
taxes requires certain assumptions, allocations, and significant estimates. The
income tax information included in these financial statements assumes that the
Company's results are included in the Westinghouse consolidated U.S. federal tax
returns. The Company's income tax expense is determined in accordance with the
asset and liability method of accounting for income taxes.
CASH AND CASH EQUIVALENTS
The Company considers all investment securities with a maturity of three
months or less when acquired to be cash equivalents. All cash and temporary
investments are placed with high credit quality financial institutions, and the
amount of credit exposure to any one financial institution is limited. At
December 31, 1996 and 1995, cash and cash equivalents included restricted funds
of $9 million and $18 million, respectively.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost on a first-in, first-out (FIFO) basis, or market. The elements of
cost included in inventories are direct labor, direct material, and certain
overheads including factory depreciation. Long-term contracts in process include
costs incurred plus estimated profits on contracts accounted for using the
percentage-of-completion method.
PLANT AND EQUIPMENT
Plant and equipment assets are recorded at cost and depreciated over their
estimated useful lives. Depreciation is generally computed on the straight-line
method based on useful lives of 27.5 to 60 years for buildings, 20 years for
land improvements, 3 to 10 years for office equipment, and 3 to 12 years for
machinery and transportation equipment. Leasehold improvements are amortized
over the terms of the respective leases. Expenditures for additions and
improvements are capitalized, and costs for repairs and maintenance are charged
to operations as incurred. The Company limits capitalization of newly acquired
assets to those assets with cost in excess of $1,500.
LEGAL COSTS
When estimating the amount of probable loss to be recognized in connection
with litigation matters, the Company includes estimated external legal costs
through the expected date of settlement. All other legal costs are accounted for
as period costs.
ENVIRONMENTAL COSTS
Environmental expenditures that do not extend the service lives of assets
or otherwise benefit future years are expensed. The Company records liabilities
when environmental assessments or remedial efforts are probable, and the costs
can be reasonably estimated. Such estimates are adjusted if necessary as new
remediation requirements are defined or as more information becomes available.
The Company accrues over their estimated remaining useful lives the
anticipated future costs of environmental closure activities and decommissioning
of nuclear licensed sites.
FOREIGN EXCHANGE
The Company's foreign exchange policy includes matching purchases and sales
in national currencies when possible and hedging unmatched transactions when
appropriate. In accordance with this policy, the Company enters into various
foreign exchange agreements to hedge receivables or payables. These agreements
may be either foreign exchange forward or option contracts.
Gains and losses on foreign currency contracts offset gains and losses
resulting from currency fluctuations inherent in the underlying transactions.
Gains and losses on contracts that hedge specific foreign currency commitments
are deferred and recognized in net income in the period in which the transaction
is
F-8
<PAGE> 82
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
consummated. The notional value of these contracts at December 31, 1996 was $123
million. See note 14 to the financial statements.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. On an
ongoing basis, management reviews its estimates, including those related to
litigation, environmental liabilities, contracts, and pensions based on
currently available information. Changes in facts and circumstances may result
in revised estimates.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
During the first quarter of 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The adoption of
SFAS 121 did not have a material effect on the results of operations.
Subsequent to the acquisition of an intangible or other long-lived asset,
the Company continually evaluates whether later events and circumstances
indicate the remaining estimated useful life of that asset may warrant revision
or that the remaining carrying value of such an asset may not be recoverable. If
definitive cash flows are not available for a specific intangible or other
long-lived asset, the Company evaluates recoverability of the specific business
to which the asset relates. When factors indicate that an intangible or other
long-lived asset should be evaluated for possible impairment, the Company uses
an estimate of the related asset's undiscounted future cash flows over the
remaining life of that asset in measuring recoverability. If such an analysis
indicates that impairment has in fact occurred, the Company writes down the book
value of the intangible or other long-lived asset to its fair value.
STOCK-BASED COMPENSATION
On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS 123 allows entities to continue to measure
compensation cost for stock-based awards using the intrinsic value based method
of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and to provide pro forma net income
and pro forma earnings per share disclosures as if the fair value based method
defined in SFAS 123 had been applied. The Company has elected to continue to
apply the provisions of APB 25 and will provide the pro forma disclosure
provisions of SFAS 123 when the Company issues stock-based awards.
NOTE 3: PENSIONS
Substantially all Company employees are covered by a number of defined
benefit pension plans sponsored either by Westinghouse or by the Company. Most
plan benefits are based on either years of service and compensation levels at
the time of retirement or a formula based on career earnings. Pension benefits
are paid primarily from trusts funded by the Company, Westinghouse, and employee
contributions.
Company employees in the U.S. participate in plans sponsored by
Westinghouse. For accounting purposes these plans were treated as multi-employer
plans. Pension costs charged to the Company by Westinghouse for active and
retired employees totalled $103 million, $128 million, and $140 million in 1996,
1995, and 1994, respectively. The portion of these amounts that represents the
service cost for active Company employees was $32 million, $31 million and $54
million for the three respective years.
F-9
<PAGE> 83
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: PENSIONS (CONTINUED)
For the Company employees who participate in Westinghouse pension plans,
the pension obligation accrued through the Distribution Date will be retained by
Westinghouse. At the time of the Distribution, the Company will establish
defined benefit pension plans for U.S. employees who previously participated in
the plan sponsored by Westinghouse. For an undetermined transition period, the
benefits under the Company's plans are expected generally to mirror those under
the Westinghouse plans.
Certain employees in Canada and other international locations are covered
by defined benefit pension plans sponsored by the Company. Included in the
following tables are the net periodic pension cost and funded status of these
plans.
Net Periodic Pension Cost for Company-Sponsored Plans (in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost......................................... $ 2 $ 2 $ 2
Interest cost on projected benefit obligation........ 15 16 16
Amortization of unrecognized net asset............... (2) (2) (2)
Amortization of unrecognized prior service cost...... 1 1 1
Amortization of unrecognized net loss................ 3 4 3
---- ---- ----
19 21 20
---- ---- ----
Return on plan assets:
Actual return on plan assets....................... (19) (15) (20)
Deferred gain (loss)............................... -- (5) --
---- ---- ----
Recognized return on plan assets..................... (19) (20) (20)
---- ---- ----
Net periodic pension cost............................ $ -- $ 1 $ --
==== ==== ====
</TABLE>
For each of the three years, the assumed discount rate, increase in
compensation levels and expected long-term rate of return on plan assets were
7%, 5%, and 9%, respectively.
Funded Status of Company-Sponsored Pension Plans (in millions)
<TABLE>
<CAPTION>
AT DECEMBER 31
---------------
1996 1995
----- -----
<S> <C> <C>
Accumulated benefit obligation (substantially all
vested)................................................. $(223) $(232)
Effect of projected future compensation levels............ (4) (5)
----- -----
Projected benefit obligation for service rendered to
date.................................................... (227) (237)
Plan assets at fair value................................. 224 229
----- -----
Projected benefit obligation in excess of plan assets..... (3) (8)
Unrecognized net loss..................................... 37 42
Prior service cost not yet recognized in net periodic
pension cost............................................ 9 8
Unrecognized net asset.................................... (11) (12)
----- -----
Prepaid pension cost...................................... 32 30
Minimum pension liability................................. -- (33)
----- -----
Pension asset (liability) included in combined balance
sheet................................................... $ 32 $ (3)
===== =====
</TABLE>
For financial reporting purposes, a pension plan is considered unfunded
when the fair value of plan assets is less than the accumulated benefit
obligation. When that is the case, a minimum pension liability is recognized for
the sum of the unfunded amount plus any prepaid pension cost. In recognizing
such a liability, a charge is made to shareholder's equity, net of any tax
effects.
F-10
<PAGE> 84
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: PENSIONS (CONTINUED)
At December 31, 1996, no minimum pension liability was required to be
recognized. At December 31, 1995, a minimum pension liability of $33 million was
recognized for the sum of the unfunded amount of $3 million plus the prepaid
pension cost of $30 million. A charge to shareholder's equity of $33 million,
which was reduced to $21 million due to deferred tax effects of $12 million,
offset the pension liability. As a result of the year-end 1995 remeasurement,
shareholder's equity was decreased by $1 million from December 31, 1994.
The Company's restructuring activities in recent years contributed to a
high level of lump sum distributions from the Westinghouse qualified pension
fund, which settled the pension obligation to certain former employees of the
Company. During 1994, these settlements reached a level requiring recognition of
a pension settlement charge of $138 million.
NOTE 4: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, AND POSTEMPLOYMENT BENEFITS
The Company's employees participate in postretirement plans sponsored
either by Westinghouse or by the Company that provide defined medical, dental,
and life insurance benefits for eligible retirees and dependents. The costs for
these plans totalled $47 million in 1996, $61 million in 1995, and $46 million
in 1994. Of these amounts, $44 million, $58 million, and $43 million,
respectively, represent costs for active and retired employees of the Company
who participate in a plan sponsored by Westinghouse. The portion of these
amounts that represents the service costs for active Company employees was $7
million, $9 million, and $14 million for the three respective years. For
accounting purposes, the plan sponsored by Westinghouse was treated as a
multi-employer plan. The remaining $3 million of cost each year, consisting
primarily of interest cost, represents net periodic postretirement benefit cost
associated with the Company's international plans.
For Company employees who participate in the Westinghouse postretirement
benefit plan, the benefit obligation accrued through the Distribution Date will
be retained by Westinghouse. At the time of the Distribution, the Company will
establish a postretirement benefit plan for active employees who previously
participated in the Westinghouse plan. For an undetermined transition period,
the benefits under the Company's plan are expected generally to mirror those
under the Westinghouse plan.
