<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
UNOVA, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
-----------------------------------------------------------------------
<PAGE>
[LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 7, 1999
The Annual Meeting of Shareholders of UNOVA, Inc., a Delaware corporation, will
be held at 11:00 a.m. on Friday, May 7, 1999, at the Regent Beverly Wilshire
Hotel, 9500 Wilshire Boulevard, Beverly Hills, California, for the following
purposes:
- - To elect three Class I directors for a three-year term;
- - To consider a proposal to approve the UNOVA, Inc. 1999 Stock Incentive Plan;
- - To consider a proposal to approve the UNOVA, Inc. Management Incentive
Compensation Plan; and
- - To transact such other business as may properly come before the meeting or any
postponement or adjournment thereof.
Shareholders of record at the close of business on March 10, 1999, are entitled
to receive notice of and to vote at the meeting. A complete list of such
shareholders will be open for examination by any shareholder for any purpose
germane to the meeting at Bank of America (NT&SA), Beverly Hills Main Office,
460 North Beverly Drive, Beverly Hills, California, for a period of ten days
prior to the meeting.
Shareholders are urged to vote their proxy promptly, whether or not they expect
to attend the meeting in person. Shareholders can vote their shares (1) by a
toll-free telephone call to 1.800.840.1208 in the U.S. and Canada or (2) by
mailing their signed proxy card in the enclosed envelope. Specific instructions
to be followed by any registered shareholder interested in voting by telephone
are set forth on the enclosed proxy card.
By order of the Board of Directors,
Virginia S. Young
Vice President and Secretary
March 29, 1999
Beverly Hills, California
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
General.................................................................................................... 1
Voting at the Meeting...................................................................................... 1
Proxies and Proxy Solicitation............................................................................. 1
Matters to be Considered at the Annual Meeting............................................................. 2
Item One. Election of Directors........................................................................ 2
Nominees for Directors............................................................................. 3
Directors Continuing in Office..................................................................... 3
Meetings and Committees of the Board............................................................... 5
Directors' Compensation and Retirement Policies.................................................... 5
Director Stock Option and Fee Plan................................................................. 6
Item Two. Proposal to Approve the 1999 Stock Incentive Plan............................................ 7
Description of the 1999 Plan....................................................................... 8
Certain Federal Income Tax Consequences............................................................ 12
Certain Federal Securities Laws.................................................................... 14
New Plan Benefits.................................................................................. 14
Item Three. Proposal to Approve the Management Incentive Compensation Plan............................. 15
Summary of the Incentive Plan...................................................................... 16
Information Regarding Compensation and Certain Transactions................................................ 19
Summary Compensation Table............................................................................. 19
Stock Option Information............................................................................... 20
Employment and Change in Control Arrangements.......................................................... 22
Retirement Benefits.................................................................................... 23
Certain Relationships and Related Transactions......................................................... 27
Report of the Compensation Committee on Executive Compensation............................................. 28
Stock Performance Graph.................................................................................... 31
Other Matters.............................................................................................. 32
Security Ownership by Certain Beneficial Owners and Management......................................... 32
Filing of Reports Under Section 16(a) of the Exchange Act.............................................. 34
Shareholder Proposals for 2000 Annual Meeting.......................................................... 34
Annex A--UNOVA, Inc. 1999 Stock Incentive Plan............................................................. A-1
Annex B--UNOVA, Inc. Management Incentive Compensation Plan................................................ B-1
Supplement to the Proxy Statement
Consolidated and Combined Financial Statements;
Management's Discussion and Analysis;
Selected Financial Data................................................................................ F-i
</TABLE>
i
<PAGE>
UNOVA, INC.
360 NORTH CRESCENT DRIVE, BEVERLY HILLS, CA 90210-4867
----------------------------
PROXY STATEMENT
----------------------------
GENERAL.
This proxy statement is furnished in connection with the solicitation of proxies
by the Board of Directors of UNOVA, Inc. ("UNOVA" or the "Company") to be used
at the Annual Meeting of Shareholders of the Company to be held on May 7, 1999,
and at any postponement or adjournment thereof, for the purposes set forth in
the accompanying Notice of Annual Meeting. This proxy statement is first being
mailed to shareholders of the Company on or about March 29, 1999.
The Company was incorporated in Delaware on August 13, 1997, and operated as a
subsidiary of Western Atlas Inc. ("Western Atlas"), until October 31, 1997, when
Western Atlas effected a pro rata distribution of all of the Company's
outstanding shares of common stock to the holders of Western Atlas common stock
on a one-for-one basis (the "Distribution"). The Company has operated as an
independent, publicly held entity since the Distribution.
VOTING AT THE MEETING.
The record date for voting at the Annual Meeting is the close of business on
March 10, 1999. As of the record date, the Company had outstanding 54,943,391
shares of its common stock, par value $.01 per share ("Common Stock" or "UNOVA
Common Stock"), not including treasury shares, which may not be voted. The
holders of the outstanding Common Stock, which is the only outstanding class of
voting security of the Company, will be voting on all matters currently
scheduled to be acted upon at the 1999 Annual Meeting, with each share entitled
to one vote.
The holders of a majority of the issued and outstanding shares of Common Stock
represented in person or by proxy at the Annual Meeting of Shareholders will
constitute a quorum for the transaction of business at the meeting. The
inspector of election appointed for the meeting will determine the existence of
a quorum and will tabulate the votes cast at the meeting. Shareholders may
withhold authority to vote for one or more of the nominees for director and may
abstain on one or more of the other matters that may come before the meeting.
Shares for which authority is withheld or for which abstentions are indicated
will be counted as present for purposes of determining whether a quorum is
present. Directors are elected by a plurality of the shares represented in
person or by proxy at the meeting; votes withheld will be excluded entirely from
the vote and will have no effect. The other two matters expected to come before
the meeting (identified as Items Two and Three in this proxy statement) require
the approval of a majority of the shares represented in person or by proxy; and,
therefore, abstentions will have the effect of a negative vote on these matters.
If a broker indicates on a proxy that such broker does not have discretionary
authority to vote on a particular matter, under applicable Delaware law those
shares will be counted as present for purposes of determining the presence of a
quorum, but will not be counted as votes cast on the matter and will have no
effect on the outcome of the vote on such matter.
PROXIES AND PROXY SOLICITATION.
All shares of Common Stock represented by properly executed proxies will be
voted at the Annual Meeting in accordance with the directions marked on the
proxies, unless such proxies previously have
1
<PAGE>
been revoked. If no directions are indicated on such proxies, they will be voted
FOR the election of the three nominees named below under "ITEM ONE. ELECTION OF
DIRECTORS," FOR the approval of the UNOVA, Inc. 1999 Stock Incentive Plan, and
FOR the approval of the UNOVA, Inc. Management Incentive Compensation Plan. If
any other matters, not presently anticipated, are properly presented at the
meeting for action, the proxy holders will vote the proxies (which confer
discretionary authority upon such holders to vote on such matters) in accordance
with their best judgment. Each proxy executed and returned by a shareholder may
be revoked at any time before it is voted by the timely submission of a written
notice of revocation or by the submission of a duly executed proxy bearing a
later date (in either case directed to ChaseMellon Shareholder Services,
Attention: Norma Cianfaglione, 600 Willowtree Road, Leonia, New Jersey 07605)
or, if a shareholder is present at the meeting, he or she may elect to revoke
his or her proxy and vote his or her shares personally.
In addition to solicitation by mail, certain directors, officers, and other
employees of the Company, not specially employed for this purpose, may solicit
proxies, without additional remuneration therefor, by personal interview, mail,
telephone, telegram, facsimile transmission, or electronic mail. The Company
intends to reimburse brokerage firms, banks, and other holders of record for
their reasonable out-of-pocket expenses in forwarding proxy material to the
beneficial owners of Common Stock or otherwise in connection with this
solicitation of proxies. The Company has retained Georgeson & Company Inc. to
assist in the solicitation for a fee of $6,500, in addition to reimbursement by
the Company of the expenses and disbursements of that firm.
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
ITEM ONE. ELECTION OF DIRECTORS.
The Board of Directors currently has nine members. The Board is divided into
three classes, each presently comprising three directors, with each director
normally elected to serve a three-year term and one full class of directors to
be elected at each Annual Meeting.
Stephen E. Frank, Claire W. Gargalli, and Orion L. Hoch, incumbent Class I
directors whose terms are currently scheduled to expire at the 1999 Annual
Meeting, have been nominated for reelection as Class I directors for three-year
terms.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION TO THE BOARD OF
DIRECTORS OF MESSRS. FRANK AND HOCH AND MS. GARGALLI.
Set forth below is information regarding the age, business experience, and Board
Committee membership as of March 15, 1999, of the nominees for election, as well
as information about the directors whose terms of office do not expire this
year. Each nominee has consented to being named as such in this proxy statement
and has agreed to serve if elected. If, as a result of circumstances not
presently known, any of such nominees shall be unable to serve as a director,
proxies will be voted for the election of such other person or persons as the
Board of Directors may select, or the number of authorized directors may be
reduced.
2
<PAGE>
NOMINEES FOR DIRECTORS.
- --------------------------------------------------------------------------------
Class I. To serve until the annual election of directors in 2002 or until their
successors are elected and qualified.
- --------------------------------------------------------------------------------
STEPHEN E. FRANK, age 57. Mr. Frank has been President and Chief Operating
Officer of Southern California Edison Company, a subsidiary of Edison
International, since 1995. He has been a director of the Company since October
31, 1997, and is Chair of the Audit and Compliance Committee and a member of the
Compensation Committee.
Mr. Frank was President and Chief Operating Officer of Florida Power and Light
Company from 1990 until he assumed his present position with Southern California
Edison. Mr. Frank is also a director of Edison International and Washington
Mutual, Inc. He is a member of the Board of the Los Angeles Area Chamber of
Commerce, the Boy Scouts of America San Gabriel Valley Council, the Los Angeles
Philharmonic Association, the United Way of Greater Los Angeles, the California
Chamber of Commerce, and the Electric Power Research Institute. Mr. Frank is
Chairman of the Business Industry Political Action Committee.
CLAIRE W. GARGALLI, age 56. Ms. Gargalli was Vice Chairman of Diversified Search
Companies (executive search consultants) from 1990 until her retirement from
that position in 1998. She has been a director of the Company since September
23, 1998.
Ms. Gargalli is a director of Praxair, Inc., and Baker Hughes Incorporated. She
is a trustee of Carnegie Mellon University and of Middlebury College.
ORION L. HOCH, age 70. Dr. Hoch has been Chairman Emeritus of Litton Industries,
Inc., since 1994. He has been a director of the Company since October 31, 1997,
and is Chair of the Compensation Committee and a member of the Audit and
Compliance Committee.
Dr. Hoch was Chairman of the Board of Litton Industries, Inc., from 1988 until
1994. He is a director of Litton and The Bessemer Group, Inc. Dr. Hoch is an
emeritus life trustee of Carnegie Mellon University.
In accordance with the Board's policy of retirement of directors on the date of
the next Annual Meeting of Shareholders following the director's 72(nd)
birthday, Dr. Hoch is expected to retire as a director of the Company effective
at the 2001 Annual Meeting of Shareholders.
DIRECTORS CONTINUING IN OFFICE.
- --------------------------------------------------------------------------------
Class II. To serve until the annual election of directors in 2000 or until
their successors are elected and qualified.
- --------------------------------------------------------------------------------
PAUL BANCROFT, III, age 69. Mr. Bancroft is an independent venture capitalist
and a consultant. He has been a director of the Company since September 23,
1998.
Mr. Bancroft was President, Chief Executive Officer, and a director of Bessemer
Securities Corporation from 1976 until 1988. He is a director of several
investment funds sponsored by Scudder Kemper Investments.
3
<PAGE>
STEVEN B. SAMPLE, age 58. Dr. Sample has been President of the University of
Southern California since 1991. He has been a director of the Company since
October 31, 1997, and is a member of the Audit and Compliance Committee and the
Compensation Committee.
From 1982 to 1991, Dr. Sample was President of the State University of New York
at Buffalo. He is a director of the Presley Companies, the Wm. Wrigley Jr.
Company, and the Santa Catalina Island Company, and is Chairman of the
Association of American Universities and the Association of Pacific Rim
Universities. Dr. Sample is a trustee of the University of Southern California,
the Los Angeles Educational Alliance for Restructuring Now (L.E.A.R.N.), and the
Regenstreif Medical Foundation and Institute. He is a member of the Board of
Governors, Los Angeles Annenberg Metropolitan Project (LAAMP).
WILLIAM D. WALSH, age 68. Mr. Walsh has been Chairman of Sequoia Associates LLC,
a private investment firm, since 1998. He has been a director of the Company
since October 31, 1997, and is a member of the Audit and Compliance Committee
and the Compensation Committee.
Mr. Walsh was previously a General Partner of Sequoia Associates since 1982. He
is Chairman of Clayton Group, Inc., Consolidated Freightways Corporation, Newell
Industrial Corporation, and Newell Manufacturing Corporation. Mr. Walsh is a
director of Basic Vegetable Products, L.P., Crown Vantage, Inc., Newcourt Credit
Group Inc., URS Corporation, Bemiss Jason Inc., and the American Ireland Fund.
- --------------------------------------------------------------------------------
Class III. To serve until the annual election of directors in 2001 or until
their successors are elected and qualified.
- --------------------------------------------------------------------------------
ALTON J. BRANN, age 57. Mr. Brann has been Chairman of the Board and Chief
Executive Officer and a director of the Company since August 13, 1997.
Mr. Brann served as Chairman of the Board and Chief Executive Officer of Western
Atlas Inc. from 1994 until 1997, when he assumed the same positions with UNOVA.
Prior thereto, Mr. Brann was President and Chief Executive Officer of Litton
Industries, Inc.
Mr. Brann is presently a director of Baker Hughes Incorporated and of Litton
Industries, Inc., where he also serves as Chairman of the Executive Committee.
He is a member of the Board of Overseers of the Executive Council on Diplomacy,
the Board of the U.S.-Russia Business Council, the Board of the National
Association of Manufacturers, the President's Cabinet of California Polytechnic
State University at San Luis Obispo, and the Board of the Los Angeles Business
Advisors. Mr. Brann is Chairman of the Board of Governors of Town Hall Los
Angeles, a director of the Los Angeles World Affairs Council, Chairman of the
Boy Scouts of America Los Angeles Area Council, a senior member of the Institute
of Electrical and Electronics Engineers, and a trustee and member of the
Executive Committee of the Manufacturers Alliance.
JOSEPH T. CASEY, age 67. Mr. Casey is retired Vice Chairman and Chief Financial
Officer of Western Atlas Inc., presently a subsidiary of Baker Hughes
Incorporated. Mr. Casey has been a director of the Company since September 23,
1998.
Mr. Casey served as Vice Chairman and Chief Financial Officer of Western Atlas
Inc. from 1994 until his retirement in September 1996. Previously he held the
same positions at Litton Industries, Inc. He is a director of Baker Hughes
Incorporated, Litton Industries, Inc., and Pressure Systems, Inc. Mr. Casey is
4
<PAGE>
also a member of the Board of Trustees of Claremont McKenna College and of the
Don Bosco Technical Institute. He is a member of the Board of Overseers, Center
for Russia and Asia, of Rand Corporation.
WILLIAM C. EDWARDS, age 70. Mr. Edwards is a partner of Bryan & Edwards, a
venture capital investment firm, and a general partner of Banner Partners and
Ritter Partners. He has been a director of the Company since November 19, 1998.
Mr. Edwards is Chairman of Xeruca Corporation and a director of Trust Company of
the West and CellNet Data Systems. He is a member of the Board of Overseers and
Executive Committee of the Hoover Institution at Stanford University, a member
of the Advisory Committee of the Stanford Institute for Economic Policy
Research, an associate of the Stanford Center for International Security and
Arms Control, and a member of the Board of Governors of the San Francisco
Symphony. Mr. Edwards is also an emeritus trustee of Scripps College and
Deerfield Academy.
MEETINGS AND COMMITTEES OF THE BOARD.
The Board of Directors of the Company met six times during 1998 with an
attendance record of 100%. The Board also acted on two occasions by unanimous
written consent in 1998. The Board has two standing committees. Membership on
these committees is indicated in the preceding biographical information. The
Board of Directors does not have a standing Nominating Committee.
AUDIT AND COMPLIANCE COMMITTEE. The Audit and Compliance Committee consists of
four directors, none of whom is an employee of the Company. The Committee, which
met three times in 1998, reviews and makes inquiries, as it deems appropriate,
with respect to the scope and results of the audit by the Company's outside
auditors, the activities of the Company's internal auditors, and the adequacy of
the Company's system of internal controls and procedures. The Committee proposes
the appointment of the outside auditors, subject to approval by the Board, and
approves fees paid for services (including any nonaudit services) rendered by
such auditors. The Audit and Compliance Committee reviews the implementation of
and monitors compliance with the Standards of Conduct of the Company and
evaluates the Reportable Transactions and Conflicts of Interest Questionnaires
completed by certain Company employees to determine if possible conflicts of
interest exist or possible violations of corporate policy have occurred. The
Committee also considers other possible conflict of interest situations brought
to its attention and makes appropriate recommendations with respect to such
matters.
COMPENSATION COMMITTEE. The Compensation Committee is composed of four
nonemployee directors. The Committee establishes policies for executive
compensation and approves the remuneration of all officers of the Company. The
Committee administers the Company's employee stock option plans, Management
Incentive Compensation Plan (including the establishment of the individual
performance goals thereunder), incentive loan program, Employee Stock Purchase
Plan, and certain other compensation and retirement arrangements. The Committee,
which met five times and acted on four occasions by unanimous written consent in
1998, also reviews and makes recommendations with respect to other compensation
plans and policies of the Company.
DIRECTORS' COMPENSATION AND RETIREMENT POLICIES.
Mr. Brann is the only director who is also an employee of the Company. He is not
paid any fee or additional remuneration for service as a member of the Board and
is not a member of any Board committee.
Directors who are not employees of the Company are paid an annual fee for Board
service of $30,000 payable in quarterly installments, and an attendance fee of
$2,000 for each meeting of the Board and for each meeting of a Committee of the
Board attended. Each nonemployee director who serves as Chair of
5
<PAGE>
a Board committee is paid an additional annual fee of $4,000, payable in
quarterly installments. Directors are reimbursed for travel and other expenses
incurred for the purpose of attending meetings of the Board and its committees.
The Board of Directors has adopted a policy establishing the mandatory
retirement date of each director as the date of the annual meeting of the
shareholders of the Company next following his or her 72(nd) birthday.
DIRECTOR STOCK OPTION AND FEE PLAN.
Under the terms of the UNOVA, Inc. Director Stock Option and Fee Plan (the
"Director Plan"), any person who joins the Board as a nonemployee director will
receive options to purchase 25,000 shares of UNOVA Common Stock at the fair
market value of such stock, provided such person neither received options under
the Company's 1997 Stock Incentive Plan during the two-year period preceding the
date of commencement of Board membership nor was an employee of the Company or a
subsidiary of the Company during such two-year period. Commencing in 1999, on
the first business day following the Company's annual shareholders' meeting for
each year during the term of the Director Plan, each nonemployee director
automatically will receive a grant of an option for 2,500 shares. All options
granted under the Director Plan become fully exercisable on the first
anniversary of the grant thereof; however, if a director dies or becomes
permanently disabled while serving on the Board, or if the director retires
pursuant to the policy for mandatory retirement of directors described above,
then all options held by such director become exercisable in full. In addition,
if a change in control of the Company (as defined in the 1999 Stock Incentive
Plan described below) occurs, then all options granted under the Director Plan
become fully exercisable. An aggregate of 500,000 shares of UNOVA Common Stock,
subject to adjustment for certain events affecting the Company's capitalization,
are authorized for issuance under the Director Plan.
Options granted under the Director Plan shall remain exercisable until three
years following the first to occur of the retirement or resignation of the
director from the Board (or the director's failure to be reelected to the
Board), the total and permanent disability of the director, or the death of the
director.
Pursuant to the Director Plan, participating directors may elect to defer all or
a portion of their fees described above under the caption "Directors'
Compensation and Retirement Policies" to either a deferred stock account or cash
account. The deferred stock account will enable directors to defer their fees
into phantom UNOVA Common Stock, and the cash account will provide a deferral
into an interest-based account.
The deferred stock account will be a bookkeeping account credited with share
units representing shares of UNOVA Common Stock. The cash account will accrue
interest at a rate equal to the prime rate.
Credits to the deferred stock and cash accounts shall be made on the first
business day following the end of each quarter. A director's stock account will
be credited with the number of shares of UNOVA Common Stock in lieu of cash fees
and are the subject of a deferral election. Transfers between the stock account
and the cash account will not be permitted.
Deferred amounts will be paid to each director commencing in the January
following the director's termination of service with the Board. Such payments
may be made in a lump sum or in two to fifteen annual installments as stipulated
by the director at the time of the deferral election. Notwithstanding the
foregoing, upon a change in control of the Company, all deferred accounts will
be paid out immediately. The deferred stock account will be paid in shares of
UNOVA Common Stock equal to the number of share units credited to such account,
and the cash account will be paid in cash.
6
<PAGE>
The Director Plan is administered by the Board, which has authority to interpret
and make rules and regulations relating to the Director Plan and to determine
the provisions of the individual option agreements to be entered into under the
Director Plan. The Director Plan will terminate on December 15, 2007 (unless
earlier discontinued by the Board), but such termination will not affect the
rights of the holder of any option or participant in a deferred stock or cash
account outstanding on such date of termination. The Board may suspend or
discontinue the Director Plan or amend it in any respect whatsoever; PROVIDED,
HOWEVER, that no such amendment shall adversely affect the rights of any
director without such director's consent or shall be made without stockholder
approval if such approval is required by any regulation, law, or stock exchange
rule.
ITEM TWO. PROPOSAL TO APPROVE THE 1999 STOCK INCENTIVE PLAN.
The UNOVA, Inc. 1999 Stock Incentive Plan (the "1999 Plan") was adopted by the
Board of Directors of the Company on March 11, 1999, and is being submitted to
the UNOVA shareholders for their approval at the Annual Meeting. The 1999 Plan
is intended to help the Company to attract and retain, and to provide
appropriate incentives for, management personnel.
Approval of the 1999 Plan by the shareholders will enable the 1999 Plan to meet
the requirements of the New York Stock Exchange for purposes of approval for
listing on that Exchange of the shares of UNOVA Common Stock which may be issued
under the 1999 Plan. In addition, under Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"), and regulations promulgated thereunder,
the shareholders of UNOVA must approve the terms of the 1999 Plan, including the
eligibility criteria, the basis for determining the maximum amount of any award
which may be granted under the 1999 Plan, and the business criteria upon which
"Performance Goals" set forth therein are based, in order for awards under the
1999 Plan to be eligible for exemption from the limits on deductibility of
executive compensation set forth in Section 162(m) of the Code. This Code
section generally limits to $1 million the Company's federal income tax
deductions for individual compensation, except for "performance-based
compensation" as that term is defined in Section 162(m), paid to the Chief
Executive Officer or any of the other four most highly compensated executive
officers (collectively, the "Named Executive Officers"). Awards in the form of
stock options and stock appreciation rights ("SARs") granted at an exercise
price or initial value not less than the fair market value of the stock subject
thereto on the date of grant are deemed, assuming the other requirements of
Section 162(m) are met, to be performance-based and thus not subject to the
limit on deductibility set forth in Section 162(m). All stock options and SARs
which may be granted under the 1999 Plan will have an exercise price or initial
value not less than the fair market value of UNOVA Common Stock on the date of
grant.
The 1999 Plan also permits the grant of awards in the form of restricted stock
("Restricted Stock") subject to the terms set forth below. The 1999 Plan
provides that the Compensation Committee may, but shall not be required to,
condition the vesting of Restricted Stock upon the achievement of preestablished
Performance Goals which shall be based on the attainment of a specified level of
one or any combination of the following: cash value added, return on capital
utilized, return on tangible equity, return on equity, return on assets, return
on capital, cash flow, revenue growth, or return on revenue of the Company or
any business unit thereof within which the participant is primarily employed, or
that are based in whole or in part on specified levels of earnings per share or
diluted earnings per share of the Company or that are based in whole or in part
on a level or levels of increase in the market price of the Common Stock.
It is expected that, in the case of any of the Named Executive Officers, (i) an
award in the form of Restricted Stock, the vesting of which is conditioned upon
the attainment of a predetermined Performance Goal or Goals, will qualify for
the performance-based exemption under Section 162(m) of the Code and (ii) an
award in the form of Restricted Stock, the vesting of which is conditioned only
upon the
7
<PAGE>
continued service of the participant, will not so qualify. The Compensation
Committee may also prescribe the attainment of a Performance Goal or Goals as a
prerequisite for the vesting of awards in the form of stock options or SARs,
but, as noted above, these awards are expected to qualify for the
performance-based exemption whether or not Performance Goals are prescribed,
since they will be granted at not less than fair market value.
Information regarding eligibility criteria and the maximum amount of any grant
under the 1999 Plan is set forth below under the captions "Description of the
1999 Plan--Stock Available for the Plan; Certain Limitations on Grants of
Awards" and "Description of the 1999 Plan--Eligibility and Participation."
As of March 18, 1999, options to purchase 3,781,900 shares of Common Stock were
outstanding under the Company's 1997 Stock Incentive Plan, and 2,267,530 shares
were available for the issuance of future awards under such Plan. However, no
further awards will be made under the 1997 Stock Incentive Plan following
approval of the 1999 Stock Incentive Plan by the Company's shareholders. On
March 23, 1999, the closing sale price of a share of Common Stock as reported on
the New York Stock Exchange composite tape was $13.375.
DESCRIPTION OF THE 1999 PLAN.
The full text of the 1999 Plan is set forth in Annex A to this proxy statement
and should be referred to for a complete description of its provisions. The
following summary of provisions of the 1999 Plan is qualified in its entirety by
reference to the full text of the 1999 Plan.
STOCK AVAILABLE FOR THE PLAN; CERTAIN LIMITATIONS ON GRANTS OF AWARDS. The 1999
Plan provides that the total number of shares available for grant shall be
4,500,000 shares of the Company's Common Stock. No more than 30% of the shares
of Common Stock available for grant under the 1999 Plan as of the first day of
any fiscal year during which the 1999 Plan is in effect may be utilized in that
fiscal year for awards in the form of Restricted Stock. Shares subject to an
option or award may be authorized but unissued shares or treasury shares. In
each calendar year, no individual may be granted awards covering more than
1,000,000 shares of UNOVA Common Stock.
If an award granted under the 1999 Plan expires, terminates, or lapses for any
reason, without the issuance of shares of Common Stock thereunder, such shares
will again be available under the 1999 Plan.
In the event of a merger, reorganization, consolidation, recapitalization, or
spinoff; stock dividend, stock split, or other distribution of stock or property
with respect to the UNOVA Common Stock; or any other similar event, the Board or
its Compensation Committee (the "Compensation Committee") shall make such
adjustments in the aggregate number and kind of shares reserved for issuance,
the maximum number of shares that can be granted to any participant in any
single year, the number of shares covered by outstanding awards, and the
exercise prices specified therein and make such other equitable adjustments as
may be determined to be appropriate. An employee may satisfy a tax withholding
requirement by delivering already-owned shares of UNOVA Common Stock or applying
shares to which the employee is entitled as a result of the exercise of a
nonqualified stock option or the termination of the restricted period with
respect to any shares of Restricted Stock awarded under the 1999 Plan.
ELIGIBILITY AND PARTICIPATION. Participants in the 1999 Plan will be selected
by the Compensation Committee, which will administer the 1999 Plan. The 1999
Plan contemplates that awards will be granted to officers and other key
employees of the Company and that participants will be such employees of the
Company and its subsidiaries and affiliates, including officers of the Company,
as from time to time are designated by the Compensation Committee.
8
<PAGE>
ADMINISTRATION. The 1999 Plan requires that the Compensation Committee consist
solely of at least two directors of the Company who are "nonemployee directors,"
as such term is used in Rule 16b-3 ("Rule 16b-3") promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and who are
"outside directors" within the meaning of Section 162(m) of the Code. Under the
1999 Plan and subject to the limitations thereunder, the Compensation Committee
is authorized (i) to select participants in the 1999 Plan, (ii) to determine
whether and to what extent awards are to be made, (iii) to determine the number
of shares of Common Stock to be covered by each award, (iv) to determine the
terms and conditions of any award, (v) to adjust the terms and conditions of any
award, (vi) to determine the extent to which and the circumstances under which
Common Stock and other amounts payable with respect to an award are to be
deferred, and (vii) to determine the circumstances under which an award may be
settled in cash or stock under the 1999 Plan. The Compensation Committee also
has authority to adopt, alter, and repeal administrative rules, guidelines, and
practices; to interpret the terms and provisions of the 1999 Plan and any award
issued thereunder; and to otherwise supervise the administration of the 1999
Plan.
AMENDMENT AND TERMINATION. The 1999 Plan will terminate on May 7, 2009. Under
the 1999 Plan, options to purchase Common Stock or other awards granted and
outstanding as of the date the 1999 Plan terminates are not affected or impaired
by such termination.
The Board may amend, alter, or discontinue the 1999 Plan in such respects as the
Board may deem advisable; but no such amendment, alteration, or discontinuation
may be made without shareholder approval to the extent such approval is required
by law or agreement. No such amendment, alteration, or discontinuation may
impair the rights of participants under outstanding awards without the consent
of the participants affected thereby (except for any amendment made to cause the
1999 Plan to qualify for an exemption provided by Rule 16b-3) or make any change
that would disqualify the 1999 Plan from the exemption provided by Rule 16b-3.
The Compensation Committee may amend any award theretofore granted,
prospectively or retroactively. No such amendment or modification may impair the
rights of any participant under any award without the consent of such
participant (except for any amendment made to cause the 1999 Plan to qualify for
an exemption provided by Rule 16b-3). However, the Compensation Committee may
not lower the exercise price of a previously granted option or replace an option
with a new option having a lower exercise price.
PRICING AND EXERCISE OF OPTIONS. Under the 1999 Plan, an employee to whom a
stock option is granted will have the right to purchase the number of shares of
UNOVA Common Stock covered by the option, subject to the terms and provisions of
the 1999 Plan. The exercise price to be paid by a participant, which may not be
less than the fair market value of the Common Stock subject thereto on the date
of grant, is determined by the Compensation Committee and will be set forth in a
stock option agreement between the Company and the participant.
