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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 20-F
/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1997
1-12398
(Commission file number)
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ELSAG BAILEY PROCESS AUTOMATION N.V.
(Exact name of registrant as specified in its charter)
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Netherlands
(Jurisdiction of incorporation or organization)
World Trade Center
Schiphol Boulevard 157
1118 BG Luchthaven Schiphol
The Netherlands
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the
Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Shares with a New York Stock Exchange
par value of NLG 1.00 each
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Securities registered or to be registered pursuant to Section 12(g) of the
Act:
None
(Title of Class)
------------------------
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
(Title of Class)
------------------------
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report.
29,201,981 Common Shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17_____ Item 18 _X_
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TABLE OF CONTENTS
Page
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PART I
ITEM 1. Description of Business 1
General 1
Process Automation Solutions 1
Strategic Acquisitions 3
Industry Overview 3
Company's Position Within the Industry 4
Company's Business Strategy 5
System and Product Offerings 6
Industries Served 10
Geographic Markets 11
Research and Development 13
Sales and Marketing 14
Employees 14
Patents, Trademarks and Licenses 15
Competition 15
Risk Factors Relating to the Company and Cautionary Statement 16
Pursuant to Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995
ITEM 2 Description of Property 23
ITEM 3 Legal Proceedings 25
ITEM 4 Control of Registrant 27
ITEM 5 Nature of Trading Market 28
ITEM 6 Exchange Controls and Other Limitations Affecting Security Holders 28
ITEM 7 Taxation 28
The Netherlands 29
United States of America 31
ITEM 8 Selected Consolidated Financial Data 32
ITEM 9 Management's Discussion and Analysis of Financial Condition and 35
Results of Operations
ITEM 9A Quantitative and Qualitative Disclosures About Market Risk 35
ITEM 10 Directors and Officers of Registrant 38
ITEM 11 Compensation of Directors and Officers 39
ITEM 12 Options to Purchase Securities from Registrant or Subsidiaries 39
ITEM 13 Interest of Management in Certain Transactions 39
PART II
ITEM 14 Description of Securities to be Registered 41
PART III
ITEM 15 Defaults Upon Senior Securities 41
ITEM 16 Changes in Securities and Changes in Security for Registered Securities 41
PART IV
ITEM 17 Financial Statements 41
ITEM 18 Financial Statements 41
ITEM 19 Financial Statements and Exhibits 42
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PART I
Item 1. Description of Business
BUSINESS
General
Elsag Bailey Process Automation N.V. (together with its subsidiaries, the
"Company") is a leading worldwide supplier of automation solutions and
technologies serving the continuous process and semi-continuous (batch)
manufacturing process industries. The Company's main lines of business are:
process automation systems, which include traditional distributed control
systems integrating hardware and software products for the control and
automation of process manufacturing facilities, as well as process
automation systems integrateable with enterprise management applications
such as financial and resource planning, in each case including related
professional services;
instrumentation products, which monitor, measure and control process
variables such as flow, pressure, level and temperature; and
analytical products, which measure the chemical and physical properties of
liquids, gases and other process materials.
The Company operates globally with more than 40 operating units in 25
countries, with a majority of the Company's sales to North America and Germany.
The Company serves customers primarily in the electric power, chemical,
pharmaceutical, petrochemical, oil and gas, metals and minerals, pulp and paper,
water and wastewater, food and beverage and other process industries. The
Company believes it is the leading supplier of process automation systems to the
electric power industry in the United States, Canada, Japan and certain
countries in Europe. In addition, the Company believes it is the world's largest
(based on revenues) provider of analytical products and of gas chromatographs,
temperature measurement products and magnetic flow meters. The Company has
developed a large worldwide installed base of process automation systems and
products from which it has traditionally derived a significant portion of its
revenue through the sale of additional products and systems, upgrades,
enhancements, replacement parts and associated services.
Process Automation Solutions
The Company's objective is to be a "one-stop-shop" global supplier of
process automation solutions. Accordingly, the Company offers systems that range
from control of a single variable to software intensive plant wide and
enterprise wide systems, including a broad range of process instrumentation and
analytical products as well as related professional services, all configured to
best serve a customer's automation requirements. The Company's technologies
benefit its customers through improved cost, quality, efficiency, safety and
regulatory and environmental compliance.
Process Automation Systems. The Company's largest (based on contribution to
revenue) and most rapidly evolving product line is its process automation
systems through which the Company has become a global provider of automation
solutions. The Company's process automation systems offerings consist of
integrated hardware and software components which can operate with the Company's
measurement and control products. These real-time, reliable process automation
systems can control a single variable or thousands of interrelated variables
such as temperature, pressure, flow and product quality, typically found in
complex manufacturing environments. In continuous and batch manufacturing
processes, frequent and accurate measurements of key process variables are
essential to achieving predictable product quality and cost, process efficiency
and regulatory compliance. The Company supplies its systems
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to a wide range of customers on two compatible platforms: Symphony
(large-and-medium-sized systems) and Freelance 2000 (smaller systems).*
o Symphony Enterprise Management System. The Company has announced the
introduction of its Symphony Enterprise Management and Control System
to meet the increasing demand of its customers for integration of
traditional physical process controls with higher level business
management and production control functions, such as finance,
manufacturing execution and enterprise resource planning. Symphony is
being introduced in stages with shipments of certain components having
begun in mid-1997. The Company believes that as additional Symphony
system components and services are introduced, Symphony will be a
state-of-the-art, "next generation" process automation platform.
Symphony is intended both to consolidate the Company's diverse process
automation offerings into a single compatible product line while
maintaining forward and backward compatibility with installed systems
and to provide significant new functionality offering full scale
integration of a customer's manufacturing process into an entire
enterprise management system. The Company has formal strategic
alliances with applications software suppliers, including IBM,
Microsoft, Hewlett Packard and Aspen Technology, to enable it to
provide a fuller range of enterprise management solutions.
o Freelance 2000/Symphony Solo Systems. The Company introduced its
Freelance 2000 compact control system globally in 1995 to provide a
cost-efficient automation solution for smaller, less complex
applications. While complementing the Company's larger systems,
Freelance 2000 is also competitive with simpler programmable logic
controllers ("PLCs") requiring a customized link to a PC as it allows
systems integrators and do-it-yourself customers to implement
automation solutions with minimal assistance from the Company. In
addition to being a stand-alone system, Freelance 2000 can be
integrated into Symphony system configurations and thereby provide
customers with the ability to expand into the Company's largest
system. The Company's soon-to-be announced Symphony Solo system which
is based on Freelance 2000 will be integrated on a plug-in basis.
Freelance 2000 is sold to customers such as the chemical,
pharmaceutical, food and water and wastewater industries, users of
small industrial boilers and smaller industrial plants.
The Company's business requires professional services to analyze and design
systems and applications and to configure, test, install and maintain complex
system configurations including increasingly sophisticated products. Such
services become more important in view of the trend to more broadly integrated,
and even enterprise wide, systems as exemplified by the Company's Symphony
platform. Most professional services are provided to customers through the
Company's sales of systems and products.
Instrumentation Products. The Company's broad line of field and control
room instruments measure, indicate and control process variables such as flow,
pressure, differential pressure, level and temperature. The Company's
instrumentation products include a variety of "smart" devices which contain
"on-board" micro-processor-based electronics that permit utility functions and
advanced calculations to be carried out in the field, thus providing faster
response time. The Company has recently introduced new in-line mass flow meter
products to supplement its leadership in magnetic flow meters as well as a new
line of smaller, configurable temperature measurement devices to build on its
existing leadership in temperature measurement products. The Company's
instrumentation products are sold across the range of the Company's customers
both on a stand-alone basis to customers such as municipalities and the
processing industries and as components of process automation systems sold to
customers generally.
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* SYMPHONY(TM), SYMPHONY SOLO(TM), FREELANCE 2000(TM), ADVANCE OPTIMA(R),
ADVANCE MAXUM(TM), NETWORK 90(R), INFI 90(R) OPEN(TM), CONTRONIC(R), DCI SYSTEM
SIX(R), RANGER(R), MICRO DCI(TM), PROTRONIC(R), TOTALFLOW(R), CONTRANS I(R),
BAILEY(R), TBI BAILEY(TM), H&B(R) and SENSYCON(R) are trademarks of the Company.
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Analytical Products. The Company offers a broad line of products for the
chemical and physical analysis of liquid, gas and other process streams. These
products include continuous gas analyzers, spectrometers and gas chromatographs.
The Company believes that it is the world's largest supplier (in terms of
revenues) of process analytical products. These analytical devices, which may be
integrated with automation and control systems, contribute to improvements in
plant operations by providing precise, sample-based measurement of process
compounds. The Company's new Advance Maxum process gas chromatograph and its
Advance Optima gas analysis system are integrated platforms which standardize
key modular elements that reduce cost and improve ease of use and maintenance.
These products are sold as systems components or directly to customers,
primarily chemical and petrochemical companies, laboratories and research
institutions.
Strategic Acquisitions
Since 1990, the Company has pursued a strategy of becoming a "one-stop
shop" full automation supplier to the process industries. In implementing this
strategy, the Company has made several significant strategic acquisitions aimed
at strengthening its position in key industrial and geographic markets and
enhancing its product offering and technology base. In August 1994, the Company
acquired Fischer & Porter Company ("F&P"), a leading supplier of flow
measurement, panel-mounted controller products and process control systems. The
Company's largest strategic acquisition was its January 1996 acquisition of the
Hartmann & Braun group of companies ("H&B"), a leading supplier of analytical,
instrumentation and process automation systems. The acquisition provided the
Company with H&B's broad product offerings and technologies, its strong presence
in Europe, particularly in Germany, and its market-leading position in
analytical products, which complemented the Company's geographic and industrial
capabilities.
Since the H&B acquisition, the Company has focused on integrating the
operations of H&B with those of the rest of the Company, including the assets of
Elsag Bailey Automazione Processi S.p.A. (the "Italian Licensee") which the
Company purchased from Finmeccanica S.p.A. ("Finmeccanica") in December, 1996.
The Company has completed its initial integration plan, but various adverse
factors affecting H&B, including the continued softness of the German economy
generally and a slowdown in investment by the European, and particularly the
German, electric power sector as well as a fall-off in large orders which were
traditionally a significant component of H&B's business, has caused the Company
to adopt further measures to rationalize the business of H&B. The Company has
also accelerated its program of divesting non-core businesses and assets,
including the following recently completed sales: Fluid Data, an analytical
business overlapping that of H&B; its ultraviolet disinfection and chlorination
product lines; its 23% investment in Impact Systems, Inc., a NASDAQ quoted
company with which the Company will have a continuing strategic alliance for
pulp and paper automation systems; various facilities including its $18 million
sale and partial leaseback of a facility in Pennsylvania and smaller facilities
in the Netherlands and South Africa.
Industry Overview
The process automation market includes process automation systems, control
instrumentation and analytical products for the measurement and control of
continuous and batch processes. Systems serving today's process automation
market requirements are generally based on computer and communications hardware
and software technologies which are significantly enhanced to meet the real-time
and high reliability needs of industrial automation applications. System
components are physically distributed throughout a plant or across multiple
plant sites, and are linked by high speed digital communications to operation
centers. From these centers operators may observe and directly interact with a
single control variable, a "unit" operation, groups of units, a whole plant-site
or multiple plant-sites.
The worldwide reach of customers' operations, and their requirement for
fully integrated information systems has increased the need to provide customers
with complete solutions, encompassing process control systems, instrumentation
devices and advanced software applications that ultimately tie in with
enterprise level functions such as resource planning and finance. Process
automation customers are demanding more sophisticated solutions to provide
enhanced productivity and cost savings while at the same time improving product
quality in their manufacturing
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operations. Process control decisions are increasingly made in the field by
smarter instrumentation, thereby increasing speed and freeing operation center
processors for higher level functions. Additionally, in light of the rapid pace
of technological development, customers are seeking open systems compatible with
different vendors' products and services representing a wide range of computer
hardware platforms and third party software. These customers are increasingly
seeking to outsource responsibilities for tasks that are not part of their core
competencies and, as a result, they are looking to process automation suppliers
for assistance in engineering their plants and optimizing their processes. In
addition, environmental regulations in the United States, such as those issued
under the Clean Air Act, and in other countries have increased the demand for
process automation both for more detailed information regarding emissions and
for control strategies that improve regulatory compliance.
Company's Position Within the Industry
Within its industry, the Company believes that it is well placed as a
global supplier of automation solutions by virtue of a number of factors,
including the following:
o Worldwide Market Position. The Company is a leading worldwide supplier
of a broad line of process automation systems and instrumentation
products and, the Company believes, the world leader in sales of
temperature measurement products and magnetic flow meters as well as
analytical products. In addition, the Company has a strong market
position in certain specific industries such as electric power, and
certain specific products such as magnetic flow meters and gas
chromatographs. The Company has gained its competitive position
through a number of strategic acquisitions, technologically-advanced
products, wide distribution of its manufacturing, engineering and
sales efforts through more than 40 local companies in more than 25
countries and strong customer relations.
o Recurring Revenues from Installed Base. The Company has historically
derived a significant portion of its revenues from the sale to
existing customers of additional products and systems as well as
upgrades, enhancements, replacement parts and maintenance and other
services. The Company designs its systems with both "forward and
backward" compatibility to enable its customers to acquire advanced
functionality and technology in an evolutionary manner, thereby
extending the useful life of a customer's initial investment and
making it more attractive for customers to buy incremental upgrades
and enhancements.
o Solutions Capabilities. Pursuant to its strategy of being a
"one-stop-shop" supplier of process automation solutions, the Company
offers a broad range of products and professional services in each of
its lines of business, including a full range of systems from the
smallest, controlling a single variable, to the largest multi-plant,
enterprise wide systems. In addition, the Company has strategic
alliances with a number of applications software and hardware
suppliers such as IBM, Microsoft, Hewlett Packard and Aspen Technology
to increase the integration and marketability of the Company's
Symphony offerings with such suppliers' products. While the Company is
well known for its large scale systems for major industrial processes
and its medium sized systems for batch processing and other
applications, its Freelance 2000 systems, which compete with PLCs and
PCS for use in smaller applications, competitively address a
substantial market of water and wastewater treatment, small chemical
and pharmaceutical plants and users of small boilers.
o Diversity of Revenue Base. The Company's revenue base is widely
diversified by geographic region, industries served and product line.
The market served by the Company is worldwide, including the Americas,
Germany, the rest of Europe, the Middle East and East Asia. The
Company sells systems, instrumentation and analytical products and
offers related professional services to customers in the electric
power industry, the basic and special chemical, petrochemical and
pharmaceutical industries, the oil and gas industry and other process
industries such as metals, mining, cement, pulp and paper and food and
beverage.
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o Market Recognition and Reputation for Quality. The Company has
achieved a market leadership position principally on the basis of the
quality, price and reliability of its products and services, and its
applications expertise derived from its experience and knowledge of
its customers' industrial processes, as well as its ongoing service
and training relationships with customers. The Company's established
brands in their respective markets include Bailey, Hartmann & Braun,
Bomem, Applied Automation, Fischer & Porter and Sensycon. The
Company's principal facilities have achieved ISO 9001 certification.
The Company expects its new Symphony and Advance Maxum offerings to
enhance the Company's established reputation and market recognition.
o Strategic Alliances. The Company has established strategic alliance
agreements with a number of large global customers , including, among
others, Boise Cascade, Detroit Edison, DuPont, Georgia Pacific, LTV
Steel, Daimler-Benz and Hoechst. These strategic alliance agreements
are cooperative agreements that increase the Company's contact with
its customers and its ability to apply effectively it products and
services to the customers' process automation requirements. The
Company's strategic alliance agreements have generated substantial
revenue while helping to limit the Company's marketing costs.
o Extensive Worldwide Sales and Service Organization. The Company has
developed an extensive worldwide sales and marketing network to carry
out its delivery of process automation solutions. Each of the
Company's local operating units employs a direct sales force and
utilizes sales and project engineers to market and sell the Company's
systems, as well as certain instrumentation, analytical devices and
services, within the local market. The Company also aggressively
markets its products through an international network of over 50 sales
representatives and distributors. The Company has 24-hour-a-day
service support, including its German-based SIRIUS computer system
which makes remote configuration and diagnosis of a system available
online, and intends to establish a similar service center in
Wickliffe, Ohio.
Company's Business Strategy
The Company's business strategy includes the following key elements:
o Exploit Global Presence as an Integrated Process Automation Solutions
Provider. The Company's strategy remains one of being a global
"one-stop-shop" supplier of process automation solutions that range
from systems for small dedicated manufacturing processes to plant-wide
and multi-plant site configurations, and include a broad offering of
instrumentation and analytical products. The Company plans to maintain
a leading position in the electric power market in the United States
and in various European and Asian markets to be in a position to
capitalize on the anticipated turnaround of those markets. The Company
believes that Symphony represents a significant advance in process
automation technology, and will continue its focus on marketing
Symphony as a solution provider for customers worldwide. Symphony is
also easily integrated with Freelance 2000, the Company's compact
control system specifically designed to meet the requirements of
smaller, less complicated processes. Their compatibility permits
Freelance 2000 customers to expand into the Company's Symphony
environment and the forthcoming Symphony Solo will extend the downsize
scalability of Symphony. By leveraging its integrated "one-stop-shop"
product offering as well as its global distribution network, the
Company expects to be able to capitalize on a number of growth
opportunities, including (i) a growing market for Freelance 2000, (ii)
the recently released new analytical products Advance Optima and
Advance Maxum, (iii) increased environmental concerns outside the
United States, as evidenced by the recent Global Climate Treaty, which
are addressed by the Company's analytical offerings, and (iv) the
expansion of sales in selected emerging markets, primarily in South
America and Asia.
o Maintain Technical Leadership in Core Product Lines. Consistent with
the Company's philosophy of "evolution without obsolescence," the
Company will continue to upgrade existing product lines, and its
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primary technological focus will continue to be the development and
implementation of optimal technology for the Symphony and Freelance
2000 product lines, including through the Company's development of the
fully integrated Symphony Solo version of Freelance 2000. Management
believes that growth in customer demand for technologically advanced
integrated systems will require it to focus on development of
increasingly sophisticated software and hardware. Accordingly, the
Company intends to continue to devote a significant amount of its
resources to research and development as a primary means of developing
new products and systems as well as integrating, enhancing and
upgrading its existing product lines.
o Continue Improvements in Operating Efficiencies. The Company is
committed to the optimization of its facilities and employment levels.
The Company has already taken major steps to reduce employment levels,
particularly in high labor cost countries such as Germany, divest
peripheral businesses such as its recent sale of Fluid Data's
overlapping analytical business and the Company's ultraviolet
disinfection and chlorination business and more efficiently employ its
facilities as with its recent sale and partial leaseback of a facility
in Pennsylvania. The Company expects to rationalize its operations
further to reduce costs. Integration of the Company's product lines,
exploiting synergies between operating units and global employment
reductions should result in increased efficiencies. The Company plans
to further decrease operating costs by seeking lower prices for its
materials through global sourcing as well as outsourcing to other
service providers non-key functions. The Company will continue to
pursue strategic alliances with key customers to generate more revenue
while reducing marketing costs. Also, the Company intends to realize
cost savings by integrating its product distribution network in
Europe, standardizing its management information systems, and pooling
its research and development activities, as well as certain
engineering and service efforts.
System and Product Offerings
The Company derives its revenues principally from the sale of process
automation systems and related professional services, instrumentation and
analytical products. The following table sets forth the percentage of the
Company's bookings for 1996 and 1997 for each of its product lines (products and
services sold as parts of systems being included within systems bookings).
BOOKINGS BY PRODUCT LINE
1996 1997
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Process Automation Systems 60% 57%
Instrumentation Products 27% 29%
Analytical Products 13% 14%
Process Automation Systems
The Company was an early leader in distributed control systems technology,
introducing its Bailey Network 90 and H&B Contronic systems product lines in the
early 1980's. The Company's newest systems product lines, introduced in 1995 and
1997 respectively, are the Freelance 2000 and Symphony Enterprise Management and
Control System. Symphony Solo is to be introduced in 1998. Symphony represents a
significant extension to and enhancement of the Company's more traditional
system product offerings, which include the Company's large INFI 90 Open and
Contronic S systems, its mid-range DCI System Six, and its smaller Freelance
2000 and Micro DCI systems. The Company's systems integrate instrumentation,
computer and communications hardware, and applications software developed and
manufactured by the Company as well as by third parties. A focus on open control
systems has led to the development
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of specific features and functions which permit the Company's systems and
products to communicate and work together with third party automation systems.
Reinforcing the Company's strategy of "evolution without obsolescence," the
Symphony system is a "next generation" process automation system platform which
will consolidate the Company's diverse systems offerings into one common
comprehensive system platform to provide enterprise management and control and
increase functionality. Symphony will also enable the Company's substantial
installed base of different large and medium sized system platforms to merge
into a common enterprise automation platform. The four principal areas of
Symphony in which new or enhanced components and services will be released from
time to time are Plant Management and Control (networking, communications), Area
Management Control (controllers, input-output interfaces), Engineering,
Operation and Maintenance Tools (tools to configure and operate the system) and
Human System Interface (consoles and related products).
The Company's Freelance 2000 is a compact control system designed to
exploit the growing market for control systems for smaller, less complicated
processes. Target customers are small chemical and pharmaceutical plants, the
water and wastewater industry, the food and beverage industry and users of small
boilers. The Company expects Freelance 2000 to address the "PLC plus PC" market,
where labor intensive systems integration is typically required to tie standard
PLCs together with PC-based human interface and applications. The Freelance 2000
system can either be sold on a stand-alone basis or can be applied as an
integrated part of a Symphony Enterprise Management System. This integration,
which will be announced in 1998 as Symphony Solo, will extend downsize
scalability to offer a competitive solution to the Company's systems' customers.
The least expensive and simplest to deploy of the Company's control system
products are the Micro DCI and Protronic which are used for less complicated
processes. These lines of panel mounted controllers provide single loop control
for stand-alone applications where networked solutions are typically not
required.
As part of its systems product portfolio, the Company provides
market-specific application solutions. For example, the Ranger suite of software
products is an energy management system ("EMS") and supervisory control and data
acquisition ("SCADA") solution for the power distribution market. The Company
also provides advanced turbine control hardware and software. Together, these
solutions augment the systems, instrumentation and analytical products of the
Company to provide a broad range of supply for the global power generation
market.
An increasing focus of the Company's professional service activities is the
integration of its traditional process controls with business management and
economic controls and other production automation systems such as finance,
manufacturing execution and management decision support systems. The Company has
developed a design capable of integrating such enterprise level solutions into
its Symphony system's architecture, an architecture which can encompass a
customer's entire business enterprise. By tightly linking the use of process and
manufacturing data with business management and analysis systems, the Company
helps its customers to achieve greater manufacturing flexibility, improved
productivity, enhanced financial performance and greater cost controls. For
example, as part of this strategy, from 1995 to 1997 the Company: entered into
supply arrangements with Digital Equipment and Hewlett-Packard for workstation,
server and networking technologies; entered into a licensing agreement with
Intuitive Technology Corporation for network connectivity software; entered into
a cooperation agreement with SAP A.G. to develop interfaces between the
Company's systems and modules of SAP's R3 software system; entered into a
licensing agreement with Fulcrum Technologies Inc. to support client-server text
retrieval; and expanded an alliance with Aspen Technologies for data management
and multi-variable control software. Complementing its research and development
in the information technology field, the Company has pursued, and intends to
continue to pursue, strategic agreements with a number of third-party
application software suppliers to enable it to provide a full range of
enterprise management and control solutions.
The Company is developing systems support centers in Europe, the Americas
and the Asia/Pacific region to deliver a unified approach to its solutions
business. In Germany, for example, the Service Division of H&B consists of
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the respective local organization and the "Service Center Europe," a
Frankfurt-based organization which houses central service professionals, the
call entry center, repair facilities and a parts warehouse. A similar service
center is also being planned for Wickliffe, Ohio.
As part of its professional services, the Company provides a variety of
applications software packages and implementation services which assist
customers in meeting application-specific requirements and demands by government
regulators for environmental compliance and documentation. Such software and
service packages are designed to be compatible with the Company's systems and
instrumentation products.
Instrumentation Products
The Company offers a broad line of field and control room instruments
marketed under the Bailey-Fisher & Porter, TBI Bailey, Sensycon and Hartmann &
Braun names. These include devices to measure, indicate and control process
variables such as flow, pressure, differential pressure, level, temperature, pH
and conductivity. The Company's instrumentation product offering includes a
variety of "smart" devices which contain "on-board" microprocessor-based
electronics. These devices permit utility functions and advanced calculations to
be carried out in the field providing faster response time. "Smart" utility
functions such as diagnostics, troubleshooting, calibration, configuration,
signal conditioning and linearization (conversion of basic signals to meaningful
information) are performed remotely via digital communication with the process
controller, reducing the need for field site visits by technicians. Advanced
calculation of values such as flow, level, pressure and temperature is conducted
by the "on-board" microprocessor, streamlining communications with the host
system. These products are sold both on a stand-alone basis and as components of
process automation systems.
Flow Measurement Products. The Company believes it is a leading supplier of
magnetic flow meters in the European and North American markets. Flow
measurement products include devices based on electromagnetics, Coriolis flow,
vortex shedding and other principles which accurately indicate the flow of
process liquids, gases or steam, complemented by specialized products for
measuring flows in partially filled pipes, precision dosing and dispensing
systems and products which measure flow based on the energy content of natural
gas and other hydrocarbon products. The Company has recently introduced a new
state of the art, in-line Coriolis mass flow meter line.
Temperature Measurement. The Company's wide range of temperature
measurement products includes temperature element sensors, and transmitters as
well as signal conditioning equipment, intelligent instruments and a sensor-head
temperature transmitter, enabling it to provide a complete measurement product
range. The Company has recently introduced a new line of smaller, configurable
head-mounted temperature devices. The Company believes it is a leading supplier
of temperature measurement products. The temperature measurement line includes
both integrated and stand-alone sensors for process fluids and gases, boilers
and furnaces, exhaust streams and moving equipment.
Controllers. The Company's controller offerings cover the entire process
control spectrum from simple PLC solutions to high level programmable process
control stations. All of these controllers can interface with the Company's
process automation systems.
Totalflow. The Company believes it is a market leader in the United States
with its systems (including instruments) for gas quantity measurement, and has
initiated actions to penetrate markets in Europe, the Middle East and Southeast
Asia.
Process Interface/Signal Conditioning. Contrans I, a process interface
based on advanced technology, provides a complete signal conversion product
family.
Pressure Transmitters. The Company manufactures a broad range of both smart
and conventional devices, developed jointly by its U.S., German and French
units, to varied international standards. With the acquisition of H&B,
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the Company has become a market leader in Germany and a major supplier in Europe
of pressure and differential pressure transmitters. These pressure transmitters
are designed to be reliable for different process applications under extreme
conditions.
Final Control Elements. These devices include electric, pneumatic, smart
and conventional positioners and actuators which provide remote indication and
positioning of valves and dampers. The Company's "smart" final control elements
feature intelligent, on-board electronics which perform more functions directly
at the process level. Control valves are marketed by the Company under a
strategic business agreement with Valtek International, a subsidiary of The
Duriron Company.
Liquid Analysers. The Company's liquid analysis products permit monitoring
and control of pH, conductivity and oxidation/reduction potential of process
liquids, utilizing solid-state electronics and highly-durable sensors for long
service life.
Recorders and Indicators. The Company provides a broad line of recorders
and indicators to the process industries. These include line, point and video
advanced graphical devices, including both paper and paperless units.
Analytical Products
By virtue of recent acquisitions, particularly that of H&B, the Company
offers a broad, well-established line of products for the chemical and physical
analysis of liquid, gas and other process streams. These products include
continuous gas analyzers, spectrometers and gas chromatographs. The Company's
combustion analysis products monitor the efficiency of combustion processes
whether burning coal, oil, or natural gas, and determine the constituents of
flue gas discharge. The Company believes that collectively, these technologies
make it the world's largest supplier of process analytical products. These
analytical devices, which may be integrated with DCSs and other control systems,
contribute to improvements in plant operation by providing precise, sample-based
measurement of process compounds.
The Company has analytical systems integration capability and considers
itself a leader in the field of multi-component analyzers. The Company is
equally committed to providing remote service capabilities. For over a decade
the Company has been offering communication capabilities that allow each
analyzer in a system to intercommunicate freely and to supply data to a central
maintenance point.
The chemical and petrochemical industries constitute the primary market for
the Company's analytical products and the Company also has significant sales to
the power generation and metals and minerals industries. In addition, the
Company also provides a broad range of analytical devices for the research and
laboratory markets, including products for raw material identification, tools
for analysis of polyatomic molecules, and systems for monitoring the composition
and equality of molten metals.
Continuous Analyzers. Continuous analyzers have historically been the core
of the analytical product offering, sold mainly to the power generation,
chemical and metals and minerals industries in Europe, but now also in the U.S.
and Asia. Continuous analyzer products include infrared, oxygen, thermal
conductivity, ultraviolet and Flame Ionizing Detector (FID) analyzers. In 1996,
the Company introduced the Advance Optima system, a modular integrated platform
which standardizes the engineering control electronics and user interface for
multi-component measurement applications. Advance Optima can reduce costs by
permitting as many as six product-specific analysis modules to be operated and
controlled from a standard central interface.
Chromatographs. Chromatographs are used in the hydrocarbon processing
industry to determine the chemical composition of feed stock and process
liquids. In January 1998, the Company introduced its Advance Maxum gas
chromatograph, a completely modular system which can separate and identify
process chemical compounds in
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concentrations as low as the parts-per-billion range. The Company believes it is
a world leader in the chromatograph market, with a significant customer base in
the United States.
FTIR Analyzers. The Company's technologies for Fourier Transform Infrared
("FTIR") spectroscopy can provide simultaneous analysis of up to 30 process
components through advanced optical measurement technologies. FTIR technology
was traditionally used primarily for laboratory analyzers. The Company now
offers products for other uses such as the new FTIR octane analyzer, which
measures the octane content of blended gasoline more accurately than previous
methods. By combining the analyzer with gas chromatographs and control systems,
the Company has the capability to supply a complete blending control package to
oil and gas customers.
Industries Served
The following table sets forth the percentage of the Company's bookings for
1996 and 1997 attributable to each of the primary industry groups it serves.