The assumptions used to develop the net periodic postretirement benefit
cost and the present value of benefit obligations for the international plans
are shown below:
Significant Postretirement Benefit Plan Assumptions
<TABLE>
<CAPTION>
AT DECEMBER 31
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate.......................................... 8% 9% 9%
Health care cost trend rates........................... 10%* 11%* 15%*
Compensation increase rate............................. 5% 5% 5%
</TABLE>
- ---------
* The rate is assumed to decrease to 11% in 1995 and then ratably to 7% in 1999
and remain at that level thereafter.
Net periodic postretirement benefit cost is determined using the
assumptions as of the beginning of the year. The funded status is determined
using the assumptions as of the end of the year.
F-11
<PAGE> 85
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, AND POSTEMPLOYMENT BENEFITS
(CONTINUED)
The funded status and amounts recognized in the Company's balance sheet at
December 31, 1996 and 1995, all of which relates to the international plans were
as follows:
Funded Status of Company-Sponsored Postretirement Benefit Plans (in
millions)
<TABLE>
<CAPTION>
AT DECEMBER
31
-------------
1996 1995
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................... $(28) $(26)
Fully eligible, active plan participants................... (7) (6)
---- ----
Total accumulated postretirement benefit obligation and
accrued postretirement benefit cost................... $(35) $(32)
==== ====
</TABLE>
The effect of a 1% annual increase in the assumed health care cost trend
rates would increase the accumulated postretirement benefit obligation by
approximately $5 million and would increase net periodic postretirement benefit
cost by approximately $1 million.
The Company provides certain postemployment benefits to former or inactive
employees and their dependents during the time period following employment but
before retirement. At December 31, 1996 and 1995, the Company's liability for
postemployment benefits totalled $38 million and $39 million, respectively.
NOTE 5: INCOME TAXES
The income tax benefit included in the combined statement of income is as
follows:
Income Tax Expense (Benefit) (in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Current:
Federal......................................... $ 15 $ 28 $ 23
State........................................... 20 6 2
Foreign......................................... 22 15 24
----- ----- -----
Total current income tax expense............. 57 49 49
----- ----- -----
Deferred:
Federal......................................... (385) (140) (50)
State........................................... (42) (22) (6)
Foreign......................................... -- 16 (12)
----- ----- -----
Total deferred income tax benefit............ (427) (146) (68)
----- ----- -----
Income tax benefit........................... $(370) $ (97) $ (19)
===== ===== =====
</TABLE>
In addition to the amounts in the tables above, during 1996, 1995, and
1994, $12 million of income tax expense, $1 million of income tax benefit, and
$11 million of income tax benefit, respectively, were recorded in shareholder's
equity as part of the minimum pension liability adjustment. See note 3 to the
financial statements.
The foreign portion of the loss before income taxes and minority interest
in income of subsidiaries included in the combined statement of income was
income of $27 million in 1996 and $46 million in 1995 and a loss of $70 million
in 1994. Such income or loss consisted of profits and losses generated from
foreign operations that can be subject to both U.S. and foreign income taxes.
F-12
<PAGE> 86
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 INCOME TAXES (CONTINUED)
Deferred federal income taxes have not been provided on cumulative
undistributed earnings from foreign subsidiaries totaling $323 million at
December 31, 1996, which have been reinvested for an indefinite time. It is not
practicable to determine the income tax liability that would result were such
earnings repatriated.
Deferred income taxes result from temporary differences in the financial
bases and tax bases of assets and liabilities. The types of differences that
give rise to significant portions of deferred income tax liabilities or assets
are shown in the following table:
Deferred Income Taxes by Source (in millions)
<TABLE>
<CAPTION>
AT DECEMBER 31
-----------------
1996 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Provision for expenses and losses....................... $ 839 $ 581
Net operating losses.................................... 289 236
Long-term contracts in process.......................... 38 84
Postretirement and postemployment benefits.............. 26 31
Other................................................... 105 74
------ ------
Total deferred tax assets............................ 1,297 1,006
Valuation allowance....................................... (47) (58)
------ ------
Net deferred tax asset.................................... 1,250 948
------ ------
Deferred tax liabilities:
Accelerated depreciation and amortization............... (81) (72)
Net pension asset....................................... (11) --
Leasing activities...................................... (13) (23)
Other................................................... (43) (133)
------ ------
Total deferred tax liabilities....................... (148) (228)
------ ------
Deferred income taxes, net asset.......................... $1,102 $ 720
====== ======
</TABLE>
The valuation allowance for deferred taxes reflects foreign tax credits not
anticipated to be utilized of $18 million and operating loss carryforwards of
certain foreign subsidiaries for which it is considered likely that the benefit
will not be realized. At December 31, 1996, there were $42 million of net
operating loss carryforwards attributable to foreign subsidiaries. Of this
total, approximately $11 million has no expiration date. The remaining amount
will expire not later than 2003.
Deferred tax assets associated with the Company's net operating loss
carryforwards for U.S. federal income tax purposes totalling $289 million at
December 31, 1996 and $236 million at December 31, 1995 have been recognized in
the balance sheet because these benefits are expected to be realized by
Westinghouse. However, in connection with the Distribution, these deferred tax
assets will be retained by Westinghouse. Realization of the remaining net
deferred tax asset which totalled $813 million at December 31, 1996 and $484
million at December 31, 1995, will be reevaluated at the time of the
Distribution. If this reevaluation had occurred at December 31, 1996, without
relying on future taxable income other than that which could be generated
through tax planning strategies, a valuation allowance of approximately $500
million would have been required. In the aggregate these adjustments would have
reduced the net deferred tax asset and total shareholder's equity at December
31, 1996 by approximately $800 million. If no incremental deferred tax assets
had been recorded in 1996, the net loss would have increased by approximately
$400 million.
F-13
<PAGE> 87
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 INCOME TAXES (CONTINUED)
A reconciliation of the applicable U.S. federal income tax rate to the
effective tax rates reflected in the statement of income follows:
Effective Tax Rate (in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Federal income tax benefit at statutory rate........ (35.0)% (35.0)% (35.0)%
Increase (decrease) in tax resulting from:
Income taxes of prior years....................... -- 4.1 6.5
Amortization of goodwill.......................... 0.4 0.3 2.2
Interest on prior years' federal income tax, net
of federal effect.............................. -- -- (13.0)
State income tax, net of federal effect........... (0.1) (3.4) (3.3)
Lower tax rate on income of foreign sales
companies...................................... (0.6) (1.0) (5.4)
Valuation allowance for deferred taxes............ (1.8) (0.7) (4.4)
Loss of foreign tax credit........................ (0.3) 1.0 8.7
Foreign rate differential......................... (0.9) 1.0 5.2
Nondeductible expenses............................ 0.5 1.4 5.4
Dividends from foreign investments................ 0.2 0.7 7.6
Other differences, net............................ 1.7 (1.3) 4.8
----- ----- -----
Income tax benefit.................................. (35.9)% (32.9)% (20.7)%
===== ===== =====
</TABLE>
NOTE 6: CUSTOMER RECEIVABLES
Customer receivables at December 31, 1996 included $109 million
representing the sales value of material under long-term contracts not billed to
customers. Billings will occur upon shipment of major components of the
contracts. Collection of these receivables is expected to be substantially
completed within one year.
Allowances for doubtful accounts of $11 million at December 31, 1996 and
1995, were deducted from customer receivables. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral.
NOTE 7: INVENTORIES AND COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
Inventories (in millions)
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------
1996 1995
------- -------
<S> <C> <C>
Raw materials........................................... $ 104 $ 71
Work in process......................................... 411 355
Finished goods.......................................... 65 62
------- -------
580 488
Long-term contracts in process.......................... 985 838
Progress payments to subcontractors..................... 45 20
Recoverable engineering and development costs........... 68 50
------- -------
1,678 1,396
Inventoried costs related to contracts with progress
billing terms......................................... (1,061) (856)
------- -------
Inventories............................................. $ 617 $ 540
======= =======
</TABLE>
F-14
<PAGE> 88
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: INVENTORIES AND COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS (CONTINUED)
Costs and Billings on Uncompleted Contracts (in millions)
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------
1996 1995
------- -------
<S> <C> <C>
Costs included in inventories........................... $ 841 $ 729
Progress billings on contracts.......................... (155) (187)
------- -------
Uncompleted contracts costs over related billings....... $ 686 $ 542
======= =======
Progress billings on contracts.......................... $ 551 $ 442
Costs included in inventories........................... (220) (127)
------- -------
Uncompleted contracts billings over related costs....... $ 331 $ 315
======= =======
</TABLE>
Raw materials, work in process, and finished goods included
contract-related costs of $481 million at December 31, 1996 and $306 million at
December 31, 1995. Substantially all costs in long-term contracts in process,
progress payments to subcontractors, and recoverable engineering and development
costs were contract related.
Inventories other than those related to long-term contracts are generally
realized within one year. Inventoried costs do not exceed realizable values.