Under the 1999 Plan, the exercise price of a stock option is payable (i) in cash
or (ii) by the surrender, at the fair market value on the date on which the
stock option is exercised, of shares of unrestricted UNOVA Common Stock already
owned by the optionee for at least six months.
STOCK APPRECIATION RIGHTS. The 1999 Plan authorizes the Compensation Committee
to grant SARs in connection with all or part of any stock option. A SAR entitles
its holder to receive from the Company, at the time of exercise of such right,
an amount equal to the excess of the fair market value (determined in accordance
with procedures to be established by the Compensation Committee) at the date of
exercise of a share of Common Stock over the exercise price of the related stock
option multiplied by the number of shares as to which the holder is exercising
the SAR. The amount payable may be paid by the Company in Common Stock (valued
at its fair market value on the date of exercise), cash, or a
9
<PAGE>
combination of Common Stock and cash, as the Compensation Committee may
determine, which determination may be made after considering any preference
expressed by the holder. To the extent a SAR is exercised, any related stock
option will be canceled and, to the extent the related option is exercised, any
SAR will be canceled.
INCENTIVE STOCK OPTIONS. Incentive stock options within the meaning of Section
422 of the Code ("ISOs") may be granted at the discretion of the Compensation
Committee under the 1999 Plan. No term of the 1999 Plan relating to ISOs may be
interpreted and no authority may be exercised so as to disqualify the 1999 Plan
under Section 422 of the Code.
EXERCISABILITY OF OPTIONS AND SARS. Stock options and SARs will become fully
exercisable upon a Change in Control (as defined below). Otherwise, the 1999
Plan provides that if such participant's employment by the Company or its
subsidiaries is terminated for any reason, other than death, disability, or
retirement, such participant may exercise a stock option or SAR to the extent
then exercisable, or on such accelerated basis as the Compensation Committee may
determine, within the period ending on the earlier of three months after such
termination (seven months if the termination follows a Change in Control) or the
date the stock option or SAR expires in accordance with its terms; provided,
however, that if the optionee dies within such three-month period, any
unexercised stock option or SAR held by such optionee shall, notwithstanding the
expiration of such three-month period, continue to be exercisable, to the extent
it was exercisable at the time of death, for a period of twelve months from the
date of such death or until the expiration of the stated term of such stock
option or SAR, whichever period is shorter.
Unless otherwise determined by the Compensation Committee, if such participant
dies prior to termination of employment, his legatees, executors, distributees,
or personal representatives may, subject to the provisions of the 1999 Plan,
exercise the stock option or SAR granted to such participant within the period
ending on the earlier of (i) twelve months after the date of such death or (ii)
the date the stock option or SAR expires in accordance with its terms.
Unless otherwise determined by the Compensation Committee, if an optionee's
employment terminates by reason of disability, any stock option or SAR held by
such optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the time of termination or on such accelerated basis as the
Compensation Committee may determine, for a period of three years (or such other
period as the Compensation Committee may prescribe in the option agreement) from
the date of such termination of employment or until the expiration of the stated
term of such stock option or SAR, whichever period is the shorter; provided,
however, that if the optionee dies within such three-year (or other) period, any
unexercised stock option or SAR held by such optionee shall, notwithstanding the
expiration of such three-year (or other) period, continue to be exercisable, to
the extent it was exercisable at the time of death, for a period of twelve
months from the date of such death or until the expiration of the stated term of
such stock option or SAR, whichever period is the shorter.
Unless otherwise determined by the Compensation Committee, if an optionee's
employment terminates by reason of retirement, any stock option or SAR held by
such optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the time of such retirement, or on such accelerated basis as the
Compensation Committee may determine, until the expiration of the stated term of
such stock option or SAR.
The right of any participant to exercise a stock option may not be transferred
in any way other than (i) by will or the laws of descent and distribution or
(ii) as otherwise expressly permitted under the applicable option agreement
including, if so permitted, pursuant to a gift to the optionee's family, whether
directly or indirectly or by means of a trust or partnership or otherwise. All
stock options are exercisable by a participant during his or her lifetime only
by the optionee or any guardian or legal representative or permitted transferee.
10
<PAGE>
AWARDS OF RESTRICTED STOCK. The 1999 Plan also permits the Compensation
Committee to grant shares of Restricted Stock to a participant subject to the
terms and conditions imposed by the Compensation Committee. Each certificate for
Restricted Stock will be evidenced in such manner as the Compensation Committee
may deem appropriate, including book entry registration or issuance of one or
more certificates registered in the name of the participant. The Compensation
Committee may require that such certificate be legended and deposited with the
Company. There will be established for each award of Restricted Stock a
restriction period (the "restriction period") of such length as is determined by
the Compensation Committee. Shares of Restricted Stock may not be sold,
assigned, transferred, pledged, or otherwise encumbered, except as described
below, during the restriction period. Except for such restrictions on transfer
and such other restrictions as the Compensation Committee may impose, the
participant will have all the rights of a holder of Common Stock as to such
Restricted Stock including, if applicable, the right to vote the shares and the
right to receive any cash dividends. If so determined by the Compensation
Committee in the applicable Restricted Stock agreement, the Compensation
Committee may require the payment of cash dividends to be deferred and
reinvested in additional Restricted Stock. At the expiration of the restriction
period, the Company will redeliver to the participant unlegended certificates.
Except as provided by the Compensation Committee at the time of grant or
otherwise, upon a termination of employment for any reason during the
restriction period, all shares still subject to restriction are forfeited by the
participant. The 1999 Plan provides that in the case of an award of Restricted
Stock, the vesting of which is conditioned only upon the continued service of
the participant, such award will not vest earlier than the first, second, and
third anniversaries of the date of grant thereof, on each of which dates a
maximum of one-third of the shares subject to the award may vest. In the case of
an award of Restricted Stock the vesting of which is conditioned upon the
attainment of a specified Performance Goal or Goals, such award will not vest
earlier than the first anniversary of the date of grant thereof.
CHANGE IN CONTROL. For purposes of the 1999 Plan, a "Change in Control" means
(1) the acquisition by any individual, entity, or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act)
of 30 percent or more of either (a) the then outstanding shares of the Company's
Common Stock (the "Outstanding Company Common Stock") or (b) the combined voting
power of the outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities")--except that the following acquisitions of stock will not
constitute a Change in Control: (i) any acquisition directly from the Company,
other than an acquisition by virtue of the exercise of a conversion privilege,
unless the security being so converted was itself acquired directly from the
Company, (ii) any acquisition by the Company, (iii) any acquisition by an
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company, or (iv) any acquisition by any
Person pursuant to a transaction which complies with subclauses (a), (b) and (c)
of clause (3) of this paragraph; or (2) individuals who, as of the effective
date of the 1999 Plan, constitute the Board (the "Incumbent Board") cease for
any reason to constitute at least a majority of the Board; except that any
individual becoming a director subsequent to such date whose election, or
nomination for election, by the shareholders of the Company was approved by a
vote of at least a majority of the directors then comprising the Incumbent Board
will be considered as though such individual were a member of the Incumbent
Board, but excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of either an actual or threatened
election contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) or other actual or threatened solicitation
of proxies or consents by or on behalf of a person other than the Board; or (3)
approval by the shareholders of the Company of a reorganization, merger, or
consolidation or sale or other disposition of all or substantially all of the
assets of the Company (a "Business Combination") or, if consummation of such
Business Combination is subject at the time of such approval by shareholders to
the consent of any government or governmental agency, the obtaining of such
consent (either explicitly or implicitly by consummation), unless following such
11
<PAGE>
Business Combination, (a) 60 percent or more of, respectively, the then
outstanding shares of common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the election of
directors of the corporation resulting from such Business Combination
(including, without limitation, a corporation which, as a result of such
transaction, owns the Company or all or substantially all of the Company's
assets) will be beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such Business Combination, in
substantially the same proportions as their ownership, immediately prior to such
Business Combination of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be, (b) no Person (excluding any
employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) will beneficially own, directly or
indirectly, 30 percent or more of, respectively, the outstanding shares of
common stock of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors except to
the extent that such ownership existed prior to the Business Combination, and
(c) at least a majority of the members of the board of directors of the
corporation resulting from such Business Combination will be members of the
Incumbent Board at the time of the execution of the initial agreement or action
of the Board providing for such Business Combination; or (4) approval by the
shareholders of the Company of a complete liquidation or dissolution of the
Company.
In the event of a Change in Control: (1) any stock options and SARs outstanding
as of the date such Change in Control is determined to have occurred and not
then exercisable and vested shall become fully exercisable and vested to the
full extent of the original grant; and (2) the restrictions applicable to any
Restricted Stock shall lapse, and such Restricted Stock shall become free of all
restrictions and become fully vested and transferable to the full extent of the
original grant.
The 1999 Plan further provides that during the 60-day period following a Change
in Control, the holder of a stock option has the right to surrender such option
for cash in an amount equal to the difference between the "change in control
price" (as defined in the 1999 Plan) and the exercise price. Notwithstanding the
foregoing, if the receipt of cash upon surrender of an option would make a
Change in Control transaction ineligible for pooling-of-interests accounting
treatment, the Compensation Committee may substitute for the cash payment common
stock with a fair market value equal to the cash that would otherwise be
payable.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.
The discussion which follows is a summary, based on current law, of some of the
significant federal income tax considerations relating to awards under the 1999
Plan.
NONQUALIFIED STOCK OPTIONS. A participant will not realize income at the time a
Nonqualified Stock Option ("NQSO") is granted. An NQSO is any stock option which
is not an ISO. Upon exercise, where the exercise price is paid in cash, the
participant will realize ordinary income in the amount by which the fair market
value of the stock acquired on the exercise date exceeds the exercise price. The
Company will generally be allowed a deduction in the year of exercise equal to
the amount of income realized by the participant. When the shares are
subsequently sold, any amount recognized in excess of the market value on the
exercise date will be reportable as short-term or long-term capital gain, as
appropriate, or, if the amount realized is less than the market value of the
shares at the time of exercise, any loss recognized will be reportable as
short-term or long-term capital loss, as appropriate.
If the exercise price of an NQSO is paid in whole or in part with already owned
shares of UNOVA Common Stock, the participant's tax basis in, and holding period
for, the old shares will carry over to the same number of shares received upon
exercise on a share-for-share basis, and the participant will not
12
<PAGE>
recognize compensation income with respect to such shares received. The fair
market value of the additional shares received will constitute compensation
taxable to the participant as ordinary income. The tax basis for the additional
shares received will equal their fair market value as so determined, and their
holding period will begin on the day after the date as of which such fair market
value is determined. The Company will generally be entitled to a tax deduction
equal to the compensation income recognized by the participant.
INCENTIVE STOCK OPTIONS. A participant will not realize income at the time a
stock option which is an ISO is granted, nor will the participant realize income
upon exercise of an ISO, whether the participant makes payment in cash or in
whole or in part with already owned shares of UNOVA Common Stock (except under
certain circumstances described below). However, the spread at exercise will
constitute an item includible in the participant's alternative minimum taxable
income and thereby may subject the optionee to the alternative minimum tax.
If shares acquired upon exercise of a stock option which is an ISO are not
disposed of by the participant within two years from the date of grant of the
stock option or within one year after the transfer of such shares to the
participant (the "ISO Holding Period"), then (i) no amount will be reportable as
ordinary income with respect to such shares by the recipient and (ii) the
Company will not be allowed a deduction in connection with such stock option or
the Common Stock acquired pursuant thereto. If a sale of such Common Stock
occurs after the ISO Holding Period has expired, then any amount recognized in
excess of the exercise price will be reportable as a long-term capital gain, and
any amount recognized below the exercise price will be reportable as a long-term
capital loss.
A "disqualifying disposition" will result if shares acquired upon the exercise
of an ISO (except in the case of the exercise of a decedent's ISO as described
in the second following paragraph) are sold before the ISO Holding Period has
expired. In such case, at the time of disposition ordinary income will be
recognized in the amount of the difference between the exercise price and the
lesser of (i) the fair market value on the date of exercise or (ii) the amount
realized on disposition. If the amount realized is less than the exercise price,
then no ordinary income will be recognized and the recognized loss will be
reportable as short-term or long-term capital loss, as appropriate. Any amount
recognized in excess of the market value on the date of exercise will be
reportable as a short-term or long-term capital gain, as appropriate. In
addition, in these circumstances there may be an adjustment in the calculation
of the participant's alternative minimum tax. The Company will generally be
allowed a deduction in the year in which the "disqualifying disposition" occurs
equal to the ordinary income recognized.
The general rules discussed above are modified if the participant disposes of
the shares of Common Stock in a "disqualifying disposition" in which a loss, if
sustained, would not be recognized by the participant. Such dispositions include
gifts or sales to related parties (defined, for example, to include members of
the participant's family and corporations in which the participant owns a
majority of the equity interest). The participant in such a situation would
recognize ordinary income equal to the difference between the exercise price of
the shares and the fair market value of the shares on the date of exercise.
Thus, the amount of ordinary income recognized would not be limited by the price
at which the shares were actually sold by the participant.
In the event of a participant's retirement or other termination of employment,
other than by reason of permanent and total disability or death, an ISO must be
exercised within three months of such termination in order to be eligible for
the tax treatment for ISOs described above (provided that the ISO Holding Period
requirements are met). If a participant terminates employment by reason of
permanent and total disability, the ISO will be eligible for such treatment if
it is exercised within one year of termination of employment (provided that the
ISO Holding Period requirements are met). In the event of a participant's death,
the ISO will be eligible for such treatment if it is exercised by the
participant's legatees, personal representatives, or distributees, provided
death occurred (i) while the participant was employed (ii)
13
<PAGE>
within three months of termination of employment, or (iii) within the one-year
following the date of termination by reason of permanent and total disability.
The Common Stock acquired pursuant to the exercise of an ISO following a
participant's death need not be held for the ISO Holding Period. When such
shares are sold, the amount realized in excess of the exercise price will be
reported as long-term or short-term capital gain, as appropriate. Moreover, if
the amount realized is less than the exercise price, any loss will be reportable
as a short-term or long-term capital loss, as appropriate, and the Company will
not be allowed any deduction in connection with the sale of such shares.
Short-term or long-term capital gain or loss treatment will be determined based
on whether the shares have been held more than one year, beginning on the date
following the exercise date.
If the exercise price of an ISO is paid in whole or in part with already owned
shares of UNOVA Common Stock, other than ISO shares which do not satisfy the ISO
Holding Period, any appreciation or depreciation in the value of the old shares
after their acquisition dates will not be recognized for tax purposes as a
result of such payment. The participant's tax basis in, and holding period for,
the old shares surrendered will carry over to the same number of the shares
received upon exercise of the ISO on a share-for-share basis. Common Stock
received in excess of the shares surrendered will have a tax basis equal to the
amount of the exercise price that is paid in cash (if any), and the holding
period for the new shares will begin on the date of exercise. After the
exercise, both the already owned shares and the additional shares acquired will
constitute ISO shares.
STOCK APPRECIATION RIGHTS. No income will be realized by a participant when a
SAR is granted. Upon exercise, the holder of a SAR will recognize as ordinary
income the amount of cash and/or the fair market value of any UNOVA Common Stock
received and the Company will generally be allowed a deduction in the year of
exercise equal to such income. Any shares of Common Stock received upon exercise
of a SAR will have a tax basis equal to their fair market value on the date
received.
RESTRICTED STOCK. A participant who is granted Restricted Stock may make an
election pursuant to Section 83(b) of the Code (a "Section 83(b) election") to
have the grant taxed as compensation income at the date of receipt with the
result that any future appreciation (or depreciation) in the value of the shares
of Common Stock granted shall be taxed as capital gain (or loss) upon a
subsequent sale of the shares. However, if the participant does not make a
Section 83(b) election, then the grant will be taxed as compensation income at
the fair market value on the date that the restrictions imposed on the shares
expire. Unless a participant makes a Section 83(b) election, any dividend paid
on Restricted Stock is compensation income to the participant. Subject to the
limitations of Section 162(m), if applicable, the Company is generally entitled
to an income tax deduction for any amounts which are taxed as compensation
income to the participant.
CERTAIN FEDERAL SECURITIES LAWS.
Executive officers and directors of the Company are required to file reports of
changes in beneficial ownership under Section 16(a) of the Exchange Act upon
acquisitions and dispositions of shares of UNOVA Common Stock. Resales of shares
of Common Stock acquired under the 1999 Plan by any person who has a control
relationship with the Company are restricted under the provisions of the
Securities Act of 1933, as amended, and the rules and regulations of the
Securities and Exchange Commission ("SEC") thereunder, including Rule 144.
NEW PLAN BENEFITS.
Inasmuch as awards under the 1999 Plan will be granted at the sole discretion of
the Compensation Committee and inasmuch as Performance Goal criteria, to the
extent applicable to any awards, may vary from year to year and from participant
to participant, future benefits under the 1999 Plan are not determinable. Awards
granted during 1998, however, to the Named Executive Officers under the
Company's 1997 Stock Incentive Plan (a predecessor plan under which stock
options were granted) are
14
<PAGE>
shown in the Option Grant Table on page 20. The number and dollar value of
awards granted during 1998 under such predecessor plan to all current executive
officers as a group (including the Named Executive Officers) and to all
employees who are not executive officers as a group were 358,000 shares and
$548,170 and 1,248,200 shares and $1,700,632, respectively. The dollar values
represent the difference between the option exercise price and the closing
market price of the Company's Common Stock on the New York Stock Exchange
composite tape on December 31, 1998, of $18.125 per share.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE UNOVA, INC.
1999 STOCK INCENTIVE PLAN.
ITEM THREE. PROPOSAL TO APPROVE THE MANAGEMENT INCENTIVE
COMPENSATION PLAN.
On March 11, 1999, the Board of Directors adopted the UNOVA, Inc. Management
Incentive Compensation Plan (the "Incentive Plan"). The principal purposes of
the Incentive Plan are to provide a significant but variable opportunity to
selected officers and key employees of the Company and its subsidiaries, to
align management incentives with the achievement of stipulated goals, and to
encourage long-term planning and performance. The Board believes that annual
cash incentive award opportunities are an important element of compensation
needed to attract and retain the best possible management personnel and to
motivate these employees to achieve business and financial goals which create
value for shareholders.
The Company has attempted to structure the Incentive Plan in a manner that
should permit the annual incentive compensation awards paid to the Chief
Executive Officer and the four other executive officers whose compensation for
the fiscal year is the highest (the "Covered Employees") to qualify as
"performance-based compensation" for purposes of Section 162(m) of the Code.
This Code provision generally limits to $1 million the Company's federal income
tax deduction for individual compensation, except for performance-based
compensation, paid to any of the Covered Employees. In order for such awards to
qualify as performance-based compensation, the shareholders must approve the
material terms of the Incentive Plan, including the business criteria on which
the Performance Goals to be established under the Incentive Plan are based.
The Incentive Plan is a cash bonus plan which, in the case of the Covered
Employees, is based on objective performance standards. The Board of Directors
presently anticipates that the award of a bonus to any participant in the
Incentive Plan will be conditioned on the achievement by the Company or its
applicable business operating unit of preestablished Performance Goals; however,
the terms of the Incentive Plan do not require the Compensation Committee of the
Board (the "Committee"), which will administer the Incentive Plan, to condition
the award of a bonus to participants who are not Covered Employees upon the
attainment of Performance Goals.
As soon as practicable after the beginning of each fiscal year, but in no event
more than 90 days thereafter, the Committee will establish Performance Goals for
such fiscal year for all participants in the Incentive Plan who are Covered
Employees and for such other participants as the Committee may deem appropriate.
Such goals need not be the same for all participants but must be based, in the
case of the Covered Employees, on the attainment of one or any combination of
the following: cash value added, return on capital utilized, return on tangible
equity, return on assets, return on capital, cash flow, revenue growth, or
return on revenue of the Company or any business unit thereof within which the
participant is primarily employed, or that are based in whole or in part on
specified levels of earnings per share or diluted earnings per share of the
Company. Bonus amounts determined under the Incentive Plan are not subject to
any minimum or maximum amount, except that no award made under the Incentive
Plan to any single participant who is a Covered Employee may exceed $5,000,000
in any single fiscal year. For
15
<PAGE>
purposes of this limitation, an award comprises both the amount paid to a
participant currently and the amount deposited to the participant's account with
the Bonus Bank as described below.
Although the Incentive Plan provides for a variety of Performance Goals which
may be utilized, either alone or in combination, for the various participants,
the Board of Directors presently intends that the Performance Goals to be
initially established for participants will generally be based on the
achievement of stipulated levels of Cash Value Added (or CVA) and sales revenues
for the Company on a consolidated basis (in the case of corporate office
participants) or CVA and sales revenues for the appropriate business unit or
units of the Company (in the case of other participants). If annual results of
CVA and sales revenues are in excess of the established targets, the Bonus
amount will be an amount in excess of the participant's Target Bonus. If annual
assets of CVA and sales revenues are less than the established targets, the
participant's Bonus amount will be an amount less than the participant's Target
Bonus.
In order to encourage a long-term commitment by executive officers and other key
employees to the Company and its shareholders, the Incentive Plan contemplates
that a portion (to be determined by the Committee) of any Bonus earned in a
given year in excess of the Target Bonus be deferred in a Bonus Bank for
possible future payout by the Company. Consequently, the total Bonus payable in
any given period consists of the participant's Target Bonus, plus (or minus) the
participant's Bonus amount based on achievement of the Performance Goals and
plus (or minus) a portion of the Bonus Bank balance. A Bonus Bank account is
considered "at risk" in the sense that in any year Performance Goal achievement
level results in a Bonus amount which is negative, the negative Bonus amount is
subtracted from the outstanding Bonus Bank balance.
It is not presently possible to estimate the amount of awards which may be made
under the Incentive Plan for 1999. The Committee anticipates that the group of
officers and other key employees eligible to participate in the Incentive Plan
will be the same group which was eligible to receive bonus awards under a
predecessor plan which was in effect for 1998. Such group presently comprises
approximately 160 employees.
The Company and its subsidiaries and affiliates have other arrangements and
plans pursuant to which incentive compensation or bonuses may be awarded to
employees. While the Board of Directors believes it is unlikely that any
participant in the Incentive Plan would receive any bonus award under any other
such plan or arrangement, the terms of the Incentive Plan would not prohibit
such an award.
Should the shareholders not approve the Incentive Plan at the Annual Meeting,
the Board will reconsider the Company's policies relating to executive bonuses.
Any alternative bonus arrangement which the Board might subsequently authorize
would not qualify as "performance-based" for purposes of Section 162(m).
SUMMARY OF THE INCENTIVE PLAN.
The full text of the Incentive Plan is set forth in Annex B to this proxy
statement and should be referred to for a complete description of its
provisions. The following summary of provisions is qualified in its entirety by
reference to the full text of the Incentive Plan.
ADMINISTRATION. The Incentive Plan will be administered by the Committee or
such other committee of the Board designated by the Board comprising at least
two "outside directors" as that term is defined in Section 162(m). Subject to
the provisions of the Incentive Plan, the Committee shall have the authority to
select participants upon the recommendation of the Chief Executive Officer,
determine the size and types of awards, determine the terms and conditions of
earning awards, determine the time and method of payment thereof, interpret the
Incentive Plan, and, subject to the limitations described below under the
caption "Amendment and Termination," amend the terms and conditions of the
Incentive Plan. All
16
<PAGE>
determinations of the Committee arising under the Incentive Plan shall be final,
binding, and conclusive on all parties.
ELIGIBILITY. The Committee will determine for each fiscal year those officers
and other key employees of the Company who are eligible to participate in the
Incentive Plan. Participation in any fiscal year will not give any person the
right to participate in the Incentive Plan in any other fiscal year.
ESTABLISHMENT OF TARGET BONUS. The Committee will determine a Target Bonus in
the case of each participant by multiplying the amount of a participant's base
salary which is actually paid during the applicable period (giving effect to any
increase or decrease in base salary) by a percentage determined by the Committee
in its sole discretion, which percentage need not be the same for each
participant.
DETERMINATION OF BONUS; BONUS BANK. The Committee may (but must in the case of
participants who are Covered Employees) condition the earning of a bonus upon
the attainment of specified Performance Goals measured over a period of not more
than one year relating to the participant, the Company, or a subsidiary or
division of the Company within which the participant is primarily employed.
Performance Goals may be different for each participant. Bonuses under the
Incentive Plan are expected to be based upon the relationship of the Target
Bonus to the degree of achievement of the prescribed Performance Goals during
the fiscal year.
The Committee shall determine the extent, if any, to which such cash amount
shall be paid currently to the participant by stipulating either a fixed amount
or a percentage of the cash amount determined as a result of the degree to which
the Performance Goals are achieved, with the remainder of such cash amount to be
credited to the account of the participant in the Bonus Bank and to remain at
risk. The Bonus Bank shall be an unfunded system of maintaining bookkeeping
entries whereby positive or negative amounts may be entered for the account of
any participant. If the minimum Performance Goals are not achieved, the cash
amount so determined from the relationship of the Target Bonus to the degree of
achievement of the Performance Goals may be a negative amount and may, if so
determined by the Committee, be recorded in whole or in part as a charge to the
participant's account in the Bonus Bank.
During each year the Incentive Plan is in operation, so long as CVA is one of
the Performance Goals applicable to the majority of participants, a participant
shall be paid one-third of any positive balance in the participant's bookkeeping
account with the Bonus Bank as of the date annual Bonus amounts of participants
are determined. If CVA is not in any year a Performance Goal for the majority of
participants in the Incentive Plan, the Committee may establish a different
schedule for the payment of Bonus Bank balances.
The Committee may, in its sole discretion, increase (except in the case of
Covered Employees) or decrease the amount of any bonus payable to any
participant and may award bonuses to specified participants other than the
Covered Employees even though the Performance Goals applicable to the award of
the bonuses are not achieved.
TERMINATION OF EMPLOYMENT. In the event a participant's employment is
terminated by reason of death, disability, or retirement, or the participant
shall have commenced an approved leave of absence, the bonus determined shall be
prorated to reflect participation prior to employment termination. In the event
a participant's employment is terminated by reason of death, disability, or
retirement, or if the participant's employment is terminated under circumstances
which the Committee determines to have been a termination without cause
(including any involuntary termination which occurs within one year following a
Change in Control as defined on pages 11-12), the participant shall, within 30
days following the next date on which annual Bonus amounts of participants are
determined, be paid in cash any positive balances in the participant's
bookkeeping account in the Bonus Bank (after adjusting the Bonus Bank for the
effect of the current year's prorated positive or negative amounts).
17
<PAGE>
AMENDMENT AND TERMINATION. The Board may amend the Incentive Plan from time to
time, but no such modification shall, without approval by the Company's
shareholders, alter the criteria on which Performance Goals for Covered
Employees are based, increase the maximum amount of an award which may be made
in any fiscal year to a participant who is a Covered Employee, or increase the
benefits accruing to participants who are Covered Employees.
PROCEDURE FOR PARTICIPANTS WHO ARE COVERED EMPLOYEES. Performance Goals shall
be established by the Committee at the time an award opportunity is granted to a
Covered Employee to comprise specified levels of one or more of the following
factors: basic earnings per share, cash value added, diluted earnings per share,
return on capital utilized, return on tangible equity, return on equity, return
on assets, return on capital, cash flow, revenue growth, revenue, or return on
revenue of the Company or of its applicable business unit, as appropriate. The
Committee shall at the same time prescribe a formula to determine the percentage
of the Target Bonus which will constitute the Bonus amount based on the degree
of attainment of the Performance Goals, indicating a determination of what
portion of any award will be made on a current basis and what portion will be
credited to the participant's account in the Bonus Bank. If the minimum
Performance Goals established by the Committee are not met, no award will be
made to a participant who is a Covered Employee. The Committee shall have the
discretion to reduce the amount of an award which a participant has otherwise
qualified to receive, and no award made to a participant who is a Covered
Employee (including the portion of any award to be credited to the participant's
account with the Bonus Bank) shall exceed $5,000,000.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE UNOVA, INC.
MANAGEMENT INCENTIVE COMPENSATION PLAN.
18
<PAGE>
INFORMATION REGARDING COMPENSATION AND
CERTAIN TRANSACTIONS
SUMMARY COMPENSATION TABLE.
For the chief executive and the four other executive officers of the Company
who, based upon employment by the Company or, for periods prior to the
Distribution, by Western Atlas (or by the respective subsidiaries of such
companies) received the highest compensation with respect to the fiscal year
ended December 31, 1998 (the "Named Executive Officers"), the following table
sets forth information concerning compensation paid to these individuals with
respect to the periods indicated. The principal positions listed in the table
are those held by the Named Executive Officers at the end of 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY OPTIONS COMPENSATION
POSITION YEAR ($) BONUS ($) (#) ($) (A)
<S> <C> <C> <C> <C> <C>
Alton J. Brann 1998 717,522 680,750 125,000(b) 17,892
Chairman of the Board 1997 713,486 875,000 500,000(b) 17,996
and Chief Executive 61,601(c)
Officer 1996 687,030 928,125 61,601(c) 17,381
Charles A. Cusumano 1998 245,000 130,700 50,000(b) 5,468
Vice President, Finance 1997 240,616 168,323 75,000(b) 5,150
18,480(c)
1996 226,289 174,242 18,480(c) 9,250
Michael E. Keane 1998 287,500 213,950 80,000(b) 15,673
Senior Vice President
and 1997 267,308 267,308 125,000(b) 6,570
Chief Financial Officer 36,961(c)
Michael Ohanian 1998 323,941 188,000 15,000(b) 14,595
Senior Vice President 1997 305,781 191,113 50,000(b) 9,050
and Group Executive, 18,480(c)
Automated Data Systems 1996 269,232 269,232 13,552(c) 9,250
Norman L. Roberts 1998 300,000 210,060 48,000(b) 10,846
Senior Vice President
and 1997 305,769 275,192 100,000(b) 9,060
General Counsel 18,480(c)
1996 295,846 292,887 18,480(c) 9,057
</TABLE>
(a) Included in this column for 1998 are the following: (i) present value costs
of the Company's portion of the 1998 premium for split-dollar life insurance
for Mr. Brann of $2,915 and for Mr. Keane of $837; (ii) the following
amounts representing premiums paid by the Company with respect to the
participation in the Company's Executive Medical Plan of each of the
following Named Executive Officers and their dependents: Mr. Brann, $4,889;
Mr. Keane, $8,353; Mr. Ohanian, $2,795; and Mr. Roberts, $4,889; (iii) the
following amounts representing interest imputed and taxable to the holder of
loans from the Company: Mr. Brann, $8,288; Mr. Cusumano, $3,668; Mr. Keane,
$4,483; and Mr. Roberts, $4,157; (iv) the Company's matching contributions
of $1,800 made to the respective accounts of each of the Named Executive
Officers under the Company's 401(k) plan; and (v) the amount of
19
<PAGE>
$10,000 paid to Mr. Ohanian by a subsidiary of the Company pursuant to an
executive flexible benefits plan.