BOOKINGS BY INDUSTRY GROUP
1996 1997
---- ----
Electric Power 28% 29%
Chemicals/Pharmaceuticals 16% 17%
Oil and Gas 13% 13%
Other 43% 41%
Electric Power. The Company is the leading supplier of process automation
equipment to the electric power industry in major markets throughout the world,
including the United States, Canada, Japan and various countries in Europe. The
Company's product offering includes controls and enhancements which help
utilities achieve maximum efficiency from gas and steam turbines as well as
steam generators used in electric power generation, and energy management
systems which help balance production of electric power with transmission and
distribution across utility grids. In addition, the Company offers a broad range
of field and control room instruments and analyzers for emission monitoring
designed for conventional power plants, combined cycle plants, nuclear plants
and industrial boilers.
The electric utility market is undergoing a dramatic restructuring on a
global basis as local power monopolies are giving way to diverse energy networks
and consortia. While new investment has been adversely affected by this trend,
the Company believes that the resulting competition will increase the value of
optimizing production and realizing cost-saving controls. In addition, these
changes are requiring more advanced automation for transmission and
distribution, as power is bought, sold, and traded among multiple utilities, and
then delivered through third-party networks.
Chemicals, Pharmaceuticals and Petrochemicals. The Company's advanced
processor modules and operator console platforms permit effective control and
monitoring of complex processes for the pharmaceutical and chemical industries
where strict product specifications and a high degree of quality control are
required. The Company's process control systems also provide the control,
measurement and documentation necessary to comply with strict environmental and
regulatory requirements. Along with advanced control strategies geared to
specific processes, the Company's offerings also include a wide range of
"recipe-based" equipment and software for automated batch processing, bringing
flexibility to chemical plants where a few basic ingredients may yield hundreds
of different end products. These systems facilitate quick product changeover by
archiving data on raw materials, formulations, and production configurations as
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repeatable "recipes." The Company also provides broad lines of analytical
solutions and instrumentation products to these industries.
Oil and Gas. The Company's capabilities in this industry relate primarily
to off-shore oil and gas production around the world. These capabilities include
a high degree of security for its engineered systems, including redundant
configuration of key control components, system checking and error-detection
techniques, and communications networks which isolate the control of specific
process areas in the event of an emergency. The Company has also developed
specialized control strategies for the distillation and blending of gasoline and
related products, intended to maximize the yield of marketable end products. The
Company also offers products that control the use by multiple suppliers of
common distribution channels, such as pipelines and tankers. The Company's first
large Symphony order was for a complex tank farm and oil distribution center in
Abu Dhabi. The Company's acquisition of H&B further enhanced the Company's
capabilities in this industry by providing, in addition to systems and
instrumentation, analytical products for the management of such processes as
gasoline blending, octane analysis, catalytic reformers and the control of
natural gas quality and BTU content.
Other Process Industries. In the metals and ceramics industries,
applications of the Company's products include processing operations for
aluminum, copper and other non-ferrous metals. The Company also supplies
numerous systems for the manufacture of cement which encompass crushing, mixing,
kiln operation and packaging steps. Related projects in the mining and ore
processing industries include controls for operations such as pelletizing,
smelting, bleaching and precious metal recovery. In the iron and steel
industries, the Company provides products, systems and services for applications
including blast and reheat furnaces, continuous casters, annealing and
electrogalvanizing operations. The Company also offers advanced controls and
software for more than 50 distinct paper-making processes, capitalizing not only
on concerns for cost and quality but also on the increased environmental
awareness of this global industry. The Company also offers millwide automation
and quality related controls for high speed paper machines.
The Company's capabilities for batch processing are of particular
significance in the food and beverage market. Recipe-oriented controls permit
the user to manufacture variations within a family of food or beverage products,
such as beer, soft drinks and processed food products, with minimal
reconfiguration of plant equipment or manual intervention. Additional
capabilities include food and beverage applications such as sugar refining and
fermentation processes. The Company also provides products, systems and services
to the water and wastewater treatment industry.
Geographic Markets
The Company operates globally through four principal regional divisions:
Americas, Germany, Asia Pacific and Europe/Rest of World. In response to the
need for more local executive management, in 1997 the Company internally
restructured its four principal regions (Americas, Germany, Rest of Europe and
Asia/Pacific) to better address local market needs. In each principal region, as
well as the principal country markets within them, the Company sells systems,
instrumentation and analytical products and offers related professional
services. The Company operates through more than 40 local operating companies,
located in 25 countries around the world. The local units are managed and
staffed by professionals native to their respective market and provide local
support and service. Core manufacturing is performed on a regional basis,
notably at units in Germany, the United States, Italy, Canada, Japan, France and
Singapore. Components are provided by the manufacturing sites to the local
operating units which provide assembly, configuration and professional services.
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The following table sets forth the percentage of the Company's bookings for
1996 and 1997 attributable to systems, products and services destined for each
of the Company's four principal regional markets.
BOOKINGS BY GEOGRAPHIC REGION
1996 1997
---- ----
Americas 28% 33%
Germany 28% 23%
Asia Pacific 13% 15%
Europe/Rest of World 31% 29%
Americas. Principal industries served by the Company's U.S. operating units
focus on serving U.S. customers in the electric utility, chemical and
pharmaceutical, oil and gas, municipal, pulp and paper and food and beverage
industries.
The Company is a leading supplier of process control systems in Canada and
has developed a strong export business, particularly to Latin America and
Southeast Asia. The Bomem subsidiary of the Company also provides continuous
analyzers (the core analytic product offering now enhanced by the Advance Optima
standard central interface) as well as Fourier Transform Infrared analyzers
(simultaneous analysis of up to 30 process components through optical
measurement technologies) and chromatographs (determine chemical composition),
both principally sold to the hydrocarbon processing industry including, for use
as a complete blending control package by oil and gas customers.
The Company's Brazilian and Venezuelan operating units primarily serve
their respective countries' large oil and gas industries. The Mexican operating
unit serves a Bailey installed base which dates back to 1958. Recent projects in
the Americas include controls for the power generation, chemical/petrochemical,
paper, steel and sugar industries.
Germany. With the acquisition of F&P and H&B, the Company significantly
expanded its operations in the important German market. The primary industries
served in Germany are the electric power generation, chemical and petrochemical,
pharmaceutical, steel, cement, oil and gas and food and beverage industries.
Asia/Pacific. In view of the geographical size of this region and to
improve its focus on critical markets within Asia/Pacific, the Company has
divided the region into two main areas: North Asia, comprised of China, Japan,
Korea and Taiwan; and South Asia, comprised of Southeast Asia, the Indian
Subcontinent and Australia.
The Company has been active in the Japanese market since 1952 and
established a Japanese joint venture in 1971. This joint venture has a large
share of Japan's utility boiler control market and has completed a number of
large projects for export to Southeast Asia and the Middle East. The Company has
been active in the Chinese market for more than 20 years and established a joint
venture in the People's Republic of China in 1989. Principal customers in China
are electric utilities and the glass, cement and steel industries.
In South Asia the Company has operations in Australia (established in 1969)
and Singapore (established in 1992), as well as joint ventures in India
(established in 1992) and Thailand (established in 1997). The Company's sales in
the region are principally to customers in the electric utility and
petrochemical industries. See "Risk Factors--Sales to East Asia."
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Europe/Rest of World. Within Europe (other than Germany), the Company has
extensive operations in Italy where it recently expanded its presence by
acquiring its prior licensee, and where the Company enjoys a major market
presence in the electric utility industry. The Company's French operations
manufacture and sell process transmitters both for the domestic and export
markets. The French operations also sell the Company's systems, instrumentation
and analytical products to customers in the electric utility, food and beverage,
metals and ceramics industries. The Company's U.K. operations have undertaken
major utility and off-shore projects in the People's Republic of China, Korea,
Indonesia and the Middle East. The Company's Norwegian subsidiary operates
throughout Scandinavia, with revenue generated principally from the off-shore
oil and gas production market, including several significant ongoing projects in
the North Sea region. In Eastern Europe the Company has subsidiaries in Russia,
Poland and the Czech Republic principally serving the energy and chemical
industries in these emerging markets.
Sales in the Middle East are principally to the oil and gas industry and
desalinization projects. Large systems sales are a primary focus of this market,
as well as products specifically designed for the oil and gas and petrochemical
industries. In South Africa, the Company's subsidiary sells systems and products
to customers in a variety of industries.
Research and Development
The Company coordinates its technology portfolio through the activities of
its three strategic centers: systems, instrumentation and analytical. Each
center is responsible for coordinating product management and R&D resources and
managing R&D activities in its area. Each center also manages its OEM and
strategic partner alliances with third party suppliers. In addition, the centers
cooperate on such shared objectives as connectivity and interoperability between
and among their respective products. The systems center operates five major and
five minor R&D centers located in the United States, Canada, Germany, Italy,
Japan and France. The instrumentation center operates R&D centers located in the
United States, Canada, Germany, Japan and France. The analytical center operates
R&D centers in the United States, Canada, and Germany.
The current focus of the Company's research and development activities is
the continued enhancement and evolution of each of its systems, instrumentation
and analytical products, evolving them to their respective "next generation"
technologies, all in support of the Company's "one-stop-shop" and enterprise
management goals. In this regard, the Company intends to sustain its research
and development spending to support the evolution of its product lines into the
Symphony system architecture. Likewise, the Freelance 2000 platform continues to
receive ongoing research and development support. This approach is intended to
yield increasing integration of the Company's product lines, resulting in fewer
products, more focused research and development, increased manufacturing
efficiencies, and improved product marketing and engineering practices.
For the years ended December 31, 1997, 1996 and 1995, respectively, the
Company's expenditures for research and development were $62.3 million, $66.2
million and $27.0 million, representing 4.1%, 4.1% and 3.2% of total revenues,
respectively. The 1997 amount excludes $5.4 million of restructuring costs
associated with terminated personnel. The 1996 amount excludes a $56.8 million
non-cash charge for in-process research and development purchased in connection
with the H&B acquisition and $6.3 million restructuring and integration costs
associated with terminated personnel in connection with the acquisition. In
addition, the Company capitalized software development costs of $15.2 million,
$9.3 million and $5.9 million in the years ended December 31, 1997, 1996 and
1995, respectively.
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Sales and Marketing
The Company markets and sells systems, instrumentation and analytical
devices and services worldwide. Each of the Company's local operating units
markets and sells the Company's systems plus certain instrumentation and
analytical devices and services within its own local market, typically the home
country of the operating unit, through a direct sales force. The principal
portion of a larger system is assembled and staged for customer acceptance prior
to delivery under the direction of a project management function at each unit's
head office. Freelance 2000 systems are sold to end-users and to value-added
resellers such as systems integrators. The Company utilizes independent
distributors principally for sales of certain instrumentation products and for
sales of analytical devices to certain industries.
Each local operating unit employs sales, marketing and technical personnel
who provide client support throughout system installation, startup,
commissioning and aftermarket service. Sales by an operating unit outside of its
home country are coordinated by international sales centers located in the
United States, Germany, Italy and Singapore. The Company and its local operating
units utilize sales, marketing and technical support personnel (including sales
engineers and project engineers) to carry out the Company's sales and marketing
activities.
The Company also maintains a network of over 50 international sales
representatives and distributors throughout the world in local markets in which
the Company does not directly operate.
Employees
As of March 25, 1998, the Company had approximately 11,360 employees
worldwide. The Company's employees are located in the following geographic
markets:
Americas........................................... 3,965
Germany............................................ 4,455
Asia/Pacific....................................... 760
Europe/Rest of World............................... 2,180
After the acquisitions of H&B in January 1996 and of Finmeccanica's process
automation business in Italy in December 1996, the Company undertook the process
of restructuring and integrating these operations into its own. This process
included a workforce reduction of approximately 2,300 employees worldwide
through 1997. The Company believes approximately 650 additional employees will
be terminated before the end of 1998.
Approximately 95% of the Company's German workforce is compensated in
accordance with agreements between various regional employer associations and IG
Metall, the union of metal and electric workers. These agreements are negotiated
annually. The German workforce covered by collective bargaining agreements
participates in a separate pension plan which is in addition to the plan which
covers those employees whose employment is not subject to collective bargaining.
Both plans provide monthly benefits, determined on the basis of the employee's
length of service, with vesting after 10 years of service. As permitted under
German law, such plans are unfunded. Workforce reductions following the
acquisition of H&B included reducing the workforce in Germany through March 31,
1998 by in excess of 1,600 employees. Reconciliation agreements were reached
with all of the workers' councils at the plants affected by the first round of
restructuring.
In the United States, approximately 480 of the Company's employees are
members of two recognized bargaining units of the United Auto Workers ("UAW"),
of which 226 are located at the Elsag Bailey, Inc. facility in Wickliffe, Ohio,
and 253 are located at the Bailey-Fischer & Porter facility in Warminster,
Pennsylvania. The employees in Ohio are
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covered by a bargaining agreement which expires on November 7, 1998. The
bargaining agreement covering the Warminster employees expires on April 30,
1999. Relations with the UAW have been generally satisfactory with no days lost
to strikes for the past ten years. Employees of the Company's operating units in
France, Italy and Mexico are covered by certain national and regional collective
bargaining agreements. The employees of the Japanese operating unit are members
of an independent bargaining unit covering only that company's employees, which
is not affiliated with any national Japanese labor union. Overall, the Company
believes that its relations with its workforce are satisfactory.
Patents, Trademarks and Licenses
As of March 31, 1998, the Company owned 212 U.S. patents and 591 non-U.S.
patents and had additional 44 U.S. patent applications and 398 non-U.S. patent
applications pending. The Company also relies on a combination of trade secret
and other intellectual property law, nondisclosure agreements and other
protective measures to establish and protect its proprietary rights in certain
of its products. As of March 31, 1998, the Company had 57 U.S. trademark
registrations and 1,731 non-U.S. registrations. Additionally, the Company had 41
U.S. trademark applications and 139 non-U.S. applications pending. The names
"Bailey," "H&B," "Applied Automation" and "Fischer & Porter" are registered
trademarks in the United States and many other countries. The Company intends to
continue to seek patents on its inventions used in its products and
manufacturing processes. Although in the aggregate its patents are of
considerable importance in the operation of its business, it is the opinion of
the Company that no patent related to a particular product is of material
importance when judged from the standpoint of its total business. The Company
protects its rights to its software through its license agreements with its
customers.
The Company believes that due to the rapid pace of technological change in
the process control industry, the technical expertise and experience of the
Company's personnel, new product development, product performance and market
recognition will be factors as important as legal protection of its proprietary
information in determining the Company's competitive position. In addition, the
laws of some countries do not protect proprietary rights in products and
technology to the same extent as do the laws of the United States. Although the
Company continues to implement protective measures and intends to defend its
proprietary rights vigorously, there can be no assurance that these efforts will
be successful.
Competition
The process automation industry is highly competitive globally and is
subject to rapid technological change. There are a number of other companies
which manufacture products that compete with all portions of the Company's
product line. Competitors include companies which principally specialize in
process control equipment, including Fisher-Rosemount, a unit of Emerson
Electric Co., the Industrial Automation & Control Division of Honeywell, Inc.,
Yokogawa Electrical, Johnson Yokogawa Corporation and The Foxboro Company, a
unit of Siebe plc, as well as divisions of major companies whose primary
activities are in other fields, including Siemens AG, ABB (Asea Brown Boveri
Ltd.) and CBS Inc. (the former Westinghouse Electric Corp.) In some specific
small-process applications, especially related to the Freelance 2000 business,
the Company competes from time to time with niche companies and PLC
manufacturers, such as Moore Products, Schneider Automation, a joint venture of
Daimler-Benz AG and Schneider S.A., and Allen-Bradley Co., a division of
Rockwell International Corp. With respect to sales of most instrumentation
devices, competition is extremely fragmented and includes both full-line and
specialty suppliers, as well as regional companies such as Endress & Hauser GmbH
& Co., GE Fanuc, Eurotherm Controls Ltd. and M.K. Juchheim GmbH & Co. However,
with respect to flow meters, the Company's two principal competitors are Krohne
Messtechnik GmbH & Co. KG and Endress & Hauser GmbH & Co., each of which has
significant financial resources. In addition to full line competitors, a large
number of smaller enterprises focused on specific technologies compete in the
analytical products market. The Company believes that competition in the process
control market will intensify in the future.
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As the software components of systems become increasingly important to
customers and as customers seek to integrate systems functionality into other
enterprise applications, the Company is facing increasing competition from
providers of enterprise software solutions, most of whom are more experienced
than the Company at designing, integrating, marketing and selling software. In
addition, the Company's traditional competitors have recently begun to acquire
software companies which bring new market presence and functionality or specific
applications to such competitors.
The Company competes principally on the basis of quality and reliability,
its experience and knowledge of its customers' industrial processes and its
related applications expertise, technological innovation, ease of system
configuration, product performance, engineering support, availability of
after-sale service and customer training, as well as price.
Risk Factors Relating to the Company and Cautionary Statement Pursuant to Safe
Harbor Provisions of the Private Securities Litigation Reform Act of 1995
This document contains "forward-looking" statements within the meaning of
the federal securities laws of the United States. These forward-looking
statements include, among others, statements concerning the Company's outlook
for 1998, the financial and technological benefits the Company expects to
receive from its newly introduced Symphony enterprise management and control
system, and other product introductions, the Company's expected earnings and
results, the continued restructuring of the Hartmann & Braun operations and the
realization of cost savings therefrom, the effect of foreign currency
fluctuations relative to the US Dollar, changes in the Company's rates or basis
of income taxation, management's belief as to the outcome of the City of Detroit
litigation, the anticipated costs of environmental compliance, market conditions
in Europe and Japan, the electric utility market in the U.S., the Company's
management of a competitive pricing environment, the Company's utilization of
tax assets (particularly in Germany), continued spending on North Sea oil
projects, the favorable trend in costs of purchased products and components,
cash outlays in connection with employee terminations in 1998 and 1999 and the
timing of those terminations, expectations as to near-term cash requirements,
the anticipated costs of addressing Year 2000 issues, and any other statements
concerning future plans, strategies or anticipated events or matters which are
not historical facts. Actual results and performance of the Company could differ
materially from those expressed in or implied by these forward-looking
statements as a result of a number of known and unknown risks.
Among the important factors that could prevent the Company form achieving
its goals - and cause actual results to differ materially from those expressed
in the forward-looking statements - include, but are not limited to, the
following risk factors: (i) increased dependence on large system contracts, (ii)
adverse economic conditions in the principal industries and geographical areas
to which the Company sells, particularly the effect of recent adverse economic
developments in East Asia, (iii) changes in market conditions, including the
effect of deregulation in the electric power industry, (iv) risk associated with
Company's investment and substantial operations outside of the United States,
particularly Germany, including those related to the local economic and market
conditions, exchange rate fluctuations, local regulatory requirements and
political factors, (v) timely introduction and acceptance by the process
automation markets of the Company's new Symphony enterprise management and
control system and other key product introductions, (vi) the ability of the
Company to successfully and timely complete the restructuring of Hartmann &
Braun operations, (vii) the effect on the Company's marketing efforts of
Finmeccanica's announcement of its intention to dispose of its interest in the
Company, (viii) the competitive nature of the industry and potential impact of
industry consolidation, (ix) the uncertainties and risks inherent in any
litigation to which the Company is a party and lack of assurances of a positive
outcome thereupon with particular reference to the City of Detroit litigation,
(x) effects of compliance with the changes in government regulations, with
particular reference to environmental regulations, (xi) changes in the Company's
rates or basis of income taxation and (xii) the uncertainties and risks
associated with resolving Year 2000 issues.
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These and other risks and uncertainties affecting the Company are also
discussed in other filings by the Company with the United States Securities and
Exchange Commission.
Uncertainty of Ability to Refinance Balloon Payments on Debt
The Company is subject to the risks associated with debt refinancing,
including the risk that its existing borrowings will not be able to be
refinanced at maturity on terms as favorable as the terms of its existing
indebtedness, or at all. The Company does not expect to have sufficient funds to
make all of the balloon payments of principal when due in January and April
1999. The Company's borrowings may come due sooner in the event of a disposition
by Finmeccanica of its interests in the Company. See Item 4. There can be no
assurance that the Company will be able to refinance its indebtedness or to
otherwise obtain funds by selling assets or by raising equity. The Company's
Cofiri Credit is currently supported by a Finmeccanica comfort letter, but there
is no assurance that Finmeccanica will continue to provide financial support to
the Company to facilitate any refinancing of its balloon indebtedness. See Item
13.
Restrictions Imposed by Indebtedness
The Company's syndicated credit agreement, as amended, with Bank of America
NT&SA and Merrill Lynch Capital Corporation, as managing agents ("B of A
Credit"), which terminates on January 14, 1999, when all amounts then
outstanding become due, contains covenants that, among other things and subject
to certain exceptions, restrict the ability of the Company to incur additional
indebtedness, pay dividends, prepay subordinated indebtedness, dispose of
certain assets, enter into sale and leaseback transactions, create liens, make
capital expenditures and incur certain investments or acquisitions and otherwise
restrict corporate activities. In addition, under the B of A Credit, the Company
is required to satisfy various financial covenants. The ability of the Company
to comply with such provisions may be affected by events beyond the Company's
control. The breach of any of these covenants could result in a default under
the B of A Credit and, therefore, the Cofiri Credit and the lenders could elect
to declare all amounts borrowed under such credits, together with accrued
interest, due and payable. See "Management Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources"
incorporated by reference from the Company's 1997 Annual Report.
Competition
The Company experiences substantial competition in each of its product
lines and geographical markets. Many of the Company's competitors have greater
financial resources than the Company, and as the industry continues to
consolidate, the competitive situation continues to evolve. The principal
factors affecting competition include technological proficiency, ease of system
configuration, reliability and functionality of hardware and software products,
applications expertise, engineering support and local presence, as well as
price. The Company believes that competition in the process automation industry
will further consolidate and intensify in the future. As the software components
of systems become increasingly important to customers and as customers seek to
integrate DCS functionality into other enterprise applications, the Company is
facing increasing competition from providers of enterprise software solutions,
most of which are more experienced than the Company at designing, integrating,
marketing and selling software.
Dependence on Large Systems Contracts
The Company derives a substantial portion of its revenues from large
systems contracts, which makes the Company's operating results more difficult to
predict. The attainment of such large orders, which are limited in number and do
not necessarily occur at regular intervals, is dependent on a variety of
factors, many of which are outside the Company's control. The revenues of the
Company would decline in the near term if the Company were unable to offset
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the impact on its results of operations resulting from the expiration of
existing contracts with new bookings of the same magnitude and profitability.
There can be no assurance that the Company will be able to obtain such large
contracts in the future. The average order size of the Company's bookings has
been declining in recent years. A substantial portion of the Company's business
is awarded through competitive bidding processes in which the Company agrees to
install a large, complex system on a fixed-price basis. As a result of the
nature of the competitive bidding process for large contracts, the Company's
business is potentially subject to cost overruns from time to time. In addition,
revenues and profits from large projects are booked under the percentage of
completion method of accounting over an extended period. To the extent the
Company's estimates of the percentage of completion of a project in a particular
period are impacted by adverse events in a subsequent period, the Company could
incur losses on projects that it had previously thought to be profitable.
Dependence on Certain Industries
In 1997, 30% of the Company's bookings were attributable to sales to the
electric power industry. Demand for large systems from electric utility
customers has not increased as anticipated. In addition, competition in sales of
large systems to electric utilities has intensified in recent periods. Many of
the other industries served by the Company, such as the pulp and paper, offshore
oil drilling and municipal industries, have in the past been, and are likely in
the future to be, subject to substantial cyclicality. This cyclicality may in
turn materially impact the Company's bookings and results of operations,
particularly as customers in these industries reduce capital expenditures, and
delay ordering the Company's products, in anticipation of potential economic
downturns or reductions in demand, or in response to economic uncertainty.
Operations Outside of the United States
The Company has substantial operations outside of the United States. As a
result, a significant portion of the Company's assets and operations are
located, and a more significant portion of the Company's revenues are derived
from operations, outside of the United States and particularly in Germany. The
Company's operations may be affected by economic, political and governmental
conditions in the countries where the Company has manufacturing facilities and
where its products are marketed, conditions which could, among other things,
result in restrictions being imposed on the operations of the Company.
Concentration of Operations in Germany
Historically, a significant portion of H&B's bookings were derived from
Germany, where the majority of its operations are located. The Company's
operations are therefore materially affected by economic, political and
competitive conditions prevailing in Germany. Prior to its January 1996
acquisition by the Company, H&B's results of operations, and subsequently the
Company's results of operations, have been negatively affected by economic,
political and competitive conditions in Germany and economic conditions
affecting the sectors of the German industry to which H&B sold, and the Company
sells, its products. These conditions have continued in 1996 and 1997, reducing
demand for the Company's products, and there can be no assurance that these
conditions will improve. German labor costs, corporate taxes and employee
benefit expenses are higher and weekly working hours are shorter as compared to
most of the other countries in the European Union and the United States,
resulting in higher costs of doing business. In addition, there can be no
assurance that H&B's ownership by a non-German corporation will not adversely
impact H&B's ability to compete successfully in the future in selling to those
German customers who have in the past shown a preference for purchasing systems
and products from German suppliers.
18
<PAGE>
Sales to East Asia
The Company's future operating results will depend in part on the general
economic conditions in East Asia, a region in which the Company had anticipated
further growth, primarily focused on China. In this regard, while Japan's
economy continues to be weak, several East Asian countries including Korea,
Malaysia, Thailand and Indonesia have recently experienced significant economic
downturns and significant declines in the value of their currencies relative to
the U.S. Dollar. Although it can be anticipated that infrastructure projects and
other investments which utilize or might utilize the Company's products may be
canceled, suspended or delayed, the Company is unable to predict what effect, if
any, the current and future economic conditions of such countries will have on
its ability to maintain or increase its sales in their markets.
Risk of Foreign Exchange Rate Fluctuations; Introduction of the Euro
The Consolidated Financial Statements of the Company are prepared in United
States dollars, but a substantial portion of its revenues and costs are
denominated in currencies other than United States dollars. In particular, the
H&B acquisition results in a greater percentage of the Company's sales being
denominated in Deutsche Marks, increasing the Company's exposure to fluctuations
of both revenues and expenses due to the translation of local currencies,
including Deutsche Marks, to United States dollars. In recent years the
Company's revenues and earnings have been adversely affected by the
increased strength of the United States Dollar relative to the Deutsche Mark and
other foreign currencies in which the Company sells its products.
Stage III of the European Economic and Monetary Union ("Stage III") is
presently anticipated to commence on January 1, 1999 for those member states of
the European Union that satisfy the convergence criteria set forth in the Treaty
on European Union. Part of Stage III is the introduction of a single currency
(the "Euro") which will be legal tender in such member states. It is anticipated
that such member states will adopt legislation providing specific rules for the
introduction of the Euro. The adoption of the Euro will affect the Company and
will leave it exposed to fluctuations in exchange rates in a way similar to
those currently experienced with fluctuations in exchange rates between U.S.
Dollars, Deutsche Marks and other principal European currencies.
In addition, if the Euro is adopted by the Federal Republic of Germany, it
will replace the Deutsche Mark as legal tender in the Federal Republic of
Germany, and result in the effective redenomination of a material amount of the
Company's indebtedness in Euro.
Uncertainty of Successful Integration and Restructuring Charges
The Company acquired H&B at the beginning of 1996, and the Italian Licensee
at the end of 1996. The Company's integration efforts and restructuring expenses
have, to a substantial degree, involved workforce reductions. A significant
portion of the expenses associated with such workforce reductions resulted in a
reduction in the Company's net income for 1996 and 1997 and may continue to
affect 1998 results. While the Company has expended substantial resources in
integrating these operations with its own in an attempt to realize the potential
synergies of such acquisitions, there can be no assurance as to the ultimate
outcome of the Company's integration plans, as to the ultimate cost of such
plans and the impact of such cost on the Company's earnings or as to the timing
of any benefits to the Company of the implementation of such plans.
19
<PAGE>
Fluctuations in Bookings and Financial Results
The Company's quarterly and annual bookings and financial results have
fluctuated in the past and may fluctuate significantly in the future due to a
number of factors, including the timing of orders from customers, changes in
pricing by the Company or its competitors, new product introductions by the
Company or its competitors, changes in the economic and political environments
of the countries and industries served by the Company, utilization levels of the
Company's manufacturing facilities and personnel, amount and growth in operating
expenses, changes in applicable tax rates, changes in product mix of system
revenue and changes in foreign currency exchange rates.
Tax Matters
The Company is structured as a holding company, conducting its operations
through manufacturing and marketing subsidiaries in a large number of
jurisdictions. Each of these subsidiaries is subject to taxation in the country
in which it has been formed. Certain of the Company's subsidiaries have at
various times been granted tax rulings by their taxing jurisdiction, resulting
in lower taxes than would otherwise be the case under ordinary tax rates. If
these tax incentives are not renewed upon expiration, if applicable tax
treaties, rulings or the tax rates applicable to the Company, are rescinded or
changed, or if tax authorities successfully challenge the manner in which
profits are recognized among the Company's subsidiaries, the Company's taxes
would increase and its results of operations and cash flow would be adversely
affected. In addition, expansion by the Company of its operations in certain
jurisdictions may increase its worldwide effective tax rate.
Recovery of Certain Assets
Recoverability of certain long lived assets, including goodwill and other
intangibles and deferred tax assets (resulting mainly from the carryforward of
net operating losses) depends on future profits and cash flows; if such do not
occur, the Company could incur a substantial charge against such net assets. See
Note 13 to the Company's Consolidated Financial Statements incorporated by
reference from the Company's 1997 Annual Report to Shareholders.
Uncertainty of New Product Development
The Company's future business prospects are dependent on its ability to
enhance its existing process automation systems and products and develop and
market new offerings that meet changing, increasingly sophisticated, customer
needs and industry realignment, that anticipate and respond to technological
changes in the process automation market and that achieve market acceptance. The
enhancement and development of these products and systems will be subject to all
of the risks associated with new product development, including unanticipated
delays, expenses, technical problems with software or hardware or other
difficulties that could result in the abandonment or substantial change in the
commercialization of these enhancements or new offerings. In particular, the
failure of the Company to enhance its process automation systems and products in
a timely fashion and to keep pace with rapidly developing computer hardware and
software technology could cause customers to delay their purchase of the
Company's products, or decide not to purchase such products.
In response to the market's demands for enhanced process automation
solutions, the Company announced the introduction of its Symphony systems
product line, and has begun offering certain new components in this line. The
Company has released certain basic elements of four different technology areas
and intends to release additional features in this line, including the
integrated Symphony Solo version of Freelance 2000, over time. No assurance can
be given that full development of technology areas and additional features will
be successfully completed or that these new elements will be accepted in the
marketplace. The anticipated release of new products and systems could cause
customers to delay purchase decisions for existing products of the Company.
