1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER
THE SECURITIES EXCHANGE ACT OF 1934
ANSALDO SIGNAL N.V. 1998 MANAGEMENT REPORT TO SHAREHOLDERS
ANSALDO SIGNAL N.V.
-------------------
(Exact name of registrant as specified in its charter)
Schiphol Boulevard 267
1118 BH Schiphol
The Netherlands
(Address of principal executive office)
Indicate by check mark whether the Registrant files or will file
annual reports under cover of Form 20-F or Form 40-F:
Form 20-F [X] Form 40-F
Indicate by check mark whether the Registrant by furnishing the
information contained in this Form is also thereby furnishing
the information to the Commission pursuant to Rule 12g3-2(b)
under the Securities Exchange Act of 1934:
Yes [ ] No [X]
This document contains 41 pages including this page.
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT REPORT TO SHAREHOLDERS
TABLE OF CONTENTS
Letter from the Chairman
Letter from the Managing Director
Selected Consolidated Financial Data
Management Discussion and Analysis
Report of Independent Auditors
Consolidated Financial Statements
Notes to Consolidated Financial Statements
==============
ANSALDO SIGNAL
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT REPORT TO SHAREHOLDERS
LETTER FROM THE CHAIRMAN
Dear Shareholder:
I am pleased to have you receive this Management Report to Shareholders for
1998, particularly since the results of this past year confirm that the
initiatives we have launched throughout the company are beginning to show real
benefits and a marked profit performance.
Ansaldo Signal has been very successful in capturing significant orders in
1997 and 1998. We have made great progress in controlling costs and in putting
unprofitable contracts behind us. We have continued to drive home efficiencies
throughout the company and its various operating units. And we have kept a
focused eye on continuous improvement in all metrics that enhance the prospects
for profit.
This report and the message from Managing Director James Sanders detail the
measures we have underway to capture orders, increase revenues, and bring more
of our revenue to the bottom line, where it belongs. It also exemplifies our
concerted effort to cut costs. We have eliminated all pictures, niceties and
color so as to keep our costs low.
Our annual meeting of shareholders is scheduled for April 26, 1999 in the
company's corporate headquarters in Amsterdam. You have received, or shortly
will receive, your Proxy for that meeting. I welcome you to attend that meeting.
I would like to take this opportunity to thank the members of the
Supervisory Board of the company for the insight, wisdom and direction they
contributed to me and the company throughout 1998. They have functioned
constructively in a challenging environment; they have been of great value to
our progress this past year.
I look forward to the opportunity to continue to serve you, our
shareholders, in 1999.
Sincerely,
Alberto Rosania
Chairman
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1998 MANAGEMENT REPORT TO SHAREHOLDERS
LETTER FROM THE MANAGING DIRECTOR
Dear Shareholder:
Ansaldo Signal began in late 1996 as a concept. Today, we are a solid,
trusted partner of our railway and mass transit customers, delivering not only
technologically advanced concepts but also projects on time and at a profit. We
have worked hard to turn around the Company, and we intend to stay on track with
our continuous improvement.
Since taking the helm of the Company in 1997, I launched a series of
fundamental initiatives to drive up our performance. We have redesigned business
processes at our operating companies to maximize efficiency and reduce indirect
cost. We have worked steadfastly to resolve problem contracts from previous
times. We have focused our marketing efforts on core markets. We have globalized
our technologies, systems, products and services where it made sense to do so.
And we have built backlog.
Our redesign work began to pay off in 1998. Furthermore, in 1998, we had a
solid year of successful orders across the board. In Asia and Australia, we won
contracts for station management systems in Hong Kong; for UM71(TM) track
circuits IN China, and from traditional domestic customers in Australia.
In North America, we won interlocking contracts for the Northeast Corridor
and automatic train control contracts in Atlanta, Miami, and Camden, New Jersey.
We also entered the communications-based train control system market with a
demonstration agreement in partnership with Matra Transport International for
New York City Transit.
In Europe, we won discontinuous cab signaling contracts in Sweden, Denmark
and Norway. We won contracts for hot box detectors in Spain. We won Italian
contracts for wayside and on-board train control systems that can be upgraded to
European Rail Traffic Management Systems standards. We won a contract which
introduces our Microlok(R) II interlockinG system into Scandinavia. And we were
declared preferred bidder to design a Network Management Center for Railtrack's
West Coast Route Modernization project.
We have much to achieve in 1999 to lock in our position as a profitable
company. We are focusing on tight contract management, continued restructuring,
and improving the skill mix of our engineers and project managers. In marketing,
we are targeting increased services such as warehousing, just-in-time delivery,
software maintenance, technical support/ operations and system integration.
Through these services, we will capture a larger share of our existing customer
base by becoming increasingly part of their value added chain.
We foresee stable markets, supported by announced Italian government
funding for high speed, for electronic interlocking systems, and for
metropolitan mass transit system upgrades. The funding authorized by the United
States government in TEA-21, and the over two-billion British pound capital
expenditures announced by Railtrack also contribute to our assessment of the
world markets going forward.
We are committed to securing the global opportunities in the rail signaling
and communication sector, and bringing their benefits to our shareholders.
Sincerely,
James N. Sanders
Managing Director
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1998 MANAGEMENT REPORT TO SHAREHOLDERS
SELECTED CONSOLIDATED FINANCIAL DATA
The following data has been derived from the audited consolidated financial
statements of Ansaldo Signal N.V. ("the Company," "ASNV" or "Ansaldo Signal"),
including those consolidated financial statements of the Company for the years
ended December 31, 1998, 1997 and 1996, which are included elsewhere herein. The
audited Consolidated Financial Statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States
("US GAAP").
YEAR ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INCOME STATEMENT DATA 1998 1997 1996 1995 1994
Revenues $ 354,532 $ 318,225 $ 353,500 $ 299,347 $ 339,193
Cost of sales 277,450 263,274 296,620 236,858 265,044
----------- ----------- ----------- ----------- -----------
Gross profit 77,082 54,951 56,880 62,489 74,149
Selling, general and administrative expenses 47,685 50,107 47,971 38,829 43,954
Research & development expenses 7,025 9,953 11,804 11,759 8,453
Acquired in process research & development (1) -- -- 15,144 -- --
Reorganization (2) -- (1,584) 17,288 -- --
----------- ----------- ----------- ----------- -----------
Operating expenses 54,710 58,476 92,207 50,588 52,407
----------- ----------- ----------- ----------- -----------
Operating income (loss) $ 22,372 $ (3,525) $ (35,327) $ 11,901 $ 21,742
=========== =========== =========== =========== ===========
Net income (loss) $ 6,522 $ (12,678) $ (38,895) $ 6,408 $ 15,534
=========== =========== =========== =========== ===========
Basic and diluted net income (loss) per
common share $ 0.32 $ (0.62) $ (1.90) $ 0.36 $ 0.86
=========== =========== =========== =========== ===========
Cash dividends per share $ -- $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
Weighted average number of common
shares outstanding 20,448,750 20,448,750 20,448,750 17,990,750 17,990,750
=========== =========== =========== =========== ===========
DECEMBER 31
(IN THOUSANDS)
1998 1997 1996 1995 1994
BALANCE SHEET DATA
Working capital $ 120,143 $ 89,804 $ 105,751 $ 98,801 $ 107,104
Total assets $ 472,592 $ 457,166 $ 487,507 $ 378,062 $ 330,707
Borrowings-financial institutions (3) $ 120,024 $ 94,132 $ 71,781 $ 61,344 $ 30,598
Borrowings-related parties $ 26,282 $ 32,379 $ 30,202 $ 3,853 $ 3,425
Shareholders' equity $ 112,374 $ 102,552 $ 125,670 $ 151,505 $ 141,213
(1) In-process research and development acquired in connection with the
acquisition of 51% of CSEE Transport S.A. in June 1996.
(2) See Note 17 of Notes to Consolidated Financial Statements.
(3) Includes current maturities.
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the related notes thereto
appearing elsewhere herein. The financial statements have been prepared in
accordance with US GAAP.
Unless otherwise indicated, all amounts are stated in thousands of US
dollars, except per share amounts. All references to years 1998, 1997 and 1996
mean the calendar years ended December 31, 1998, December 31, 1997 and December
31, 1996, respectively.
THE COMPANY
Ansaldo Signal N.V. was incorporated on November 13, 1996 in Amsterdam, The
Netherlands. Its corporate headquarters are located in Schiphol, The
Netherlands. Ansaldo Trasporti S.p.A. ("ATR") is the owner of 14,711,250 common
shares, NLG .01 per share ("Common Shares"), or approximately 72% of the
outstanding Common Shares, of the Company. Finmeccanica S.p.A. ("Finmeccanica")
is the owner of approximately 56% of the outstanding shares of ATR and Istituto
per la Ricostruzione Industriale-IRI S.p.A. ("IRI"), the Italian state holding
company, is in turn the owner of approximately 61% of the outstanding shares of
Finmeccanica.
The Company was formed by Union Switch and Signal Inc. ("US&S") to combine
the business of US&S with the other railway signaling and automation business
investments of ATR. See Note 1 of Notes to the Consolidated Financial
Statements.
The Company is a worldwide supplier of signaling, automation and control
systems, related components and services for the global railroad and mass
transit industries.
OVERVIEW
The Company's operating segments are managed along geographic divisions
that correspond to the location of its principal subsidiaries: US&S is a
Delaware corporation with facilities located in Pittsburgh, Pennsylvania and
Batesburg, South Carolina; Ansaldo Segnalamento Ferroviario S.p.A. ("ASF") is an
Italian corporation with facilities located in Genoa, Naples, Tito and Torino,
Italy; and CSEE Transport S.A. ("CSEE") is a French corporation with facilities
located in Paris and Riom, France. The Company has other subsidiaries based in
Sweden (AT Signal Systems A.B.), Australia (Union Switch & Signal Pty. Ltd.),
Ireland (AT Signaling (Ireland) Ltd.) and India (Union Switch & Signal Ltd.
Pvt.). While each such subsidiary services its domestic market, it also sells to
specific international markets.
The Company's largest operations are located in the United States, Italy
and France which, including their international sales, accounted for
approximately 97% of revenues in 1998. The Company's operations may be affected
by economic, political and regulatory conditions in the countries where the
Company does business, changes in which could, among other things, result in
currency or exchange controls or other restrictions being imposed on the
operations of the Company.
Systems revenues for all of the Company's operating units are derived from
long-term contracts and are recognized using the percentage-of-completion method
of accounting. Product revenues for all operating units result from the sales of
component products, which are not part of a long-term contract, and are
recognized upon shipment of these products.
ASNV returned to profitability in 1998 as a result of improved and
stabilized markets and greater efficiencies at the operating level. Gross
profits of the Company's two largest subsidiaries, US&S and ASF, increased
during 1998. While benefiting from its large contract entered into in 1997 with
the New York City Transit Authority ("NYCTA"), US&S also reinforced its presence
in the automatic train control market, winning contracts from the Delaware River
Port Authority, the Metropolitan Atlanta Rapid Transit Authority and the
Miami-Dade County Transit Authority. In addition, US&S won contracts for its
Microlok(R) II interlocking control system from AMTRAK for its upgrade of the
Northeast Corridor.
