-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BDENjuP95hsVX0HjMqXowpdRR3GE4IVyZ5Q4iisRB8OrgHXGNgXuC1Duh/OjlfAj iVOtAlpi22P26SuFeMrfpQ== 0000912057-97-032393.txt : 19971002 0000912057-97-032393.hdr.sgml : 19971002 ACCESSION NUMBER: 0000912057-97-032393 CONFORMED SUBMISSION TYPE: 10-12B/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19971001 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNOVA INC CENTRAL INDEX KEY: 0001044590 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY (NO METALWORKING MACHINERY) [3550] IRS NUMBER: 954647021 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-12B/A SEC ACT: SEC FILE NUMBER: 001-13279 FILM NUMBER: 97689529 BUSINESS ADDRESS: STREET 1: 360 NORTH CRESCENT DRIVE CITY: BEVERLY HILLS STATE: CA ZIP: 90210 BUSINESS PHONE: 3108882500 10-12B/A 1 10-12B/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ FORM 10 (AMENDMENT NO. 1) --------------------- GENERAL FORM FOR REGISTRATION OF SECURITIES Pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934 ------------------------ UNOVA, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4647021 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 360 NORTH CRESCENT DRIVE BEVERLY HILLS, CALIFORNIA 90210 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 888-2500 ------------------------ Securities to be registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED - --------------------------------------------- --------------------------------------------- Common Stock, New York Stock Exchange par value $.01 per share Preferred Share Purchase Rights New York Stock Exchange
Securities to be registered pursuant to Section 12(g) of the Act: None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNOVA, INC. I. INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED IN FORM 10 BY REFERENCE CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
ITEM NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT ----- ---------------------------------------------------- ---------------------------------------------------- 1. Business............................................ "Summary of Certain Information"; "Introduction"; "The Distribution -- Background and Reasons for the Distribution"; "Business and Properties"; and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 2. Financial Information............................... "Summary of Certain Information"; "Risk Factors"; "UNOVA, Inc. Unaudited Pro Forma Combined Selected Statements of Operations"; "UNOVA, Inc. Selected Combined Historical Financial Data"; "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements." 3. Properties.......................................... "Business and Properties." 4. Security Ownership of Certain Beneficial Owners and Management.......................................... "The Distribution -- Listing and Trading of Company Common Stock"; "Management" and "Security Ownership of Certain Beneficial Owners of Company Common Stock." 5. Directors and Executive Officers.................... "Risk Factors"; "Arrangements Between Western Atlas and the Company Relating to the Distribution"; "Management" and "Liability and Indemnification of Officers and Directors." 6. Executive Compensation.............................. "Arrangements Between Western Atlas and the Company Relating to the Distribution" and "Management." 7. Certain Relationships and Related Transactions...... "Summary of Certain Information"; "Introduction"; "Risk Factors"; "The Distribution -- Background and Reasons for the Distribution"; "Arrangements Between Western Atlas and the Company Relating to the Distribution"; "Management"; "Certain Transactions" and "Index to Financial Statements." 8. Legal Proceedings................................... "Business and Properties -- Legal Proceedings."
ITEM NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT ----- ---------------------------------------------------- ---------------------------------------------------- 9. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters....... "Summary of Certain Information"; "Introduction"; "Risk Factors" and "The Distribution -- Listing and Trading of Company Common Stock." 11. Description of Registrant's Securities to be Registered.......................................... "Description of Capital Stock"; "Certain Antitakeover Effects of Certain Provisions of the Certificate of Incorporation, the By-laws, State Law and the Rights Plan." 12. Indemnification of Directors and Officers........... "Liability and Indemnification of Directors and Officers" and "Annex C -- Certificate of Incorporation of UNOVA, Inc." 13. Financial Statements and Supplementary Data......... "Summary of Certain Information"; "UNOVA, Inc. Unaudited Pro Forma Combined Statements of Operations"; "UNOVA, Inc. Selected Combined Historical Financial Data"; "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Index to Financial Statements." 15. Financial Statements and Exhibits (a) Financial Statements and Schedules*............. "Index to Financial Statements."
II. INFORMATION NOT INCLUDED IN INFORMATION STATEMENT Item 10. Recent Sales of Unregistered Securities. None. Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.
- ------------------------ * All schedules not included in the Information Statement have been omitted because the amounts in question are insufficient to require inclusion or because the information required is presented in the combined financial statements contained in the Information Statement. 2 SIGNATURE Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. UNOVA, INC. By /s/ ALTON J. BRANN ----------------------------------------- Alton J. Brann CHAIRMAN AND CHIEF EXECUTIVE OFFICER October 1, 1997 A REGISTRATION STATEMENT ON FORM 10 RELATING TO THE COMMON STOCK OF UNOVA, INC. HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BEEN DECLARED EFFECTIVE. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. [LETTERHEAD OF UNOVA] INFORMATION STATEMENT UNOVA, INC. COMMON STOCK (PAR VALUE $.01 PER SHARE) PREFERRED SHARE PURCHASE RIGHTS This Information Statement is being furnished to shareholders of Western Atlas Inc. ("Western Atlas") in connection with the distribution by Western Atlas to its shareholders of all of the outstanding shares of common stock of its wholly owned subsidiary, UNOVA, Inc. The distribution will be made on , 1997, on the basis of one share of common stock of UNOVA, Inc. for each share of Western Atlas common stock held at the close of business on , 1997. No consideration will be paid by shareholders of Western Atlas for the shares of common stock of UNOVA, Inc. to be received by them in the distribution, nor will they be required to surrender or exchange shares of Western Atlas in order to receive common stock of UNOVA, Inc. Each share of UNOVA, Inc. common stock distributed will be accompanied by one Preferred Share Purchase Right. There is currently no public market for the common stock of UNOVA, Inc. UNOVA, Inc. has applied to have its common stock listed on the New York Stock Exchange. ------------------------ WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY. ------------------------ THIS INFORMATION STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. ANY SUCH OFFERING MAY ONLY BE MADE BY MEANS OF A SEPARATE PROSPECTUS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND OTHERWISE IN COMPLIANCE WITH APPLICABLE LAW. THE DATE OF THIS INFORMATION STATEMENT IS , 1997. TABLE OF CONTENTS
PAGE ----- AVAILABLE INFORMATION...................................................................................... iii SUMMARY OF CERTAIN INFORMATION............................................................................. iv The Distribution....................................................................................... iv UNOVA, Inc............................................................................................. v Summary Financial Information.......................................................................... vii INTRODUCTION............................................................................................... 1 RISK FACTORS............................................................................................... 1 THE DISTRIBUTION........................................................................................... 3 Background and Reasons for the Distribution............................................................ 3 Manner of Effecting the Distribution................................................................... 4 Material Federal Income Tax Consequences of the Distribution........................................... 4 Listing and Trading of Company Common Stock............................................................ 5 Future Management of the Company....................................................................... 6 Conditions; Termination................................................................................ 7 ARRANGEMENTS BETWEEN WESTERN ATLAS AND THE COMPANY RELATING TO THE DISTRIBUTION............................ 7 Distribution and Indemnity Agreement................................................................... 7 Tax Sharing Agreement.................................................................................. 8 Benefits Agreement..................................................................................... 8 Intellectual Property Agreement........................................................................ 9 FINANCING.................................................................................................. 10 BUSINESS AND PROPERTIES.................................................................................... 10 General................................................................................................ 10 Products and Services.................................................................................. 11 Business Strategy...................................................................................... 14 Markets and Customers.................................................................................. 15 Competition............................................................................................ 16 Research and Development............................................................................... 17 Patents and Trademarks................................................................................. 17 Seasonality; Backlog................................................................................... 18 Employees.............................................................................................. 18 Legal and Environmental Matters........................................................................ 18 Raw Materials.......................................................................................... 18 Properties............................................................................................. 19 UNOVA, INC. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS.......................................... 20 UNOVA, INC. SELECTED COMBINED HISTORICAL FINANCIAL DATA.................................................... 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 26 General................................................................................................ 26 Recent Developments.................................................................................... 27 Results of Operations.................................................................................. 28 Six Months Ended June 30, 1997 Compared to 1996........................................................ 28 Year Ended December 31, 1996 Compared to 1995.......................................................... 29 Year Ended December 31, 1995 Compared to 1994.......................................................... 29 Foreign Currency Transactions.......................................................................... 30 Liquidity and Capital Resources........................................................................ 30 Inflation.............................................................................................. 30
i
PAGE ----- MANAGEMENT................................................................................................. 31 Directors of the Company............................................................................... 31 Executive Officers of the Company...................................................................... 32 The Board and Certain Board Committees................................................................. 33 Directors' Compensation and Retirement Policies........................................................ 33 Director Stock Option and Deferred Fee Plan............................................................ 33 Annual Meeting......................................................................................... 35 Historical Compensation................................................................................ 35 Summary Compensation Table............................................................................. 35 Option Grants in Last Fiscal Year...................................................................... 36 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values...................... 38 Employment and Change in Control Arrangements.......................................................... 39 Retirement Benefits.................................................................................... 40 Indebtedness of Management to the Company.............................................................. 43 Incentive Compensation Plans Following the Distribution................................................ 43 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF COMPANY COMMON STOCK.................................... 49 By Management.......................................................................................... 49 By Others.............................................................................................. 49 DESCRIPTION OF CAPITAL STOCK............................................................................... 51 Authorized Capital Stock............................................................................... 51 Company Common Stock................................................................................... 51 Company Preferred Stock................................................................................ 51 CERTAIN ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION, THE BY-LAWS, STATE LAW AND THE RIGHTS PLAN.................................................................................. 52 Classified Board of Directors.......................................................................... 52 Number of Directors; Removal; Filling Vacancies........................................................ 52 No Shareholder Action by Written Consent; Special Meetings............................................. 53 Fair Price Provision................................................................................... 53 Advance Notice Provisions for Shareholder Nominations and Shareholder Proposals........................ 59 Preferred Stock........................................................................................ 60 Amendment of Certain Provisions of the Certificate and By-laws......................................... 61 Antitakeover Legislation............................................................................... 61 Relationship of Article IX to Section 203.............................................................. 61 Rights Plan............................................................................................ 62 Comparison with Rights of Holders of Western Atlas Common Stock........................................ 64 LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS.................................................... 64 Elimination of Liability of Directors.................................................................. 64 Indemnification of Directors and Officers.............................................................. 65 INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
ANNEXES A. UNOVA, Inc. Director Stock Option and Fee Plan B. UNOVA, Inc. 1997 Stock Incentive Plan C. Certificate of Incorporation of UNOVA, Inc. D. By-laws of UNOVA, Inc. ii AVAILABLE INFORMATION UNOVA, Inc. (the "Company") has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form 10 (the "Registration Statement") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with respect to its Common Stock described herein. The Registration Statement became effective on , 1997. This Information Statement does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information, reference is made hereby to the Registration Statement and such exhibits and schedules. Copies of these documents may be inspected without charge at the principal office of the Commission at 450 5th Street, N.W., Washington, D.C. 20549, and copies of all or any part thereof may be obtained from the Commission upon payment of the charges prescribed by the Commission. Copies of such materials can also be obtained from the Commission's Web Site (http:// www.sec.gov). Following the Distribution (as defined herein), the Company will be required to comply with the reporting requirements of the Exchange Act and will file annual, quarterly and other reports with the Commission. The Company will also be subject to the proxy solicitation requirements of the Exchange Act and, accordingly, will furnish audited financial statements to its shareholders in connection with its annual meetings of shareholders. No person is authorized by Western Atlas Inc. or the Company to give any information or to make any representations other than those contained in this Information Statement, and if given or made, such information or representations must not be relied upon as having been authorized. iii SUMMARY OF CERTAIN INFORMATION THIS SUMMARY IS QUALIFIED BY THE MORE DETAILED INFORMATION SET FORTH ELSEWHERE IN THIS INFORMATION STATEMENT, WHICH SHOULD BE READ IN ITS ENTIRETY. THE DISTRIBUTION Distributing Company......................... Western Atlas Inc., a Delaware corporation ("Western Atlas"). Shares to be Distributed..................... Approximately 53.9 million shares of common stock, par value $.01 per share ("Company Common Stock"), of UNOVA, Inc., a Delaware corporation (the "Company"), based on approximately 53.9 million shares of common stock of Western Atlas ("Western Atlas Common Stock") currently outstanding. Distribution Ratio........................... One share of Company Common Stock for each share of Western Atlas Common Stock. See "The Distribution -- Manner of Effecting the Distribution." Federal Income Tax Consequences.............. The Distribution is expected to qualify as a tax-free distribution under Sections 355 and/or 368(a)(1)(D) of the Internal Revenue Code. See "The Distribution -- Material Federal Income Tax Consequences of the Distribution." Risk Factors................................. Shareholders should consider certain factors discussed under "Risk Factors." Trading Market............................... There is currently no public market for Company Common Stock. The Company has applied to have the Company Common Stock listed on the New York Stock Exchange. See "The Distribution -- Listing and Trading of Company Common Stock." Record Date.................................. , 1997. Distribution Date............................ , 1997 (the "Distribution Date"). On or shortly after the Distribution Date, the Distribution Agent will commence mailing account statements reflecting ownership of shares of Company Common Stock to holders of Western Atlas Common Stock on the Record Date. Western Atlas shareholders will not be required to make any payment or to take any other action to receive their Company Common Stock. See "The Distribution -- Manner of Effecting the Distribution." Distribution Agent........................... ChaseMellon Shareholder Services, L.L.C.