NOTE 8: PLANT AND EQUIPMENT
Plant and Equipment (in millions)
<TABLE>
<CAPTION>
AT DECEMBER 31
-------------------
1996 1995
------- -------
<S> <C> <C>
Land and buildings...................................... $ 378 $ 392
Machinery and equipment................................. 1,546 1,613
Construction in progress................................ 118 112
------- -------
Plant and equipment, at cost............................ 2,042 2,117
Accumulated depreciation................................ (1,290) (1,290)
------- -------
Plant and equipment, net................................ $ 752 $ 827
======= =======
</TABLE>
For the years ended December 31, 1996, 1995, and 1994, depreciation expense
totalled $107 million, $116 million, and $121 million, respectively. Of these
amounts, $92 million, $98 million, and $101 million, respectively, were included
in costs of products and services, and $15 million, $18 million, and $20
million, respectively, were included in marketing, administration and general
expenses.
F-15
<PAGE> 89
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: INTANGIBLE AND NONCURRENT ASSETS
Intangible and Noncurrent Assets (in millions)
<TABLE>
<CAPTION>
AT DECEMBER
31
-------------
1996 1995
---- ----
<S> <C> <C>
Goodwill..................................................... $ 38 $ 52
Other intangible assets...................................... 23 26
Prepaid pension asset (note 3)............................... 32 --
Joint ventures and other affiliates.......................... 89 33
Noncurrent receivables....................................... 292 68
Other........................................................ 58 117
---- ----
Intangible and noncurrent assets............................. $532 $296
==== ====
</TABLE>
Goodwill is shown in the preceding table net of accumulated amortization of
$12 million at December 31, 1996, and December 31, 1995. Other intangible assets
are shown net of accumulated amortization of $11 million at December 31, 1996,
and $8 million at December 31, 1995.
Joint ventures and other affiliates include investments in companies over
which the Company exercises significant influence but does not control.
NOTE 10: OTHER CURRENT LIABILITIES
Other Current Liabilities (in millions)
<TABLE>
<CAPTION>
AT DECEMBER
31
-------------
1996 1995
---- ----
<S> <C> <C>
Accrued employee compensation................................ $107 $109
Accrued product warranty..................................... 33 27
Accrued restructuring costs.................................. 138 45
Liability for business dispositions.......................... 71 88
Accrued interest and insurance............................... 124 104
Accrued expenses............................................. 307 256
Short-term debt.............................................. 6 5
Environmental liabilities.................................... 55 39
Other........................................................ 115 85
---- ----
Other current liabilities.................................... $956 $758
==== ====
</TABLE>
NOTE 11: OTHER NONCURRENT LIABILITIES
Other Noncurrent Liabilities (in millions)
<TABLE>
<CAPTION>
AT DECEMBER
31
-------------
1996 1995
---- ----
<S> <C> <C>
Postretirement benefits (note 4)............................. $ 35 $ 32
Postemployment benefits (note 4)............................. 38 39
Accrued restructuring costs.................................. 22 8
Liability for business dispositions.......................... 87 19
Long-term debt............................................... -- 4
Other........................................................ 86 76
---- ----
Other noncurrent liabilities................................. $268 $178
==== ====
</TABLE>
F-16
<PAGE> 90
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: SHAREHOLDER'S EQUITY
Shareholder's Equity (in millions)
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Minimum pension liability:
Balance at January 1............................. $ (21) $ (20) $ --
Pension liability adjustments, net of deferred
taxes (note 3)................................. 21 (1) (20)
------ ------ ------
Balance at December 31........................... $ -- $ (21) $ (20)
------ ------ ------
Cumulative foreign currency translation
adjustments:
Balance at January 1............................. $ (17) $ (18) $ (21)
Currency translation activity.................... 13 1 3
------ ------ ------
Balance at December 31........................... $ (4) $ (17) $ (18)
------ ------ ------
Invested equity:
Balance at January 1............................. $1,579 $1,760 $1,364
Net loss......................................... (665) (202) (77)
Net transfer from Westinghouse................... 199 21 473
------ ------ ------
Balance at December 31........................... $1,113 $1,579 $1,760
------ ------ ------
Shareholder's equity............................. $1,109 $1,541 $1,722
====== ====== ======
</TABLE>
NOTE 13: STOCK-BASED COMPENSATION PLANS
The Company intends to adopt long-term incentive and director compensation
plans under which stock options, restricted stock, and other performance awards
to employees and non-employee directors of the Company would be granted.
Outstanding stock option awards issued prior to December 31, 1996 under the
Westinghouse long-term incentive and director plans held by Company and
Westinghouse employees and non-employee directors generally will be adjusted at
the Distribution Date into a combination of both Company and Westinghouse stock
options based on a distribution ratio to be determined. Stock option awards that
are adjusted into awards of the Company's common stock will be assumed by the
Company.
The combined adjusted stock option awards will have the same ratio of the
exercise price per option to the market value per share, the same aggregate
difference between market value and exercise price, and the same vesting
provisions, option periods, and other terms and conditions, except for certain
reload features, as the original awards. The formula for determining the number
of shares and exercise price per option will depend on the respective market
values of Westinghouse common stock and Company common stock for a certain
period prior to the Distribution. Accordingly, the Company cannot currently
determine the exercise price per option for the stock option awards that the
Company will assume.
At December 31, 1996, there were 57.8 million shares of Westinghouse common
stock subject to stock awards held by Company and Westinghouse employees and
non-employee directors, 41.3 million of which were exercisable. The actual
number of shares of Company common stock subject to stock option awards will be
based on a distribution ratio to be determined.
NOTE 14: CONTINGENT LIABILITIES AND COMMITMENTS
URANIUM SETTLEMENTS
In the late 1970's, Westinghouse provided for the estimated future costs
for the resolution of all uranium supply contract suits and related litigation.
The Company is assuming all obligations associated with settlement of these
matters. The remaining uranium reserve balance includes assets required for
certain
F-17
<PAGE> 91
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: CONTINGENT LIABILITIES AND COMMITMENTS (CONTINUED)
settlement obligations and reserves for estimated future costs. The reserve
balance at December 31, 1996, is deemed adequate considering all facts and
circumstances known to management. The future obligations require providing the
remainder of the fuel deliveries through 2013. The supply of equipment and
services is essentially complete. Variances from estimates that may occur are
considered in determining if an adjustment of the liability is necessary.
LEGAL MATTERS
The Company will assume responsibility for a number of lawsuits brought
against Westinghouse including the legal matters described below.
Steam Generators
Westinghouse has been defending various lawsuits brought by utilities
claiming a substantial amount of damages in connection with alleged tube
degradation in steam generators sold by Energy Systems as components of nuclear
steam supply systems. Since 1993, settlement agreements have been entered
resolving ten litigation claims. These agreements generally require the Company
to provide certain products and services at prices discounted at varying rates.
Two cases were resolved in favor of the Company after trial or arbitration. One
steam generator lawsuit remains.
At December 31, 1996, Westinghouse was also a party to five tolling
agreements with utilities or utility plant owners' groups that have asserted
steam generator claims. The tolling agreements delay initiation of any
litigation for various specified periods of time and permit the parties time to
engage in discussions.
Asbestos
The Company will assume responsibility for numerous lawsuits claiming
various asbestos-related personal injuries, which allegedly occurred from use or
inclusion of asbestos in certain Westinghouse products, generally in the
pre-1970 time period. Typically, these lawsuits are brought against multiple
defendants. Westinghouse was neither a manufacturer nor a producer of asbestos
and oftentimes these lawsuits are dismissed on the basis that Westinghouse has
no relationship to the products in question or the claimant did not have
exposure to Westinghouse's product. At December 31, 1996, approximately 103,000
claims were outstanding.
In court actions that have been resolved, Westinghouse has prevailed in the
vast majority of the asbestos claims and has resolved others through settlement.
Furthermore, Westinghouse has brought suit against certain of its insurance
carriers with respect to these asbestos claims. Under the terms of a settlement
agreement resulting from this suit, a substantial portion of the current costs
and settlements associated with asbestos claims are being reimbursed by
insurance carriers that have agreed to the settlement. The Company has recorded
a liability for asbestos-related matters that are deemed probable and can be
reasonably estimated, and has separately recorded an asset equal to the amount
of such estimated liabilities that will be recovered pursuant to agreements with
insurance carriers. The Company cannot reasonably estimate costs for unasserted
asbestos claims.
General
Litigation is inherently uncertain and always difficult to predict.
Substantial damages are sought in the steam generator claims, certain groupings
of asbestos claims, and other litigation; and, although management believes a
significant adverse judgment is unlikely, any such judgment could have a
material adverse effect on the Company's results of operations for a quarter or
a year. However, based on its understanding and evaluation of the relevant facts
and circumstances, management believes that the Company has meritorious defenses
to the litigation described above and that the Company has adequately provided
for costs arising from potential settlement of these matters when in the best
interest of the Company. Management believes that the existing litigation should
not have a material adverse effect on the financial condition of the Company.
F-18
<PAGE> 92
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: CONTINGENT LIABILITIES AND COMMITMENTS (CONTINUED)
ENVIRONMENTAL MATTERS
Compliance with federal, state and local laws and regulations relating to
the discharge of pollutants into the environment, the disposal of hazardous
wastes, and other related activities affecting the environment have had and will
continue to have an impact on the Company. It is difficult to estimate the
timing and ultimate costs to be incurred in the future due to uncertainties
about the status of laws, regulations and technology; the adequacy of
information available for individual sites; the extended time periods over which
site remediation occurs; and the identification of new sites. The Company has,
however, recognized an estimated liability, measured in current dollars, for
those sites where it is probable that a loss has been incurred and the amount of
the loss can be reasonably estimated. The Company recognizes changes in
estimates as new remediation requirements are defined or as more information
becomes available. In connection with the Distribution, the Company will assume
all of the environmental liabilities associated with its current businesses as
well as those related to certain Westinghouse businesses that were previously
divested.