There can be no assurance that the Company will not experience delays in the
introduction of new systems, products or enhancements, or be successful in
developing and marketing, on a timely and cost-effective basis, enhancements or
new systems or products, or that any such products,
20
<PAGE>
enhancements or applications, including the new system and enhancements recently
announced by the Company, will be commercially successful.
Legal Proceedings, Contract Disputes and Product Liability
The Company is subject to a number of lawsuits, investigations and claims
(some of which involve substantial amounts) arising out of the conduct of its
business, including those relating to commercial transactions, government
contracts, product liability, and environmental matters. In February 1996, the
Company filed a complaint against the City of Detroit alleging that the City had
materially breached a $134 million contract to upgrade and replace portions of
the Detroit water and wastewater treatment and transmission systems. The City
counterclaimed for breach of contract seeking damages for increased costs to the
City for the completion of the work under the contract, liquidated damages and
reimbursements. The Court thereafter granted motions dismissing certain of the
Company's tort counts against the City and the Company's constitutional claims.
On January 16, 1998 the Company commenced another action claiming the City
breached its Memorandum of Understanding with the Company, which the City has
answered and to which it has asserted affirmative defenses. See Item 3 below and
Note 16 to the Consolidated Financial Statements of the Company, incorporated by
reference herein from the Company's 1997 Annual Report to Shareholders, for a
further description of the litigation.
The Company's process control systems and instrumentation devices are often
used in industrial processes in connection with the production and handling of
hazardous and flammable substances or in processes involving extremes of
temperatures or pressure. In the event that one of the Company's systems or
devices malfunctioned or failed, it is possible that the Company could be liable
for substantial monetary damages in excess of its product liability and general
liability insurance coverages.
Environmental Liabilities
The Company has received inquiries concerning, or has been designated a
potentially responsible party by the Environmental Protection Agency in
connection with, the cleanup of various off-site locations under the
Comprehensive Environmental Response Compensation and Liability Act ("CERCLA").
The Company is still in the process of assessing its involvement and potential
exposure relative to the remediation of these sites. The Company is also
performing certain remediation activities in New Jersey and may be held
responsible, under state law, for costs to remediate contamination of potable
wells providing water to a nearby community. See Item 3 below and Note 16 to the
Consolidated Financial Statements of the Company, incorporated by reference
herein from the Company's 1997 Annual Report to Shareholders.
The Company will incur capital expenditures in connection with certain
environmental matters and will also be required to spend additional amounts in
connection with ongoing compliance with current and future laws and regulations.
Although capital expenditures for environmental control equipment and compliance
costs in future years will depend on legislative, regulatory and technological
developments which cannot accurately be predicted at this time, the Company
anticipates that these costs are likely to increase as environmental
requirements become more stringent. There can be no assurance, however, that
environmental costs will not exceed the estimated expenditures.
Due to the nature of the historical disposal and release activities typical
of manufacturing and related operations that have occurred in the United States
and other countries, and as a result of United States and foreign laws which now
and in the future may impose liability for previously lawful disposal and
release activities, future remedial costs not now anticipated may arise in
connection with the Company's currently or formerly owned or operated properties
and remediation costs may exceed the estimated range.
21
<PAGE>
Potential Litigation/Liability Related to Year 2000
The Company's products (including its systems, instrumentation and
analytical devices) are used in numerous operating environments. It is likely
that, commencing in the Year 2000, the functionality of certain operating
environments will be adversely affected when one or more components of the
environment is unable to process four-digit characters representing years.
Although the Company is taking measures to bring its products into Year 2000
compliance in a timely way, there can be no assurance that such efforts,
including those of its suppliers, will be fully successful or that the Company's
fully compliant products, if any, will be able to function when integrated with
other noncompliant components. The inability of one or more of the Company's
products to properly manage and manipulate data related to the Year 2000 could
result in a material adverse effect on the Company's business, financial
condition and results of operations, including increased warranty costs,
customer satisfaction issues and potential lawsuits.
Even if the Company successfully brings its products into Year 2000
compliance, the Company anticipates that substantial litigation may be brought
against vendors of all components of noncompliant operating environments,
including the Company. The Company's agreements with its customers typically
contain provisions designed to limit the Company's liability for such claims. It
is possible, however, that these measures will not provide protection from
liability claims, as a result of existing or future federal, state or local laws
or ordinances or unfavorable judicial decisions. The Company believes that any
such claims, with or without merit, could result in costly litigation (and
possible adverse judgment) that could absorb significant management and product
development time and potentially result in significant liability to the Company,
which could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company is identifying Year 2000 dependencies in the Company's own
internal information systems and implementing changes to such systems to make
them Year 2000 compliant. While the Company currently expects that the Year 2000
will not pose significant operational problems, delays in the implementation of
changes to its internal information systems or a failure to fully identify all
Year 2000 dependencies in such systems could result in material adverse
consequences, including delays in the delivery or sale of products.
Software Product Errors or Defects
Products and systems which incorporate software as complex as those offered
by the Company frequently contain errors or defects, especially when first
introduced or when new versions or enhancements are released. Despite product
testing, the Company's recently introduced products or systems such as
components of its Symphony Enterprise Management and Control System may contain
defects or software errors and, as a result, the Company may experience delayed
or lost revenues during the period required to correct any defects or errors.
Any such defects or errors could result in adverse customer reactions, negative
publicity regarding the Company and its products, harm to the Company's
reputation or loss of or delay in market acceptance, or could require extensive
product changes, any of which could have a material adverse effect upon the
Company's business, operating results or financial condition.
No Assurance of Continuing Finmeccanica Support
Finmeccanica has indicated that it is in the process of considering the
possible disposition of its interests in the Company. See Item 4. Historically,
as part of the worldwide group of Finmeccanica companies and affiliates, the
Company has utilized the resources of Finmeccanica for a significant portion of
its capital and financing requirements. Recently Finmeccanica provided a comfort
letter to COFIRI to support the Company's $150 million credit facility. In
addition, Finmeccanica has guaranteed performance bonds related to the Company's
large system contract with the City of Detroit with a value of $134 million and
other bonds totaling $94 million. See Item 13. It is uncertain at this time
whether Finmeccanica will continue to provide financial or other assistance to
the Company.
22
<PAGE>
Potential Conflicts of Interest
The Company and Finmeccanica or its affiliates have been and will continue
to be parties to material transactions and agreements with one another. See Item
13. Potential conflicts of interest will continue to arise between the Company
and Finmeccanica or its affiliates in various circumstances.
Uncertainty of Protection of Proprietary Information
The Company relies on a combination of trade secret and other intellectual
property law, nondisclosure agreements and other protective measures to
establish and protect its proprietary rights in certain of its products. In the
aggregate, the Company's patents are of considerable importance in the operation
of its business. Without legal protection, competitors may copy information
which the Company regards as proprietary to develop products competing with the
Company's products. The laws of some countries do not protect proprietary rights
in products and technology to the same extent as do the laws of the United
States. There can be no assurance that the Company's efforts to implement
protective measures and to defend its proprietary rights will be successful.
Enforceability of Judgments; Effect of Foreign Law
The Company is a limited liability company organized under the laws of The
Netherlands. Most of the directors and executive officers of the Company are
non-residents of the United States. All or a substantial portion of the assets
of such persons and of the Company are located outside the United States. As a
result, it may not be possible for investors to effect service of process within
the United States upon such persons or the Company or to enforce against them
judgments obtained in U.S. courts predicated upon civil liability provisions of
the Federal securities laws of the United States.
The Company has been advised by its legal counsel in The Netherlands, De
Brauw Blackstone Westbroek, that the United States and the Netherlands do not
currently have a treaty providing for reciprocal recognition and enforcement of
judgments (other than arbitration awards) in civil and commercial matters.
Therefore, a final judgment for the payment of money rendered by any federal or
state court in the United States based on civil liability, whether or not
predicated solely upon U.S. federal securities laws, would not be enforceable in
the Netherlands. However, if the party in whose favor such final judgment is
rendered brings a new suit in a competent court in the Netherlands such party
may submit to a Dutch court the final judgment which has been rendered in the
United States. To the extent that the Dutch court finds that the jurisdiction of
the federal or state court in the United States has been based on grounds that
are intentionally acceptable and that proper legal procedures have been
observed, the Dutch court will, in principle, give binding effect to the final
judgment which has been rendered in the United States unless such judgment
contravenes principles of public policy of the Netherlands.
Dependence on Key Personnel
The future success of the Company will be dependent, in part, upon the
continued service of the Company's senior management and other key employees.
The loss of services of certain of these persons could have a material adverse
effect on the Company. In addition, the Company's ability to maintain its
competitive position is dependent upon its ability to attract and retain
qualified manufacturing, sales and marketing people. See "Management."
Item 2. Description of Property
The Company's corporate administration office is located in Schiphol, The
Netherlands. The Company operates through numerous facilities worldwide. In the
judgment of management, the facilities used by the Company are adequate and
suitable for the purposes they serve in light of the Company's current and
planned requirements. None of the
23
<PAGE>
Company's material facilities is subject to a mortgage. Certain information
about the Company's principal facilities is set forth in the chart below:
<TABLE>
<CAPTION>
Approximate
Location Square Footage Owned/Leased Services
-------- -------------- ------------ --------
<S> <C> <C> <C>
Wickliffe, Ohio USA 534,136 Owned Administration, Manufacturing,
Sales Support
Williamsport, PA USA 87,134 Owned Manufacturing
Warminster, PA USA 399,298 Leased Manufacturing, Administration
Carson City, Nevada USA 15,000 Leased Manufacturing
New Kensington, PA USA 46,000 Leased Administration, Assembly,
Manufacturing
Sugar Land, Texas USA 70,000 Leased Administration, Assembly,
Manufacturing, Sales Support
Bartlesville, Oklahoma USA 161,791 Owned Administration, Assembly
Naucalpan, Mexico 25,812 Owned Administration, Assembly,
Manufacturing, Sales Support
Quebec City, Quebec, Canada 36,000 Leased Administration, Assembly
Burlington, Ontario, Canada 144,000 Leased Assembly, Sales Support
Downsview, Ontario, Canada 77,717 Owned Sales Support, Administrative,
Assembly, Manufacturing
Frankfurt-Praunheim, Germany 52,239 Owned Assembly, Sales Support
Frankfurt-Praunheim, Germany 164,403 Leased Assembly, Manufacturing,
Administration, Sales Support
Eschborn, Germany 105,490 Leased Administration, Sales Support
Leipzig, Germany 465,393 Owned Administration, Assembly,
Manufacturing, Sales Support
Minden, Germany 615,827 Owned Administration, Assembly,
Manufacturing, Sales Support
Heiligenhaus, Germany 1,109,786 Owned Administration, Assembly,
Manufacturing, Sales Support
Alzenau, Germany 472,802 Owned Administration, Assembly,
Manufacturing, Sales Support
Hannover, Germany 494,824 Leased Administration, Assembly,
Manufacturing, Sales Support
Goettingen, Germany 382,331 Owned Administration, Assembly,
Manufacturing, Sales Support
Massy, France 245,160 Owned Administration, Assembly,
Manufacturing
Metz, France 25,812 Owned Assembly, Sales Support
Vienna, Austria 23,717 Owned Administration, Assembly, Sales
Support
Delft, The Netherlands 17,280 Leased Administration, Assembly, Sales
Support
Johannesburg, South Africa 13,700 Leased Administration, Assembly, Sales
Support
Telford, United Kingdom 66,960 Owned Administrative, Manufacturing,
Sales Support
Workington, United Kingdom 54,000 Leased Manufacturing, Sales Support
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Approximate
Location Square Footage Owned/Leased Services
-------- -------------- ------------ --------
<S> <C> <C> <C>
Cheadle, United Kingdom 32,400 Leased Administrative, Manufacturing,
Sales Support
Bergen, Norway 43,200 Leased Administrative, Assembly, Sales
Support
Pero, Italy 99,641 Owned Administrative, Manufacturing,
Sales Support
Genoa, Italy 194,400 Leased Administrative, Manufacturing,
Sales Support
Antwerp, Belgium 17,280 Owned Assembly, Sales Support
Madrid, Spain 32,400 Leased Administrative, Assembly, Sales
Support
Yishun Industrial Park, Sing. 62,454 Leased Administration, Assembly, Sales
Support
Beijing, China 12,960 Owned Administrative, Assembly,
Manufacturing
Regents Park, Australia 46,440 Owned Administration, Assembly, Sales
Support
</TABLE>
The Company's facilities which have been certified as compliant with the
requirements of International Standard ISO 9001 or 9002 include facilities in
Wickliffe, Ohio, Applied Automation, Inc., Bailey Network Management, Electronic
Technology Systems, Inc. and Fischer & Porter Company in the United States, H&B
AG, Schoppe & Faeser GmbH, Sensycon GmbH and H&B Leipzig GmbH in Germany, H&B
France SA in France (instrumentation products only), Bailey Automation PLC
Fischer & Porter Limited and H&B Ltd. in England, Bomem, Inc. in Canada, Elsag
Bailey Pte. Ltd. in Singapore, Bailey Japan Co., Ltd. in Japan and Elsag Bailey
Pty. Ltd. in Australia. The Company has undertaken a program to implement ISO
9001 or higher compliance and certification at its other operating units which
assemble systems and instrumentation devices.
Item 3. Legal Proceedings
The Company is subject to a number of lawsuits, investigations and claims
(some of which involve substantial amounts) arising out of the conduct of its
business, including those relating to commercial transactions, government
contracts, product liability, and environmental matters.
The Company provides products and services to customers under long-term
systems contracts and the Company has a long history of using the percentage of
completion method of accounting for long-term contracts. In connection with such
contracts, it is common for the Company to submit change orders and claims. The
Company does not consider additional change orders or claims in measuring
profitability on a percentage of completion basis unless the additional receipt
of funding is considered probable. Anticipated losses on contracts (generally,
estimated total contract costs in excess of estimated total contract revenues)
are charged to operating income as soon as they are evident.
In 1992, the Company was awarded a $134 million contract by the City of
Detroit ("City") to upgrade and replace substantial portions of the Detroit
water and wastewater treatment and transmission systems. As a result of a
dispute concerning claims, change orders and other directives by the City, in
1995, the Company and the City began negotiations to consider a fundamental
restructuring of the contract. On October 30, 1995, a Memorandum of
Understanding ("MOU") was executed by the Company and the City. In early 1996,
the City, despite the MOU, announced its intention to hold the Company in
default. On February 9, 1996, the Company ceased work under the Detroit contract
and
25
<PAGE>
commenced legal action, styled Elsag Bailey, Inc. d/b/a Bailey Controls Co. v.
City of Detroit, Michigan, Thomas J. DeRiemaker and Westin Engineering, Inc. in
the United States District Court for the Eastern District of Michigan
(96-70623), against the City of Detroit, an engineering firm retained by the
City and the City's project engineer. The complaint alleged that, among other
things, the City materially breached the Detroit contract, made cardinal changes
to it and made misrepresentations in connection with its negotiation and award.
All of the defendants have filed answers and asserted defenses to such
complaint. In March of 1997, the Company amended its Complaint to add
allegations concerning constitutional and other violations arising from, among
other things, the City's default of the Company in June 1996. In addition, the
City has a counterclaim against the Company for breach of contract seeking
damages for, among other things, increased costs to the City for the completion
of the work under the contract, liquidated damages and reimbursement for amounts
paid for equipment, software and engineering the City claims are no longer
useful to the project. The City's counterclaim also states that a total of
approximately $22.4 million has been paid to the Company for equipment, software
and engineering services. The City joined American Home Assurance Company, the
Company's performance bond surety, as a third party defendant in the litigation.
The Company responded to the City's counterclaim and asserted affirmative
defenses to it. The Court thereafter granted motions dismissing certain of the
Company's tort counts against the City and the Company's constitutional claims.
The Court declined to grant motions seeking summary judgment against the Company
on certain other motions. On January 16, 1998, the Company commenced an action,
styled Elsag Bailey, Inc. d/b/a Bailey Controls Company v. City of Detroit,
Michigan, in the United States District Court for the Eastern District of
Michigan (98-70259), in which the Company alleges, among other things, that the
City breached the MOU. The City answered and asserted affirmative defenses to
the complaint. Based on the facts currently known, the Company believes it will
prevail in the litigation; however, there can be no assurance of a positive
outcome of this dispute. In 1995, the Company estimated a probable range of
charges ($12 million to $30 million) for expenses and other costs which might be
incurred in the litigation and recorded a charge to cost of sales corresponding
to the lower end of the range. At December 31, 1997 and 1996, the Company
continues to have an accrual representing the low end of a range of loss
estimates as no amount within the range is more likely than another.
Based on a January 30, 1995 complaint, thirteen former sales
representatives and distributors of the Company whose contracts were not renewed
at the end of 1994 commenced an arbitration action against the Company before
the American Arbitration Association alleging fraud, negligent
misrepresentation, unfair competition, tortious interference and other tort
claims, and sought compensatory damages in excess of $50 million and punitive
damages. The Company has filed an answer and asserted counterclaims for amounts
due from the plaintiffs and for trade libel. Based upon the facts currently
known to it, the Company believes that it has meritorious defenses to this
action and that any outcome of this case will not be material.
There are numerous other claims and pending legal proceedings that
generally involve product liability and employment issues. These cases are, in
the opinion of management, ordinary routine matters incidental to the normal
business conducted by the Company.
Environmental Laws and Proceedings
The Company's operations are subject to environmental regulation by
federal, state and local authorities in the United States and regulatory
authorities with jurisdiction over its foreign operations. The Company is
conducting environmental tests or remedial activities at certain properties
which are currently or were formerly owned or operated, including one on the
National Priority List pursuant to the Comprehensive Environmental Response
Compensation and Liability Act ("CERCLA"). Although additional remediation may
be required, to date costs incurred for these remedial activities have not been
significant. The Company has received inquiries concerning, or has been
designated a potentially responsible party by the Environmental Protection
Agency in connection with, the cleanup of various off-site locations under
CERCLA. The Company is still in the process of assessing its involvement and
potential exposure relative to the remediation of these sites. However, based on
the volume and types of waste involved which might be attributable to the
Company, it is management's opinion that the financial contribution required
will not be material to the Company. The Company is also performing certain
remediation activities in New Jersey and may be held responsible, under state
26
<PAGE>
law, for costs to remediate contamination of potable wells providing water to a
nearby community. While future costs are not currently estimable, costs to date
at the New Jersey facility have not been material.
Item 4. Control of Registrant
The Company is controlled by Finmeccanica, which owned (directly and
indirectly through subsidiaries) 17,813,527 Common Shares, or approximately 61%
of the Company's issued and outstanding Common Shares, at March 31, 1998. A
subsidiary of Finmeccanica also purchased 1,600,000 shares of Convertible Trust
Originated Preferred Securities ("Convertible Preferred Securities") issued by
Elsag Bailey Financing Trust on January 2, 1996, representing 27.9% of that
class of securities, which securities are convertible into Common Shares of the
Company. On a diluted basis, assuming conversion of all outstanding Convertible
Preferred Securities, Finmeccanica and its subsidiaries would own 53.4% of the
Company's outstanding Common Shares. Finmeccanica is a corporation organized
under the laws of Italy which operates principally in the following areas:
aeronautics, space, helicopters, defense, transportation, energy, process
automation, service automation and industrial automation. Finmeccanica's address
is Piazza Monte Grappa, 4, 00195 Rome, Italy and its telephone number is
39-6-324731.
Finmeccanica, approximately 37.9% of the common shares of which are traded
through the Telematic Market (Mercato Telematico) of the Italian Stock Exchange,
is controlled by Istituto per la Ricostruzione Industriale--IRI S.p.A. ("IRI").
IRI is wholly owned by the Ministry of the Treasury of the Republic of Italy. In
June 1997, IRI was given the mandate to complete its privatization by selling or
otherwise disposing of its holdings over the period through 2001. To the extent
some of the assets currently owned by IRI have not been sold or otherwise
transferred to third parties by the time IRI is liquidated, IRI has stated that
it expects that such assets would be transferred to another entity wholly-owned
by the Italian Government.
The following table sets forth the indicated information, as reflected in
the Company's records at March 31, 1998 with respect to each person who owns
more than 10% of any class of voting securities of the Company and the total
amount of any class of voting securities of the Company owned by the directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Amount Percent Diluted
Identity of Person or Group Title of Class Owned of Class Ownership(1)
- --------------------------- -------------- ----- -------- ------------
<S> <C> <C> <C>
Finmeccanica S.p.A. Common Shares 13,327,546 45.6% 34.9%
Subsidiaries of Finmeccanica Common Shares 4,485,981 15.4% 11.8%
(including the Company) Convertible Preferred Securities 1,600,000 27.9% 0.28%
Directors and Executive Common Shares 35,595(2) 0.1% 0.1%
Officers of the Company
</TABLE>
- --------------
(1) Assumes conversion of all the Convertible Preferred Securities.
(2) Excludes 106,650 Shares issuable pursuant to currently exercisable options
granted under the Company's Stock Incentive Plan. Includes shares owned
under the Company's United States and Global Employee Stock Purchase Plans.
Finmeccanica has stated in its filings with the Securities and Exchange
Commission that, in consultation with IRI and Finmeccanica's financial adviser,
Merrill Lynch International, Finmeccanica is in the process of considering the
possible disposition of its interests in the Company. Finmeccanica further
stated that any such disposition could involve the sale of its interests in the
Company either alone or together with other assets of Finmeccanica, in a
transaction which may or may not include all outstanding Common Shares of the
Company and that no assurance can be given as to the form of any such
transaction or as to when or whether any such transaction will be consummated.
27
<PAGE>
In the event of any such disposition, the Company's principal credit
facilities become payable on demand. See "Management Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
incorporated by reference from the Company's 1997 Annual Report to Shareholders.
Item 5. Nature of Trading Market
The Company's Common Shares have traded on the New York Stock Exchange
("NYSE") since November 19, 1993 under the symbol "EBY". The Company's Common
Shares are not traded on any other securities exchange.
The following are the high and low closing prices of the Company's Common
Shares on the NYSE, as reported in the Wall Street Journal:
1996 High Low
---- ---- ---
1st Quarter...................................27 5/8 20 1/4
2nd Quarter.................................. 30 21 1/2
3rd Quarter...................................26 7/8 20 1/2
4th Quarter...................................22 3/4 14
1997 High Low
---- ---- ---
1st Quarter...................................20 5/8 14 1/2
2nd Quarter.................................. 19 3/8 13 5/8
3rd Quarter...................................21 3/4 14 5/8
4th Quarter...................................19 1/4 14 3/8
As of March 31, 1998, there were 29,201,981 Common Shares outstanding. As
of that date, there were approximately 11.4 million Common Shares held of record
in the United States by approximately 250 record holders.
Item 6. Exchange Controls and Other Limitations Affecting Security Holders
The Company does not believe that there are any restrictions imposed by
Netherlands law on the export or import of capital or which affect the
remittance of dividend or other payments to nonresident holders of Common Shares
of the Company. There are no limitations imposed by Netherlands law or the
Articles of Association of the Company on the rights of holders of Common Shares
not resident in The Netherlands to hold or vote Common Shares of the Company.
Item 7. Taxation
The following is a summary of certain tax consequences of the acquisition,
ownership and disposition of the Common Shares based on tax laws of The
Netherlands and the United States as in effect on the date of this Annual
Report, and is subject to changes in The Netherlands or United States law,
including changes that could have a retroactive effect. The following summary
does not take into account or discuss the tax laws of any country other than The
Netherlands and the United States, nor does it take into account the individual
circumstances of an investor. This summary does not purport to be a complete
technical analysis or an examination of all potential tax effects relevant to a
decision to purchase the Common Shares and prospective investors in the Common
Shares in all jurisdictions are advised to consult their own tax advisers as to
The Netherlands, United States or other tax consequences of the purchase,
ownership and disposition of the Common Shares.
28
<PAGE>
The Netherlands
The following summary of The Netherlands tax considerations is based on
current Netherlands tax laws as interpreted under officially published case law.
The description is limited to the tax implications for an owner of Common Shares
who is not, or is not deemed to be, a resident of The Netherlands for purposes
of the relevant tax codes (a "non-resident Shareholder" or "Shareholder").
Dividend Withholding Tax
General. Dividends distributed by the Company are subject to a withholding
tax imposed by The Netherlands at a rate of, generally, 25%. The expression
"dividends distributed by the Company" as used herein includes, but is not
limited to: (i) distributions in cash or in kind, deemed and constructive
distributions and repayments of paid-in capital not recognized for Netherlands
dividend withholding tax purposes; (ii) liquidation proceeds, proceeds of
redemption of Common Shares or, as a rule, consideration for the repurchase of
Common Shares by the Company in excess of the average paid-in capital recognized
for Netherlands dividend withholding tax purposes; (iii) the par value of shares
issued to a holder of Common Shares or an increase of the par value of Common
Shares; as the case may be, to the extent that it does not appear that a
contribution, recognized for Netherlands dividend withholding tax purposes, has
been made or will be made; and (iv) partial repayment of paid-in capital,
recognized for Netherlands dividend withholding tax purposes, if and to the
extent that there are net profits (zuivere winst), unless the general meeting of
shareholders of the Company has resolved in advance to make such repayment and
provided that the par value of the Common Shares concerned has been reduced by
an equal amount by way of an amendment of the Articles of Association.
Generally, no withholding tax applies on the sale or disposition of Common
Shares to persons other than the Company and affiliates of the Company.
A Shareholder can be eligible for a reduction or a refund of Netherlands
dividend withholding tax under a tax convention which is in effect between the
country of residence of the Shareholder and The Netherlands. The Netherlands has
concluded such conventions with, among others, the United States, Canada,
Switzerland, Japan, and all member states of the European Union except Portugal.
Under all of those conventions, Netherlands dividend withholding tax is
generally reduced to 15%.
Under legislation which became effective on January 1, 1995, the Company
will under certain circumstances be allowed to refrain from transferring to The
Netherlands tax authorities the full amount of the dividend tax effectively
withheld by the Company with respect to dividend distributions made on the
Common Shares.
United States Shareholders. The Tax Convention of December 18, 1992
concluded between The Netherlands and the United States (the "Convention")
entered into force on January 1, 1994. Under the Convention, the dividend tax
rate on dividends paid by the Company to a resident of the United States (as
defined in the Convention) who is entitled to the benefits of the Convention
under Article 26 will generally be reduced to 15% pursuant to Article 10 of the
Convention. The reduced dividend tax rate, if any, under the Convention may be
applied upon payment by the Company of a dividend to a United States Investor
provided that such investor has previously filed the appropriate Netherlands tax
forms with the Company in accordance with Netherlands regulations under the
Convention. Absent the filing of such forms, the Company generally would be
required to withhold tax at The Netherlands statutory rate of 25%.
Consequently, United States Investors should consult their tax advisers
with respect to procedures for claiming a reduced withholding rate or for
obtaining a refund of excess withholding.
Under the Convention, dividends paid by the Company to U.S. pension funds
and United States exempt organizations may be eligible for an exemption from
dividend withholding tax under Article 35 or Article 36 of the Convention.
29
<PAGE>
Income Tax and Corporate Income Tax
General. A non-resident Shareholder will not be subject to Netherlands
taxes on income or capital gains with respect to dividends distributed by the
Company on the Common Shares or with respect to capital gains derived from the
sale or disposition of Common Shares in the Company, provided that:
(a) the non-resident Shareholder does not have an enterprise or an interest
in an enterprise that is, in whole or in part, carried on through a permanent
establishment or a permanent representative in the Netherlands and to which
enterprise or part of an enterprise, as the case may be, the Common Shares are
attributable;
(b) the non-resident Shareholder does not have a substantial interest or a
deemed substantial interest in the Company or, if such non-resident Shareholder
does have such an interest, it forms part of the assets of an enterprise; and
(c) the non-resident Shareholder is not entitled to a share in the profits
of an enterprise that is effectively managed in The Netherlands other than by
way of securities or through an employment contract, the Common Shares being
attributable to that enterprise.
Generally, the Shareholder will not have a substantial interest if he, his
spouse, certain other relatives (including foster children) or certain persons
sharing his household, do not hold, alone or together, whether directly or
indirectly, the ownership of, or certain other rights over, shares representing
five per cent or more of the total issued and outstanding capital (or the issued
and outstanding capital of any class of shares) of the Company, or rights to
acquire shares, whether or not currently issued, that represent at any time (and
from time to time) five per cent or more of the total currently issued and
outstanding capital (or the currently issued and outstanding capital of any
class of shares) of the Company or the ownership of certain profit participating
certificates that relate to five per cent or more of the annual profit of the
Company and/or to five per cent or more of the liquidation proceeds of the
Company. A deemed substantial interest is present if (part of) a substantial
interest has been disposed of, or is deemed to have been disposed of, on a
non-recognition basis.
United States Shareholders. Pursuant to the Convention, the gain derived by
a U.S. Shareholder who is an individual from an alienation of the Common Shares
constituting a substantial interest of the Shareholder in the Company, not
effectively connected with a permanent establishment or fixed base of the
Shareholder in The Netherlands, is not subject to Netherlands individual income
tax, provided that the gain from the alienation of the Common Shares is not
derived by an individual Shareholder who has, at any time during the five-year
period preceding such alienation, been a resident of The Netherlands and who at
the time of the alienation owns, either alone or together with close relatives,
at least 25% of any class of shares of the Company.
Net Wealth Tax
A non-resident individual Shareholder is not subject to Netherlands net
wealth tax with respect to the Common Shares, provided (i) the non-resident
Shareholder does not have an enterprise or an interest in an enterprise that is,
in whole or in part, carried on through a permanent establishment or a permanent
representative in the Netherlands and to which enterprise or part of an
enterprise, as the case may be, the Common Shares are attributable, and (ii) the
Shareholder is not entitled to a share in the profits of a Netherlands
enterprise, other than by way of securities or through an employment contract,
the Common Shares being attributable to that enterprise. Corporations are not
subject to Netherlands net wealth tax.
30
<PAGE>
Gift and Inheritance Tax
No gift, estate or inheritance taxes will arise in the Netherlands with
respect to an acquisition of Common Shares by way of a gift by, or on the death
of, a non-resident Shareholder, unless; (i) such Shareholder at the time of the
gift or at the time of his death had an enterprise or an interest in an
enterprise that is or was, in whole or in part, carried on through a permanent
establishment or a permanent representative in the Netherlands and to which
enterprise or part of an enterprise, as the case may be, the Common Shares are
or were attributable; or (ii) in the case of a gift of Common Shares by an
individual who at the time of the gift was neither resident nor deemed to be
resident in the Netherlands, such individual dies within 180 days after the date
of the gift, while being resident or deemed to be resident in the Netherlands.