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
MANAGEMENT DISCUSSION AND ANALYSIS
During 1998, US&S also positioned itself favorably to enter two new
markets. In partnership with Matra Transportation International, US&S signed a
demonstration agreement to design and demonstrate a communications-based train
control ("CBTC") system for the NYCTA, which has announced that it will
implement CBTC technology on its entire system during the early part of the next
century. In addition, US&S was named preferred bidder for a Network Management
Center System for the West Coast Main Line of Railtrack PLC in the United
Kingdom, on which work is well underway. The system will be designed to manage
and control conventional and high speed passenger and freight traffic traveling
as much as 140 miles per hour and is part of an overall infrastructure
improvement program expected to take place over 10 years.
ASF benefited from its existing large contract with the Italian state
railway ("FS"), but also won the second part of the biggest European contract
let in 1998 for centralized traffic control from the FS to upgrade its
infrastructure with technologies to bring it toward compliance with emerging
European Traffic Management System (ERTMS) standards. ERTMS is being developed
under the auspices of the European Union by a consortium of European signaling
system suppliers (EUROSIG) whose goal is to achieve harmonious standards for
signaling for all European railroads. In addition to European contracts,
including its hot box detector products, CSEE continued to make sales in Hong
Kong and China in 1998 for a station management system and its UM71(TM) track
circuits, respectively.
ORDERS
The Company's orders for 1998 were $357,488. This was a decrease of
$213,876 (37.4%) from $571,364, received in 1997. This decrease was primarily
caused by the non-recurrence of two large orders totaling $244,000 in 1997: one
in the United States, for the NYCTA and another from the FS for the first part
of Grande Rete (the "large network" connecting the major cities in Italy).
BACKLOG
The Company's backlog has increased $19,158 (2.5%) to $792,220 at December
31, 1998 from $773,062 at December 31, 1997. Included in the backlog is the
major portion of the two large 1997 orders discussed above totaling $244,000
which are expected to be completed over the next three to four years.
RESULTS OF OPERATIONS
1998 VERSUS 1997
Ansaldo Signal's consolidated results of operations improved in 1998
compared to 1997. Revenue in 1998 increased 11% to $354,532 on the strength of
the year-end 1997 backlog. Gross profit in 1998 increased 40% to $77,082 as a
result of higher volume and better mix of contracts. Operating expenses in 1998
were reduced by 6% to $54,710 as a result of efficiency improvements. The
consolidated net income in 1998 was $6,522 compared to a net loss of $12,678 in
1997. Items contributing to this improved performance in addition to the higher
revenue volume and strong improvement in gross profit include (i) a one-time
pretax gain of $980 from the conversion from a capital lease to an operating
lease of the lease for the Pittsburgh Engineering and Technology Facility; (ii)
the forgiveness by the French government of a pretax $1,400 repayable research
and development grant; and (iii) the net decrease in the valuation allowance of
$2,040, which has reduced the 1998 tax provision and reflects utilization of a
portion of loss carryforwards in 1998 for which a valuation allowance had
previously been established.
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
MANAGEMENT DISCUSSION AND ANALYSIS
REVENUE
The Company's revenue is presented below by major operating unit. Revenues
shown for each unit include revenue for work outside of such unit's own country
boundaries.
REVENUE
1998 1997
US&S $150,834 $122,419
ASF 113,314 108,481
CSEE 79,354 75,681
Other 11,030 11,644
-------- --------
Total $354,532 $318,225
======== ========
Company revenues increased by $36,307 (11.4%) to $354,532 for 1998 from
$318,225 for 1997. This net increase in revenue was due to increased volumes for
all major operating units. The Company began to recognize revenues in 1998 on
significant contracts awarded in the later part of 1997. The foreign exchange
effect on revenue was not significant. US&S's and ASF's increases in revenue
were primarily due to increased systems revenue. CSEE's increase in revenue was
due to an increase in component sales partially offset by lower systems sales.
GROSS PROFIT
The Company's gross profit is set forth below:
GROSS PROFIT
1998 1997
US&S $30,786 $13,348
ASF 23,992 19,564
CSEE 16,440 19,821
Other 5,864 2,218
------- -------
Total $77,082 $54,951
======= =======
Gross profit increased by $22,131 (40.3%) to $77,082 (21.7% of revenues) in
1998 from $54,951 (17.3% of revenues) in 1997. US&S completed a major software
contract in 1997 that reduced gross profit in 1997 by $11.0 million, and there
were no similar negative adjustments of that magnitude necessary in 1998.
Increased revenue and a more favorable product mix accounted for the balance of
the increase in gross profit.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general, and administrative expenses decreased by $2,422 (4.8%) to
$47,685 (13.4% of revenue) in 1998 from $50,107 (15.7% of revenue) in 1997. This
decrease is due to lower spending levels associated with efficiency
improvements. The decrease as a percentage of revenue reflects the combination
of lower expenses and higher 1998 revenue.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased by $2,928 (29.4%) to $7,025
(2.0% of revenue) in 1998 from $9,953 (3.1% of revenue) in 1997, due to lower
spending levels (due to planned cost reductions and completion of existing
projects). In 1998 and 1997 the Company incurred an additional $5,500 and
$7,200, respectively, of research and development expenditures not shown on the
income statement which were funded by government
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
MANAGEMENT DISCUSSION AND ANALYSIS
grants. Total internal and external supported research and development
expenditure for 1998 and 1997 was $12,525 (3.5% of revenue) and $17,153 (5.4% of
revenue), respectively. In addition, the research and development that is
performed in accordance with contract requirements is considered in cost of
revenue.
NON-RECURRING CHARGES
In 1998, there were no non-recurring charges. In 1997, $1,584 of accrued
reorganization costs were reversed. See Note 17 of Notes to Consolidated
Financial Statements.
INTEREST EXPENSE
Interest expense increased by $1,515 (17.2%) to $10,349 in 1998 from $8,834
in 1997. The increase is due to higher average debt levels in 1998. The higher
average debt is mainly caused by increased working capital requirements related
to larger, more complex contracts with longer cycle time in backlog.
OTHER INCOME
Other income increased by $2,216 to $1,868 in 1998 from a net expense of
$348 in 1997. The increase is primarily due a one-time gain of $980 which
resulted from the conversion of the Pittsburgh Engineering and Technology
Facility lease and the forgiveness of a $1,400 research and development grant by
the French government.
TAXES
The Company recorded a $7,300 tax provision in 1998 compared to a $77 tax
provision for 1997. The effective rate was 52.6% in 1998 compared to (0.1%) in
1997. In 1998 the Company recorded a net decrease in the valuation allowance
related to loss carryforwards of $2,040, which has reduced the 1998 tax
provision. The decrease reflects utilization of a portion of loss carry forwards
in 1998 for which a valuation allowance had previously been established and the
Company's improved expectations about the future realizability of certain of the
remaining loss carry forwards before their expiration. The 1997 provision
includes a charge of $2,632 to reflect changes in the tax laws in Italy and a
$3,742 charge for the increase in the valuation allowance relating to loss
carryforwards. See Note 9 of Notes to Consolidated Financial Statements.
1997 VERSUS 1996
The historical information shown below reflects CSEE's revenues, gross
profit and operating expenses from June 28, 1996, the date on which the
remaining 51% of CSEE was acquired by the Company. Prior to that date, the
Company's 49% share of CSEE's results were included in other (income) expense in
the consolidated statements of income. The pro forma information includes CSEE
on a 100% consolidated basis for each period shown. The changes in amounts
between 1997 and 1996 for the information presented primarily reflect the impact
of the acquisition of the remaining interest in CSEE. Consequently, the
discussion below between 1997 and 1996 focuses on changes from the 1996 pro
forma information.
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
MANAGEMENT DISCUSSION AND ANALYSIS
REVENUE
The Company's revenue is presented below by major operating unit. Revenues
shown for each unit include revenue for work outside of such unit's own country
boundaries.
REVENUES
HISTORICAL HISTORICAL HISTORICAL PRO FORMA
1997 1996 1997 1996
US&S $122,419 $153,183 $122,419 $153,183
ASF 108,481 128,037 108,481 128,037
CSEE 75,681 55,213 75,681 89,747
Other 11,644 17,067 11,644 17,067
-------- -------- -------- --------
Total $318,225 $353,500 $318,225 $388,034
======== ======== ======== ========
Historical Company revenue for 1997 was $318,225 compared to $353,500 for
1996.
Company revenues decreased by $69,809 (18.0%) to $318,225 for 1997 from
$388,034 for pro forma 1996. This net decrease in revenue was due to decreased
volumes for all locations. In part this was due to the fact that the award of
contracts tended to happen in the later part of 1997 and could not be converted
into significant revenues for the year. This decrease includes a $24,127
decrease due to the effect of a stronger dollar that reduces the reported value
of revenue denominated in other currencies. The decrease in US&S and ASF revenue
was primarily due to delay by customers in putting new work out to bid and a
further delay in the release of high speed work in Italy. The decrease in
revenue in CSEE was due to a less favorable French market and to delay in an
Asian project.
GROSS PROFIT
The Company's gross profit is set forth below:
GROSS PROFIT
HISTORICAL HISTORICAL HISTORICAL PRO FORMA
1997 1996 1997 1996
US&S $13,348 $17,670 $13,348 $17,670
ASF 19,564 20,839 19,564 20,839
CSEE 19,821 13,450 19,821 23,822
Other 2,218 4,921 2,218 4,921
------- ------- ------- -------
Total $54,951 $56,880 $54,951 $67,252
======= ======= ======= =======
Historical Company gross profit for 1997 was $54,951 compared to $56,880
for 1996.
Gross profit decreased by $12,301 (18.3%) to $54,951 (17.3% of revenues) in
1997 from $67,252 (17.3% of revenues) for pro forma 1996. This decrease includes
a $5,209 decrease due to the effect of a stronger dollar that reduces the
reported US dollar value of gross profit denominated in other currencies. US&S
completed a major software contract in 1997 that reduced gross profit in 1997
and 1996 by $11.0 million and $7.1 million, respectively. Decreased revenue and
the reactions to the currency devaluation in Asia, which impacted several of the
operations, accounted for the balance of the decrease in gross profit.
SELLING, GENERAL, AND ADMINISTRATIVE
Historical selling, general, and administrative expenses increased by
$2,136 (4.4%) to $50,107 in 1997 from $47,971 in 1996.
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
MANAGEMENT DISCUSSION AND ANALYSIS
Selling, general, and administrative expenses decreased by $6,324 (11.2%)
to $50,107 (15.7% of revenue) in 1997 from $56,431 (14.5% of revenue) on a pro
forma basis in 1996. This decrease is primarily due to the effect of the
stronger dollar, which reduces the cost in US dollars of foreign currency
denominated expenditures and to lower overall spending levels. The increase as a
percentage of revenue reflects the sharp decline in 1997 revenue and the
continuation of certain marketing and other costs.
RESEARCH AND DEVELOPMENT
Historical research and development expense decreased by $1,851 (15.7%) to
$9,953 in 1997 from $11,804 in 1996.
Research and development expense decreased by $4,429 (30.8%) to $9,953
(3.1% of revenue) in 1997 from $14,382 (3.7% of revenue) on a pro forma basis in
1996, due to the effect of the stronger dollar, which reduces the cost in US
dollars of foreign currency denominated expenditures) and to lower spending
levels due to planned cost reductions and completion of existing projects. In
1997 the Company incurred an additional $7,200 of research and development
expenditures not shown on the income statement which were funded by government
grants. Total internal and externally supported research and development
expenditure for 1997 was $17,153 (5.4% of revenue).