With regard to remedial actions under federal and state Superfund laws, the
Company has been named a potentially responsible party at numerous sites located
throughout the country. At many of these sites, the Company is either not a
responsible party or its site involvement is very limited or de minimis.
However, the Company may have varying degrees of cleanup responsibilities at
approximately 75 sites. The Company believes that any liability incurred for
cleanup at these sites will be satisfied over a number of years, and in many
cases, the costs will be shared with other responsible parties. These sites
include certain sites for which the Company, as part of an agreement for sale,
has retained obligations for remediation of environmental contamination and for
other Comprehensive Environmental Response Compensation and Liability Act
issues.
In the second quarter of 1996, the Company and its external consultants
completed a study to evaluate the Company's environmental remediation
strategies. Based on the costs associated with the most probable alternative
remediation strategy for the above-mentioned sites, the Company has an accrued
liability of $359 million, of which $175 million was recognized in the second
quarter of 1996. Depending on the remediation alternatives ultimately selected,
the costs related to these sites could differ from the amounts currently
accrued. The accrued liability includes $261 million for site investigation and
remediation, and $98 million for post-closure and monitoring activities.
Management anticipates that the majority of expenditures for site investigation
and remediation will occur during the next five to ten years. Expenditures for
post-closure and monitoring activities will be made during periods of up to 30
years.
Other
The Company has assumed responsibility for several administrative actions
alleging violations of federal, state, or local environmental regulations. For
these matters, the Company has estimated its remaining reasonably possible costs
and determined them to be immaterial.
The Company currently manages under contract several government-owned
facilities that, among other things, are engaged in the remediation of hazardous
and nuclear wastes. To date, under the terms of the contracts, the Company is
not responsible for costs associated with environmental liabilities, including
environmental cleanup costs, except under certain circumstances associated with
the willful misconduct or lack of good faith of its managers or their failure to
exercise prudent business judgment. There are currently no material claims for
which the Company believes it is responsible.
The Company has or will have responsibilities for environmental closure
activities or decommissioning of nuclear licensed sites. The Company has
estimated that the total potential cost to be incurred for these actions is
approximately $91 million, of which $23 million was accrued at December 31,
1996. The Company's policy is to accrue these costs over the estimated life of
the individual facilities, which in most cases approximates 20 years. The
anticipated annual costs currently being accrued are $6 million.
F-19
<PAGE> 93
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: CONTINGENT LIABILITIES AND COMMITMENTS (CONTINUED)
Capital expenditures related to environmental compliance in 1996 and 1995
totalled $5 million and $4 million, respectively. Operating expenses that are
recurring and associated with managing hazardous waste and pollutants in ongoing
operations totalled $5 million in 1996 and 1995.
Management believes, based on its best estimate, that the Company has
adequately provided for its present environmental obligations and that complying
with existing government regulations will not materially impact the Company's
financial position, liquidity, or results of operations.
COMMITMENTS
In the ordinary course of business, standby letters of credit and surety
bonds are issued on behalf of the Company related to performance obligations
primarily under contracts with customers.
The Company's commitments consist primarily of those for the purchase of
plant and equipment totaling approximately $39 million at December 31, 1996.
HEDGING
The following is a schedule of the Company's foreign currency contracts,
their maturities in U.S. dollar equivalents, and the unrealized gain or loss on
these contracts as of December 31, 1996. These contracts are entered into with
high credit quality financial institutions, at customary terms.
Foreign Currency Contracts (in millions)
<TABLE>
<CAPTION>
NOTIONAL MATURES MATURES UNREALIZED
CURRENCY AMOUNTS IN 1997 IN 1998 LOSS
-------------------------------------- --------- -------- -------- -----------
<S> <C> <C> <C> <C>
Saudi Riyal........................... $ 76 $ 55 $ 21 $--
Belgian Franc......................... 17 17 -- --
British Pound......................... 17 17 -- (2)
Canadian Dollar....................... 6 6 -- --
Other Currencies...................... 7 7 -- --
--------- -------- --- ---
Total............................... $ 123 $102 $ 21 $(2)
======= ======= ======= =========
</TABLE>
NOTE 15: LEASES
The Company has commitments under operating leases for certain machinery
and equipment and facilities used in various operations. Rental expense for
operations in 1996, 1995, and 1994 was $74 million, $74 million, and $86
million, respectively. These amounts include immaterial amounts for contingent
rentals. Rental expense included sublease income totaling $5 million, $7 million
and $5 million for 1996, 1995, and 1994, respectively.
Minimum Rental Payments (in millions)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 LEASE OBLIGATIONS
---------------------------------------------------- -----------------
<S> <C>
1997.............................................. $ 63
1998.............................................. 52
1999.............................................. 49
2000.............................................. 54
2001.............................................. 42
Subsequent years.................................. 156
------
Minimum rental payments........................ $ 416
==============
</TABLE>
F-20
<PAGE> 94
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: OTHER INCOME AND EXPENSES, NET
Other Income and Expenses, Net (in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1996 1995 1994
----- ---- -----
<S> <C> <C> <C>
Miscellaneous interest income...................... $ 16 $ 5 $ 2
Loss on disposition of other assets, net........... (147) -- (17)
Foreign currency transaction and high-inflation
translation effect............................... (3) (6) (1)
Pension settlement loss (note 3)................... -- -- (138)
Other.............................................. (6) (12) (1)
----- ---- -----
Other income and expenses, net..................... $(140) $(13) $(155)
===== ==== =====
</TABLE>
NOTE 17: RESTRUCTURING, LITIGATION AND OTHER MATTERS
The Company has undertaken a number of actions to downsize its businesses
and resolve various litigation and other matters. Certain of these actions
resulted in the recognition of charges to operating profit.
Restructuring, Litigation and Other Matters (in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Restructuring......................................... $210 $ 58 $21
Litigation matters.................................... 458 236 --
Impairment of assets.................................. 15 -- --
Environmental remediation activities.................. 175 -- --
Other................................................. 30 -- --
---- ---- ----
Total............................................... $888 $294 $21
==== ==== ====
</TABLE>
In recent years, the Company has restructured many of its businesses and
the Westinghouse corporate headquarters in an effort to reduce its cost
structure and remain competitive in its markets. Costs for restructuring the
corporate headquarters represent the Company's share of the total cost incurred
by Westinghouse for the downsizing programs. Restructuring activities primarily
involve the separation of employees, the closing of facilities, the termination
of leases, and the exiting of product lines. Costs for restructuring activities
are limited to incremental costs that directly result from the restructuring
activities and that provide no future benefit to the Company.
A summary of restructuring charges by business segment follows:
Restructuring Costs by Segment (in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Power Generation...................................... $ 68 $28 $(5)
Energy Systems........................................ 113 16 26
Government Operations................................. 8 -- --
Corporate & Other..................................... 21 14 --
---- ---- ----
Total............................................... $210 $58 $21
==== ==== ====
</TABLE>
Generally, separated employees received benefits such as layoff income
benefits, permanent job separation benefits, retraining and/or outplacement
assistance. The amount included for these benefits in the
F-21
<PAGE> 95
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: RESTRUCTURING, LITIGATION AND OTHER MATTERS (CONTINUED)
restructuring charge represents the incremental cost of such benefits over those
amounts previously accrued under SFAS No. 112, "Employers' Accounting for
Postemployment Benefits."
Based on the Company's current estimates, summarized below are the
restructuring costs by category of expenditure:
Restructuring Costs by Category of Expenditure (dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Number of employee separations........................ 2,225 855 490
---- ---- ----
Employee separation costs............................. $165 $52 $37
Pension and postretirement curtailment costs.......... 13 -- --
Asset writedowns...................................... 21 3 --
Facility closure/rationalization costs................ 13 3 --
Adjustments of prior plans............................ (2) -- (16)
---- ---- ----
Total charge to operations.......................... $210 $58 $21
==== ==== ====
</TABLE>
Of the employee separations in the 1996 plans, 44% were completed at
December 31, 1996. For the 1995 and 1994 plans, 86% and 100%, respectively, were
completed at December 31, 1996. The majority of the remaining separations are
expected to be completed in 1997. Employee separation costs generally are paid
over a period of up to two years following their separation.
The following is a reconciliation of the restructuring liability:
Reconciliation of Restructuring Liability (in millions)
<TABLE>
<S> <C>
Balance at January 1, 1994........................................... $ 184
Provision for restructuring.......................................... 21
Cash expenditures.................................................... (110)
Noncash expenditures................................................. (20)
-----
Balance at December 31, 1994......................................... 75
-----
Provision for restructuring.......................................... 58
Cash expenditures.................................................... (80)
Noncash expenditures................................................. --
-----
Balance at December 31, 1995......................................... 53
-----
Provision for restructuring.......................................... 210
Cash expenditures.................................................... (62)
Noncash expenditures................................................. (41)
-----
Balance at December 31, 1996......................................... $ 160
====
</TABLE>
The Company will be reimbursed by Westinghouse for accrued liabilities
associated with restructuring programs initiated prior to the Distribution that
are unpaid at the Distribution Date.
NOTE 18: SEGMENT INFORMATION
The Company has global operations in the principal business areas of power
generation systems and chemical and nuclear materials management. The Company's
businesses are aligned for reporting purposes into the following three segments:
Power Generation, Energy Systems, and Government Operations. Results of
international activities, including manufacturing, export sales, and foreign
licensee income, are included in the financial information of the segment that
has operating responsibility.