(b) Represents options to purchase UNOVA Common Stock.
(c) Represents options to purchase Western Atlas common stock. The Named
Executive Officers were employed by Western Atlas until October 31, 1997,
when UNOVA Common Stock was distributed to the shareholders of Western Atlas
as a dividend. During the period prior to the Distribution, the Named
Executive Officers received options to purchase Western Atlas common stock
as indicated in the table above. On October 31, 1997, the Named Executive
Officers became employees of the Company and thereafter received options to
purchase UNOVA Common Stock. Upon the Distribution each then outstanding
Western Atlas option was adjusted by increasing the number of shares subject
to the option and decreasing the exercise price per share so as to preserve
the difference between the aggregate exercise price of the options and the
aggregate market value of the shares subject to the options. The number of
shares subject to options to purchase Western Atlas common stock shown in
the preceding table reflect the number of shares which resulted from
applying this adjustment.
STOCK OPTION INFORMATION.
The following table shows stock option grants with respect to shares of UNOVA
Common Stock under the Company's 1997 Stock Incentive Plan to the Named
Executive Officers during the 1998 fiscal year:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENTAGE
OF
NUMBER OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO GRANT DATE
OPTIONS EMPLOYEES EXERCISE PRESENT
GRANTED (#) IN PRICE EXPIRATION VALUE
NAME (A) FISCAL YEAR ($/SH) DATE ($) (B)
<S> <C> <C> <C> <C> <C>
Alton J. Brann 6,026(c) 0.3752% 16.5938 11/19/2008 59,148
118,974(d) 7.4072% 16.5938 11/19/2008 1,167,777
Charles A. Cusumano 6,026(c) 0.3752% 16.5938 11/19/2008 59,148
43,974(e) 2.7378% 16.5938 11/19/2008 431,622
Michael E. Keane 6,026(c) 0.3752% 16.5938 11/19/2008 59,148
73,974(f) 4.6055% 16.5938 11/19/2008 726,084
Michael Ohanian 15,000(g) 0.9339% 16.5938 11/19/2008 147,231
Norman L. Roberts 48,000(h) 2.9884% 16.5938 11/19/2008 471,139
</TABLE>
(a) All options granted to the Named Executive Officers were granted at the
prevailing market price of UNOVA Common Stock on the date of the grant.
These options permit payment of the exercise price and any withholding tax
due upon exercise by the surrender of already owned shares of UNOVA Common
Stock having a fair market value equal to the exercise price or the amount
of withholding tax and also permit payment of withholding tax by applying
shares otherwise issuable upon exercise. All such options become immediately
exercisable upon the occurrence of certain events resulting in a Change in
Control of the Company, and accelerated vesting schedules become applicable
in the event of the death of the optionee while in the employ of the
Company. Change in Control has the meaning described on pages 11-12.
20
<PAGE>
(b) The Black-Scholes model was used to determine the grant date present value
of UNOVA stock options. This method requires the assumption of certain
values that affect the option price. The values which were used in this
model are the volatility of the stock price of the UNOVA Common Stock and
the estimate of the risk-free interest rate. Since the Company does not pay
a cash dividend, no yield on the Common Stock was assumed. For purposes of
the model used to value the options in this table, a volatility factor of
39.6% for the Company, determined from historical stock price fluctuations,
and a 4.8% risk-free interest rate determined from market information
prevailing on the grant date were used. No adjustments were made for the
nontransferability or risk of forfeiture of the stock options. This model
allocates the valuation evenly over the vesting schedule. There is no
assurance that these assumptions will prove true in the future. The actual
value of the options depends on the market price of the UNOVA Common Stock
at the date of exercise, which may vary from the theoretical value indicated
in the table.
(c) Incentive Stock Options. These options become exercisable in one
installment of the shares subject thereto on the fifth anniversary of the
date of grant.
(d) Nonqualified Stock Options. These options become exercisable in four
installments of 25,000 shares each on the first through the fourth
anniversaries of the date of grant; and in one installment of 18,974 shares
on the fifth anniversary of the date of grant.
(e) Nonqualified Stock Options. These options become exercisable in four
installments of 10,000 shares each on the first through the fourth
anniversaries of the date of grant; and in one installment of 3,974 shares
on the fifth anniversary of the date of grant.
(f) Nonqualified Stock Options. These options become exercisable in four
installments of 16,000 shares each on the first through the fourth
anniversaries of the date of grant; and in one installment of 9,974 shares
on the fifth anniversary of the date of grant.
(g) Nonqualified Stock Options. These options become exercisable in one
installment of the shares subject thereto on the first anniversary of the
date of grant.
(h) Nonqualified Stock Options. These options become exercisable in three equal
installments of 16,000 shares each on the first through the third
anniversaries of the date of grant.
The following table provides the information indicated with respect to options
to purchase UNOVA Common Stock exercised by any of the Named Executive Officers
during 1998:
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE DECEMBER 31, 1998 (#) DECEMBER 31, 1998 ($)
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Alton J. Brann -0- -0- 100,000 525,000 -0- 191,400
Charles A. Cusumano -0- -0- 15,000 110,000 -0- 76,560
Michael E. Keane -0- -0- 25,000 180,000 -0- 122,496
Michael Ohanian -0- -0- 25,000 40,000 -0- 22,968
Norman L. Roberts -0- -0- 25,000 123,000 -0- 73,498
</TABLE>
21
<PAGE>
All of the Named Executive Officers held options to purchase Western Atlas
common stock following the Distribution. At the time of the Distribution, these
options were adjusted in the manner described in footnote (c) to the Summary
Compensation Table. Thereafter, effective August 10, 1998, Western Atlas and
Baker Hughes Incorporated ("Baker Hughes") consummated certain transactions
provided for in a plan of merger, as a result of which Western Atlas became a
subsidiary of Baker Hughes. Such transaction constituted a "Change in Control"
of Western Atlas for purposes of the Western Atlas 1993 Stock Incentive Plan
with the result that all options to purchase Western Atlas common stock
outstanding under the plan, including those held by the Named Executive
Officers, became immediately exercisable, and certain change in control rights
became applicable upon consummation of the merger. These change in control
rights entitled the holder of the option for a period of 60 days following the
merger to receive shares of the common stock of Baker Hughes equal in value to
the difference between the "Change in Control Price" specified in the Western
Atlas Plan and the option exercise price as in effect prior to the merger.
As a result of the exercise of such change in control rights by the Named
Executive Officers during 1998, each of the following individuals realized the
value indicated upon exercise (which was paid in shares of Baker Hughes common
stock valued as of the date of exercise of the right): Mr. Brann, $23,985,988;
Mr. Cusumano, $2,958,131; Mr. Keane, $3,202,662; Mr. Ohanian, $1,419,354; and
Mr. Roberts, $5,071,518. In addition, prior to the merger transaction between
Baker Hughes and Western Atlas, Mr. Cusumano exercised options to purchase
19,712 shares of Western Atlas common stock and realized $1,218,750 from such
transaction.
As of December 31, 1998, none of the Named Executive Officers held unexercised
employee stock options to purchase shares of Baker Hughes common stock.
In addition to options to purchase UNOVA Common Stock and Western Atlas common
stock, certain of the Named Executive Officers exercised during 1998 or held at
the end of 1998 options to purchase Litton common stock granted to them prior to
the spinoff of Western Atlas by Litton in 1994 (the "Litton Spinoff") and
adjusted in accordance with a formula into options to purchase shares of both
Western Atlas and Litton at the time of the Litton Spinoff. For purposes of
vesting and exercisability of these options, service with UNOVA is regarded as
service with Litton.
During 1998, Alton J. Brann exercised options to purchase 33,440 shares of
Litton common stock, realizing $1,238,514 from such transaction, and Charles A.
Cusumano exercised options to purchase 12,500 shares of Litton common stock,
realizing $567,919 from such transaction. At December 31, 1998, certain of the
Named Executive Officers held unexercised (but exercisable) options to purchase
the following numbers of shares of Litton common stock, having the following
year-end values: Michael E. Keane, options to purchase 14,000 shares having a
value of $700,516; Michael Ohanian, options to purchase 4,500 shares having a
value of $225,462; and Norman L. Roberts, options to purchase 16,000 shares
having a value of $758,398.
EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS.
Messrs. Brann, Cusumano, Keane, Roberts, and certain additional officers of the
Company have entered into change in control employment agreements with the
Company (collectively, the "Agreements"). The Agreements are operative only upon
the occurrence of a change in control, which includes substantially those events
described below. Absent a change in control, the Agreements do not require the
Company to retain the executives or to pay them any specified level of
compensation or benefits.
Generally, under the Agreements, a change in control is deemed to have occurred
if: (a) a majority of the Board becomes composed of persons other than persons
for whose election proxies have been solicited by the Board, or other than
persons who are then serving as directors appointed by the Board
22
<PAGE>
to fill vacancies caused by death or resignation (but not removal) of a director
or to fill newly created directorships; (b) another party becomes the beneficial
owner of at least 30% of the Company's outstanding voting stock, other than as a
result of a repurchase by the Company of its voting stock; (c) the approval by
the shareholders of the Company of a merger, reorganization, consolidation with
another party (other than certain limited types of mergers), or sale or other
disposition of all or substantially all of the Company's assets; or (d) the
shareholders approve the liquidation or dissolution of the Company.
Each Agreement provides that, for three years after a change in control, there
will be no adverse change in the executive's salary, bonus opportunity,
benefits, or location of employment. If, during this three-year period, the
executive's employment is terminated by the Company other than for cause, or if
the executive terminates his or her employment for good reason, as such terms
are defined in the Agreements (including compensation reductions, demotions,
relocation, and requiring excessive travel), or voluntarily during the 30-day
period following the first anniversary of the change in control, the executive
is entitled to receive an accrued salary and annual incentive payment through
the date of the termination and, except in the event of death or disability, a
lump-sum severance payment equal to three times the sum of the executive's base
salary and annual bonus (and certain pension credit and insurance and other
welfare plan benefits). Further, an additional payment is required in such
amount that after the payment of all taxes, income and excise, the executive
will be in the same after-tax position as if no excise tax under the Code had
been imposed. In the event of termination of employment by reason of death or
disability or for cause, the Agreements terminate and the sole obligation of the
Company is to pay any amounts theretofore accrued thereunder.
Mr. Ohanian has an employment contract with Intermec Technologies Corporation, a
subsidiary of the Company, which provides for his employment through December
31, 1999, for a base salary of $350,000 (which was increased from $325,000
effective March 1, 1999) and provides that he is eligible to receive an annual
bonus, subject to the satisfaction of performance goals established by the
Compensation Committee of the Company's Board of Directors, in accordance with
the terms of any cash bonus plan in which he is eligible to participate.
The Company has entered into an employment agreement with Clayton A. Williams,
whereby Mr. Williams has agreed to serve as Group Executive of the Company's
Industrial Automation Systems operations and Senior Vice President of the
Company until December 31, 1999, his anticipated retirement date. Under this
agreement, Mr. Williams will receive an annual salary of not less than $280,000
and is entitled to participate in the cash bonus plan or plans of the Company
for which he is eligible. Upon retirement, Mr. Williams will be entitled to
receive retirement benefits under the Supplemental Executive Retirement Plan.
There will be offset from his benefits the amount he will receive under the
pension plan of a former employer and amounts payable under Social Security.
However, there will be no offset of Company provided benefits that would have
been available if Mr. Williams had participated fully in the FSSP (described
below), or the similar plan of Western Atlas during his employment with the
Company or Western Atlas. Effective December 31, 1999, Mr. Williams will be
deemed to have 20 credited years of service for purposes of determination of his
benefit under the Supplemental Plan.
RETIREMENT BENEFITS.
THE FSSP AND RELATED RETIREMENT PLAN.
The Named Executive Officers participate in the Company's Financial Security and
Savings Program (the "FSSP"), a defined contribution plan intended to qualify
under Sections 401(a) and 401(k) of the Code. Participation in the FSSP is
generally available to employees of the Company located in the United States.
23
<PAGE>
A participant in the FSSP may elect to defer from 2% to 18% of his or her
covered compensation for investment in the trust established under the FSSP, but
the maximum amount which the employee may contribute to the FSSP for any
calendar year is limited by provisions of the Code relating to the maximum
amount, as adjusted for inflation, which may be contributed to plans qualified
under Section 401(k) of the Code (the "401(k) Maximum Amount"), which is $10,000
for 1998. Deposits of 2% to 4% of the participant's compensation are invested in
the FSSP Retirement Fund, while deposits in excess of 4% are invested in one or
more investment funds, as designated by the participant.
The Company adds to the investment fund account of an FSSP participant an amount
(not to exceed 2% of the participant's compensation) equal to 50% of the
participant's deposits in excess of 4% of his or her covered compensation. In
the case of employees who are classified as highly compensated pursuant to
applicable Treasury releases (those earning over $80,000 for 1998), such
employees' permissible contributions may be reduced further and the amount of
the employer's matching contributions may be limited if certain
nondiscrimination tests set forth in the Code are not achieved. A participant is
entitled to receive his or her entire FSSP account, to the extent it has become
vested, upon retirement or earlier termination of employment with the Company.
Benefits under the FSSP are intended to supplement benefits under the Company's
related retirement plan, which is a defined benefit plan. Although deposits to
the FSSP do not comprise part of the retirement plan's trust (except for
transfers of assets made at the request of a participant in connection with a
distribution, as described below), the extent of an employee's participation in
the Retirement Fund of the FSSP will affect the amount of such employee's
benefit under the related retirement plan. The employee's contribution to the
FSSP of 2% to 4% of his or her gross earnings causes the employee (if eligible
to participate in the Company's retirement plan) to become eligible to accrue
benefits under such retirement plan. Covered compensation for purposes of both
the retirement plans and the FSSP Retirement Fund is aggregate cash compensation
including bonuses and commissions but would, in the case of the Named Executive
Officers, be limited to $160,000 pursuant to provisions of the Code.
The amount of a participant's annual retirement benefit at his or her normal
retirement date (generally age 65) under the Company's defined benefit
retirement plan is the HIGHER of (i) 60% of the participant's deposits to the
Retirement Fund of the FSSP (during the entire period of his or her employment)
or (ii) 85% of such deposits MINUS 75% of the participant's estimated Social
Security primary benefit at age 65 with adjustments in the amount of the benefit
to take into account factors such as age at retirement, degree of vesting, and
form of benefit selected. In the case of Company employees who transferred
directly from Western Atlas to the Company, contributions to the Retirement Fund
or the similar plan sponsored by Western Atlas will be included in the
computation of a participant's total deposits for purposes of the formula set
forth above. The annual retirement benefit at normal retirement age is reduced
by the actuarial equivalent of lump sum distributions made (at the request of
the participant) of the participant's Retirement Fund account in the FSSP.
Should a participant wish to receive the entire benefit described in the formula
set forth above, the participant may direct that his or her Retirement Fund
balance, consisting of deposits with earnings, be transferred to the retirement
plan trust.
RESTORATION PLAN.
The limitations in the Code establishing the 401(k) Maximum Amount cause certain
participants in the FSSP to lose Company-provided benefits which they could
otherwise have derived from the deposit of a full 8% of their covered
compensation to the FSSP. Consequently, the Company has adopted a
noncontributory and unfunded plan (the "Restoration Plan") designed to restore
the approximate amount of lost employer-provided benefits to those employees who
participate in the FSSP to the fullest extent permitted by the applicable Code
provisions but who are unable (as a result of the 401(k) Maximum Amount
limitation) to contribute 8% of their compensation to the FSSP. Such lost
employer-provided benefits which are restored under this plan consist of (i) all
or part of the 50% matching contribution to the
24
<PAGE>
investment fund account of the FSSP participant and (ii) except in the case of
Mr. Brann, who participates in a supplemental contractual arrangement (as
described below), a portion of the full benefit under the Company's retirement
plan if the participant's contributions to the FSSP Retirement Fund are limited
to less than 4% of his or her compensation. Amounts that would have been
deposited to the employee's Retirement Fund account by the employee and to his
or her investment fund account by the Company are projected with interest to the
participant's normal retirement date. Based upon these amounts, the
participant's lost benefits from the Company's retirement plan and lost Company
contributions to the investment fund are determined and converted to, and
payable upon the participant's retirement as, a single life annuity if the
participant is unmarried at such time or as a 100% joint and survivor annuity if
the participant is then married. No retirement benefit is payable under the
Restoration Plan until the retired employee has reached the age of 62.
SUPPLEMENTAL ARRANGEMENT FOR MR. BRANN.
In addition to the FSSP, the related retirement plan, and the Restoration Plan,
the Company has a noncontributory and unfunded supplemental contractual
arrangement (the "Supplemental Arrangement") designed to provide additional
retirement benefits to Mr. Brann. If Mr. Brann retires on or after age 65
following 25 years of service with the Company (including prior service with
Western Atlas and Litton), his annual benefit (computed as a single life
annuity) under the Supplemental Arrangement is 55% of his final average
compensation, less amounts payable to Mr. Brann under Social Security and less
that portion of pension benefits deemed to have been provided by the employer's
(as opposed to Mr. Brann's) contributions which would have been received by Mr.
Brann under any other retirement plan sponsored by the Company, Western Atlas,
or Litton if he was eligible to participate and had participated at all times in
any such plan to the maximum extent permitted (regardless of the degree of
actual participation). Final average compensation means one-third of covered
cash compensation (including salary and bonus) deemed to have been awarded to or
received by Mr. Brann during any three periods of 12 consecutive months
specified by Mr. Brann occurring during the 60-month period preceding his
retirement. Bonuses are deemed to have been paid in equal monthly installments
during the fiscal year or other period for which they were awarded and do not
include, for purposes of the Supplemental Arrangement, deposits to the Bonus
Bank under the Management Incentive Compensation Plan as described on page 17,
but do include normal periodic payments from the Bonus Bank. For purposes of the
Supplemental Arrangement, Mr. Brann had 25 credited years of service at March
15, 1999.
If Mr. Brann's employment terminates before he has attained the age of 65, then
the factor of 55% referred to in the benefit computation formula set forth above
is reduced in accordance with a schedule relating to age and length of service;
however, payment of retirement benefits to Mr. Brann under the Supplemental
Arrangement will, in no event, commence until he reaches age 62. The
Supplemental Arrangement also provides for certain salary continuation payments
in the event of Mr. Brann's disability and certain survivors' benefits in the
event of his death while employed by the Company and prior to the commencement
of the payment of retirement benefits.
The following table indicates the approximate annual combined benefit which
would be received by Mr. Brann representing the sum of (a) the benefit under the
Company's basic retirement plan deemed to have been provided by the employer's
contributions and (b) the benefit under the Supplemental Arrangement, based on
the following assumptions: (i) participation in the voluntary retirement plans
to the maximum extent permitted during the entire period of Mr. Brann's
employment, (ii) retirement at age 65, and (iii) election of the benefit in the
form of a single life annuity.
25
<PAGE>
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
REMUNERATION 15 20 25 OR MORE
<S> <C> <C> <C>
$1,200,000 $ 420,000 $ 570,000 $ 660,000
1,400,000 490,000 665,000 770,000
1,600,000 560,000 760,000 880,000
1,800,000 630,000 855,000 990,000
2,000,000 700,000 950,000 1,100,000
</TABLE>
Although, as indicated above, the amount of such combined benefit would be
reduced by Mr. Brann's Social Security primary benefit, the foregoing table does
not give effect to such offset. Covered compensation under the Supplemental
Arrangement is base compensation actually paid to Mr. Brann during the fiscal
year plus the bonus awarded for such year and thus would generally be the sum of
the amounts shown in the first two columns of the Summary Compensation Table.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN.
Messrs. Cusumano, Keane, Ohanian, and Roberts participate in the Company's
Supplemental Executive Retirement Plan, an unfunded plan which provides
additional retirement benefits to key executive employees designated by the
Compensation Committee of the Board after nomination by the Chief Executive
Officer. A participant in this plan does not ordinarily vest in a retirement
benefit until the participant has reached the age of 60 and completed 15 years
of service following the participant's 40(th) birthday and may not ordinarily
begin receiving a retirement benefit thereunder until the participant has
reached age 62. Under this plan a participant's annual retirement benefit is the
actuarial equivalent, as of the age of the participant at retirement, of the
following computation: (a) 1.6% of "average earnings" of the participant up to
$125,000 (which amount is adjusted annually for inflation and was $137,416 at
January 1, 1999) plus (b) 2.2% of "average earnings" in excess of such amount,
the sum of (a) plus (b) then being multiplied by the participant's number of
years of service (not to exceed 25) following the participant's 40(th) birthday.
Average earnings for purposes of this plan is the average of base salary paid
and bonus awarded by the Company to the participant in the three periods of 12
consecutive months in which the participant's compensation was highest during
the final 60 months of the participant's employment. Bonuses are deemed to have
been paid in equal monthly installments during the fiscal year or other period
for which they were awarded and do not include, for purposes of this plan,
deposits to the Bonus Bank under the Management Incentive Compensation Plan as
described on page 17, but do include normal periodic payments from the Bonus
Bank. Thus, covered compensation for the Named Executive Officers would
generally be the sum of the amounts shown in the first two columns of the
Summary Compensation Table. There is offset from the benefit calculated in the
manner described above the participant's Social Security primary benefit as well
as all amounts of Company-provided retirement benefit which the participant
receives (or could have received assuming full participation at all times of
eligibility) under other retirement plans sponsored by the Company. For purposes
of this plan at March 15, 1999, Mr. Roberts had 24 credited years of service,
Mr. Cusumano had 12 credited years of service, Mr. Keane had 3 credited years of
service, and Mr. Ohanian had 15 credited years of service.
The following table indicates the approximate combined annual retirement benefit
which would be received by a participant in this plan representing the sum of
(a) the Company-provided benefit under the Company's basic retirement plan; (b)
the benefit under the Restoration Plan; and (c) the benefit under the
Supplemental Executive Retirement Plan based on retirement at age 65, full
participation at all relevant times in the basic retirement plans, and election
of a benefit in the form of a single life annuity. The table does not give
effect to the offset of the participant's Social Security benefit.
26
<PAGE>
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
REMUNERATION 15 20 25 OR MORE
<S> <C> <C> <C>
$ 600,000 $ 176,293 $ 235,058 $ 293,822
800,000 242,293 323,058 403,822
1,000,000 308,293 411,058 513,822
1,200,000 374,293 499,058 623,822
</TABLE>
In addition to retirement benefits, certain benefits are payable under this plan
in the event of the death or disability of the participant. In the event of a
change in control of the Company, a participant is immediately vested in the
retirement benefit and is entitled to receive a lump sum payment equal to the
actuarial equivalent, as of the age of the participant on the date of the change
in control of the Company, of the retirement benefit which would have been
payable at age 65, unless the committee which then administers the plan elects
to defer such lump sum payment.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
INDEBTEDNESS OF MANAGEMENT.
As a form of additional incentive for its key employees, the Company provides
loans to certain such employees located in the United States. Under such
program, loans in the aggregate principal amount of $1,035,000 were outstanding
at March 15, 1999, to four executive officers of the Company, as follows:
Charles A. Cusumano, $225,000; Michael E. Keane, $275,000; Norman L. Roberts,
$255,000; and Clayton A. Williams, $280,000. These loans are unsecured,
currently bear interest at the rate of 4% per annum, and are payable on the
Company's demand, but, in any event, not later than the earlier of (i)
termination of the borrower's employment with the Company or any subsidiary
thereof, or (ii) December 31, 2002. The foregoing amounts represent the largest
amount of indebtedness of each such executive officer under such loan program
outstanding since December 31, 1997. In addition, Alton J. Brann repaid an
outstanding loan in the amount of $616,000 on November 9, 1998, and Edward J.
Borey, who resigned as a Vice President of the Company on December 18, 1998,
held a loan in the amount of $100,000 of which $50,000 was repaid on April 10,
1998, and the remaining $50,000 was repaid on March 12, 1999.
TRANSACTIONS WITH MANAGEMENT.
Edward J. Borey relocated his office from Fairfield, Ohio, to Everett,
Washington, in September 1997 to assume the position of Senior Vice President
and Chief Operating Officer of Intermec Technologies Corporation ("Intermec"), a
subsidiary of the Company. To facilitate such relocation, Intermec purchased Mr.
Borey's former residence for resale in Centerville, Ohio, for a purchase price
of $350,000. Such purchase price was determined by the Company's corporate
director of real estate after comparing the results of the reports of three
independent real estate appraisers engaged by the Company.
27
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors of UNOVA, Inc., is composed
of outside directors of UNOVA and is responsible for, among other duties, the
policies and procedures regarding executive compensation and setting the amounts
of such compensation.
The Committee's last report to the shareholders appeared in UNOVA's Annual
Report on Form 10-K for the 1997 fiscal year. As stated in that report, in
accordance with the Agreement relating to the spinoff of UNOVA by Western Atlas
Inc., certain compensation plans and policies were formulated prior to the
appointment of the UNOVA Compensation Committee. Recommendations with respect to
executive compensation at UNOVA were made to this Committee by the Western Atlas
Compensation Committee at the time of the spinoff of UNOVA in the fall of 1997.
The Committee viewed its role with respect to the 1998 fiscal year as one of
initially evaluating the effectiveness of the previously adopted plans and
policies. The Committee then made such adjustments to these plans and policies
as the Committee deemed appropriate in light of the performance of UNOVA
subsequent to the spinoff.
The compensation program presently in effect at UNOVA has three principal
elements: (1) base annual salary; (2) potential annual cash incentive bonuses
which are based primarily on the performance of the Company or its relevant
operating unit; and (3) long-term incentives in the form of stock options. The
Committee believes that a significant portion of the total compensation of the
Company's executive officers should be contingent upon the achievement of
preestablished performance goals.
BASE ANNUAL SALARY.
In considering appropriate adjustments to base annual salaries for executive
officers made during the 1998 fiscal year, the Committee carefully considered an
executive salary analysis prepared by the Company's internal financial analysis
group based on information extracted from the latest proxy statements and other
public information available with respect to a peer group of companies. This
peer group is a combination of the companies selected from two Standard & Poor's
Indices. The Standard & Poor's 400 Electrical Equipment Index is believed by the
Committee to comprise companies reasonably comparable to UNOVA's Automated Data
Systems segment, and the Standard & Poor's 400 Manufacturing (Specialized) Index
is believed by the Committee to comprise companies reasonably comparable to
UNOVA's Industrial Automation Systems segment.
The Committee, after reviewing the report and other materials, increased Mr.
Brann's annual salary from $700,000 to $735,000, which represented an increase
of 5%. In deciding that such increase was appropriate for Mr. Brann, the
Committee gave particular consideration to Mr. Brann's leadership in
establishing UNOVA as a successful independent public company and in developing
and implementing an acquisitions program designed to make the Company a leader
in both of its business segments.
The Committee also increased the salaries of other executive officers by amounts
ranging from 4.2% to 9.1% of their previous salaries. However, one executive
officer was not given a salary increase, since his existing total compensation
was considered higher than the total compensation of persons holding a similar
position at the peer group of companies.
STOCK OPTION GRANTS.
In November 1998 the Committee reviewed a written and oral presentation by Mr.
Brann of his recommendations with respect to the Company's annual grant of stock
options to executive officers and other key employees. The Committee reviewed
stock option practices at the peer group of companies
28
<PAGE>
described above and noted the widespread use of stock options as an incentive in
the businesses in which the Company was engaged. Mr. Brann described in some
detail the projected possible dilution of the Common Stock that would result
from implementation of the program he recommended. The Committee also discussed
data from an earlier report prepared for the Company by an outside compensation
consulting firm.
After extensive discussion and debate, the Committee voted to implement the
stock option program substantially in the form recommended by Mr. Brann. The
methodology used to determine the size of the individual grants was based upon a
multiple of base salary, subject to the Committee's qualitative evaluation of
each individual's performance. The Committee decided that the multiples of base
salary of the executive officers which should be used to determine the magnitude
of the 1998 annual stock option grant would range from 2.7 to 4.3.
The Committee determined that options to purchase an aggregate of 418,000 shares
would be granted to executive officers as a group, which included options to
purchase 125,000 shares granted to Mr. Brann and options to purchase 60,000
shares granted to Edward J. Borey, who resigned as an executive officer in
December 1998. The option exercise price was $16.5938 per share, the fair market
value of UNOVA Common Stock on the date of grant. The Committee directed that
the options become cumulatively exercisable at the rate of 20 percent per year
on the first through fifth anniversaries of the date of grant, with the
exception of options granted to three executive officers expected to retire in
less than five years, whose options become fully exercisable over a shorter
period of time.
ANNUAL BONUSES FOR 1998.
On January 22, 1998, the Board of Directors adopted a Management Incentive
Compensation Plan for UNOVA's first full fiscal year, which provided for the
payment of annual bonuses subject to the achievement by the Company or its
applicable operating unit of preestablished performance goals. The Committee
established maximum potential bonus amounts for each Plan participant based upon
a percentage of the participant's salary.
Such percentage was 125% of base salary for Mr. Brann and ranged from 70% to
125% of base salary for the other executive officers. For executive officers
associated with the corporate headquarters, performance goals were established
based upon stipulated levels of consolidated revenues and earnings per share of
the Company for 1998. For the executive officers associated with the Company's
two business segments, performance goals were established based on stipulated
levels of revenues and return on capital utilized for the applicable business
segment.
Based upon actual performance of the Company and its operating units during
1998, the performance goals applicable to corporate headquarters participants
were met at a level which entitled the participants to receive 100% of their
maximum potential bonuses. The performance goals of the executive officer
associated with the Company's Automated Data Systems business segment were
achieved at a level which entitled the officer to receive 51.1% of his maximum
potential bonus. The performance goals applicable to the executive officer
associated with the Company's Industrial Automation Systems segment were not
achieved at a level which entitled such officer to receive a bonus.
The Management Incentive Compensation Plan entitles the Committee to reduce the
amount of the bonuses below the maximum amount which may be awarded based upon
achievement of the relevant performance goals. In the case of executive officers
associated with the corporate headquarters, the Committee analyzed the "quality"
of the Company's 1998 earnings per share and noted that of the reported $1.27
earnings per share, 35 cents per share was attributable to the one-time gain
resulting from the sale of the Company's headquarters building in Beverly Hills,
California, and the remainder was attributable to operations. The Committee
decided to apply a formula which would relate the bonuses of
29
<PAGE>
these executive officers more clearly with the Company's operating results. As a
result, the four executive officers associated with the corporate headquarters
were awarded 77.8% of the maximum bonus amounts which could have been paid as a
result of the level at which corporate performance goals were achieved. Mr.