United States of America
The following is a summary of certain United States federal income tax
considerations arising from the acquisition, ownership and disposition of Common
Shares to a person that is a United States holder. For purposes of this summary,
the term "United States holder" means a beneficial owner of Common Shares that
(i) is an individual citizen or resident of the United States or a United States
corporation and (ii) holds the Common Shares as a capital asset, within the
meaning of Section 1221 of the United States Internal Revenue Code of 1986, as
amended (the "Code"). This summary is not a complete description of all
potential tax consequences to United States holders; in particular, this summary
does not address the United States federal income tax treatment of United States
holders that may be subject to special tax rules, such as dealers in securities
or currencies, financial institutions, life insurance companies, tax-exempt
organizations, persons that hold Common Shares as part of a straddle or
conversion transaction, persons that have a tax home outside the United States
or persons that have a functional currency other than the United States dollar.
In addition, this summary does not address the application of other United
States taxes, such as the federal estate tax, or state or local tax laws.
This summary is based upon the current provisions of the Code, and upon
regulations, rulings and judicial decisions currently in effect, all of which
are subject to change; any such change could apply on a retroactive basis and
could affect the tax consequences described herein.
Each holder is advised to consult its own tax advisor in determining the
specific tax consequences to such holder of the acquisition, ownership and
disposition of Common Shares, including the application to its particular
situation of the tax considerations discussed below, as well as the application
of state, local or other tax laws.
Tax on Dividends. A United States holder receiving a distribution with
respect to any Common Shares will be required to include such distribution in
gross income as a taxable dividend to the extent such distribution is paid from
the Company's current or accumulated earnings and profits (as determined under
United States federal income tax law). Taxable dividends will be includible as
of the dividend payment date. Distributions in excess of such earnings and
profits of the Company will first be treated as a nontaxable return of capital
to the extent of the United States holder's adjusted tax basis in the Common
Shares and then as gain from the sale or exchange of a capital asset. Dividends
received on the Common Shares will not be eligible for the dividends received
deduction (allowed to U.S. corporations in respect of dividends received from
U.S. corporations). Netherlands withholding tax imposed on dividends paid to a
United States holder by the Company generally will be treated as a foreign
income tax eligible, subject to certain limitations, for credit against such
United States holder's U.S. federal income tax. The amount of such Netherlands
withholding tax on dividends which a United States holder may be entitled to
claim as a credit against such United States holder`s U.S. federal income tax
generally will not exceed the reduced rate, if any, which may be applicable to
such United States holder under the Convention, even if the Company would be
required to withhold such Netherlands withholding tax on dividends at a higher
rate under applicable Netherlands law and regulations. Consequently, United
States holders should consult their tax advisers with respect to procedures for
claiming a reduced withholding rate or for obtaining a refund of excess
withholding, because any amounts withheld in excess of such reduced withholding
rate may not be available as foreign tax credits for U.S. federal income tax
purposes. See "Taxation--The Netherlands--Dividend Withholding Tax--United
States Shareholders" for further discussion of these issues. Additionally, as a
result of certain Netherlands
31
<PAGE>
legislation which became effective on January 1, 1995, it appears that certain
amounts withheld by the Company in respect of payments of certain dividends
(generally not exceeding 3% of the gross amount of the dividend distributed by
the Company) may not be available as foreign tax credits for U.S. federal income
tax purposes.
Capital Gains Tax. With certain exceptions, gain or loss on the sale or
exchange of the Common Shares will be treated as capital gain or loss. Under
certain circumstances, capital gains derived by individuals are taxed at
preferential rates. Generally, under recently enacted legislation, individuals
will be taxed on (i) net capital gains on assets held for more than one year,
but not more than 18 months, at a maximum rate of 28 percent and (ii) net
capital gains on assets held for more than 18 months at a maximum rate of 20
percent. Subject to certain limited exceptions, capital losses cannot be applied
to offset ordinary income for United States federal income tax purposes.
Non-U.S. Investors. For purposes of this discussion, a Non-U.S. Investor is
any corporation, individual, partnership, estate or trust that is, as to the
United States, a foreign corporation, a non-resident alien individual, a foreign
partnership, or a non-resident fiduciary of a foreign estate or trust.
An investment in the Common Shares by entities or individuals which are
Non-U.S. Investors will not give rise to any U.S. federal income tax
consequences, unless the dividends received or any gain recognized on the sale
or disposition of the Common Shares by such investors are treated as effectively
connected with the conduct of a trade or business in the United States, or, in
the case of gains derived by an individual, such individual is present in the
United States for 183 days or more during the taxable year of the disposition of
the Common Shares and certain other requirements are met.
Item 8. Selected Consolidated Financial Data
The following tables set forth certain selected historical consolidated
financial data of the Company as of the end of and for each of the five years in
the period ended December 31, 1997. Except for certain items under "Other
Information," the Selected Consolidated Financial Data as of the end of and for
each of the years in the five-year period ended December 31, 1997 are derived
from the Company's Consolidated Financial Statements and notes thereto prepared
on the basis of United States generally accepted accounting principles ("U.S.
GAAP"). The Selected Consolidated Financial Data should be read in conjunction
with Item 9 below ("Management's Discussion and Analysis of Financial Condition
and Results of Operations") and the Consolidated Financial Statements of the
Company included in Item 19(a), each incorporated by reference from the
Company's 1997 Annual Report to Shareholders.
32
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1993(1) 1994(2) 1995 1996(3) 1997(4)
------------ ------------ ------------ ------------ ------------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data
Revenues ............................................ $ 605,875 $ 682,734 $ 843,874 $ 1,606,100 $ 1,513,237
Cost of sales ....................................... 401,247 445,226 557,646 1,148,840 1,008,386
------------ ------------ ------------ ------------ ------------
Gross profit(2)(3)(4) ............................... 204,628 237,508 286,228 457,260 504,851
Selling, general and administrative expenses ........ 123,489 146,061 187,224 413,214 382,954
Research, development and engineering expenses ...... 27,589 42,931 36,218 141,335 80,107
Amortization of intangibles ......................... 15,470 22,382 25,197 80,396 76,596
Royalty (income)-affiliates ......................... (5,188) (5,539) (6,463) (7,117) --
------------ ------------ ------------ ------------ ------------
Operating income (loss)(2)(3)(4) .................... 43,268 31,673 44,052 (170,568) (34,806)
Interest expense .................................... 14,724 13,225 24,721 37,341 36,705
Other (income) and expense, net ..................... (5,119) (3,756) (3,187) (10,877) (14,650)
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes, minority interest,
extraordinary item and effect of accounting change .. 33,663 22,204 22,518 (197,032) (56,861)
Provision (benefit) for income taxes(5) ............. 12,742 (6,088) (12,546) (66,528) (38,719)
------------ ------------ ------------ ------------ ------------
Income (loss) before minority interest, extraordinary
item and effect of accounting change ................ 20,921 28,292 35,064 (130,504) (18,142)
Minority interest in (income) loss of subsidiaries .. (3,428) (3,870) (3,820) (16,084) (15,144)
------------ ------------ ------------ ------------ ------------
Income (loss) before extraordinary item and effect of
accounting change ................................... 17,493 24,422 31,244 (146,588) (33,286)
Extraordinary item .................................. -- -- (651) (718) --
Cumulative effect of change in accounting for income
taxes ............................................... 4,085 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss)(1)(2)(3)(4) ....................... $ 21,578 $ 24,422 $ 30,593 $ (147,306) $ (33,286)
============ ============ ============ ============ ============
Income (loss) per share - basic:
Income (loss) before extraordinary item and effect of
accounting change ................................... $ .88 $ 1.04 $ 1.34 $ (5.26) $ (1.14)
Extraordinary items - ............................... -- -- (.03) (.02) --
Cumulative effect of change in accounting for income
taxes ............................................... .21 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss)(1)(2)(3)(4) ....................... $ 1.09 $ 1.04 $ 1.31 $ (5.28) $ (1.14)
============ ============ ============ ============ ============
Weighted average shares outstanding ................. 19,866,000 23,400,000 23,400,000 27,886,000 29,202,000
Income (loss) per share - diluted:
Income (loss) before extraordinary item and effect of
accounting change ................................... $ .88 $ 1.04 $ 1.33 $ (5.26) $ (1.14)
Extraordinary items - ............................... -- -- (.03) (.02) --
Cumulative effect of change in accounting for income
taxes ............................................... .21 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss)(1)(2)(3)(4) ....................... $ 1.09 $ 1.04 $ 1.30 $ (5.28) $ (1.14)
============ ============ ============ ============ ============
Weighted average shares outstanding ................. 19,872,000 23,430,000 23,470,000 27,886,000 29,202,000
Cash dividends ...................................... $ .53 -- -- -- --
============ ============ ============ ============ ============
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Working capital(7) ........................................... $ 148,443 $ 184,523 $ 202,319 $ 202,319 $ 306,417
Total assets ................................................. 579,650 924,006 1,168,825 2,184,694 1,938,153
Long-term debt (including current maturities and notes
payable) ..................................................... 161,519 331,224 318,550 701,959 618,703
Shareholders' equity ......................................... 227,449 251,318 277,001 258,736 206,985
Other Data
Bookings ..................................................... $ 618,000 $ 686,000 $ 870,000 $1,626,000 $1,486,000
Backlog ...................................................... 505,000 542,000 481,000 918,000 744,000
EBITDA(6) .................................................... 77,299 95,258 118,308 178,021 135,399
Depreciation ................................................. 16,870 19,637 23,181 44,576 42,416
Capital expenditures ......................................... 17,218 21,732 18,311 36,896 36,207
</TABLE>
- ----------------
(1) The cumulative effect of the Company's adoption on January 1, 1993 of
Statement of Financial Accounting Standard (SFAS) 109, "Accounting for Income
Taxes," was to increase net income by $4,085 for the year ended December 31,
1993.
(2) The consolidated income statement data for 1994 includes the operations of
F&P since its acquisition as of August 25, 1994. In connection with the
acquisition of F&P and the related integration of its operations, the Company
recorded nonrecurring charges of $24,984, before income taxes, and $15,300,
after income taxes (or $0.65 per share). The non-cash portion of these charges
include $7,600 of purchased in-process research and development; $4,800
representing the fair value of acquired inventory that was sold over its
replacement cost; and $3,304 for the write-down of certain technology made
redundant. The remaining costs totaling $9,280 include severance and related
benefits, facility closures and costs associated with terminated personnel.
Gross profit, operating income, net income and earnings per share were thus
reduced by $8,321, $24,984, $15,300, and $0.65 per share, respectively, as a
result of nonrecurring charges in connection with the acquisition and related
integration.
(3) The consolidated income statement data for 1996 includes the operations of
H&B since its acquisition as of January 2, 1996. In connection with the
acquisition of H&B and the related integration of its operations, the Company
recorded nonrecurring charges of $258,487, before income taxes, and $186,881
after income taxes (or $6.70 per share). The non-cash portion of these charges
include $56,752 for purchased in-process research and development, $108,592
representing the fair market value of inventory over replacement cost of
inventory and $38,351 for the write-down of impaired intangible assets. The
remaining costs include $18,601 of other costs incurred pursuant to
restructuring programs undertaken primarily to consolidate and integrate the
combined operating and business functions and $36,191 of costs associated with
integration activities, principally employee related costs. Gross profit,
operating income, net income and earnings per share were thus reduced by
$128,723, $257,728, $186,881, and $6.70 per share, respectively, as a result of
nonrecurring charges in connection with the acquisition and related integration.
(4) In connection with the H&B integration and the 1997 restructuring activity,
the Company recorded non-recurring charges of $79,427 before income taxes and
$53,635 after income taxes (or $ 1.84 per share). The non-cash portion of these
charges includes a $38,247 write-off of impaired intangible assets. The
remaining costs include $8,809 of costs incurred pursuant restructuring program
undertaken primarily to consolidate operating and business functions and $32,371
of employee related costs. Gross Profit, Operating Income, Net Income and
earnings per share were thus reduced by $20,464, $79,427, $53,635 and $1.84 per
share.
(5) Provision (benefit) for income taxes includes a deferred tax benefit
beginning in 1994 associated with a series of European tax rulings obtained
during 1994. The primary element of these rulings is approximately $150,000 of
tax deductions to be received over the subsequent 17 years, which have no
corresponding pre-tax charge. Since January 1994, for accounting purposes, the
Company had been recognizing the benefit of these deductions ratably over the
six year life
34
<PAGE>
given to the underlying assets. In 1997 the Company wrote-off these assets and
recorded the residual income tax benefit, net of a valuation reserve, amounting
to $11,312.
(6) EBITDA represents income before interest expense, interest income, provision
(benefit) for income taxes, extraordinary item, effect of accounting change,
depreciation and amortization and non-recurring charges. In 1994, this amount
excludes non-recurring charges in connection with the acquisition of Fischer &
Porter and related integration of $24,984, before income taxes, and $15,300,
after income taxes. In 1995, this amount excludes non-recurring charges in
connection with the Fischer & Porter integration and the City of Detroit
litigation of $12,475 before income taxes. The 1995 EBITDA also excludes an
extraordinary charge of $1,050 before income taxes, and $651 after income taxes.
In 1996, this amount excludes non-recurring charges in connection with the
acquisition of H&B and related integration of $258,487 before income taxes, and
$186,881 after income taxes. The 1996 EBITDA also excludes an extraordinary
charge of $798 before income taxes, and $718 after income taxes. In 1997, this
amount excludes non-recurring charges in connection with the H&B integration and
restructuring charges of $79,427 before income taxes, and $53,635 after income
taxes. EBITDA is not presented herein as an alternative measure of operating
results or cash flow (in each case as determined in accordance with U.S. GAAP).
(7) Working Capital is defined as follows: Current Assets less Cash and Cash
Equivalents minus Current Liabilities less Note Payable and Current Maturity of
Long Term Debt.
Item 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Incorporated herein by reference from the Company's 1997 Annual Report to
Shareholders, pages 19-28. The discussion and analysis of the Company's
financial condition and results of operations should be read in conjunction with
the Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995 at forth on page 28 of the Company's
1997 Annual Report to Shareholders and the Company's Consolidated Financial
Statements and the notes thereto on pages 29 through 53 of such Annual Report,
which are also incorporated herein by reference.
Item 9A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 10. Directors and Officers of Registrant
The members of the Supervisory Board of the Company at March 31, 1998 were as
follows:
Enrico Albareto is currently Chief Executive Officer of the Elsag Bailey
Group of Companies of Finmeccanica. Mr. Albareto has served as Chairman of the
Supervisory Board of the Company since 1993. He has been with the Elsag Group in
various senior positions for over 35 years. Prior to his current position, Mr.
Albareto was the Managing Director and Chief Executive Officer of Elsag Bailey
S.p.A. Mr. Albareto serves on the Board of Directors of a number of subsidiaries
of Finmeccanica.
Giuseppe Bono is currently General Manager of Finmeccanica. He serves on
the Board of Directors of several Italian Finmeccanica subsidiaries, such as
Agusta, a helicopter manufacturing company, Alenia Spazio, a satellite
manufacturing company, Ansaldo Trasporti, which operates in the rail and
transportation fields and Elettronica, which operates in the field of electronic
devices for defense. He has previously been the General Manager of the
state-owned holding company EFIM and has also served in other positions
including Managing Director of Aviofer Breda, General Manager of Sopal and
Administration Director of Omeca, all Italian corporations.
35
<PAGE>
T. Kevin Dunnigan is currently Chairman of Thomas & Betts Corporation. Mr.
Dunnigan has been with Thomas & Betts Corporation since 1962 serving in a
variety of senior management positions. Thomas & Betts Corporation, a
manufacturer of electrical and electronic connectors, components and related
products, with its principal executive offices in Memphis, Tennessee, is listed
on the NYSE. Mr. Dunnigan served as its President and Chief Executive Officer
from 1985 to 1992 and from January 1992 to May 1997, he has served as Chairman
and Chief Executive Officer. Mr. Dunnigan also serves on the Board of Directors
of Lukens, Inc., a large specialty steel manufacturer, and C.R. Bard, Inc., a
producer of health care products.
Josef Felder joined H&B in 1978 as Deputy Chairman of the Management Board
after having served as Vice President and General Manager for the European
Material Handling Group of Clark Equipment. Mr. Felder was previously Chief
Executive Officer and President of the Management Board of H&B. Following the
acquisition by the Company of H&B from Mannesmann, Mr. Felder resigned his post
as President of the Management Board of H&B. Mr. Felder is also Chairman of the
Supervisory Board of Elexis GmbH.
Bruno Musso is the former President of Ansaldo, a division of Finmeccanica.
For over 25 years Mr. Musso was associated with the Ansaldo Finmeccanica group
of companies serving in several different management positions. In 1987 he
became Vice Chairman and Managing Director of Ansaldo S.p.A. With the suspension
of nuclear power in Italy in 1987, Mr. Musso undertook the conversion of
resources within Ansaldo, outlining a new industrial strategy to transform
Ansaldo into one of the world's leading international companies in the
thermo-electromechanical sector. He was appointed to the position of President
in 1993 and later appointed President of Ansaldo Energia, Ansaldo Industria and
Ansaldo Trasporti.
Alberto Rosania is currently First Vice President Strategic Finance of
Finmeccanica. Mr. Rosania has been with Finmeccanica for over twelve years.
Prior to his current position, Mr. Rosania was First Vice President Planning and
Control of Finmeccanica. He serves on the Board of Directors of a number of
subsidiaries of Finmeccanica, including as Chairman of the Supervisory Board of
Ansaldo Signal N.V., a manufacturer of railway signal and control equipment
whose shares are quoted on NASDAQ. Mr. Rosania is also Director of CS Compagnie
des Signaux S.A., a manufacturer of electronic systems and equipment, quoted on
the Paris Stock Exchange.
Alberto Rosania and T. Kevin Dunnigan serve on the Company's Audit
Committee, which was established in December 1994.
The term of office of Enrico Albareto, T. Kevin Dunnigan, Bruno Musso and
Alberto Rosania, all elected as members of the Supervisory Board at the June 2,
1997 General Meeting of Shareholders, expires no later than at the first annual
general meeting of the shareholders occurring after June 1, 2000. The term of
office of Giuseppe Bono and Josef Felder as members of the Supervisory Board
expires no later than the first annual general meeting of shareholders occurring
after May 6, 1999.
The sole member of the Board of Management is Vincenzo Cannatelli:
Vincenzo Cannatelli is the Managing Director and Chief Executive Officer of
the Company. He has also been the Managing Director and Chief Executive Officer
of Elsag Bailey, Inc. since 1994. He was Group Executive Vice President of Elsag
Bailey, Inc. from 1992 to 1993. In addition, Mr. Cannatelli serves on the Board
of Directors of Concentra Corporation.
The Board of Management is supported in its management of the Company by an
Executive Committee consisting of the following:
M.N. Zaharna is Group Executive Vice President and Chief Operating Officer.
Mr. Zaharna has served as Senior Group Vice President--America, Pacific and the
Far East and Group Vice President--Strategic Marketing and Technology for the
Elsag Bailey group of companies since 1992. Mr. Zaharna has been with Bailey for
over 25 years.
36
<PAGE>
Antonio Cavo is Group Executive Vice President. Mr. Cavo has served in this
capacity since November 1997. From November 1994 to November 1997, he was Group
Vice President--Europe, Africa and Middle East Operations. From mid-1993 to late
1994, he was Group Vice President--Americas, Pacific and Far East. From 1991 to
mid-1993, Mr. Cavo was Vice President--European Sales and Marketing of Elsag.
Mr. Cavo has been with the Company for over ten years.
Uwe Alwardt is Group Vice President--Instrumentation. Mr. Alwardt has
served in this capacity since December, 1996. He presently also serves as
Managing Director of two German subsidiaries of the Company. From April 1995 to
December 1996 he was a member of the Board of Hartmann & Braun AG and had been
with H&B more than twenty years.
Wolf Klinz is Group Vice President--Central/Eastern Europe. Mr. Klinz has
served in this capacity since November 1996. He also serves as the Chief
Executive Officer of H&B GmbH & Co. KG. Prior to joining the Company in 1996,
Mr. Klinz was Chairman of Lurgi AG from 1994 to 1996 and a member of the Board
of Management of Treuhandanstalt from 1990 to 1994.
Garry Vail is Group Vice President--Analytics. Mr. Vail has held this
position since 1997. Mr. Vail is also President and General Manager of Bomem,
Inc., a subsidiary of the Company, which he has headed since its founding in
1973.
Hartmut Wuttig is Group Vice President--Systems, a position he has held
since 1997. Mr. Wuttig who has been with H&B for 25 years, had been working in
Marketing and R&D Systems for the prior seven years.
Other group staff includes the following:
Robert Edin is Vice President of the Company and Chief Financial Officer of
EBPA Hartmann & Braun GmbH. Prior to joining the Company in January 1996 he
served in various management positions with H&B for over ten years.
Christopher M. Farage is Director--Investor Relations. Dr. Farage joined
the Company in this role in 1996. Previously, he served in a variety of
management positions for British Petroleum plc.
Carlo Ferro is Vice President--Strategic Planning and Group Controller. Mr.
Ferro joined the Company in 1996 as Vice President - Strategic Planning and
Business Development and assumed his present position in February 1998, having
previously served in several management positions with Finmeccanica since 1992.
Jean-Paul Marie is Vice President, Treasury. Mr. Marie joined the Company
in 1990. He has previously served as Group Controller--Americas, Asia Pacific
and the Far East as well as the Chief Financial Officer of Elsag Bailey France.
Prior to joining the Company, Mr. Marie was a controller for Schlumberger
Limited.
David W. Norgard is Group Vice President--Human Resources. Mr. Norgard has
held this position since 1994. Prior to that time he served as Vice
President--Human Resources of Elsag Bailey, Inc. from 1991.
Mark V. Santo is Group Vice President and General Counsel of the Company
and Secretary of the Board of Management. He has held that position since 1996.
Mr. Santo joined Elsag Bailey, Inc. as Legal Counsel in April 1990.
37
<PAGE>
Item 11. Compensation of Directors and Officers
Members of the Supervisory Board who are affiliated with Finmeccanica are
compensated by Finmeccanica. Members of the Supervisory Board who are not
affiliated with Finmeccanica are paid an annual remuneration of $20,000 for
their services (plus an additional $1,000 per meeting for a member's service on
the Audit Committee) and reimbursement of reasonable expenses in connection with
such services.
In 1997, the aggregate cash compensation of the Managing Director, members
of the Executive Committee and the other group staff identified above, as a
group, paid or accrued by the Company and its subsidiaries, was $3,012,259. Of
this amount, $485,088 was paid or accrued as bonuses under the Executive
Incentive Plan which provides for the payment of short-term and long-term
bonuses based upon incentive targets established by the Management Board on an
annual basis.
The Company has implemented a discounted employee stock purchase plan
("Stock Purchase Plan") which enables employees to purchase Common Shares of the
Company through a payroll deduction. As a result of employer contributions, cost
of the stock to the employee is at a 10% discount from the trading price of the
stock on the day it is purchased (expected to be the last day of the month).
Employees who hold the stock for two years are given additional shares equal to
5% of the shares held for such two-year period. Shares held in the Stock
Purchase Plan are subject to a voting proxy in favor of an officer of the
Company while such shares remain in the plan.
Elsag Bailey, Inc. has a tax-qualified retirement savings plan (the "401(k)
Plan") covering all of the salaried employees of Elsag Bailey, Inc. and its
subsidiaries. Participating employees may elect to reduce their current
compensation on a pretax basis by up to the statutorily prescribed annual limit
($9,500 in 1997; $10,000 in 1998) and have the amount of such reduction
contributed to the 401(k) Plan. Participating employees may also make after-tax
contributions. The Company makes matching contributions up to 6% of each
participating employee's compensation for the year. In addition, the Company in
its discretion may each year make a "performance incentive contribution" with
respect to all or any group of participating employees as are designated by the
Company, which it will determine on the basis of the Company's or specific
operating unit's financial performance and success in meeting its business
commitments for the year. A special contribution also may be made by the Company
with respect to each participating employee who, on January 1, 1990, was age 45,
had completed ten years of service and became a participating employee in the
401(k) Plan. The special contribution is 1% of the participating employee's
annual compensation and is expected to be made by the Company each year,
commencing with 1990, until the number of years that the contribution has been
made is equal to the participating employee's years of prior service with the
Company as of January 1, 1990. In 1997, Elsag Bailey, Inc. made matching and
discretionary contributions to the accounts of five members of the Executive
Committee and the other group staff identified above in the aggregate amount of
$45,400.
In addition to the 401(k) Plan, the Company maintains an excess defined
contribution plan (the "Supplemental Plan") for certain select executives of the
Company who are participants in the 401(k) Plan and the Company's deferred
compensation plan contributing at least 6% and 2% of their compensation,
respectively, and whose annual compensation is in excess of a statutorily
prescribed annual amount.
Under the Supplemental Plan, the Company makes a contribution in an amount
equal to the participating executive's contribution up to a maximum of 6% of
such individual's base pay in excess of the statutorily prescribed limit
referred to in the previous sentence. Amounts contributed by the Company vest to
the participant in accordance with the vesting schedule provided in the 401(k)
Plan. In 1997, the Company made contributions to the Supplemental Plan to the
accounts of two members of the Board of Management, the Executive Committee and
the other group staff identified above in the aggregate amount of $34,065.
The Managing Director, the members of the Executive Committee and the other
group staff identified above were also covered in 1997 under certain group life
and medical insurance programs provided by the particular company by which they
were employed. The aggregate additional amount set aside by the Company in 1997
to provide pension,
38
<PAGE>
retirement or similar benefits (excluding statutory social security programs)
for the Managing Director, the members of the Executive Committee and the other
group staff identified above as a group was approximately $193,849. As of March
31, 1998, the Managing Director, the members of the Executive Committee and the
other group staff identified above have been granted options to purchase 588,250
Common Shares under the Company's Stock Incentive Plan, of which options for
106,650 Common Shares are currently exercisable. Options granted in 1993 and
certain options granted in 1994 are exercisable over five years. The remaining
options vest at the end of ten years; however, they may become exercisable upon
attainment of specific performance goals. In December 1997, approximately
239,000 options granted to such officers in 1996, 1995 and 1994 at prices
ranging from $23.68 to $27.50 were canceled and 179,250 options granted in their
place at the then fair market value of $14.81. The date of grant, purchase price
and expiration dates of the options granted to such officers to date and
outstanding are summarized in the table below:
<TABLE>
<CAPTION>
Grant Date Number of Options Exercise Price Expiration Date
- ---------- ----------------- -------------- ---------------
<S> <C> <C> <C>
November 18, 1993..................... 90,000 $ 19.00 November 18, 2003
March 14, 1994........................ 22,500 $ 14.8125 March 14, 2004
July 20, 1994......................... 35,250 $ 14.8125 July 20, 2004
December 8, 1994...................... 37,500 $ 14.8125 December 8, 2004
December 21, 1995..................... 75,000 $ 14.8125 December 21, 2005
January 4, 1996....................... 9,000 $ 14.8125 January 4, 2006
December 17, 1996..................... 162,000 $ 17.25 December 17, 2006
December 18, 1997..................... 157,000 $ 14.8125 December 17, 2007
</TABLE>
Item 12. Options to Purchase Securities from Registrant or Subsidiaries
As of March 31, 1998, the Company has reserved 1,000,000 Common Shares for
issuance under stock options which may be granted under its Stock Incentive
Plan, of which 726,250 Common Shares are subject to currently outstanding
options granted under such plan. The Company has filed a registration statement
on Form S-8 with regard to the Common Shares issuable under its Stock Incentive
Plan, by virtue of which Common Shares issued thereunder generally will be
transferable without restriction. For further discussion concerning the grant
dates, exercise prices and expiration dates of such options, see Item 11 above.
Item 13. Interest of Management in Certain Transactions
In the ordinary course of business, the Company and Finmeccanica or
affiliates of Finmeccanica have from time to time entered into various business
transactions and agreements, and the Company and Finmeccanica or affiliates of
Finmeccanica may from time to time enter into additional transactions and
agreements in the future. See Note 17 of the Notes to the Consolidated Financial
Statements of the Company incorporated by reference from the Company's 1997
Annual Report to Shareholders. Since January 1, 1995, the Company has used
Finmeccanica facilities and personnel for certain administrative functions, for
which the Company reimbursed Finmeccanica. These transactions, agreements and
arrangements have been and are expected to be continued on terms which in the
aggregate are not materially different from those which generally could be
obtained from unrelated third parties through negotiations on an arm's-length
basis. It is possible that potential conflicts of interest could arise between
the Company and Finmeccanica in the future. The following is a summary of the
material agreements, arrangements and transactions between the Company and
Finmeccanica or its affiliates.
39
<PAGE>
Acquisition of Italian Licensee; Prior Relationship. On December 30, 1996
the Company acquired from Finmeccanica the assets of the Italian Licensee, a
division of Finmeccanica which operated as a licensee of the Company in Italy.
The Company issued to Finmeccanica 1.3 million Common Shares and assumed $13
million of debt as part of such acquisition. Prior to the acquisition, the
Italian Licensee paid the Company royalties of $7.1 million and $6.5 million in
1996 and 1995, respectively, related to the license of certain technology of the
Company. The Italian Licensee was charged by the Company an aggregate of
$585,000 and $739,000 in 1996 and 1995, respectively, as its allocable share for
certain management and sales and administrative services performed on its
behalf. There were also purchases and sales of products between the Italian
Licensee and the Company.
Purchases and Sales
In 1997, 1996 and 1995, the Company made sales to certain Finmeccanica
operating subsidiaries of $50.1 million, $42.5 million and $19.8 million,
respectively. The Company's purchases from Finmeccanica's operating subsidiaries
were $0.9 million, $8.5 million and $9.8 million in 1997, 1996 and 1995,
respectively.
Cofiri Credit
The Company entered into a credit facility dated February 19, 1998 with
Compagnia Finanziamenti e Rifinanziamenti - Cofiri S.p.A. ("Cofiri") providing
for a line of credit in the amount of $150 million ( or the equivalent in
Deutsche Marks or Yen) which expires April 30, 1999, at which time all amounts
then outstanding thereunder become due and payable ("Cofiri Credit"). Cofiri is
a wholly-owned subsidiary of IRI. The Cofiri Credit, which the Company drew down
in full on February 27, 1998, provides for interest at 1.15% in excess of the
London Interbank Offered Rate (LIBOR). The Cofiri Credit is terminable, and all
amounts outstanding thereunder payable on demand, upon the occurrence of certain
events including payment or other performance defaults, a cross default for
non-payment of at least $10 million, the Company experiencing a material adverse
change or Finmeccanica ceasing to own at least 51% of the Company's share
capital. Reference is made to Exhibit 3 to the Company's filing on Form 6-K
dated March 4, 1998 for the full text of the agreement governing the Cofiri
Credit.