F-22
<PAGE> 96
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: SEGMENT INFORMATION (CONTINUED)
Power Generation designs, manufactures, installs and services steam and
combustion turbine generators, as well as constructs turn-key power plants
worldwide.
Energy Systems services the domestic and international electric power
industry by supplying fuel and a wide range of operating plant services for
nuclear facilities. Through its Process Control Division, Energy Systems
provides distributed control, communications, data acquisition, and information
systems to electric utilities and for a variety of other processes and specialty
applications. Other Energy Systems reflects activities arising from certain
litigation involving products sold by Energy Systems.
Government Operations includes management services for certain
government-owned facilities under contracts with the U.S. Department of Energy
(DOE) and the U.S. Department of Defense (DOD), management of nuclear reactor
programs for the U.S. Navy, and management of a chemical agent destruction
program for the DOD.
Corporate & Other includes corporate activities that are managed for the
benefit of the entire Company and the results of operations for the Company's
non-strategic businesses.
Segment sales of products and services include products that are
transferred between segments, generally at inventoried cost plus a margin.
Segment operating profit or loss consists of sales of products and services less
segment operating expenses, which include costs of products and services,
marketing, administration and general expenses, and depreciation and
amortization.
Segment operating profit for 1996, 1995, and 1994 also included special
charges consisting of costs for restructuring, litigation, and other matters
(see note 14 to the financial statements) as follows:
Special Charges Included in Segment Operating Profit (in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Power Generation..................................... $ 73 $ 28 $ (5)
---- ---- ----
Energy Systems....................................... 124 16 26
Other Energy Systems................................. 289 236 --
---- ---- ----
Energy Systems, net.................................. 413 252 26
---- ---- ----
Government Operations................................ 8 -- --
Corporate & Other.................................... 394 14 --
---- ---- ----
Total................................................ $888 $294 $ 21
==== ==== ====
</TABLE>
Sales of Products and Services and Operating Profit by Segment (in
millions)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------------------
SALES OF PRODUCTS OPERATING
AND SERVICES PROFIT (LOSS)
---------------------------- -------------------------
1996 1995 1994 1996 1995 1994
------ ------ ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Power Generation........................ $2,172 $1,718 $1,630 $ (75) $ (57) $ 82
------ ------ ------ ----- ----- -----
Energy Systems.......................... 1,234 1,369 1,364 (30) 114 114
Other Energy Systems.................... (172) (138) (149) (362) (305) (79)
------ ------ ------ ----- ----- -----
Energy Systems, net..................... 1,062 1,231 1,215 (392) (191) 35
------ ------ ------ ----- ----- -----
Government Operations................... 121 155 133 63 81 77
Corporate & Other....................... 149 360 598 (486) (113) (123)
Intersegment sales...................... (37) (30) (46) -- -- --
------ ------ ------ ----- ----- -----
Total................................... $3,467 $3,434 $3,530 $(890) $(280) $ 71
====== ====== ====== ===== ===== =====
</TABLE>
F-23
<PAGE> 97
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: SEGMENT INFORMATION (CONTINUED)
Other Segment Financial Information (in millions)
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------
DEPRECIATION AND
IDENTIFIABLE ASSETS AMORTIZATION CAPITAL EXPENDITURES
-------------------------- -------------------- --------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994
------ ------ ------ ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Power Generation................... $1,718 $1,605 $1,383 $ 46 $ 44 $ 46 $38 $ 64 $ 48
------ ------ ------ ---- ---- ---- ---- ---- ----
Energy Systems..................... 876 929 981 47 49 49 34 37 39
Other Energy Systems............... 2 24 33 -- -- -- -- -- --
------ ------ ------ ---- ---- ---- ---- ---- ----
Energy Systems, net................ 878 953 1,014 47 49 49 34 37 39
------ ------ ------ ---- ---- ---- ---- ---- ----
Government Operations.............. 60 99 83 3 1 2 2 2 2
Corporate & Other.................. 1,885 1,186 1,321 17 26 30 1 21 21
------ ------ ------ ---- ---- ---- ---- ---- ----
Total.............................. $4,541 $3,843 $3,801 $113 $120 $127 $75 $124 $110
====== ====== ====== ===== ===== ===== ===== ===== =====
</TABLE>
Corporate & Other assets in the table above are not identifiable to
operating segments and principally include cash and cash equivalents, deferred
income taxes, plant and equipment associated with corporate headquarters, and
certain noncurrent receivables.
Included in income is income of subsidiaries located outside the United
States. These subsidiaries reported net income of $15 million in 1996, $31
million in 1995, and a net loss of $10 million in 1994. Subsidiaries located
outside the United States comprised 20.3% of total assets in 1996, 13.6% in
1995, and 14.9% in 1994. Subsidiaries located outside the United States
comprised 5.2% of total liabilities in 1996, 7.7% in 1995, and 8.1% in 1994.
The following table reflects selected financial information based on the
geographic area where the sale originated:
Financial Information by Geographic Area (in millions)
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Sales of products and services:
U.S.......................................... $2,973 $2,900 $3,023
Outside the U.S.............................. 494 534 507
------ ------ ------
Sales of products and services................. $3,467 $3,434 $3,530
------ ------ ------
Operating profit (loss):
U.S.......................................... $ (922) $ (332) $ 55
Outside the U.S.............................. 32 52 16
------ ------ ------
Operating profit (loss)........................ $ (890) $ (280) $ 71
------ ------ ------
Segment identifiable assets:
U.S.......................................... $3,617 $3,319 $3,235
Outside the U.S.............................. 924 524 566
------ ------ ------
Segment identifiable assets.................... $4,541 $3,843 $3,801
====== ====== ======
</TABLE>
The Company sells products manufactured domestically to customers
throughout the world using domestic divisions and subsidiaries doing business
primarily outside the United States. Generally, products manufactured outside
the United States are sold outside the United States.
F-24
<PAGE> 98
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: SEGMENT INFORMATION (CONTINUED)
Sales of Products and Services Outside the U.S. (in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
AMOUNT % OF SALES AMOUNT % OF SALES AMOUNT % OF SALES
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Subsidiaries outside the U.S.:
Europe, Africa, Middle East.... $ 167 4.8% $ 227 6.6% $240 6.8%
Canada......................... 274 7.9% 257 7.5% 201 5.7%
All other...................... 53 1.5% 50 1.5% 66 1.9%
------ ---------- ------ ----- ------ -----
Total............................ $ 494 14.2% $ 534 15.6% $507 14.4%
====== ======== ====== ======== ====== ========
U.S. exports:
Europe, Africa, Middle East.... $ 324 9.4% $ 302 8.8% $376 10.6%
Asia-Pacific................... 639 18.4% 716 20.8% 413 11.7%
Latin America.................. 271 7.8% 102 3.0% 143 4.1%
Canada......................... 11 0.3% 20 0.6% 14 0.4%
------ ---------- ------ ----- ------ -----
Total............................ $1,245 35.9% $1,140 33.2% $946 26.8%
====== ======== ====== ======== ====== ========
</TABLE>
Purchases by the U.S. Government and its agencies accounted for 8.2% of
sales of products and services during 1996, 10.2% in 1995 and 9.0% in 1994.
Sales to the utility segment accounted for 62.1% of sales of products and
services during 1996, 56.1% in 1995, and 58.4% in 1994.
Research and Development (in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Company-sponsored:
Power Generation.................................. $ 17 $ 24 $ 45
Energy Systems.................................... 12 16 21
Government Operations............................. 1 -- --
Corporate & Other................................. 4 2 10
Customer-sponsored:
Power Generation.................................. 21 10 7
Energy Systems.................................... 52 56 40
Government Operations............................. -- -- --
Corporate & Other 26 45 52
---- ---- ----
Total research and development expenditures......... $133 $153 $175
==== ==== ====
</TABLE>
NOTE 19: FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by
the Company using the best available market information and appropriate
valuation methodologies. However, considerable judgment is necessary in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented are not necessarily indicative of the amounts that the
Company could realize in a current market exchange or the value that ultimately
will be realized by the Company upon maturity or disposition. Additionally,
because of the variety of valuation techniques permitted under SFAS No. 107,
"Disclosures about Fair Values of Financial Instruments," comparability of fair
values among entities may not be meaningful. The use of different market
assumptions or estimation methodologies may have a material effect on the
estimated fair value amounts.
F-25
<PAGE> 99
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19: FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair Value of Financial Instruments (in millions)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
------------------------------------ ------------------------------------
CARRYING ESTIMATED CONTRACT CARRYING ESTIMATED CONTRACT
AMOUNT FAIR VALUE AMOUNT AMOUNT FAIR VALUE AMOUNT
-------- ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents...... $ 87 $ 87 $ -- $ 83 $ 83 $ --
Noncurrent customer and other
receivables.................. 292 286 -- 68 64 --
LIABILITIES:
Short-term debt................ 6 6 -- 5 5 --
Long-term debt................. -- -- -- 4 4 --
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS:
Foreign currency exchange
contracts:
Unrealized gains (losses).... -- (2) -- -- 5 --
Letters of credit.............. -- -- 412 -- -- 451
</TABLE>
The following methods and assumptions were used to estimate the fair value
of financial instruments for which it was practicable to estimate that value.
CASH AND CASH EQUIVALENTS
The carrying amount for cash and cash equivalents approximates fair value.