Brann was awarded a bonus of $680,750 for 1998. Bonuses of the other four
executive officers who received cash incentive awards for 1998 are set forth in
the Summary Compensation Table appearing on page 19 of the proxy statement in
which this Report is included.
The Committee awarded bonuses to executive officers associated with the
Company's two business segments at the amount, if any, permitted by the degree
to which the performance goals for these officers were attained.
SECTION 162(m) POLICY.
In general, the Committee believes that executive compensation should be
designed to qualify for exemption from the limitation on deductibility
prescribed by Section 162(m) of the Internal Revenue Code. The Management
Incentive Compensation Plan, being presented for shareholder approval at the
Annual Meeting, has been designed so that the awards thereunder should qualify
for such exemption.
However, the Committee believes there may in the future be instances when the
interests of the Company and its shareholders may be best served by awarding
compensation based on factors other than, or in addition to, achievement of the
shareholder-approved performance goals. In such cases the Committee may
determine to award compensation which would not be deductible for Federal income
tax purposes from the Company's gross income.
DATED: February 5, 1999
THE COMPENSATION COMMITTEE
Orion L. Hoch, Chair
Stephen E. Frank
Steven B. Sample
William D. Walsh
30
<PAGE>
STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the percentage change in the
cumulative total shareholder return on UNOVA Common Stock with the cumulative
total return of the Standard & Poor's Midcap 400 Index and a composite
line-of-business index designed to reflect the mix of the Company's business
segments for the period beginning October 22, 1997, which was the date "when
issued" trading commenced in UNOVA Common Stock on the New York Stock Exchange,
and ending December 31, 1998. The composite line-of-business index was prepared
by combining the Standard & Poor's 400 Electrical Equipment Index, believed by
management to comprise companies reasonably comparable to UNOVA's Automated Data
Systems segment, and the Standard & Poor's 400 Manufacturing (Specialized)
Index, believed by management to comprise companies reasonably comparable to
UNOVA's Industrial Automation Systems segment. Each of these two indexes was
weighted based on relative sales and asset levels of the Company's business
segments. The graph assumes the investment of $100 on October 22, 1997, in UNOVA
Common Stock, in the S&P Midcap 400 Index, and in the composite line-of-business
index prepared as described above. Total shareholder return was calculated on
the basis that in each case all dividends were reinvested.
TOTAL RETURN TO SHAREHOLDER'S
(DIVIDENDS REINVESTED MONTHLY)
ANNUAL RETURN PERCENTAGE
<TABLE>
<CAPTION>
YEARS ENDING
------------------------
COMPANY/INDEX 12/31/97 12/31/98
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UNOVA INC -12.92 10.27
*S&P COMPOSITE INDEX -6.88 14.45
S&P MIDCAP 400 INDEX -1.17 19.11
</TABLE>
INDEXED RETURNS
<TABLE>
<CAPTION>
BASE YEARS ENDING
PERIOD ------------------------
COMPANY/INDEX 10/22/97 12/31/97 12/31/98
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UNOVA INC 100 87.08 96.02
*S&P COMPOSITE INDEX 100 93.14 106.60
S&P MIDCAP 400 INDEX 100 98.83 117.71
</TABLE>
*S&P COMPOSITE INDEX IS MADE UP OF ELECTRICAL EQUIPMENT -400 (46%) AND
MANUFACTURING (SPECIALIZED)-400 (54%)
31
<PAGE>
OTHER MATTERS
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
BY MANAGEMENT.
The following table sets forth the number of shares of UNOVA Common Stock
beneficially owned, directly or indirectly, by each director, each Named
Executive Officer, and all directors and executive officers as a group as of
March 15, 1999. Except as otherwise indicated, each individual named (1) has
sole investment and voting power with respect to the securities shown or (2)
shares investment and/or dispositive power with the individual's spouse.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF
BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP (a) CLASS
<S> <C> <C>
Paul Bancroft, III 2,892 *
Alton J. Brann 301,475 *
Joseph T. Casey 76,284(b) *
William C. Edwards 39,653(c) *
Stephen E. Frank 36,260(d) *
Claire W. Gargalli 2,000 *
Orion L. Hoch 130,717(e) *
Steven B. Sample 29,472(f) *
William D. Walsh 120,452(g) *
Charles A. Cusumano 18,517 *
Michael E. Keane 43,260 *
Michael Ohanian 34,002 *
Norman L. Roberts 35,245 *
Clayton A. Williams 40,638 *
All directors and executive officers (14 persons) 990,842(h) 1.77%
</TABLE>
* Less than 1%.
(a) Includes shares of the Company's Common Stock subject to options which were
exercisable on March 15, 1999, or become exercisable within 60 days
thereafter, as follows: Mr. Brann, 100,000 shares; Mr. Frank, 25,000 shares;
Dr. Hoch, 25,000 shares; Dr. Sample, 25,000 shares; Mr. Walsh, 25,000
shares; Mr. Cusumano, 15,000 shares; Mr. Keane, 25,000 shares; Mr. Ohanian,
25,000 shares; Mr. Roberts, 25,000 shares; Mr. Williams, 25,000 shares; and
such group, 315,000 shares.
(b) Includes 1,021 shares of phantom Common Stock credited to Mr. Casey's
deferred account under the Director Stock Option and Fee Plan. Also,
includes 10,000 shares held by a charitable corporation of which Mr. Casey
serves as trustee. Mr. Casey has voting and investment power with respect to
such 10,000 shares and may thus be deemed to have incidents of beneficial
ownership thereof for certain purposes within the meaning of applicable
regulations of the SEC.
32
<PAGE>
(c) Includes 353 shares of phantom Common Stock credited to Mr. Edwards'
deferred account under the Director Stock Option and Fee Plan.
(d) Includes 4,260 shares of phantom Common Stock credited to Mr. Frank's
deferred account under the Director Stock Option and Fee Plan.
(e) Includes 4,260 shares of phantom Common Stock credited to Dr. Hoch's
deferred account under the Director Stock Option and Fee Plan. Also includes
1,080 shares owned by Dr. Hoch's wife, as to which shares Dr. Hoch disclaims
beneficial ownership.
(f) Includes 3,972 shares of phantom Common Stock credited to Dr. Sample's
deferred account under the Director Stock Option and Fee Plan.
(g) Includes 1,652 shares of phantom Common Stock credited to Mr. Walsh's
deferred account under the Director Stock Option and Fee Plan.
(h) Includes 48,500 shares of Common Stock held by The UNOVA Foundation (the
"Foundation"). Voting power and investment power with respect to these
shares are exercised by the Foundation's officers, who are elected by the
directors of the Foundation. The Foundation's directors are elected by, and
may be removed by, the Board of Directors of the Company. The officers of
the Foundation share voting power with respect to such shares of Common
Stock held by the Foundation, and one officer of the Foundation, who is also
an executive officer of the Company, has sole investment power with respect
to such shares. Thus such officers may be deemed to have incidents of
beneficial ownership thereof for certain purposes within the meaning of the
SEC regulations referred to above. Also includes 31,475 shares of Common
Stock held by the UNOVA Master Pension Trust, a trust organized to hold the
assets of certain qualified U.S. pension plans. Voting and investment power
with respect to these shares is exercised by a committee appointed by the
Board of Directors comprising four officers of the Company.
BY OTHERS.
The following table sets forth each person or entity that as of December 31,
1998, reported beneficial ownership of more than 5% of the Company's outstanding
Common Stock, except for any entity which has subsequently advised the Company
that it is no longer such a 5% holder.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF
BENEFICIAL
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP PERCENT OF CLASS
<S> <C> <C>
Unitrin, Inc. 12,657,764(a) 23.04%
One East Wacker Drive
Chicago, Il 60601
Perry Corp. and Richard C. Perry 4,263,300(b) 7.76%
599 Lexington Avenue
New York, NY 10022
Dodge & Cox 3,462,733(c) 6.30%
One Sansome Street, 35(th) Floor
San Francisco, CA 94104
FMR Corp. 3,252,400(d) 5.92%
82 Devonshire Street
Boston, MA 02109
</TABLE>
(a) Unitrin, Inc. ("Unitrin"), has reported in a filing on Schedule 13D under
the Exchange Act that these shares are owned by two of its subsidiaries,
Trinity Universal Insurance Company (7,206,776
33
<PAGE>
shares) and United Insurance Company of America (5,450,988 shares). Unitrin
and each of such subsidiaries reported that each such subsidiary shared
voting power and dispositive power with Unitrin with respect to the shares
so owned. Based upon the foregoing, Unitrin may be deemed to be the indirect
beneficial owner of such 12,657,764 shares.
(b) In a filing on Schedule 13G under the Exchange Act by Richard C. Perry and
Perry Corp., Perry Corp. is described as a private investment firm of which
Richard C. Perry is the president and sole stockholder. The joint filers
state that they have sole voting and dispositive power with respect to
4,263,300 shares.
(c) In a filing on Schedule 13G under the Exchange Act, Dodge & Cox stated that
it held sole voting power with respect to 3,124,933 shares, shared voting
power with respect to 47,100 shares, and sole dispositive power with respect
to 3,462,733 shares. Dodge & Cox has reported that such shares are
beneficially owned by clients of such firm, including investment companies,
pension funds, and other institutional holders.
(d) In a filing on Schedule 13G under the Exchange Act, FMR Corp. stated that it
held sole voting power with respect to 403,100 shares and sole dispositive
power with respect to 3,252,400 shares. The filing further disclosed that
its subsidiary Fidelity Management & Research Company is the beneficial
owner of 2,849,300 shares as a result of acting as investment advisor to
various registered investment companies.
FILING OF REPORTS UNDER SECTION 16(a) OF THE EXCHANGE ACT.
Section 16(a) of the Exchange Act requires that the Company's executive
officers, directors, and persons who own more than 10% of a registered class of
the Company's equity securities file reports of ownership and changes in
ownership with the SEC and the New York Stock Exchange. Executive officers,
directors, and greater than 10% shareholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on an examination of the copies of such forms furnished to the
Company and upon written representations that no other reports were required
during 1998, all Section 16(a) filing requirements applicable to the Company's
executive officers and directors were satisfied in 1998.
SHAREHOLDER PROPOSALS FOR 2000 ANNUAL MEETING.
Shareholders may submit proposals on matters appropriate for shareholder action
at the Company's annual meetings consistent with regulations adopted by the SEC
and the By-laws of the Company. For such proposals to be considered for
inclusion in the Company's proxy statement and form of proxy relating to the
2000 Annual Meeting, they must be received by the Company not later than
November 30, 1999. Shareholder proposals for business matters to be conducted at
the meeting, including nominations of persons to serve as directors of the
Company, but not to be considered for inclusion in the Company's proxy statement
and form of proxy relating to the 2000 Annual Meeting, must be received not
earlier than January 8, 2000, or later than February 7, 2000. Such proposals
should be directed to the attention of the Secretary of the Company at 21900
Burbank Boulevard, Woodland Hills, California 91367-7418.
THE BOARD OF DIRECTORS
UNOVA, INC.
Beverly Hills, California
March 29, 1999
34
<PAGE>
ANNEX A
UNOVA, INC.
1999 STOCK INCENTIVE PLAN
SECTION 1. PURPOSE; DEFINITIONS
The purpose of the Plan is to give the Company a competitive advantage in
attracting, retaining and motivating officers and employees and to provide the
Company and its subsidiaries with a stock plan providing incentives directly
linked to the profitability of the Company's businesses and increases in
shareholder value.
For purposes of the Plan, the following terms are defined as set forth below:
a. "AFFILIATE" means a corporation or other entity controlled by the
Company and designated by the Committee from time to time as such.
b. "AWARD" means a Stock Appreciation Right, Stock Option, or Restricted
Stock.
c. "BOARD" means the Board of Directors of the Company.
d. "CHANGE IN CONTROL" and "Change in Control Price" have the meanings
set forth in Sections 8(b) and (c), respectively.
e. "CODE" means the Internal Revenue Code of 1986, as amended from time
to time, and any successor thereto.
f. "COMMISSION" means the Securities and Exchange Commission or any
successor agency.
g. "COMMITTEE" means the Committee referred to in Section 2.
h. "COMPANY" means UNOVA, Inc., a Delaware corporation.
i. "COVERED EMPLOYEE" means a participant designated prior to the grant
of shares of Restricted Stock by the Committee who is or may be a "covered
employee" within the meaning of Section 162(m)(3) of the Code in the year in
which Restricted Stock is expected to be taxable to such participant.
j. "DISABILITY" means permanent and total disability as determined for
purposes of the Company's Long Term Disability Plan for the staff of the
Company's corporate headquarters.
k. "EARLY RETIREMENT" means retirement from active employment with the
Company, a subsidiary or an Affiliate pursuant to the early retirement
provisions of the applicable pension plan of such employer.
l. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
m. "FAIR MARKET VALUE" means, as of any given date, the mean between the
highest and lowest reported sales prices of the Stock on the New York Stock
Exchange Composite Tape or, if not listed on such exchange, on any other
national securities exchange on which the Stock is listed or on NASDAQ. If
there is no regular public trading market for such Stock, the Fair Market
Value of the Stock shall be determined by the Committee in good faith.
n. "INCENTIVE STOCK OPTION" means any Stock Option designated as, and
qualified as, an "incentive stock option" within the meaning of Section 422
of the Code.
A-1
<PAGE>
o. "NON-EMPLOYEE DIRECTOR" means a member of the Board who qualifies as
a Non-Employee Director as defined in Rule 16b-3(b)(3), as promulgated by
the Commission under the Exchange Act, or any successor definition adopted
by the Commission.
p. "NON-QUALIFIED STOCK OPTION" means any Stock Option that is not an
Incentive Stock Option.
q. "NORMAL RETIREMENT" means retirement from active employment with the
Company, a subsidiary or an Affiliate at or after age 65.
r. "QUALIFIED PERFORMANCE-BASED AWARD" means an Award of Restricted
Stock designated as such by the Committee at the time of grant, based upon a
determination that (i) the recipient is or may be a "covered employee"
within the meaning of Section 162(m)(3) of the Code in the year in which the
Company would expect to be able to claim a tax deduction with respect to
such Restricted Stock and (ii) the Committee wishes such Award to qualify
for the Section 162(m) Exemption.
s. "PERFORMANCE GOALS" means the performance goals established by the
Committee in connection with the grant of an Award. In the case of Qualified
Performance-Based Awards, (i) such Performance Goals shall be based on the
attainment of specified levels of one or more of the following measures:
cash flow ("CF"), cash value added ("CVA"), revenue growth ("RG"), return on
assets ("ROA"), return on capital ("ROC"), return on capital utilized
("ROCU"), return on equity ("ROE"), return on revenue ("ROR") or return on
tangible equity ("ROTE") of the Company or of any business unit thereof
within which the participant is primarily employed, or that are based on the
attainment of specified levels of Basic Earnings per Share ("BEPS") or
Diluted Earnings per Share ("DEPS") of the Company or that are based, in
whole or in part, on a level or levels of increase in the Fair Market Value
of the Stock, and that are intended to qualify under Section 162(m)(4)(c) of
the Code, and (ii) such Performance Goals shall be set by the Committee
within the time period prescribed by Section 162(m) of the Code and related
regulations. For purposes of the Plan, CF, CVA, RG, ROA, ROC, ROCU, ROE,
ROR, ROTE, BEPS and DEPS shall have the meanings set forth in Exhibit A
hereto.
t. "PLAN" means the UNOVA, Inc. 1999 Stock Incentive Plan, as set forth
herein and as hereinafter amended from time to time.
u. "RESTRICTED STOCK" means an Award granted under Section 7.
v. "RETIREMENT" means Normal or Early Retirement.
w. "RULE 16B-3" means Rule 16b-3, as promulgated by the Commission under
Section 16(b) of the Exchange Act, as amended from time to time.
x. "SECTION 162(M) EXEMPTION" means the exemption from the limitation on
deductibility imposed by Section 162(m) of the Code that is set forth in
Section 162(m)(4)(C) of the Code.
y. "STOCK" means the common stock, par value $.01 per share, of the
Company.
z. "STOCK APPRECIATION RIGHT" means a right granted under Section 6.
aa. "STOCK OPTION" means an option granted under Section 5.
bb. "TERMINATION OF EMPLOYMENT" means the termination of the
participant's employment with the Company and any subsidiary or Affiliate. A
participant employed by a subsidiary or an Affiliate shall also be deemed to
incur a Termination of Employment if the subsidiary or Affiliate ceases to
be such a subsidiary or an Affiliate, as the case may be, and the
participant does not immediately thereafter become an employee of the
Company or another subsidiary or Affiliate. Temporary absences from
employment because of illness, vacation or leave of absence and transfers
among the Company and its subsidiaries and Affiliates shall not be
considered Terminations of Employment. If so determined by the Committee, a
participant shall be deemed not to have incurred a
A-2
<PAGE>
Termination of Employment if the participant enters into a contract with the
Company or a subsidiary providing for the rendering by the participant of
consulting services to the Company or such subsidiary on terms approved by
the Committee; however, Termination of Employment of the participant shall
occur when such contract ceases to be in effect.
In addition, certain other terms used herein have definitions given to them in
the first place in which they are used.
SECTION 2. ADMINISTRATION
The Plan shall be administered by the Compensation Committee or such other
committee of the Board as the Board may from time to time designate (the
"Committee"), which shall be composed of not less than two Non-Employee
Directors, each of whom shall be an "outside director" for purposes of Section
162(m)(4) of the Code and shall be appointed by and serve at the pleasure of the
Board.
The Committee shall have plenary authority to grant Awards pursuant to the terms
of the Plan to officers and employees of the Company and its subsidiaries and
Affiliates.
Among other things, the Committee shall have the authority, subject to the terms
of the Plan:
(a) To select the officers and employees to whom Awards may from time
to time be granted;
(b) To determine whether and to what extent Incentive Stock Options,
Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock or
any combination thereof are to be granted hereunder;
(c) To determine the number of shares of Stock to be covered by each
Award granted hereunder;
(d) To determine the terms and conditions of any Award granted
hereunder (including, but not limited to, the option price (subject to
Section 5(a)), any vesting condition, restriction or limitation (which may
be related to the performance of the participant, the Company or any
subsidiary or Affiliate) and any vesting acceleration or forfeiture waiver
regarding any Award and the shares of Stock relating thereto, based on such
factors as the Committee shall determine;
(e) To modify, amend or adjust the terms and conditions of any Award,
at any time or from time to time, including but not limited to Performance
Goals; provided, however, that the Committee may not adjust upwards the
amount payable with respect to a Qualified Performance-Based Award or waive
or alter the Performance Goals associated therewith;
(f) To determine to what extent and under what circumstances Stock and
other amounts payable with respect to an Award shall be deferred; and
(g) To determine under what circumstances an Award may be settled in
cash or Stock under Sections 5(j), 5(k) and 6(b)(ii), except as otherwise
therein provided.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall
from time to time deem advisable, to interpret the terms and provisions of the
Plan and any Award issued under the Plan (and any agreement relating thereto)
and to otherwise supervise the administration of the Plan.
Any determination made by the Committee pursuant to the provisions of the Plan
with respect to any Award shall be made in the sole discretion of the Committee
at the time of the grant of the Award or, unless in contravention of any express
term of the Plan, at any time thereafter. All decisions made by the Committee
pursuant to the provisions of the Plan shall be final and binding on all
persons, including the Company and Plan participants.
A-3
<PAGE>
Any authority granted to the Committee may also be exercised by the full Board,
except to the extent that the grant or exercise of such authority would cause
any Award or transaction to become subject to (or lose an exemption under) the
short-swing profit recovery provisions of Section 16 of the Exchange Act. To the
extent that any permitted action taken by the Board conflicts with action taken
by the Committee, the Board action shall control.
SECTION 3. SHARES OF STOCK SUBJECT TO PLAN
Subject to adjustment as provided herein, the total number of shares of Stock
available for grant under the Plan shall be four million five hundred thousand
(4,500,000). However, no more than 30 percent of the shares of Stock available
for grant under the Plan as of the first day of any calendar year during which
the Plan is in effect shall be utilized in that fiscal year for the grant of
Awards in the form of Restricted Stock. No participant may be granted Awards
covering more than one million (1,000,000) shares of Stock in any calendar year
during which the Plan is in existence. Shares subject to an Award under the Plan
may be authorized and unissued shares or may be treasury shares.
If any shares of Restricted Stock are forfeited, or if any Stock Option (and
related Stock Appreciation Right, if any) terminates without being exercised, or
if any Stock Appreciation Right is exercised for cash, shares subject to such
Awards shall again be available for distribution in connection with Awards under
the Plan.
In the event of any change in corporate capitalization, such as a stock split or
any corporate transaction (such as any merger, consolidation or separation
(including a spin-off)), any other distribution of stock or property of the
Company, any reorganization (whether or not such reorganization comes within the
definition of such term in Section 368 of the Code) or any partial or complete
liquidation of the Company, the Committee or Board may make such substitution or
adjustments in the aggregate number and kind of shares reserved for issuance
under the Plan, in the individual limits on Awards under the Plan, in the
number, kind and exercise price of shares subject to outstanding Stock Options
and Stock Appreciation Rights, in the number and kind of shares subject to
outstanding Awards in the form of Restricted Stock granted under the Plan and/or
such other equitable substitution or adjustments as it may determine to be
appropriate in its sole discretion; PROVIDED, HOWEVER, that the number of shares
subject to any Award shall always be a whole number. Such adjusted exercise
price shall also be used to determine the amount payable by the Company upon the
exercise of any Stock Appreciation Right associated with any Stock Option.
SECTION 4. ELIGIBILITY
Officers and employees of the Company, its subsidiaries and Affiliates who are
responsible for or contribute to the management, growth and profitability of the
business of the Company, its subsidiaries and Affiliates are eligible to be
granted Awards under the Plan. No grant shall be made under this Plan to a
director who is not an officer or a salaried employee of the Company, its
subsidiaries or Affiliates.
SECTION 5. STOCK OPTIONS
Stock Options may be granted alone or in addition to other Awards granted under
the Plan and may be of two types: Incentive Stock Options and Non-Qualified
Stock Options. Any Stock Option granted under the Plan shall be in such form as
the Committee may from time to time approve.
The Committee shall have the authority to grant any optionee Incentive Stock
Options, Non-Qualified Stock Options or both types of Stock Options (in each
case with or without Stock Appreciation Rights); PROVIDED, HOWEVER, that grants
hereunder are subject to the annual limit on grants to individual participants
set forth in Section 3. Incentive Stock Options may be granted only to employees
of the Company and its subsidiaries (within the meaning of Section 424(f) of the
Code). To the extent that any Stock
A-4
<PAGE>
Option is not designated as an Incentive Stock Option or even if so designated
does not qualify as an Incentive Stock Option, it shall constitute a
Non-Qualified Stock Option.
Stock Options shall be evidenced by option agreements, the terms and provisions
of which may differ. An option agreement shall indicate on its face whether it
is intended to be an agreement for an Incentive Stock Option or a Non-Qualified
Stock Option. The grant of a Stock Option shall occur on the date the Committee
selects an individual to be a participant in any grant of a Stock Option,
determines the number of shares of Stock to be subject to such Stock Option to
be granted to such individual and specifies the terms and provisions of the
Stock Option. The Company shall notify a participant of any grant of a Stock
Option, and a written option agreement or agreements shall be duly executed and
delivered by the Company to the participant. Such agreement or agreements shall
become effective upon execution by the Company and the participant.
Anything in the Plan to the contrary notwithstanding, no term of the Plan
relating to Incentive Stock Options shall be interpreted, amended or altered nor
shall any discretion or authority granted under the Plan be exercised so as to
disqualify the Plan under Section 422 of the Code.
Stock Options granted under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions as the
Committee shall deem desirable:
(a) OPTION PRICE. The option price per share of Stock purchasable under a Stock
Option shall be determined by the Committee and set forth in the option
agreement, and shall not be less than the Fair Market Value of the Stock subject
to the Stock Option on the date of grant.
(b) OPTION TERM. The term of each Stock Option shall be fixed by the Committee,
but no Incentive Stock Option shall be exercisable more than 10 years after the
date the Stock Option is granted.
(c) EXERCISABILITY. Except as otherwise provided herein, Stock Options shall be
exercisable at such time or times and subject to such terms and conditions as
shall be determined by the Committee. The exercisability of a Stock Option may
be conditional upon the attainment of Performance Goals, which need not be the
same for all optionees. If the Committee provides that any Stock Option is
exercisable only in installments, the Committee may at any time waive such
installment exercise provisions, in whole or in part, based on such factors as
the Committee may determine. In addition, the Committee may at any time
accelerate the exercisability of any Stock Option.
(d) METHOD OF EXERCISE; ISSUANCE OF STOCK. Subject to the provisions of this
Section 5, Stock Options may be exercised, in whole or in part, at any time
during the option term by giving written notice of exercise to the Company
specifying the number of shares of Stock subject to the Stock Option to be
purchased.
Such notice shall be accompanied by payment in full of the purchase price by
certified or bank check or such other instrument as the Company may accept.
Payment, in full or in part, may also be made in the form of unrestricted Stock
already owned by the optionee for a period of at least six months prior to the
date of exercise based on the Fair Market Value of the Stock on the date the
Stock Option is exercised.
In the discretion of the Committee, payment for any shares subject to a Stock
Option may also be made by delivering a properly executed exercise notice to the
Company, together with a copy of irrevocable instructions to a broker to deliver
promptly to the Company the amount of sale or loan proceeds necessary to pay the
purchase price, and, if requested, the amount of any federal, state, local or
foreign withholding taxes. To facilitate the foregoing, the Company may enter
into agreements for coordinated procedures with one or more brokerage firms.
A-5
<PAGE>
No shares of Stock shall be issued until full payment therefor has been made.
Except as otherwise provided in Section 5(l) below, an optionee shall have all
of the rights of a shareholder of the Company holding the class or series of
Stock that is subject to such Stock Option (including, if applicable, the right
to vote the shares and the right to receive dividends), when the optionee has
given written notice of exercise, has paid in full for such shares and, if
requested, has given the representation described in Section 11(a). Upon
exercise of a Stock Option, a participant shall be entitled (unless the
participant has given a broker the irrevocable instructions referred to in the
preceding paragraph) to receive a certificate representing the Stock issuable
upon exercise of the Stock Option or such other evidence of ownership as the
Company may then generally provide to its shareholders of record.
(e) NONTRANSFERABILITY OF STOCK OPTIONS. No Stock Option shall be transferable
by the optionee other than (i) by will or by the laws of descent and
distribution; or (ii) in the case of a Non-Qualified Stock Option, as otherwise
expressly permitted under the applicable option agreement including, if so
permitted, pursuant to a gift to such optionee's family, whether directly or
indirectly or by means of a trust or partnership or otherwise. All Stock Options
shall be exercisable, subject to the terms of this Plan, only by the optionee,
the guardian or legal representative of the optionee, or any person to whom such
option is transferred pursuant to the preceding sentence, it being understood
that the term "holder" and "optionee" include such guardian, legal
representative and other transferee.
(f) TERMINATION BY DEATH. Unless otherwise determined by the Committee, if an
optionee's employment terminates by reason of death, any Stock Option held by
such optionee may thereafter be exercised, to the extent then exercisable, or on
such accelerated basis as the Committee may determine, for a period of one year
(or such other period as the Committee may specify in the option agreement) from
the date of such death or until the expiration of the stated term of such Stock
Option, whichever period is the shorter.
(g) TERMINATION BY REASON OF DISABILITY. Unless otherwise determined by the
Committee, if an optionee's employment terminates by reason of Disability, any
Stock Option held by such optionee may thereafter be exercised by the optionee,
to the extent it was exercisable at the time of termination, or on such
accelerated basis as the Committee may determine, for a period of three years
(or such shorter period as the Committee may specify in the option agreement)
from the date of such termination of employment or until the expiration of the
stated term of such Stock Option, whichever period is the shorter; provided,
however, that if the optionee dies within such period, any unexercised Stock
Option held by such optionee shall, notwithstanding the expiration of such
period, continue to be exercisable to the extent to which it was exercisable at
the time of death for a period of 12 months from the date of such death or until
the expiration of the stated term of such Stock Option, whichever period is the
shorter. In the event of termination of employment by reason of Disability, if
an Incentive Stock Option is exercised after the expiration of the exercise
periods that apply for purposes of Section 422 of the Code, such Stock Option
will thereafter be treated as a Non-Qualified Stock Option.
(h) TERMINATION BY REASON OF RETIREMENT. Unless otherwise determined by the
Committee, if an optionee's employment terminates by reason of Retirement, any
Stock Option held by such optionee may thereafter be exercised by the optionee,
to the extent it was exercisable at the time of such Retirement, or on such
accelerated basis as the Committee may determine until the expiration of the
stated term of such Stock Option, PROVIDED, HOWEVER, that if the optionee dies
within such period any unexercised Stock Option held by such optionee shall,
notwithstanding the expiration of such period, continue to be exercisable to the
extent to which it was exercisable at the time of death for a period of 12
months from the date of such death or until the expiration of the stated term of
such Stock Option, whichever period is the shorter. In the event of termination
of employment by reason of Retirement, if an Incentive Stock Option is exercised
after the expiration of the exercise periods that apply for purposes of Section
422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified
Stock Option.
A-6
<PAGE>
(i) OTHER TERMINATION. Unless otherwise determined by the Committee, if an
optionee incurs a Termination of Employment for any reason other than death,
Disability or Retirement, any Stock Option held by such optionee, to the extent
then exercisable, or on such accelerated basis as the Committee may determine,
may be exercised for the lesser of three months from the date of such
Termination of Employment or the balance of the term of such Stock Option;
provided, however, that if the optionee dies within such three-month period, any
unexercised Stock Option held by such optionee shall, notwithstanding the
expiration of such three-month period, continue to be exercisable to the extent
to which it was exercisable at the time of death for a period of 12 months from
the date of such death or until the expiration of the stated term of such Stock
Option, whichever period is the shorter. In the event of Termination of
Employment, if an Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422 of the Code, such
Stock Option will thereafter be treated as a Non-Qualified Stock Option.
(j) CASHING OUT OF STOCK OPTION. On receipt of written notice of exercise, the
Committee may elect to cash out all or part of the portion of the shares of
Stock for which a Stock Option is being exercised by paying the optionee an
amount, in cash or Stock, equal to the excess of the Fair Market Value of the
Stock over the option price times the number of shares of Stock for which the
Option is being exercised on the effective date of such cash-out.