NON-RECURRING CHARGES
In 1996, non-recurring charges consisted of $17,288 relating to
reorganization costs and $15,144 of in process research and development costs
written off in connection with the acquisition of the remaining 51% interest in
CSEE. In 1997, $1,584 of the accrued reorganization provision was reversed. See
Note 17 of Notes to Consolidated Financial Statements included herein.
INTEREST EXPENSE
Historical interest expense increased by $2,733 (44.8%) to $8,834 in 1997
from $6,101 in 1996.
Interest expense increased by $2,557 (40.7%) to $8,834 in 1997 from $6,277
on a pro forma basis in 1996. The increase is due to higher debt levels in 1997
than 1996 ($3,067) offset in part by the effect of the stronger dollar, which
reduces the cost in US dollars of foreign currency denominated expenditures
($510).
TAXES
The Company recorded a $77 tax provision in 1997 compared to a ($2,714) tax
benefit for 1996. The effective rate was (0.1%) in 1997 compared to 6.5% in
1996. The 1997 provision includes a charge of $2,632 to reflect changes in the
tax laws in Italy and a $3,742 charge for the increase in the valuation
allowance relating to realization of deferred tax assets. The 1996 provision was
impacted by loss carryovers for which no tax benefit was recognized. See Note 9
of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING CASH FLOW
The Company's operating activities used cash of $20,785 in 1998 compared to
$26,845 used in 1997. Cash was used to support increases in inventories of
$3,616, net increases in contract-related accounts totaling $29,174, and
decreases in accounts payable of $8,377. Major sources of operating cash flow
included net income of $6,522 that included non-cash provisions for depreciation
and amortization of $9,967. The increases in contract-related accounts totaling
$29,174 is due primarily to higher contract work in progress associated with the
beginning of large contracts by US&S and ASF and lower advance payments.
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
MANAGEMENT DISCUSSION AND ANALYSIS
The Company's operating activities used cash of $26,845 in 1997 compared to
$20,801 used in 1996. Cash was used to support increases in receivables of
$12,949, net increases in contract-related accounts totaling $21,144,
reorganization expenditures of $12,440 and a net loss of $12,678. Major sources
of operating cash flow included an increase in accounts payable of $15,245 as
well as non-cash provisions for depreciation and amortization of $11.526. The
increase in receivables of $12,949 is due to higher invoicing in December and an
increase in amounts due from ATR. The increases in contract-related accounts
totaling $21,144 is due primarily to higher contract work in progress and lower
advance payments.
PROCEEDS FROM SALE OF FIXED ASSETS
In June 1998, the Company renegotiated the Pittsburgh Engineering and
Technology Facility lease. The conversion from a capital lease to an operating
lease generated cash proceeds of $12,200. See Note 5 of Notes to Consolidated
Financial Statements.
CAPITAL EXPENDITURES
The Company's capital expenditures were $3,152 in 1998, compared to $7,138
in 1997 and $5,218 in 1996. The decrease in the 1998 capital spending levels
from 1997 is due to withholding the authorization to proceed with capital
spending on certain elective projects. The Company anticipates capital
expenditures will be approximately $9,000 for 1999, and that they will be
financed by borrowing facilities.
BORROWINGS
At December 31, 1998, the Company had total borrowings of $26,282 from ATR,
$50,000 from a related financial institution and $70,024 from unrelated
financial institutions. Short-term borrowings of $75,403 consisted primarily of
a $50,000 loan from Cofiri S.p.A. ("Cofiri"), a subsidiary of IRI, and the
drawings on local lines of credit by subsidiaries to supply cash management
needs and the current portion of obligations under capital leases. Long-term
borrowings due within one year of $4,286 represents the 1999 installment due on
the Senior Notes issued by US&S in 1994 under a private placement (the "US&S
Senior Notes"). Long-term borrowings of $40,336 included $21,429 of US&S Senior
Notes, $16,950 of long-term notes at ASF, and $1,957 in long-term capital lease
obligations.
At December 31, 1997, the Company had total borrowings of $32,379 from ATR,
$13,000 from a related financial institution and $81,132 from unrelated
financial institutions. Short-term borrowings consisted primarily of drawings on
local lines of credit by subsidiaries to supply cash management needs and the
current portion ($4,286) of long-term borrowings. Long-term borrowings included
$25,714 of US&S Senior Notes and $8,289 in capital lease obligations.
CREDIT FACILITIES
In 1994, US&S issued senior, unsecured promissory notes to various lenders
in the total amount of $30 million at an 8% fixed rate. The private placement
notes have a ten-year term, and principal repayments began in 1997. US&S was in
compliance with the indenture's covenants at December 31, 1998.
On December 22, 1997, the Company entered into a $30 million loan agreement
with Cofiri bearing interest at 7% per annum at December 31, 1997. The loan
agreement was increased to $50 million on April 23, 1998. As of December 31,
1998 the total outstanding borrowings amounted to $50 million bearing interest
at 6.63%. This agreement has no restrictive covenants, and borrowings are
unsecured, but with letters of comfort from ATR and Finmeccanica.
ATR / Finmeccanica continues to provide and / or guarantee various
borrowings. At December 31, 1998 total borrowings from ATR were $26,282.
11
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
MANAGEMENT DISCUSSION AND ANALYSIS
ATR / Finmeccanica has agreed to continue to provide sufficient guarantees
and / or financing support for the operations of Ansaldo Signal N.V. and its
subsidiaries until March 2000. The repayment of any present or future
indebtedness to ATR / Finmeccanica can be deferred until such date if requested
by the Company. Management would request deferral of payment if such payment
would result in the Company violating any of its current debt covenants.
The Company had uncommitted lines of credit available at December 31, 1998
of $127.7 million with various banks. The unused portion of the lines of credit
available at December 31, 1998 totaled $52.3 million, a substantial portion of
which related to a specific commercial arrangement with one customer and
therefore is not available for general corporate use.
The Company had uncommitted lines of credit available at December 31, 1997
of $101.8 million with various banks. The unused portion of the lines of credit
available at December 31, 1997 totaled $35.6 million after a deduction of $11.2
million for commercial and stand-by letters of credit issued under one of the
lines.
Because of the planned growth of the business and the delay in collection
of some of the larger contracts, the Company expects to need to increase its
financing facilities, including committed facilities. Management expects to be
able to put new facilities in place in 1999, with the dependence on credit
enhancement from ATR / Finmeccanica. Management believes that these new
facilities, together with those already in place, will be adequate to meet its
anticipated requirements in 1999.
DIVIDENDS
To date the Company has not paid dividends and has no plans to pay any
future dividends.
BONDING ARRANGEMENTS
The Company is required, in the normal course of its business, to provide
bid, performance and advance payment bonding on certain contracts. The Company
maintains a $100,000 surety bonding facility ($30,004 outstanding at December
31, 1998), in addition to a $300,000 surety-bonding facility ($107,993
outstanding at December 31, 1998) provided by Finmeccanica. US&S also had a
$2,917 letter of credit outstanding at December 31, 1998 that is supported by
ATR. ATR / Finmeccanica is also providing bid, advance payment, performance and
retention bonding of $179,632 for the European subsidiaries. Pursuant to a
Bonding Support Agreement, dated as of November 13, 1996, Finmeccanica and ATR
have agreed to continue providing these services through December 31, 1999 at
which time the agreement shall be automatically renewed for another year unless
terminated upon 60 days' written notice prior to such date.
FOREIGN EXCHANGE RISK MANAGEMENT
Foreign exchange rates related to significant non-US Dollar operations of
the Company were as follows:
PER US DOLLAR
FRENCH FRANC ITALIAN LIRE
YEAR AVG. HIGH LOW AVG. HIGH LOW
1998 5.896 6.215 5.420 1736.7 1828.0 1589.9
1997 5.832 6.351 4.557 1702.7 1840.0 1517.0
1996 5.139 5.830 4.996 1542.1 1600.0 1494.0
On January 1, 1999, certain member countries of the European Union
established fixed conversion rates between their existing currencies and the
European Union's common currency (the "Euro"). The Euro conversion rates for
Lire and French Francs were fixed at 1936.28 Lire and 6.5596 French Francs for 1
Euro. As of March 31,1999 the US Dollar exchange rate for 1 Euro was $1.077. The
Company conducts business in many of the
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
MANAGEMENT DISCUSSION AND ANALYSIS
member countries and the Company is addressing the issues involved with the
introduction of the Euro. The more important issues facing the Company include
converting information technology systems; reassessing currency risk; and
processing tax and accounting records. See "Euro Conversion."
The Company has entered into foreign currency exchange contracts to reduce
its foreign currency exchange risk. Because these contracts are intended as, and
effective as, hedges of the underlying assets, liabilities or commitments, any
exchange gains or losses are deferred. The net unrealized gain on open contracts
at December 31, 1998 that was not recognized in the consolidated statements of
income (loss) and comprehensive income (loss) was $118. The fair value of these
contracts approximates the contract value because they are short-term in nature.
The Company's theoretical risk in these transactions is the cost of replacing,
at current market rates, foreign currency exchange contracts in the event of a
default by the counterparty. Management believes the risk of such losses is
remote, and that such losses would not be material.
INTEREST RATE RISK MANAGEMENT
The Company maintains debt facilities with both fixed and floating interest
rates. As of December 31, 1998, approximately $42, 664 of the Company's
borrowings were at fixed interest rates. Interest rates on the remaining portion
of the debt are generally based on LIBOR or similar short-term interest rate
indices. From time to time, the Company enters into interest rate hedging
contracts to mitigate the impact of interest rate fluctuations on operating
results. The Company does not expect that short-term, floating interest rates
will vary materially from historical patterns in 1999.
INFLATION
Although inflation over the last three years has been at reduced levels
compared to prior years, it has nevertheless caused an increase in the Company's
costs. These increased costs are not usually fully recoverable on the Company's
fixed price, multiyear contracts. Because it is very difficult to predict the
rate of inflation in the future, management is unable to predict the effect of
inflation upon the Company's future business. Higher rates of inflation increase
the potential for adverse consequences to the business due to increased costs
and lower infrastructure spending
YEAR 2000
In 1997, the Company commenced, for all of its internal systems, a Year
2000 ("Y2K") data conversion project to address all necessary code changes,
testing, and implementation. Project completion is planned for the middle of
1999. The Company is re-deploying existing information technology resources to
minimize the risk of potential disruption from the Year 2000 problem. This
problem is a result of computer programs that were written using two digits
(rather than four) to define the applicable year. Any information technology
("IT") systems that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000, which could result in
miscalculations and system failures. The problem also extends to many "non-IT"
systems, i.e., operating and control systems that rely on embedded
microprocessors. In addition, like every other business enterprise, the Company
is at risk from Y2K failures on the part of its major business counterparts,
including suppliers and manufacturers, as well as potential failures in public
and private infrastructure services, including electricity, water, gas,
transportation and communications.
System failures resulting from the Y2K problem could adversely affect
operations and financial results in all of the Company's business segments.
Failures may affect security, payroll operations or employee health and safety,
as well as such routine but important operations as billing and collection.
The Company has developed an approach to resolving the Y2K issues that are
reasonably within its control. The Company's approach to solving the problem is
described below.