NONCURRENT CUSTOMER AND OTHER RECEIVABLES
The fair value of noncurrent customer and other receivables is estimated by
discounting the expected future cash flows at interest rates commensurate with
the creditworthiness of the customers and other third parties.
SHORT-TERM DEBT
The carrying amount of the Company's borrowings under credit facilities and
other arrangements approximate fair value.
LONG-TERM DEBT
The fair value of long-term debt has been estimated using quoted market
prices or discounted cash flow methods based on the Company's current borrowing
rates for similar types of borrowing arrangements with comparable terms and
maturities.
FOREIGN CURRENCY EXCHANGE CONTRACTS
The fair value of foreign exchange contracts is based on quoted market
prices to terminate the contracts.
F-26
<PAGE> 100
NOTES TO THE COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly Financial Information (in millions)
<TABLE>
<CAPTION>
1996 QUARTER ENDED 1995 QUARTER ENDED
------------------------------------------ ------------------------------------------
DEC. 31 SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of products and
services...................... $1,186 $823 $ 788 $ 670 $1,102 $775 $ 872 $685
Gross margin.................... 294 145 124 49 249 114 137 68
Restructuring, litigation, and
other matters................. (135) -- (175) (578) (200) (89) (5) --
Operating profit (loss)......... 3 1 (215) (679) (109) (98) (15) (58)
Other income and expenses,
net........................... 8 2 1 (151) (6) (1) (4) (2)
Net income (loss)............... 4 1 (137) (533) (79) (68) (14) (41)
</TABLE>
F-27
<PAGE> 101
WESTINGHOUSE ELECTRIC COMPANY
CONDENSED COMBINED STATEMENT OF INCOME
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
---------------
1997 1996
----- -----
(UNAUDITED)
<S> <C> <C>
Sales of products and services............................................ $ 650 $ 670
Costs of products and services sold....................................... (619) (621)
Restructuring, litigation and other matters (notes 2 and 3)............... -- (578)
Marketing, administration and general expenses............................ (154) (150)
----- -----
Operating loss............................................................ (123) (679)
Other income and expenses, net (note 4)................................... (6) (151)
Interest expense.......................................................... -- (1)
----- -----
Loss before income taxes and minority interest in income of
subsidiaries............................................................ (129) (831)
Income tax benefit........................................................ 49 299
Minority interest in income of subsidiaries............................... -- (1)
----- -----
Net loss.................................................................. $ (80) $(533)
===== =====
Unaudited pro forma net loss per common share (note 1)....................
=====
</TABLE>
See Notes to Condensed Combined Financial Statements.
F-28
<PAGE> 102
WESTINGHOUSE ELECTRIC COMPANY
CONDENSED COMBINED BALANCE SHEET
(IN MILLIONS)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
AT MARCH 31, 1997 --------------------
-----------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents............................... $ 47 $ 87
Customer receivables.................................... 611 643
Inventories (note 5).................................... 691 617
Uncompleted contracts costs over related billings....... 661 686
Deferred income taxes................................... 362 354
Prepaid and other current assets........................ 90 122
------- -------
Total current assets.................................... 2,462 2,509
Plant and equipment, net................................ 733 752
Deferred income taxes, noncurrent....................... 791 748
Intangible and noncurrent assets (note 6)............... 549 532
------- -------
Total assets......................................... $ 4,535 $4,541
============= ================
LIABILITIES AND SHAREHOLDER'S EQUITY:
Accounts payable........................................ $ 363 $ 610
Uncompleted contracts billings over related costs....... 407 331
Other current liabilities (note 7)...................... 876 956
------- -------
Total current liabilities............................... 1,646 1,897
Settlements and other accrued liabilities............... 940 959
Environmental liabilities............................... 298 304
Other noncurrent liabilities (note 7)................... 227 268
------- -------
Total liabilities.................................... 3,111 3,428
------- -------
Contingent liabilities and commitments (note 8)
Minority interest in equity of subsidiaries............. 7 4
Shareholder's equity:
Cumulative foreign currency translation
adjustments........................................ (7) (4)
Invested equity...................................... 1,424 1,113
------- -------
Total shareholder's equity.............................. 1,417 1,109
------- -------
Total liabilities and shareholder's equity.............. $ 4,535 $4,541
============= ================
</TABLE>
See Notes to Condensed Combined Financial Statements.
F-29
<PAGE> 103
WESTINGHOUSE ELECTRIC COMPANY
CONDENSED COMBINED STATEMENT OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
---------------
1997 1996
----- -----
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................ $ (80) $(533)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................................ 24 33
Losses on asset dispositions......................................... -- 151
Changes in assets and liabilities, net of effects of acquisitions and
divestitures of businesses:
Receivables, current and noncurrent................................ 32 95
Inventories........................................................ (74) (131)
Progress payments net of costs on uncompleted contracts............ 101 (97)
Deferred and current income taxes.................................. (50) (337)
Accounts payable................................................... (247) (171)
Settlements and accrued costs...................................... (65) 600
Environmental liabilities.......................................... (7) (9)
Accrued restructuring.............................................. (60) 58
Other assets and liabilities....................................... 10 (73)
----- -----
Cash used by operating activities......................................... (416) (414)
----- -----
Cash flows from investing activities:
Business acquisitions................................................... -- (10)
Capital expenditures.................................................... (14) (16)
----- -----
Cash used by investing activities......................................... (14) (26)
----- -----
Cash flows from financing activities:
Net increase (reduction) in short-term debt............................. (1) 2
Repayments of long-term debt............................................ -- (4)
Net transfer from Westinghouse.......................................... 391 384
----- -----
Cash provided by financing activities..................................... 390 382
----- -----
Decrease in cash and cash equivalents..................................... (40) (58)
Cash and cash equivalents at beginning of period.......................... 87 83
----- -----
Cash and cash equivalents at end of period................................ $ 47 $ 25
===== =====
Supplemental disclosure of cash flow information:
Interest paid........................................................... $ -- $ 1
===== =====
Income taxes paid....................................................... $ 2 $ 6
===== =====
</TABLE>
See Notes to Condensed Combined Financial Statements.
F-30
<PAGE> 104
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1: OVERVIEW
BACKGROUND
In November 1996, Westinghouse announced that its Board of Directors had
conditionally approved a plan for a strategic restructuring whereby Westinghouse
would separate its media and industrial businesses into two separate publicly
traded companies. The Westinghouse Board of Directors modified the separation
plan in June 1997 such that the industrial businesses would consist primarily of
the manufacturing and services businesses for the nuclear and fossil-fueled
power generation industry and the government operations business.
Westinghouse plans to separate its industrial businesses by way of a
tax-free dividend to shareholders, forming a publicly traded company called
Westinghouse Electric Company. The Company, currently a wholly owned subsidiary
of Westinghouse, was incorporated in 1997.
Westinghouse will effect a series of asset and stock transfers, and
liability assumptions among itself and its subsidiaries in order to separate
Westinghouse's industrial business from its media businesses and Thermo King
business unit. In connection with the Restructuring, Westinghouse and its
subsidiaries will transfer to the Company all of the assets and liabilities
related to the Power Generation, Energy Systems, and Government Operations
business units. Additionally, the Company will receive and assume responsibility
for assets and liabilities, including environmental and litigation-related
liabilities, associated with Divested Businesses, and asbestos and other toxic
tort litigation-related liabilities. The pension and postretirement liabilities,
as of the Distribution Date, for certain employees of both Westinghouse's
industrial business and Divested Businesses certain income tax benefits of the
Company as well as will be retained by Westinghouse.
Upon completion of the Restructuring and subject to the satisfaction of all
the conditions to the Distribution, Westinghouse will distribute to each holder
of record of Westinghouse common stock at the Distribution record date,
certificates representing a specific number of shares of Company common stock
based on a ratio to be determined, and cash in lieu of any fractional shares of
Company common stock.
Completion of the Restructuring and Distribution is subject to a number of
conditions, including receipt of a favorable ruling from the Internal Revenue
Service that the transaction will not be taxable for U.S. federal income tax
purposes to Westinghouse or its shareholders, a credit facility being in place,
and the registration statement being declared effective.
BASIS OF PRESENTATION
The condensed combined financial statements reflect the results of
operations, financial position, changes in shareholder's equity, and cash flows
of the businesses that will be transferred to the Company from Westinghouse in
the Distribution. The condensed combined financial statements have been prepared
using the historical bases in the assets and liabilities and historical results
of operations related to the Company's businesses. Changes in shareholder's
equity represent the net loss of the Company and net cash transfers to or from
Westinghouse. Additionally, the condensed combined financial statements include
allocations of certain other assets, liabilities, and expenses that will be
transferred to the Company from Westinghouse. All material intercompany
transactions and balances among the Company's businesses have been eliminated.
General corporate overhead expenses related to Westinghouse's corporate
headquarters and common support functions have been allocated to the Company
based on the ratio of the Company's sales to those of Westinghouse, including
sales of those businesses classified as discontinued operations by Westinghouse.
Subsequent to the Distribution, the Company will perform these functions using
its own resources or will purchase services and will be responsible for the
costs and expenses associated with the management of a public corporation.
Various interim services will be provided by both Westinghouse and the Company.
The Company's financial statements include an estimate of the costs
experienced by the Westinghouse pension and postretirement benefit plans for
employees and retirees of the Company. Plan obligations accrued through the
Distribution Date will be retained by Westinghouse.