(k) CHANGE IN CONTROL CASH-OUT. Notwithstanding any other provision of the Plan,
during the 60-day period from and after a Change in Control (the "Exercise
Period"), unless the Committee shall determine otherwise at the time of grant,
an optionee shall have the right, whether or not the Stock Option is fully
exercisable and in lieu of the payment of the exercise price for the shares of
Stock being purchased under the Stock Option and by giving notice to the
Company, to elect (within the Exercise Period) to surrender all or part of the
Stock Option to the Company and to receive cash, within 30 days of such notice,
in an amount equal to the amount by which the Change in Control Price per share
of Stock on the date of such election shall exceed the exercise price per share
of Stock under the Stock Option (the "Spread") multiplied by the number of
shares of Stock granted under the Stock Option as to which the right granted
under this Section 5(k) shall have been exercised. Notwithstanding the
foregoing, if any right granted pursuant to this Section 5(k) would make a
Change in Control transaction ineligible for pooling-of-interests accounting
under APB No. 16 that but for the nature of such grant would otherwise be
eligible for such accounting treatment, the Committee shall have the ability to
substitute for the cash payable pursuant to such right Stock with a Fair Market
Value equal to the cash that would otherwise be payable hereunder.
(l) DEFERRAL OF OPTION SHARES. The Committee may from time to time establish
procedures pursuant to which an optionee may elect to defer, until a time or
times later than the exercise of an Option, receipt of all or a portion of the
Shares subject to such Option and/or to receive cash at such later time or times
in lieu of such deferred Shares, all on such terms and conditions as the
Committee shall determine. If any such deferrals are permitted, then
notwithstanding Section 5(d) above, an optionee who elects such deferral shall
not have any rights as a stockholder with respect to such deferred Shares unless
and until Shares are actually delivered to the optionee with respect thereto,
except to the extent otherwise determined by the Committee.
SECTION 6. STOCK APPRECIATION RIGHTS
(a) GRANT AND EXERCISE. Stock Appreciation Rights may be granted in conjunction
with all or part of any Stock Option granted under the Plan. In the case of a
Non-Qualified Stock Option, such rights may be granted either at or after the
time of grant of such Stock Option. In the case of an Incentive Stock Option,
such rights may be granted only at the time of grant of such Stock Option. A
Stock Appreciation Right shall terminate and no longer be exercisable upon the
termination or exercise of the related Stock Option.
A-7
<PAGE>
A Stock Appreciation Right may be exercised by an optionee in accordance with
Section 6(b) by surrendering the applicable portion of the related Stock Option
in accordance with procedures established by the Committee. Upon such exercise
and surrender, the optionee shall be entitled to receive an amount determined in
the manner prescribed in Section 6(b). Stock Options which have been so
surrendered shall no longer be exercisable to the extent the related Stock
Appreciation Rights have been exercised.
(b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to such
terms and conditions as shall be determined by the Committee, including the
following:
(i) Stock Appreciation Rights shall be exercisable only at such time or
times and to the extent that the Stock Options to which they relate are
exercisable in accordance with the provisions of Section 5 and this Section
6.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee shall
be entitled to receive an amount in cash, shares of Stock or both, in value
equal to the excess of the Fair Market Value of one share of Stock over the
option price per share specified in the related Stock Option multiplied by
the number of shares in respect of which the Stock Appreciation Right shall
have been exercised, with the Committee having the right to determine the
form of payment.
(iii) Stock Appreciation Rights shall be transferable only to permitted
transferees of the underlying Stock Option in accordance with Section 5(e).
(iv) Upon the exercise of a Stock Appreciation Right, the Stock Option
or part thereof to which such Stock Appreciation Right is related shall be
deemed to have been exercised for the purpose of the limitation set forth in
Section 3 on the number of shares of Stock to be issued under the Plan, but
only to the extent of the number of shares covered by the Stock Appreciation
Right at the time of exercise based on the value of the Stock Appreciation
Right at such time.
SECTION 7. RESTRICTED STOCK
(a) ADMINISTRATION. Shares of Restricted Stock may be awarded either alone or in
addition to other Awards granted under the Plan. The Committee shall determine
the officers and employees to whom and the time or times at which grants of
Restricted Stock will be awarded, the number of shares to be awarded to any
participant (subject to the annual limit on grants to individual participants
set forth in Section 3), the conditions for vesting, the time or times within
which such Awards may be subject to forfeiture and any other terms and
conditions of the Awards, in addition to those contained in Section 7(c).
(b) AWARDS AND CERTIFICATES. Shares of Restricted Stock shall be evidenced in
such manner as the Committee may deem appropriate, including book-entry
registration or issuance of one or more stock certificates. Any certificate or
other evidence of ownership issued in respect of shares of Restricted Stock
shall be registered in the name of such participant and shall bear an
appropriate legend referring to the terms, conditions, and restrictions
applicable to such Award, substantially in the following form:
"The transferability of the shares of stock represented hereby [referred
to herein] are subject to the terms and conditions (including forfeiture)
of the UNOVA, Inc. 1999 Stock Incentive Plan and a Restricted Stock
Agreement. Copies of such Plan and Agreement are on file at the principal
executive offices of UNOVA, Inc."
The Committee may require that any certificates evidencing such shares be held
in custody by the Company until the restrictions thereon shall have lapsed and
that, as a condition of any Award of Restricted Stock, the participant shall
have delivered a stock power, endorsed in blank, relating to the Stock covered
by such Award.
A-8
<PAGE>
(c) TERMS AND CONDITIONS. Shares of Restricted Stock shall be subject to the
following terms and conditions:
(i) The Committee may, prior to or at the time of grant, designate an
Award of Restricted Stock as a Qualified Performance-Based Award, in which
event it shall condition the grant or vesting, as applicable, of such
Restricted Stock upon the attainment of Performance Goals. If the Committee
does not designate an Award of Restricted Stock as a Qualified
Performance-Based Award, it may also condition the grant or vesting thereof
upon the attainment of Performance Goals. Regardless of whether an Award of
Restricted Stock is a Qualified Performance-Based Award, the Committee may
also condition the grant or vesting thereof upon the continued service of
the participant. The conditions for grant or vesting and the other
provisions of Restricted Stock Awards (including without limitation any
applicable Performance Goals) need not be the same with respect to each
recipient. The Committee may at any time, in its sole discretion, accelerate
or waive, in whole or in part, any of the foregoing restrictions; PROVIDED,
HOWEVER, that in the case of Restricted Stock that is a Qualified
Performance-Based Award, the applicable Performance Goals shall have been
satisfied.
(ii) Subject to the provisions of the Plan and the Restricted Stock
Agreement referred to in Section 7(c)(vi), during the period, if any, set by
the Committee, commencing with the date of such Award for which such
participant's continued service is required (the "Restriction Period"), and
until the later of (i) the expiration of the Restriction Period and (ii) the
date the applicable Performance Goals (if any) are satisfied, the
participant shall not be permitted to sell, assign, transfer, pledge or
otherwise encumber shares of Restricted Stock; PROVIDED that the foregoing
shall not prevent a participant from pledging Restricted Stock as security
for a loan, the sole purpose of which is to provide funds to pay the option
price for Stock Options.
(iii) Except as provided in this paragraph (iii) and Sections 7(c)(i)
and 7(c)(ii) and the Restricted Stock Agreement, the participant shall have,
with respect to the shares of Restricted Stock, all of the rights of a
stockholder of the Company holding the class or series of Stock that is the
subject of the Restricted Stock, including, if applicable, the right to vote
the shares and the right to receive any cash dividends. If so determined by
the Committee in the applicable Restricted Stock Agreement and subject to
Section 11(e) of the Plan, (A) cash dividends on the class or series of
Stock that is the subject of the Restricted Stock Award shall be
automatically deferred and reinvested in additional Restricted Stock, held
subject to the vesting of the underlying Restricted Stock, or held subject
to meeting Performance Goals applicable only to dividends, and (B) dividends
payable in Stock shall be paid in the form of Restricted Stock of the same
class as the Stock with which such dividend was paid, held subject to the
vesting of the underlying Restricted Stock, or held subject to meeting
Performance Goals applicable only to dividends.
(iv) Except to the extent otherwise provided in the applicable
Restricted Stock Agreement and Sections 7(c)(i), 7(c)(ii), 7(c)(v) and
8(a)(ii), upon a participant's Termination of Employment for any reason
during the Restriction Period or before the applicable Performance Goals are
satisfied, all shares still subject to restriction shall be forfeited by the
participant.
(v) Except to the extent otherwise provided in Section 8(a)(ii), in the
event that a participant retires or such participant's employment is
involuntarily terminated, the Committee shall have the discretion to waive,
in whole or in part, any or all remaining restrictions (other than, in the
case of Restricted Stock with respect to which a participant is a Covered
Employee, satisfaction of the applicable Performance Goals unless the
participant's employment is terminated by reason of death or Disability)
with respect to any or all of such participant's shares of Restricted Stock.
(vi) If and when any applicable Performance Goals are satisfied and the
Restriction Period expires without a prior forfeiture of the Restricted
Stock, unlegended certificates or other evidence of ownership for such
shares shall be delivered to the participant upon surrender of the legended
certificates or other evidence of ownership.
A-9
<PAGE>
(vii) Each Award shall be confirmed by, and be subject to, the terms of
a Restricted Stock Agreement.
(viii) Notwithstanding the foregoing, but subject to the provisions of
Section 8 hereof, no Award in the form of Restricted Stock, the vesting of
which is conditioned only upon the continued service of the participant,
shall vest earlier than the first, second and third anniversaries of the
date of grant thereof, on each of which dates a maximum of one-third of the
shares of Stock subject to the Award may vest, and no award in the form of
Restricted Stock, the vesting of which is conditioned upon the attainment of
a specified Performance Goal or Goals, shall vest earlier than the first
anniversary of the date of grant thereof.
SECTION 8. CHANGE IN CONTROL PROVISIONS
(a) IMPACT OF EVENT. Notwithstanding any other provision of the Plan to the
contrary, in the event of a Change in Control:
(i) Any Stock Options and Stock Appreciation Rights outstanding as of
the date such Change in Control is determined to have occurred, and which
are not then exercisable and vested, shall become fully exercisable and
vested to the full extent of the original grant.
(ii) The restrictions and deferral limitations applicable to any
Restricted Stock shall lapse, and such Restricted Stock shall become free of
all restrictions and become fully vested and transferable to the full extent
of the original grant.
(b) DEFINITION OF CHANGE IN CONTROL. For purposes of the Plan, a "Change in
Control" shall mean the happening of any of the following events:
(i) An acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 30 percent or more of either (1) the then outstanding
shares of common stock of the Company (the "Outstanding Company Common
Stock") or (2) the combined voting power of the outstanding voting
securities of the Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); excluding, however,
the following acquisitions of Outstanding Company Common Stock and
Outstanding Company Voting Securities: (1) any acquisition directly from the
Company, other than an acquisition by virtue of the exercise of a conversion
privilege unless the security being so converted was itself acquired
directly from the Company, (2) any acquisition by the Company, (3) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company, or
(4) any acquisition by any Person pursuant to a transaction which complies
with clauses (1), (2) and (3) of subsection (iii) of this Section 8(b); or
(ii) Individuals who, as of the effective date of the Plan, constitute
the Board (the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; PROVIDED, HOWEVER, that any individual who
becomes a member of the Board subsequent to such effective date of the Plan,
whose election, or nomination for election by the Company's shareholders,
was approved by a vote of at least a majority of directors then comprising
the Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board; but, PROVIDED FURTHER, that any such
individual whose initial assumption of office occurs as a result of either
an actual or threatened election contest (as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual
or threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board shall not be so considered as a member of the
Incumbent Board; or
(iii) The approval by the shareholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of all
or substantially all of the assets of the Company ("Business
A-10
<PAGE>
Combination") or if consummation of such Business Combination is subject, at
the time of such approval by shareholders, to the consent of any government
or governmental agency, obtaining of such consent (either explicitly or
implicitly by consummation); excluding, however, such a Business Combination
pursuant to which (1) all or substantially all of the individuals and
entities who are the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities immediately
prior to such Business Combination will beneficially own, directly or
indirectly, more than 60 percent of, respectively, the outstanding shares of
common stock, and the combined voting power of the outstanding voting
securities entitled to vote generally in the election of directors, as the
case may be, of the corporation resulting from such Business Combination
(including, without limitation, a corporation which as a result of such
transaction owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in substantially
the same proportions as their ownership, immediately prior to such Business
Combination, of the Outstanding Company Common Stock and Outstanding Company
Voting Securities, as the case may be, (2) no Person (other than any
employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company or such corporation
resulting from such Business Combination) will beneficially own, directly or
indirectly, 30 percent or more of, respectively, the outstanding shares of
common stock of the corporation resulting from such Business Combination or
the combined voting power of the outstanding voting securities of such
corporation entitled to vote generally in the election of directors except
to the extent that such ownership existed with respect to the Company prior
to the Business Combination and (3) at least a majority of the members of
the board of directors of the corporation resulting from such Business
Combination will have been members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the Board, providing
for such Business Combination; or
(iv) The approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
(c) CHANGE IN CONTROL PRICE. For purposes of the Plan, "Change in Control Price"
means the higher of (i) the highest reported sales price, regular way, of a
share of Common Stock in any transaction reported on the New York Stock Exchange
Composite Tape or other national exchange on which such shares are listed or on
NASDAQ during the 60-day period prior to and including the date of a Change in
Control or (ii) if the Change in Control is the result of a tender or exchange
offer or a Business Combination, the highest price of a share of Stock paid in
such tender or exchange offer or Business Combination; PROVIDED, HOWEVER, that
in the case of Incentive Stock Options and Stock Appreciation Rights relating to
Incentive Stock Options, the Change in Control Price shall be in all cases the
Fair Market Value of the Stock on the date such Incentive Stock Option or Stock
Appreciation Right is exercised. To the extent that the consideration paid in
any such transaction described above consists all or in part of securities or
other noncash consideration, the value of such securities or other noncash
consideration shall be determined in the sole discretion of the Board.
SECTION 9. TERM, AMENDMENT AND TERMINATION
The Plan will terminate 10 years after the effective date of the Plan. Under the
Plan, Awards outstanding as of such date shall not be affected or impaired by
the termination of the Plan.
The Board may amend, alter or discontinue the Plan, but no amendment, alteration
or discontinuation shall be made which would impair the rights of an optionee
under a Stock Option or a recipient of a Stock Appreciation Right, or Restricted
Stock Award theretofore granted without the optionee's or recipient's consent,
except such an amendment made to cause the Plan to qualify for any exemption
provided by Rule 16b-3. In addition, no such amendment shall be made without the
approval of the Company's shareholders to the extent such approval is required
by law or agreement.
A-11
<PAGE>
The Committee may amend the terms of any Stock Option or other Award theretofore
granted, prospectively or retroactively, but no such amendment shall impair the
rights of any holder without the holder's consent except such an amendment made
to cause the Plan or Award to qualify for any exemption provided by Rule 16b-3 ;
provided, however, that such power of the Committee shall not extend to the
reduction of the exercise price of a previously granted Stock Option, except as
provided in Section 3 hereof, nor may the Committee substitute new Stock Options
for previously granted Stock Options having higher option prices.
Subject to the above provisions, the Board shall have authority to amend the
Plan to take into account changes in law and tax and accounting rules as well as
other developments, and to grant Awards which qualify for beneficial treatment
under such rules without stockholder approval.
SECTION 10. UNFUNDED STATUS OF PLAN
It is presently intended that the Plan constitute an "unfunded" plan for
incentive and deferred compensation. The Committee may authorize the creation of
trusts or other arrangements to meet the obligations created under the Plan to
deliver Stock or make payments; PROVIDED, HOWEVER, that unless the Committee
otherwise determines, the existence of such trusts or other arrangements is
consistent with the "unfunded" status of the Plan.
SECTION 11. GENERAL PROVISIONS
(a) The Committee may require each person purchasing or receiving shares
pursuant to an Award to represent to and agree with the Company in writing that
such person is acquiring the shares without a view to the distribution thereof.
The certificates or evidence of ownership for such shares may include any legend
which the Committee deems appropriate to reflect any restrictions on transfer.
Notwithstanding any other provision of the Plan or agreements made pursuant
thereto, the Company shall not be required to issue or deliver any certificate
or certificates for shares of Stock under the Plan prior to fulfillment of all
of the following conditions:
(1) Listing or approval for listing upon notice of issuance, of such
shares on the New York Stock Exchange, Inc., or such other securities
exchange as may at the time be the principal market for the Stock;
(2) Any registration or other qualification of such shares of Stock
under any state or federal law or regulation, or the maintaining in effect
of any such registration or other qualification which the Committee shall,
in its absolute discretion upon the advice of counsel, deem necessary or
advisable; and
(3) Obtaining any other consent, approval or permit from any state or
federal governmental agency which the Committee shall, in its absolute
discretion after receiving the advice of counsel, determine to be necessary
or advisable.
(b) Nothing contained in the Plan shall prevent the Company or any subsidiary
or Affiliate from adopting other or additional compensation arrangements for its
employees.
(c) Adoption of the Plan shall not confer upon any employee any right to
continued employment, nor shall it interfere in any way with the right of the
Company or any subsidiary or Affiliate to terminate the employment of any
employee at any time.
(d) No later than the date as of which an amount first becomes includable in
the gross income of the participant for federal income tax purposes with respect
to any Award under the Plan, the participant shall pay to the Company, or make
arrangements satisfactory to the Company regarding the payment of,
A-12
<PAGE>
any federal, state, local or foreign taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the
Company, withholding obligations may be settled with Stock, including Stock that
is part of the Award that gives rise to the withholding requirement. The
obligations of the Company under the Plan shall be conditional on such payment
or arrangements, and the Company and its Affiliates shall, to the extent
permitted by law, have the right to deduct any such taxes from any payment
otherwise due to the participant. The Committee may establish such procedures as
it deems appropriate for the settlement of withholding obligations with Stock.
(e) Reinvestment of dividends in additional Restricted Stock at the time of any
dividend payment shall only be permissible if sufficient shares of Stock are
available under Section 3 for such reinvestment (taking into account then
outstanding Stock Options and other Awards).
(f) The Committee shall establish such procedures as it deems appropriate for a
participant to designate a beneficiary to whom any amounts payable in the event
of the participant's death are to be paid or by whom any rights of the
participant, after the participant's death, may be exercised.
(g) In the case of a grant of an Award to any employee of a subsidiary of the
Company, the Company may, if the Committee so directs, issue or transfer the
shares of Stock, if any, covered by the Award to the subsidiary, for such lawful
consideration as the Committee may specify, upon the condition or understanding
that the subsidiary will transfer the shares of Stock to the employee in
accordance with the terms of the Award specified by the Committee pursuant to
the provisions of the Plan.
(h) The Plan and all Awards made and actions taken thereunder shall be governed
by and construed in accordance with the laws of the State of Delaware, without
reference to principles of conflict of laws.
SECTION 12. EFFECTIVE DATE OF PLAN
The Plan shall be effective as of the date it is approved by the stockholders of
the Company.
A-13
<PAGE>
EXHIBIT A
[TO ANNEX A]
DEFINITIONS
BASIC EARNINGS PER SHARE (BEPS)
Income available to common stockholders of the Company excluding the
cumulative effect on prior years of an accounting change net of income taxes
and the after tax charges that may result from the acquisition of research
and development associated with acquiring a business entity, a line of
business, or a technology, divided by the weighted-average number of common
shares of the Company outstanding during the applicable period. Shares
issued during the applicable period and shares reacquired during the
applicable period shall be weighted for the portion of the period that they
were outstanding.
BUSINESS OPERATING PROFIT (BOP)
Total Sales less Total Cost of Sales less Marketing expense less General and
Administrative Expenses plus Other Income or minus Other Expense.
CAPITAL
The sum of all interest-bearing debt, including debt with imputed interest,
and total equity.
CAPITAL CHARGE PERCENTAGE
Represents the risk adjusted cost of capital charge expressed as a
percentage established for the Company and each business unit as determined
by the Holt Associates, Inc. model.
CAPITAL UTILIZED
Total equity, plus Notes Payable, plus Current Portion of Long-Term Debt
plus Long-Term Debt, plus Advances from Corporate (less if net Advances are
to Corporate), less Investments in Consolidated Subsidiaries.
CASH FLOW (CF)
The sum of Net Income plus depreciation and amortization.
CASH VALUE ADDED (CVA)
Gross Cash Flow minus the product of Gross Investment times Capital Charge
Percentage, plus any amounts borrowed from CVA Bank, less any amounts repaid
to the CVA Bank.
CONSOLIDATED PRE-TAX INCOME
Net Income of the Company and its Consolidated Subsidiaries before taxes and
before giving effect to extraordinary items.
A-14
<PAGE>
CVA BANK
CVA Bank means, with respect to each approved project or approved
acquisition, a bookkeeping record of an account used to defer negative CVA
generation to later fiscal periods. All deferred negative CVA amounts will
incur an annual capital charge of the respective business unit. For purposes
of this definition, an "approved acquisition" shall be any acquisition of
the stock or assets of another entity which has been approved by the
Company's Board of Directors, and an "approved project" shall be one which
has been designated as eligible for CVA Bank treatment by the Compensation
Committee during the first 90 days of the fiscal year in which such deferral
account is established.
DILUTED EARNINGS PER SHARE (DEPS)
DEPS is computed in the same manner as BEPS; however, the weighted-average
number of common shares of the Company outstanding during the applicable
period is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares
resulting from stock options or other common stock equivalents had been
issued.
GROSS CASH FLOW
Annual BOP plus depreciation, amortization, rental expense, and research and
development expense, less taxes paid, plus increases in or less decrease in
non-operating accrued other expenses, plus net decrease in pension asset,
less net increase in pension asset.
GROSS INVESTMENT
Average Capital Utilized plus accumulated depreciation, capitalization of
research and development expense for the most recent five fiscal years and
rental expense, less deferred tax assets, less pension assets, plus fixed
asset inflation adjustment, plus non-operating accrued other expenses.
NET INCOME
Net Income (Loss) shall include income (loss) from continuing operations
before provision for income taxes; provision for income taxes; income from
discontinued operations net of applicable income taxes; and effect on income
from extraordinary items net of applicable income taxes. Net Income shall
not include the cumulative effect on prior years of an accounting change net
of income taxes and the after tax charges that may result from the
acquisition of research and development associated with acquiring a business
entity, a line of business, or a technology.
NET REVENUE (NR)
Total net sales and service revenue after adjustments for all discounts,
returns, and allowances.
RETURN ON ASSETS (ROA)
BOP divided by average assets (computed on a monthly basis).
RETURN ON CAPITAL (ROC)
Income before interest and taxes divided by average annual capital (computed
on a monthly basis).
RETURN ON CAPITAL UTILIZED (ROCU)
BOP divided by average Capital Utilized (computed on a monthly basis).
A-15
<PAGE>
RETURN ON EQUITY (ROE)
Net Income divided by beginning equity.
RETURN ON REVENUE (ROR)
BOP divided by total Net Revenue expressed as a percent.
RETURN ON TANGIBLE EQUITY (ROTE)
Net Income divided by beginning tangible equity.
REVENUE (RV)
Revenue as reported on the Company's annual financial statements.
REVENUE GROWTH (RG)
The increase in revenue for the current fiscal year, expressed as a percent,
above a specified base line period.
A-16
<PAGE>
ANNEX B
UNOVA, INC.
MANAGEMENT INCENTIVE COMPENSATION PLAN
I
PURPOSE
This UNOVA, Inc. Management Incentive Compensation Plan (the "Plan") is
intended to provide a significant but variable economic opportunity to selected
officers and key employees of UNOVA, Inc. and its subsidiaries; to align
management incentives with the achievement of stipulated goals; and to encourage
long-term planning and performance. Payments pursuant to Section IX of the Plan
are intended to qualify under Section 162(m)(4)(c) of the Internal Revenue Code
of 1986, as amended, as excluded from the term "applicable employee
remuneration" as used in such Section (such payments are hereinafter referred to
as "Excluded Income").
II
DEFINITIONS
"APPROVED LEAVE OF ABSENCE" shall have the meaning set forth in rules to be
adopted by the Committee and shall include in any event a leave of absence for
purposes of service in the Armed Forces of the United States.
"BOARD" shall mean the Board of Directors of UNOVA, Inc.
"BONUS" shall mean a cash amount allocated to a Participant pursuant to the
terms of the Plan, including an Incentive Award, and shall comprise both the
amount of the award payable currently in cash and the amount allocated to a
Participant's bookkeeping account in the Bonus Bank.
"BONUS BANK" shall mean a system of maintaining bookkeeping entries whereby
positive or negative amounts may be entered for the account of any Participant
as contemplated by Article V, and indicating the balance of each Participant's
account, which shall initially be zero, computed by combining any previously
entered amounts, whether positive or negative, but without crediting any amount
of interest. The Bonus Bank shall not be funded; no Participant shall have any
vested right with respect to specific assets thereof; and all positive balances
shown in the accounts of Participants shall be considered a portion of the
general assets of the Company and be available to satisfy claims of the
Company's creditors.
"CHANGE IN CONTROL" shall have the meaning assigned to such term in Section
8(b) of the Company's 1999 Stock Incentive Plan.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMMITTEE" shall mean the Compensation Committee of the Board.
"COMPANY" shall mean UNOVA, Inc., a Delaware corporation, and its
subsidiaries.
"COVERED EMPLOYEES" shall mean Participants designated by the Committee
prior to the grant of a Bonus award opportunity hereunder who are or are
expected to be "covered employees" within the meaning of Section 162(m)(3) of
the Code for the Measurement Period in which a Bonus hereunder is payable and
for whom the Committee intends that amounts payable hereunder shall constitute
Excluded Income.
B-1
<PAGE>
"DISABILITY" shall mean permanent and total disability as determined for
purposes of the Company's Long-Term Disability Plan for the staff of the
Company's corporate headquarters as in effect from time to time.
"DISINTERESTED PERSON" shall mean a member of the Board who qualifies as an
"outside director" for purposes of Section 162(m) of the Code.
"INCENTIVE AWARD" shall have the meaning set forth in Article IX hereof.
"MEASUREMENT PERIOD" shall have the meaning set forth in Article IX hereof.
"PARTICIPANT" shall have the meaning set forth in Article IV hereof.
"PERFORMANCE GOALS" shall have the meaning set forth in Article IX hereof.
"RETIREMENT" shall mean either (i) retirement from active employment with
the Company or a subsidiary at or after age 65 or (ii) early retirement from
active employment with the Company or a subsidiary pursuant to the early
retirement provisions of the applicable pension plan of such employer.
"TARGET BONUS" shall mean the amount determined by multiplying the amount of
a Participant's base salary actually paid during the applicable Measurement
Period by a percentage designated by the Committee in its sole discretion prior
to the commencement of such Measurement Period, or within the first 90 days
thereof, which percentage need not be the same for each Participant.
III
ADMINISTRATION
The Plan shall be administered by the Committee or such other committee of
the Board designated by the Board which is composed of not less than two
Disinterested Persons, each of whom shall be appointed by and serve at the
pleasure of the Board.
In administering the Plan the Committee may at its option employ
compensation consultants, accountants, and counsel (who may be the compensation
consultants, independent auditors, or outside counsel of the Company) and other
persons to assist or render advice to the Committee, all at the expense of the
Company.
Except as limited by law or by the Company's Certificate of Incorporation or
By-laws, and subject to the provisions hereof, the Committee shall have
authority to select Participants in the Plan upon the recommendation of the
Chief Executive Officer; determine the size and types of awards; determine the
terms and conditions of earning awards; determine the time or times and method
of payment thereof; interpret the Plan; establish, amend, or waive rules and
regulations for the Plan's administration; and, subject to Article VI, amend the
terms and conditions of the Plan. Further, the Committee shall make all other
determinations which may be necessary or advisable for the administration of the
Plan. Subject to the provisions hereof, the Committee may adopt written
guidelines for the implementation and administration of the Plan. All
determinations and decisions of the Committee arising under the Plan shall be
final, binding, and conclusive upon all parties.
B-2
<PAGE>
IV
ELIGIBILITY
The Committee shall, in its sole discretion, determine for each Measurement
Period those officers and other key employees of the Company who shall be
eligible to participate in the Plan (the "Participants") for such Measurement
Period. Nothing contained in the Plan shall be construed as or be evidence of
any contract of employment with any Participant for a term of any length, nor
shall participation in the Plan in any Measurement Period by any Participant
give any person the right to participate in the Plan in any subsequent
Measurement Period.
V
DETERMINATION OF BONUS; BONUS BANK
Subject to Article IX hereof, the form, amount, and manner of and time of
payment of each Bonus to a Participant shall be determined by and at the
discretion of the Committee. The Committee may (but must, in the case of
Participants who are Covered Employees) condition the earning of a Bonus upon
the attainment of specified Performance Goals measured over a period not greater
than one year relating to the Participant or the Company, or a subsidiary or
division of the Company for or within which the Participant is primarily
employed, or upon such other factors or criteria as the Committee shall
determine, which Performance Goals (or other factors or criteria) may be
different for each Participant. Bonuses under the Plan will consist of a cash
amount, based upon the relationship of the Target Bonus to the degree of
achievement of such Performance Goals during the Measurement Period. Bonuses
under this Plan for Covered Employees shall be subject to preestablished
Performance Goals in accordance with Article IX hereof. The Committee shall
determine the extent, if any, to which such cash amount shall be paid currently
to the Participant, by stipulating either a fixed amount or a percentage of the
cash amount determined under the Plan, with the remainder of such cash amount
(unless the Committee otherwise determines) to be credited to the account of the
Participant in the Bonus Bank.
In each year in which this Plan is in operation, so long as CVA shall be one
of the designated Performance Goals for a majority of the Participants during
such fiscal year, each Participant shall receive one-third of any positive
balance of such Participant's Bonus Bank account as at the date on which Annual
Bonus amounts of Participants are determined (after adjusting the Bonus Bank for
the effect, if any, of the current year's prorated positive or negative
amounts). If for any year CVA shall not be one of the designated Performance
Goals for a majority of the Participants, the Committee may prescribe a
different schedule for payment of any balances of Participants' bookkeeping
accounts in the Bonus Bank.
If the minimum Performance Goals are not attained, the cash amount so
determined from the relationship of the Target Bonus to the degree of
achievement of the Performance Goals may be a negative amount and may, if so
determined by the Committee, be recorded in whole or in part as a charge to the
Participant's account in the Bonus Bank.