iv UNOVA, INC. The Company.................................. UNOVA, Inc., following the Distribution, will own and operate substantially all of the industrial automation systems businesses currently being conducted by Western Atlas. In the fiscal year ended December 31, 1996, the businesses to be owned by the Company had aggregate pro forma revenues and net earnings of approximately $1.4 billion and $27.9 million, respectively. The industrial automation systems businesses are international suppliers of industrial automation technologies, with emphasis on automated data collection, mobile computing and manufacturing systems. See "UNOVA, Inc. Unaudited Pro Forma Combined Statements of Operations" and "Business and Properties." The principal corporate offices of the Company are located at 360 North Crescent Drive, Beverly Hills, California 90210 and its telephone number is (310) 888-2500. Pre-Distribution Intercompany Dividend....... Immediately prior to the Distribution, the Company will distribute approximately $230 million to Western Atlas to enable Western Atlas to repay short-term debt in a like amount. Management of the Company.................... Immediately after the Distribution Date, all of the executive officers of the Company are expected to be persons who currently serve as officers or other key employees of Western Atlas, several of whom manage the businesses to be owned by the Company. All such persons will resign from their positions as executives of Western Atlas, so that the Company and Western Atlas will have no executive officers in common. Two persons who are directors or executive officers of the Company will continue as directors of Western Atlas. See "Management." Trading Market............................... There is not currently a public market for Company Common Stock, although a "when- issued" trading market (as described on page 6 below) is expected to develop prior to the Distribution Date. The Company has applied to have the Company Common Stock listed on the New York Stock Exchange. See "Risk Factors" and "The Distribution -- Listing and Trading of Company Common Stock."
v Preferred Share Purchase Rights.............. As of the Distribution Date, the Company will have adopted a Preferred Share Purchase Rights Plan (the "Rights Plan"). Certificates or book-entry credits issued in the Distribution representing shares of Company Common Stock will also initially represent an equivalent number of associated Preferred Share Purchase Rights of the Company (the "Rights"). See "Certain Antitakeover Effects of Certain Provisions of the Certificate of Incorporation, the By-laws, State Law and the Rights Plan -- Rights Plan." Certain Provisions of Certificate of Incorporation and By-laws.................. Certain provisions of the Company's Certificate of Incorporation and By-laws, as each will be in effect following the Distribution, may have the effect of making more difficult an acquisition of control of the Company in a transaction not approved by the Company's Board of Directors. See "Certain Antitakeover Effects of Certain Provisions of the Certificate of Incorporation, the By-laws, State Law and the Rights Plan." The Company's Certificate of Incorporation would, in some circumstances, eliminate liabilities of the Company directors in connection with the per-formance of their duties. See "Liability and Indemnification of Directors and Officers. Post-Distribution Dividend Policy............ Neither Western Atlas nor the Company is expected to pay cash dividends in the near future. The payment of future dividends, if any, by Western Atlas or the Company will be at the discretion of the Western Atlas Board of Directors and the Company's Board of Directors, respectively. See "Risk Factors -- Dividend Policies." Transfer Agent and Registrar................. ChaseMellon Shareholder Services, L.L.C.
vi SUMMARY FINANCIAL INFORMATION UNOVA, INC. SELECTED COMBINED HISTORICAL FINANCIAL DATA The following selected combined historical financial data of the Company should be read in conjunction with the historical combined financial statements and notes thereto included elsewhere in this Information Statement. The following selected combined historical financial data which relate to the three years in the period ended December 31, 1996 have been derived from combined financial statements audited by Deloitte & Touche LLP, independent auditors. The selected combined historical financial data for the five-month period ended December 31, 1993, the one-year periods ended July 31, 1993 and 1992 and the six-month periods ended June 30, 1997 and 1996 have been derived from unaudited combined financial statements. In the opinion of management, the unaudited combined financial statements reflect all adjustments, consisting only of normal adjustments, necessary to present fairly the financial position of the Company at December 31, 1993, July 31, 1993 and 1992 and June 30, 1997 and 1996 and the results of operations for the five-month period ended December 31, 1993, for the years ended July 31, 1993 and 1992 and for the six-month periods ended June 30, 1997 and 1996. The historical combined financial statements of the Company may not necessarily reflect the results of operations or financial position that would have been obtained had the Company been a separate, independent company. The historical combined results for the six months ended June 30, 1997 and 1996 are not necessarily indicative of results for the entire year. See "UNOVA, Inc. Unaudited Pro Forma Combined Statements of Operations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." See page (ix) for selected pro forma financial data. vii UNOVA, INC. SELECTED COMBINED HISTORICAL FINANCIAL DATA
YEAR SIX MONTHS FIVE MONTHS ENDED ENDED JUNE 30, YEAR ENDED DECEMBER 31, ENDED JULY 31, -------------------- ------------------------------- DECEMBER 31, --------- 1997 1996 1996 1995 1994 1993 1993 --------- --------- --------- --------- --------- -------------- --------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) OPERATING RESULTS: Sales and Service Revenues............... $ 732.3 $ 504.5 $ 1,164.7 $ 942.9 $ 971.1 $ 360.9 $ 844.3 --------- --------- --------- --------- --------- -------------- --------- Operating Costs and Expenses Cost of sales.......................... 512.5 356.5 841.8 669.3 689.9 270.2 589.9 Selling, general and administrative(1).................... 356.0 103.8 218.7 194.1 199.9 79.4 170.6 Depreciation and amortization.......... 17.0 12.9 27.0 26.1 28.7 12.0 26.8 --------- --------- --------- --------- --------- -------------- --------- Total................................ 885.5 473.2 1,087.5 889.5 918.5 361.6 787.3 --------- --------- --------- --------- --------- -------------- --------- (Loss) Earnings before Interest and Taxes (2).............................. (153.2) 31.3 77.2 53.4 52.6 (0.7) 57.0 Interest Expense--net (3)................ (7.1) (3.1) (7.1) (9.3) (15.7) (4.3) (5.1) Taxes on Income.......................... (17.2) (11.3) (28.1) (17.9) (15.3) (0.3) (20.5) --------- --------- --------- --------- --------- -------------- --------- Net (Loss) Earnings (2).................. $ (177.5) $ 16.9 $ 42.0 $ 26.2 $ 21.6 $ (5.3) $ 31.4 --------- --------- --------- --------- --------- -------------- --------- --------- --------- --------- --------- --------- -------------- --------- Pro Forma Net (Loss) Earnings per Share (2).......................... $ (3.29) $ 0.78 Equivalent Shares (4).................... 53,892 53,892 FINANCIAL POSITION (at end of period): Total Assets............................. $ 1,351.3 $ 906.6 $ 1,073.8 $ 919.0 $ 860.8 $ 799.0 $ 748.0 Equity -- Investment by Western Atlas.... $ 590.2 $ 501.5 $ 574.5 $ 502.7 $ 439.4 $ 380.9 $ 471.5 Notes Payable and Current Portion of Long-term Obligations.................. $ 57.4 $ 23.3 $ 27.5 $ 22.2 $ 41.7 $ 7.1 $ 4.3 Long-term Obligations.................... $ 17.3 $ 14.0 $ 14.5 $ 14.1 $ 9.0 $ 8.9 $ 19.1 Allocated Portion of Western Atlas Debt................................... $ 228.2 $ 112.7 $ 109.6 $ 112.4 $ 112.8 $ 211.0 $ 27.3 Working Capital.......................... $ 83.5 $ 192.2 $ 266.0 $ 194.7 $ 115.2 $ 53.0 $ 199.5 Current Ratio............................ 1.1 1.6 1.6 1.6 1.3 1.1 2.0 Total Debt as a Percentage of Total Capitalization......................... 34% 23% 21% 23% 27% 37% 10% 1992 --------- OPERATING RESULTS: Sales and Service Revenues............... $ 761.8 --------- Operating Costs and Expenses Cost of sales.......................... 526.3 Selling, general and administrative(1).................... 159.8 Depreciation and amortization.......... 26.7 --------- Total................................ 712.8 --------- (Loss) Earnings before Interest and Taxes (2).............................. 49.0 Interest Expense--net (3)................ (7.0) Taxes on Income.......................... (16.6) --------- Net (Loss) Earnings (2).................. $ 25.4 --------- --------- Pro Forma Net (Loss) Earnings per Share (2).......................... Equivalent Shares (4).................... FINANCIAL POSITION (at end of period): Total Assets............................. $ 717.8 Equity -- Investment by Western Atlas.... $ 410.9 Notes Payable and Current Portion of Long-term Obligations.................. $ 1.8 Long-term Obligations.................... $ 19.8 Allocated Portion of Western Atlas Debt................................... $ 76.7 Working Capital.......................... $ 117.7 Current Ratio............................ 1.5 Total Debt as a Percentage of Total Capitalization......................... 19%
- ------------------------ (1) General and Administrative Costs include allocated charges from Western Atlas of $22.2 million, $19.9 million, $27.6 million, $8.1 million, $14.1 million and $10.4 million for the fiscal years ended December 31, 1996, 1995 and 1994, the five months ended December 31, 1993, and the fiscal years ended July 31, 1993 and 1992, respectively, and $9.1 million and $10.8 million for the six-month periods ended June 30, 1997 and 1996, respectively. The June 30, 1997 period includes a $203.3 million non-tax-deductible charge, or $3.77 per share, for the value of in-process research and development activities resulting from the Norand and UBI acquisitions. (2) Amounts presented for the year ended July 31, 1993 are before a cumulative effect of a change in accounting principle for the adoption of the provisions of SFAS No. 106, Employer's Accounting for Postretirement Benefits Other Than Pensions. The Company elected immediate recognition of the transition liability, and recorded a net of tax charge of $9.3 million. Net earnings for the period were $22.1 million and earnings per share were $0.41 after the cumulative effect of a change in accounting principle. (3) Interest expense includes allocated charges from Western Atlas of $8.3 million, $8.4 million, $12.1 million, $3.7 million, $3.9 million and $5.8 million for the fiscal years ended December 31, 1996, 1995 and 1994, the five months ended December 31, 1993, and the fiscal years ended July 31, 1993 and 1992, respectively, and $6.3 million and $4.1 million for the six-month periods ended June 30, 1997 and 1996, respectively. (4) In thousands. The number of common shares used to calculate earnings per share for all periods presented is based on the number of shares of Western Atlas Common Stock outstanding as of June 30, 1997. viii UNOVA, INC. SELECTED PRO FORMA FINANCIAL DATA (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) (UNAUDITED) The following unaudited selected pro forma financial data of the Company give effect to the Distribution, the Company's purchase of Norand Corporation ("Norand") and the related borrowings. For purposes of the unaudited pro forma operating data, such transactions are assumed to have taken place on the first day of each period presented. The selected unaudited pro forma financial data should be read in conjunction with the more detailed unaudited pro forma financial data and notes thereto included elsewhere in this Information Statement.