F-31
<PAGE> 105
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: OVERVIEW (CONTINUED)
The income tax benefit in the income statement is presented as if the
Company had been eligible to be included in the consolidated tax returns of
Westinghouse or other affiliates. Deferred tax assets associated with the
Company's net operating loss carryforwards for U.S. federal income tax purposes
totalling $329 million have been recognized in the balance sheet because these
benefits are expected to be realized by Westinghouse. However, in connection
with the Distribution, these deferred tax assets will be retained by
Westinghouse. Realization of the remaining net deferred tax asset of $824
million will be reevaluated at the time of the Distribution. If this
reevaluation had occurred at March 31, 1997, without relying on future taxable
income other than that which could be generated through tax planning strategies,
a valuation allowance of approximately $500 million would have been required. In
the aggregate these adjustment would have reduced the net deferred tax asset and
total shareholder's equity at March 31, 1997 by approximately $800 million. If
no incremental deferred tax assets had been recorded in the first quarter of
1997, the net loss for the three months ended March 31, 1997 would have
increased by approximately $50 million.
Management believes that the allocations made are reasonable. However, the
financial information included herein may not necessarily reflect the combined
results of operations, financial position, changes in shareholder's equity and
cash flows of the Company in the future or what they would have been had it been
a separate, stand-alone entity during the periods presented.
When reading the financial information contained in these interim financial
statements, reference should be made to the financial statements and notes
contained in the Company's financial statements for the year ended December 31,
1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. On an
ongoing basis, management reviews its estimates, including those related to
litigation, environmental liabilities, contracts, and pensions based on
currently available information. Changes in facts and circumstances may result
in revised estimates. In the opinion of management, the condensed combined
financial statements include all material adjustments necessary to present
fairly the Company's financial position, results of operations, and cash flows.
Such adjustments are of a normal recurring nature. The results for this interim
period are not necessarily indicative of results for the entire year or any
other interim period.
EARNINGS (LOSS) PER COMMON SHARE
Historical earnings (loss) per share have not been presented because it
would not be meaningful. Pro forma earnings (loss) per common share is
calculated by dividing the net earnings (loss) by the number of shares of common
stock to be outstanding after the Distribution. [Because the number of shares of
common stock to be issued in the Distribution has not yet been determined,
unaudited pro forma earnings (loss) per share is not presented. These
determinations will be made prior to the effective date of this Information
Statement and unaudited pro forma earnings (loss) per share will be furnished by
amendment and reflected in the definitive Information Statement.]
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share," which requires the dual presentation of basic and
diluted earnings per share. The Company will adopt this standard as of December
31, 1997, as required. In June 1997, SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" were issued. The Company will adopt these standards in
1998.
F-32
<PAGE> 106
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: RESTRUCTURING, LITIGATION AND OTHER MATTERS
During the first three months of 1996, the Company took several actions to
downsize its businesses and recognize the financial impact of certain matters.
Certain of these actions resulted in the recognition of charges to operating
profit. Costs for new restructuring projects of $75 million were recognized
primarily for the consolidation of facilities and the separation of employees. A
charge of $458 million was recognized for pending litigation matters. Other
costs of $45 million recognized in the first quarter generally related to asset
impairment, as discussed in note 3 to the financial statements, or to costs
associated with previously divested businesses.
No such charges were incurred in the first three months of 1997.
NOTE 3: IMPAIRMENT OF LONG-LIVED ASSETS
During the first quarter of 1996, the Company adopted SFAS 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS 121 requires that long-lived assets, including related goodwill, be
reviewed for impairment and written down to their estimated fair value whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable.
Upon the adoption of SFAS 121, an impairment charge of $15 million was
recognized in the 1996 first quarter operating profit.
NOTE 4: OTHER INCOME AND EXPENSES, NET
Other Income and Expenses, Net (in millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
------------------------------------
1997 1996
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
Miscellaneous interest income............... $ 2 $ 4
Loss on disposition of other assets, net.... -- (151)
Foreign currency transaction and
high-inflation translation effect......... 1 --
Other....................................... (9) (4)
--- -------
Other income and expenses, net.............. $ (6) $(151)
=========== =============
</TABLE>
NOTE 5: INVENTORIES
Inventories (in millions)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
MARCH 31, 1997 -----------------
--------------
(UNAUDITED)
<S> <C> <C>
Raw materials............................... $ 103 $ 104
Work in process............................. 395 411
Finished goods.............................. 76 65
-------------- -----------------
574 580
Long-term contracts in process.............. 1,078 985
Progress payments to subcontractors......... 52 45
Recoverable engineering and development
costs..................................... 102 68
-------------- -----------------
1,806 1,678
Inventoried costs related to contracts with
progress billing terms.................... (1,115) (1,061)
-------------- -----------------
Inventories................................. $ 691 $ 617
=========== =============
</TABLE>
F-33
<PAGE> 107
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INTANGIBLE AND NONCURRENT ASSETS
Intangible and Noncurrent Assets (in millions)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
MARCH 31, 1997 -----------------
--------------
(UNAUDITED)
<S> <C> <C>
Goodwill.................................... $ 34 $ 38
Other intangible assets..................... 22 23
Prepaid pension asset....................... 37 32
Joint ventures and other affiliates......... 95 89
Noncurrent receivables...................... 293 292
Other....................................... 68 58
------ ------
Intangible and noncurrent assets............ $549 $ 532
=========== =============
</TABLE>
NOTE 7: OTHER CURRENT AND NONCURRENT LIABILITIES
Other Current Liabilities (in millions)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
MARCH 31, 1997 -----------------
--------------
(UNAUDITED)
<S> <C> <C>
Accrued employee compensation............... $ 73 $ 107
Accrued product warranty.................... 30 33
Accrued restructuring costs................. 82 138
Liability for business dispositions......... 94 71
Accrued interest and insurance.............. 126 124
Accrued expenses............................ 261 307
Short-term debt............................. 5 6
Environmental liabilities................... 54 55
Other....................................... 151 115
------ ------
Other current liabilities................... $876 $ 956
=========== =============
</TABLE>
Other Noncurrent Liabilities (in millions)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
MARCH 31, 1997 -----------------
--------------
(UNAUDITED)
<S> <C> <C>
Postretirement benefits..................... $ 35 $ 35
Postemployment benefits..................... 38 38
Accrued restructuring costs................. 18 22
Liability for business dispositions......... 62 87
Other....................................... 74 86
------ ------
Other noncurrent liabilities................ $227 $ 268
=========== =============
</TABLE>
NOTE 8: CONTINGENT LIABILITIES AND COMMITMENTS
LEGAL MATTERS
The Company will assume responsibility for a number of lawsuits brought
against Westinghouse including the legal matters described below.
Steam Generators
Westinghouse has been defending various lawsuits brought by utilities
claiming a substantial amount of damages in connection with alleged tube
degradation in steam generators sold by Energy Systems as components of nuclear
steam supply systems. Since 1993, settlement agreements have been entered
resolving ten litigation claims. These agreements generally require the Company
to provide certain products and
F-34
<PAGE> 108
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: CONTINGENT LIABILITIES AND COMMITMENTS (CONTINUED)
services at prices discounted at varying rates. Two cases were resolved in favor
of the Company after trial or arbitration. One active steam generator lawsuit
remains.
At March 31, 1997, Westinghouse was also a party to six tolling agreements
with utilities or utility plant owners' groups which have asserted steam
generator claims. The tolling agreements delay initiation of any litigation for
various specified periods of time and permit the parties time to engage in
discussions.
Asbestos
The Company will assume responsibility for numerous lawsuits claiming
various asbestos-related personal injuries, which allegedly occurred from use or
inclusion of asbestos in certain Westinghouse products, generally in the
pre-1970 time period. Typically, these lawsuits are brought against multiple
defendants. Westinghouse was neither a manufacturer nor a producer of asbestos
and oftentimes these lawsuits are dismissed on the basis that Westinghouse has
no relationship to the products in question or the claimant did not have
exposure to Westinghouse's product. At March 31, 1997, approximately 101,000
claims were outstanding.
In court actions that have been resolved, Westinghouse has prevailed in the
vast majority of the asbestos claims and has resolved others through settlement.
Furthermore, Westinghouse has brought suit against certain of its insurance
carriers with respect to these asbestos claims. Under the terms of a settlement
agreement resulting from this suit, a substantial portion of its current costs
and settlements associated with asbestos claims are being reimbursed by
insurance carriers that have agreed to the settlement. The Company has recorded
a liability for asbestos-related matters that are deemed probable and can be
reasonably estimated, and has separately recorded an asset equal to the amount
of such estimated liabilities that will be recovered pursuant to agreements with
insurance carriers. The Company cannot reasonably estimate costs for unasserted
asbestos claims.
General
Litigation is inherently uncertain and always difficult to predict.
Substantial damages are sought in the steam generator claims, certain groupings
of asbestos claims, and other litigation; and, although management believes a
significant adverse judgment is unlikely, any such judgment could have a
material adverse effect on the Company's results of operations for a quarter or
a year. However, based on its understanding and evaluation of the relevant facts
and circumstances, management believes that the Company has meritorious defenses
to the litigation described above and that the Company has adequately provided
for costs arising from potential settlement of these matters when in the best
interest of the Company. Management believes that the existing litigation should
not have a material adverse effect on the financial condition of the Company.