The Committee may, in its sole discretion, increase or decrease the amount
of any Bonus payable to a Participant (but may not increase the amount of any
Bonus payable to Covered Employees) and may award Bonuses to Participants (other
than Covered Employees except as provided in Article VI) even though the
Performance Goals applicable to the award of the Bonuses are not achieved.
B-3
<PAGE>
VI
TERMINATION OF EMPLOYMENT
In the event a Participant's employment is terminated by reason of death,
Disability, or Retirement, or the Participant shall have commenced an Approved
Leave of Absence, the Bonus determined in accordance with Article V hereof shall
be calculated to reflect participation prior to employment termination only. The
reduced award shall be determined by multiplying such Bonus by a fraction, the
numerator of which is the number of full months of employment in the Measurement
Period through the date of employment termination, and the denominator of which
is 12. In the case of a Participant's Disability, the employment termination
shall be deemed to have occurred on the date all of the conditions of Disability
have been satisfied, as determined by the Committee. Except as otherwise
provided in any agreement or plan of the Company to which the Participant is
party or in which he or she participates providing for payments following a
Change in Control, in the event that a Participant's employment is terminated
prior to completion of a Measurement Period for any reason other than death,
Disability, or Retirement, and the Participant shall not have been on an
Approved Leave of Absence at the time the Participant's Bonus would have been
determined, all of the Participant's rights to a Bonus for such Measurement
Period shall be forfeited. However, the Committee may, in its sole discretion,
pay an award prorated in the manner described above for the portion of the
Measurement Period that the Participant was employed by the Company.
Furthermore, in the event a Participant's employment is terminated by reason
of death, Disability, or Retirement, or if the Participant's employment is
terminated under circumstances which the Committee in its sole discretion deems
to have been a termination without cause, the Participant shall within 30 days
following the next date on which annual Bonus amounts of Participants are
determined be paid in cash any positive balance in the Participant's bookkeeping
account in the Bonus Bank after adjusting the Bonus Bank for the effect, if any,
of the current year's negative or positive amounts. Notwithstanding the
foregoing, any involuntary termination of a Participant's employment (other than
by reason of death, Disability, or Retirement) which occurs within a period of
one year following a Change in Control shall be conclusively deemed to have been
a termination without cause. If the balance of the Participant's account as of
the date of such determination of Bonus amounts following termination of
employment is negative, such negative amount shall be disregarded for all
purposes and may not be offset in whole or in part against any other amount then
payable to the Participant.
VII
AMENDMENT AND TERMINATION
The Board shall have the right to modify the Plan from time to time but no
such modification shall, without prior approval of the Company's shareholders,
change Section (c) of Article IX of this Plan to alter the criteria on which the
Performance Goals are based, to increase the amount of the limitation on certain
awards set forth in Section (e) of Article IX, or to increase the benefits
accruing to Participants hereunder who are Covered Employees, or, without the
consent of the Participant affected, impair any Bonus awarded prior to the
effective date of the modification.
VIII
MISCELLANEOUS
Bonus payments shall be made from the general funds of the Company and no
special or separate fund shall be established or other segregation of assets
made to assure payment. No Participant or other person shall have under any
circumstances any interest in any particular property or assets of the Company.
The Plan shall be governed by and construed in accordance with the laws of the
State of Delaware, without regard to its principles of conflicts of law.
B-4
<PAGE>
IX
PROCEDURES FOR CERTAIN DESIGNATED PARTICIPANTS
Bonuses under the Plan awarded to Participants who are Covered Employees
shall be subject to preestablished Performance Goals as set forth herein.
Notwithstanding Article V hereof, the Committee shall not have discretion to
modify the terms of awards to such Participants except as specifically set forth
in this Article IX.
(A) TARGET BONUS. Prior to the commencement of a Measurement Period, or
within the first 90 days thereof, the Committee shall grant bonus award
opportunities to such of the Participants who may be Covered Employees, payment
of which shall be conditioned upon satisfaction of specific Performance Goals
measured over a period not greater than one year established by the Committee in
writing at the time of grant of the award opportunities. An award to a Covered
Employee (an "Incentive Award") shall consist of a cash amount to be based upon
the relationship between the Participant's Target Bonus and the degree to which
the applicable Performance Goals are achieved, which amount may, in the event
the minimum Performance Goals are not achieved, be a negative amount. The
Committee may, in its sole discretion, reduce the amount which would otherwise
be payable with respect to a Measurement Period (under which circumstances the
Participant will have no right to receive the amount of such reduction even if
the Performance Goals are met).
(B) MEASUREMENT PERIOD. The Measurement Period will be a period of one
fiscal year, unless a shorter period is otherwise selected and established in
writing by the Committee at the time the Performance Goals are established with
respect to a particular Incentive Award (the period so specified being herein
referred to as the "Measurement Period").
(C) PERFORMANCE GOALS. The performance goals ("Performance Goals")
established by the Committee at the time an award opportunity is granted shall
comprise specified levels of one or more of the following factors: basic
earnings per share ("BEPS"), cash value added ("CVA"), diluted earnings per
share ("DEPS"), return on capital utilized ("ROCU"), return on tangible equity
("ROTE"), return on equity ("ROE"), return on assets ("ROA"), return on capital
("ROC"), cash flow ("CF"), revenue growth ("RG"), revenue ("RV"), or return on
revenue ("ROR") of the Company or of its applicable business unit, as
appropriate. For purposes of this Plan, BEPS, CVA, DEPS, ROCU, ROTE, ROE, ROA,
ROC, CF, RG, RV, or ROR shall have the meanings set forth in Exhibit A hereto.
(D) PAYMENT OF AN INCENTIVE AWARD. At the time the opportunity to receive
an Incentive Award is granted, the Committee shall prescribe a formula to
determine the percentage of the Target Bonus award which will constitute the
Bonus amount based upon the degree of attainment of the Performance Goals during
the Measurement Period. If the minimum Performance Goals established by the
Committee are not met, no award will be made to a Participant who is a Covered
Employee (however, a negative account may in such case be recorded in the
Participant's account in the Bonus Bank). To the extent that the minimum
Performance Goals are satisfied or surpassed, and upon written certification by
the Committee that the Performance Goals have been satisfied to a particular
extent and any other material terms and conditions of the Incentive Awards have
been satisfied, an Incentive Award shall be made in accordance with the
prescribed formula based upon a percentage of the Participant's Target Bonus
unless the Committee determines, in its sole discretion, to reduce the payment
to be made. The Committee shall also determine, by prescribing a dollar amount
or a formula, what portion of the Incentive Award shall be paid on a current
basis to the Participant and what portion shall be credited to the Participant's
account in the Bonus Bank.
(E) MAXIMUM PAYABLE. The maximum amount of an Incentive Award made to a
Covered Employee, comprising both the portion thereof paid currently in cash and
the portion thereof credited to the Participant's bookkeeping account in the
Bonus Bank, for any fiscal year of the Company shall be $5,000,000. The maximum
amount which may be paid to a Covered Employee pursuant to the Plan
B-5
<PAGE>
during any fiscal year shall be such Covered Employee's Incentive Award for the
preceding fiscal year plus any portion of his or her prior Incentive Awards
credited to such person's Bonus Bank account but not previously paid.
X
DEFERRAL ELECTIONS
The Committee may at its option establish procedures pursuant to which
Participants are permitted to defer the receipt of Bonuses otherwise payable
currently in cash hereunder.
XI
EFFECTIVE DATE
This Plan shall become effective on the date of its adoption by the Board
and shall supersede in its entirety the Management Incentive Compensation Plan
which was in effect for 1998. The Plan shall be submitted to the shareholders of
the Company for approval at the 1999 Annual Meeting of Shareholders.
XII
OTHER AWARDS
Nothing in this Plan shall limit the power of the Company to award any
annual or longer-term incentive compensation, whether payable in cash, Common
Stock of the Company, or otherwise, to any employee of the Company or any
subsidiary thereof under any other arrangement, contract, or understanding,
whether written or not, regardless of whether or not such employee is a
Participant in this Plan.
XIII
BENEFICIARY DESIGNATION
Each Participant under the Plan may name, from time to time, any beneficiary
or beneficiaries (who may be named contingently or successively) to whom any
benefit, including without limitation the payment of any positive balance of a
Participant's account with the Bonus Bank, under the Plan is to be paid in case
of the Participant's death before he or she receives any or all of such benefit.
Each designation will revoke all prior designations by the same Participant,
shall be in a form prescribed by the Committee, and shall be effective only when
filed by the Participant in writing with the Company during the Participant's
lifetime. In the absence of any such designation, or if the designated
beneficiary is no longer living, benefits shall be paid to the surviving
member(s) of the following classes of beneficiaries, with preference for classes
in the order listed below:
(a) Participant's spouse (unless the parties were divorced or legally
separated by court decree);
(b) Participant's children (including children by adoption);
(c) Participant's parents (including parents by adoption); or
(d) Participant's executor or administrator.
Payment of benefits under the Plan following a Participant's death shall be
made exclusively to the member(s) of the first class, in the order listed above,
which has surviving member(s). If that class has more than one member, benefit
payments shall be made in equal shares among members of that class.
B-6
<PAGE>
EXHIBIT A
[TO ANNEX B]
DEFINITIONS
BASIC EARNINGS PER SHARE (BEPS)
Income available to common stockholders of the Company excluding the
cumulative effect on prior years of an accounting change net of income taxes
and the after tax charges that may result from the acquisition of research
and development associated with acquiring a business entity, a line of
business, or a technology, divided by the weighted-average number of common
shares of the Company outstanding during the applicable period. Shares
issued during the applicable period and shares reacquired during the
applicable period shall be weighted for the portion of the period that they
were outstanding.
BUSINESS OPERATING PROFIT (BOP)
Total Sales less Total Cost of Sales less Marketing expense less General and
Administrative Expenses plus Other Income or minus Other Expense.
CAPITAL
The sum of all interest-bearing debt, including debt with imputed interest,
and total equity.
CAPITAL CHARGE PERCENTAGE
Represents the risk adjusted cost of capital charge expressed as a
percentage established for the Company and each business unit as determined
by the Holt Associates, Inc. model.
CAPITAL UTILIZED
Total equity, plus Notes Payable, plus Current Portion of Long-Term Debt
plus Long-Term Debt, plus Advances from Corporate (less if net Advances are
to Corporate), less Investments in Consolidated Subsidiaries.
CASH FLOW (CF)
The sum of Net Income plus depreciation and amortization.
CASH VALUE ADDED (CVA)
Gross Cash Flow minus the product of Gross Investment times Capital Charge
Percentage, plus any amounts borrowed from CVA Bank, less any amounts repaid
to the CVA Bank.
CONSOLIDATED PRE-TAX INCOME
Net Income of the Company and its Consolidated Subsidiaries before taxes and
before giving effect to extraordinary items.
B-7
<PAGE>
CVA BANK
CVA Bank means, with respect to each approved project or approved
acquisition, a bookkeeping record of an account used to defer negative CVA
generation to later fiscal periods. All deferred negative CVA amounts will
incur an annual capital charge of the respective business unit. For purposes
of this definition, an "approved acquisition" shall be any acquisition of
the stock or assets of another entity which has been approved by the
Company's Board of Directors, and an "approved project" shall be one which
has been designated as eligible for CVA Bank treatment by the Compensation
Committee during the first 90 days of the fiscal year in which such deferral
account is established.
DILUTED EARNINGS PER SHARE (DEPS)
DEPS is computed in the same manner as BEPS; however, the weighted-average
number of common shares of the Company outstanding during the applicable
period is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares
resulting from stock options or other common stock equivalents had been
issued.
GROSS CASH FLOW
Annual BOP plus depreciation, amortization, rental expense, and research and
development expense, less taxes paid, plus increases in or less decrease in
non-operating accrued other expenses, plus net decrease in pension asset,
less net increase in pension asset.
GROSS INVESTMENT
Average Capital Utilized plus accumulated depreciation, capitalization of
research and development expense for the most recent five fiscal years and
rental expense, less deferred tax assets, less pension assets, plus fixed
asset inflation adjustment, plus non-operating accrued other expenses.
NET INCOME
Net Income (Loss) shall include income (loss) from continuing operations
before provision for income taxes; provision for income taxes; income from
discontinued operations net of applicable income taxes; and effect on income
from extraordinary items net of applicable income taxes. Net Income shall
not include the cumulative effect on prior years of an accounting change net
of income taxes and the after tax charges that may result from the
acquisition of research and development associated with acquiring a business
entity, a line of business, or a technology.
NET REVENUE (NR)
Total net sales and service revenue after adjustments for all discounts,
returns, and allowances.
RETURN ON ASSETS (ROA)
BOP divided by average assets (computed on a monthly basis).
RETURN ON CAPITAL (ROC)
Income before interest and taxes divided by average annual capital (computed
on a monthly basis).
RETURN ON CAPITAL UTILIZED (ROCU)
BOP divided by average Capital Utilized (computed on a monthly basis).
B-8
<PAGE>
RETURN ON EQUITY (ROE)
Net Income divided by beginning equity.
RETURN ON REVENUE (ROR)
BOP divided by total Net Revenue expressed as a percent.
RETURN ON TANGIBLE EQUITY (ROTE)
Net Income divided by beginning tangible equity.
REVENUE (RV)
Revenue as reported on the Company's annual financial statements.
REVENUE GROWTH (RG)
The increase in revenue for the current fiscal year, expressed as a percent,
above a specified base line period.
B-9
<PAGE>
[LOGO]
SUPPLEMENT
TO THE
PROXY STATEMENT
<PAGE>
----------------------
INDEX
----------------------------
SUPPLEMENT TO THE PROXY STATEMENT
UNOVA, INC.
CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Management's Responsibility for Financial Reporting........................................................ F-1
Independent Auditors' Report............................................................................... F-2
Consolidated and Combined Statements of Operations
Years Ended December 31, 1998, 1997 and 1996.............................................................. F-3
Consolidated Balance Sheets
December 31, 1998 and 1997................................................................................ F-4
Consolidated and Combined Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996.............................................................. F-5
Consolidated and Combined Statements of Changes in Shareholders' Investment
Years Ended December 31, 1998, 1997 and 1996.............................................................. F-6
Notes to Consolidated and Combined Financial Statements.................................................... F-7
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... F-27
Quantitative and Qualitative Disclosures about Market Risk................................................. F-32
Selected Financial Data.................................................................................... F-33
</TABLE>
F-i
<PAGE>
UNOVA, INC.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated and combined financial statements of UNOVA, Inc. and
subsidiaries and related financial information included in this Annual Report,
have been prepared by the Company, whose management is responsible for their
integrity. These statements, which necessarily reflect estimates and judgments,
have been prepared in conformity with generally accepted accounting principles.
The Company maintains a system of internal controls to provide reasonable
assurance that assets are safeguarded and transactions are properly executed and
recorded. As part of this system, the Company has an internal audit staff to
monitor compliance with and the effectiveness of established procedures.
The consolidated and combined financial statements have been audited by Deloitte
& Touche LLP, independent auditors, whose report appears on page F-2.
The Audit and Compliance Committee of the Board of Directors, which consists
solely of directors who are not employees of the Company, meets periodically
with management, the independent auditors and the Company's internal auditors to
review the scope of their activities and reports relating to internal controls
and financial reporting matters. The independent and internal auditors have full
and free access to the Audit and Compliance Committee and meet with the
Committee both with and without the presence of Company management.
/s/ Michael E. Keane
Senior Vice President and
Chief Financial Officer
February 12, 1999
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
UNOVA, Inc.
Beverly Hills, California
We have audited the accompanying consolidated and combined balance sheets of
UNOVA, Inc. and subsidiaries (as described in Note A) as of December 31, 1998
and 1997, and the related consolidated and combined statements of operations,
changes in shareholders' investment, and cash flows for each of the three years
in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated and combined financial statements present
fairly, in all material respects, the financial position of UNOVA, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 12, 1999
F-2
<PAGE>
UNOVA, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Sales and Service Revenues............................. $1,662,663 $1,426,247 $1,164,682
---------- ---------- ----------
Costs and Expenses
Cost of sales........................................ 1,110,799 981,380 841,820
Selling, general and administrative.................. 383,663 324,405 218,672
Depreciation and amortization........................ 57,043 40,672 27,043
Acquired in-process research and development
charges............................................ 211,500
Interest, net........................................ 25,715 16,689 7,111
---------- ---------- ----------
Total Costs and Expenses........................... 1,577,220 1,574,646 1,094,646
---------- ---------- ----------
Other Income, Net...................................... 31,523
----------
Earnings (Loss) before Taxes on Income................. 116,966 (148,399) 70,036
Taxes on Income........................................ (47,253) (22,968) (28,014)
---------- ---------- ----------
Net Earnings (Loss).................................... $ 69,713 $ (171,367) $ 42,022
---------- ---------- ----------
---------- ---------- ----------
Basic Earnings (Loss) per Share........................ $ 1.28 $ (3.17) $ .78
---------- ---------- ----------
---------- ---------- ----------
Diluted Earnings (Loss) per Share...................... $ 1.27 $ (3.17) $ .78
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-3
<PAGE>
UNOVA, INC.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................................ $ 17,708 $ 13,685
Accounts receivable, net of allowance for doubtful accounts of
$24,021 (1998) and $19,719 (1997).............................. 662,885 448,079
Inventories, net of progress billings............................ 336,005 150,537
Deferred tax assets.............................................. 141,773 106,694
Other current assets............................................. 21,129 30,072
---------- ----------
Total Current Assets......................................... 1,179,500 749,067
Property, Plant and Equipment, Net................................. 286,171 157,680
Goodwill and Other Intangibles, Net of Accumulated Amortization of
$70,244 (1998) and $54,266 (1997)................................ 400,164 366,098
Other Assets....................................................... 113,381 83,513
---------- ----------
Total Assets....................................................... $1,979,216 $1,356,358
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities
Accounts payable and accrued expenses............................ $ 456,812 $ 311,759
Payroll and related expenses..................................... 93,199 72,909
Notes payable and current portion of long-term obligations....... 237,276 86,645
---------- ----------
Total Current Liabilities.................................... 787,287 471,313
---------- ----------
Long-term Obligations.............................................. 366,487 216,938
---------- ----------
Deferred Tax Liabilities........................................... 42,154 22,918
---------- ----------
Other Long-term Liabilities........................................ 81,863 55,700
---------- ----------
Commitments and Contingencies......................................
Shareholders' Investment
Preferred stock; 50,000,000 shares authorized....................
Common stock; shares outstanding:
54,942,655 (1998) and 54,510,193 (1997)........................ 549 545
Additional paid-in capital....................................... 645,054 603,743
Retained earnings (deficit)...................................... 61,672 (8,041)
Accumulated other comprehensive income:
Cumulative currency translation adjustment..................... (5,850) (6,758)
---------- ----------
Total Shareholders' Investment............................... 701,425 589,489
---------- ----------
Total Liabilities and Shareholders' Investment..................... $1,979,216 $1,356,358
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-4
<PAGE>
UNOVA, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash and Cash Equivalents at Beginning of Year............ $ 13,685 $ 149,467 $ 103,501
--------- --------- ---------
Cash Flows from Operating Activities:
Net earnings (loss)..................................... 69,713 (171,367) 42,022
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities (net of
acquisitions):
Acquired in-process research and development
charges........................................... 211,500
Depreciation and amortization....................... 57,043 40,672 27,043
Gain on sale of property plant and equipment, net... (35,043)
Deferred taxes...................................... (437) 2,162 (9,803)
Change in accounts receivable....................... (109,096) 39,752 (142,159)
Change in inventories............................... (67,223) (9,167) 21,986
Change in other current assets...................... 13,889 (12,540) (804)
Change in accounts payable and accrued expenses..... 69,922 (53,830) 73,701
Change in payroll and related expenses.............. 13,493 6,238 (2,382)
Change in prepaid pension costs, net................ (14,620) (11,217) (6,983)
Other operating activities.......................... 6,823 (1,247) 6,537
--------- --------- ---------
Net cash provided by operating activities......... 4,464 40,956 9,158
--------- --------- ---------
Cash Flows from Investing Activities:
Acquisition of businesses net of cash acquired.......... (287,350) (400,754)
Capital expenditures.................................... (83,776) (30,310) (22,541)
Proceeds from sale of property, plant and equipment..... 71,118 7,198
Investment in unconsolidated companies.................. (8,500)
Investment in radio frequency identification
technology............................................ (8,200)
Proceeds from sale of businesses and investments........ 4,671 31,100
Other investing activities.............................. (9,162) (81) 1,049
--------- --------- ---------
Net cash (used in) provided by investing
activities...................................... (304,499) (440,647) 9,608
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from borrowings................................ 754,780 276,698 11,551
Repayment of borrowings................................. (457,271) (95,607) (7,243)
Dividend paid to Western Atlas Inc...................... (230,000)
Net transactions with Western Atlas Inc................. 190,338 25,747
Change in due to Western Atlas Inc...................... 120,426 (2,855)
Other financing activities.............................. 6,549 2,054
--------- --------- ---------
Net cash provided by financing activities......... 304,058 263,909 27,200
--------- --------- ---------
Resulting in Increase (Decrease) in Cash and Cash
Equivalents............................................. 4,023 (135,782) 45,966
--------- --------- ---------
Cash and Cash Equivalents at End of Year.................. $ 17,708 $ 13,685 $ 149,467
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-5
<PAGE>
UNOVA, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN
SHAREHOLDERS' INVESTMENT
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED ACCUMULATED OTHER NET INVESTMENT
COMMON PAID-IN EARNINGS COMPREHENSIVE BY WESTERN
TOTAL STOCK CAPITAL (DEFICIT) INCOME ATLAS
--------- ------------- ----------- ----------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996.............. $ 502,659 $ 502,659
---------
Comprehensive Income:
Net earnings........................ 42,022 42,022
Currency translation adjustment..... 4,080 4,080
---------
Comprehensive Income.............. 46,102
---------
Net transactions with Western Atlas
Inc................................. 25,747 25,747
--------- ---------------
BALANCE, DECEMBER 31, 1996............ 574,508 574,508
---------
Comprehensive Loss before Distribution
Date:
Net loss to Distribution Date....... (163,326) (163,326)
Currency translation adjustment to
Distribution Date................. (3,699) (3,699)
---------
Comprehensive Loss before
Distribution Date............... (167,025)
---------
Net transactions with Western Atlas
Inc................................. 190,338 190,338
---------
Distribution of common stock to UNOVA
shareholders........................ $ 545 $ 601,689 $ (4,413) (597,821)
Comprehensive Loss from Distribution
Date to December 31, 1997:
Net loss from Distribution Date to
December 31, 1997................. (8,041) $ (8,041)
Currency translation adjustment from
Distribution Date to December 31,
1997.............................. (2,345) (2,345)
---------
Comprehensive Loss from
Distribution Date to December
31, 1997........................ (10,386)
---------
Other................................. 2,054 2,054
--------- ----- ----------- ----------- ------- ---------------
BALANCE, DECEMBER 31, 1997............ 589,489 545 603,743 (8,041) (6,758)
---------
Comprehensive Income:
Net earnings........................ 69,713 69,713
Currency translation adjustment..... 908 908
---------
Comprehensive Income.............. 70,621
---------
Distribution-related tax benefit...... 34,809 34,809
Other................................. 6,506 4 6,502
--------- ----- ----------- ----------- ------- ---------------
BALANCE, DECEMBER 31, 1998............ $ 701,425 $ 549 $ 645,054 $ 61,672 $ (5,850) $ --
--------- ----- ----------- ----------- ------- ---------------
--------- ----- ----------- ----------- ------- ---------------
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-6
<PAGE>
UNOVA, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
GENERAL INFORMATION. UNOVA, Inc. ("UNOVA" or the "Company") became an
independent public company on October 31, 1997 (the "Distribution Date"), when
all of the UNOVA common stock was distributed to holders of common stock of
Western Atlas Inc. ("WAI"), in the form of a dividend (the "Distribution").
Every WAI shareholder of record on October 24, 1997 was entitled to receive one
share of UNOVA common stock for each WAI share of common stock held.
NATURE OF OPERATIONS. UNOVA is an industrial technologies company providing
global customers with solutions for improving their efficiency and productivity.
The Automated Data Systems business segment comprises automated data collection
("ADC") and mobile computing products and services, principally serving the
industrial market. Customers are global distribution and transportation
companies, food and beverage operations, manufacturing industries, health care
providers and government agencies. The Industrial Automation Systems business
segment includes integrated manufacturing systems, body welding and assembly
systems, precision grinding and abrasives operations, and machining systems and
stand-alone machine tools primarily serving the worldwide automotive, off-road
vehicle, diesel engine and aerospace manufacturing industries.
PRINCIPLES OF CONSOLIDATION AND COMBINATION. The consolidated and combined
financial statements include those of the Company, its subsidiaries and
companies in which UNOVA has a controlling interest. Investments in companies
over which UNOVA has influence but not a controlling interest are accounted for
using the equity method. Investments in other companies are carried at cost. All
material intercompany transactions have been eliminated.
The combined financial statements for all periods presented prior to the
Distribution Date include the historical accounts and operations of the former
WAI businesses that now comprise the Company. They include, at their historical
amounts, the assets, liabilities, revenues and expenses directly related and
those allocated to the businesses that now comprise the Company's operations. A
pro rata share of certain general and administrative corporate costs incurred by
WAI prior to the Distribution Date have been allocated to the Company based on
the relative ratio of such projected costs to be incurred by WAI and the Company
individually. Such costs include general management, legal, tax, treasury,
insurance, financial audit, financial reporting, human resources and real estate
services.
The Company's debt prior to the Distribution Date includes an allocation of a
portion of WAI's corporate debt, based on the Company's estimated past capital
requirements. Interest expense related thereto has been included in the
Company's statements of operations at WAI's estimated blended historical rate of
interest on long-term borrowings of 7.5%.
Management believes the above stated allocations were made on a reasonable
basis; however, they do not necessarily reflect the results of operations which
would have occurred had the Company been an independent entity nor are they
necessarily indicative of future expenses or income (see Note J).
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses for each reporting period. Actual results could differ
from those estimates.
CASH EQUIVALENTS. The Company considers time deposits and commercial paper
purchased within three months of their date of maturity to be cash equivalents.
F-7
<PAGE>
NOTE A: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES. Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out or last-in, first-out method.
REVENUE RECOGNITION. Revenues are generally recognized when products are
shipped or as services are performed. Revenues and profits on long-term
contracts are recorded under the percentage-of-completion, cost to cost method
of accounting. Any anticipated losses on contracts are charged to operations as
soon as they are determinable. General and administrative costs are expensed as
incurred.
RESEARCH AND DEVELOPMENT. Research and development costs are charged to expense
as incurred. Total expenditures on research and development activities amounted
to $71.5 million, $53.1 million and $29.7 million, in the years ended December
31, 1998, 1997, and 1996, respectively. The Company expensed a total of $211.5
million of acquired in-process research and development in 1997. See further
discussion in Note B.
OTHER INCOME, NET. In the year ended December 31, 1998, other income, net
consists of a gain of $35.5 million recognized on the sale of UNOVA's corporate
headquarters building, offset by other non-operating expenses.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is stated at cost.
Depreciation, computed generally by the straight-line method for financial
reporting purposes, is provided over the estimated useful lives of the related
assets.
INCOME TAXES. The Company accounts for income taxes using the asset and
liability approach, which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities. See
further discussion in Note G.
The Company's domestic operations and their foreign branches were included in
WAI's consolidated tax returns (for periods prior to the Distribution Date). Any
tax benefits related to these operations have been recorded in these financial
statements if such were realizable by WAI on a consolidated basis. Foreign
entities included in these financial statements pay taxes in accordance with
local laws and regulations.
CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of cash and cash
equivalents and trade receivables. The Company places its cash and cash
equivalents with high credit quality institutions and limits the amount of
credit exposure with any one institution. Concentrations of credit risk with
respect to trade receivables are limited because a large number of
geographically diverse customers make up the Company's customer base, thus
spreading the trade credit risk. The Company evaluates the creditworthiness of
its customers and maintains an allowance for anticipated losses.
No customer was significant to the Company's revenues in 1998. In 1997, one
automotive customer represented 13% of revenues, while in 1996 another
automotive customer represented 15% of revenues.
FOREIGN CURRENCIES. The currency effects of translating the financial
statements of the Company's foreign entities that operate in local currency
environments are included in the "cumulative currency translation adjustment"
component of shareholders' investment. Currency transaction gains and losses are
included in the consolidated and combined statements of operations and were not
material for any periods presented herein.
FINANCIAL INSTRUMENTS. The Company from time to time enters into foreign
currency exchange contracts to hedge certain foreign currency transactions and
commitments and to reduce its exposure from
F-8
<PAGE>
NOTE A: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
investments in certain foreign operations. The amount and volume of such
transactions are not material. The Company does not enter into any foreign
currency contracts for trading purposes.
GOODWILL AND OTHER INTANGIBLES. Goodwill is amortized on a straight-line basis
over periods ranging from 15 to 40 years. Other intangibles are amortized on a
straight-line basis over periods ranging from four to 18 years.
IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL. The Company assesses the
recoverability of long-lived assets and goodwill at the end of each fiscal year
or as circumstances indicate that the carrying amount of an asset may not be
fully recoverable. Factors considered in evaluating recoverability include
management's plans for the operations to which the asset relates and the
historical earnings and projected undiscounted cash flows of such operations. An
impairment is recorded to writedown long-lived assets and goodwill to their
estimated fair value if the undiscounted cash flows estimated to be generated by
the asset are less than its carrying amount.
ENVIRONMENTAL COSTS. Provisions for environmental costs are recorded when the
Company determines its responsibility for remedial efforts and such amounts are
reasonably estimable.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is effective for fiscal
years beginning after June 15, 1999. The Company is currently evaluating the
impact of adopting this statement.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to conform
to the current year presentation.
F-9
<PAGE>
NOTE B: BUSINESS ACQUISITIONS, INVESTMENTS, AND DISPOSITIONS
ACQUISITIONS AND INVESTMENTS
In October 1998, UNOVA acquired the machine tool business of Cincinnati Milacron
for approximately $180.0 million in cash, subject to post-closing adjustments.
The division, which was renamed Cincinnati Machine, a UNOVA Company ("Cincinnati
Machine"), is engaged in the design, manufacture, sale and servicing of standard
and advanced computer numerically controlled metal cutting machine tools for the
industrial component, aerospace, job shop, fluid power and automotive
industries. Cincinnati Machine has become part of the Company's Industrial
Automation Systems ("IAS") segment. The acquisition cost has been allocated to
the net assets acquired based on the relative fair values. The acquisition was
funded using the Company's committed credit facility and was accounted for under
the purchase method of accounting.