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 -------------- ------------------- OPERATING RESULTS: Sales and Service Revenues................................................... $ 769,141 $ 1,405,812 -------------- ------------------- Costs and Expenses Cost of sales.............................................................. 534,191 981,785 Selling, general and administrative........................................ 169,839 305,837 Depreciation and amortization.............................................. 20,103 46,224 Interest--net.............................................................. 9,611 15,924 Litigation settlement...................................................... 5,100 Cost of restructuring operations........................................... 4,392 -------------- ------------------- Total costs and expenses................................................... 733,744 1,359,262 -------------- ------------------- Earnings before Taxes on Income............................................ 35,397 46,550 Taxes on Income............................................................ (14,159) (18,620) -------------- ------------------- Net Earnings................................................................. $ 21,238 $ 27,930 -------------- ------------------- -------------- ------------------- Pro Forma Net Earnings per Share............................................. $ 0.39 $ 0.52 -------------- ------------------- -------------- ------------------- (Equivalent Shares of 53.9 million)
ix INTRODUCTION On May 5, 1997, Western Atlas Inc., a Delaware corporation ("Western Atlas"), announced that its Board of Directors had approved in principle a plan to distribute as a dividend to Western Atlas' shareholders (the "Distribution") substantially all of the industrial automation systems businesses being conducted by Western Atlas. Western Atlas' industrial automation businesses will be transferred to wholly owned subsidiaries of UNOVA, Inc., a Delaware corporation (the "Company") and a wholly owned subsidiary of Western Atlas. On September 24, 1997, the Board of Directors of Western Atlas reaffirmed its approval in principle of the Distribution, and delegated to a committee of the board the authority to take the actions necessary to complete the Distribution, subject to the satisfaction of the conditions described under "The Distribution - -- Conditions; Termination." The Distribution will be effected by distributing to holders of Western Atlas common stock, par value $1.00 per share ("Western Atlas Common Stock"), all of the outstanding common stock, par value $.01 per share, of the Company ("Company Common Stock"). On , 1997 (the "Distribution Date"), Western Atlas will effect the Distribution by delivering all of the outstanding shares of the Company Common Stock to ChaseMellon Shareholder Services, L.L.C. as the distribution agent (the "Distribution Agent") for transfer and distribution to the holders of Western Atlas Common Stock on , 1997, the record date for the Distribution. The Company's principal executive offices are located at 360 North Crescent Drive, Beverly Hills, California 90210 and its telephone number is (310) 888-2500. Shareholders of Western Atlas with inquiries relating to the Distribution should contact the Distribution Agent at (800) 821-5130, or Western Atlas Inc., Shareholder Services Office, 360 North Crescent Drive, Beverly Hills, California 90210, telephone number (310) 888-2660. After the Distribution Date, shareholders of the Company with inquiries relating to their investment in the Company should contact UNOVA, Inc., Shareholder Services Office, 360 North Crescent Drive, Beverly Hills, California 90210, telephone number (310) 888-2660. NO ACTION IS REQUIRED BY WESTERN ATLAS SHAREHOLDERS IN ORDER TO RECEIVE THE COMPANY COMMON STOCK TO WHICH THEY ARE ENTITLED IN THE DISTRIBUTION. RISK FACTORS Certain risk factors are involved in an investment in the Company, as described below. The Company also cautions readers that, in addition to the historical information included herein, this Information Statement includes certain forward-looking statements and information that are based on management's beliefs as well as on assumptions made by and information currently available to management. When used in this Information Statement, the words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," and similar expressions are intended to identify such forward-looking statements. However, this Information Statement also contains other forward-looking statements. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, including but not limited to the following factors, which could cause the Company's future results and shareholder values to differ materially from those expressed or implied in any forward-looking statements made by or on behalf of the Company. Many of such factors are beyond the Company's ability to control or predict. Readers are cautioned not to put undue reliance on forward-looking statements. The Company disclaims any intent or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. CERTAIN FINANCIAL CONSIDERATIONS Following the Distribution, Western Atlas will become more leveraged than it currently is. Assuming the Distribution had been consummated as of June 30, 1997, Western Atlas would have had total debt, excluding deferred items and post-retirement benefit obligations other than pensions, of $740 million and total shareholders' equity of $783 million, compared with Western Atlas' actual total debt at June 30, 1997 of $1,043 million and total shareholders' equity of $1,373 million. If the Distribution had occurred on June 30, 1997, Western Atlas would have had approximately $19 million in cash or cash equivalents. The Company will be less leveraged immediately following the Distribution than Western Atlas currently is. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DIVIDEND POLICIES Neither Western Atlas nor the Company is expected to pay cash dividends in the near future. The dividend policy of each company will be reviewed from time to time by its Board of Directors. The payment of future dividends, if any, would depend on the companies' respective operating results, financial requirements and other factors, and should be within the sole discretion of such Board of Directors. CERTAIN ANTITAKEOVER EFFECTS The Certificate of Incorporation and By-laws of the Company, certain sections of the Delaware General Corporations Law (the "DGCL") and the Rights Plan contain several provisions that may make the acquisition of control of the Company more difficult or expensive. See "Certain Antitakeover Effects of Certain Provisions of the Certificate of Incorporation, the By-laws, State Law and the Rights Plan." TRADING OF WESTERN ATLAS COMMON STOCK AND COMPANY COMMON STOCK The Western Atlas Common Stock will continue to be listed and traded on the New York Stock Exchange ("NYSE") after the Distribution. There is currently no public market for the Company Common Stock. The Company has applied to have the Company Common Stock listed on the NYSE. The combined trading price of Western Atlas Common Stock and Company Common Stock held by shareholders after the Distribution may be less than, equal to or greater than the trading price of Western Atlas Common Stock prior to the Distribution. Substantially all of the shares of Company Common Stock will be eligible for immediate resale in the public market after the Distribution. Any sales of substantial amounts of Company Common Stock in the public market, or the perception that such sales might occur, whether as a result of the Distribution or otherwise, could materially adversely affect the market price of Company Common Stock. See "The Distribution -- Listing and Trading of Company Common Stock." MATERIAL FEDERAL INCOME TAX CONSIDERATIONS Western Atlas has been advised by its special counsel, Wachtell, Lipton, Rosen & Katz, that the Distribution will qualify as a tax-free distribution under Sections 355 and/or 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code"), and the Distribution is conditioned on receipt of an opinion of counsel satisfactory to the Western Atlas Board to the same effect. See "The Distribution -- Material Federal Income Tax Consequences of the Distribution." 2 THE DISTRIBUTION BACKGROUND AND REASONS FOR THE DISTRIBUTION The Board of Directors of Western Atlas (the "Western Atlas Board") believes that the Distribution will be beneficial to Western Atlas' shareholders and to each of Western Atlas' current businesses. It will separate businesses with distinctly different financial, investment and operating characteristics so that each could adopt strategies and pursue objectives more appropriate to its specific markets and industries than is possible under Western Atlas' present combined structure. Western Atlas' Industrial Automation Systems segment and Oilfield Services segment ("Oilfield Services") have also grown to a size that allows each to continue on its own without significantly reducing the operational or financial flexibility of either entity. The Distribution will enable management of each company to concentrate its attention and financial resources on the core businesses of its respective company without being limited by the corporate objectives, policies and investment standards of the other. Under current capital market conditions, the oilfield services sector is valued differently than either automated data collection or manufacturing systems. Moreover, competitive conditions in the oilfield services industry, particularly the demands of customers for a broader range of services to be provided by a single major service company, necessitate, in management's view, that the Oilfield Services business expand the range of services it offers. Management believes that this expansion will not be achievable solely through internal growth and thus the Oilfield Services business will need to engage in mergers and other significant acquisitions to respond to the competitive needs of this business and secure future expansion. Management believes that the Oilfield Services business is more likely to successfully realize its strategic and financing strategies as a separate public company. Western Atlas regards the UNOVA businesses as well-positioned in a worldwide market with attractive growth opportunities. Western Atlas has recently significantly expanded these businesses through the acquisition of Norand Corporation ("Norand") and United Barcode Industries ("UBI"), and further acquisitions in this segment are likely. While these recent acquisitions have added critical mass to UNOVA's businesses and helped establish Western Atlas as a leading participant in the industrial workplace information technology market, they have also made Western Atlas' prospects more difficult to analyze by investors and analysts, who follow and rate Western Atlas primarily because of its participation in the oilfield services industry. Management is concerned that as UNOVA continues to grow internally and through further acquisitions, the market value of Western Atlas' stock, in the absence of the Distribution, might be affected adversely. By dividing Western Atlas into two independent oilfield services and industrial automation entities, management hopes to facilitate the market's analysis of the two businesses so as to promote more accurate assessments of the value of each business, enhancing the likelihood that each will achieve appropriate market recognition of its performance and potential. Accordingly, the Distribution will enable current shareholders and potential investors to direct their investment to their specific area of interest by allowing them to choose between the industrial automation business and the Oilfield Services business or to continue to have an interest in both. The Oilfield Services business by its nature requires particularly extensive involvement between its senior executives and the senior executives of customers of the business on a global scale, as over two-thirds of its activities are performed outside North America and often in countries that are not highly developed from an industrial standpoint. As such this business benefits substantially from continuity of senior management and stability of relationships developed over many years. A major and growing part of UNOVA's activities participates in markets that are driven by constant technology advances and changes, and by the need to establish multi-layered distribution and marketing networks. Management 3 orientation in this business is distinctly different from that in Oilfield Services. Accordingly, these differences in the management characteristics of Western Atlas' businesses, and in the customers of each business, lead to issues related to management development and succession and to the compensation structure of each business. The Western Atlas Board believes that, following the Distribution, the value and potential of UNOVA and the Oilfield Services business can be better realized as separate public companies. In addition, the Distribution will permit each company to offer incentives that are unique to its business and, therefore, more appropriate for the key employees of its business. By establishing UNOVA and the Oilfield Services business as separate independent public companies, the Distribution should assist each company in recruiting key personnel and tailoring its compensation, particularly stock-based compensation, to correspond more closely to the performance of its business. For the reasons stated above, the Western Atlas Board believes that the Distribution is in the best interests of Western Atlas and its shareholders. MANNER OF EFFECTING THE DISTRIBUTION On , 1997, all of the outstanding shares of Company Common Stock will be delivered to the Distribution Agent for transfer. Commencing on or shortly after that date, the Distribution Agent will commence mailing account statements to holders of Western Atlas Common Stock as of the close of business on , 1997, the date selected by the Western Atlas Board as the record date for the Distribution (the "Record Date"), on the basis of one share of Company Common Stock for each share of Western Atlas Common Stock held on the Record Date. All such shares of Company Common Stock will be fully paid, nonassessable and free of preemptive rights. See "Description of Capital Stock." The Company maintains a direct registration system for the Company Common Stock. See "Description of Capital Stock -- Company Common Stock." Accordingly, physical certificates representing shares of Company Common Stock will not be issued, except to shareholders that specifically request a certificate as described in the materials provided by the Distribution Agent. NO HOLDER OF WESTERN ATLAS COMMON STOCK WILL BE REQUIRED TO PAY ANY CASH OR OTHER CONSIDERATION FOR THE SHARES OF COMPANY COMMON STOCK TO BE RECEIVED IN THE DISTRIBUTION OR TO SURRENDER OR EXCHANGE SHARES OF WESTERN ATLAS COMMON STOCK OR TO TAKE ANY OTHER ACTION IN ORDER TO RECEIVE COMPANY COMMON STOCK. THE DISTRIBUTION WILL NOT AFFECT THE NUMBER OF OUTSTANDING SHARES OF WESTERN ATLAS COMMON STOCK. MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION Western Atlas has been advised by its special counsel, Wachtell, Lipton, Rosen & Katz, that the Distribution will qualify as a tax-free distribution under Sections 355 and/or 368(a)(1)(D) of the Code. The Distribution is conditioned upon receipt of an opinion of counsel satisfactory to the Western