ENVIRONMENTAL MATTERS
Compliance with federal, state, and local laws and regulations relating to
the discharge of pollutants into the environment, the disposal of hazardous
wastes, and other related activities affecting the environment have had and will
continue to have an impact on the Company. It is difficult to estimate the
timing and ultimate costs to be incurred in the future due to uncertainties
about the status of laws, regulations, and technology; the adequacy of
information available for individual sites; the extended time periods over which
site remediation occurs; and the identification of new sites. The Company has,
however, recognized an estimated liability, measured in current dollars, for
those sites where it is probable that a loss has been incurred and the amount of
the loss can be reasonably estimated. The Company recognizes changes in
estimates as new remediation requirements are defined or as more information
becomes available. In connection with the Distribution, the Company will assume
all of the environmental liabilities associated with its current businesses as
well as those related to certain Westinghouse businesses that were previously
divested.
With regard to remedial actions under federal and state Superfund laws, the
Company has been named a potentially responsible party at numerous sites located
throughout the country. At many of these sites, the
F-35
<PAGE> 109
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: CONTINGENT LIABILITIES AND COMMITMENTS (CONTINUED)
Company is either not a responsible party or its site involvement is very
limited or de minimis. However, the Company may have varying degrees of cleanup
responsibilities at approximately 75 sites. The Company believes that any
liability incurred for cleanup at these sites will be satisfied over a number of
years, and in many cases, the costs will be shared with other responsible
parties. These sites include certain sites for which the Company, as part of an
agreement for sale, has retained obligations for remediation of environmental
contamination and for other Comprehensive Environmental Response Compensation
and Liability Act issues.
Based on the costs associated with the most probable alternative
remediation strategy for the above mentioned sites, the Company has an accrued
liability of $352 million. Depending on the remediation alternatives ultimately
selected, the costs related to these sites could differ from the amounts
currently accrued. The accrued liability includes $254 million for site
investigation and remediation, and $98 million for post closure and monitoring
activities. Management anticipates that the majority of expenditures for site
investigation and remediation will occur during the next five to ten years.
Expenditures for post-closure and monitoring activities will be made over
periods of up to 30 years.
COMMITMENTS
In the ordinary course of business, standby letters of credit and surety
bonds are issued on behalf of the Company related primarily to performance
obligations under contracts with customers.
F-36
<PAGE> 110
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following pro forma combined financial statements of the Company for
the year ended December 31, 1996 and as of and for the three months ended March
31, 1997 were prepared by the Company to illustrate the estimated effects of the
Distribution as described in the notes to pro forma combined financial
statements as if they had occurred as of January 1, 1996 for purposes of the pro
forma combined statements of income and at March 31, 1997 for purposes of the
pro forma combined balance sheet. The Pro Forma Combined Financial Statements do
not purport to represent what the results of operations or financial position of
the Company would actually have been if the Distribution had in fact occurred on
such dates or to project the results of operations or financial position of the
Company for any future period or date. The Pro Forma Combined Financial
Statements should be read together with the Combined Financial Statements of the
Company and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Information Statement.
F-37
<PAGE> 111
WESTINGHOUSE ELECTRIC COMPANY
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AT MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents........................... $ 47 $ $ 47
Customer receivables................................ 611 611
Inventories......................................... 691 691
Uncompleted contracts costs over related billings... 661 661
Deferred income taxes............................... 362 (35)(1) 127
(200)(2)
Prepaid and other current assets.................... 90 82(1) 172
----------- ----------- ---------
Total current assets................................ 2,462 (153) 2,309
Plant and equipment, net............................ 733 733
Deferred income taxes, noncurrent................... 791 (600)(2) 191
Intangible and noncurrent assets.................... 549 18(1) 567
----------- ----------- ---------
Total assets........................................ $ 4,535 $(735) $ 3,800
========== ========= ========
LIABILITIES AND SHAREHOLDER'S EQUITY:
Accounts payable.................................... 363 363
Uncompleted contracts billings over related costs... 407 407
Other current liabilities........................... 876 876
----------- ----------- ---------
Total current liabilities........................... 1,646 1,646
Settlements and accrued liabilities................. 940 940
Environmental liabilities........................... 298 298
Other noncurrent liabilities........................ 227 227
----------- ----------- ---------
Total liabilities................................... 3,111 3,111
Minority interest in equity of subsidiaries......... 7 7
Shareholder's equity:
Cumulative foreign currency translation
adjustments.................................... (7) (7)
Invested equity.................................. 1,424 65(1) 689
(800)(2)
----------- ----------- ---------
Total shareholder's equity.......................... 1,417 (735) 682
----------- ----------- ---------
Total liabilities and shareholder's equity.......... $ 4,535 $(735) $ 3,800
========== ========= ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
F-38
<PAGE> 112
WESTINGHOUSE ELECTRIC COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Sales of services and products........................ $ 650 $ $ 650
Costs of services and products........................ (619) 21(3) (598)
Restructuring, litigation and other matters........... -- --
Marketing, administrative and general expenses........ (154) 4(3) (150)
----------- ----------- ---------
Operating loss........................................ (123) 25 (98)
Other income and expenses, net........................ (6) (6)
Interest expense...................................... -- (5)(4) (5)
----------- ----------- ---------
(Loss) income before income taxes and minority
interest in income of subsidiaries.................. (129) 20 (109)
Income tax benefit (expense).......................... 49 (51)(5) (9)
(7)(6)
Minority interest in income of subsidiaries........... -- --
----------- ----------- ---------
Net loss.............................................. $ (80) $ (38) $ (118)
========== ========= ========
Loss per common share (7)
========== ========
</TABLE>
WESTINGHOUSE ELECTRIC COMPANY
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Sales of services and products........................ $ 3,467 $ $ 3,467
Costs of services and products........................ (2,855) 85(3) (2,770)
Restructuring, litigation and other matters........... (888) (888)
Marketing, administrative and general expenses........ (614) 15(3) (599)
----------- ----------- ---------
Operating loss........................................ (890) 100 (790)
Other income and expenses, net........................ (140) (140)
Interest expense...................................... (1) (20)(4) (21)
----------- ----------- ---------
(Loss) income before income taxes and minority
interest in income of subsidiaries.................. (1,031) 80 (951)
Income tax benefit (expense).......................... 370 (382)(5) (40)
(28)(6)
Minority interest in income of subsidiaries........... (4) (4)
----------- ----------- ---------
Net loss.............................................. $ (665) $(330) $ (995)
========== ========= ========
Loss per common share (7)
========== ========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Statements.
F-39
<PAGE> 113
NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BALANCE SHEET
(1) ACCRUED RESTRUCTURING. Pursuant to the terms of the Distribution
Agreement, the Company will be reimbursed by Westinghouse for accrued
liabilities associated with restructuring programs initiated prior to the
Distribution Date that are unpaid at the Distribution Date. This entry
recognizes an asset for the reimbursement of these accrued liabilities.
(2) VALUATION ALLOWANCE. Income taxes in the Combined Financial Statements
were prepared as if the Company continued to file a consolidated tax return with
Westinghouse. However, subsequent to the Distribution, the Company will not be
permitted to file a consolidated tax return with Westinghouse and Westinghouse
will retain the U.S. federal net operating loss carryforwards generated by the
Company. Therefore, the deferred tax assets associated with these net operating
loss carryforwards will not be retained by the Company. Management has evaluated
the potential for the Company to realize the remaining net deferred tax assets
as a stand-alone entity on the basis of the criteria of SFAS No. 109,
"Accounting for Income Taxes." Without relying on future taxable income, other
than that which could be generated through tax planning strategies, management
has determined that a valuation allowance may be required.
INCOME STATEMENT
(3) PENSION AND POSTRETIREMENT PLANS. As discussed in notes 1 and 3 to the
December 31, 1996 Combined Financial Statements, Westinghouse will retain most
of the pension and postretirement benefit obligations accrued through the
Distribution Date. The Company's cost associated with these plans subsequent to
the Distribution is expected to be substantially less, approximating the current
service cost.
(4) INTEREST COSTS. Although the Company would be essentially debt-free at
the Distribution Date, the Company would have needed to borrow funds under its
revolving credit facility to meet the cash flow needs during its business cycles
and other credit needs. Interest cost has been calculated by multiplying the
estimated average borrowing requirements times a rate of 6.6% which is based on
LIBOR plus 1%.
(5) VALUATION ALLOWANCE. This entry eliminates the deferred tax benefit
associated with the net operating loss carryforwards generated during the period
and adjusts the valuation allowance on the Company's remaining net deferred tax
assets. See note 2 above.
(6) INCOME TAXES. Pro forma adjustments reflect the current tax impact of
the pro forma adjustments at a rate of 35%.
(7) PRO FORMA EARNINGS (LOSS) PER SHARE. Pro forma loss per share has been
calculated assuming shares of Company common stock were outstanding. This
is based on the number of outstanding shares of Westinghouse common stock at the
close of business on the record date of the Distribution and the distribution
ratio to be determined.
F-40
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 47
<SECURITIES> 0
<RECEIVABLES> 622
<ALLOWANCES> 11
<INVENTORY> 691
<CURRENT-ASSETS> 2,462
<PP&E> 2,015
<DEPRECIATION> 1,282
<TOTAL-ASSETS> 4,535
<CURRENT-LIABILITIES> 1,646
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,417
<TOTAL-LIABILITY-AND-EQUITY> 4,535
<SALES> 650
<TOTAL-REVENUES> 650
<CGS> 619
<TOTAL-COSTS> 619
<OTHER-EXPENSES> 160
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (129)
<INCOME-TAX> (49)
<INCOME-CONTINUING> (80)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (80)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