During the third quarter of 1998, UNOVA acquired R & B Machine Tool Company
("R&B Machine"), a specialty machine and retooling company. This acquisition was
funded using short-term uncommitted credit lines. In June 1998, the Company
acquired the radio frequency identification ("RFID") business unit of Amtech
Corporation known as the Amtech Systems Division ("Amtech Systems"). Amtech
Systems is a supplier of wireless data technologies for electronic toll
collection, rail and motor fleet tracking, and access control to parking and
other structures. The Company had previously purchased $10.0 million of Amtech
Corporation common stock which was applied towards the purchase price of Amtech
Systems. Although these acquisitions are integral to the Company's business
strategy, they are not material in the aggregate to UNOVA's consolidated and
combined financial statements.
The allocation of the acquisition costs of Cincinnati Machine, R&B Machine and
Amtech Systems is preliminary and subject to revision upon receipt of pending
information, such as final assessment of certain legal and environmental
exposures and the completion of certain appraisals. Any such revisions are not
expected to have a material impact on the Company's consolidated and combined
financial statements.
The Company acquired Norand Corporation ("Norand") on March 3, 1997, and United
Barcode Industries ("UBI") on April 4, 1997. Norand designs, manufactures and
markets mobile computing systems and wireless data communications networks using
radio frequency technology. UBI, a European-based ADC company, manufactures bar
code on-demand printers with labels and ribbons as well as hand-held scanners.
These two companies were consolidated in Intermec Technologies Corporation, the
Company's Automated Data Systems subsidiary. Both acquisitions were funded by
Western Atlas borrowings and cash on hand, and have been accounted for under the
purchase method of accounting. Accordingly, the acquisition costs (approximately
$280.0 million and $107.0 million for Norand and UBI, respectively) were
allocated to the net assets acquired based upon their relative fair values. Such
allocation resulted in $203.3 million assigned to acquired in-process research
and development activities; $154.1 million assigned to goodwill (amortized over
25 years using the straight-line method); and $29.0 million assigned to other
intangibles (amortized over periods ranging from four to 18 years using the
straight-line method). During the second quarter of 1997, the Company expensed
the amounts assigned to acquired in-process research and development projects
that had not yet achieved technological feasibility in accordance with Financial
Accounting Standards Board Interpretation No. 4 ("FIN 4").
The Company acquired the remaining 51% of Honsberg, a German machine tool maker,
in the second quarter of 1997. The original 49% of Honsberg was acquired during
1995. The Company purchased the stamping, engineering and prototyping division
of Modern Prototype Company in September 1997. In December 1997, UNOVA acquired
Goldcrown Machinery, Inc., a manufacturer of precision centerless grinding
systems. Although these acquisitions are integral to the Company's business
strategy, they are not material in the aggregate to UNOVA's consolidated and
combined financial statements.
In December 1997, the Company acquired radio frequency identification ("RFID")
technology from IBM Corporation. In connection with this acquisition, the
Company recorded a $13.0 million after-tax charge
F-10
<PAGE>
NOTE B: BUSINESS ACQUISITIONS, INVESTMENTS, AND DISPOSITIONS (CONTINUED)
in 1997 to expense acquired in-process research and development in accordance
with FIN 4 and the anticipated loss on a related long-term contract. The Company
is using this acquired technology to further develop its own RFID technology.
CASH FLOW DISCLOSURE
The fair values of acquired assets and liabilities, at their respective
acquisition dates, are presented below for supplemental cash flow disclosure
purposes. The 1998 balances include the assets and liabilities of Cincinnati
Machine, R&B Machine and Amtech Systems while the 1997 balances include Norand,
UBI, Honsberg, Modern Prototype and Goldcrown Machinery.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
-------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Current assets............................................................................ $263,266 $164,153
Property, plant and equipment............................................................. 111,593 29,093
Goodwill and intangibles.................................................................. 50,983 201,380
Other non-current assets.................................................................. 17,864 55,956
Total debt................................................................................ (29,221) (84,163)
Other current liabilities................................................................. (85,049) (146,724)
Other non-current liabilities............................................................. (9,154) (11,642)
In-process research and development....................................................... 203,300
-------- --------
Purchase price............................................................................ 320,282 411,353
Less non-cash payment of Amtech common stock.............................................. (10,000)
Less cash acquired........................................................................ (22,932) (10,599)
-------- --------
Cash paid for acquisitions, net of cash acquired.......................................... $287,350 $400,754
-------- --------
-------- --------
</TABLE>
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The pro forma information for the year ended December 31, 1998 in the following
paragraph gives effect to the acquisition of Cincinnati Machine as if it had
occurred on January 1, 1998. The pro forma information for the year ended
December 31, 1997 gives effect to the acquisitions of Cincinnati Machine and
Norand as if they had occurred on January 1, 1997. The financial information has
been prepared from the historical financial statements of the Company,
Cincinnati Machine and Norand after giving effect to certain pro forma
adjustments, including depreciation on the fair market value of the acquired
property, plant, and equipment and interest expense associated with the increase
in debt.
Unaudited pro forma sales and service revenues, net earnings and earnings per
diluted share for the year ended December 31, 1998 are $2,009.1 million, $68.2
million and $1.25, respectively, reflecting the Cincinnati Machine acquisition
as if it had occurred on January 1, 1998. Unaudited pro forma sales and service
revenues, net earnings and earnings per diluted share for the year ended
December 31, 1997 are $1,921.0 million, $27.4 million and $0.51, respectively,
reflecting the Cincinnati Machine and Norand acquisitions as if they had
occurred on January 1, 1997.
The unaudited pro forma financial information is not necessarily indicative of
what the results of operations would have been if the combination had occurred
on the above-mentioned dates. Additionally, such information may not be
predictive of future results of operations.
DISPOSITIONS
The Company sold its Material Handling Systems operations in November of 1996.
The activities of the division were not considered a core business of the
Company.
F-11
<PAGE>
NOTE C: CASH AND CASH EQUIVALENTS, DEBT AND INTEREST
Cash and cash equivalents amounted to $17.7 million and $13.7 million at
December 31, 1998 and December 31, 1997, respectively, and consisted mainly of
time deposits and commercial paper.
Notes payable and long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Borrowings under revolving credit facility, with
average interest at 5.4% (1998) and 6.0% (1997), due
2002................................................ $ 200,000 $ 200,000
Debentures, with interest at 6.875%, due 2005......... 100,000
Debentures, with interest at 7.00%, due 2008.......... 100,000
Notes payable, with average interest at 5.3% (1998)
and 5.1% (1997), due 1999........................... 186,024 86,411
Industrial revenue bonds, with average interest at
5.5% (1998) and 5.6% (1997), due through 2005....... 13,500 13,500
Other, with average interest at 6.9% (1998) and 6.2%
(1997), due through 2002............................ 4,239 3,672
--------- ---------
603,763 303,583
Less notes payable and current portion of long-term
obligations......................................... (237,276) (86,645)
--------- ---------
Long-term obligations................................. $ 366,487 $ 216,938
--------- ---------
--------- ---------
</TABLE>
At December 31, 1998 the Company classified $150.0 million of borrowings under
the revolving credit facility as long-term, as the Company intends to refinance
such obligations on a long-term basis. At December 31, 1997 the Company
classified $200.0 million of short-term debt as long-term to reflect the debt
offering that occurred in March 1998, which is described below.
Notes payable and long-term obligations at December 31, 1998 mature as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (THOUSANDS OF DOLLARS)
- ---------------------------------------------------------------------- ----------------------
<S> <C>
1999.................................................................. $ 237,276
2000.................................................................. 1,266
2001.................................................................. 181
2002.................................................................. 150,005
2003.................................................................. --
Thereafter............................................................ 215,035
----------
$ 603,763
----------
----------
</TABLE>
The Company has an unsecured committed credit facility with a group of banks
from which it may borrow up to $400.0 million. Under this credit facility, which
expires in September 2002, the Company may borrow at the prime rate or at rates
based on the London Inter Bank Offered Rate, certificates of deposit or other
rates that are mutually acceptable to the banks and the Company. At February 12,
1999, $200.0 million of the credit facility was available for the Company's
general use.
F-12
<PAGE>
NOTE C: CASH AND CASH EQUIVALENTS, DEBT AND INTEREST (CONTINUED)
In January 1999, the Company entered into a new unsecured committed credit
facility with a group of banks from which it may borrow up to $100.0 million.
Under this credit facility, which expires in January 2000, the Company may
borrow at the prime rate or at rates based on the London Inter Bank Offered
Rate, certificates of deposit or other rates that are mutually acceptable to the
banks and the Company. At February 12, 1999, $100.0 million of the credit
facility was available for the Company's general use.
In addition, the Company maintains other uncommitted credit facilities and lines
of credit of which $89.3 million was available to the Company at February 12,
1999.
The Company is in compliance with its various debt covenants the most
restrictive of which relate to the Company's incurrence of debt, mergers,
consolidations and sale of assets and which require the Company to satisfy
certain leverage ratios.
In March 1998, the Company sold $200.0 million principal amount of senior
unsecured debt. The sale comprised $100.0 million of 6.875% seven-year notes, at
a price of 99.867 and $100.0 million of 7.00% ten-year notes, at a price of
99.856. Including underwriting fees, discounts and effects of forward rate
agreements entered into by the Company to hedge the interest rates on the debt,
the effective interest rates on the seven-year and ten-year notes are 7.125% and
7.175%, respectively. The net proceeds of approximately $198.0 million were used
by the Company to repay outstanding short-term debt.
Financial instruments on the Company's consolidated balance sheets include
accounts receivable, notes payable, and accounts payable which approximate their
market values due to their short maturity. The $366.5 million of long term
obligations had an estimated fair market value of $363.4 million as of December
31, 1998, based primarily on quoted market prices. UNOVA also has
off-balance-sheet guarantees and letter-of-credit reimbursement agreements with
respect to liabilities totaling a maximum amount of $228.8 million at December
31, 1998. These agreements primarily relate to the guarantee of performance on
contracts.
Net interest expense is composed of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Interest expense..................................... $ 28,182 $ 20,234 $ 11,533
Interest income...................................... (2,467) (3,545) (4,422)
--------- --------- ---------
Net interest expense................................. $ 25,715 $ 16,689 $ 7,111
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company made interest payments to non-related parties of $25.3 million, $6.6
million, and $2.6 million in the years ended December 31, 1998, 1997 and 1996,
respectively. Capitalized interest costs in each of the periods presented were
not material. Interest expense of $12.0 million and $8.3 million on the
allocated portion of WAI's corporate debt for the years ended December 31, 1997
and 1996, respectively, has been included in the Company's consolidated and
combined statements of operations at WAI's estimated blended historical rate of
interest on long-term borrowings of 7.5%.
F-13
<PAGE>
NOTE D: ACCOUNTS RECEIVABLE AND INVENTORIES
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Trade receivables, net............................................ $ 365,232 $ 202,890
Receivables related to long-term contracts
Amounts billed.................................................. 125,920 116,865
Unbilled costs and accrued profit on progress completed and
retentions.................................................... 171,733 128,324
--------- ---------
Accounts receivable, net.......................................... $ 662,885 $ 448,079
--------- ---------
--------- ---------
</TABLE>
The unbilled costs and retentions at December 31, 1998 are expected to be
entirely billed and collected during 1999.
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Raw materials and work in process................................. $ 232,010 $ 94,845
Finished goods.................................................... 82,434 38,074
Inventoried costs related to long-term contracts.................. 56,823 29,656
Less progress billings............................................ (35,262) (12,038)
--------- ---------
Inventories, net of progress billings............................. $ 336,005 $ 150,537
--------- ---------
--------- ---------
</TABLE>
F-14
<PAGE>
NOTE E: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Property, plant and equipment, at cost
Land..................................................... $ 27,313 $ 23,418
Buildings and improvements............................... 120,142 102,462
Machinery and equipment.................................. 316,932 213,582
Less accumulated depreciation.............................. (178,216) (181,782)
--------- ---------
Net property, plant and equipment.......................... $ 286,171 $ 157,680
--------- ---------
--------- ---------
</TABLE>
Depreciation expense was $40.9 million, $27.4 million and $20.7 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
The range of estimated useful lives of the major classes of assets are:
<TABLE>
<S> <C>
Buildings............................................................ 10-45 years
Building improvements................................................ 2-20 years
Machinery and equipment.............................................. 2-15 years
</TABLE>
As of December 31, 1998, minimum rental commitments under noncancellable
operating leases were:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, OPERATING LEASES
- ------------------------------------------------------------------------------------------ ---------------------
(THOUSANDS OF DOLLARS)
<S> <C>
1999...................................................................................... $17,517
2000...................................................................................... 12,904
2001...................................................................................... 7,793
2002...................................................................................... 5,191
2003...................................................................................... 3,781
Thereafter................................................................................ 15,468
--------
$62,654
--------
--------
</TABLE>
Rental expense for operating leases, including amounts for short-term leases
with nominal, if any, future rental commitments, was $20.5 million, $17.9
million and $10.4 million, for the years ended December 31, 1998, 1997 and 1996,
respectively.
In 1998, proceeds totaling approximately $71.1 million were received on the sale
of the Company's corporate headquarters building and three operations
facilities.
F-15
<PAGE>
NOTE F: SHAREHOLDERS' INVESTMENT
CAPITAL STOCK
At December 31, 1998, there were authorized 250 million shares of common stock,
par value $0.01, and 50 million shares of preferred stock, par value $0.01.
SHAREHOLDER RIGHTS PLAN
On September 24, 1997, the Company's Board of Directors adopted a Share Purchase
Rights Plan (the "Plan") and, in accordance with such Plan, declared a dividend
of one preferred share purchase right (the "Right") for each outstanding share
of Company common stock, payable to shareholders of record on October 31, 1997.
The Plan will cause substantial dilution to a party that attempts to acquire the
Company in a manner or on terms not approved by the Board of Directors. Each
Right entitles the holder to purchase from the Company one one-hundredth of a
share of Series A Preferred Stock at a price of seventy dollars. The Rights
become exercisable if a person other than a person which presently holds more
than 15 percent of the Company's common stock acquires 15 percent or more, or
announces a tender offer for 15 percent or more, of the Company's outstanding
common stock. If a person acquires 15 percent or more of the Company's
outstanding common stock, each right will entitle the holder to purchase the
Company's common stock having a market value of twice the exercise price of the
Right. The Rights, which expire in September 2007, may be redeemed by UNOVA at a
price of one cent per Right at any time prior to a person acquiring 15 percent
or more of the outstanding common stock.
EARNINGS PER SHARE
For the year ended December 31, 1998, basic earnings per share is calculated
using the weighted average number of common shares outstanding for the period
while diluted earnings per share is computed on the basis of the weighted
average number of common shares outstanding plus the effect of outstanding stock
options using the "treasury stock" method. For the year ended December 31, 1997,
basic earnings per share is calculated using the weighted average balance of the
number of shares outstanding for post-Distribution Date periods and the
outstanding shares of WAI common stock at June 30, 1997 for periods prior to the
Distribution Date, while diluted earnings per share is computed by adding the
effect of outstanding stock options using the "treasury stock" method to the
basic weighted average balance.
Shares used for basic and diluted earnings per share were computed as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------- -------------------
<S> <C> <C>
Weighted average common shares -- Basic 54,620,208 54,056,243
Dilutive effect of stock options 82,859 --
------------------- -------------------
Weighted shares--Diluted 54,703,067 54,056,243
------------------- -------------------
------------------- -------------------
</TABLE>
The Company used 53,891,534 shares, the outstanding shares of WAI common stock
at June 30, 1997, to calculate both basic and diluted earnings per share in the
year ended December 31, 1996.
At December 31, 1998, Company employees and directors held options to purchase
3,937,750 shares of Company common stock that were antidilutive to the diluted
earnings per share computation. These options could become dilutive in future
periods if the average market price of the Company's common stock exceeds the
exercise price of the outstanding options.
F-16
<PAGE>
NOTE F: SHAREHOLDERS' INVESTMENT (CONTINUED)
STOCK OPTIONS
The UNOVA, Inc. 1997 Stock Incentive Plan (the "1997 Plan") provides for the
grant of incentive awards to officers and other key employees. Incentive awards
may be granted in the form of stock options, with or without related stock
appreciation rights, or in the form of restricted stock. Under the 1997 Plan,
stock options may not be granted at a price less than the market value of the
Company's common stock on the date of grant. The 1997 Plan options usually vest
in equal increments over five years. The Company also has a Director Stock
Option and Fee Plan (the "Director Plan") which provides for the grant of stock
options to the Company's non-employee directors. Under the Director Plan, stock
options are granted annually at the market value of the Company's common stock
on the date of grant. The number of options granted annually is fixed by the
plan. Such options become fully exercisable on the first anniversary of their
grant. Under the 1997 Plan and Director Plan, there were 582,700 options
exercisable and 2,045,250 options available for grant as of December 31, 1998.
No options were exercisable as of December 31, 1997.
The following table summarizes the activity of the Company's stock option
plans:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
EXERCISE PRICE
NUMBER OF SHARES PER SHARE
------------------ ------------------
<S> <C> <C>
1997
Granted 2,504,500 $ 18.80
----------
Outstanding at December 31, 1997 2,504,500 18.80
----------
1998
Granted 1,706,200 16.97
Canceled (255,950) 18.37
----------
Outstanding at December 31, 1998 3,954,750 18.04
----------
----------
</TABLE>
Outstanding stock option data as of December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ---------------- ----------- ----------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$14.56 to $17.56 1,620,500 9.81 $ 16.62 103,000 $ 17.48
18.81 to 22.00 2,334,250 8.88 19.02 479,700 18.88
</TABLE>
The weighted-average fair value of stock options granted during 1998 and 1997
were $7.10 per option and $7.76 per option, respectively. The fair value of each
stock option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions used for
grants in 1998 and 1997, respectively; risk-free interest rates of 4.63% and
5.80%, expected life of five years for both years; and expected volatility of
39.6%, determined from historical UNOVA stock price fluctuations, and 36.0%,
determined from historical industry stock price fluctuations. There is no
assurance that the assumptions used in determining the fair values of stock
options will prove true in the future. The actual value of the options depends
on several factors, including the actual market price of the common stock on the
date of exercise. Changes in any of these factors as well as fluctuations in the
market price of the Company's common stock will cause the actual value of these
options to vary from the theoretical value indicated above.
F-17
<PAGE>
NOTE F: SHAREHOLDERS' INVESTMENT (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
Effective January 1, 1998, UNOVA adopted an Employee Stock Purchase Plan under
which the Company is authorized to sell up to five million shares of common
stock to its eligible full-time employees. Under the terms of the plan, which is
intended to qualify under Section 423 of the Internal Revenue Code, employees
can choose to have up to 8% of their annual earnings (up to a maximum amount of
$21,250 per calendar year) withheld to purchase the Company's common stock. The
purchase price of the stock is 85% of the lower of the market price on the first
day or last day of the applicable offering period, which is normally six months
in duration. The Company sold 433,506 shares under the Plan in 1998, with
approximately 30% of eligible employees participating. The weighted-average fair
value of purchase rights granted in 1998 was $5.14 per share. The fair value of
the stock purchase rights were determined using the same method and parameters
for stock option grants described above, except for the use of an expected life
equal to the applicable offering period. As previously noted, the actual value
of purchase rights may vary from the theoretical value determined using the
Black-Scholes option pricing model.
PRO FORMA COMPENSATION COST DISCLOSURE
The Company accounts for its stock-based compensation plans in accordance with
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized at the grant of stock options. Had compensation cost for these
plans been determined consistent with Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, the Company's pro
forma net income and diluted earnings per share for 1998 would have been $64.6
million and $1.18, respectively. In 1997 the Company's pro forma net loss and
diluted loss per share would have been $173.6 million and $3.21, respectively.
F-18
<PAGE>
NOTE G: TAXES ON INCOME
Earnings (loss) before taxes on income by geographic area are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
United States.......................................... $ 90,976 $(113,075) $ 47,470
Other nations.......................................... 25,990 (35,324) 22,566
--------- --------- ---------
$ 116,966 $(148,399) $ 70,036
--------- --------- ---------
--------- --------- ---------
</TABLE>
Taxes on income consist of the following provisions (benefits):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Currently Payable:
U.S. taxes.............................................. $ 20,416 $ 13,821 $ 31,619
International taxes..................................... 12,451 10,124 6,446
--------- --------- ---------
32,867 23,945 38,065
--------- --------- ---------
Deferred:
U.S. taxes.............................................. 13,689 242 (9,685)
International taxes..................................... 697 (1,219) (366)
--------- --------- ---------
14,386 (977) (10,051)
--------- --------- ---------
$ 47,253 $ 22,968 $ 28,014
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred taxes result from the effect of transactions which are recognized in
different periods for financial and tax reporting purposes. The primary
components of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------- --------------------
ASSET LIABILITY ASSET LIABILITY
--------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Accrued liabilities....................... $ 56,863 $ 49,194
Receivables and inventories............... 18,872 14,431
Retiree medical benefits.................. 10,176 6,255
Intangibles............................... 12,963 9,025
Tax credit carryforwards.................. 6,395 4,887
Deferred income........................... 2,718 10,195
Net operating loss carryforwards.......... 41,511 13,572
Pensions.................................. $ 23,588 $ 14,251
Accelerated depreciation.................. 18,566 6,123
Other items............................... 1,220 3,571 2,544
--------- --------- --------- ---------
Total before valuation allowance.......... 150,718 42,154 111,130 22,918
Valuation allowance....................... (8,945) (4,436)
--------- --------- --------- ---------
$ 141,773 $ 42,154 $ 106,694 $ 22,918
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The Company has available at December 31, 1998, a net operating tax loss
carryforward in the United States of approximately $69.4 million. Approximately
$7.7 million, $13.9 million, $4.2 million and
F-19
<PAGE>
NOTE G: TAXES ON INCOME (CONTINUED)
$43.6 million of the net operating tax loss carryforwards will expire in 2010,
2011, 2017 and 2018, respectively. The Company also has general business credit
and other tax credits of approximately $6.4 million to offset future tax
liability in the United States through 2018. The Company has foreign net
operating tax loss carryforwards of $17.9 million and $31.4 million in Germany
and the U.K. respectively.
Valuation allowances of $8.9 million and $4.4 million as of December 31, 1998
and 1997, respectively, were established for deferred income tax benefits
related to the German loss carryforwards that may not be realized. Included in
the valuation allowance is $4.4 million that relates to the acquired German net
operating loss carryforwards; any tax benefits subsequently recognized for the
acquired German net operating loss carryforwards will be allocated to goodwill.
With the exception of the German tax loss carryforward, the Company believes it
will utilize all other U.S. and foreign carryforward benefits.
The following is a reconciliation of income taxes at the U.S. statutory rate to
the provision for income taxes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Tax at U.S. statutory rate........................... $ 40,938 $ (51,940) $ 24,513
Nondeductible acquired in-process research and
development........................................ 71,050
State income taxes net of federal benefit............ 3,055 1,625 1,382
Amortization of nondeductible goodwill............... 4,272 4,431 1,916
Foreign operating losses with no tax benefit
provided........................................... 4,556
Tax credits and FSC benefit.......................... (3,276) (1,250)
Foreign earnings taxed at other than U.S. statutory
rate............................................... (316) (223) 60
Other items.......................................... (1,976) (725) 143
--------- --------- ---------
$ 47,253 $ 22,968 $ 28,014
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company made net tax payments of $4.5 million, $44.4 million and $26.1
million in the years ended December 31, 1998, 1997 and 1996, respectively.
The Company has provided for federal income taxes and foreign withholding taxes
on the undistributed earnings of foreign subsidiaries.
F-20
<PAGE>
NOTE H: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has retirement and pension plans which cover most of its employees.
Most of the Company's U.S. employees are covered by a contributory defined
benefit plan, under which annual contributions are made to the extent such
contributions are actuarially determined to adequately fund the plan.
There are also defined contribution voluntary savings programs generally
available for U.S. employees, which are intended to qualify under Sections
401(a) and 401(k) of the Internal Revenue Code. These plans are designed to
enhance the retirement programs of participating employees. Under these plans,
the Company matches up to 50% of a certain portion of participants'
contributions.
Certain of the Company's non-U.S. subsidiaries also have a retirement plan for
employees. The pension liabilities and their related costs are computed in
accordance with the laws of the individual nations and appropriate actuarial
practices.
U.S. PENSION PLANS
The following table sets forth the change in benefit obligations and plan assets
of the Company's U.S. pension plans and the amounts recognized in the Company's
balance sheets at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligation at beginning of year.................... $ 151,649 $ 139,026
Service cost............................................... 6,140 5,988
Interest cost.............................................. 10,982 10,075
Plan participants' contributions........................... 431 922
Actuarial loss............................................. 22,149 5,770
Benefits paid.............................................. (10,019) (10,132)
Other...................................................... 510
--------- ---------
Benefit obligation at end of year.......................... 181,842 151,649
--------- ---------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year............. 345,347 267,956
Actual return on plan assets............................... (11,858) 88,571
Plan participants' contributions........................... 431 922
Benefits paid.............................................. (9,554) (9,739)
Spin-off adjustment........................................ (8,125) (2,363)
--------- ---------
Fair value of plan assets at end of year................... 316,241 345,347
--------- ---------
Funded status.............................................. 134,399 193,698
Unrecognized net actuarial gain............................ (76,901) (148,576)
Unrecognized prior service cost............................ 4,201 3,526
Unrecognized transition asset.............................. (9,381) (12,769)
--------- ---------
Prepaid pension cost....................................... $ 52,318 $ 35,879
--------- ---------
--------- ---------
</TABLE>
F-21
<PAGE>
NOTE H: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
The preceding table includes prepaid pension cost presented net of pension
liabilities for plans in which accumulated benefits exceed plan assets. As of
December 31, 1998 and 1997, these liabilities amounted to $17.1 million and
$16.2 million, respectively.
Actuarial assumptions for the Company's U.S. defined benefit plans included an
expected long-term rate of return on plan assets of 9 1/4% for fiscal years 1998
and 1997. The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7% and 7 1/2% at December
31, 1998 and 1997, respectively. The rate of increase in future compensation
levels was 4 1/2% and 5% at December 31, 1998 and 1997, respectively.
Plan assets consist primarily of equity securities and U.S. Government
securities. The excess of plan assets over the projected benefit obligation at
August 1, 1986 (when the Company adopted SFAS No. 87) and subsequent
unrecognized gains and losses are fully amortized over the average remaining
service period of active employees expected to receive benefits under the plans,
generally 15 years.
A summary of the components of net periodic pension income for the U.S. defined
benefit plans and defined contribution plans for the years ended December 31,
1998, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
COMPONENTS OF NET PERIODIC PENSION INCOME 1998 1997 1996
- -------------------------------------------------------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service cost............................................ $ 6,140 $ 5,988 $ 6,507
Interest cost........................................... 10,982 10,075 10,107
Expected return on plan assets.......................... (24,203) (20,784) (18,518)
Amortization of prior service cost...................... 461 406 404
Recognized net actuarial gain........................... (5,641) (3,043) (1,765)
Amortization of transition asset........................ (2,477) (2,477) (2,477)
--------- --------- ---------
(14,738) (9,835) (5,742)
Defined contribution plans.............................. 4,500 4,160 2,983
--------- --------- ---------
Net periodic pension income............................. $ (10,238) $ (5,675) $ (2,759)
--------- --------- ---------
--------- --------- ---------
</TABLE>
NON-U.S. PENSION PLANS
For the principal non-U.S. pension plans located in the United Kingdom, the
weighted-average discount rate used was approximately 6% at December 31, 1998.
The rate of increase in future compensation used was approximately 3 1/2%, and
the rate of return on assets was 6 1/2% at December 31, 1998.
Pension costs for non-U.S. pension plans were not material for any of the
periods presented herein. The actuarial present value of projected benefits at
December 31, 1998 was $107.2 million compared with net assets available for
benefits of $111.6 million.
F-22
<PAGE>
NOTE H: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
OTHER POSTRETIREMENT BENEFITS
In addition to pension benefits, certain of the Company's U.S. employees are
covered by postretirement health care and life insurance benefit plans provided
by UNOVA. These benefit plans are unfunded. The following table sets forth the
change in benefit obligation of the Company's other postretirement benefits and
amounts recognized in the Company's balance sheets at December 31, 1998 and
1997.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
CHANGE IN POSTRETIREMENT BENEFIT OBLIGATIONS 1998 1997
- -------------------------------------------------------------- --------- ---------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Benefit obligation at beginning of year....................... $ 27,789 $ 18,664
Service cost.................................................. 292 586
Interest cost................................................. 2,037 1,688
Acquisitions.................................................. 11,423
Actuarial loss................................................ 104 7,959
Benefits paid................................................. (1,237) (1,108)
--------- ---------
Benefits obligation at end of year............................ 40,408 27,789
--------- ---------
Funded status................................................. (40,408) (27,789)
Unrecognized net actuarial loss............................... 8,198 8,828
Unrecognized transition obligation............................ 2,316
Other......................................................... (2,187) (603)
--------- ---------
Accrued postretirement benefit obligation..................... $ (32,081) $ (19,564)
--------- ---------
--------- ---------
</TABLE>
The following table sets forth the status of the Company's net periodic
postretirement benefit cost for the years ended December 31, 1998, 1997 and
1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
COMPONENTS OF NET PERIODIC POSTRETIREMENT BENEFIT COST 1998 1997 1996
- -------------------------------------------------------------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service cost.................................................. $ 620 $ 586 $ 212
Interest cost................................................. 2,037 1,688 1,576
--------- --------- ---------
Net periodic postretirement benefit cost...................... $ 2,657 $ 2,274 $ 1,788
--------- --------- ---------
--------- --------- ---------
</TABLE>
Actuarial assumptions used to measure the accumulated benefit obligation include
a discount rate of 7% and 7 1/2% at December 31, 1998 and 1997. The assumed
health care cost trend rate for fiscal year 1998 was 12% and is projected to
decrease over 18 years to 6%, where it is expected to remain thereafter. The
effect of a one-percentage-point increase or decrease in the assumed health care
cost trend rate on the service cost and interest cost components of the net
periodic postretirement benefit cost is not material. A one-percentage-point
increase in the assumed health care cost trend rate on the accrued
postretirement benefit obligation results in an increase of approximately $1.9
million, while a one-percentage point decrease results in a decrease of $1.7
million.