Atlas Board to the same effect. So long as the Distribution qualifies under Sections 355 and/or 368(a)(1)(D) of the Code, in the opinion of Wachtell, Lipton, Rosen & Katz the principal federal income tax consequences of the Distribution will be as follows: (a) No gain or loss will be recognized by, or be includible in the income of, a holder of Western Atlas Common Stock solely as a result of the receipt of Company Common Stock and the associated Preferred Share Purchase Rights in the Distribution. (b) No gain or loss will be recognized by Western Atlas as a result of the Distribution (other than income or gain, if any, recognized by Western Atlas or its subsidiaries in connection with the intercompany items or excess loss accounts). (c) Assuming that a holder of Western Atlas Common Stock holds such Western Atlas Common Stock as a capital asset, such holder's holding period for the Company Common Stock 4 received in the Distribution will include the period during which such Western Atlas Common Stock was held. (d) The tax basis of Western Atlas Common Stock held by a Western Atlas shareholder immediately prior to the Distribution will be apportioned (based upon relative fair market values at the time of the Distribution) between such Western Atlas Common Stock and the Company Common Stock received by such shareholder in the Distribution. THE FOREGOING IS ONLY A SUMMARY OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION UNDER CURRENT LAW, AND DOES NOT TAKE INTO ACCOUNT ANY SPECIAL CIRCUMSTANCES THAT MAY APPLY TO PARTICULAR SHAREHOLDERS. EACH SHAREHOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE PARTICULAR CONSEQUENCES OF THE DISTRIBUTION TO SUCH SHAREHOLDER, INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS, AND AS TO POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX CONSEQUENCES DESCRIBED ABOVE. THIS SUMMARY MAY NOT BE APPLICABLE TO SHAREHOLDERS WHO RECEIVED THEIR WESTERN ATLAS COMMON STOCK PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK OPTIONS, UNDER AN EMPLOYEE STOCK PURCHASE PLAN OR OTHERWISE AS COMPENSATION OR WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES. The opinions of counsel referred to above would not be binding upon the Internal Revenue Service (the "IRS") and would be subject to certain factual representations and assumptions. Western Atlas is not aware of any present facts or circumstances which should cause such representations and assumptions to be untrue. However, certain future events not within the control of Western Atlas or the Company, including certain extraordinary purchases of Western Atlas Common Stock or Company Common Stock, could cause the Distribution not to qualify as tax-free. Depending on the event, the Company may be liable for some or all of the taxes resulting from the Distribution not qualifying under Sections 355 and/ or 368(a)(1)(D)of the Code as tax-free. See "Arrangements Between Western Atlas and the Company Relating to the Distribution -- Tax Sharing Agreement." If the Distribution were taxable, then (i) each holder of Western Atlas Common Stock who receives shares of Company Common Stock in the Distribution would be treated as if such shareholder received a taxable distribution, taxed as a dividend to the extent of such shareholder's pro rata share of Western Atlas' current and accumulated earnings and profits and then treated as a return of capital to the extent of the holder's basis in the Western Atlas Common Stock and finally as gain from the sale or exchange of Western Atlas Common Stock and (ii) corporate level taxes would be payable by the consolidated group of which Western Atlas is the common parent, based upon the excess of the fair market value of the Company Common Stock on the date of the Distribution over Western Atlas' tax basis therein. Western Atlas does not intend to effect the Distribution if, prior to the Distribution Date, Western Atlas becomes aware of circumstances that would result in the Distribution being a taxable transaction. Information with respect to the allocation of tax basis between Company Common Stock and Western Atlas Common Stock will be provided to shareholders at the time of distribution of the account statements reflecting ownership of shares of Company Common Stock. For a description of the agreement pursuant to which Western Atlas and the Company have provided for various tax matters, see "Arrangements Between Western Atlas and the Company Relating to the Distribution -- Tax Sharing Agreement." LISTING AND TRADING OF COMPANY COMMON STOCK There is not currently a public market for Company Common Stock. Prices at which Company Common Stock may trade prior to the Distribution on a "when-issued" basis (see the second following paragraph) or after the Distribution cannot be predicted. Until the Company Common Stock is fully distributed and an orderly market develops, the prices at which trading in such stock occurs may fluctuate significantly. The prices at which Company Common Stock trades will be determined by the marketplace and may be influenced by many factors, including, among others, the depth and liquidity of the market for Company 5 Common Stock, investor perception of the Company and of the industries in which the Company operates, the Company's dividend policy and general economic and market conditions. The planned Distribution will involve the distribution of an aggregate of approximately 53.9 million shares of Company Common Stock to the shareholders of Western Atlas on the Distribution Date, representing all of the outstanding shares of Company Common Stock. Substantially all of such shares of Company Common Stock will be eligible for immediate resale in the public market. In addition, because Western Atlas is included in the Standard & Poor's 500 stock index, but the Company is not so included, shares of Company Common Stock received by "index funds" that invest in Western Atlas may be made available for sale, although the Company is unable to predict the timing or amounts of any such sales. Neither Western Atlas nor the Company is able to predict whether substantial amounts of Company Common Stock will be sold in the open market following the Distribution. Any sales of substantial amounts of Company Common Stock in the public market, or the perception that such sales might occur, whether as a result of the Distribution or otherwise, could materially adversely affect the market price of Company Common Stock. In "when-issued" trading, contracts for the purchase and sale of shares of stock are made prior to the issuance of such shares in the same manner as currently issued shares, except that when-issued contracts are settled by delivery of and payment for the shares on a date chosen by the particular exchange on which such shares are to be listed. Ordinarily, in connection with a distribution of stock such as described in this Information Statement, the date fixed for settlement of when-issued contracts relating to such stock is the sixth business day after distribution of such stock. Shareholders who may wish to effect a when-issued trade in Company Common Stock should consult their brokers for additional details. The Company has applied to have the Company Common Stock listed on the NYSE. The Company initially will have approximately 22,000 shareholders of record and an additional 14,000 beneficial holders, based on the number of record holders and the estimated number of beneficial holders of Western Atlas Common Stock, and 53.9 million shares of Company Common Stock will be outstanding. The Transfer Agent and Registrar for the Company Common Stock will be ChaseMellon Shareholder Services, L.L.C. For certain information regarding options to purchase Company Common Stock that are expected to become outstanding after the Distribution, see "Management -- Benefit Plans Following the Distribution." Shares of Company Common Stock distributed to Western Atlas shareholders in the Distribution will be freely transferable, except for securities received by persons who may be deemed to be "affiliates" of the Company, under the Securities Act of 1933, as amended (the "Securities Act"). Persons who may be deemed to be affiliates of the Company after the Distribution generally include individuals or entities that control, are controlled by, or are under common control with, the Company and may include certain officers and directors of the Company as well as principal shareholders of the Company, if any. Persons who are affiliates of the Company will be permitted to sell their shares of Company Common Stock only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act. FUTURE MANAGEMENT OF THE COMPANY Following the Distribution it is intended that the Company will operate Western Atlas' industrial automation businesses substantially in the manner in which they have been operated by Western Atlas in the past. All of the executive officers of the Company are expected to be persons who currently serve as officers or other key employees of Western Atlas. See "Management -- Executive Officers of the Company." In order to avoid adversely affecting the intended tax consequences of the Distribution, and incurring indemnification obligations under the Tax Sharing Agreement (as hereinafter defined), the Company intends not to (a) liquidate, merge with any other corporation, or sell or otherwise dispose of assets other than in certain transactions, (b) engage in certain repurchases or issuances of stock or 6 (c) discontinue the active conduct of the trade or business conducted by it immediately after the Distribution, unless it obtains a satisfactory opinion of counsel or tax ruling. The Company does not expect these limitations to significantly inhibit its financing or acquisition activities or its ability to respond to unanticipated developments. See "Arrangements Between Western Atlas and the Company Relating to the Distribution -- Tax Sharing Agreement." CONDITIONS; TERMINATION The Distribution is conditioned upon, among other things, (i) the receipt by Western Atlas of opinions of counsel satisfactory to the Western Atlas Board that, among other things, the Distribution will be tax-free; (ii) the Company Common Stock having been approved for listing on the NYSE, subject to official notice of issuance; (iii) the Board of Directors of the Company (the "Board"), as described below under "Management -- Directors of the Company," having been elected by Western Atlas as sole shareholder of the Company, and the Certificate of Incorporation and the By-laws of the Company, as each will be in effect after the Distribution, having been adopted and being in effect; (iv) the Registration Statement having become effective; and (v) the receipt of a statement from the Staff of the Commission that the Distribution may be effected without registration of Company Common Stock under the Securities Act. Even if all the above conditions are satisfied, the Western Atlas Board has reserved the right to abandon, defer or modify the Distribution and the related transactions described herein at any time prior to the Distribution Date. See "Arrangements Between Western Atlas and the Company Relating to the Distribution -- Distribution and Indemnity Agreement." ARRANGEMENTS BETWEEN WESTERN ATLAS AND THE COMPANY RELATING TO THE DISTRIBUTION For the purpose of governing certain of the relationships between Western Atlas and the Company after the Distribution, Western Atlas and the Company will enter into the various agreements described below. The agreements summarized below have been filed as exhibits to the Registration Statement, of which this Information Statement is a part, and the following summaries are qualified in their entirety by reference to the agreements as filed. DISTRIBUTION AND INDEMNITY AGREEMENT Western Atlas and the Company will enter into a Distribution and Indemnity Agreement (the "Distribution Agreement") providing for, among other things, the principal corporate transactions required to effect the Distribution and certain other agreements governing the relationship between Western Atlas and the Company with respect to or in consequence of the Distribution. The Distribution Agreement provides that, immediately prior to the Distribution, (i) the Company will pay a dividend in the amount of $230 million to Western Atlas, which will be utilized by Western Atlas to repay short-term debt, and (ii) all indebtedness owed by the Company or its subsidiaries to Western Atlas will be canceled as a contribution to the capital of the Company. Funds for the dividend to Western Atlas will be obtained from borrowings under the Company's credit agreement. See "Financing." Subject to certain exceptions, the Distribution Agreement provides for certain cross-indemnities designed principally to place financial responsibility for the liabilities of the Company and its subsidiaries with the Company and financial responsibility for the liabilities of Western Atlas and its other subsidiaries with Western Atlas. The Distribution Agreement also provides that each of Western Atlas and the Company will indemnify the other in the event of certain liabilities arising under the federal securities laws. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy, as expressed in such Act and is therefore unenforceable. 