Credit Support
Finmeccanica has historically guaranteed certain obligations of the Company
and its operating units in the form of letters of credit or guarantees, or
provided comfort letters, in respect of certain short-term and long-term credit
facilities. Since January 1, 1995, Finmeccanica's only support for the Company's
borrowings and letters of credit has been a comfort letter to support the Cofiri
Credit. Finmeccanica has no obligation to continue to provide credit support to
the Company and no assurance can be given that the Company would be able to
refinance the B of A Credit maturing in January 1999 or the Cofiri Credit
maturing in April 1999 without such support. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-- Liquidity and
Capital Resources" incorporated by reference from the Company's 1997 Annual
Report to Shareholders.
Bonding Support
Since January 1, 1995, the utilization of Finmeccanica's resources to
support the Company's bonding requirements has been limited to guaranteeing
performance bonds related to one large system contract of the Company with an
initial contract value of $134 million and certain other bonds currently
totaling $94 million. Finmeccanica has no obligation to continue to provide such
support to the Company. No assurances can be given that the Company would be
able to satisfy its bonding requirements on terms substantially as favorable as
those previously obtained with the assistance provided by Finmeccanica if
Finmeccanica discontinued providing such assistance. The Company incurred an
expense of $1,025,000, $929,000 and $860,000, payable to Finmeccanica in 1997,
1996 and 1995, respectively, for such bonding support.
40
<PAGE>
Insurance
The Company purchases certain insurance coverage in conjunction with other
affiliates of Finmeccanica on a pooled risk basis (whereby claims of the
participating companies are aggregated for purposes of determining covered
amounts), at rates and on terms which the Company believes are generally
comparable to those which it would otherwise have been able to obtain. None of
Finmeccanica, any insured or the relevant insurer is under any obligation to
continue to participate in such arrangement.
Supervisory Board
Four of the six current members of the Company's Supervisory Board are
officers of Finmeccanica.
Registration Rights Agreement
Under a Registration Rights Agreement between the Company and Finmeccanica,
the Company has agreed to file, upon the request of Finmeccanica, up to three
more registration statements under the U.S. Securities Act of 1933, to permit
Finmeccanica to offer and sell any Common Shares that Finmeccanica may hold.
Subject to certain conditions, the Company has also granted Finmeccanica the
right to include its Common Shares in any registration statements covering
offerings of Common Shares by the Company. In either case, the Company will pay
all costs of any such registered offering other than underwriting commissions,
discounts and expenses and transfer taxes attributable to the shares sold on
behalf of Finmeccanica. The Company will indemnify Finmeccanica, and
Finmeccanica will indemnify the Company, against certain liabilities in respect
of any registration statement or offering covered by such Registration Rights
Agreement. The rights of Finmeccanica under such Registration Rights Agreement
are transferable to entities included within the Finmeccanica consolidated
group.
PART II
Item 14. Description of Securities to be Registered
Not applicable.
PART III
Item 15. Defaults Upon Senior Securities
None.
Item 16. Changes in Securities and Changes in Security for Registered Securities
None.
PART IV
Item 17. Financial Statements
The Company has responded to Item 18 in lieu of responding to Item 17.
Item 18. Financial Statements
Reference is made to Item 19(a) for a list of all financial statements
filed as part of this annual report.
41
<PAGE>
Item 19. Financial Statements and Exhibits
(a) Index of Financial Statements, Financial Statement Schedules
The following Consolidated Financial Statements including the notes thereto
included in the Company's 1997 Annual Report to Shareholders, which immediately
follows, are incorporated herein by reference. With the exception of the pages
listed below from the Company's 1997 Annual Report to Shareholders and the items
referred to in Item 3 and Item 9 of this Annual Report, the 1997 Annual Report
to Shareholders of the registrant is not to be deemed filed as part of this
Annual Report.
<TABLE>
<CAPTION>
Page(s) in 1997
Annual Report
to Shareholders
- ---------------
<S> <C>
I. The Company
Consolidated Financial Statements:
Consolidated Statement of Income for the Years
Ended December 31, 1997, 1996 and 1995.......................................................................29
Consolidated Balance Sheet as of December 31, 1997 and 1996.......................................................30
Consolidated Statement of Changes in Shareholders'
Equity for the Years Ended December 31, 1997,
1996 and 1995................................................................................................31
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995.......................................................................32
Notes to Consolidated Financial Statements.....................................................................33-52
Report of Independent Accountants (as to Consolidated
Financial Statements)........................................................................................53
<CAPTION>
Page(s) in this
Annual Report
on Form 20-F
- ------------
<S> <C>
Financial Statement Schedule:
Report of Independent Accountants (as to Financial Statement Schedule)...........................................F-1
Schedule II--Valuation and Qualifying Accounts for the Years Ended
December 31, 1997, 1996 and 1995............................................................................F-2
</TABLE>
(b) Index to Exhibits
Exhibit
Number Description
------- -----------
2 (a) Consent of Price Waterhouse LLP
(b) 1997 Annual Report to Shareholders - pages 18 through 53.
(The Company's entire 1997 Annual Report to Shareholders is
available at the Company's website at www.ebpa.com.)
The Registrant agrees to furnish a list of its subsidiaries including, as
to each subsidiary, its country or other jurisdiction of incorporation or
organization, its relationship to the Company and the percentage of voting
securities owned or other basis of control by its immediate parent, if any,
to the Securities and Exchange Commission.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ELSAG BAILEY PROCESS AUTOMATION N.V.
(REGISTRANT)
By: /s/ Vincenzo Cannatelli
---------------------------------
Vincenzo Cannatelli
Managing Director and Chief
Executive Officer
May 14, 1998
43
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Supervisory Board
of Elsag Bailey Process Automation N.V.
Our audits of the consolidated financial statements referred to in our report
dated March 3, 1998 appearing on page 53 of the 1997 Annual Report to
Shareholders of Elsag Bailey Process Automation N.V. ("Company") (which report
and consolidated financial statements are incorporated by reference in this
Annual Report on Form 20-F) also included an audit of the Financial Statement
Schedule listed in Item 19(a) of this Form 20-F. In our opinion, this Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PRICE WATERHOUSE LLP
Cleveland, Ohio
March 3, 1998
F - 1
<PAGE>
ELSAG BAILEY PROCESS AUTOMATION N.V.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
<TABLE>
<CAPTION>
Balance at Additions Balance at
beginning of charged to Deductions Translation end of
Classification period expense from reserves Other adjustment period
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Deducted from assets to which they apply:
Accounts Receivable Allowance:
Year ended December 31, 1997 $ 17,366 $ 4,937 ($ 5,338) -- ($ 1,445) $ 15,520
Year ended December 31, 1996 $ 6,827 $ 3,549 ($ 3,690) $11,242 (3) ($ 582) $ 17,366
Year ended December 31, 1995 $ 5,325 $ 2,488 ($ 1,383) $331 (1) $ 66 $ 6,827
Valuation allowance on deferred tax assets:
Year ended December 31, 1997 $ 28,541 $ 22,202 ($ 1,193) -- -- $ 49,550
Year ended December 31, 1996 $ 31,625 $ 3,316 ($17,058) $10,658 (3) -- $ 28,541
Year ended December 31, 1995 $ 30,646 $ 2,927 ($ 3,088) $1,140 (2) -- $ 31,625
</TABLE>
(1) Represents the Fluid Data acquired balance.
(2) Represents the Fischer & Porter acquired balance.
(3) Represents the Hartmann & Braun acquired balance. Refer to Note
3--"Acquisition" of the Notes to the Consolidated Financial Statements
included in the 1997 Annual Report to Shareholders for additional
discussion on the Hartmann & Braun acquisition.
F - 2
<PAGE>
Exhibit 2(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-8418) of Elsag Bailey Process Automation N.V. of
our report dated March 3, 1998 appearing on page 53 of the 1997 Annual Report to
Shareholders which is incorporated by reference in this Annual Report on Form
20-F. We also consent to the incorporation by reference of our report on the
Financial Statement Schedule, which appears on page F-2 of this Annual Report on
Form 20-F.
PRICE WATERHOUSE LLP
Cleveland, Ohio
May 14, 1998
<PAGE>
financial summary 1997-1993
<TABLE>
<CAPTION>
Year Ended December 31, 1997(9) 1996(6) 1995 1994 (5) 1993
- ------------------------------------------------------------------------------------------------------------------------------------
(Amounts in Thousands, Except Share Data)
<S> <C> <C> <C> <C> <C>
Financial Results
Revenues $ 1,513,237 $ 1,606,100 $ 843,874 $ 682,734 $ 605,875
Income (loss) before extraordinary item and
effect of accounting change (33,286)(10) (146,588)(7) 31,244(4) 24,422(2) 17,493
Extraordinary item -- (718) (651) -- --
Cumulative effect of change in accounting for
income taxes -- -- -- -- 4,085(1)
Net income (loss) (33,286)(10) (147,306)(7) 30,593(4) 24,422(2) 21,578
Net income (loss) as a percent of revenues (2.2%) (9.2%) 3.63% 3.58% 3.56%
Per Share Data -- Basic (11)
Income (loss) before extraordinary item and
cumulative effect of accounting change (1.14) (5.26) 1.34 1.04 0.88
Extraordinary item -- (.02) (.03) -- --
Cumulative effect of change in accounting for
income taxes -- -- -- -- 0.21
Net income (loss) (1.14) (5.28) 1.31(12) 1.04 1.09
Book value at December 31, 7.09 9.28 11.84 10.74 11.45
Financial Results
Total assets 1,938,153 2,184,694 1,168,825 924,006 579,650
Property, plant and equipment, net 280,946 44,576 23,181 19,637 16,870
Capital expenditures 36,207 36,896 18,311 21,732 17,218
Long-term debt (including current maturities) 560,075 661,958 289,522 262,647 124,874
Total shareholders' equity 206,985 258,736 277,001 251,318 227,449
Current ratio 1.36 1.33 1.59 1.37 1.60
Other Information
Research, development and engineering expenses 80,107 141,335(8) 36,218 42,931(3) 27,589
Interest expense 36,705 37,341 24,721 13,225 14,724
Common Stock:
Outstanding at December 31, 29,202,000 29,202,000 23,400,000 23,400,000 23,400,000
Average outstanding during the year 29,202,000 27,886,000 23,400,000 23,400,000 19,865,833
Price range:
High 21.750 30.000 34.125 28.750 21.875
Low 13.625 14.000 22.125 19.250 17.750
Number of associates at December 31, 11,579 12,475 5,724 5,819 4,454
Dividends declared -- -- -- -- 10,243
</TABLE>
(1) The Company adopted Statement of Financial Accounting Standards No. 109,
'Accounting for Income Taxes,' effective January 1, 1993.
(2) Includes $15,300, net of tax, of charges associated with the acquisition of
Fischer & Porter and the related integration.
(3) Includes a $7,600 non-cash charge for in-process research and development
purchased in connection with the Fischer & Porter acquisition.
(4) Includes $8,206, net of tax, of charges in connection with the Fischer &
Porter integration and City of Detroit litigation.
(5) Fischer & Porter was acquired in August 1994. The financial results for
1994 include the effects of this acquisition from the date of purchase.
(6) Hartmann & Braun was acquired on January 2, 1996. The financial results for
1996 include the effects of this acquisition from the date of purchase.
(7) Includes $186,881, net of tax, of charges in connection with the Hartmann &
Braun integration.
(8) Includes $56,752 non-cash charge for in-process research and development
purchased in connection with the Hartmann & Braun acquisition.
(9) Italian Licensee was acquired on December 30, 1996. The financial results
for 1997 include the results of this operation.
(10) Includes $53,635, net of tax, of charges in connection with the Hartmann &
Braun integration and 1997 restructuring.
(11) For 1997 and 1996 the assumed conversion of additional common stock is
antidilutive due to the losses in the periods, therefore, diluted earnings
per common share in 1997 and 1996 is equivalent to basic earnings per
common share. For 1994 and 1993, there was no effect of dilutive
securities, therefore, diluted earnings per common share in 1994 and 1993
are equivalent to basic earnings per common share.
(12) Diluted earnings per common share for 1995 was $1.30 based upon diluted
common shares of 23,470,000.
18
<PAGE>
management's discussion and analysis
of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto included elsewhere in this document.
The Company
Global Operations
The Company has substantially expanded its international presence through the
acquisitions in 1996 of Hartmann & Braun and Elsag Bailey Automazione Processi
S.p.A. ('Italian Licensee'). As a result, a majority of the Company's assets and
operations are located in Europe, and in particular Germany, from where a
majority of the Company's revenues are derived. The Company's largest operations
are located in the United States, Germany, Japan, France, Italy and Canada. The
Company's operations may be affected by economic, political and regulatory
conditions in the countries where the Company does business, changes in which
could, among other things, result in currency or exchange controls or other
restrictions being imposed on the operations of the Company. The Consolidated
Financial Statements of the Company are prepared in United States Dollars ('US
Dollars') in accordance with United States Generally Accepted Accounting
Principles.
While the Company has significant operations in a number of countries, revenues
and costs and related assets and liabilities are generally denominated in the
functional currencies of these operations, thereby limiting the Company's
exposure to exchange gains and losses. However, because a substantial portion of
its revenues and costs are denominated in currencies other than US Dollars,
particularly after the acquisition of Hartmann & Braun, which increased the
significance of the Deutsche Mark ('DM'), the Company has experienced, and may
continue to experience, fluctuations of both revenues and expenses due to the
translation of local currencies to US Dollars.
In 1997, the Company continued to experience weak market conditions in Europe,
particularly Germany and France, in Japan, and in the United States electric
utility market. In these markets, capital spending by the Company's traditional
customer base of electric power was less than the average level of prior years.
The Company continues to experience a competitive pricing environment for orders
received which it will be required to manage closely over the course of 1998.
The Company does not hold or issue financial instruments for trading purposes.
Foreign exchange contracts are utilized to hedge assets and liabilities, and
commitments in currencies other than the functional currency of the entity.
Because the Company generally enters into short-term contracts, the fair value
of these forward exchange contracts does not differ materially from the carrying
amount. Premiums or discounts which arise at the time these arrangements are
entered into are generally amortized over the life of the contract. Realized and
unrealized gains and losses on forward exchange contracts are recorded in net
income currently, with the exception of gains and losses on contracts designed
to hedge the Company's net investment in certain foreign subsidiaries which are
included as a separate component of shareholders' equity and gains and losses on
contracts designed to hedge specific foreign currency commitments which are
deferred and included in the basis of the underlying transaction. Such deferred
amounts were not material at December 31, 1997 or 1996.
The Company does not file a consolidated tax return, but pays taxes at the local
level for each of its subsidiaries. On a consolidated basis, this practice may
result in the Company paying taxes even though it may not have consolidated
pre-tax income or in paying taxes in excess of pre-tax income if some of its
subsidiaries are profitable while others are not. Furthermore, the Company's
income tax rate has been favorably affected by a series of European tax rulings
(see Note 13 of the Notes to Consolidated Financial Statements).
Acquisitions
19
<PAGE>
On December 30, 1996, the Company acquired the net assets of the Italian
Licensee, the process control division of Finmeccanica S.p.A. ('Finmeccanica').
Previously, this division was a licensee of the Company's technology in Italy.
Total consideration was comprised of assumed debt of $13 million and 1,300,000
shares of common stock with a fair market value of $29 million. Because of the
related party nature of the transaction, it was accounted for as a purchase
using the predecessor's accounting basis. Assets and liabilities of
approximately $97 million and $76 million, respectively, were recorded and
included in the Consolidated Balance Sheet at December 31, 1996. The difference
between the consideration and the underlying historical net assets amounted to
approximately $21 million and was recorded as a charge to retained earnings. The
results of operations of the Italian Licensee are included with those of the
Company from January 1, 1997.
On January 2, 1996, the Company acquired the stock of substantially all of the
Hartmann & Braun group of companies from Mannesmann AG for approximately $639
million and assumed debt of $60 million owing to Mannesmann which was paid
concurrently. The acquisition was financed through the issuance of preferred
securities, common stock and a debt facility (see Note 3 of the Notes to
Consolidated Financial Statements). The acquisition was accounted for using the
purchase method. The results of operations of Hartmann & Braun are included with
those of the Company for periods subsequent to the date of acquisition. Hartmann
& Braun provides process control systems, instrumentation and related services
to customers in the electrical power generation, hydrocarbon processing,
chemical, steel, cement, pulp and paper, food and beverage and other process
industries. The majority of Hartmann & Braun's revenues are generated in Germany
and other European countries.
The 1996 integration of the Hartmann & Braun companies included facility
closures, relocation costs and charges associated with the reduction of 1,600
personnel for which $129 million was reserved for in the opening balance sheet
and $55 million was charged to the Consolidated Statement of Income in 1996. In
1997, additional integration and restructuring charges relating to the reduction
of approximately 1,300 personnel and facility closures, amounting to $41
million, were taken by the Company in order to reduce costs and improve
operating efficiencies. At December 31, 1997, there remain approximately 550
employees to be terminated. Further charges, amounting to approximately $7
million, will be recorded in the first quarter of 1998 to complete this process
and reduce costs in Germany in the light of market conditions.
The principal restructuring programs undertaken by the Company involved the
reduction of personnel in administrative and production functions at the
Hartmann & Braun locations. Historically, Hartmann & Braun had a higher cost
structure than the Company. The Company has focused on reducing numbers of
personnel and increasing productivity. Further, where the acquisition resulted
in duplicative facilities on a geographic basis, the Company determined which,
if any, facilities should be closed and operations combined. Such plans also
resulted in employee terminations. Substantially all of the intended closures
and relocations were identified and executed during 1996 and 1997. The Company
has also centralized, on a broad geographic basis, production of certain product
lines.
Divestitures
The Company's integration of the Hartmann & Braun operations resulted in
management's re-evaluation of certain existing lines of business. Accordingly,
it was decided that certain of these lines of business would be held for sale
and others would be combined into other existing businesses of the Company. As a
result, the Company recorded an impairment loss in 1996 of $38 million for these
lines of business. The impairment loss on assets held for sale was equal to the
difference between the book value and the estimated sales price less costs to
sell. At December 31, 1997, the Company has completed the sale of certain lines
of business with proceeds substantially in line with estimated net sales prices.
Approximately $10 million and $1.5 million in net proceeds and pre-tax gain were
recorded on these sales in the aggregate. The revenues related to these lines of
business are not material to the Consolidated Statement of Income.
In early 1998, the Company sold its interest in an equity investee for
approximately $6.5 million and recorded a pre-tax gain of $3 million.
Contract Business
20
<PAGE>
Orders for individual process automation systems typically range in size from
approximately $150,000 to several million dollars, although orders can be for
much larger amounts. As a result of the great variation in order size, the time
from the receipt of an order to delivery ranges, on average, from four months to
over two years. The Company recognizes revenue and expense relating to large
systems sales on the percentage-of-completion method. The percentage of contract
completion is measured on the basis of either costs incurred as compared to
management's estimate of total costs, engineering costs incurred as compared to
management's estimate of total engineering costs or units of delivery.
Management's estimates of total costs are reviewed periodically as the work on
contracts progresses. The majority of the Company's projects are on fixed-price
terms and, therefore, revisions resulting from such periodic reviews may affect
the gross profit recognized. The Company records the cumulative effect of these
revisions to gross profit in the period that the revision is made. Revenues from
product sales and services are recognized upon shipment or when services are
performed.
Many systems contracts are performed over extended periods of time and are
subject to changes in the scope of work and delivery schedules. Negotiations on
such contracts' scope of work, pricing changes, responsibility for delays and
settlement of claims often extend over prolonged periods of time. Revenues
relating to contracts or contract changes that have not been completely priced,
negotiated, documented, or funded are not recognized unless realization of such
revenues is considered probable. Any anticipated losses on contracts (estimated
total contract costs, excluding period costs, in excess of estimated total
contract revenues) are charged to operating income as soon as they are
determined.
Bookings
The following table sets forth the total bookings (i.e., the total dollar volume
of firm orders for systems, products and services received during the relevant
period) for each of the years ended December 31, 1997, 1996 and 1995, together
with the backlog (i.e., the total dollar volume of bookings not yet recognized
as revenue as of December 31 of the respective year) at the end of each year or
period presented. Backlog relating to non-systems business (i.e. instrumentation
products) is shipped sooner than the portion of backlog represented by systems
business.
21
<PAGE>
Bookings and backlog should not be considered as an indication of future
revenues or cash flows since contracts can be canceled and other contingencies
could occur that could cause elimination or extension of payments on existing
contracts. Because a substantial portion of backlog is denominated in currencies
other than US Dollars, backlog can fluctuate due to the translation of
functional currencies to US Dollars.
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(In millions)
Backlog (at period end) $ 744 $ 918 $481
Bookings $1,486 $1,626 $870
Currency translation reduced reported backlog by approximately 8.5% from 1996 to
1997. Excluding this impact, backlog was reduced by 10.5% as a result of shorter
lead times and a trend towards smaller size system orders. Essentially, all of
the increase in the backlog from 1995 to 1996 was attributed to the acquisition
of Hartmann & Braun and to a much lesser extent the Italian Licensee
acquisition. Bookings in 1997 declined by $140 million or 8.6% to $1,486
million. Excluding the impact of currency translation, bookings decreased by $18
million or 1.1%, mainly due to the weak market conditions in Germany, France and
Japan which were compensated for by the contribution of the Italian Licensee and
growth in North America and certain other European countries.
Bookings in 1996 grew by $756 million, or 86.9% to $1,626 million. The increase
from 1995 was primarily attributable to the acquisition of Hartmann & Braun. On
a proforma basis with Hartmann & Braun included in 1995, bookings declined from
approximately $1,720 million to $1,626 million. This decrease reflected a strong
US Dollar versus the DM and Japanese Yen ('Yen') and weaker market conditions in
Germany and Japan which were only partially compensated by growth in the United
States and developing markets.
Since the acquisition of Hartmann & Braun, approximately one quarter of the
Company's bookings are derived from Germany. The Company's operations are
therefore materially affected by economical, political and competitive
conditions prevailing in Germany, and in particular the economic conditions
affecting those sectors of German industry to which the Company sells its
products.
Results of Operations of the Company
The following table sets forth the percentage relationship to revenues of
certain income statement items for the periods presented with respect to the
Company:
<TABLE>
<CAPTION>
Year Ended December 31, 1997(1) 1996(1) 1995(1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of sales 66.6 71.5 66.1
Gross profit 33.4 28.5 33.9
Selling, general and administrative expenses 25.3 25.7 22.2
Research, development and engineering expenses 5.3 8.8 4.3
Amortization of intangibles 5.1 5.0 3.0
Royalty (income)-affiliates --- (0.4) (0.8)
Operating (loss) income (2.3) (10.6) 5.2
Interest expense 2.4 2.3 2.9
Other (income), net (1.0) (0.7) (0.4)
(Loss) income before income taxes, minority
interest and extraordinary item (3.7) (12.2) 2.7
Income tax benefit (2.6) (4.1) (1.5)
Minority interest in net income of subsidiaries --- --- 0.5
Minority interest - dividends on preferred
securities of grantor trust 1.1 1.0 ---
(Loss) income before extraordinary item (2.2) (9.1) 3.7
Extraordinary item - early extinguishment of debt
(write-off of deferred financing costs) --- --- (0.1)
Net (loss) income (2.2%) (9.1%) 3.6%
</TABLE>
(1) In connection with the Company's 1997 restructuring measures to reduce
costs and improve efficiencies, the 1996 acquisition of Hartmann & Braun
and the 1994 acquisition of Fischer & Porter, the Company incurred
substantial nonrecurring charges which affected cost of sales, selling,
general and administrative expenses, research, development and engineering
expenses and amortization of intangibles. Excluding these nonrecurring
charges from 1997, 1996 and 1995 results, and the pre-tax charge to cost of
sales in 1995 relating to the Detroit contract, gross profit, operating
income and net income as a percentage of revenues for 1997, 1996 and 1995
would have been 34.7%, 36.5% and 35.1%; 2.9%, 5.4% and 6.7%; and 1.3%, 2.5%
and 4.6%, respectively.
22
<PAGE>
1997 Compared to 1996
The Company's results of operations for 1997 include the results of the Italian
Licensee, acquired on December 30, 1996. The 1997 results of operations were
negatively affected by the strength of the US Dollar relative to the currencies
of significant operations in Europe and Japan.
Revenues
Revenues decreased by $93 million, or 5.8%, from $1,606 million in 1996 to
$1,513 million in 1997. In 1997, the US Dollar strengthened in relation to most
foreign currencies, and in particular the DM and Yen, which resulted in a $125
million decrease in revenue when compared to the average exchange rates for
1996. Excluding currency impact, revenues increased by $32 million, of which
approximately $80 million relates to the net revenue contribution of the Italian
Licensee. The underlying decrease in revenues is attributed to weak market
conditions in Germany, France and Japan.
Revenues from operations in the Americas region decreased by 1.8%, from $565
million in 1996 to $555 million in 1997. Revenues in the region continue to be
affected by the low level of capital spending in the United States' electrical
utilities market. The deregulation of this industry in the United States has
prompted many utilities to postpone capital investment projects. As the United
States represents the Company's largest market in the Americas region, this
trend has adversely affected the Company's revenues and will continue to do so
until spending levels by utilities increase. In addition, revenues from the
Company's North American analytical operations declined as a result of their
transition to the newest generation product line which was introduced to the
market in January 1998.
Revenues in Germany declined by 24.9%, from $551 million in 1996 to $414 million
in 1997. Excluding currency impact, revenues declined by 11.0%. Although some
signs of economic recovery are evident, capital spending in the industries
traditionally served by Hartmann & Braun remains weak and competition in the
German marketplace has been intense. In addition, the extent and duration of the
restructuring actions in Germany, over the last two years, may have contributed
to the lower revenues of the region. However, these restructuring efforts have
positively impacted the cost structure and are expected to provide future
benefits.
Revenues from operations in the Asia/Pacific region decreased by 4.8%, from $124
million in 1996 to $118 million in 1997; $8 million of the decrease was due to
the strength of the US Dollar relative to the Yen. Revenues in the region were
affected by the continued weakness of the Japanese economy, the Company's
largest market in this region.
Revenues in the Rest of the World, including Europe other than Germany,
excluding currency impact increased by 26.7% in 1997. Approximately 22.0% of the
1997 increase is due to the contributions from the Italian Licensee. Revenues
were $367 million in 1996 and $426 million in 1997.
Gross Profit
Absent the nonrecurring costs described below, gross profit in 1997 and 1996
would have been $525 million and $586 million, or 34.7% and 36.5% of revenues,
respectively. The decline in gross profit is attributable to weak market
conditions, particularly in Germany, and the increasing level of competition in
the marketplace. Nonrecurring costs associated with the Company's 1997
restructuring and 1996 Hartmann & Braun integration plan negatively affected
gross profit in 1997 and 1996, respectively. In 1997, the Company recorded $20
million of nonrecurring costs related primarily to severance and related
benefits for employee terminations. In 1996, the Company recorded a $109 million
non-cash charge representing the fair value of the acquired Hartmann & Braun
inventory over its replacement cost and $20 million of charges associated with
severance and related benefits for terminated employees as well as charges for
the closure of facilities. Including nonrecurring costs, the Company's gross
profit increased by $48 million, or 10.5%, from $457 million in 1996 to $505
million in 1997. As a percentage of revenues, gross profit increased from 28.5%
to 33.4%.
23
<PAGE>
Operating Income
Absent the nonrecurring costs, operating income would have been $44 million and
$87 million for 1997 and 1996, or 2.9% and 5.4% of revenues, respectively. In
addition to the nonrecurring costs recorded to cost of sales, various
nonrecurring costs related to the 1997 restructuring measures and the 1996
integration of Hartmann & Braun were recorded to other components of operating
income. Selling, general and administrative expenses included nonrecurring costs
of $15 million and $28 million in 1997 and 1996, respectively, for severance and
related benefits for the terminated employees and the closure of facilities
associated with the acquisition of Hartmann & Braun. Absent these nonrecurring
costs, selling, general and administrative expenses in 1997 and 1996 would have
been $368 million and $386 million, or 24.3% and 24.0% of revenues,
respectively. Research, development and engineering expenses, in 1997, included
$5 million of nonrecurring costs primarily for severance and related benefits
for terminated employees. In 1996 the same expense category included $6 million
of nonrecurring costs for severance and related benefits for terminated
employees and the closure of facilities and a $57 million non-cash charge for
the write-off of purchased in-process research and development. Absent these
nonrecurring charges, research, development and engineering expenses in 1997 and
1996 would have been $75 million and $78 million, or 5.0% and 4.9% of revenues,
respectively.
In the fourth quarter of 1997, the market release of the first components of the
Symphony Enterprise Management and Control System was completed. Amortization of
intangibles in 1997 includes $38 million for technology and capitalized software
written off as a result of the release of Symphony.
In 1996, the acquisition of Hartmann & Braun caused the Company to re-evaluate
existing lines of business. Amortization of intangibles in 1996 includes a $38
million non-cash write down of technology and goodwill relating to certain of
the Company's lines of business. In 1997, the stronger US Dollar resulted in an
unfavorable translation effect of approximately $7 million on operating income
before nonrecurring costs when compared to the 1996 average exchange rates.
The nonrecurring costs, described above, impacted each of the geographic regions
as follows:
Year Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------
(In millions)
Americas $ 9 $ 48 $ 11
Germany 29 173 ---
Asia/Pacific 3 3 ---
Rest of World 38 34 1
Total $ 79 $ 258 $ 12
Absent the nonrecurring costs noted above; (i) operating income in Germany
decreased from $42 million in 1996 to $12 million in 1997 due to weak market
conditions, (ii) operating income in the Americas decreased from $29 million in
1996 to $19 million in 1997, (iii) operating income in the Rest of the World
increased from $8 million in 1996 to $14 million in 1997 which included a
contribution from the Italian Licensee and (iv) operating income in Asia/Pacific
decreased from $8 million in 1996 to a loss of $0.6 million in 1997 due
primarily to the decreased performance in the Japanese market.