F-23
<PAGE>
NOTE I: LITIGATION, COMMITMENTS AND CONTINGENCIES
The Company is currently, and is from time to time, subject to claims and suits
arising in the ordinary course of its business. In the opinion of the Company's
General Counsel, the ultimate resolution of currently pending proceedings will
not have a material adverse effect on the Company's consolidated and combined
financial statements.
NOTE J: RELATED PARTY TRANSACTIONS
Included in other assets are amounts due from certain Company officers and other
related parties of $1.9 million and $2.1 million at December 31, 1998 and 1997,
respectively.
In 1999, the Company intends to move its executive offices to a leased facility
that is owned by the UNOVA Master Trust, a vehicle which holds the assets of the
Company's major U.S. pension plans ("UNOVA Master Trust"). The Company is
currently awaiting Department of Labor approval of the transaction under
provisions of the Employment Retirement Income Security Act of 1974 governing
transactions between pension plans and related parties before it executes a
long-term lease with the UNOVA Master Trust, which is expected to be consummated
on terms equivalent to an arm's-length transaction.
Immediately prior to the Distribution in 1997, the Company paid a dividend of
$230.0 million to WAI with funds borrowed under the Company's revolving credit
facility.
Included in general and administrative expenses are allocated charges from WAI
of $13.5 million and $22.2 million, for the years ended December 31, 1997 and
1996, respectively.
Included in interest expense are allocated charges from WAI of $12.0 million and
$8.3 million, for the years ended December 31, 1997 and 1996, respectively.
F-24
<PAGE>
NOTE K: BUSINESS SEGMENT REPORTING
The Company manages and reports its operations in two business segments: the
Automated Data Systems segment and the Industrial Automation Systems segment.
Material Handling Systems was sold during the fourth quarter of 1996. Figures
for this division were reported as part of the Industrial Automation Systems
segment. The Company uses operating profit, which is computed by adding net
interest expense to earnings before taxes on income, to evaluate performance.
Corporate and other amounts include corporate operating costs and currency
transaction gains and losses (see Notes A and J). Assets classified as corporate
and other amounts consist of cash and cash equivalents and other corporate
assets. Activities are primarily product sales oriented. Export sales are not
material. All material intercompany transactions have been excluded.
OPERATIONS BY BUSINESS SEGMENT
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
INDUSTRIAL AUTOMATED CORPORATE
YEAR ENDED AUTOMATION DATA AND OTHER
DECEMBER 31, SYSTEMS SYSTEMS AMOUNTS TOTAL
------------ ---------- --------- --------- ------
<S> <C> <C> <C> <C> <C>
Sales............................................... 1998 $ 833 $ 830 $1,663
1997 790 636 1,426
1996 798 367 1,165
Operating profit (loss)............................. 1998 77 55 $ 11(B) 143(B)
1997 95 (202)(A) (25) (132)(A)
1996 70 30 (23) 77
Capital expenditures................................ 1998 38 46 84
1997 14 16 30
1996 14 9 23
Depreciation and amortization expense............... 1998 19 38 57
1997 15 25 1 41
1996 15 11 1 27
Total assets at year end............................ 1998 1,128 775 76 1,979
1997 650 642 64 1,356
1996 620 277 177 1,074
</TABLE>
(A) Includes the $211.5 million charges for acquired in-process research and
development.
(B) Includes gain of $35.5 million on sale of UNOVA's corporate headquarters
building.
OPERATIONS BY GEOGRAPHIC AREA
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
CORPORATE
YEAR ENDED UNITED AND OTHER
DECEMBER 31, STATES EUROPE OTHER AMOUNTS TOTAL
----------------- --------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales......................................... 1998 $ 1,064 $ 442 $ 157 $ 1,663
1997 989 363 74 1,426
1996 950 193 22 1,165
Operating profit (loss)....................... 1998 98 28 6 $ 11 143
1997 (78) (35) 6 (25) (132)
1996 78 22 (23) 77
Total assets at year end...................... 1998 1,470 388 45 76 1,979
1997 1,015 261 16 64 1,356
1996 751 136 10 177 1,074
</TABLE>
F-25
<PAGE>
UNOVA, INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
BASIC
EARNINGS DILUTED COMMON STOCK
GROSS NET PER EARNINGS SALES PRICE
SALES PROFIT EARNINGS SHARE PER SHARE HIGH/LOW (1)
------ ------ -------- -------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
(MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, 1998
First Quarter..................................... $333.4 $110.1 $ 7.8 $ 0.14 $ 0.14 $20 9/16 13 7/8
Second Quarter.................................... 345.2 117.8 9.2 0.17 0.17 $24 19 15/16
Third Quarter..................................... 405.7 133.2 13.3 0.24 0.24 $22 15 1/2
Fourth Quarter.................................... 578.4 166.2 39.4(2) 0.72 0.72 $18 1/4 12 3/8
YEAR ENDED DECEMBER 31, 1997
First Quarter..................................... $323.1 $ 88.9 $ 11.6 $ 0.21 $ 0.21
Second Quarter.................................... 409.3 122.7 (189.1)(3) (3.51) (3.51)
Third Quarter..................................... 361.8 116.4 11.7 0.22 0.22
Fourth Quarter.................................... 332.0 99.9 (5.6)(4) (0.10) (0.10) $19 1/4 14 1/8
</TABLE>
As of January 31, 1999 there were approximately 20,246 holders of record of the
Company's common stock.
(1) The common stock began trading on the New York Stock Exchange under the
symbol "UNA" on October 22, 1997 on a "when issued" basis, and "regular way"
on November 3, 1997. Prior to October 31, 1997, the Company was a wholly
owned subsidiary of Western Atlas Inc.
(2) In December 1998, the Company recognized a gain of $35.5 million on the sale
of its corporate headquarters building.
(3) In June 1997, the Company expensed $203.3 million of in-process research and
development activities in connection with the acquisitions of Norand and
UBI.
(4) In December 1997, the Company expensed $4.9 million (net of tax) of
in-process research and development activities in connection with the
acquisition of RFID technology.
F-26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Sales and service revenues and segment operating profit for the years ended
December 31, 1998, 1997 (excluding the $211.5 million charges for acquired
in-process research and development) and 1996, were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
SALES AND SERVICE REVENUES
Industrial Automation Systems................................ $ 833.3 $ 789.8 $ 797.4
Automated Data Systems....................................... 829.4 636.4 367.3
--------- --------- ---------
Total Sales and Service Revenues............................. $ 1,662.7 $ 1,426.2 $ 1,164.7
--------- --------- ---------
--------- --------- ---------
SEGMENT OPERATING PROFIT
Industrial Automation Systems................................ $ 76.9 $ 94.6 $ 69.5
Automated Data Systems....................................... 55.4 9.1 30.1
--------- --------- ---------
Total Segment Operating Profit............................... $ 132.3 $ 103.7 $ 99.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997
Total sales and service revenues increased $236.5 million, or 17% for the year
ended December 31, 1998 compared with the corresponding prior period. Total
segment operating profit increased $28.6 million, or 28% for the year ended
December 31, 1998 compared to the corresponding prior period.
IAS revenues increased $43.5 million, or 6% while related operating profit
decreased $17.7 million, or 19% for the year ended December 31, 1998 compared
with the corresponding prior period. The increase in IAS revenues is primarily
attributable to the acquisitions of Cincinnati Machine and R&B Machine Tool,
which are discussed below. Startup issues on a new product line at Lamb Honsberg
in Germany impacted operating profit in 1998. In addition, the IAS segment began
several new projects in 1998 that are not expected to materially affect sales
and profits until next year. Delays caused by unexpected customer changes were
encountered in the engineering phase of these new projects. Conversely, during
the first half of 1997, the integrated manufacturing systems operations
experienced a higher level of sales and profits from contracts in the final
delivery and installation phase. IAS backlog increased from $332.0 million at
December 31, 1997 to $705.5 million at December 31, 1998.
ADS segment sales increased $193.0 million or 30% and operating profit increased
$46.3 or 509% for the year ended December 31, 1998 compared with the
corresponding prior period. The sales and operating profit increases are due
primarily to new licensing revenues, internal growth and the contribution of a
full year of operations and the realization of improved profitability from the
integration of the Norand and UBI acquisitions, offset by information system
problems that negatively impacted the results of the third and fourth quarter.
These problems, which were caused by the larger volume of business that resulted
from the integration, did not allow the ADS segment to fully realize the
benefits of its integration activities in 1998. A new information system,
designed to resolve these problems, will become operational during 1999.
In October 1998, UNOVA acquired the machine tool business of Cincinnati Milacron
for approximately $180.0 million in cash, subject to post-closing adjustments.
The division, which was renamed Cincinnati Machine, a UNOVA Company ("Cincinnati
Machine"), is engaged in the design, manufacture, sale and servicing of standard
and advanced computer numerically controlled metal cutting machine tools for the
F-27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
industrial component, aerospace, job shop, fluid power and automotive
industries. Cincinnati Machine has become part of the Company's Industrial
Automation Systems ("IAS") segment. The acquisition cost has been allocated on a
preliminary basis to the net assets acquired based on their relative fair
values. The acquisition was funded using the Company's committed credit facility
and was accounted for under the purchase method of accounting.
During the third quarter of 1998, UNOVA acquired R&B Machine Tool Company ("R&B
Machine"), a specialty machine and retooling company. This acquisition was
funded using short-term uncommitted credit lines. In June 1998, the Company
acquired the radio frequency identification ("RFID") business unit of Amtech
Corporation known as the Amtech Systems Division ("Amtech Systems"). Amtech
Systems is a supplier of wireless data technologies for electronic toll
collection, rail and motor fleet tracking, and access control to parking and
other structures. The Company had previously purchased $10.0 million of Amtech
Corporation common stock which was applied towards the purchase price of Amtech
Systems.
Depreciation and amortization increased from $40.7 million to $57.0 million from
the year ended December 31, 1997 to the year ended December 31, 1998. This
increase is primarily due to higher amortization of goodwill and other
intangibles resulting from the Norand and UBI acquisitions, as well as
additional depreciation from capital expenditures and business acquisitions.
Selling, general and administrative ("SG&A") expense increased $59.3 million
from the year ended December 31, 1997 to the year ended December 31, 1998.
However, as a percentage of sales, SG&A remained constant at 23% in both years.
The increase in the amount is due primarily to 1998 acquisitions as well as the
increase in the Company's sales and service revenues over the prior year.
Net interest expense was $25.7 million and $16.7 million for the years ended
December 31, 1998 and 1997, respectively. The increase is attributable to an
increase in outstanding debt due primarily to the acquisitions of Norand and UBI
in 1997 and Cincinnati Machine, R&B Machine and Amtech Systems in 1998.
Other income, net consists of a gain of $35.5 million recognized on the sale of
UNOVA's corporate headquarters building, offset by other non-operating expenses.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996
Total sales and service revenues increased $261.5 million, or 22% for the year
ended December 31, 1997 compared with the corresponding prior period. Total
segment operating profit, excluding the $211.5 million charges for acquired
in-process research and development, increased $4.1 million, or 4% for the year
ended December 31, 1997 compared to the corresponding prior period.
IAS revenues decreased $7.6 million, or 1% and related operating profit
increased $25.1 million, or 36% for the year ended December 31, 1997 compared
with the corresponding prior period. The decrease in IAS revenues is primarily
attributable to the sale of the Material Handling Systems ("MHS") division in
November 1996, which offsets an increase in integrated manufacturing systems
revenues. IAS experiences lower profit margins in the early stages of long-term
contracts until the development risks have been mitigated. During 1997 the
integrated manufacturing systems operations experienced a higher level of
revenues and profits from contracts in the final delivery and installation
phase. These projects contributed to an increase in operating margins for IAS
from 8.7% in 1996 to 12.0% in 1997. Accordingly, IAS backlog declined from
$545.0 million at December 31, 1996 to $332.0 million at December 31, 1997.
F-28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Also contributing to the increased operating profit are nonrecurring costs
recorded in 1996 associated with the MHS sale and the reorganization of the
Company's IAS European operations and domestic grinding businesses.
ADS revenues increased by $269.1 million, or 73% due to the acquisitions of
Norand Corporation ("Norand") and United Barcode Industries ("UBI"). However,
ADS operating profit declined by $21.0 million, or 70% due primarily to the
process of integrating the newly acquired companies with Intermec and the costs
of a long-term contract related to wireless RFID technology purchased from IBM
Corporation.
The Company acquired Norand on March 3, 1997, and UBI on April 4, 1997. Norand
designs, manufactures and markets mobile computing systems and wireless data
communications networks using radio frequency technology. UBI is a
European-based automated data collection company headquartered in Sweden. These
companies were integrated into Intermec Technologies Corporation. Both
transactions were funded by WAI borrowings and cash on hand, and have been
accounted for under the purchase method of accounting. Accordingly, the
acquisition costs (approximately $280.0 million and $107.0 million for Norand
and UBI, respectively) were allocated to the net assets acquired based upon
their relative fair values. Such allocation resulted in $203.3 million assigned
to in-process research and development activities; $154.1 million assigned to
goodwill (amortized over 25 years); and $29.0 million assigned to other
intangibles (amortized over periods ranging from 4 to 18 years). During the
second quarter of 1997, the Company expensed the amounts assigned to acquired
in-process research and development in accordance with Financial Accounting
Standards Board Interpretation No. 4.
The Company acquired the remaining 51% of Honsberg, a German machine tool maker,
in the second quarter of 1997. The original 49% of Honsberg was acquired during
1995. The Company acquired the stamping, engineering, and prototyping division
of Modern Prototype Company in September 1997. In December 1997, UNOVA acquired
Goldcrown Machinery, Inc., a manufacturer of precision centerless grinding
systems. Also, in November 1997, the Company acquired 13% of the common stock of
Amtech Corporation, which was applied toward the purchase price of Amtech's RFID
business in 1998.
SG&A expense as a percentage of sales and service revenues increased to 22.7%
for the year ended December 31, 1997, compared to 18.8% in 1996. This increase
is primarily due to a higher percentage of the Company's 1997 sales coming from
the ADS segment, where SG&A rates are historically higher than those experienced
in the IAS segment. ADS sales as a percentage of total Company sales increased
to 44.6% in 1997 from 31.5% in 1996.
Net interest expense was $16.7 million and $7.1 million for the years ended
December 31, 1997 and 1996, respectively. The increase is primarily due to an
increase in the level of Western Atlas allocated debt from $109.6 million at
December 31, 1996 to $230.0 million at October 31, 1997 (when the Company paid
this amount to WAI as an intercompany dividend). The increase in allocated debt
is primarily attributable to the 1997 acquisitions of Norand and UBI.
FOREIGN CURRENCY TRANSACTIONS
The Company is subject to the effects of international currency fluctuations due
to the global nature of its operations. Currency fluctuations did not have a
significant impact on operations during fiscal years 1998, 1997 and 1996. It is
not possible to predict the Company's exposure to foreign currency fluctuations
beyond the near term because revenues generated from particular foreign
jurisdictions vary widely over time. The Company hedges transactions from time
to time, but the amount and volume of such transactions are not material.
F-29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
For fiscal year 1998, the Company derived approximately 36% of its revenues and
approximately 26% of its operating profits (exclusive of corporate overhead)
from non-U.S. operations. At December 31, 1998, identifiable assets attributable
to foreign operations comprised 22% of total assets. As the largest components
of these foreign assets are attributable to European operations, the exposure of
identifiable assets to foreign currency fluctuations or expropriations is not
significant.
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities increased from $13.7 million at December 31, 1997
to $17.7 million at December 31, 1998. Total debt increased from $303.6 million
at December 31, 1997 to $603.8 million at December 31, 1998 due to the
acquisitions of Cincinnati Machine, R&B Machine and Amtech Systems and the
normal capital expenditure and working capital needs of the operations.
In March 1998, the Company sold $200.0 million principal amount of senior
unsecured debt. The sale comprised $100.0 million of 6.875% seven-year notes, at
a price of 99.867 and $100.0 million of 7.00% ten-year notes, at a price of
99.856. Including underwriting fees, discounts and effects of forward rate
agreements entered into by the Company to hedge the interest rates on the debt,
the effective interest rates on the seven-year and ten-year notes are 7.125% and
7.175%, respectively. The net proceeds of approximately $198.0 million were used
by the Company to repay outstanding debt.
The Company has two unsecured committed credit facilities with a group of banks
from which it may borrow up to $500.0 million. Under these credit facilities,
the Company may borrow at the prime rate or at rates based on the London Inter
Bank Offered Rate, certificates of deposit or other rates that are mutually
acceptable to the banks and the Company. At February 12, 1999, $300.0 million of
these credit facilities was available for the Company's general use. In
addition, the Company maintains other uncommitted credit facilities and lines of
credit of which $89.3 million was available to the Company at February 12, 1999.
The Company expects that cash flow from operations, along with available
borrowing capacity, will be adequate to meet working capital requirements.
YEAR 2000
The Year 2000 issue is the result of computer programs designed to define a year
using two digits rather than four. As such, a date sensitive field using "00"
could be recognized as the year 1900 rather than the year 2000, potentially
causing the worst case scenario of a system failure or other business
disruption.
The operating segments of the Company formed internal review teams to address
the Year 2000 issue. The teams are monitored on an ongoing basis by executive
management. As a result of this review, the Company has identified its
significant information technology and non-information technology systems that
will require modification to ensure Year 2000 compliance. Internal and external
resources are being used to make the required modifications and test Year 2000
compliance. Although there can be no assurance that the Company will identify
and correct every Year 2000 problem, the Company believes that it has in place a
comprehensive program to identify and correct any such problems. The Company
plans to complete the internal modification and testing process prior to
December 31, 1999.
UNOVA is also actively working with its significant suppliers and customers to
assess their Year 2000 compliance efforts and the Company's exposure to them.
While the Company currently does not anticipate problems related to third party
Year 2000 issues, the Company will continue to assess potential risk from third
parties. However, there can be no assurance that Year 2000 problems originating
with a supplier or other third party will not occur.
F-30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company has also assessed the capability of its products to determine
whether they are Year 2000 compliant. The Company believes that all of its
current products are Year 2000 compliant. UNOVA has not tested products that are
no longer sold by the Company and the Company does not believe it is legally
responsible for costs incurred by customers related to ensuring their Year 2000
capability. However, the Company is providing customer support and customer
satisfaction services related to Year 2000 issues. UNOVA defines "Year 2000
compliant" as a product that, when used properly and in conformity with the
product information provided by the Company, will accurately transition data
between the twentieth and twenty-first centuries, including leap year
calculations, provided that all other technology used in combination with the
product properly exchanges data with the UNOVA product.
In addition, the Company has begun internal discussions concerning contingency
planning to address potential problem areas with internal systems and third
parties. If deemed necessary, these contingency plans will be developed prior to
December 31, 1999.
The Company estimates that the total incremental cost of these Year 2000
compliance activities will be approximately $7.0 million. Of these costs, it is
estimated that approximately $1.5 million are expense items and the remaining
$5.5 million are capitalizable. As of December 31, 1998, the Company has
incurred approximately $3.3 million of Year 2000 costs of which about $500
thousand was expensed and approximately $2.8 million was capitalized. These
costs and the date on which the Company plans to complete the Year 2000
modification are based on management's best estimates, which were derived
utilizing numerous assumptions of future events. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
from those plans. Based on currently available information, management does not
believe that Year 2000 issues will have a material adverse impact on the
Company's financial condition or results of operations. However, the Year 2000
problem has many aspects and potential consequences, some of which are not
reasonably foreseeable, and there can be no assurance that unforeseen
consequences will not arise.
INFLATION
In the opinion of management, inflation has not been a significant factor in the
markets in which the Company operates and has not had a significant impact upon
the results of its operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, which is effective for fiscal years beginning after June
15, 1999. The Company is currently evaluating the impact of adopting this
statement.
FORWARD-LOOKING STATEMENTS
The Company cautions readers that, in addition to the historical information
covered in this discussion and analysis, included are certain forward-looking
statements and information that are based on management's beliefs as well as on
assumptions made by and information currently available to management. They
include, but are not limited to, statements about the demand for the Company's
products and services, the Company's ability to profitably exploit new
technologies acquired or developed, and the Company's ability to realize its
intentions with respect to the future performance of operations being acquired.
Such forward-looking statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions which could cause the
Company's future results to differ materially from those expressed or implied in
any forward-looking statements made by, or on behalf of, the
F-31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Company. Such factors include, but are not limited to, the following which are
beyond the Company's control: fluctuations in the strength of the automotive and
aerospace markets; technological changes and developments, particularly in the
ADC/Mobile Computing System industry; the presence of competitors with greater
financial and other resources; the availability and cost of materials and
supplies; relations with the Company's employees; the Company's ability to
manage its operating costs and to integrate acquired businesses in an effective
manner; worldwide political stability and economic conditions; regulatory
uncertainties; operating risks associated with international operations; and the
risk that the Company's due diligence procedures may have failed to reveal
undisclosed material information concerning acquired operations. Any
forward-looking statements should be considered in light of these factors, many
of which are beyond the Company's ability to control or predict. Readers are
cautioned not to put undue reliance on forward-looking statements. The Company
disclaims any intent or obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily from its short-term and
long-term borrowings and to exchange rate risk with respect to its foreign
operations and from foreign currency transactions. The information presented
below summarizes the Company's cash flows for its borrowings and related
interest rates by dates of maturity. Variable interest rates disclosed represent
the weighted average rates of the borrowings at December 31, 1998. Fair values
have been determined based on quoted market prices. The information presented
below should be read in conjunction with Note C to the Consolidated and Combined
Financial Statements.
<TABLE>
<CAPTION>
DEBT 1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
- ---------------------- ---------- --------- --------- ---------- --------- ----------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate $ 200,000 $ 200,000 $ 196,871
Average Interest Rate 6.94%
Variable Rate $ 237,276 $ 1,266 $ 181 $ 150,005 $ 15,035 $ 403,763 $ 403,763
Average Interest Rate 5.36% 7.03% 7.24% 5.37% 5.52%
</TABLE>
The Company from time to time enters into foreign currency exchange contracts to
hedge certain foreign currency transactions and commitments and to reduce its
exposure from investments in certain foreign operations. These contracts were
not significant at December 31, 1998. The Company does not enter into any
foreign currency contracts for trading purposes. A hypothetical 10% change in
the relevant currency rates at December 31, 1998 would not have a material
impact on the Company's results of operations or cash flows.
F-32
<PAGE>
SELECTED FINANCIAL DATA
UNOVA, INC.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA AND
RATIOS)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Sales and Service Revenues................... $ 1,662.7 $ 1,426.2 $ 1,164.7 $ 942.9 $ 971.1
--------- --------- --------- --------- ---------
Operating Costs and Expenses
Cost of sales.............................. 1,110.8 981.4 841.8 669.3 689.9
Selling, general and administrative (1).... 383.7 535.9 218.7 194.1 199.9
Depreciation and amortization.............. 57.0 40.6 27.0 26.1 28.7
--------- --------- --------- --------- ---------
Total.................................... 1,551.5 1,557.9 1,087.5 889.5 918.5
--------- --------- --------- --------- ---------
Other Income, Net............................ 31.5
---------
Earnings (Loss) before Interest and Taxes.... 142.7 (131.7) 77.2 53.4 52.6
Interest Expense, net (2).................... (25.7) (16.7) (7.1) (9.3) (15.7)
Taxes on Income.............................. (47.3) (23.0) (28.1) (17.9) (15.3)
--------- --------- --------- --------- ---------
Net Earnings (Loss).......................... $ 69.7 $ (171.4) $ 42.0 $ 26.2 $ 21.6
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic Net Earnings (Loss) per Share.......... $ 1.28 $ (3.17) $ 0.78 $ 0.49 $ 0.40
Diluted Net Earnings (Loss) per Share........ $ 1.27 $ (3.17) $ 0.78 $ 0.49 $ 0.40
Shares used for Basic Earnings (Loss) per
Share (3).................................. 54,620 54,056 53,892 53,892 53,892
Shares used for Diluted Earnings (Loss) per
Share (3).................................. 54,703 54,056 53,892 53,892 53,892
FINANCIAL POSITION (at end of year):
Total Assets................................. $ 1,979.2 $ 1,356.4 $ 1,073.8 $ 919.0 $ 860.8
Notes Payable and Current Portion of
Long-term Obligations...................... $ 237.3 $ 86.6 $ 27.5 $ 22.2 $ 41.7
Long-term Obligations........................ $ 366.5 $ 216.9 $ 14.5 $ 14.1 $ 9.0
Allocated Portion of Western Atlas Debt...... $ 109.6 $ 112.4 $ 112.8
Working Capital.............................. $ 392.2 $ 277.8 $ 266.0 $ 194.7 $ 115.2
Current Ratio................................ 1.5 1.6 1.6 1.6 1.3
Total Debt as a Percentage of Total
Capitalization............................. 46% 34% 21% 23% 27%
</TABLE>
- ------------------------
(1) General and Administrative Costs include allocated charges from Western
Atlas of $13.5 million, $22.2 million, $19.9 million and $27.6 million for
the years ended December 31, 1997, 1996, 1995 and 1994, respectively. The
year ended December 31, 1997 includes charges of $211.5 million, or $3.91
per share, for the value of acquired in-process research and development
activities resulting from acquisitions made during the year.
(2) Interest expense includes allocated charges from Western Atlas of $12.0
million, $8.3 million, $8.4 million and $12.1 million for the years ended
December 31, 1997, 1996, 1995 and 1994, respectively.
(3) In thousands. The number of common shares used to calculate basic and
diluted earnings per share prior to 1997 is based on the number of shares of
Western Atlas Common Stock that was outstanding as of June 30, 1997.
F-33
<PAGE>
[LOGO]
UNOVA, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 7, 1999
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Alton J. Brann and Michael E. Keane, and each of them, with full power of
substitution, are hereby appointed by the signatory of this Proxy to vote all
shares of UNOVA, Inc. Common Stock entitled to be voted by the signatory at
the Annual Meeting of Shareholders to be held on May 7, 1999, or at any
adjournment thereof, on the matters set forth on the reverse side in
accordance with any directions given by the signatory and, in the discretion
of such proxy holders, on all other matters that may properly come before the
Annual Meeting or any adjournment thereof.
IMPORTANT - PLEASE SIGN AND DATE ON THE REVERSE SIDE AND RETURN PROMPTLY.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED ON
THE REVERSE SIDE. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR
PROPOSALS 1, 2, AND 3.
FOLD AND DETACH PROXY CARD HERE
[LOGO]
YOUR VOTE IS IMPORTANT
YOU CAN VOTE IN ONE OF TWO WAYS:
1. Mark, date, sign, and return your proxy by detaching the top portion of
this sheet and returning it in the enclosed envelope.
OR
2. Call toll free 1.800.840.1208 on a touch tone telephone and follow the
instructions on the reverse side. There is NO CHARGE to you for this call.
<PAGE>
<TABLE>
<S><C>
UNOVA, INC. ANNUAL MEETING OF SHAREHOLDERS PLEASE MARK YOUR /X/
VOTES LIKE THIS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ITEMS 1, 2, AND 3:
- ----------------------------------------------------------------------------------------------------------------------------------
1. Election of Directors: FOR all nominees listed below: / / WITHHOLD AUTHORITY to vote for all nominees listed below: / /
Nominees to serve for a three-year term that expires in 2002: (01) Stephen E. Frank, (02) Claire W. Gargalli, and (03) Orion L.
Hoch.
To withhold authority to vote for any individual nominee, write that nominee's name in
the space that follows:
-----------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
2. Approval of UNOVA, Inc. 1999 Stock 3. Approval of UNOVA, Inc. Management FOR SHAREHOLDERS WITH MULTIPLE ACCOUNTS ONLY:
Incentive Plan: Incentive Compensation Plan:
FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN Mark this box to discontinue receipt of
/ / / / / / / / / / / / an Annual Report for this account / /
- ----------------------------------------------------------------------------------------------------------------------------------
UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED "FOR" ITEMS 1, 2, AND 3.
/ / I (WE) PLAN TO ATTEND THE ANNUAL MEETING OF
SHAREHOLDERS ON FRIDAY, MAY 7, 1999.
VOTING BY TELEPHONE ON OUR TOLL-FREE NUMBER WILL EXPEDITE
THE TALLY OF THE VOTES. PLEASE SEE THE INSTRUCTIONS BELOW.
SIGNATURE SIGNATURE DATE
--------------------------------------- ----------------------------- -------------------
NOTE: PLEASE SIGN YOUR NAME AS IT APPEARS HEREON. JOINT OWNERS SHOULD SIGN. WHEN SIGNING AS ATTORNEY, ADMINISTRATOR, TRUSTEE, OR
GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH.
FOLD AND DETACH PROXY CARD HERE
-----------------------------------------------
VOTE BY TELEPHONE
QUICK *** EASY *** IMMEDIATE
-----------------------------------------------
Your telephone vote authorizes the named proxies to vote your shares in the same manner as if you marked, signed, and returned
your proxy card.
CALL OUR TOLL FREE NUMBER 1.800.840.1208 ON A TOUCH TONE TELEPHONE AT ANY TIME OF THE DAY OR NIGHT. THERE IS NO CHARGE TO YOU
FOR THIS CALL.
YOU WILL BE ASKED TO ENTER THE 11-DIGIT CONTROL NUMBER LOCATED IN THE BOX IN THE LOWER RIGHT HAND CORNER OF THIS FORM.
- --------------------------------------------------------------------------------------------------------
OPTION 1: To vote as the Board of Directors recommends on ALL proposals, press 1.
- --------------------------------------------------------------------------------------------------------
WHEN ASKED, PLEASE CONFIRM BY PRESSING 1.
- --------------------------------------------------------------------------------------------------------
OPTION 2: If you choose to vote on each Proposal separately, press 0. You will hear these instructions:
- --------------------------------------------------------------------------------------------------------
* PROPOSAL 1: to vote FOR ALL nominees, press 1;
to WITHHOLD AUTHORITY for all nominees, press 9;
to WITHHOLD AUTHORITY FOR AN INDIVIDUAL NOMINEE, press 0 and listen to the instructions.
* PROPOSAL 2: to vote FOR, press 1; to vote AGAINST, press 9; to ABSTAIN, press 0.
* PROPOSAL 3: to vote FOR, press 1; to vote AGAINST, press 9; to ABSTAIN, press 0.
WHEN ASKED, PLEASE CONFIRM YOUR VOTE BY PRESSING 1.
- -------------------------------------------------
PLEASE DO NOT RETURN THE ABOVE PROXY
CARD IF YOU HAVE VOTED BY TELEPHONE
- -------------------------------------------------
</TABLE>