7 In the Distribution Agreement, each of Western Atlas and the Company has agreed to make available to the other for a limited period certain administrative services to assist in effecting an orderly transition following the Distribution. The party providing such services will be entitled to reimbursement for all direct costs of providing such services, including amounts relating to supplies, disbursements and other out-of-pocket expenses. These costs are not expected to be material. The Distribution Agreement provides that, except as otherwise set forth therein or in the other agreements between Western Atlas and the Company relating to the Distribution, all costs and expenses arising prior to the Distribution Date in connection with the Distribution will be paid by Western Atlas, other than the expenses of printing the Company's new stock certificates. TAX SHARING AGREEMENT Through the Distribution Date, the results of the operations of the Company and its domestic subsidiaries (the "Company Group") have been and will be included in Western Atlas' consolidated United States federal income tax returns. As part of the Distribution, Western Atlas and the Company will enter into a Tax Sharing Agreement (the "Tax Sharing Agreement") which provides, among other things, for the allocation between the parties thereto of federal, state, local and foreign tax liabilities for all periods through the Distribution Date. In general, the Tax Sharing Agreement provides that Western Atlas will be liable for consolidated federal income tax and joint state income tax liabilities, including any such liabilities resulting from the audit of or other adjustment to previously filed tax returns, which are attributable to the Company Group through the Distribution Date. Western Atlas will be entitled to tax benefits resulting from any audit or other adjustments to the Company's pre-Distribution Date consolidated federal income tax and joint state income tax liabilities, when and if realized by the Company. The Company Group will generally be liable for all other state, local and foreign tax liabilities which are attributable to the Company Group through the Distribution Date and the pre-acquisition tax liabilities of Norand. Though valid as between the parties thereto, the Tax Sharing Agreement is not binding on the IRS and does not affect the several liability of the Company, Western Atlas and their respective subsidiaries to the IRS for all federal taxes of the consolidated group relating to periods prior to the Distribution Date. While the Tax Sharing Agreement provides that the Company Group should be liable generally only for items attributable to the Company Group's operations, it also provides that in the event that the Distribution fails to qualify as a tax-free distribution under the provisions of Sections 355 and/or 368(a)(1)(D) of the Code, the Company will indemnify Western Atlas for 50% of all taxes (100% of all taxes if an acquisition of 50% or more of the Company's stock or assets results in the Distribution's failure to so qualify, and 0% if an acquisition of 50% or more of Western Atlas' stock or assets results in the Distribution's failure to so qualify), including penalties and interest, incurred by Western Atlas by reason of the Distribution being a taxable event. In the event that the Distribution failed to so qualify, the amount by which the fair market value of the Company Common Stock on the date of the Distribution exceeds Western Atlas' tax basis therein would be recognized as gain upon the Distribution. BENEFITS AGREEMENT Western Atlas and the Company will enter into an Employee Benefits Agreement (the "Benefits Agreement") providing for the treatment of employee benefit matters and other compensation arrangements for certain former and current employees of the Company and its subsidiaries. The Benefits Agreement generally provides that the Company and its subsidiaries will be responsible for all liabilities to any employee of Western Atlas or any of its subsidiaries as of the Distribution Date who is or will become an employee of the Company or its subsidiaries after the Distribution ("Separated Employees"), as well as any former employee of Western Atlas who was previously employed in the Company's businesses. Further, except as specifically provided therein, the Benefits Agreement will not 8 affect any employee benefit plan or compensation arrangement of Western Atlas in respect of employees of Western Atlas and its subsidiaries who are not Separated Employees. Effective on or prior to the Distribution, the Company will assume the pension, 401(K) and welfare benefit plans of Western Atlas in which the Company's employees currently participate, and will assume all assets and liabilities under such plans. Such assumption will be effected in a manner intended to assure that all material qualified pension plans of the Company will be fully funded as of the Distribution Date. All of the Company's benefit plans that are subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), will comply with ERISA on the Distribution Date. The Benefits Agreement provides that the Separated Employees' cessation of employment with Western Atlas will not be deemed a severance of employment for purposes of any plan or agreement of Western Atlas or any subsidiary that provides for the payment of severance benefits. The Company expects all severance compensation agreements between Western Atlas or any subsidiary and any Separated Employee to be terminated as of the Distribution Date and that the Company will execute new agreements with such employees in the form described in "Management -- Historical Compensation" and adopt severance plans or arrangements similar to those presently in effect at Western Atlas covering other Separated Employees. The Benefits Agreement provides for an adjustment to all outstanding options to purchase Western Atlas Common Stock to account for the Distribution. The adjustment will have the effect of increasing the number of shares of Western Atlas Common Stock subject to each option, and decreasing the exercise price per share of Western Atlas Common Stock. See "Management -- Historical Compensation." INTELLECTUAL PROPERTY AGREEMENT Some of the intellectual property utilized by the Company and its subsidiaries is nominally owned by Western Atlas or by one of Western Atlas' subsidiaries which will continue to be a Western Atlas subsidiary after the Distribution. The Company and its subsidiaries have been using the Western Atlas trade name, trademark and service mark on stationery, advertising and promotional materials, products and facilities. Western Atlas and the Company will enter into an Intellectual Property Agreement providing for the transfer of ownership of intellectual property without charge from the nominal owner to the Company or its subsidiaries, and to provide to the Company and its subsidiaries rights to use the Western Atlas name for a period of six months without charge therefor. 9 FINANCING On September 24, 1997, the Company entered into a Credit Agreement, to become effective as of the Distribution Date, with Morgan Guaranty Trust Company of New York, as Agent, and with Bank of America National Trust and Savings Association, The Bank of New York, The Chase Manhattan Bank, CIBC Inc., The First National Bank of Chicago, and Nations Bank of Texas, N.A., as Co-Agents, providing for borrowings by the Company up to $400 million under a five-year revolving credit facility. Borrowings under this facility will bear interest according to one of three interest rate options selected by the Company based on (i) the London interbank offered rate; (ii) the domestic certificate of deposit rate; or (iii) a floating rate based on the Agent's prime rate. The margin over the rates varies depending on the Company's "Leverage Ratio" from time to time, defined as the ratio of debt to net income plus interest expense, income taxes, and depreciation and amortization. The Credit Agreement contains a covenant that the Leverage Ratio will in no event exceed 3.5 to 1.0 for the period through September 29, 1998; 3.0 to 1.0 for the period from September 30, 1998 through September 29, 1999; and 2.75 to 1.0 for the period from September 30, 1999, and thereafter. The Credit Agreement limits the amount of debt which may be incurred by the Company's subsidiaries. Events of default under the Credit Agreement include (i) the failure to make required payments or to perform other agreements contained in the Credit Agreement, in each case after any applicable grace period; (ii) events permitting acceleration of other indebtedness of the Company or its subsidiaries in a principal amount in excess of $25 million; (iii) certain events of bankruptcy of the Company or its subsidiaries; and (iv) a change in control of the Company. The Company expects to borrow $230 million under this facility on the Distribution Date to distribute to Western Atlas as a dividend. BUSINESS AND PROPERTIES The Company operates in two business segments -- Automated Data Systems ("ADS") and Industrial Automation Systems ("IAS") (formerly the title for all of the operations to be spun off by Western Atlas). The Company had pro forma revenues of approximately $1.4 billion for the fiscal year ended December 31, 1996. The Company had approximately 6,650 employees as of June 30, 1997 located principally at offices, plants or other facilities in nine states within the United States and in Canada, the United Kingdom, Germany, France, Sweden, the Netherlands and Australia. Approximately 25% of the Company's sales and service revenues come from activities and customers outside the United States. The Company has been, and will be until the Distribution Date, a wholly owned subsidiary of Western Atlas. Prior to March 17, 1994, Western Atlas was a wholly owned subsidiary of Litton Industries, Inc. ("Litton"). Western Atlas became an independent public company on March 17, 1994 through the distribution by Litton to Litton's shareholders of all of the outstanding common stock of Western Atlas. The Company's principal executive offices are located at 360 North Crescent Drive, Beverly Hills, California 90210. Its telephone number at that address is (310) 888-2500. GENERAL The Company is an industrial technologies company providing customers with solutions for improving their efficiency and productivity. The Automated Data Systems business segment comprises automated data collection and mobile computing products and services, principally serving the industrial market. 10 Customers include the distribution and transportation companies, food and beverage operations, manufacturing industries, health care providers and government agencies. The Industrial Automation Systems business segment includes integrated machining systems, body welding and assembly systems, and precision grinding and abrasive systems, primarily serving the worldwide automotive, off-road and diesel engine manufacturing industries. Current estimates call for about 45% of the Company's revenues to come from the ADS business and about 55% of revenues to be derived from IAS activities for the 1997 fiscal year. PRODUCTS AND SERVICES AUTOMATED DATA SYSTEMS. The Company's Automated Data Collection ("ADC") and Mobile Computing Systems business is conducted under the Intermec, Norand and UBI brand names. Intermec was acquired in 1991; Norand and UBI were acquired early in 1997. All three companies operate as one organization serving the global bar code, data collection and mobile computing market, which has grown approximately 12% to 15% annually over the past five years. The Company's activities in this market represented slightly more than 30% of the Company's total revenues in each of the fiscal years ended 1996, 1995 and 1994, and were based only on Intermec's results prior to the 1997 acquisitions of Norand and UBI. Together, the three companies would have had pro forma combined revenues of about $700 million in 1996, which would have represented 50% of the Company's pro forma 1996 revenues. Intermec accounted for 32%, 34% and 31% of the Company's combined revenues in fiscal 1996, 1995 and 1994, respectively. This combination of companies and capabilities establishes the Company as a leading participant in the emerging logistics automation marketplace. Together, they offer a broad range of products which are used to gather, organize and transmit selected data from various off-site or in-premise locations to central computers or information retrieval systems in order to track parts, products and people through manufacturing, distribution and other processes. Through its Intermec subsidiary, the Company has been in the forefront of many innovations within the bar code and ADC technologies. Its ADC products comprise batch and radio frequency ("RF") terminals, hand-held and stationary scanners and related software. Intermec entered the bar code market in 1969 with a contract to create specialized printers for bar code labels, and later moved into hand-held scanners. In the late 1970s Intermec developed Code 39, the most widely used bar code symbology in the world. The Company also was an early originator in the use of open operating systems for industrial data collection applications, and continues to develop improved bar code label printing systems, which provide higher resolution, superior quality and greater label flexibility. Some of Intermec's other "firsts" included inventing the first stacked bar code symbology; introducing the first high-speed, wide-area scanning technology and spread spectrum radio frequency technology to the data collection market; and developing 400 dpi bar code label printing technology. The Norand acquisition added increased knowledge and capabilities from one of the leading originators of wireless data communications using radio frequency ("RF") technology and mobile computing solutions for the logistics market. Mobile computing refers to rugged PC-based devices for route accounting, meter reading, field services and sales management, rather than general personal or desktop computing applications. In combination with wireless communications, mobile computing enables remote workers to have access to centralized computer applications and databases and to send and receive information through wireless networks for improved productivity, efficiency and accuracy of data. Wireless network data communications represent an area in which the Company expects growth in the future. In the communications area, Norand provides advanced axis point and docking station technology, communications software, product configuration and ergonomics. This acquisition also expands the Company's offering in the RF spread-spectrum technology. 11 Norand is credited with inventing the world's first bar code scanner in 1971, and developing the first radio data network in 1985. It also originated the Pocket RF product category four years later, followed by the first pen-based hand-held computer with desktop PC performance in 1993. With the addition of UBI, the Company now also has access to an extensive distribution network for ADC products in the expanding European market. UBI further provided two major product lines: bar code on-demand printers with labels and ribbons, and hand-held scanners. These scanners are primarily based on "charge coupled device" ("CCD") technology which is an alternative to laser scanners in many applications. UBI also provides software that improves laser scanning for one- and two-dimensional symbologies. UBI's printer technology complements the Company's existing printer offerings with low-end, low cost printers and high-end, high speed printers. In addition, UBI provides enhanced media-handling systems, such as linerless adhesive labels and software. Bar code systems, which continue to represent the most widely used technology for ADC, typically consist of the bar code labels or tags and label printers, input devices such as scanners and wands, hand-held batch or RF terminals, vehicle mounted terminals, on-line (or stationary) terminals, systems integration tools and data transmission techniques. Complete systems installation, service and support are provided to customers on a global basis. The Company's operations also integrate technologies such as the newer 2-D symbologies, radio frequency identification tags ("RFID"), vision and scanning systems, magnetic stripe and optical character recognition. Ongoing product development efforts include advanced communication networks, further integration of RF technology, application software technologies, advances in portable computers and automatic identification technology integration. Innovative electronics miniaturization and packaging also have enabled the Company to develop pen computing hand-held terminals for applications in which traditional keypad or bar code scanner data input is not practical. Typical uses for these wireless, durable pen-based, hand-held and mobile computers include route accounting for the distribution and package handling industries, public works, health care and utilities. Major offices and manufacturing facilities are located in the states of Iowa, Ohio and Washington; and internationally in The Netherlands, Sweden, France and Australia. INDUSTRIAL AUTOMATION SYSTEMS. The Company is a major designer, producer and integrator of manufacturing technologies, primarily for the global automotive, off-road and diesel engine industries, but also for other markets such as electronics and durable goods. Products include integrated machining systems for the manufacture of powertrain components such as engines, transmissions and connecting rods, and chassis components such as steering knuckles, rear axle housings and brake calipers; body welding and assembly systems; test and automation equipment for integration into production lines; precision grinding and abrasives; the redesign, remanufacturing and retooling of installed equipment; and design/engineering services. During 1995 the Company acquired 49% of Honsberg, a German machine tool engineering and manufacturing company. The Company acquired the remaining 51% in 1997. The Company's integrated manufacturing systems are marketed under the Lamb, Lamb Technicon and Honsberg Lamb names; the Body Welding and Assembly Systems also are available under the Lamb and Lamb Technicon brands; and the Precision Grinding and Abrasives market is served under the Landis, Landis Lund, Gardner and Cranfield Precision brands. INTEGRATED MANUFACTURING SYSTEMS. Through its Lamb, Lamb Technicon and Honsberg Lamb operations, the Company designs, integrates and installs integrated machining systems for the world's automotive and off-road vehicle industries. The integrated manufacturing systems divisions design manufacturing solutions for all production volumes of powertrain components -- primarily engines and transmissions. Integrated manufacturing systems accounted for 39%, 38% and 44% of the Company's combined revenues in fiscal 1996, 1995 and 1994, respectively. 