In the first phase, all hardware and software (including business and
operations applications, operating systems and third-party products) that may be
at risk are identified. Once each at-risk system has been identified, the Y2K
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
MANAGEMENT DISCUSSION AND ANALYSIS
task forces assess how critical the system is to business operations and the
potential impact of failure, in order to establish priorities for repair or
replacement. This process has been completed for all IT systems, resulting in
the identification of those business systems that are "critical" to continued
functioning. New software has been installed at the French subsidiary and a new
payroll system is being installed in the United States. ASF is relying on the
outsourced systems solutions provided by ATR.
The next phase involves the development of appropriate remedial strategies
for both IT and non-IT systems. These strategies may include repairing, testing
and certifying, replacing or abandoning particular systems (as discussed below).
Selection of appropriate strategies is based upon such factors as the
assessments made in the risk review, the type of system, the availability of a
Y2K-compliant replacement and cost. The development of remedial strategies phase
has been completed for all IT systems. For some non-IT embedded systems,
strategy development is continuing.
The remediation phase involves creating detailed project plans, marshalling
necessary resources and executing the strategies chosen. For IT systems, this
should be completed for critical and important systems by July 31, 1999. For
non-critical systems, most corrections are expected to be completed by December
31, 1999.
Testing includes establishing a test environment, performing systems
testing and using third party consultants to certify the results. Testing for
non-IT systems has been initiated; however, due to the Company's reliance on
many third-party vendors for these systems, the Company cannot estimate
precisely when this phase will be completed. The Company's target for all
critical and important non-IT systems is September 1999.
The Company has initiated written and telephonic communications with key
third-party businesses, as well as public and private providers of
infrastructure services, to ascertain and evaluate their efforts in addressing
Y2K compliance. It is anticipated that the majority of testing and certification
with these entities will occur in 1999.
Contingency planning involves addressing any remaining open issues expected
at the close of 1999 and early 2000. As a precautionary measure, the Company is
currently developing contingency plans for all systems that are not expected to
be Y2K compliant by September 1999. A variety of automated as well as manual
plans are under consideration, including the use of electronic spreadsheets and
manual workarounds. The Company estimates that all of these plans will be
completed by December 1999.
A significant portion of the Company's Y2K costs has not been incremental,
but rather reflect redeployment of internal resources from other activities. The
Company does not expect these redeployments to have a material adverse effect on
other ongoing business operations of the Company and its subsidiaries, although
it is possible that certain maintenance and upgrading processes will be delayed
as the result of the priority being given to Y2K remediation. All of the costs
of the Y2K project are being borne out of the Company's existing credit
facilities.
Based upon its efforts to date, the Company believes that the vast majority
of both its IT and its non-IT systems, including all critical and important
systems, will be Y2K compliant. Accordingly, the Company does not currently
anticipate that internal systems failures will result in any material adverse
effect to its operations or financial condition. During 1999, the Company will
also continue and expand its efforts to ensure that major third-party businesses
and public and private providers of infrastructure services, such as utilities,
communications services and transportation, will also be prepared for the Year
2000, and to develop contingency plans to address any failures on their part to
become Y2K compliant. At this time, the Company believes that the most likely
"worst-case" scenario involves potential disruptions in areas in which the
Company's operations must rely on such third parties whose systems may not work
properly after January 1, 2000. In addition, the Company's international
operations may be adversely affected by failures of businesses in other parts of
the world to take adequate steps to address the Y2K problem. While such failures
could affect important operations of the Company and its subsidiaries, either
directly or indirectly, in a significant manner, the Company cannot at present
estimate either the likelihood or the potential cost of such failures.
The nature and focus of the Company's efforts to address the Y2K problem
may be revised periodically as interim goals are achieved or new issues are
identified. In addition, it is important to note that the description of the
Company's efforts necessarily involves estimates and projections with respect to
activities required in the future. These estimates and projections are subject
to change as work continues, and such changes may be substantial.
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
MANAGEMENT DISCUSSION AND ANALYSIS
The Company's agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential warranty and product
liability claims. The Company has also communicated with its customers as to
their concerns with the Company's products as relating to the Y2K problem. It is
possible, however, that the limitation of liability provisions contained in the
Company's agreements may not be effective as a result of existing or future
federal, state, or local laws or ordinances or unfavorable judicial decisions.
The sale and support of its products by the Company may entail the risk of such
claims, which could be substantial in light of the use of such products in
system management, resource optimization and overall systems control
applications. The Company is aware of the potential for such claims against it
and other companies for damages from products and services that were not Y2K
ready. A successful claim brought against the Company could have a material
adverse effect upon the Company's business, operating results and financial
condition. Management believes, however, that the Company will not be exposed to
material liability for Y2K claims of third parties.
EURO CONVERSION
On January 1, 1999, certain member countries of the European Union,
including Italy, France and Ireland, established fixed conversion rates between
their existing currencies and the Euro. The Company conducts business in several
European Union member countries and is in the process of addressing the issues
involved with the introduction of the Euro. The more important issues facing the
Company include converting information technology systems, reassessing currency
risk, and processing tax and accounting records.
Based upon progress to date the Company believes that use of the Euro will
not have a significant impact on the manner in which it conducts its business
affairs and processes its business and accounting records. Accordingly,
conversion to the Euro is not expected to have a material effect on the
Company's financial condition or results of operations.
However, there can be no assurance that the systems of other companies on
which the Company's systems rely also will be converted in a timely fashion, or
that any such failure to convert by another company would not have an adverse
effect on the Company's systems.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), which the Company is required to adopt no later than January 1,
2000. SFAS 133 will require the Company to record all derivatives on the balance
sheet at fair value. Changes in derivative fair values will either be recognized
in earnings contemporaneously with the changes in fair value of related hedged
assets, liabilities and firm commitments or, for forecasted transactions,
recorded as a component of other comprehensive income within stockholders'
equity. The ineffective portion of a hedging derivative's change in fair value
will be immediately recognized in earnings. The Company does not believe the
effect of adopting SFAS 133 will be material to its financial position or
results of operations.
OUTLOOK
The Company's backlog provides a base of business over the next several
years. The Company expects to benefit from the substantial number of contracts
to be bid in North America compared to recent prior years and from an expected
increase in high-speed train work in Europe. However, the Asian markets other
than China may continue to defer infrastructure spending in light of their
current economic condition. In addition the Company's industry has been
experiencing consolidation and thus increased competition, particularly from new
firms entering into the software sector of the business.
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
MANAGEMENT DISCUSSION AND ANALYSIS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN EXCHANGE RISK
The operations of the Company are conducted by entities in many countries,
and accordingly, the results of operations of the Company are subject to
currency translation risk and currency transaction risk. With respect to
currency translation risk, the financial condition and results of operations of
each of these entities is measured and recorded in the relevant local currency
and then translated into US Dollars ("USD") for inclusion in the consolidated
financial statements. The entities translate the balance sheets of the
respective non-USD denominated operations into USD at the prevailing exchange
rates on the balance sheet date. Income and cash flow statements are translated
at the average exchange rate for the period.
The Company generally attempts to hedge a portion of its currency
translation risk by financing its operations in subsidiaries through borrowings
denominated in local currencies, wherever possible. The lending entity will then
hedge the USD / local currency foreign currency exposure on the intercompany
financing using foreign exchange forward contracts.
In addition to currency translation risk, the Company incurs currency
transaction risk whenever one of its operating subsidiaries enters into either a
sales or purchase transaction using a currency other than its functional
currency. Currency transaction risk is reduced by matching sales revenue and
costs in the same currency, which is generally the practice in the railway
industry.
Currency hedging is generally used by businesses to protect against
contract risk. The Company incurs currency risk primarily from loans to its
subsidiaries. Given the volatility of currency exchange rates, there can be no
assurance that the Company will be able to effectively manage its currency
transaction risks or that any volatility in currency exchange rates will not
have a material adverse effect on the Company's financial conditions or results
of operations.
The Company uses forward foreign exchange contracts to manage foreign
currency risk. The premium or discount on a forward foreign exchange contract
(or on the forward element of a foreign currency swap) is amortized to the
income statement over the life of the contract.
The following table summarizes, by major currency, the amounts to be
received and paid under forward foreign exchange contracts and currency swaps as
of December 31, 1998 (in thousands of US dollars):
RECEIVABLE PAYABLE
U.S. Dollar $15,580 $6,286
Australian Dollar 4,126 4,418
Canadian Dollar -- 56
French Franc 6,539 12,132
Irish Pound 178 --
Italian Lire 1,974 5,352
Hong Kong Dollar 3,285 3,285
Swedish Krona 3,453 3,628
Pound Sterling 1,137 1,137
------- -------
Balance at December 31, 1998 $36,272 $36,294
INTEREST RATE RISK
The Company maintains debt facilities with both fixed and floating interest
rates. As of December 31, 1998, approximately $42,664 of the Company's
borrowings were at fixed interest rates. Interest rates on the remaining portion
of the debt are generally based on LIBOR or similar short-term interest rate
indices. From time to time, the Company enters into interest rate hedging
contracts to mitigate the impact of interest rate fluctuations on operating
results; however, no such instruments were outstanding as of December 31, 1998.
The Company does not expect that short-term, floating interest rates will vary
materially from historical patterns in 1999.
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
MANAGEMENT DISCUSSION AND ANALYSIS
The following table details the fixed rate debt obligations of the Company
at December 31, 1998.
CURRENCY DECEMBER 31, 1998
PAYABLE IN CARRYING AMOUNT FAIR VALUE
Ansaldo Segnalamento Ferroviario S.p.A.
Notes (unsecured) due 2002 with a
fixed interest rate of 4.10% (1) Lire $16,949 $16,059
Union Switch & Signal Inc.
Senior Notes (unsecured) due 2004, with a
fixed interest rate of 8.00% (2) USD $25,715 $26,587
(1) For determination of fair market value an interest rate of 5.875% was
used.
(2) For determination of fair market value an interest rate of 6.85% was
used.
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Supervisory Board
and Shareholders of
Ansaldo Signal N.V.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income (loss) and comprehensive income
(loss), of cash flows and of changes in shareholders' equity present fairly, in
all material respects, the financial position of Ansaldo Signal N.V. and its
subsidiaries (the Company), a majority-owned subsidiary of Ansaldo Trasporti
S.p.A., at December 31, 1998 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
March 5, 1999
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
ANSALDO SIGNAL N.V.
CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share amounts)
DECEMBER 31
----------------------
1998 1997
ASSETS
Current Assets:
Cash and cash equivalents ..................................................... $ 12,913 $ 4,530
Receivables - net of allowance for doubtful accounts of $3,657 and $1,735 ..... 104,647 95,689
Receivables from parent and affiliates (Note 10) .............................. 10,051 15,761
Inventory (Note 3) ............................................................ 49,305 44,771
Costs and estimated earnings in excess of billings
on uncompleted contracts (Note 4) ......................................... 182,253 157,008
Deferred income taxes (Note 9) ................................................ 6,844 8,059
Prepaid expenses and other current assets ..................................... 13,763 17,587
-------- --------
Total current assets: ................................................ 379,776 343,405
Contract retentions receivable ..................................................... 11,275 13,370
Property, plant and equipment - net (Note 5) ....................................... 33,735 54,302
Intangible assets - net (Note 16) .................................................. 33,658 33,118
Deferred income taxes (Note 9) ..................................................... 9,320 9,653
Other assets ....................................................................... 4,828 3,318
-------- --------
Total assets .............................................................. $472,592 $457,166
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term borrowings and current
obligations under capital leases (Note 6) ................................. $ 75,403 $ 55,843
Accounts payable .............................................................. 91,593 97,844
Accounts payable - parent and affiliates (Note 10) ............................ 4,956 4,465
Accrued liabilities ........................................................... 27,982 24,331
Accrued reorganization costs (Note 17) ........................................ 2,276 4,160
Billings in excess of costs and estimated earnings
on uncompleted contracts (Note 4) ......................................... 53,137 62,672
Long-term borrowings due within one year (Note 7) ............................. 4,286 4,286
-------- --------
Total current liabilities ............................................ 259,633 253,601
Employee benefit obligations (Note 8) .............................................. 22,477 21,304
Deferred income taxes (Note 9) ..................................................... 647 606
Other liabilities .................................................................. 10,844 12,721
Long-term borrowings and obligations under capital leases (Note 7) ................. 40,335 34,003
Long-term borrowings from parent (Note 10) ......................................... 26,282 32,379
-------- --------
Total liabilities .................................................... 360,218 354,614
-------- --------
Commitments and contingencies (Note 13) ............................................ -- --
Shareholders' equity:
Priority shares, NLG 0.01 par value, 100 shares authorized,
no shares issued or outstanding ........................................... -- --
Common shares, NLG 0.01 par value, 50,000,000 shares authorized,
20,448,750 and 20,448,750 issued and outstanding .......................... 120 120
Additional paid-in capital .................................................... 139,999 139,999
Accumulated other comprehensive loss - foreign currency translation
adjustments........................................................... (7,262) (10,562)
Accumulated deficit ........................................................... (20,483) (27,005)
-------- --------
Total shareholders' equity ........................................... 112,374 102,552
-------- --------
Total liabilities and shareholders' equity ........................... $472,592 $457,166
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
ANSALDO SIGNAL N.V.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
AND COMPREHENSIVE INCOME (LOSS)
($ in thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
Revenue .................................................. $ 354,532 $ 318,225 $ 353,500
Cost of revenue .......................................... 277,450 263,274 296,620
----------- ----------- -----------
Gross profit .................................... 77,082 54,951 56,880
----------- ----------- -----------
Operating expenses:
Selling, general and administrative ................. 47,685 50,107 47,971
Research and development - net ...................... 7,025 9,953 11,804
Acquired in process research and development (Note 1) -- -- 15,144
Reorganization costs (Notes 1 and 17) ............... -- (1,584) 17,288
----------- ----------- -----------
Operating expenses .............................. 54,710 58,476 92,207
----------- ----------- -----------
Operating income (loss) ......................... 22,372 (3,525) (35,327)
Interest expense ......................................... 10,349 8,834 6,101
Other (income) expense ................................... (1,868) 348 57
----------- ----------- -----------
Income (loss) before income taxes and
minority interest in subsidiaries .......... 13,891 (12,707) (41,485)
Provision for (benefit from) income taxes (Note 9) ....... 7,300 77 (2,714)
Minority interest in net (income) loss of subsidiaries ... (69) 106 (124)
----------- ----------- -----------
Net income (loss) ................................... 6,522 (12,678) (38,895)
Other comprehensive income (loss):
Foreign currency translation adjustment ............. 3,300 (10,350) (362)
----------- ----------- -----------
Comprehensive income (loss) ......................... $ 9,822 $ (23,028) $ (39,257)
=========== =========== ===========
EARNINGS PER SHARE:
Basic and diluted net income (loss) per common
share .......................................... $ 0.32 $ (0.62) $ (1.90)
=========== =========== ===========
Basic and diluted weighted average number of
common shares outstanding ....................... 20,448,750 20,448,750 20,448,750
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
ANSALDO SIGNAL N.V
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .......................................... $ 6,522 $(12,678) $(38,895)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization: ............................. 9,967 11,526 11,370
Deferred income taxes ...................................... 3,388 3,878 (2,310)
Gain on sale of fixed assets ............................... (980) -- --
Acquired in process research and development .................... -- -- 15,144
Changes in:
Receivables ............................................ 1,411 (12,949) (234)
Inventory .............................................. (3,616) 2,943 (1,696)
Contracts - net (a) .................................... (29,174) (21,144) (13,537)
Other assets ........................................... 1,231 (5,485) 865
Accounts payable ....................................... (8,377) 15,245 (8,336)
Accrued liabilities .................................... 727 4,259 228
Accrued reorganization costs ........................... (1,884) (12,440) 16,600
-------- -------- --------
Net cash used in operating activities ............. (20,785) (26,845) (20,801)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets ......................... 12,200 -- --
Proceeds from sale of investments in affiliates ............ 506 -- --
Capital expenditures ....................................... (3,152) (7,138) (5,218)
Acquisition of CSEE - Transport S.A. (c) ................... -- -- 2,581
Purchase of intangibles and other noncurrent assets ........ (3,501) (344) (578)
-------- -------- --------
Net cash provided by (used in) investing
activities .................................. 6,053 (7,482) (3,215)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short term borrowings .................... 18,475 15,108 16,366
Financing by parent company ................................ 17,893 19,475 26,175
Proceeds from long term borrowings ......................... 16,117 -- 12,000
Payments on long term borrowings ........................... (28,799) (5,316) (22,137)
Payments on capital leases ................................. (295) (468) (476)
-------- -------- --------
Net cash provided by financing activities ......... 23,391 28,799 31,928
-------- -------- --------
Effects of exchange rate changes on cash ........................ (276) (1,039) (74)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............ 8,383 (6,567) 7,838
Cash and cash equivalents at beginning of period ................ 4,530 11,097 3,259
-------- -------- --------
Cash and cash equivalents at end of period ................. $ 12,913 $ 4,530 $ 11,097
======== ======== ========
Interest paid during period ..................................... $ 9,580 $ 8,586 $ 4,487
======== ======== ========
Income taxes paid (refunded) during period (b) .................. $ 2,831 $ 1,562 $ (1,107)
======== ======== ========
(a), (b), (c) See notes on continuation page following.
21
23
ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
ANSALDO SIGNAL N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
($ in thousands)
(a) Includes costs and estimated earnings in excess of billings on uncompleted
contracts, contract retentions receivable, billings in excess of costs and
estimated earnings on uncompleted contracts and contract retentions
payable.
(b) The line item "Income taxes paid (refunded)" for 1996 includes an estimate
of taxes that have been paid by the ATR signaling business unit; these
payments were allocated to ASF as if it were a separate taxpayer. (See
Notes 9 and 10).
(c) Supplemental cash flow information regarding acquisition of CSEE-Transport
S.A.
Fair value of net assets acquired.................. $ 77,644
Fair value of stock issued......................... (18,912)
Reduction in parent receivables.................... (58,732)
--------
Cash paid.......................................... $ --
========
Cash acquired...................................... $ 2,581
========
The accompanying notes are an integral part of these
consolidated financial statements.
22
24
ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
ANSALDO SIGNAL N.V.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
($ in thousands)
ACCUMULATED
ADDITIONAL OTHER TOTAL
SHARE PAID-IN COMPREHENSIVE RETAINED SHAREHOLDERS
CAPITAL CAPITAL INCOME/(LOSS) EARNINGS EQUITY
------- ---------- ------------- -------- ------------
Balance, January 1, 1996 ...... $108 $126,589 $ 150 $ 24,658 $151,505
Net loss ...................... -- -- -- (38,895) (38,895)
CSEE acquisition .............. 12 18,900 -- -- 18,912
Other (1) ..................... -- (5,490) -- -- (5,490)
Foreign currency translation... -- -- (362) -- (362)
---- -------- -------- -------- --------
Balance, December 31, 1996..... 120 139,999 (212) (14,237) 125,670
Net loss ...................... -- -- -- (12,678) (12,678)
Foreign currency translation... -- -- (10,350) (90) (10,440)
---- -------- -------- -------- --------
Balance, December 31, 1997..... 120 139,999 (10,562) (27,005) 102,552
Net income .................... -- -- -- 6,522 6,522
Foreign currency translation... -- -- 3,300 -- 3,300
---- -------- -------- -------- --------
Balance, December 31, 1998..... $120 $139,999 $ (7,262) $(20,483) $112,374
==== ======== ======== ======== ========
(1) Relates to the contribution of the Signaling Business Unit of Ansaldo
Trasporti S.p.A (SBU) discussed at Note 1. The adjustment represents net
assets at September 30, 1996 that were not ceded to SBU by ATR on October
1, 1996.
The accompanying notes are an integral part of these
consolidated financial statements.
23
25
ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND CAPITALIZATION
Ansaldo Signal N.V. ("the Company," "ASNV," or "Ansaldo Signal") was
incorporated on November 13, 1996, in Amsterdam, The Netherlands and is a
majority-owned subsidiary of Ansaldo Trasporti S.p.A. ("ATR"). ATR is a member
of a group of companies controlled by Finmeccanica S.p.A., which is in turn
controlled by the Italian state holding company, Istituto per la Ricostruzione
Industriale-IRI S.p.A.
ASNV was formed upon the merger of Union Switch & Signal Inc. ("US&S") (at
the time, a majority owned subsidiary of ATR) with a direct wholly-owned
subsidiary of ASNV. As a result of the merger, US&S ceased to exist as a
separate publicly traded entity and each outstanding share of US&S common stock
(9,737,500 shares) was exchanged on a one-for-one basis for common shares of
ASNV. Immediately after the merger described above, ATR contributed the
outstanding capital stock of its other railway signaling and automation
businesses to ASNV in exchange for 10,711,250 common shares of ASNV.
The transactions noted above have been treated as a reorganization of
companies under common control and, accordingly, have been reflected within the
consolidated financial statements as a pooling of interests. As required under
the pooling of interests method of accounting, ASNV's historical results reflect
the historical results of the companies merged with and contributed to ASNV. The
Company's results of operations for the first six-months of 1996 reflect the
combined operating results of: (i) 100% of US&S; (ii) 100% of Ansaldo
Segnalamento Ferroviario S.p.A. ("ASF") - an Italian corporation; (iii) 49% of
CSEE - Transport S.A. ("CSEE") - a French corporation; (iv) 75% of AT Signal
Systems AB ("ATSS") - a Swedish corporation and (v) 100% of Ansaldo Trasporti
Signaling (Ireland) Ltd. ("ATI") - an Irish limited liability company. Results
of operations for the remaining six months of 1996 and for the years ended
December 31, 1997 and December 31, 1998 reflect 100% of CSEE, as the remaining
51% was acquired by the Company on June 28, 1996.
The Company markets its products and services to customers in the
international rail transportation and mass transit industry. The Company is
primarily engaged in the design, engineering, production, distribution and
after-sale service of integrated railway signaling, automation and control
systems and related component products. The Company's headquarters are in
Schiphol, The Netherlands.
Signaling Business Unit Contribution
On October 1, 1996, ATR contributed all of its wholly owned signaling
business unit ("SBU") to ASF with the exception of certain contracts and
liabilities, thus consolidating all of ATR's railway signaling business and
assets in Italy. Under the terms of the contribution, ASF received substantially
all of the assets and liabilities under the supervision of SBU at the date of
the contribution.
The consolidated statements of income (loss) and comprehensive income
(loss) for 1996 include all revenues and costs directly attributed to SBU
including costs for facilities, functions and services used by the business at
shared sites and costs for certain functions and services performed by ATR that
were directly charged to SBU based upon usage.
Acquisition of CSEE - Transport S.A.