Interest
Interest expense remained flat at $37 million in 1997 and l996. This reflects
the higher average borrowing levels in 1997 due to the cash outflows for the
continued restructuring and integration of Hartmann & Braun, offset by a
reduction in average interest rates due to a shift in the mix of borrowing to
currencies bearing lower interest rates than US Dollar denominated debt, and a
reduction due to currency translation.
Other Income and Expense, Net
Other income increased by $4 million from $11 million in 1996 to $15 million in
1997. The change was primarily due to a $6 million foreign currency exchange
gain realized in the first quarter of 1997 and a $1.5 million pre-tax
24
<PAGE>
gain related to the divestiture of certain business lines recorded in the fourth
quarter, both of which were offset by lower interest earnings of approximately
$2 million.
Benefit from Income Taxes and Extraordinary Item
On a consolidated basis, the Company's income tax benefit decreased from $67
million on a pre-tax loss of $197 million in 1996 to $39 million on a pre-tax
loss of $57 million in 1997. Absent nonrecurring costs, the Company's effective
tax rate was a charge of 8.3% in 1996 and benefit of 57.3% in 1997. Overall, the
Company's effective tax benefit of 68.1% and 33.8% in 1997 and 1996, reflects
the recognition of deferred tax benefits associated with a series of European
tax rulings obtained in 1994. The primary element of the benefits is
approximately $150 million of tax deductions to be received over 17 years,
beginning January 1994. For accounting purposes, the Company had been
recognizing the benefit of the deductions ratably over the six-year life given
to the underlying assets; in 1997, these assets were fully amortized and the
residual tax benefit of $11 million, net of reserves, was recorded.
The Company has significant deferred tax assets largely related to the
restructuring activities undertaken, most significantly in Germany. Although the
German deferred tax assets have an indefinite carryforward period, management is
committed to a plan to accelerate the realization of these deferred tax assets.
Management believes it is more likely than not that the deferred tax assets will
be realized; however, if not, a significant charge relating to these deferred
tax assets could result. In the fourth quarter of 1997, the Company has
recognized a valuation allowance of $11 million.
25
<PAGE>
The extraordinary item in 1996 relates to the accelerated write-off of
capitalized debt issue costs, recorded in conjunction with the January 1996
acquisition and refinancing.
1996 Compared to 1995
The Company's results of operations for 1996 include Hartmann & Braun for the
period beginning January 2, 1996, the acquisition date. The results of
operations for the Italian Licensee were not included in the Company's 1996
results of operations with the exception of $1 million of restructuring and
integration costs. The 1996 results of operations were negatively affected by
the movement of exchange rates between the US Dollar and the foreign currencies
of significant international operations, namely Germany and Japan.
Revenues
Revenues increased by $762 million, or 90.3%, from $844 million in 1995 to
$1,606 million in 1996. The majority of this increase was due to the acquisition
of Hartmann & Braun. Revenues for 1996 if compared to 1995 revenues on a
proforma basis, including Hartmann & Braun revenues from January 1, 1995,
decreased by $240 million, or 13.0%, from $1,846 million in 1995 to $1,606
million in 1996. This decrease was attributed to weak market conditions in
Germany and Japan, the decline in revenues from large systems contracts in
Hartmann & Braun due to the substantial completion in early 1996 of three large
contracts acquired in 1992 and also to exchange rates. In 1996, the rise of the
US Dollar in relation to foreign currencies, primarily the DM and Yen, resulted
in $57 million decrease in revenue when compared to the average exchange rates
for 1995. The relationship of revenue increases by geographic region reflects
primarily the merging of Hartmann & Braun which had the majority of its revenues
in Europe with approximately half in Germany alone.
Revenues from operations in the Americas region increased by 25.6%, from $450
million in 1995 to $565 million in 1996. The growth in revenues was primarily
attributed to the acquisition of Hartmann & Braun's analytical businesses
located in North America. Aside from the acquisition, revenues in the region
continued to be affected by lower capital spending in the United States'
electrical utilities market. The deregulation of this industry in the United
States prompted many utilities to postpone capital investment projects. As this
represents the Company's largest market in the Americas region, this trend
negatively affected the Company's revenues.
Revenues in Germany grew by 803%, from $61 million in 1995 to $551 million in
1996. The increase was due almost entirely to the acquisition of Hartmann &
Braun which had approximately half of its business in Germany. The slow pace of
the overall economic recovery in Germany has negatively affected the capital
spending of the industries traditionally served by Hartmann & Braun. In
addition, the magnitude of the restructuring that took place in Germany
following the acquisition of Hartmann & Braun contributed to the less than
expected operating results of the region.
Revenues from the operations in Asia/Pacific decreased by 17.9%, from $151
million in 1995 to $124 million in 1996. Revenues in the region were affected by
the continued weakness of the Japanese economy, the Company's largest market in
this region.
Revenues in the Rest of the World, including Europe other than Germany, grew by
102%, from $182 million in 1995 to $367 million in 1996. A substantial portion
of the growth was due to the acquisition of Hartmann & Braun which historically
derived a large percentage of its non-German revenue from the European market.
Revenues in the Rest of the World were favorably affected by spending on North
Sea Oil related projects, offset somewhat by lower spending levels of electric
utilities, primarily in Europe.
Gross Profit
The Company's gross profit increased by $171 million, or 59.7%, from $286
million in 1995 to $457 million in 1996. As a percentage of revenues, gross
profit decreased from 33.9% to 28.5%. Nonrecurring costs associated with the
Hartmann & Braun and Fischer & Porter acquisitions negatively affected gross
profit in 1996 and 1995. In 1996, the Company recorded a $109 million non-cash
charge representing the fair value of the acquired Hartmann &
26
<PAGE>
Braun inventory over its replacement cost and $20 million of charges associated
with severance and related benefits for terminated employees as well as charges
for the closure of facilities. In 1995, the Company recorded $0.1 million for
nonrecurring costs associated with the acquisition of Fischer & Porter. In
addition, the Company recorded a $12 million charge to cost of sales in 1995
relating to the City of Detroit contract. Absent the nonrecurring costs
described above, gross profit in 1996 and 1995 would have been $586 million and
$296 million, or 36.5% and 35.1% of revenues, respectively. The proforma
increase in gross profit percentage is attributed to product mix due to the
higher proportion of instrumentation sales in 1996 stemming from the acquisition
of Hartmann & Braun.
27
<PAGE>
Operating Income
Operating income decreased by $215 million or 489% from $44 million in 1995 to a
loss of $171 million in 1996. Operating income was affected by higher
amortization charges following the acquisition of Hartmann & Braun. In addition
to the nonrecurring costs recorded to cost of sales, various nonrecurring costs
associated with the Hartmann & Braun and Fischer & Porter acquisitions were
recorded to other components of operating income. In 1996, selling, general and
administrative expenses included $28 million of nonrecurring costs for severance
and related benefits for the terminated employees and the closure of facilities
associated with the acquisition of Hartmann & Braun. In 1995, selling, general
and administrative expenses included $3 million of nonrecurring costs for
severance and related benefits associated with the acquisition of Fischer &
Porter. Absent these nonrecurring costs, selling, general and administrative
expenses in 1996 and 1995 would have been $386 million and $184 million, or
24.0% or 21.8% of revenues, respectively. In 1996, associated with the
acquisition of Hartmann & Braun, research, development and engineering expenses
included $6 million of nonrecurring costs for severance and related benefits for
terminated employees and the closure of facilities and a $57 million non-cash
charge for the write-off of purchased in-process research and development. In
1995, research, development and engineering expenses included $0.1 million of
nonrecurring costs for severance and related benefits associated with the
acquisition of Fischer & Porter. Absent these nonrecurring charges, research,
development and engineering expenses in 1996 and 1995 would have been $78
million and $36 million, or 4.9% and 4.3% of revenues, respectively.
As previously mentioned, the acquisition of Hartmann & Braun caused the Company
to re-evaluate existing lines of business. Amortization of intangibles in 1996
included a $38 million non-cash write down of technology and goodwill relating
to certain of the Company's lines of business held for sale or being combined
into other existing businesses, resulting from decisions undertaken while
integrating the Hartmann & Braun operations into those of the Company. Absent
the nonrecurring charges described above, operating income would have been $87
million or 5.4% of revenue in 1996 compared to $57 million or 6.8% of revenue in
1995. In 1996, the stronger US Dollar resulted in an unfavorable translation
effect of approximately $2 million on operating income before nonrecurring costs
when compared to the 1995 average exchange rates.
Absent the nonrecurring costs noted above; (i) operating income in Germany
increased from a loss of $0.4 million in 1995 to $42 million in 1996 due to the
acquisition of Hartmann & Braun, (ii) operating income in the Americas decreased
from $30 million in 1995 to $29 million in 1996, (iii) operating income in the
Rest of the World decreased from $9 million in 1995 to $8 million in 1996, and
(iv) operating income in Asia/Pacific decreased from $18 million in 1995 to $8
million in 1996 due primarily to the decreased performance in the Japanese
market.
Interest
Interest expense increased from $25 million in 1995 to $37 million in l996.
Despite the Company's lower borrowing rates, the increase reflects the higher
borrowing levels used to finance the acquisition of Hartmann & Braun. Interest
expense was not materially affected by foreign currency translation.
Other Income and Expense, Net
Other income increased by $8 million from $3 million in 1995 to $11 million in
1996. The change was primarily due to an increase in interest income associated
with the trust account designated to fund certain pension benefits in Germany
and foreign currency exchange gains.
Benefit from Income Taxes and Extraordinary Items
On a consolidated basis, the Company's income tax benefit increased from $13
million on pre-tax income of $23 million in 1995 to $67 million on a pre-tax
loss of $197 million in 1996. Absent nonrecurring costs, the Company's effective
tax rate was a benefit of 23.7% in 1995 and a charge of 8.3% in 1996. Overall,
the benefit provision reflects the recognition of tax benefits, including
deferred tax benefits associated with a series of European tax rulings obtained
in 1994. The primary element of the benefits is approximately $150 million of
tax deductions to be
28
<PAGE>
received over 17 years, beginning January 1994, which have no corresponding
pre-tax charge. For accounting purposes, the benefit of the deductions is
recognized ratably over six years beginning January 1994.
The extraordinary items in 1996 and 1995 relate to the accelerated write-off of
capitalized debt issue costs. The 1996 charge was recorded in conjunction with
the January acquisition and refinancing and the 1995 charge was recorded
coincident with the August 1995 refinancing (see Liquidity and Capital
Resources).
29
<PAGE>
Weighted Average of Common Shares Outstanding
The weighted average number of common shares outstanding in 1997 for the purpose
of computing basic earnings per share ('EPS') was 29,202,000 compared to
27,886,000 in 1996. The increase was due to shares issued to Finmeccanica as
consideration for the Italian Licensee in December 1996 (Note 3). Shares used in
the basic EPS and diluted EPS computations are the same in 1997 and 1996 due to
the Company's net loss.
Inflation
While the Company conducts business in numerous countries around the world,
inflation has not had a significant effect in the regions where its principal
operating units are located. Moreover, while pricing pressures have limited
revenue increases, cost containment efforts have helped maintain operating
income levels. Specifically, productivity increases have helped offset labor and
overhead cost increases. Generally, the Company has experienced a favorable
trend in the cost of purchased products and components. The operations conducted
by the Company in areas of the world experiencing hyperinflation are not
material to the Company's Consolidated Financial Statements.
Seasonality
Although the Company's business is not seasonal in the traditional sense,
earnings have tended to concentrate in the second half of each calendar year. In
1997 and 1996, this trend was offset in part by the slow growth in served
markets, principally electric utilities, and Germany.
Liquidity and Capital Resources
The Company's net debt at December 31, 1997 and 1996 was $604 million and $681
million, respectively. The reduction in 1997 resulted from the improved
management of working capital, the divestiture of non-core or under-performing
assets, and the impact of currency translation.
At December 31, 1997 and 1996, $287 million of convertible preferred securities,
issued by a special purpose business trust (a wholly-owned subsidiary of the
Company) were outstanding. The preferred securities, cumulative from the date of
issue, require an annual dividend of 5.5% on their aggregate liquidation amount
of $287 million. The annual dividend is payable in quarterly installments.
In connection with the financing needs arising from the 1996 acquisition of
Hartmann & Braun, the Company entered into a financing agreement ('BofA Credit
Facility') agented by Bank of America ('BofA') and Merrill Lynch Capital
Corporation. This agreement is comprised of sub-facilities including a US Dollar
denominated term loan principal amount of $200 million, a DM denominated term
loan principal amount of the US Dollar equivalent of DM 286.5 million, and a
multicurrency reducing revolving sub-facility, in the principal amount of the US
Dollar equivalent of $355 million. The reducing revolving sub-facility provides
for multicurrency borrowing options and US Dollar or DM denominated letter of
credit options.
At December 31, 1997, under the BofA Credit Facility the Company had $102
million of total availability and $540 million outstanding. The outstanding $540
million BofA Credit Facility was comprised of $160 million of US Dollar term
loans, $127 million of DM term loans and $253 million of primarily US Dollar
revolving credit facilities. At December 31, 1997, the US Dollar and DM term
loans bore interest of 6.1% and 4.1%, respectively, while the revolving credit
facility bore interest of 5.0% to 6.3%. In addition, fees are payable with
respect to outstanding letters of credit and on the banks' commitments.
The Company's majority shareholder, Finmeccanica, has recently selected an
investment bank to advise in reviewing its options relative to the disposition
of its holdings in the Company. As a result, the Company has determined that it
was in the best interest to postpone its earlier decision to proceed with the
refinancing of its long-term debt through access to public debt markets and the
issue of new bank debt, until later in the year.
30
<PAGE>
In the meantime, the terms and conditions of the BofA Credit Facility were
amended effective February 27, 1998. Further to this amendment, a $150 million
prepayment of the outstanding term loans was made utilizing the proceeds of a
committed line of credit from Cofiri S.p.A. ('Cofiri'), an affiliate of the
Company by virtue of being a wholly-owned subsidiary of Istituto per la
Ricostruzione Industriale - IRI S.p.A. ('IRI') which is the majority shareholder
of Finmeccanica. This committed line of credit amounting to $150 million, fully
drawn on February 27, 1998, bears interest at LIBOR plus a spread of 115 basis
points and is repayable in full on April 30, 1999.
Pursuant to the February 27, 1998 amendment, the BofA Credit Facility will
terminate and is repayable in full on January 14, 1999. The term loans will
continue to amortize in equal quarterly installments of approximately $8.6
million and are payable at the end of each calendar quarter. Subsequent to
February 27, 1998 the loans advanced under the BofA Credit Facility will bear
interest at LIBOR plus a spread of 112.5 basis points up to June 30, 1998, 125
basis points up to September 30, 1998 and 150 basis points thereafter.
Both the BofA Credit Facility, as amended, and the Cofiri line of credit have a
change in control provision, whereby in the event Finmeccanica ceases to own at
least 51% of the voting shares of the Company, the facilities become payable. In
any event, the aforementioned BofA Credit Facility will be classified as current
maturities at March 25, 1998.
In connection with the February 1998 amendment of the BofA Credit Facility,
previously capitalized debt issue costs of $3.5 million will be expensed in the
first quarter of 1998 as an Extraordinary item in the Consolidated Statement of
Income.
The Company has pledged the capital stock of certain of its subsidiaries and the
BofA Credit Facility is guaranteed by certain of the Company's subsidiaries and
by a lien on the tangible assets of the Company's United States subsidiaries.
The facility limits the Company's ability to pay dividends on the preferred
securities of its subsidiary and prohibits the payment of dividends on the
Company's common stock. The terms of the agreement obligate the Company to
maintain a variety of covenants and financial ratios. These covenants were
amended both in October 1997 and February 1998 due to the shortfall in earnings
compared to initial expectations. In addition, the BofA Credit Facility requires
the Company to enter into interest rate protection agreements and restricts the
Company's borrowings outside the facility, as well as its ability to have liens,
encumbrances, capital expenditures and other items.
As previously discussed, the Company's borrowings are principally subject to
variable interest rates. In order to reduce the risk associated with certain of
its variable rate indebtedness, and in order to meet its obligations with
respect to the BofA Credit Facility, the Company entered into an interest rate
swap agreement through May, 1999. The swap agreement requires the Company to pay
a fixed rate of 3.91% and to receive a floating rate based on LIBOR on a
notional amount of DM 230 million. Net payments or receipts under this agreement
are recorded in the period to which the payments relate as an adjustment to
interest expense.
During 1997 the Company made capital expenditures of $36 million and incurred
$80 million of research, development and engineering costs.
The Company's liquidity needs arise principally from working capital
requirements, research and development costs, capital expenditures and interest
payments on its indebtedness, including dividends on preferred securities. In
addition, the Company incurred significant cash outlays in 1997 and 1996
relative to the employee terminations and facility closures. The Company will
continue to incur such outlays in 1998 and to a lesser extent in 1999, as it
funds severance and related costs associated with the reduction in work force of
the combined companies (see Outlook). The Company anticipates that it will be
able to satisfy its near-term cash requirements for operations primarily with
cash generated by operations, borrowings under its credit facilities, continual
improvements with respect to working capital levels and to a lesser extent
through the divestiture of non-core assets and investments. In addition to the
BofA Credit Facility, the Company's subsidiaries generally fund their short-term
cash requirements through lines of credit negotiated independently.
Outlook
31
<PAGE>
The Company is currently working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Company's internal
computerized information systems. The Company is also communicating with its
installed customer base to help identify and resolve the year 2000 issues. Based
on preliminary information, costs of addressing potential problems are not
currently expected to have a material adverse impact on the Company's financial
position, results of operations, or cash flows in future periods. However, if
the Company, its customers, or vendors are unable to resolve such processing
issues on a timely manner, it could result in a material financial risk.
Accordingly, the Company plans to devote the necessary internal resources and
align itself with an external partner in order to resolve all significant year
2000 issues in a timely manner.
The Company's 1997 restructuring initiatives included additional restructuring
in Germany, although the plan was not entirely finalized as of December 31,
1997. With respect to this 1997 initiative an additional pre-tax restructuring
charge of $7 million will be recorded in the first quarter of 1998. At this
time, there can be no assurance as to the ultimate outcome of the Company's
restructuring and integration plans, as to the ultimate cost of such plans and
the impact of such cost on the Company's earnings or as to the timing of any
benefits to the Company of the implementation of such plans.
Looking forward to 1998 operations, market conditions in most of Europe, Japan
and in the US electrical utilities market are not expected to strengthen
significantly.
32
<PAGE>
New Accounting Pronouncements
The Company adopted SFAS 121 'Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed of' and SFAS 123 'Accounting for
Stock-Based Compensation' in 1996, and SFAS 128 'Earnings Per Share' in 1997.
The Company is required to adopt SFAS 130 'Reporting Comprehensive Income' and
SFAS 131 'Disclosures about Segments of an Enterprise and Related Information',
both disclosure-related standards, in its 1998 Consolidated Financial
Statements.
Cautionary Statement -- Certain Risk Factors
This document contains 'forward-looking' statements within the meaning of the
federal securities laws of the United States. These forward-looking statements
include, among others, statements concerning the Company's outlook for 1998, the
financial and technological benefits the Company expects to receive from its
newly introduced Symphony enterprise management and control system, and other
product introductions, the Company's expected earnings and results, the
continued restructuring of the Hartmann & Braun operations and the realization
of cost savings therefrom, the effect of foreign currency fluctuations relative
to the US Dollar, changes in the Company's rates or basis of income taxation,
management's belief as to the outcome of the City of Detroit litigation, the
anticipated costs of environmental compliance, market conditions in Europe and
Japan, the electric utility market in the U.S., the Company's management of a
competitive pricing environment, the Company's utilization of tax (and
particularly German) assets, continued spending on North Sea oil projects, the
favorable trend in costs of purchased products and components, cash outlays in
connection with employee terminations in 1998 and 1999 and the timing of those
terminations, expectations as to near-term cash requirements, the anticipated
costs of achieving Year 2000 compliance, and any other statements concerning
future plans, strategies or anticipated events or matters which are not
historical facts. Actual results and performance of the Company could differ
materially from those expressed in or implied by these forward-looking
statements as a result of a number of known and unknown risks.
Among the important factors that could prevent the Company from achieving its
goals - and cause actual results to differ materially from those expressed in
the forward-looking statements - include, but are not limited to, the following
risk factors: (i) increased dependence on large system contracts, (ii) adverse
economic conditions in the principal industries and geographical areas to which
the Company sells, particularly the effect of recent adverse economic
developments in East Asia, (iii) changes in market conditions, including the
effect of deregulation in the electric power industry, (iv) risk associated with
Company's investment and substantial operations outside of the United States,
particularly Germany, including those related to the local economic and market
conditions, exchange rate fluctuations, local regulatory requirements and
political factors, (v) timely introduction and acceptance by the process
automation markets of the Company's new Symphony enterprise management and
control system and other key product introductions, (vi) the ability of the
Company to successfully and timely complete the restructuring of Hartmann &
Braun operations, (vii) the effect on the Company of any Finmeccanica
announcement regarding the disposition of its interests in the Company, (viii)
the competitive nature of the industry and potential impact of industry
consolidation, (ix) the uncertainties and risks inherent in any litigation to
which the Company is a party and lack of assurances of a positive outcome
thereupon with particular reference to the City of Detroit litigation, (x)
effects of compliance with the changes in government regulations, with
particular reference to environmental regulations, and (xi) changes in the
Company's rates or basis of income taxation.
These and other risks and uncertainties affecting the Company are discussed in
greater detail in the Company's 20-F and in other filings by the Company with
the United States Securities and Exchange Commission.
33
<PAGE>
consolidated statement of income
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
(Amounts in Thousands, Except Share Data)
<S> <C> <C> <C>
Revenues(1) $ 1,513,237 $ 1,606,100 $ 843,874
Cost of sales 1,008,386 1,148,840 557,646
Gross profit(2) 504,851 457,260 286,228
Selling, general and administrative expenses(3)(4) 382,954 413,214 187,224
Research, development and engineering expenses 80,107 141,335 36,218
Amortization of intangibles 76,596 80,396 25,197
Royalty income - affiliates -- (7,117) (6,463)
Operating (loss) income (34,806) (170,568) 44,052
Interest expense 36,705 37,341 24,721
Other (income) and expense, net (14,650) (10,877) (3,187)
(Loss) income before income taxes, minority interest,
and extraordinary item (56,861) (197,032) 22,518
Income tax benefit (38,719) (66,528) (12,546)
Minority interest in net income (loss) of subsidiaries (850) -- 3,440
Minority interest - dividends on preferred securities of grantor trust 15,994 16,084 380
(Loss) income before extraordinary item (33,286) (146,588) 31,244
Extraordinary item - early extinguishment of debt -
(write-off of deferred financing costs) -- (718) (651)
Net (loss) income $ (33,286) $ (147,306) $ 30,593
Earnings per common share - basic:
(Loss) income before extraordinary item $ (1.14) $ (5.26) $ 1.34
Extraordinary item - early extinguishment of debt -
(write-off of deferred financing costs) -- (0.02) (0.03)
Net (loss) income $ (1.14) $ (5.28) $ 1.31
Weighted average shares outstanding 29,202,000 27,886,000 23,400,000
Earnings per common share - diluted:
(Loss) income before extraordinary item $ (1.14) $ (5.26) $ 1.33
Extraordinary item - early extinguishment of debt -
(write-off of deferred financing costs) -- (0.02) (0.03)
Net (loss) income $ (1.14) $ (5.28) $ 1.30
Weighted average shares outstanding 29,202,000 27,886,000 23,470,000
</TABLE>
(1) Includes sales to affiliates of $50,078, $42,452 and $19,779 for the years
ended December 31, 1997, 1996 and 1995, respectively (Note 17).
(2) Includes gross profit on sales to affiliates of $11,668, $16,556 and $7,714
for the years ended December 31, 1997, 1996 and 1995, respectively (Note
17).
(3) Includes charges from affiliates for reimbursement of costs incurred and
services performed amounting to $7,089, $2,300 and $3,782 for the years
ended December 31, 1997, 1996 and 1995, respectively (Note 17).
(4) Includes reimbursements for costs incurred in performing services on behalf
of affiliates amounting to $585 and $739 for the years ended December 31,
1996 and 1995, respectively.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
34
<PAGE>
consolidated balance sheet
<TABLE>
<CAPTION>
December 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------
(Amounts in Thousands, Except Share Data)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 15,179 $ 21,241
Accounts receivable(1) 326,630 404,535
Amounts due from affiliates 17,496 20,053
Costs in excess of billings on uncompleted contracts 147,571 169,006
Inventory 263,069 289,492
Refundable and deferred income taxes 37,034 51,094
Other current assets 34,989 25,982
Total current assets 841,968 981,403
Property, plant and equipment, net 280,946 342,289
Technology, goodwill and other intangibles 448,715 552,195
Deferred tax assets 267,990 203,489
Other assets 98,534 105,318
Total assets $ 1,938,153 $ 2,184,694
Liabilities and Shareholders' Equity
Current Liabilities:
Notes payable $ 58,628 $ 40,001
Current maturities of long-term debt 39,107 82,886
Accounts payable 120,010 113,186
Amounts due to affiliates 6,228 8,219
Billings in excess of costs on uncompleted contracts 56,996 93,431
Accrued employee benefits 116,615 141,775
Accrued and deferred income taxes 65,663 76,087
Other accrued liabilities 154,860 184,614
Total current liabilities 618,107 740,199
Long-term debt 520,968 579,072
Pension and other postretirement benefits 224,980 257,672
Other non-current liabilities 78,838 59,571
Minority equity in subsidiaries 9,208 10,586
Minority equity -- Company obligated preferred securities of grantor trust(2) 279,067 278,858
Shareholders' Equity:
Common stock, NLG 1.00 par value per share, 75,000,000 shares authorized
and 29,202,000 outstanding at 1997 and 1996 16,461 16,461
Priority shares, NLG 1.00 par value per share, 1,000 shares authorized;
none outstanding -- --
Additional paid in capital 385,254 385,254
Retained deficit (169,292) (136,006)
Foreign currency translation adjustment and other equity (25,438) (6,973)
Total shareholders' equity 206,985 258,736
Total liabilities and shareholders' equity $ 1,938,153 $ 2,184,694
Commitments and contingencies (Note 16) $ -- $ --
</TABLE>
(1) Net of allowances of $15,520 and $17,366 at December 31, 1997 and 1996,
respectively.
(2) The sole asset of the grantor trust is the principal amount of the
Company's 5.5% convertible subordinated debentures due 2035, of $295,876 at
December 31, 1997 and 1996.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
35
<PAGE>
consolidated statement of changes in shareholders' equity
<TABLE>
<CAPTION>
Foreign
Currency
Additional Retained Translation
Common Stock Paid (Deficit) and
Shares Amount in Capital Earnings Other Equity Total
------ --------- --------- --------- --------- ---------
(Amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1994 23,400 $ 12,912 $ 241,303 $ 2,102 $ (4,999) $ 251,318
Net income -- -- -- 30,593 -- 30,593
Foreign currency translation
and other -- -- -- -- (4,910) (4,910)
Balance -- December 31, 1995 23,400 12,912 241,303 32,695 (9,909) 277,001
Net loss -- -- -- (147,306) -- (147,306)
Net proceeds from common stock
issuances of exercised options 16 9 292 -- -- 301
Shares issued to majority shareholder
for cash and as consideration for
business acquisition(1) 5,786 3,540 143,659 -- -- 147,199
Excess of purchase price over net book
value of business acquired from
majority shareholder(1) -- -- -- (21,395) -- (21,395)
Foreign currency translation and other -- -- -- -- 2,936 2,936
Balance -- December 31, 1996 29,202 16,461 385,254 (136,006) (6,973) 258,736
Net loss -- -- -- (33,286) -- (33,286)
Foreign currency translation and other -- -- -- -- (18,465) (18,465)
Balance -- December 31, 1997 29,202 $ 16,461 $ 385,254 $(169,292) $ (25,438) $ 206,985
</TABLE>
(1) See Note 3.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
36
<PAGE>
consolidated statement of cash flows
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
(Amounts in Thousands)
<S> <C> <C> <C>
Cash flows provided by (used for) operating activities:
Net income (loss) $ (33,286) $ (147,306) $ 30,593
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation 42,416 44,576 23,181
Amortization 76,596 80,396 25,197
Non-cash charges related to acquisitions -- 165,818 --
Non-cash charges related to debt refinancing -- 798 1,050
Gain on disposal of assets (2,162) -- --
Deferred income taxes (52,613) (83,922) (17,725)
Dividends on preferred securities 15,785 16,196 --
Changes in operating assets and liabilities, net of
effects from acquisition of businesses:
Decrease in accounts receivable 74,756 33,417 11,012
(Increase) decrease in amounts due to/from affiliates 566 6,481 (7,845)
(Increase) decrease in costs in excess of billings on uncompleted contracts 20,885 16,239 (2,812)
(Increase) decrease in inventory 22,325 8,834 (16,908)
Increase (decrease) in accounts payable 7,799 (45,586) 11,152
Increase (decrease) in billings in excess of costs on uncompleted contracts (36,435) (38,416) 8,848
Decrease in accrued employee benefits and other accrued liabilities (56,924) (74,574) (32,469)
Other (11,128) 17,022 (9,032)
Net cash provided by (used for) operating activities 68,580 (27) 24,242
Cash flows provided by (used for) investing activities:
Acquisition of businesses, less cash and cash equivalents acquired -- (712,905) (9,752)
Cash restricted for business acquisition financing -- 201,316 (201,316)
Purchase of property and equipment (36,207) (33,051) (18,311)
Increase in technology, goodwill and other intangibles (15,207) (9,352) (10,668)
Proceeds from sale of assets 31,152 -- --
Other -- -- (3,200)
Net cash (used for) investing activities (20,262) (553,992) (243,247)
Cash flows provided by (used for) financing activities:
Proceeds from long-term borrowings 236,760 1,021,510 305,949
Repayments of long-term borrowings (307,935) (652,163) (276,795)
Net borrowings (repayments) under short-term facilities 18,627 9,367 (39,549)
Payment of deferred financing costs -- (6,119) (1,025)
Net proceeds from common stock issuance -- 118,414 --
Net proceeds from grantor trust's issuance of preferred securities -- 77,304 201,316
Dividends on preferred securities paid by grantor trust (15,785) (16,196) --
Net cash (used for) provided by financing activities (68,333) 552,117 189,896
Effect of exchange rates on cash 13,953 11,516 1,377
Net (decrease) increase in cash and cash equivalents (6,062) 9,614 (27,732)
Cash and cash equivalents at beginning of year 21,241 11,627 39,359
Cash and cash equivalents at end of year $ 15,179 $ 21,241 $ 11,627
Significant non-cash financing and investing activities were as follows:
Common stock issued for acquired companies (Note 3) $ -- $ 29,087 $ --
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
37
<PAGE>
notes to consolidated financial statements
(Amounts in Thousands, Except Share Data)
Note 1 -- Organization
Elsag Bailey Process Automation N.V. is a Netherlands company formed on October
28, 1993 (together with its subsidiaries, the 'Company') and is the successor to
the business of Bailey Controls Company which was acquired along with certain
affiliates by a subsidiary of Finmeccanica S.p.A. ('Finmeccanica') on October
31, 1989. Finmeccanica, an Italian engineering company, is the majority owner of
the Company, having a 61%, interest at December 31, 1997 and 1996. Finmeccanica
is majority owned by Istituto per la Ricostruzione Industriale--IRI S.p.A.