12 The product lines include computer-numeric-control ("CNC") machines for low-volume applications (up to 25,000 units of production annually), and modular flexible production systems for medium-(25,000 to 75,000 units of production annually) and high-volume (75,000 to 250,000 units of production annually) requirements. The integrated manufacturing systems operations specialize in utilizing simultaneous engineering techniques, in conjunction with its customers, to develop optimum solutions to complex manufacturing requirements. Historically, the Company has specialized in designing solution sets for manufacturing cylinder heads, engine blocks and transmission cases. However, the retooling of existing systems and the design of manufacturing processes for smaller parts also have expanded into growing businesses for the Company in recent years. The Company's emphasis on engineering has resulted in the advancement of machining processes. These upgrades offer lower life-cycle costs and improved production performance by reducing unproductive time during operation. Innovations also include a high-speed "dry" machining process for precision work on aluminum parts without the use of coolants, and better flexibility of transfer line systems using less production floor space, providing faster throughput at much lower costs. The Company has developed modular flexible transfer systems in which parts are mounted on pallet fixtures which transport work pieces between work stations faster than guided vehicles could between flexible machining systems. Recent additions to the Company's product range include modular machining centers that perform continuous high-speed, high-precision machining of cast iron, aluminum or magnesium parts. The Duraflex-TM- CNC machine line is designed to produce a variety of cylinder heads or engine blocks, in a random-run environment, while maintaining close tolerances. The MACH I-TM- dual-spindle machine has been designed to improve the efficiency of CNC machines in higher-volume production scenarios. The MACH I can complete a machining operation, change tools and resume machining, all in less than one second. These new designs allow the machines to operate in stand-alone, cellular or system configurations. Larger systems also can be adapted to process changes by exchanging single machining modules on a transfer line. The utilization of advanced process technology, as represented in these newest CNC machines, has enabled the Company to provide highly accurate, durable and truly flexible machining systems. The Company's emphasis on process engineering is demonstrated by its efforts in "simultaneous engineering," a process in which manufacturing solutions are developed with the customer while the customer's product design and engineering phases are still underway. In these processes, another important technology, "virtual manufacturing," creates sophisticated 3-D computer simulations which are used by the Company to design and pre-program systems, work flow and single machining operations. BODY WELDING AND ASSEMBLY SYSTEMS. The Lamb Body Welding and Assembly Systems division designs automated systems to assemble and weld high-quality automobile and truck bodies as well as other industrial products. The division integrates robotic systems, high-precision holding and alignment fixtures and high-volume welding equipment to produce components and sub-assemblies for the automotive industry, and supplies specialized assembly systems for car bodies. It also provides engineering services and advanced electronic design technology in the areas of computer simulations and three-dimensional tool design. Through its Assembly and Test Systems operations, the division also designs and builds specialized assembly and/or testing equipment and systems for a variety of manufacturing applications. Body Welding and Assembly Systems accounted for 12%, 8% and 9% of the Company's combined revenues in fiscal 1996, 1995 and 1994, respectively. A number of proprietary technologies have been developed for use in automotive assembly. Examples are specialized material handling solutions to move subassemblies or complete car bodies through the manufacturing process, such as overhead non-synchronous gantries. The Company also is recognized 13 for its expertise in "hemming," the process of attaching exterior sheet metal to the interior frames of doors, hoods, deck lids and similar "hang-ons" or "closures." Another solution is called "flexible body framing," a patented system which enables consistent, high-precision positioning for final body assembly. PRECISION GRINDING AND ABRASIVES. The Company develops and produces precision grinding systems and equipment for the global manufacturing market. A key area of the Company's expertise is the application of precision cylindrical and disc grinding technologies to medium- and high-volume production of car engines and transmission components such as camshafts, crankshafts or connecting rods. Precision Grinding and Abrasives accounted for 17%, 20% and 16% of the Company's combined revenues in fiscal 1996, 1995 and 1994, respectively. In response to the automotive industry's need to reduce costs, improve fuel consumption and decrease car emissions, the Company provides a full range of CNC precision grinding systems that enable car manufacturers to produce car engine parts at tight tolerances, increase production throughput and improve quality. Among the Company's new developments in precision grinding are a CNC machine for grinding the lobes of automotive camshafts. This advanced camlobe grinder uses superabrasive cubic boron nitride ("CBN") grinding wheels, which are capable of higher grinding speeds, more consistent accuracy, and longer effective performance life. Other technological innovations include a camshaft lobe grinder for large-scale production of soft camshaft applications, centerless grinders for high-production parts processing, a new generation of double-disc grinding machines used for precision machining of parts with flat and parallel sides and a horizontal double-disc grinder for automotive connecting rods. The Company also has developed sophisticated software tools for monitoring and controlling grinding processes and dressing grinding wheels. The Industrial Automation Systems segment's major offices and production facilities are located in Illinois, Michigan, Ohio and Pennsylvania and internationally in Canada, the United Kingdom and Germany. BUSINESS STRATEGY The Company's strategy is to develop products, processes and services that help improve productivity and efficiency in a variety of manufacturing and distribution applications. Both business segments -- Automated Data Systems and Industrial Automation Systems -- offer single products as well as integrated solutions to their customers. Future growth in these businesses is expected to result from expansion of the Company's existing operations and its customer base, and through acquisitions. In seeking acquisitions, the Company will concentrate on technologies, products and services which enhance customer productivity and efficiency, and those that can be characterized as growth drivers. The ongoing development of the Company's ADC/Mobile Computing activities will depend primarily on the application of new technologies and products to maintain its position in this technology-driven market. The Company believes it has the necessary technical expertise to achieve this goal. Future geographic opportunities have been identified outside North America, particularly in Europe, Latin America and Asia, where the use of data collection technology is less developed. To capitalize on these emerging markets, the Company is expanding its international marketing, distribution and support network, and is engaged in an ongoing program to locate Company-owned resources in key markets worldwide. In its Industrial Automation Systems business segment, the Company plans to continue to develop its existing customer base by seeking a greater role in customer projects, by continuing its emphasis on product development and by expanding its international activities. 14 The Company also intends to increase its presence in market segments where it presently holds a smaller market share, such as the body welding and assembly systems area, and the application of lower-volume flexible manufacturing systems and CNC machines. In some areas the Company also has developed high-precision manufacturing technologies that should allow it to establish a presence in growth markets such as micro-electronics with its new generation of ultra-high-precision wafer grinders. In recent years, cost-cutting needs and quality requirements in the automotive industry have affected the Company's relationships with its customers. The car makers' trend toward fewer suppliers has benefited the Company and allowed it to expand its market participation. These market-driven changes also have forced many smaller competitors to either withdraw from the market or reduce their role to that of a second or third tier supplier. The Company's strategy has been to establish an extensive outsourcing network of qualified suppliers in North America and overseas, thereby avoiding unnecessary vertical integration and gaining flexibility in its market approach. Both major business segments should be able to grow from established positions in their respective markets, often serving customers in a multitude of projects which result in repeat business opportunities. MARKETS AND CUSTOMERS AUTOMATED DATA SYSTEMS. Because Automated Data Systems represents technologies that can be utilized by a company of any size, and small systems can be installed at very low cost, the market is extensive. Worldwide sales of automated data systems equipment exceeded $8 billion in 1996, according to estimates from independent research sources. These sources also predict that the overall market will continue to grow at an annual rate of approximately 12% to 15% over the next several years. Market growth is driven by the global need for technologies and solutions which improve quality, productivity and cost-efficiency in business and government, particularly through logistics automation and supply chain management. Worldwide coverage with a dedicated sales organization is therefore a major advantage. Through its application of technologies in the manufacturing, warehouse-distribution, transportation, health care, government and other non-retail markets, the Company maintains a strong position in the global non-retail ADC/mobile computing market. The Company sells and services its products through multiple sales and distribution channels: a direct field sales force which concentrates on large, complex systems sales; value added resellers ("VARs") that offer applications-specific solutions; and alliances with major systems integrators. The Company's direct sales organization serves customers from offices throughout North America, Europe and in some selected countries outside these regions. An indirect sales channel includes long-time exclusive relationships with international value-added distributors and master resellers. Although the Company obtains approximately 34% of its sales through indirect sales channels, no individual value-added distributor or reseller is material to overall Company results. The Company also maintains contact with customers and prospective users by having established user forums for Automated Data Systems applications and technologies. The mobile computing systems market consists of several applications, such as route accounting for the distribution and package/parcel delivery industries, sales merchandising, remote delivery and field service. These applications are generally used in the consumer products, food, beverage, wholesale, parcel delivery, freight, field service and home service industries. The RF systems market comprises manufacturing, warehousing and distribution center and retail applications. Manufacturing applications include the collection and communication of information related to receipt of materials, work-in-progress, finished goods inventory and other functions throughout the manufacturing process. Warehousing and distribution center applications involve the collection and communication of 15 information related to receiving materials to be stored, storage locations, materials retrieval and shipping. Retail applications include the automation of shelf label maintenance and product shipping and receiving functions. International sales opportunities exist in countries where mobile computing systems market practices and other applications are similar to those in the U.S. The extent of RF systems opportunities in any particular country is based on the level of industrialization, the status of bar coding implementation and the RF regulatory environment. The major markets for printers are manufacturing, distribution, warehousing, transportation, health care, government and other services. INDUSTRIAL AUTOMATION SYSTEMS. The Company participates in the automotive manufacturing market, the largest capital equipment investor in the world, and in the general manufacturing markets. Investments by automotive customers are driven by model changes; competitive pressures; government regulations such as emission standards and gasoline consumption rates; and by the customers' own internal spending cycles. Investments in diesel engine manufacturing are driven by the infrastructure needs of emerging industrial nations and by the efficiency benefits diesel engines offer for heavy and light trucks and utility vehicles. Customers for the Company's integrated manufacturing systems products are the major auto manufacturers and tier 1 suppliers. Although the passenger car and light truck industries continue to represent this division's largest market, business from diesel engine manufacturers has grown in recent years. The Company believes the areas with growth potential for this business are the developing countries in Asia, Eastern Europe and Latin America. Potential customers include the major manufacturers from the U.S. and Western Europe who are building plants in these developing countries as well as indigenous manufacturers seeking to improve their competitiveness. Based upon internal surveys of equipment installed at customer engine and transmission plants, management believes that the Company is a leading global supplier of high-volume production systems for engine, transmission and chassis components in this $5.7 billion market. While the Company is not yet a leader in the body welding and assembly industry, its growth rate exceeds that of the market which is about the same size as integrated machining systems. A substantial majority of the Industrial Automation Systems segment's total revenues is generated by worldwide automotive and diesel engine industry purchases of automated manufacturing systems, including integrated machining, body welding and assembly and precision grinding systems. Among customers for such equipment, U.S. and Canadian auto producers currently account for more than 70% of integrated manufacturing systems sales, and manufacturers in Europe account for about 20%. The remainder of sales represents products exported from the Company's production facilities, mostly for installation in Latin America and Asia. Recent major customers include U.S.