Prior to June 28, 1996, ATR owned 49% of CSEE and accounted for its
investment under the equity method. On June 28, 1996, pursuant to an agreement
between ATR and Compagnie des Signaux S.A. ("CS"), CSEE repurchased 604,340
shares of its outstanding shares from CS for $58.7 million As a result of this
transaction, ATR increased its interest in CSEE to approximately 80% and,
contemporaneously with this transaction, CS placed in escrow its remaining
shares (201,460 shares) in anticipation of exchanging such shares for a certain
number of shares in ASNV. These shares were exchanged for 2,000,000 ASNV common
shares in December 1996. The CSEE shares which were held in escrow were
considered to be under the control of ATR. The June 28 transactions were
accounted for as a purchase. Accordingly, 100% of the results of operations of
CSEE have been included in the combined results of ASNV since June 28, 1996.
24
26
ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total cost of the transaction to acquire the remaining 51% interest in
CSEE was valued at approximately $77.6 million. The net tangible assets acquired
from CSEE had a fair value at the time of acquisition of $28.8 million, as well
as goodwill and identified intangibles of $48.8 million, of which $15.1 million
represents acquired in process research and development. Immediately following
the acquisition, the Company wrote-off the acquired in process research and
development. The residual goodwill and intangibles are being amortized over 20
years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The consolidated financial statements are expressed in US dollars and have
been prepared in accordance with United States Generally Accepted Accounting
Principles (US GAAP).
Consolidation
The Company's majority-owned subsidiaries are consolidated. All significant
intercompany transactions and balances have been eliminated in the consolidated
financial statements. Investments representing a 20% to 50% interest in the
voting shares of affiliated companies in which the Company exercises significant
influence over operating and financial policies are accounted for using the
equity method.
Foreign Currencies
Transactions in foreign currencies are translated into each entity's
functional currency at the exchange rate in effect on the transaction dates.
Exchange differences arising from translating foreign currency receivables or
payables at year-end exchange rates are charged or credited to current period
net income.
The Company's results of operations and financial position are reported in
US dollars. When translating local currency financial statements to US dollars,
assets and liabilities are translated at the year-end rate, while income and
expenses are translated using the average rate for the year. Translation
differences are included as a component of shareholders' equity.
Use of Estimates
The preparation of consolidated financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingencies at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates. The use of estimates is an integral part of applying
percentage-of-completion accounting for long-term contracts.
Revenue Recognition - Contracts
Revenue and costs of revenue on long-term contracts are recognized using
the percentage-of-completion method of accounting. Under this method, income is
recognized as work progresses on the contracts based on the relationship between
total contract revenues and total estimated contract costs. The percentage of
work completed is determined principally by comparing the accumulated costs
incurred to date with management's current estimate of total costs to be
incurred at contract completion. Revenue is recognized on the basis of actual
costs incurred plus the portion of income earned.
Contract costs include all direct material, subcontractor costs, and labor
costs and those indirect costs related to contract performance. Revisions in
profit estimates during the period of a contract are reflected in the accounting
period in which the revised estimates are made on the basis of the stage of
completion at that time. If estimated total costs on a contract indicate a loss,
the entire amount of the estimated loss is provided for currently.
25
27
ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue related to unsigned change orders is recognized when it is
determined that collection under the change order is probable. Revenue related
to claims is recognized only to the extent of costs incurred when recovery under
the claims is considered probable.
Contracts are considered complete upon completion of all essential contract
work, including support to integrated testing and customer acceptance.
Costs and estimated earnings in excess of billings on uncompleted contracts
represent revenue recognized in excess of amounts billed to customers. These
amounts are not yet billable under the terms of the contracts and are
recoverable from customers upon various measures of performance.
Billings in excess of costs and estimated earnings on uncompleted contracts
represents billings to customers in excess of earned revenue and advances on
contracts.
Revenue Recognition - Components
Sales of component parts, which are not part of a long-term contract, are
recognized upon shipment of products.
Inventory
Inventory is stated at the lower of cost or market, with cost being
determined using standard costs, which approximate weighted average actual
costs.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is
provided based on estimated useful asset lives and is computed on a
straight-line method for financial reporting purposes. Maintenance and repairs
are charged to expense as incurred. At the time property, plant and equipment is
retired or otherwise disposed of, the cost and related accumulated depreciation
are adjusted and any profit or loss on dispositions is included in the
consolidated statement of income (loss).
Intangible Assets
Intangible assets represent goodwill, purchased research and development
and proprietary technology, which comprises patents, drawings and other
proprietary information. Intangible assets other than goodwill are being
amortized over the economic lives of the assets, generally 8 to 20 years.
Goodwill, which represents the excess of purchase price over the fair value of
the net identifiable tangible and intangible assets purchased, is being
amortized over 10 to 20 years.
Earnings Per Share
Earnings per share is calculated in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 128 - "Earnings per
Share". Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
earnings per share is calculated by dividing net income by the weighted average
number of common shares outstanding during the year plus common equivalent
shares outstanding if the common equivalent shares are dilutive. Common
equivalent shares include dilutive stock options as if the options were
exercised and the proceeds used by the Company to acquire common stock (i.e.,
the treasury stock method).
Basic and diluted earnings per share for the years ended December 31, 1998
and December 31, 1997 are based upon 20,448,750 common shares outstanding. Basic
and diluted earnings per share for the year ended December 31, 1996, are based
upon 20,448,750 common shares outstanding which reflects the one-for-one
exchange of
26
28
ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9,737,500 shares with US&S shareholders and the issuance of 10,711,250
additional shares, in exchange for 100% of ASF, CSEE, ATI and 75% of ATSS.
Cash and Cash Equivalents
Cash and cash equivalents represent funds held in interest-bearing money
market accounts with original maturities of 3 months or less.
Credit Risks
Financial instruments that potentially subject the Company to
concentrations of credit risks consist primarily of billed and unbilled
receivables. Concentrations of credit risk with respect to billed and unbilled
accounts receivable are limited due to the Company's credit evaluation process
and obtaining letters of credit to ensure payment from international customers.
Historically, the Company has not incurred any significant credit-related
losses.
Financial Instruments
In managing interest rate exposure, the Company at times enters into
interest rate swap agreements. Net receipts or payments under the agreements are
recognized as an adjustment to interest expense. In order to hedge exposures
from firm commitments in foreign currencies, the Company at times enters into
forward foreign exchange contracts primarily related to long-term contracts
which are settled in currencies other than the currency in which the costs are
incurred. Gains and losses resulting from these instruments are recognized in
the same period as the underlying hedged transaction. The fair values of the
Company's financial instruments are estimated based on quoted market prices for
the same or similar issues.
Research and Development
Research and development expense is presented net of government grant
reimbursements. Research and development efforts that are performed in
accordance with contract requirements are included in cost of revenue. Certain
government research grants which are repayable in the event that the related
research project proves to be successful are recognized in the income statement
when the research project has been determined to be unsuccessful and all other
conditions for non-repayment of the grants have been met.
Income Taxes
The Company accounts for certain income and expense items differently for
financial reporting and income tax purposes. In accordance with SFAS No. 109,
"Accounting for Income Taxes," deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
return bases of assets and liabilities applying enacted statutory tax rates in
effect for the year in which the differences are expected to reverse.
Reclassifications
Certain amounts from prior periods have been reclassified for comparative
purposes.
27
29
ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVENTORY
DECEMBER 31,
--------------------------
1998 1997
Raw materials............................... $27,435 $25,005
Work-in-process............................. 13,893 14,028
Finished components......................... 7,977 5,738
------- -------
$49,305 $44,771
======= =======
4. LONG-TERM CONTRACT BALANCES
DECEMBER 31,
--------------------------
1998 1997
Costs incurred on uncompleted contracts..... $1,382,798 $1,206,219
Estimated earnings.......................... 239,552 190,081
---------- ----------
1,622,350 1,396,300
Less billings-to-date and advances on
contracts.............................. (1,493,234) (1,301,964)
---------- ----------
$ 129,116 $ 94,336
========== ==========
The net amount in the preceding table is included in the consolidated
balance sheet under the following captions:
DECEMBER 31,
----------------------
1998 1997
Costs and estimated earnings in excess
of billings on uncompleted contracts.... $182,253 $157,008
Billings in excess of costs and estimated
earnings on uncompleted contracts....... (53,137) (62,672)
-------- --------
$129,116 $ 94,336
======== ========
At December 31, 1998, there were $2,800 of claims and unsigned change
orders that are included in costs and estimated earnings in excess of billings
on uncompleted contracts. At December 31, 1997, there were $15,554 of claims and
unsigned change orders that are included in costs and estimated earnings in
excess of billings on uncompleted contracts.
All amounts included in unbilled costs and estimated earnings on
uncompleted contracts at December 31, 1998, are expected to be collected within
one year.
Contract retentions receivable and payable arise from the performance of
long-term contracts. Approximately $6,476 of retentions receivable and $1,173 of
retentions payable are estimated to be collected or paid, respectively, in 1999.
5. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
---------------------
1998 1997
Land............................... $ 2,467 $ 3,350
Buildings.......................... 24,276 44,829
Machinery and equipment............ 81,014 64,628
Construction-in-progress........... 3,331 11,495
-------- --------
$111,088 $124,302
Less accumulated depreciation...... (77,353) (70,000)
-------- --------
$ 33,735 $ 54,302
======== ========
28
30
ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense for the years ended December 31, 1998, 1997, and 1996,
was $6,641, $8,446, and $6,819, respectively. Depreciable lives average 39 years
for building, and range between3 and 7 years for machinery and equipment.
In June 1998 the Company renegotiated the Pittsburgh Engineering and
Technology Facility lease. The conversion from a capital lease to an operating
lease generated a nonrecurring gain of $980. Land and buildings having a net
book value of approximately $18,090 were removed from the balance sheet. Net
cash proceeds received at the time of closing were $12,200.
6. SHORT-TERM BORROWINGS AND CAPITAL LEASE OBLIGATIONS
CURRENCY DECEMBER 31,
PAYABLE IN 1998 1997
Borrowings (unsecured but with letters
of comfort from ATR and Finmeccanica),
by Ansaldo Signal from Confiri S.p.A.,
a related party (see Note 10). The interest
rate in effect on December 31, 1998 was
6.63% (1997: 7.00%). USD $50,000 $13,000
Borrowings (unsecured) under various
lines of credit expiring within one year
with interest payable at least quarterly.
The interest rate in effect on December 31,
1997 was between 7.88% and 8.375% USD -- 21,987
Borrowings (unsecured), in Italy
by ASF under various agreements
with several banks, expiring within one
year. The interest rate in effect at
December 31,1998 was between 6.88%
and 7.88% (1997: 8.01%). Lira 14,713 8,945
Borrowings (unsecured) under various
lines of credit expiring within one
year with interest payable at least
quarterly. The interest rate in effect
on December 31, 1998 was between 3.56%
and 5.30% (1997: between 3.88% and 5.91%). Various 10,534 11,433
Current portion of obligations under
capital leases 156 478
------- -------
Total short-term borrowings and current
portion of obligations under capital leases $75,403 $55,843
======= =======
29
31
ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company had committed and uncommitted lines of credit available at
December 31, 1998, of $127.7 million with various banks. The unused portion of
the committed and uncommitted lines of credit available at December 31, 1998,
totaled $52.3 million. US&S also has a $2,917 letter of credit line available
and fully utilized from a bank at December 31, 1998. Certain of these lines are
guaranteed by ATR.