('IRI') (Note 17).
Note 2 -- Significant Accounting Policies
Basis of Accounting
The Consolidated Financial Statements and the Notes to Consolidated Financial
Statements are expressed in thousands of United States Dollars ('US Dollars')
and have been prepared in accordance with United States Generally Accepted
Accounting Principles ('US GAAP'). Certain prior year amounts have been
reclassified to conform to the current year's presentation.
Consolidation
The Consolidated Financial Statements include the accounts of all majority-owned
subsidiaries and subsidiaries in which the Company has control. The Company's
investments in other companies in which it does not have the ability to exercise
significant influence over operating and financial policies are accounted for
using the equity method. The Company's share of the net income (losses) of these
companies is included in the consolidated results of operations within other
(income) and expense, net. Investments in other companies, carried at cost, are
not significant. All significant intercompany transactions have been eliminated.
Cash
Cash and cash equivalents include cash and interest-bearing deposits, demand or
other, which mature within three months from the date of deposit.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using the
first-in, first-out ('FIFO') or average cost method.
Investments
The Company follows the provisions of Statement of Financial Accounting
Standards ('SFAS'), No. 115 'Accounting for Certain Investments in Debt and
Equity Securities,' when accounting for applicable investments. This standard
requires that certain debt and equity securities be adjusted to market value at
the end of each accounting period and that others be carried at amortized cost.
Unrealized market value gains and losses are included in earnings if the
securities are held for sale or deemed to be trading securities. Otherwise, such
unrealized gains and losses, if recognized, are included as a separate component
of shareholders' equity.
Management determines the proper classification of investments in obligations
with fixed maturities and marketable equity securities at the time of purchase
and reevaluates such designations as of each balance sheet date. At December 31,
1997, certain debt securities with fixed maturities are designated as held to
maturity. Accordingly, these securities are stated at amortized cost.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for maintenance
and repairs are charged to expense as incurred. When property is sold or
retired, the cost of the property and related accumulated depreciation are
removed from the balance sheet and any gain or loss is included in income.
Property, plant and
38
<PAGE>
equipment are generally depreciated using accelerated
methods for income tax purposes, and the straight-line method for financial
reporting purposes over the following estimated useful lives:
Buildings 20-50 years
Machinery and equipment 3-15 years
Leasehold improvements and furniture and fixtures 2-20 years
39
<PAGE>
Technology, Goodwill and Other Intangibles
Purchased technology is amortized over periods ranging from two to fifteen
years. Capitalized software development costs are amortized over periods ranging
from three to five years. Goodwill is amortized over periods ranging from ten to
thirty years. Other intangible assets are amortized over periods of up to
seventeen years. The Company experiences substantial competition and operates in
an environment of constant technological change. Therefore, it is reasonably
possible that the economic life attributed to each of the aforementioned
intangibles will be reduced in the near term. The Company periodically evaluates
the recoverability of intangible assets and related amortization periods.
Capitalized Software
Costs related to the conceptual formulation and design of software products and
other costs incurred prior to establishing technological feasibility are
expensed as product development costs. Costs incurred subsequent to establishing
the technological feasibility of software products are capitalized in accordance
with SFAS No. 86 "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed." Amortization of capitalized software costs,
which begins when products are available for general release to customers, is
calculated on a straight-line basis over the expected product lives.
Income Taxes
The Company accounts for income taxes utilizing an asset and liability approach.
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
"Earnings Per Share", which requires companies to present basic earnings per
share ('EPS') and diluted EPS, instead of the primary and fully diluted EPS
previously required. The new standard requires additional information and
disclosures, and makes certain modifications to the EPS calculations defined in
Accounting Principles Board No. 15. The adoption of the new standard is required
for the year ending December 31, 1997, and requires restatement of EPS for all
prior periods reported.
The convertible preferred securities issued by the Company's subsidiary (Note
11) and outstanding stock options under the Company's 1993 long-term Stock
Incentive Plan (Note 14) are included in the diluted EPS calculation to the
extent they are dilutive. Due to the net loss for 1997 and 1996, the effects
would be anti-dilutive. For 1995, convertible preferred securities were excluded
from the computation as their effect was anti-dilutive; however, outstanding
stock options had a dilutive effect. In accordance with SFAS 128, the following
is a reconciliation of the numerator and denominator of the basic and diluted
EPS computation for "income before extraordinary item" in 1995.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1995
Income Shares Per-Share
(Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS:
Income before extraordinary item $ 31,244 23,400,000 $ 1.34
Effect of Dilutive Options -- 70,000
Diluted EPS:
Income before extraordinary item
plus assumed exercise of options $ 31,244 23,470,000 $ 1.33
</TABLE>
A total of 1,000 priority shares, with a par value of 1.00 Netherlands Guilder
('NLG') per share have been authorized, none of which are issued or outstanding.
The priority shares are only issuable to Finmeccanica upon certain changes in
control of the Company.
40
<PAGE>
Foreign Currency Translation
Foreign currency translation of substantially all assets and liabilities of
non-United States affiliates is computed using period-end currency exchange
rates. Income and expense are translated using average exchange rates for the
period. Cumulative translation adjustments are presented as a separate component
of shareholders' equity. Foreign currency translation adjustments relating to
hyperinflationary currencies are included in other (income) and expense, net.
Revenue Recognition
The Company recognizes revenue and expense relating to system sales on the
percentage-of-completion method, measured on the basis of costs incurred as
compared to management's estimate of total costs, engineering costs incurred as
compared to management's estimate of total engineering costs, or units of
delivery. Management's estimates of costs are reviewed periodically as the work
on contracts progresses. Substantially all of the Company's projects are on
fixed-price terms; therefore, any revisions resulting from such periodic reviews
may affect the gross profit recognized. The Company records the cumulative
effect of these revisions on gross profit in the period when the revision is
determined. Revenues relating to contracts or contract changes that have not
been completely priced, negotiated, documented, or funded are not recognized
unless realization is considered probable and the amount can be reasonably
estimated. Many contracts are performed over extended periods of time and are
subject to changes in scope of work and delivery schedules. Until change orders
are approved, there can be no assurance that associated revenues will be
realized. Pricing negotiations on changes and settlement of claims often extend
over prolonged periods of time. Any anticipated losses on contracts (estimated
final contract costs, excluding period costs, in excess of estimated final
contract revenues) are charged to current operations as soon as they are
evident. The aggregate of all costs incurred, including direct subcontracting
charges, raw material, direct labor and certain indirect costs, and income
recognized on uncompleted contracts in excess of related billings is shown as a
current asset. The aggregate of billings in excess of costs incurred and income
recognized on uncompleted contracts is shown as a current liability.
Product and service revenues are recognized upon shipment or when services are
performed.
Research, Development and Engineering Expenses
The Company is actively engaged in basic technology, applied research and
development and general engineering programs that are designed to develop new or
improved products and process applications. The cost of these programs is
charged to expense as incurred except for certain software development costs, as
described above, that are capitalized in accordance with SFAS 86. Research and
development expenditures were $67,668, $129,338 and $26,993, in 1997, 1996 and
1995, respectively. The 1996 amount includes a $56,752, non-cash charge for
in-process research and development purchased in connection with the acquisition
of Hartmann & Braun.
Credit Risk and Fair Value of Financial Instruments
The Company markets its products to numerous customers in various industries and
geographic regions, thereby spreading its credit risk related to receivables.
The Company is exposed to credit risk with respect to the obligation on
receivables sold with recourse, letters of credit, bank guarantees, foreign
exchange forward contracts and interest rate swap agreements in the event of
non-performance by the counter-parties to financial instruments. Management
believes the risk of incurring material losses related to these financial
instruments is remote since the counter-parties are major financial
institutions.
The Company sold receivables with recourse to financial institutions at various
times in 1997 and 1996 for total amounts of $136,835 and $110,641, respectively.
At December 31, 1997 and 1996 the Company had $37,837 and $31,806, respectively,
of receivables outstanding under such programs. The discount on transferring the
receivables is recorded in the Consolidated Statement of Income as interest
expense. Where receivables have been sold with recourse, an estimated provision
for uncollectibility is provided. The fair value of the off-balance sheet
recourse obligation at December 31, 1997 and 1996 approximates the carrying
value.
41
<PAGE>
The Company is contingently liable under standby letters of credit totaling
$142,354 and $156,157 at December 31, 1997 and 1996, respectively. Such letters
of credit and bank guarantees are issued in the ordinary course of the Company's
large systems business in accordance with specified terms and conditions, and,
in some cases, reduce availability under the credit facilities (Note 10). The
fair value of these off-balance sheet instruments approximates contract values
based on the nature of the arrangement with the issuing institution.
42
<PAGE>
The Company enters into foreign exchange forward contracts to hedge the foreign
currency transaction exposure that arises in the normal course of business.
These contracts are primarily utilized to hedge intercompany borrowing
arrangements, assets, liabilities and commitments denominated in currencies
other than the functional currency of the entity. Because the Company generally
enters into short-term contracts, the fair value of these forward contracts does
not differ materially from the carrying amount. Premiums or discounts that arise
at the time these arrangements are entered into are generally amortized over the
life of the contract. Realized and unrealized gains and losses on foreign
exchange forward contracts are recorded in net income, with the exception of
gains and losses on contracts designed to hedge the Company's net investment in
certain foreign subsidiaries which are included in the cumulative translation
adjustment account and gains and losses on contracts designed to hedge specific
foreign currency commitments which are deferred and included in the basis of the
underlying transaction. Deferred amounts were not material in 1997 or 1996. The
Company does not hold or issue financial instruments for trading purposes.
The table below summarizes, by currency, the notional amounts of the Company's
outstanding foreign exchange forward contracts at December 31, 1997 and 1996.
Foreign currency amounts are translated at exchange rates as of December 31,
1997 and 1996. The "Buy" and "Sell" amounts represent the U.S. Dollar equivalent
of commitments to purchase and sell foreign currencies, respectively.
1997 1996
- --------------------------------------------------------------------------------
Currency Buy Sell Buy Sell
- --------------------------------------------------------------------------------
Deutsche Mark $ 1,177 $231,196 $ 45,484 $221,279
Italian Lira $ 25,828 $ 27,120 $ -- $ 27,670
French Franc $ -- $ 26,171 $ 4,817 $ 16,435
British Pound $ 1,454 $ 13,223 $ 5,480 $ 22,470
Japanese Yen $ -- $ 12,367 $ -- $ --
Netherland Guilder $ 10,176 $ 11,911 $ 5,887 $ --
United States Dollar $ 172 $ 10,500 $ 1,921 $ 6,050
Norwegian Krona $ 2,161 $ 6,743 $ 931 $ 372
Other $ 396 $ 16,549 $ 435 $ 14,295
In 1996, the Company entered into an interest rate swap agreement through May
1999 to reduce risk associated with variable interest rates. The agreement
requires the Company to pay a fixed rate of 3.91% and to receive a floating rate
based on LIBOR on a notional amount of DM 230,000. Net payments or receipts
under this agreement are recorded in the period to which the payments relate as
an adjustment to interest expense.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of these instruments approximate
fair value due to their short maturity, generally less than three months.
Investment securities: The fair value of long-term investment securities (Note
9) are determined based on quoted market prices at December 31, 1997 and 1996.
Short and long-term debt: The carrying amounts of short and long-term borrowings
approximate fair value because of the variable interest rate nature of the
portfolio.
Foreign exchange forward contracts: The fair value of foreign currency exchange
contracts is based on exchange rates at December 31, 1997 and 1996 as the
contracts generally have a maturity of less than one month. The estimated fair
market value of the Company's off-balance sheet foreign exchange forward
contracts was an asset of $1,926 at December 31, 1997 and a liability of $2,657
at December 31, 1996.
43
<PAGE>
Defined Benefit Plans
The Company utilizes the projected unit credit actuarial cost method for
determining pension costs. The Company's funding policies comply with the
requirements of local laws and regulations. Where funded, assets of the
Company's defined benefit plans are invested primarily in short-term marketable
investments and corporate securities.
Postretirement Benefits Other Than Pensions
The Company recognizes postretirement benefit costs, including medical benefits,
prescription drug and life insurance plans for certain of its United States
hourly bargaining employees over the service lives of such employees. These
benefit plans are unfunded. The Company's liability for such costs outside the
United States is insignificant (Note 15).
Other (Income) and Expense, Net
Other (income) and expense, net, shown on the Consolidated Statement of Income
consists primarily of interest income ($5,489, $7,395 and $2,529, for 1997, 1996
and 1995, respectively); and currency exchange gains (losses) ($7,258, $1,219
and ($28), for 1997, 1996 and 1995, respectively).
Impairment of Assets
The Company is continuously developing its products and process applications.
These investments eventually evolve into the release of new products. In the
fourth quarter of 1997, the Company completed the market release of the first
components of its Symphony enterprise management and control system. As a result
of this significant release, the Company performed an in-depth review of
existing technologies, capitalized software, patents and licenses in order to
assess possible impairment. As a result, in the fourth quarter the Company
recorded a pre-tax charge of $38,246 to write-down the value of existing
technology by $27,566 and capitalized software by $10,680.
In the first quarter of 1996, the Company adopted SFAS 121, 'Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of.'
There was no effect on the financial statements from the adoption of this
statement.
Other Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements displayed with the same prominence as
other financial statements. Comprehensive income includes such items as foreign
currency translation adjustments and unrealized gains and losses from investing
and hedging activities. Adoption of SFAS 130 is required in the Company's
calendar year ending December 31, 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." This
statement requires that public companies report financial and descriptive
information about its reportable operating segments. Generally, financial
information is required to be reported on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. This statement requires that public companies report a measure of
segment profit or loss, certain specific revenue and expenses items, and segment
assets. It requires that public companies report information about the revenues
derived from a company's products or services, geographic areas, and major
customers. Adoption of SFAS 131 is required in the Company's calendar year
ending December 31, 1998. The Company's management has not yet completed its
assessment of how the "management approach" impacts existing disclosure
requirements.
44
<PAGE>
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities and
the reported amounts of revenues and expenses during the year. Actual results
could differ from those estimates.
45
<PAGE>
Note 3 -- Acquisitions
On December 30, 1996 the Company acquired the net assets of Elsag Bailey
Automazione Processi S.p.A. ('Italian Licensee'), the process control division
of Finmeccanica. Previously, this division was a licensee of the Company's
technology in Italy. Total consideration was comprised of assumed debt of
$13,176 and 1,300,000 shares of common stock valued at $29,087. The fair market
value of the common stock was based on the market value on the date the terms of
the transaction were agreed upon. The total consideration was based on an
appraisal received from an independent investment banking firm. Because of the
related party nature of the transaction, it was accounted for as a purchase
using the predecessor's accounting basis. Assets and liabilities of
approximately $97,207 and $76,339, respectively, were recorded and included in
the Company's Consolidated Balance Sheet at December 31, 1996. The difference
between the consideration and the underlying historical net assets amounted to
$21,395 and was recorded as a charge to retained earnings. The results of
operations of the Italian Licensee have been included with those of the Company
since January 1, 1997. The combined 1996 revenues of the Company would have been
approximately $1,706,000 had the acquisition occurred on January 1, 1996.
On January 2, 1996, the Company acquired the stock of substantially all of the
Hartmann & Braun group of companies from Mannesmann AG for approximately
$639,000 and assumed debt of $60,000 owing to Mannesmann which was paid
concurrently. The purchase price was principally financed by (i) the private
placement of $207,000 of preferred securities by a subsidiary of the Company in
December 1995 (Note 11), (ii) Finmeccanica's subsidiary's purchase, in January
1996, of $80,000 of preferred securities carrying the same terms as those issued
through the private placement in December 1995 (Note 11), (iii) Finmeccanica's
subsidiary's purchase of $120,000 of the Company's common shares (4,485,981
common shares), and (iv) bank borrowings aggregating $292,000, pursuant to the
credit facility described in Note 10.
The acquisition of Hartmann & Braun was accounted for under the purchase method
of accounting. Accordingly, the purchase price was allocated to assets acquired
and liabilities assumed based on their fair value. The fair value of assets
acquired and liabilities assumed were approximately $1,300,000 and $929,000,
respectively. The difference between the fair market value of the net assets
acquired and purchase price amounted to approximately $328,000, and was recorded
as goodwill. The accompanying Consolidated Financial Statements include the
results of Hartmann & Braun for the periods subsequent to the acquisition.
Note 4 -- Restructuring and Divestitures
In 1997, in connection with the Company's plan to reduce costs and improve
operating efficiencies, restructuring liabilities of $33,594 were recorded in
the Consolidated Statement of Income. The principal actions in the 1997
restructuring plan involve the termination of approximately 1,300 employees and
the closure of certain facilities. This restructuring plan is expected to be
complete by 1999.
In addition, in 1996 the Company established restructuring liabilities through
operations and the opening balance sheet, depending upon the type of cost, in
connection with the Hartmann & Braun acquisition for the termination of 1,600
employees, facility closures and other integration costs. Geographically, the
most significant terminations occurred at the Hartmann & Braun German
facilities, where several facilities were vacated and operations consolidated.
In addition, other operations around the world were combined, resulting in
vacated facilities and cancelled lease commitments. The 1996 restructuring plan
is expected to be complete in 1998.
At December 31, 1997 there were approximately 550 remaining terminations to be
made of employees identified in the 1997 and 1996 restructuring plans.
46
<PAGE>
The restructuring liabilities recorded in 1997 and 1996, and related activity,
are summarized below:
<TABLE>
<CAPTION>
Facility Closures,
Relocation
Terminated Costs
Personnel and Other Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Restructuring liabilities established in the opening
balance sheet -- Hartmann & Braun $ 108,665 $ 20,006 $ 128,671
Restructuring liabilities established through operations 11,407 7,194 18,601
Provisions utilized and effects of translation (52,240) (19,233) (71,473)
Balance at December 31, 1996 67,832 7,967 75,799
Restructuring liabilities established through operations 24,785 8,809 33,594
Provisions utilized and effects of translation (47,470) (11,688) (59,158)
Balance at December 31, 1997 $ 45,147 $ 5,088 $ 50,235
Cash Expenditures -- 1996 $ 44,962 $ 14,304 $ 59,266
Cash Expenditures -- 1997 $ 34,630 $ 6,224 $ 40,854
</TABLE>
The pre-tax restructuring costs for the terminations and the integration of
operations and acquisition charges recorded in the Consolidated Statement of
Income were as follows:
Year Ended December 31, 1997 1996
- ---------------------------------------------------------------------------
Cost of sales $ 19,293 $117,388
General and administrative 11,346 9,055
Research, development and engineering 2,955 57,143
Amortization of intangibles 38,246 38,351
Other expense -- 359
Total $ 71,840 $222,296
In addition to the 1997 restructuring liabilities recorded, the Company
determined, in the fourth quarter, that certain intangible assets were impaired
and a non-cash pre-tax charge of $38,246 was recorded to write-down the value of
existing technology by $27,566 and capitalized software by $10,680 (Note 2).
The 1996 acquisition charges include non-cash amounts of $56,752 for purchased
in-process research and development and $108,592 representing the fair market
value of inventory over replacement cost of inventory. Also, as a result of the
Company's integration of the Hartmann & Braun operations, management
re-evaluated certain existing lines of business and decided that certain of
these lines of business would be held for sale, and others would be combined
into other existing businesses of the Company; accordingly, in 1996, the Company
recorded a pre-tax charge of $38,351, representing the impairment of long-lived
assets.
In 1997, the Company divested certain under-performing lines of business for net
proceeds of $10,416 and recorded a net gain of $1,541 in the Consolidated
Statement of Income.
47
<PAGE>
Note 5 -- Inventory
Inventory consisted of the following:
December 31, 1997 1996
- -----------------------------------------------------------------------------
Raw material $117,824 $112,458
Work-in-progress 82,481 115,220
Finished goods 62,764 61,814
Total $263,069 $289,492
In 1996, as inventories purchased in connection with the Hartmann & Braun
Acquisition were sold, the Company incurred non-cash charges to cost of sales.
These non-cash charges represented the excess of fair value of acquired
inventories over replacement cost and reduced gross profit and operating income
by $108,592 in 1996.
Note 6 -- Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings on uncompleted systems contracts consisted of the
following:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Costs incurred on uncompleted contracts $ 793,015 $ 820,421
Estimated earnings 217,017 296,183
1,010,032 1,116,604
Less: billings to date (919,457) (1,041,029)
Total $ 90,575 $ 75,575
Included in accompanying Consolidated Balance Sheet:
Costs in excess of billings on uncompleted contracts 147,571 169,006
Billings in excess of costs on uncompleted contracts (56,996) (93,431)
Total $ 90,575 $ 75,575
</TABLE>
Included in accounts receivable were $8,769 and $7,336 at December 31, 1997 and
1996, respectively, representing retainages relating to large systems contracts.
Retainages are generally collected within one year from the date billed. The
contract position and associated receivables for the City of Detroit contract
(Note 16) are classified as long-term and, accordingly, $34,324 and $26,452 are
included in Other assets in the Consolidated Balance Sheet at December 31, 1997
and 1996, respectively.
Note 7 -- Property, Plant and Equipment, Net
Property, plant and equipment consisted of the following:
December 31, 1997 1996
- --------------------------------------------------------------------------------
Land $ 40,271 $ 48,980
Buildings 133,314 161,963
Machinery and equipment 90,308 96,329
Leasehold improvements and furniture and fixtures 152,074 150,383
Construction-in-progress 5,821 6,507
Less: accumulated depreciation (140,842) (121,873)
Total $ 280,946 $ 342,289
48
<PAGE>
Note 8 -- Technology, Goodwill and Other Intangibles
Technology, goodwill and other intangibles, net of accumulated amortization,
consisted of the following:
December 31, 1997 1996
- -------------------------------------------------------------------------------
Goodwill $386,923 $447,090
Technology 31,705 72,314
Capitalized software 22,659 23,189
Other intangibles 7,428 9,602
Total $448,715 $552,195
Accumulated amortization was as follows:
December 31, 1997 1996
- -------------------------------------------------------------------------------
Goodwill $ (89,546) $ (74,172)
Technology (124,984) (83,279)
Capitalized software (31,529) (14,427)
Other intangibles (19,253) (16,838)
Total $(265,312) $(188,716)
Amortization expense was as follows:
December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Goodwill $ 15,374 $ 51,980 $ 7,861
Technology 41,705 18,646 11,020
Capitalized software 17,102 5,495 3,981
Other intangibles 2,415 4,275 2,335
Total $ 76,596 $ 80,396 $ 25,197
Amortization expense in 1997 includes the non-cash write-down of $27,566 of
existing technology and $10,680 of capitalized software associated with certain
assets determined to be impaired (Note 2). Amortization expense in 1996 includes
the non-cash write-down of $34,687 of goodwill, $3,134 of acquired technology
and $530 of capitalized software associated with certain product lines following
the Company's reevaluation of its product lines (Note 2).
Pursuant to the acquisition of Hartmann & Braun, the Company recorded $328,536
of goodwill and $36,821 of acquired technology (excluding purchased in-process
research and development). The goodwill is being amortized over 30 years and the
technology is being amortized over periods ranging from two to eight years.
Other intangibles in 1996 are reflected net of the write-off of financing costs
of $798 resulting from the refinancing of long-term debt (Note 10). The
write-off of these deferred financing costs, $718 net of tax, was presented as
an Extraordinary item in 1996 in the Consolidated Statement of Income.
49
<PAGE>
Note 9 -- Investment Securities
The amortized cost and estimated fair value of the Company's investment
securities are as follows:
December 31, 1997 1996
- -------------------------------------------------------------------------------
Held-to-maturity debt securities
Amortized Cost $49,494 $59,230
Gross Unrealized Gain 3,641 5,267
Fair Value $53,135 $64,497
The contractual maturities of the debt securities held at amortized cost are as
follows:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One year $ 5,526 $ 5,483 $ 3,700 $ 3,872
One to five years 36,184 39,336 32,523 35,900
Five to ten years 7,784 8,316 23,007 24,725
Total $ 49,494 $53,135 $59,230 $64,497
</TABLE>
Note 10 -- Borrowing Arrangements
Short-Term Debt
The aggregate amounts outstanding under credit facilities at December 31, 1997
and 1996 were $58,628 and $40,001, respectively, at weighted average interest
rates of 7.01% and 4.13%, respectively. The Company had available $111,148 and
$130,089 at December 31, 1997 and 1996, respectively, under credit facilities
with banking institutions. These borrowings are generally secured by guarantees
of the Company.
Long-Term Debt
The Company's long-term debt obligations consisted of the following:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Bank of America -- December 1995
US Dollar Term Loan (6.1% and 5.9%, respectively) $160,000 $200,000
Bank of America -- December 1995
DM Term Loan (4.1% and 3.5%, respectively) 127,475 186,039
Bank of America -- December 1995
Revolving Sub-facility (variable rate -- 6.3% and 5.8%, respectively) 252,845 249,228
Yen promissory notes due 1997-1999 at variable
interest rates from 1.9-2.5% and 1.9-5.5%, respectively 4,131 8,110
Other unsecured debt -- various maturities and interest rates 4,053 4,859
Capital Leases 11,571 13,722
Total $560,075 $661,958
</TABLE>
50
<PAGE>
In December 1995, the Company entered into a credit agreement agented by Bank of
America ('BofA') and Merrill Lynch Capital Corporation ('BofA Credit Facility').
The proceeds received on January 2, 1996 were used to refinance the existing
credit facility and to provide for additional borrowings to fund a portion of
the acquisition of Hartmann & Braun. The BofA Credit Facility is comprised of
sub-facilities including a US Dollar denominated term loan principal amount of
$200,000, a DM denominated term loan principal amount of the US Dollar
equivalent of DM 286,500, and a multicurrency, reducing revolving sub-facility,
in the principal amount of the US Dollar equivalent of $355,000. The reducing
revolving sub-facility provides multicurrency borrowing options and US Dollar or
DM denominated letter of credit options. At December 31, 1997 and 1996 there was
$102,155 and $105,772 available under the revolving sub-facility.
Prior to being amended on February 27, 1998 (see below), the principal on the
term loans was repayable commencing in March 1997, in equal quarterly
installments over a five year period, subject to certain mandatory prepayments.
The loans advanced under the BofA Credit Facility bore interest at rates
calculated as an amount over BofA's base rate or the LIBOR offered to major
banks in the London eurocurrency market for similar amounts in the same currency
for equivalent maturities. The amount over the aforementioned rates was
determined on a sliding scale with reference to certain financial ratios, or the
attainment of an investment grade ranking, as applicable. Fees were payable with
respect to outstanding letters of credit and the Company paid a commitment fee
through December 31, 1997, of 0.15% on the total facility.
Under the BofA Credit Facility, the Company has pledged to the lending syndicate
the capital stock of certain of its subsidiaries. In addition, the BofA Credit
Facility is guaranteed by one of the Company's subsidiaries. The BofA Credit
Facility limits the Company's ability to pay dividends on its common stock and
on the preferred securities of its subsidiary. The facility requires the Company
to maintain interest rate protection agreements (Note 2) and restricts the
Company's borrowings outside the facility, as well as its ability to have liens,
encumbrances, capital expenditures and other items. In addition, the terms of
the agreement obligate the Company to maintain compliance with a variety of
covenants and financial ratios. Finally, Finmeccanica was required to commit to
contributing equity capital in order to induce the bank to provide the financing
under the agreement described above.
At the September 25, 1997 covenant measurement date, the Company was unable to
meet certain required financial ratios, and accordingly, obtained waivers and
amendments with respect to these covenants from its lenders. The waivers and
amendments were for the measurement dates up to and including February 28, 1998.
As of February 27, 1998, the Company substantively amended its BofA Credit
Facility. The most significant changes included amending the final maturity date
of the term loans and revolving sub-facility to January 14, 1999, revising the
interest rates (LIBOR plus 0.875% through June 1998, LIBOR plus 1.0% from July
through September 1998, and LIBOR plus 1.25% from September 1998 through January
14, 1999), increasing the commitment fee on the total facility to 0.25% and
amending certain covenants and financial ratios for all quarterly measurements
including and subsequent to December 31, 1997. The amendment specifically
allowed for the Cofiri credit agreement described below. In addition, the BofA
Credit Facility was amended such that all outstanding loans become due and
payable in the event Finmeccanica ceases to own at least 51% of the voting
shares of the Company.
On February 19, 1998, the Company entered into a $150,000 credit agreement with
Compagnia Finanziamenti e Rifinaziamenti -- Cofiri S.p.A. ('Cofiri'), a
subsidiary of IRI. The initial proceeds received on February 27, 1998 were used
to retire outstanding Bank of America US Dollar Term loans. The facility is
denominated in US dollars or the equivalent amount of DM or Yen, bears interest
at a rate of LIBOR plus 1.15% and matures in full on April 30, 1999. The amounts
outstanding under this agreement become due and payable in the event
Finmeccanica ceases to own at least 51% of the voting shares of the Company.
The weighted average interest rate at December 31, 1997 and 1996 on long-term
debt was 4.71% and 5.21%, respectively. In addition to the previously described
pledges of subsidiaries' stock, loans of approximately $4,131 and $8,100 were
secured by land and buildings of the Company at December 31, 1997 and 1996,
respectively.
51
<PAGE>
Interest paid was $35,556, $28,480 and $21,159 in 1997, 1996 and 1995,
respectively.
In 1995, the Company recorded $6,546 of costs, including legal and arrangement
fees associated with the BofA Credit Facility. Such amounts were included in
Technology, goodwill and other intangible assets in the Consolidated Balance
Sheet. These fees are being amortized over the term of the related facilities
and in 1997 and 1996, $1,455 and $1,527 respectively, was recognized as
amortization expense.