-based Chrysler, Cummins, Ford, General Motors, Navistar and Detroit Diesel; in foreign markets, the major Western European auto manufacturers, BMW/Rover, Fiat, Mercedes Benz, Jaguar, Peugeot, Renault, Volkswagen, and the European subsidiaries of the large U.S. manufacturers, as well as Yuchai Diesel in China and Tata (Telco) in India and Kamaz in Russia. The Company has also won major systems contracts in the U.S. for the manufacturing facilities of foreign auto makers, including both European and Japanese, and also serves the automotive components manufacturing market. COMPETITION Strong competition exists both in the domestic and international markets for the Company's products and services. Products are sold and projects are won in the marketplace based on price, technology and service. 16 AUTOMATED DATA SYSTEMS. The market for ADC/Mobile Computing systems is highly fragmented. Based on independent market surveys, management believes that Intermec/Norand/UBI is one of the largest participants measured by revenues, with a more than 10% market share in the bar code segment of the Automated Data Systems industry. The other two major participants are Symbol and Telxon. The Company also faces strong competition for single product lines from specialized suppliers. The Company competes on the basis of its open modular systems approach, network and communications expertise, applications software, level of sales and support services, and product functionality, performance, ruggedness and overall quality. The market for mobile computing and RF products is highly competitive and rapidly changing. Some firms manufacture and market hand-held systems for route accounting applications, including Telxon and Fujitsu. In addition, a number of firms manufacture and market radio-linked data communication products, including LXE, Teklogix, Symbol, and Telxon. On the printer side, the Company faces competition from Zebra, Eltron, Datamax and many others, depending on the geographic area. INDUSTRIAL AUTOMATION SYSTEMS. While product quality is a key determinate in the competition to win market share, pricing remains the most important criteria in the global market. Lamb Machining Systems' strength is the ability to design reliable and efficient manufacturing processes for its customers and combine them with cost-effective machining solutions in order to win orders against strong competition. There are numerous competitors in the markets served by integrated manufacturing. The division's major competitors include four German companies and one in Italy. The market for high-volume production systems for engines and transmissions in North America and Europe is divided among approximately ten major competitors and numerous smaller participants. Major competitors are Thyssen/Giddings & Lewis, Ingersoll Milling and Grob (Germany). Management estimates that the Company has approximately a 12% share of this market. In the Body Welding and Assembly Systems market, the Company is faced with competitors that are involved in a broad range of assembly equipment and other competitors that provide "niche" machines to address specific markets. Some of the stronger competitors have been or are aligned with machine tool companies for "total capability." In North America, there are eight main competitors and another seven in Europe. The primary competitors include DCT, Progressive Industries (PICO) and Valiant in the U.S.; FFT and Kuka in Germany; Comau (Italy); and Thyssen (Germany). In the worldwide market for high-precision grinding of engine parts, the Company has achieved a strong market position through innovative products that improve customer efficiency while reducing their capital costs. Major competitors are the foreign companies Koyo and Toyoda in Japan; the Koerber Group, Naxos Union and Junkers in Germany; and Guistina in Italy. RESEARCH AND DEVELOPMENT Companywide expenditures on research and development activities amounted to $29.7 million, $27.5 million and $31.7 million, substantially all of which was sponsored by the Company, in the fiscal years ended December 31, 1996, 1995 and 1994, respectively. PATENTS AND TRADEMARKS The Company owns a large number of patents, trademarks and copyrights relating to its manufactured products, which have been secured over a period of years. These patents, trademarks and copyrights have been of value in the growth of the Company's business and may continue to be of value in the future. However, the Company's business generally is not dependent upon the protection of any patent, 17 patent application or patent license agreement, or group thereof, and would not be materially affected by expiration thereof. The Company has approximately 21 patent licenses under which it paid out or received income in the fiscal year ended December 31, 1996. During such fiscal year, the aggregate amount of license fees paid by the Company was approximately $6.9 million, and the aggregate amount of license fees received was approximately $700,000. SEASONALITY; BACKLOG Sales backlog was $459 million at June 30, 1997, and $595 million, $579 million and $413 million at December 31, 1996, 1995 and 1994, respectively. The operations of the Company are not seasonal to any appreciable degree. The majority of the Company's backlog is concentrated in the Industrial Automation Systems segment. The Automated Data Systems market typically operates without a significant backlog of firm orders and does not consider backlog to be a relevant measure of future sales. EMPLOYEES At June 30, 1997, the Company had approximately 6,650 full-time employees, of which approximately 3,220 are engaged in the Automated Data Systems business, approximately 3,310 in the Industrial Automation Systems segment and approximately 120 in corporate and shared services. LEGAL AND ENVIRONMENTAL MATTERS The Company is currently, and is from time to time, subject to claims and suits arising in the ordinary course of its business. Although the results of litigation proceedings cannot be predicted with certainty, the Company believes that the ultimate resolution of these proceedings will not have a material adverse effect on the Company's financial statements. During the fiscal year ended December 31, 1996, the amounts incurred to comply with federal, state and local legislation pertaining to environmental standards did not have a material effect upon the capital expenditures or earnings of the Company. Radio emissions are the subject of governmental regulation in all countries in which the Company currently conducts business. In North America, both the Canadian and the U.S. governments publish relevant regulations, and changes to these regulations are made only after public discussion. In some countries regulatory changes can be introduced with little or no grace period for implementing the specified changes. Furthermore, there is little consistency among the regulations of various countries outside North America, and future regulatory changes in North America are possible. These conditions introduce uncertainty into the product planning process and could have an adverse effect on the ADC/ Mobile Computing business. The European Community ("EC") has passed a directive requiring its members to adopt laws relating to electro-magnetic compatibility and emissions standards. These standards will apply to ADC/Mobile Computing products sold in EC member countries as those countries adopt the EC standards into law. Currently, the Company believes that its products are in material compliance with the regulations in force in each of the EC member countries. RAW MATERIALS The Company uses a wide variety of raw materials in the manufacture of its products and obtains such raw materials from a variety of suppliers. No single supplier provides 10% or more of the Company's raw materials, nor do raw materials from any one supplier generate 10% or more of the Company's consolidated revenues. The Company does not have any long-term supply agreements relating to raw materials. 18 PROPERTIES The Company's executive offices, in owned premises, are at 360 North Crescent Drive, Beverly Hills, California. Its principal plants and offices have an aggregate floor area of approximately 3,324,098 square feet, of which 2,454,428 square feet (74%) are located in the United States, and 869,670 square feet (26%) are located outside of the United States, primarily in the United Kingdom and Canada. These properties are used by the business segments as follows:
SQUARE FEET ------------ Industrial Automation Systems................................................... 2,331,788 Automated Data Systems.......................................................... 659,310 ------------ 2,991,098 ------------ ------------
Approximately 2,873,428 square feet (86%) of the principal plant, office and commercial floor area is owned by the Company, and the balance is held under lease. The Company's plants and offices in the United States are situated in 17 locations in the following states:
STATE SQUARE FEET - -------------------------------------------------------------------------------- ------------ Michigan........................................................................ 575,099 Pennsylvania.................................................................... 459,425 California...................................................................... 333,000 Washington...................................................................... 312,000 Illinois........................................................................ 189,438 Iowa............................................................................ 180,927 Other states.................................................................... 404,539 ------------ 2,454,428 ------------ ------------
The above-mentioned facilities are in satisfactory condition and suitable for the particular purposes for which they were acquired or constructed and are adequate for present operations. The foregoing information excludes Company-held properties leased to others and also excludes plants or offices which, when added to all other of the Company's plants and offices in the same city, have a total floor area of less than 50,000 square feet. 19 UNOVA, INC. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS The following unaudited pro forma combined statements of operations have been prepared from the historical financial statements of the Company and Norand Corporation. Effective March 3, 1997, the Company acquired Norand for approximately $280 million. The acquisition has been accounted for under the purchase method of accounting. Accordingly, the acquisition cost has been allocated among the net assets of Norand based upon their estimated fair values. Such allocation process resulted in approximately $138 million in value assigned to in-process research and development activities; $23 million was assigned to identified intangibles (which will be amortized over periods ranging from five to eighteen years); and approximately $123 million was assigned to goodwill (which will be amortized over 25 years). In accordance with Financial Accounting Standards Board Interpretation No. 4 ("FIN 4"), the values assigned to in-process research and development activities acquired in the Norand and UBI transactions ($203 million in total) were charged to expense by the Company during the period ended June 30, 1997. The operations of Norand for the year ended November 30, 1996 have been combined with the Company's operations for the year ended December 31, 1996. Norand's historical operations for the two months ended March 1, 1997 have been combined with the Company's operations for the six months ended June 30, 1997 (which include Norand subsequent to the acquisition date). The unaudited pro forma combined statements of operations are not necessarily indicative of what the results of operations would have been if the combination had occurred on the above-mentioned dates. Additionally, they are not predictive of future results of operations. The unaudited pro forma combined statements of operations should be read in conjunction with the Company's audited historical combined financial statements, along with Norand's audited historical financial statements for the year ended August 31, 1996, included elsewhere in this Information Statement. 20 UNOVA, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 (THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
UNOVA NORAND HISTORICAL HISTORICAL SIX MONTHS TWO MONTHS ENDED ENDED JUNE 30, MARCH 1, 1997 1997 ADJUSTMENTS PRO FORMA ------------- ----------- ------------ ------------- Sales and Service Revenues........................ $ 732,343 $ 36,798 $ 769,141 ------------- ----------- ------------- Costs and Expenses Cost of sales................................... 512,516 21,675 534,191 Selling, general and administrative............. 152,671 17,168 169,839 In-process research and development charge...... 203,300 $ (203,300)(2) Depreciation and amortization................... 17,035 1,932 1,136(1) 20,103 Interest -- net................................. 7,099 979 1,533 )(4 9,611 ------------- ----------- ------------ ------------- Total Costs and Expenses.......................... 892,621 41,754 (200,631) 733,744 ------------- ----------- ------------ ------------- Earnings (Loss) before Taxes on Income............ (160,278) (4,956) 200,631 35,397 Taxes on Income................................... (17,208) 1,487 1,562(5) (14,159) ------------- ----------- ------------ ------------- Net Earnings (Loss)............................... $ (177,486) $ (3,469) $ 202,193 $ 21,238 ------------- ----------- ------------ ------------- ------------- ----------- ------------ ------------- Pro Forma Net Earnings (Loss) per Share........... $ (3.29) $ (0.07) $ 3.75 $ 0.39 ------------- ----------- ------------ ------------- ------------- ----------- ------------ ------------- (Equivalent Shares of 53.9 million)
21 UNOVA, INC. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