7. LONG TERM BORROWINGS AND CAPITAL LEASES
The carrying value of the Company's long-term debt approximates fair value
based on the borrowing rates currently available to the Company for loans with
similar terms and maturities.
DECEMBER 31,
-------------------
1998 1997
Ansaldo Segnalamento Ferroviario S.p.A.
Notes (unsecured) due 2002 with a
fixed interest rate of 4.10%............................................. $16,949 $ --
Union Switch & Signal
Senior Notes (unsecured) due 2004, with a
fixed interest rate of 8.00%............................................. 25,715 30,000
Long term obligations under capital leases............................... 1,957 8,289
------- -------
Subtotal ........................................................... 44,621 38,289
Less current portion of senior notes..................................... 4,286 4,286
------- -------
Total long term borrowings and obligations
under capital leases................................................ $40,335 $34,003
======= =======
The aggregate principal maturities of debt under the present credit
arrangements for the periods subsequent to December 31, 1998:
1999 ................................................................... $ 4,286
2000 .................................................................... 6,102
2001 .................................................................... 11,550
2002 .................................................................... 12,155
2003 .................................................................... 4,286
Thereafter................................................................... 4,285
-------
$42,664
=======
Future minimum lease payments under, non-cancelable operating leases and
capital leases, as of December 31, 1998, are primarily for buildings machinery
and equipment as follows:
OPERATING CAPITAL
1999......................................................................... $ 4,623 $ 391
2000......................................................................... 3,533 392
2001......................................................................... 3,200 391
2002......................................................................... 3,055 392
2003......................................................................... 2,787 393
Thereafter................................................................... 34,759 1,099
------- ------
Total minimum lease payments................................................. $51,957 3,058
=======
Amount representing imputed interest......................................... (945)
------
Present value of future minimum lease payments............................... 2,113
Less current portion......................................................... (156)
------
$1,957
======
30
32
ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1994, US&S issued senior, unsecured promissory notes to various lenders
in the total amount of $30,000 at a fixed rate of 8 percent. The private
placement notes have a ten-year term; principal repayments began in 1998. Under
this agreement, the Company is subject to certain financial covenants. US&S is
in compliance with the financial covenants included in the note agreement as of
December 31, 1998.
ATR and Finmeccanica have agreed to continue to provide sufficient
guarantees and/or financing support for the operations of Ansaldo Signal NV and
its subsidiaries until March 2000. The repayment of any present or future
indebtedness to ATR and/or Finmeccanica will not be required if the Company
requests deferral of repayment. Management intends to request deferral of
repayment if such repayment would result in the Company violating any of its
current debt covenants.
US&S maintains a $100 million surety bonding facility ($30.0 million
outstanding at December 31, 1998) in addition to a $300 million surety bonding
facility provided by Finmeccanica (see Note 10).
8. EMPLOYEE BENEFIT OBLIGATIONS
Retirement benefits
Substantially all employees are covered by Government sponsored retirement
plans or Company sponsored defined contribution retirement plans which are
provided for through charges to income by the Company during the employees'
working careers. In some cases, employees may also contribute to the cost of the
plan. The Company has no significant obligations for pension or similar
postretirement income benefits.
Other postemployment benefits
The following other postemployment and postretirement benefits other than
pension are included in the consolidated financial statements:
DECEMBER 31,
-----------------------
1998 1997
Severance.................................... $16,644 $15,299
Profit Sharing............................... 3,074 3,366
Other........................................ 2,759 2,639
------- -------
$22,477 $21,304
======= =======
The following is a description of the more significant postemployment
benefit plans:
Severance
ASF has an unfunded severance plan in accordance with Italian government
regulations. The Italian government requires the employer to provide severance
pay (Trattamento di fine rapporto - TFR) in amounts equal to annual
contributions of 7-8% of a worker's annual salary. The amounts accrued become
payable upon termination of the individual employee, for any reason, e.g.,
retirement, dismissal or reduction in work force. Employees are fully vested in
TFR benefits after their first year of service.
31
33
ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Profit Sharing
CSEE operates a two-tier employee profit sharing plan. The first tier of
the plan is mandatory under French law and CSEE is required to make an annual
provision of a certain amount of profit after tax based upon a formula. A
discretionary second tier to the profit-sharing plan is negotiated under a
collective bargaining arrangement.
Other
The Company's other unfunded plans, include CSEE's pension plan and the
US&S postretirement benefit plan which pays a fixed amount toward the cost of
medical insurance and provides life insurance benefits. The liabilities and
costs related to these plans are determined on an actuarial basis appropriate to
the circumstances.
The approximate cost of providing all of the above benefits for the years
ended December 31, 1998, 1997 and 1996 was $2,515, $4,000 and $4,079,
respectively.
9. PROVISION FOR INCOME TAXES
Generally, each subsidiary of the Company is a tax paying entity within its
own country. The tax returns of ASF, pre-contribution of SBU to ASF on October
1, 1996, were filed on a separate basis with the government of Italy; however,
SBU as a unit of ATR did not have separate income tax returns filed on its
behalf, and an estimated provision was calculated based upon the operating
results of SBU.
For the nine-month period ended September 30, 1996, tax expense has been
allocated to SBU by applying the liability approach set forth in SFAS No. 109 as
if it were a separate taxpayer. Under this approach, a tax benefit for income
taxes currently refundable is recognized only if a refund could have been
realized by SBU had SBU been a separate taxpayer. A tax benefit for future
deductible amounts and carry forwards is recognized when it is more likely than
not that such future tax benefit would be realized if SBU were a separate
taxpayer.
The components of the provision for (benefit from) income taxes were as
follows:
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
Current:
Netherlands................................................ $ -- $ -- $ --
Other...................................................... 3,912 (3,801) (404)
------ ------- -------
Total current provision (benefit)...................... 3,912 (3,801) (404)
------ ------- -------
Deferred:
Netherlands............................................ -- -- --
Other.................................................. 3,388 3,878 (2,310)
------ ------- -------
Total deferred provision (benefit)................ 3,388 3,878 (2,310)
------ ------- -------
Total provision (benefit)......................... $7,300 $ 77 $(2,714)
====== ======= =======
32
34
ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for (benefit from) income taxes differs from the amount of
income tax determined by applying the applicable Netherlands statutory rate to
pretax income as a result of the following differences:
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
Expected tax at the statutory rate of 35%................... $ 4,860 $(4,448) $14,346)
Earnings of subsidiaries at rates over 35%.................. 367 121 191
Other foreign taxes......................................... 1,605 -- --
In process research and development......................... -- -- 5,178
Loss carryover with no tax benefit.......................... 21 206 3,834
Non-deductible goodwill..................................... 730 1,614 1,301
Non-deductible reorganization costs......................... 588 431 2,520
Change in tax rates......................................... -- 2,632 --
Change in valuation reserve................................. (2,040) 3,742 --
Other....................................................... 1,169 (4,221) (1,392)
------- ------- -------
Total income tax........................................ $ 7,300 $ 77 $(2,714)
======= ======= =======
Deferred taxes were comprised of the following:
DECEMBER 31,
--------------------------
1998 1997
Deferred tax assets:
Reserves for contract losses................................................. $ 1,019 $ 1,797
Employee benefit obligations................................................. 2,030 2,335
Accrued expenses and reserves................................................ 4,265 3,867
Goodwill..................................................................... 4,087 4,647
Research and development..................................................... 1,663 2,936
Revaluation of assets........................................................ 2,237 2,206
Net operating loss carryforwards............................................. 3,340 6,639
Tax credit carryforwards..................................................... 1,063 780
Other........................................................................ 646 419
------- -------
Deferred tax assets...................................................... 20,350 25,626
Valuation allowance.......................................................... (1,707) (3,625)
------- -------
18,643 22,001
------- -------
Deferred tax liabilities:
Property, plant and equipment................................................ (990) (2,924)
Leveraged lease.............................................................. (903) (714)
Intangibles ................................................................ (235) (295)
Other........................................................................ (998) (962)
------- -------
Total deferred tax liabilities........................................... (3,126) (4,895)
------- -------
Net deferred tax asset................................................... $15,517 $17,106
======= =======
During 1998, the Company released into taxable income certain government
grants whose recognition had been previously deferred. The recognition of income
had the effect of reducing the NOL carryforward by $732.
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For income tax reporting purposes, the Company has net operating loss
carryforwards that aggregate $9,800 at December 31, 1998. NOL carryforward
periods vary from five years to indefinite, and the first NOL carryforwards
begin to expire in 2002.
Also during 1998 the Company recorded a net decrease in the valuation
allowance of $2,040, which has reduced the 1998 tax provision. The decrease
reflects utilization of a portion of NOL carryforwards in 1998 for which a
valuation allowance had previously been established and the Company's improved
expectations about the future realizability of certain of the remaining NOL
carryforwards before their expiration. Management believes that it will have
sufficient taxable income in the future to make it more likely than not that the
deferred assets net of the valuation allowance at December 31, 1998 will be
realized.
During 1997, the Company recorded an adjustment to reduce the net deferred
tax balance at December 31, 1997 by $2,632 based principally on changes in the
tax laws of Italy. These changes reduced the expected tax benefit to be received
in the future relating to net deductions already reported for financial
statement purposes but not yet taken for tax purposes.
Also during 1997 the Company recorded a net increase in the valuation
allowance of $3,742, which was charged to the 1997 tax provision which reflected
the Company's expectations about the utilization of certain of its NOL
carryforwards before their expiration.
10. RELATED-PARTY TRANSACTIONS
The Company's borrowings from its controlling shareholder (ATR) are as
follows:
DECEMBER 31,
--------------------
1998 1997
Borrowings by ASNV (unsecured); interest rate in
effect at December 31, 1998 was 7.00%.................................... $17,893 $ --
Borrowings by ASF (unsecured); interest rate in
effect at December 31, 1998 was 6.375% (1997: 12%)...................... 5,245 29,154
Borrowings by ATSS (subordinated); non-interest bearing...................... 1,911 1,960
Borrowings by ATSS; floating interest rate tied to
official discount rate in Sweden......................................... 1,233 1,265
------- -------
Total borrowings from parent Company......................................... $26,282 $32,379
======= =======
The Company's borrowings from Cofiri, a related financial institution
majority-owned by IRI, were $50 million at December 31, 1998 (interest at 6.63%)
and $13 million at December 31, 1997 (interest at 7.00%). See Note 6.
Borrowings by ASF and by ASNV from ATR are for an indefinite period of
time.
The subordinated ATSS loan from the parent company is interest free and is
classified in the Swedish statutory financial statements as a conditional
Shareholders Contribution to be repaid upon demand from future available
earnings. According to statutory legislation, this loan can be repaid to the
parent company under certain conditions after a decision at the Annual General
Meeting of Shareholders. For US GAAP purposes, this amount is considered
subordinated debt.
US&S, as well as the other subsidiaries of the Company, relies on ATR /
Finmeccanica for certain financial and management services. Such services for
US&S include guaranteeing a $300,000 performance bonding facility
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(of which $107,993 was utilized at December 31, 1998). US&S pays fees to ATR /
Finmeccanica for these services. The fees paid are calculated on the basis of
the value of credit enhancement. The fee equals 1.0 percent per annum of the
aggregate principal amount of credit enhanced by Finmeccanica and 0.50 percent
per annum of any bond or letter of credit for which Finmeccanica provides an
indemnity. For the years ended December 31, 1998, 1997 and 1996, fees were $593,
$204 and $271, respectively.