52
<PAGE>
The aggregate amounts of maturities subsequent to December 31, 1997 for all
long-term debt, reflective of the changes pursuant to the February 27, 1998
amendment, were as follows:
1998 $ 39,107
1999 510,059
2000 1,722
2001 1,531
2002 1,481
Thereafter 6,175
560,075
Less: current maturities (39,107)
Total $520,968
Note 11 -- Company-Obligated Preferred Securities of Business Trust
In December 1995, Elsag Bailey Financing Trust (the 'Trust'), a business trust
and a consolidated, wholly-owned subsidiary of the Company, issued $207,000
liquidation amount of its 5.5% convertible trust originated preferred securities
('Preferred Securities') in a private placement. In connection with the December
issuance of the Preferred Securities and the related purchase by the Company of
the Trust's common shares, the Company issued to the Trust, $213,402 principal
amount of 5.5% convertible subordinated debentures. On January 2, 1996, the
Trust issued $80,000 liquidation amount of its Preferred Securities to a
subsidiary of Finmeccanica. The proceeds of the Preferred Securities issuances
were used to fund a portion of the Hartmann & Braun Acquisition (Note 3). In
connection with the issuance of the Preferred Securities and the related
purchase by the Company of an additional amount of the Trust's common
securities, the Company issued to the Trust $82,474 principal amount of 5.5%
convertible subordinated debentures. In June 1996, the Company registered all of
the underlying securities with the Securities and Exchange Commission.
The convertible subordinated debentures mature on December 31, 2035 and may be
redeemed by the Company only in certain limited situations. Upon such
redemption, at their original stated maturity or upon acceleration in certain
limited cases, as defined, the Preferred Securities will be subject to mandatory
redemption, at a redemption price of fifty dollars per Preferred Security
together with accrued and unpaid dividends. The interest and other payment dates
on the convertible subordinated debentures correspond to the quarterly
distribution dates of the Preferred Securities. The dividends accruing from the
date of issuance of the Preferred Securities are deducted from the Company's
income. The Company may extend the interest payment date on the convertible
subordinated debentures for up to 20 consecutive quarters. However, during the
interest extension period, the Company is prohibited from paying dividends on
its common stock. Under certain circumstances involving a change of law or legal
interpretation, the convertible subordinated debentures may be distributed to
holders of the Preferred Securities. The Company's obligations under the
convertible subordinated debentures and related agreements, taken together,
provide a full and unconditional guarantee of payments due on the Preferred
Securities.
The Preferred Securities are convertible at the option of the holder into common
shares of the Company at a conversion rate of $32.10 per common share. After
December 31, 1998, the Trust can cause this conversion option to terminate,
providing certain stipulations have been met, including but not limited to, the
common share price having reached a specified price per share. Upon the
conversion of the Preferred Securities, the equivalent principal amount of the
convertible subordinated debentures will be retired. As of December 31, 1997 and
1996, this conversion feature was not dilutive to the Company's earnings per
common share as calculated on a diluted basis.
The Preferred Securities are recorded as minority equity and captioned in the
Consolidated Balance Sheet as Company obligated preferred securities of grantor
trust. At December 31, 1997 and 1996, offering costs of $8,200 and $8,409,
respectively, were reflected as a reduction to minority equity in the
Consolidated Balance Sheet. These costs are being amortized to minority equity
over 40 years, the life of the Preferred Securities.
53
<PAGE>
Note 12 -- Lease Commitments
Certain facilities, machinery and equipment are utilized under operating lease
agreements. Future minimum payments under operating leases which have initial or
remaining non-cancelable terms in excess of one year at December 31, 1997 are as
follows:
1998 $17,470
1999 14,219
2000 12,499
2001 10,359
2002 9,750
Thereafter 29,988
Total $94,285
In the fourth quarter of 1997, the Company entered into sale-and-leaseback
transactions for certain of its facilities for net proceeds of approximately
$20,856. Gains realized of approximately $3,660 were deferred and are being
recorded as an adjustment to rent expense over the lease terms.
Operating lease expense was $18,201, $16,681 and $15,062 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Note 13 -- Income Taxes
Income (loss) before income taxes, minority interest, and extraordinary item
included:
Year Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------
Domestic $ (43,200) $ (23,895) $ 9,618
Foreign (13,661) (173,137) 12,900
Total $ (56,861) $(197,032) $ 22,518
The provision (benefit) for income taxes included:
Year Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------
Current taxes:
Domestic $ 1,633 $ 2,230 $ 2,413
Foreign 12,261 15,164 2,766
Total current taxes 13,894 17,394 5,179
Deferred taxes:
Domestic (20,607) (31,673) (11,544)
Foreign (32,006) (52,249) (6,181)
Total deferred taxes (52,613) (83,922) (17,725)
Total income tax benefit $ (38,719) $ (66,528) $ (12,546)
In 1994, the Company finalized a series of tax rulings in Europe which, among
other matters, provided a tax benefit lowering the Company's overall effective
tax rate. The primary element of these rulings was $150,000 of tax deductions to
be allowed pro-rata over 17 years, beginning January 1994. Since January 1994,
for accounting purposes, the Company had been recognizing the benefit of the
deductions ratably over the six-year life given to the underlying assets. In
1997 the Company wrote-off these assets (Note 2) and recorded the residual
income tax benefit, net of a valuation reserve, amounting to $11,312.
54
<PAGE>
A reconciliation of Dutch income taxes at 35% to income taxes provided is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax at the statutory rate $ (19,902) $ (68,961) $ 7,881
Earnings of subsidiaries taxed at rates other than 35% (20,980) (6,008) (9,450)
Loss carryover benefits and losses with no tax benefit 13,661 1,158 (748)
Non-deductible expenses 8,262 27,750 2,687
Benefit of European tax ruling (19,943) (8,393) (8,750)
Realization of tax benefits previously reserved (501) (16,453) (6,866)
Other 684 4,379 2,700
Total income tax benefit $ (38,719) $ (66,528) $ (12,546)
</TABLE>
Temporary differences and carryforwards which give rise to deferred tax assets
and liabilities were as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Technology and software development costs $ 66,850 $ 39,897
Inventory 11,008 10,448
Pension and postretirement obligations 19,054 20,714
Vacation and bonuses 8,903 8,154
Warranty 5,591 8,207
Tax loss and other carryforwards 200,023 164,404
Other accrued expenses deductible when paid 18,596 24,282
Other 5,130 10,436
$335,155 $286,542
Valuation allowance (49,550) (28,541)
Total deferred tax assets $285,605 $258,001
Long-term contracts (10,322) (9,766)
Fixed assets (11,439) (16,122)
Total deferred tax liabilities (21,761) (25,888)
Total deferred taxes $263,844 $232,113
</TABLE>
The valuation allowance of $49,550 and $28,541 at December 31, 1997 and 1996,
respectively, is principally related to tax loss and other carryforwards. The
change in the valuation allowance was primarily attributable to the deferred tax
assets generated in Germany and the Netherlands. Management believes it is more
likely than not that the net deferred tax assets will be realized, however, if
not, a significant charge relating to these deferred tax assets will result. In
the event that the tax benefits relating to the valuation allowance at December
31, 1997 are subsequently realized, $21,744 of such benefits would reduce
goodwill.
For income tax reporting purposes, the Company has tax loss carryforwards that
aggregate $463,254 at December 31, 1997. Such carryforwards have various
expiration dates of which some commence in 1998. A significant portion of the
carryforwards have either no expiration date or a carryforward period of over
ten years.
No provision for Dutch income tax or foreign withholding tax has been accrued on
unremitted earnings of international subsidiaries at December 31, 1997 of
$21,584 because such earnings are indefinitely reinvested in the operations. It
is not practical for the Company to quantify the deferred tax liability that
would arise if earnings of foreign subsidiaries that are indefinitely reinvested
were repatriated.
The Company made net cash payments for income taxes in 1997, 1996 and 1995 of
$6,672, $5,925 and $210, respectively. The taxes paid in 1996 included payments
totaling $5,034 made by former Hartmann & Braun companies relating to the
pre-acquisition period.
55
<PAGE>
Note 14 -- Savings, Retirement and Other Plans
The Company maintains noncontributory defined benefit pension plans, primarily
flat rate benefits plans, covering substantially all of its United States hourly
(bargaining and non-bargaining) employees and certain employees outside the
United States. The retirement benefits of these plans are based primarily on
years of service and compensation. Net periodic pension cost for the plans
included:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 5,816 $ 6,652 $ 2,537
Interest cost 20,398 22,241 7,377
Actual return on plan assets (10,597) (9,177) (12,190)
Net amortization and deferral 2,724 1,807 7,331
Net periodic pension cost $18,341 $ 21,523 $ 5,055
</TABLE>
The net pension cost for defined benefit plans outside the United States for
1997, 1996 and 1995 was $17,457, $20,183 and $3,564, respectively. The majority
of the increase in pension costs between 1995 and 1996 is attributed to the
benefit plans of the Hartmann & Braun operations, in particular the German
pension plans.
The discount rate used to measure the benefit obligations as of December 31, and
long-term rate of return on plan assets were as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States Plans:
Discount rate 7.5% 7.5% 7.0%
Long-term rate of return 9.0% 9.0% 9.0%
German Plans:
Discount rate 7.0% 7.0% 7.5%
Long-term rate of return -- -- --
Non-United States Plans, excluding Germany:
Discount rate 5.5 - 7.5% 5.5 - 8.3% 5.5-9.0%
Long-term rate of return 2.5 - 9.0% 3.0 - 9.5% 4.5-9.5%
</TABLE>
The funded status of these pension plans was as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Over Under Over Under
Funded Funded Funded Funded
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 37,515 $ 234,256 $ 35,406 $ 263,855
Non-vested benefits 1,352 12,063 1,012 14,365
Accumulated benefit obligation 38,867 246,319 36,418 278,220
Projected benefit obligation 42,524 256,826 38,555 290,326
Plan assets at fair value 53,508 46,944 49,061 43,201
Plan assets in excess of (less than) projected
benefit obligation 10,984 (209,882) 10,506 (247,125)
Amounts necessary to reconcile to balance sheet:
Unrecognized net (gain)/loss (6,778) 712 (6,148) 6,378
Unrecognized transition obligation (361) 728 -- 456
Adjustment required to recognize
minimum liability -- (864) -- (1,687)
Unrecognized prior service cost 1,893 (1,254) 1,175 (1,700)
Prepaid (accrued) pension cost $ 5,738 $(210,560) $ 5,533 $(243,678)
</TABLE>
56
<PAGE>
The Company has deposited funds in a trust account to fund certain pension
benefits, primarily in Germany. The assets included in the trust aggregate
$49,494 and $59,230 (Note 9) at December 31, 1997 and 1996, respectively. These
funds are not considered pension plan assets since the Company can access the
funds; however, management intends to hold these funds to maturity. The funds
are included in Other assets in the Consolidated Balance Sheet.
The Company also provides termination and severance benefits to certain
employees outside the United States. These benefits are due upon termination or
retirement from the Company. The cost of these benefits is accrued currently
based on the net present value of the estimated future costs. The liability
associated with these plans was $24,377 and $25,795 at December 31, 1997 and
1996, respectively. Annual expense for these plans is not significant.
In December 1995, the Supervisory Board of the Company approved the Global
Employee Stock Purchase Plan ('GESPP'). The GESPP allows eligible employees the
right to purchase common stock on a monthly basis at 90% of the market price on
the last business day of the month. If the shares are held for two years the
employee receives an additional award equivalent to 5% of the eligible common
shares. The Company records expense equal to the initial discount and the bonus.
Under the GESPP, the shares may either be issued from the authorized common
stock or purchased on the open market. Total shares purchased under the GESPP in
1997 and 1996 were 47,908 and 15,308, respectively, and the Company's
contributions were not significant.
The Company also maintains defined contribution plans for employees at certain
subsidiaries whereby it matches a portion of amounts contributed by plan
participants and contributes additional amounts based on plan provisions. The
Company's expense pursuant to these plans for the years ended December 31, 1997,
1996 and 1995 was $8,597, $8,084 and $6,841, respectively.
The Company has a long-term stock incentive plan for selected employees,
including the Managing Director and members of the Executive Committee and Group
Staff. An aggregate of 1,000,000 common shares has been reserved for issuance
upon the exercise of stock options, stock appreciation rights (SARs), limited
SARs, restricted stock units and other stock based awards to be granted by the
Supervisory Board. Under the terms of the plan, stock options granted may be
either non-qualified or incentive stock options and the exercise price,
determined by the Supervisory Board, may not be less than 85% or greater than
110% of the fair market value of a share on the date of grant.
Only non-qualified stock options have been granted to date and all at the market
price on the date of the grant. Options expire ten years from the date of grant.
Options granted in 1993 and certain options granted in 1994 are exercisable over
five years. The remaining options vest at the end of ten years, however, they
may become exercisable upon attainment of specified performance goals. In
December 1997, approximately 275,000 options granted in 1996, 1995 and 1994 at
prices ranging from $23.68 to $27.50 were cancelled and 206,250 options granted
in their place at the then fair value of $14.81. A summary of option activity
under the plan follows:
<TABLE>
<CAPTION>
Number of Shares Weighted Average
Under Option Option Price Per Share
------------ ----------------------
<S> <C> <C>
Outstanding at December 31, 1994 349,000 $22.45
Granted 121,000 $27.50
Exercised -- --
Canceled -- --
Outstanding at December 31, 1995 470,000 $23.75
Granted 244,000 $18.17
Exercised (16,000) $19.00
Canceled (102,000) $24.13
Outstanding at December 31, 1996 596,000 $21.72
Granted 423,250 $14.81
Exercised -- --
Canceled (293,000) $25.71
Outstanding at December 31, 1997 726,250 $16.08
Exercisable - December 31, 1995 58,800 $19.10
Exercisable - December 31, 1996 101,000 $20.89
Exercisable - December 31, 1997 126,750 $17.59
</TABLE>
57
<PAGE>
In 1996, the Company adopted SFAS 123, 'Accounting for Stock-based
Compensation.' This statement allows companies to choose the method of
recognition of compensation either by adopting the fair value method or by
continuing to measure compensation using the intrinsic value approach under the
Accounting Principles Board Opinion No. 25, the former standard. Since the
Company has elected the intrinsic value method for measurement, only
supplemental proforma disclosures are required. However, the proforma effect on
the Company's earnings per share in 1997, 1996 and 1995, had compensation
expense been determined based on the fair value of the awards at the date of
grant, was not significant.
Note 15 -- Postretirement Benefits Other Than Pensions
The Company provides up to $25 lifetime maximum health care benefits and flat
death benefits to eligible retired United States Bailey Controls bargaining unit
employees, the cost of which is accrued for over the service lives of the
employees. In addition, the Company provides a flat $10 and $9 retiree life
insurance benefit for the United States Fischer & Porter salaried and hourly
employees, respectively, hired prior to December 31, 1994 and a flat $9 retiree
life insurance benefit for all United States Fischer & Porter bargaining unit
employees who retire from active employment. Benefits are payable to designated
beneficiaries upon a participant's death. The reconciliation of the
postretirement benefit obligation with the amount recorded in the Consolidated
Balance Sheet was as follows:
<TABLE>
<CAPTION>
December 31, 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees $4,051 $4,090
Eligible active participants 758 1,870
Other active participants 535 1,835
APBO $5,344 $7,795
Unrecognized actuarial gains (losses) 3,197 492
Unrecognized transition obligation and other (2,957) (3,154)
Net postretirement benefit liability recognized in the balance sheet $5,584 $5,133
</TABLE>
Principal actuarial assumptions used in computing the APBO include a discount
rate of 7.5% for 1997 and 1996 and turnover assumptions. The Company is
amortizing the original transition obligation of $3,942 on a straight-line basis
over 20 years. Net periodic postretirement benefits cost consisted of the
following components:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of benefits earned during period $ 69 $120 $112
Interest cost on accumulated postretirement
benefit obligations 498 554 582
Amortization of transition obligation and
other amortization 62 204 143
Total $ 629 $878 $837
</TABLE>
The assumed health care cost trend rate used in measuring the APBO at December
31, 1997 and 1996 was 8.0%, gradually declining to 5.5% in 2007 and remaining at
that level thereafter. A 1% increase in the assumed health care cost trend rate
does not substantially increase the APBO due to the maximum lifetime health care
benefit.
Note 16 -- Commitments and Contingencies
Litigation
58
<PAGE>
The Company is subject to a number of lawsuits, investigations and claims (some
of which involve substantial amounts) arising out of the conduct of its
business, including those relating to commercial transactions, government
contracts, product liability, and environmental matters.
The Company provides products and services to customers under long-term systems
contracts and, as discussed in Note 2, the Company has a long history of using
the percentage of completion method of accounting for long-term contracts. In
connection with such contracts, it is common for the Company to submit change
orders and claims. The Company does not consider additional change orders or
claims in measuring profitability on a percentage of completion basis unless the
additional receipt of funding is considered probable. Anticipated losses on
contracts (generally, estimated total contract costs in excess of estimated
total contract revenues) are charged to operating income as soon as they are
evident.
59
<PAGE>
In 1992, the Company was awarded a $134 million contract by the City of Detroit
('City') to upgrade and replace substantial portions of the Detroit water and
wastewater treatment and transmission systems. As a result of a dispute
concerning claims, change orders and other directives by the City, in 1995, the
Company and the City began negotiations to consider a fundamental restructuring
of the contract. On October 30, 1995, a Memorandum of Understanding ("MOU") was
executed by the Company and the City. In early 1996, the City, despite the MOU,
announced its intention to hold the Company in default. On February 9, 1996, the
Company ceased work under the Detroit contract and commenced legal action,
styled Elsag Bailey, Inc. d/b/a Bailey Controls Co. v. City of Detroit,
Michigan, Thomas J. DeRiemaker and Westin Engineering, Inc. in the United States
District Court for the Eastern District of Michigan (96-70623), against the City
of Detroit, an engineering firm retained by the City and the City's project
engineer. The complaint alleged that, among other things, the City materially
breached the Detroit contract, made cardinal changes to it and made
misrepresentations in connection with its negotiation and award. All of the
defendants have filed answers and asserted defenses to such complaint. In March
of 1997, the Company amended its Complaint to add allegations concerning
constitutional and other violations arising from, among other things, the City's
default of the Company in June 1996. In addition, the City has a counterclaim
against the Company for breach of contract seeking damages for, among other
things, increased costs to the City for the completion of the work under the
contract, liquidated damages and reimbursement for amounts paid for equipment,
software and engineering the City claims are no longer useful to the project.
The City's counterclaim also states that a total of approximately $22.4 million
has been paid to the Company for equipment, software and engineering services.
The City joined American Home Assurance Company, the Company's performance bond
surety, as a third party defendant in the litigation. The Company responded to
the City's counterclaim and asserted affirmative defenses to it. The Court
thereafter granted motions dismissing certain of the Company's tort counts
against the City and the Company's constitutional claims. The Court declined to
grant motions seeking summary judgment against the Company on certain other
motions. On January 16, 1998, the Company commenced an action, styled Elsag
Bailey, Inc. d/b/a Bailey Controls Company v. City of Detroit, Michigan, in the
United States District Court for the Eastern District of Michigan (98-70259), in
which the Company alleges, among other things, that the City breached the MOU.
The City answered and asserted affirmative defenses to the complaint. Based on
the facts currently known, the Company believes it will prevail in the
litigation; however, there can be no assurance of a positive outcome of this
dispute. In 1995, the Company estimated a probable range of charges ($12 million
to $30 million) for expenses and other costs which might be incurred in the
litigation and recorded a charge to cost of sales corresponding to the lower end
of the range. At December 31, 1997 and 1996, the Company continues to have an
accrual representing the low end of a range of loss estimates as no amount
within the range is more likely than another.
Based on a January 30, 1995 complaint, thirteen former sales representatives and
distributors of the Company whose contracts were not renewed at the end of 1994
commenced an arbitration action against the Company before the American
Arbitration Association alleging fraud, negligent misrepresentation, unfair
competition, tortious interference and other tort claims, and sought
compensatory damages in excess of $50 million and punitive damages. The Company
has filed an answer and asserted counterclaims for amounts due from the
plaintiffs and for trade libel. Based upon the facts currently known to it, the
Company believes that it has meritorious defenses to this action and that any
outcome of this case will not be material.
The Company's operations are subject to environmental regulation by federal,
state and local authorities in the United States and regulatory authorities with
jurisdiction over its foreign operations. The Company is conducting
environmental tests or remedial activities at certain properties which are
currently or were formerly owned or operated, including one on the National
Priority List pursuant to the Comprehensive Environmental Response, Compensation
and Liability Act ('CERCLA'). Although additional remediation may be required,
to date costs incurred for these remedial activities have not been significant.
The Company has received inquiries concerning, or has been designated a
potentially responsible party by the Environmental Protection Agency in
connection with, the cleanup of various off-site locations under CERCLA. The
Company is still in the process of assessing its involvement and potential
exposure relative to the remediation of these sites. However, based on the
volume and types of waste involved which might be attributable to the Company,
it is management's opinion that the financial contribution required will not be
material to the Company. The Company is also performing certain remediation
activities in New Jersey and may be held responsible, under state law, for costs
to remediate
60
<PAGE>
contamination of potable wells providing water to a nearby community. While
future costs are not currently estimable, costs to date at the New Jersey
facility have not been material.
After giving effect to reserves established, management does not believe any
liabilities which may ultimately be incurred with respect to the aforementioned
matters would have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
There are numerous other claims and pending legal proceedings that generally
involve product liability and employment issues. These cases are, in the opinion
of management, ordinary routine matters incidental to the normal business
conducted by the Company.
Note 17 -- Related Party Transactions
Finmeccanica is majority-owned by IRI. The Company has extensive transactions
with affiliates of Finmeccanica.
On February 19, 1998, the Company entered into a $150,000 credit agreement with
Cofiri, a subsidiary of IRI (Note 10).
The Company sells products to certain operating subsidiaries of Finmeccanica and
also received royalties from the Italian Licensee prior to the date of the
Company's acquisition (Note 3) and a non-consolidated joint venture in China.
The following table summarizes the impact of the above transactions on the
Consolidated Statement of Income for each period presented.
Gross Royalty
Year Ended Revenue Profit Income
- ---------------------------------------------------------------------------
December 31, 1997 $ 50,078 $ 11,668 $ --
December 31, 1996 $ 42,452 $ 16,556 $ 7,117
December 31, 1995 $ 19,779 $ 7,714 $ 6,463
The Company also purchased products and certain technologies from Finmeccanica
amounting to $864, $8,548 and $9,830 in 1997, 1996 and 1995, respectively.
Historically, the Company received reimbursement from affiliates for certain
management and sales and administrative services performed on their behalf.
These reimbursements were $0, $585 and $739 in 1997, 1996 and 1995,
respectively. In addition, the Company reimbursed Finmeccanica for certain
management, administrative and other costs paid on the Company's behalf. These
reimbursements to Finmeccanica amounted to $7,089, $2,300 and $3,782 in 1997,
1996 and 1995, respectively.
Guarantees
As of December 31, 1997 and 1996, Finmeccanica has guaranteed performance bonds
relating to a large system contract which had an initial contract value of
$133,650 and other bonds totaling $93,660 and $54,900, respectively.
Finmeccanica charges the Company fees on the principal amount of bonds for which
it provides an indemnity, based on prevailing market rates, plus any related
out-of-pocket expenses incurred. The Company incurred $1,025, $929 and $860 in
costs for such indemnity in 1997, 1996 and 1995, respectively.
It is at least reasonably possible that the Company would not be able to achieve
financing on terms as favorable as those obtained with the assistance of
Finmeccanica.
Note 18 -- Geographic Segments
61
<PAGE>
The Company operates principally in one industry, process control and
automation. The Company designs, develops, manufactures and markets primarily
microprocessor-based distributed process control systems, instrumentation
products and analytical products that can be applied to a full range of
industrial process control and batch applications. These products are primarily
distributed to the electric power generation, utilities, chemicals, pulp and
paper, and water and wastewater treatment industries. A significant amount of
sales are to municipalities.
Income from operations represents total revenue less operating expenses, which
include amortization expenses and the allocation of certain corporate expenses
to the regions. In computing income from operations, interest expense and other
(income) expense have not been included. Transfers between geographic areas are
accounted for principally at current market value adjusted for quantity and
operating efficiencies. Identifiable assets are those assets used in the
Company's operations in each geographic area.
62
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Americas $ 599,635 $ 609,100 $ 477,492
Asia/Pacific 119,590 124,852 151,566
Germany 566,587 704,291 83,718
Rest of World 435,546 374,512 188,753
Eliminations (208,121) (206,655) (57,655)
Consolidated $ 1,513,237 $ 1,606,100 $ 843,874
(Loss) income from operations:
Americas $ 10,402 $ (18,876) $ 18,781
Asia/Pacific (3,690) 5,013 17,622
Germany (17,308) (131,233) (385)
Rest of World (24,210) (25,472) 8,034
Operating (loss) income (34,806) (170,568) 44,052
Interest expense 36,705 37,341 24,721
Other (income) and expense, net (14,650) (10,877) (3,187)
(Loss) income before income taxes, minority
interest and extraordinary item $ (56,861) $ (197,032) $ 22,518
Identifiable assets:
Americas $ 663,399 $ 638,696 $ 627,871
Asia/Pacific 99,975 131,831 171,644
Germany 715,640 924,920 133,953
Rest of World 586,016 620,481 316,365
Eliminations (126,877) (131,234) (81,008)
Consolidated $ 1,938,153 $ 2,184,694 $ 1,168,825
Operating income includes nonrecurring
charges as follows:
Americas $ 8,703 $ 48,047 $ 11,495
Asia/Pacific 3,109 2,660 36
Germany 29,256 173,147 --
Rest of World 38,359 33,874 944
Consolidated $ 79,427 $ 257,728 $ 12,475
</TABLE>
A significant portion of the Company's assets and operations are located, and a
significant portion of the Company's revenues are derived from operations
outside of the United States. The Company's operations may be affected by
economic, political and governmental conditions in the countries where the
Company has manufacturing facilities and where its products are marketed. In
addition, changes in economic policies and political conditions in any of the
countries in which the Company operates could result in currency or exchange
controls or other restrictions being imposed on the operations of the Company.
Note 19 -- Subsequent Events
On February 27, 1998, the Company substantively restructured its debt by
amending its BofA Credit Facility (Note 10). The early extinguishment will
result in an extraordinary charge against first quarter 1998 earnings of
approximately $3,500, before taxes, representing the write-off of unamortized
deferred finance costs as of February 27, 1998.
In the fourth quarter of 1997, the Company initiated further rationalization of
the workforce at a manufacturing facility in Germany. In February 1998, final
agreements were reached with the labor organizations. These restructuring
activities were finalized in the first quarter of 1998 and will result in a
pre-tax charge of approximately $7 million.
In the first quarter of 1997, the Company sold its interest in an equity
investee for $6,542 and recorded a pre-tax gain of $3,113.
63
<PAGE>
report of independent accountants
To the Supervisory Board and Shareholders of Elsag Bailey Process Automation
N.V.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of changes in shareholders'
equity present fairly, in all material respects, the financial position of Elsag
Bailey Process Automation N.V. and its subsidiaries ('Company'), a
majority-owned subsidiary of Finmeccanica S.p.A., at December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of the consolidated financial statements in accordance with
United States generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Cleveland, Ohio
March 3, 1998
64
<PAGE>
financial highlights
<TABLE>
<CAPTION>
Highlights 1993 1994 1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Revenues $ 605,875 $ 682,734 $ 843,874 $ 1,606,100 $ 1,513,237
Operating margin, before amortization 57,795 75,735(1) 81,724(3) 129,205(5) 82,971(9)
Income before extraordinary
item and accounting change 17,493 39,722(1) 39,450(3) 56,377(6) 36,343(10)
Net income 21,578 39,722(1) 38,799(3) 55,659(6) 36,343(10)
Earnings Per Share -- Basic
Income before extraordinary
item and accounting change 0.88 1.70(1) 1.69(3) 1.53(6) 0.95(10)
Net income 1.09 1.70(1) 1.66(3) 1.51(6) 0.95(10)
Weighted average shares outstanding 19,866,000 23,400,000 23,400,000 36,840,000(7) 38,140,000(7)
Other Financial Information
Research, development and
engineering expenses 27,589 35,331(2) 36,150(4) 78,191(8) 74,708(11)
Bookings 618,000 686,000 870,000 1,626,000 1,486,000
Backlog 505,000 542,000 481,000 918,000 744,000
Long-term debt
(including current maturities) 124,874 262,647 289,522 661,958 560,075
Shareholders' equity 227,449 251,318 277,001 258,736 206,985
</TABLE>
(1) Excludes nonrecurring charges in connection with the Fischer & Porter
acquisition and related integration amounting to $24,984, before taxes, and
$15,300 after tax.
(2) Excludes a $7,600 non-cash charge for purchased in-process research and
development in connection with the Fischer & Porter acquisition.
(3) Excludes nonrecurring charges in connection with the Fischer & Porter
integration and City of Detroit litigation amounting to $12,475, and $8,206
after tax.
(4) Excludes nonrecurring charges of $68.
(5) Excludes nonrecurring charges in connection with the Hartmann & Braun
integration amounting to $219,377.
(6) Excludes minority interest expense on preferred securities of $16,084 and
nonrecurring charges in connection with the Hartmann & Braun integration
amounting to $258,488, and $186,881 after tax.
(7) Weighted average number of shares outstanding, assuming conversion of the
preferred securities; however, conversion of the preferred securities is
antidilutive.
(8) Excludes nonrecurring charges of $63,144.
(9) Excludes nonrecurring Hartmann & Braun integration costs and 1997
restructuring charges of $41,181.
(10) Excludes minority interest expense on preferred securities of $15,994 and
non-cash asset impairment charges and 1997 integration and restructuring
costs amounting to $79,427, and $53,635 after tax.
(11) Excludes nonrecurring charges of $5,399.
stock price information
Quarter Ending High Low
------------------------------------------------
March 1994 26 21
June 1994 24 19-1/4
September 1994 27-3/8 20-3/4
December 1994 28-3/4 23-1/2
March 1995 29-3/8 22-1/8
June 1995 29-1/8 23
September 1995 34-1/8 26-3/4
December 1995 32-5/8 25-1/8
March 1996 27-5/8 20-1/4
June 1996 30 21-1/2
September 1996 26-7/8 20-1/2
December 1996 22-3/4 14
March 1997 20-5/8 14-1/2
June 1997 19-3/8 13-5/8
September 1997 21-3/4 14-5/8
December 1997 19-1/4 14-3/8
The Company's Initial Public Offering occurred on November 18, 1993, at a price
of $19.00 per share. Elsag Bailey Process Automation N.V. common shares are
traded on the New York Exchange under the symbol "EBY".
65