ATR / Finmeccanica has provided bid, advance payment, performance and
retentions bonding of $179,632 for all subsidiaries of ASNV.
Management expects ATR / Finmeccanica to continue to provide these
services, to the extent required, at least through March 2000.
SBU, as a division of ATR, obtained virtually all of its head office
services, including centralized administrative staff functions, human relations,
legal, planning, accounting and central purchasing, from ATR through September
30, 1996. Effective October 1, 1996, ASF entered into agreements with ATR to
continue to provide these services as well as to lease space at ATR's facilities
through 1998, which term is extended on an annual basis unless terminated by
either party. The cost of these services during the three month period ended
December 31, 1996, and the years ended December 31, 1997 and 1998, was $3,200,
$9,989 and $8,463, respectively.
All of the allocations and estimates in the consolidated statement of
operations are based on assumptions that management believes are reasonable
under the circumstances. These allocations and estimates are not necessarily
indicative of the costs and expenses that would have resulted if ASF had been
operated as a separate entity; however, management believes the differences, if
any, would not be material.
ASF has been involved in a number of large turnkey projects with ATR. ATR
acted as a prime contractor on such projects. The contracts require ATR to
provide varied rail products and services, including signaling and automation of
the signaling systems. In connection with the SBU contribution, ATR entered into
formal subcontract agreements with ASF to continue providing these services on
the incomplete contracts. For the years ended December 31, 1998 and 1997, ASF
received revenues on these contracts of some $17,047 and $17,125, respectively.
US&S has been a subcontractor to ATR. ATR is the prime contractor on such
projects and has agreements with US&S for US&S to provide goods and services on
these contracts. For the years ended December 31, 1998, 1997 and 1996 US&S's
revenue included $10,492, $3,425 and $1,556, respectively, on these contracts.
In addition, pursuant to an agreement effective as of November 1, 1995
through December 10, 1997, US&S provided management consulting services to ATR.
For said services, US&S received a fee of $643 plus reimbursement of expenses.
11. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company has entered into foreign currency exchange contracts to reduce
its foreign currency exchange risk. Because these contracts are intended as, and
effective as, hedges of the underlying assets, liabilities or commitments, any
exchange gains or losses are deferred. The net unrealized gain on open contracts
at December 31, 1998, not recognized in the income statement, amounts to $118.
The fair value of these contracts approximates the contract value because they
are short-term in nature. The Company's theoretical risk in these transactions
is the cost of replacing, at current market rates, these foreign currency
exchange contracts in the event of a default by the counterparty. Management
believes the risk of such losses is remote and that such losses would not be
material.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
standard requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge which permits, in some cases, deferral of the effects of gains
35
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and losses on current net income. If the conditions for hedging are not met,
changes in value will be recognized in current net income. Regardless of whether
the derivative qualifies as a hedge, all changes in value will be recognized in
comprehensive income. The Company is required to adopt this standard in 2000.
Management does not expect the adoption of this standard to have a material
impact on the Company's results of operations or financial position.
12. SEGMENT INFORMATION
The Company operates principally in one industry: the design, engineering,
production, distribution and after-sale service of integrated railway signaling,
automation and control systems and related component products.
The Company's operating segments are managed along geographic divisions
which correspond to the locations of its subsidiaries. ASF is in Italy. CSEE is
in France. US&S is in the United States. Other subsidiaries are located in
Sweden, Australia, Ireland and India.
Disclosures of operating segment information as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998 is
provided in the following table.
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998
ASF CSEE US&S OTHER TOTAL
Income Statement Data:
Revenues...................................... $113,314 $79,354 $150,834 $11,030 $354,532
Gross profit.................................. 23,992 16,440 30,786 5,864 77,082
Depreciation ................................. 1,409 1,794 3,376 62 6,641
Amortization.................................. 268 1,941 218 899 3,326
Operating expenses............................ 14,941 14,606 20,638 4,525 54,710
Operating income.............................. 9,051 1,834 10,148 1,339 22,372
Balance Sheet Data:
Total current assets.......................... $162,975 $64,930 $135,621 $16,250 $379,776
Property, plant and equipment - net........... 11,994 5,252 15,632 857 33,735
Intangible assets - net....................... 299 30,794 351 2,214 33,658
Total assets.................................. 192,657 102,923 161,164 15,848 472,592
Other Data:
Capital expenditures.......................... $535 $590 $1,844 $183 $3,152
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1997
ASF CSEE US&S OTHER TOTAL
Income Statement Data:
Revenues...................................... $108,481 $75,681 $122,419 $11,644 $318,225
Gross profit.................................. 19,564 19,821 13,348 2,218 54,951
Depreciation ................................. 2,556 1,715 3,974 201 8,446
Amortization.................................. -- 2,003 116 961 3,080
Operating expenses............................ 15,160 18,522 20,404 4,390 58,476
Operating income.............................. 4,403 1,299 (7,056) (2,171) (3,525)
Balance Sheet Data:
Total current assets.......................... $157,417 $65,122 $103,627 $17,239 $343,405
Property, plant and equipment - net........... 12,038 6,058 35,492 714 54,302
Intangible assets - net....................... 478 29,414 219 3,007 33,118
Total assets.................................. 188,324 102,656 151,259 14,927 457,166
Other Data:
Capital expenditures.......................... $3,039 $1,585 $2,299 $215 $7,138
36
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996
ASF CSEE US&S OTHER TOTAL
Income Statement Data:
Revenues...................................... $128,037 $55,213 $153,183 $17,067 $353,500
Gross profit.................................. 20,839 13,450 17,670 4,921 56,880
Depreciation ................................. 1,381 1,156 3,934 348 6,819
Amortization.................................. 1,429 1,271 836 1,015 4,551
Operating expenses............................ 20,552 12,017 27,810 31,828 92,207
Operating income.............................. 287 1,433 (10,139) (26,908) (35,327)
In 1996, operating income included nonrecurring charges of $32,432 related
to reorganization costs ($17,288) and the write off of in process research and
development costs ($15,144).
13. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is a party to claims related
to work performed for certain transit authorities and railroads. In the opinion
of management, ultimate settlement of these claims will not have a material
adverse effect on the results of operations or the financial position of the
Company.
14. PRIORITY SHARES AND OPTION AGREEMENT
The Company and ATR have entered into an Option Agreement (the "Option
Agreement") pursuant to which the Company has granted ATR an option to purchase
all of the authorized Priority Shares of the Company for a price equal to the
aggregate par value of such shares. The option granted to ATR pursuant to the
Option Agreement may only be exercised in the event that an unrelated party
acquires or announces a tender offer for 20% or more of the Company's
outstanding common shares.
In the event that ATR acquires the Priority Shares, ATR would be entitled
under the Company's Articles of Association to nominate the members of the
Supervisory Board and the Management Board. Such nominations would bind the
holders of common shares unless the holders of two-thirds or more of the common
shares voted to make nominations non-binding. If ATR acquires the Priority
Shares and still holds at least one-third of the outstanding common shares, it
will be able to make a binding nomination of the members of the Supervisory
Board and the Management Board. Pursuant to the Option Agreement ATR has agreed
that in the event it acquires the Priority Shares and subsequently its holdings
of common shares fall below 25% of the outstanding common shares, the Company
may repurchase the Priority Shares for no consideration.
15. STOCK OPTION PLAN
In 1996, the Management and Supervisory Boards of the Company approved a
Long-Term Stock Incentive Plan (the Incentive Plan). The Incentive Plan is
intended to (i) provide incentives and rewards to selected employees of the
Company; (ii) assist the Company in attracting, retaining and motivating
employees with experience and ability; and (iii) make the Company's compensation
program competitive with those of other employers. An aggregate of 1,000,000
common shares has been reserved for issuance under the Incentive Plan.
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes all stock option activity in 1998, 1997, and
1996.
1998 1997 1996
---------------------- ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of year....... 168,500 $7.50 294,000 $7.50 -- --
Granted ............................. -- -- 20,000 $7.50 294,000 $7.50
Forfeited ............................. (32,000) $7.50 (145,500) $7.50 -- --
------- -------- -------
Outstanding at end of year............. 136,500 $7.50 168,500 $7.50 294,000 $7.50
======= ======== =======
Options exercisable at year end........ 17,600 $7.50 17,600 $7.50 -- --
======= ======== =======
Weighted-average fair value of each
option granted during the year.... $ -- $0.95 $3.92
===== ===== =====
Of these options, 17,600 became exercisable in 1997 and 118,900 will become
exercisable in 1999.
In 1997, the Company adopted SFAS No. 123,"Accounting for Stock-Based
Compensation", and elected to account for compensation expense related to stock
options under the recognition and measurement provisions of Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees", (APB
25). Therefore, no compensation expense has been recognized for these options
since the options' exercise prices are greater than or equal to the market price
of the shares on the dates of grant. Had the Company elected to account for
stock-based compensation under the provisions of SFAS 123, net income would have
been a reduced by $178, $194 and $21 for the years ended December 31, 1998, 1997
and 1996, respectively. The corresponding effect on basic earnings per share and
diluted earnings per share would have been a reduction of $0.01, $0.01 and $0.00
for the years ended December 31, 1998, 1997 and 1996, respectively
16. GOODWILL, TECHNOLOGY AND OTHER INTANGIBLE ASSETS
Goodwill, technology and other intangibles net of accumulated amortization
consisted of the following:
DECEMBER 31,
---------------------------
1998 1997
Goodwill................................. $ 30,297 $ 28,785
Technology............................... 12,487 11,675
Other.................................... 5,407 3,424
-------- --------
48,191 43,884
Less Accumulated amortization........ (14,533) (10,766)
-------- --------
$ 33,658 $ 33,118
======== ========
The amortization expense for the years ended December 31, 1998, 1997 and
1996 was $3,326, $3,080 and $4,551, respectively.
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ANSALDO SIGNAL N.V.
1998 MANAGEMENT BOARD REPORT TO SHAREHOLDERS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. REORGANIZATION COSTS
The Company recorded restructuring charges of $10,095 in December, 1996
related to the rationalization of certain of the operations of the individual
companies to take advantage of the Company's new world-wide organization. As of
December 31, 1998, $2,276 of this reserve remains for specific expenditures
which will occur in the first half of 1999. The original charge related
primarily to involuntary separation and severance benefits for displaced
employees. The involuntary separation and severance benefits principally related
to (i) US&S's management employees whose positions were eliminated and / or
chose not to relocate from US&S's former headquarters in Columbia, South
Carolina to Pittsburgh, Pennsylvania; and (ii) employees of ASF working at the
Company's facilities in Italy. Also included in the charge were costs related to
the elimination of redundant product lines.
Costs of $7,193 accrued and incurred in 1996 to effect a combination
accounted for by the pooling of interests method are also included as
reorganization charges. (See Note 1). During 1997 costs of $1,584 were reversed,
related to estimated costs which never materialized or were overestimated, (no
such costs remained as of December 31, 1997) which resulted in net cost of
$5,609 to effect the combination accounted for by the pooling of interests
method.
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==============
ANSALDO SIGNAL
==============
ANSALDO SIGNAL N.V.
WORLD TRADE CENTER
SCHIPHOL BOULEVARD 267
1118 BH SCHIPHOL
THE NETHERLANDS