UNOVA NORAND HISTORICAL HISTORICAL YEAR YEAR ENDED ENDED DECEMBER 31, NOVEMBER 30, 1996 1996 ADJUSTMENTS PRO FORMA -------------- -------------- ------------ ------------- Sales and Service Revenues.................... $ 1,164,682 $ 241,130 $ 1,405,812 -------------- -------------- ------------- Costs and Expenses Cost of sales............................... 841,820 139,965 981,785 Selling, general and administrative......... 218,672 87,165 305,837 Depreciation and amortization............... 27,043 12,344 $ 6,837(1) 46,224 Interest -- net............................. 7,111 5,821 2,992 )(4 15,924 Litigation settlement....................... 5,100 5,100 Cost of restructuring operations............ 4,392 4,392 -------------- -------------- ------------ ------------- Total Costs and Expenses...................... 1,094,646 254,787 9,829 1,359,262 -------------- -------------- ------------ ------------- Earnings (Loss) before Taxes on Income........ 70,036 (13,657) (9,829) 46,550 Taxes on Income............................... (28,014) 4,097 5,297(5) (18,620) -------------- -------------- ------------ ------------- Net Earnings (Loss)........................... $ 42,022 $ (9,560) $ (4,532) $ 27,930 -------------- -------------- ------------ ------------- -------------- -------------- ------------ ------------- Pro Forma Net Earnings (Loss) per Share....... $ 0.78 $ (0.18) $ (0.08) $ 0.52 -------------- -------------- ------------ ------------- -------------- -------------- ------------ ------------- (Equivalent Shares of 53.9 million)
22 UNOVA, INC. NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS (UNAUDITED) The following pro forma adjustments give effect to the acquisition of Norand as if it had occurred on January 1, 1996 or January 1, 1997, respectively. The pro forma statements of operations have not been adjusted to eliminate the results of the Material Handling division (sold in November 1996) nor the acquisitions of UBI and Honsberg, because such results are not material to the Company's operations. (1) To record amortization of goodwill and other intangible assets acquired in the acquisition of Norand. (2) To eliminate the Company's non-recurring, non-tax-deductible charge to expense acquired in-process research and development activities in accordance with FIN 4. (3) To record incremental interest expense on allocated Western Atlas corporate debt using the Western Atlas estimated blended historical 7.5% annual rate. (4) To eliminate Norand's historical interest expense related to short-term borrowings under agreements which were repaid with additional Western Atlas corporate debt concurrent with the Company's acquisition of Norand. (5) To adjust the pro forma combined effective federal and state income tax rate to 40%. 23 UNOVA, INC. SELECTED COMBINED HISTORICAL FINANCIAL DATA The following selected combined historical financial data of the Company should be read in conjunction with the historical combined financial statements and notes thereto included elsewhere in this Information Statement. The following selected combined historical financial data which relate to the three years in the period ended December 31, 1996 have been derived from combined financial statements audited by Deloitte & Touche LLP, independent auditors. The selected combined historical financial data for the five-month period ended December 31, 1993, the one-year periods ended July 31, 1993 and 1992 and the six-month periods ended June 30, 1997 and 1996 have been derived from unaudited combined financial statements. In the opinion of management, the unaudited combined financial statements reflect all adjustments, consisting only of normal adjustments, necessary to present fairly the financial position of the Company at December 31, 1993, July 31, 1993 and 1992 and June 30, 1997 and 1996 and the results of operations for the five-month period ended December 31, 1993, for the years ended July 31, 1993 and 1992 and for the six-month periods ended June 30, 1997 and 1996. The historical combined financial statements of the Company may not necessarily reflect the results of operations or financial position that would have been obtained had the Company been a separate, independent company. The historical combined results for the six months ended June 30, 1997 and 1996 are not necessarily indicative of results for the entire year. 24 UNOVA, INC. SELECTED COMBINED HISTORICAL FINANCIAL DATA
SIX MONTHS FIVE MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31, ENDED --------------------- -------------------------------- DECEMBER 31, 1997 1996 1996 1995 1994 1993 ---------- --------- ---------- --------- --------- -------------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) OPERATING RESULTS: Sales and Service Revenues.......................... $ 732.3 $ 504.5 $ 1,164.7 $ 942.9 $ 971.1 $ 360.9 ---------- --------- ---------- --------- --------- ------- Operating Costs and Expenses Cost of sales..................................... 512.5 356.5 841.8 669.3 689.9 270.2 Selling, general and administrative(1)............ 356.0 103.8 218.7 194.1 199.9 79.4 Depreciation and amortization..................... 17.0 12.9 27.0 26.1 28.7 12.0 ---------- --------- ---------- --------- --------- ------- Total............................................. 885.5 473.2 1,087.5 889.5 918.5 361.6 ---------- --------- ---------- --------- --------- ------- (Loss) Earnings before Interest and Taxes(2)........ (153.2) 31.3 77.2 53.4 52.6 (0.7) Interest Expense-net(3)............................. (7.1) (3.1) (7.1) (9.3) (15.7) (4.3) Taxes on Income..................................... (17.2) (11.3) (28.1) (17.9) (15.3) (0.3) ---------- --------- ---------- --------- --------- ------- Net (Loss) Earnings(2).............................. $ (177.5) $ 16.9 $ 42.0 $ 26.2 $ 21.6 $ (5.3) ---------- --------- ---------- --------- --------- ------- ---------- --------- ---------- --------- --------- ------- Pro Forma Net (Loss) Earnings per Share(2)...................................... $ (3.29) $ 0.78 Equivalent Shares(4)................................ 53,892 53,892 FINANCIAL POSITION (at end of period): Total Assets........................................ $ 1,351.3 $ 906.6 $ 1,073.8 $ 919.0 $ 860.8 $ 799.0 Equity -- Investment by Western Atlas............... $ 590.2 $ 501.5 $ 574.5 $ 502.7 $ 439.4 $ 380.9 Notes Payable and Current Portion of Long-term Obligations....................................... $ 57.4 $ 23.3 $ 27.5 $ 22.2 $ 41.7 $ 7.1 Long-term Obligations............................... $ 17.3 $ 14.0 $ 14.5 $ 14.1 $ 9.0 $ 8.9 Allocated Portion of Western Atlas Debt............. $ 228.2 $ 112.7 $ 109.6 $ 112.4 $ 112.8 $ 211.0 Working Capital..................................... $ 83.5 $ 192.2 $ 266.0 $ 194.7 $ 115.2 $ 53.0 Current Ratio....................................... 1.1 1.6 1.6 1.6 1.3 1.1 Total Debt as a Percentage of Total Capitalization.................................... 34% 23% 21% 23% 27% 37% YEAR ENDED JULY 31, -------------------- 1993 1992 --------- --------- OPERATING RESULTS: Sales and Service Revenues.......................... $ 844.3 $ 761.8 --------- --------- Operating Costs and Expenses Cost of sales..................................... 589.9 526.3 Selling, general and administrative(1)............ 170.6 159.8 Depreciation and amortization..................... 26.8 26.7 --------- --------- Total............................................. 787.3 712.8 --------- --------- (Loss) Earnings before Interest and Taxes(2)........ 57.0 49.0 Interest Expense-net(3)............................. (5.1) (7.0) Taxes on Income..................................... (20.5) (16.6) --------- --------- Net (Loss) Earnings(2).............................. $ 31.4 $ 25.4 --------- --------- --------- --------- Pro Forma Net (Loss) Earnings per Share(2)...................................... Equivalent Shares(4)................................ FINANCIAL POSITION (at end of period): Total Assets........................................ $ 748.0 $ 717.8 Equity -- Investment by Western Atlas............... $ 471.5 $ 410.9 Notes Payable and Current Portion of Long-term Obligations....................................... $ 4.3 $ 1.8 Long-term Obligations............................... $ 19.1 $ 19.8 Allocated Portion of Western Atlas Debt............. $ 27.3 $ 76.7 Working Capital..................................... $ 199.5 $ 117.7 Current Ratio....................................... 2.0 1.5 Total Debt as a Percentage of Total Capitalization.................................... 10% 19%
- ------------------------ (1) General and Administrative Costs include allocated charges from Western Atlas of $22.2 million, $19.9 million, $27.6 million, $8.1 million, $14.1 million and $10.4 million for the fiscal years ended December 31, 1996, 1995 and 1994, the five months ended December 31, 1993, and the fiscal years ended July 31, 1993 and 1992, respectively, and $9.1 million and $10.8 million for the six-month periods ended June 30, 1997 and 1996, respectively. The June 30, 1997 period includes a $203.3 million non-tax-deductible charge, or $3.77 per share, for the value of in-process research and development activities resulting from the Norand and UBI acquisitions. (2) Amounts presented for the year ended July 31, 1993 are before a cumulative effect of a change in accounting principle for the adoption of the provisions of SFAS No. 106, Employer's Accounting for Postretirement Benefits Other Than Pensions. The Company elected immediate recognition of the transition liability, and recorded a net of tax charge of $9.3 million. Net earnings for the period were $22.1 million and earnings per share were $0.41 after the cumulative effect of a change in accounting principle. (3) Interest expense includes allocated charges from Western Atlas of $8.3 million, $8.4 million, $12.1 million, $3.7 million, $3.9 million and $5.8 million for the fiscal years ended December 31, 1996, 1995 and 1994, the five months ended December 31, 1993, and the fiscal years ended July 31, 1993 and 1992, respectively, and $6.3 million and $4.1 million for the six-month periods ended June 30, 1997 and 1996, respectively. (4) In thousands. The number of common shares used to calculate earnings per share for all periods presented is based on the number of shares of Western Atlas Common Stock outstanding as of June 30, 1997. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a description of the business segments of the Company and a discussion of the historical combined financial condition and results of operations of the Company and factors affecting the Company's financial resources and capital after the Distribution. This discussion should be read in conjunction with the historical combined financial statements and notes thereto included elsewhere in this Information Statement. GENERAL The Company is an industrial technologies company providing global customers with solutions for improving their efficiency and productivity. The Company's business segments comprise Automated Data Systems ("ADS") and Industrial Automation Systems ("IAS"). Future growth in these businesses is expected to result from expansion of the Company's existing operations and its customer base, and through acquisitions. In seeking acquisitions, the Company will concentrate on technologies, products and services which enhance customer productivity and efficiency, and those that can be characterized as growth drivers. Currently, the Company estimates that about 45% of its revenues will come from ADS operations and about 55% of revenues will be derived from IAS activities for the 1997 fiscal year. AUTOMATED DATA SYSTEMS ADS comprises automated data collection ("ADC") and mobile computing products and services, conducted under the Intermec, Norand and UBI brand names. Intermec was acquired in 1991; Norand and UBI were acquired early in 1997. Customers include the global distribution and transportation companies, food and beverage operations, manufacturing industries, health care providers and government agencies. All three companies operate as one organization serving the global bar code, data collection and mobile computing market, which has grown approximately 12% to 15% annually over the past five years. The Company's ADS operations represented slightly more than 30% of the Company's total revenues in each of the fiscal years ended 1996, 1995 and 1994, and were based only on Intermec's results prior to the 1997 acquisitions of Norand and UBI. Together, the three companies would have had combined revenues of about $700 million in 1996, which would have represented 50% of the Company's unaudited pro forma 1996 revenues. Intermec accounted for 32%, 34% and 31% of the Company's combined revenues in fiscal 1996, 1995 and 1994, respectively. This combination of companies and capabilities establishes the Company as a leading participant in the emerging logistics automation marketplace. Together, they offer a broad range of products which are used to gather, organize and transmit selected data from various off-site or in-premise locations to central computers or information retrieval systems in order to track parts, products and people through manufacturing, distribution and other processes. The ongoing development of the Company's ADC/Mobile Computing activities will depend primarily on the application of new technologies and products to maintain its position in this technology-driven market. The Company believes it has the necessary technical expertise to achieve this goal. Future geographic opportunities have been identified outside North America, particularly in Europe, Latin America and Asia, where the use of data collection technology is less developed. To capitalize on these emerging markets, the Company is expanding its international marketing, distribution and support network, and is engaged in an ongoing program to locate Company-owned resources in key markets worldwide. 26 INDUSTRIAL AUTOMATION SYSTEMS IAS includes integrated manufacturing systems, body welding and assembly systems, and precision grinding and abrasive systems, primarily serving the worldwide automotive, off-road and diesel engine manufacturing industries. The Company plans to continue to develop its existing IAS customer base by seeking a greater role in customer projects, continuing its emphasis on product development and expanding its international activities. The Company also intends to increase its presence in IAS market segments where it presently holds a smaller market share, such as the body welding and assembly systems area, and the application of lower-volume flexible manufacturing systems and CNC machines. In some areas the Company also has developed high-precision manufacturing technologies that should allow it to establish a presence in growth markets such as micro-electronics with its new generation of ultra-high-precision wafer grinders. INTEGRATED MANUFACTURING SYSTEMS. Through its Lamb, Lamb Technicon and Honsberg Lamb operations, the Company designs, integrates and installs integrated machining systems for the world's automotive and off-road vehicle industries. The integrated manufacturing systems divisions design manufacturing solutions for all production volumes of powertrain components -- primarily engines and transmissions. Integrated manufacturing systems accounted for 39%, 38% and 44% of the Company's combined revenues in fiscal 1996, 1995 and 1994, respectively. BODY WELDING AND ASSEMBLY SYSTEMS. The Lamb Body Welding and Assembly Systems division designs automated systems to assemble and weld high-quality automobile and truck bodies as well as other industrial products. Through its Assembly and Test Systems operations, the division also designs and builds specialized assembly and/or testing equipment and systems for a variety of manufacturing applications. Body Welding and Assembly Systems accounted for 12%, 8% and 9% of the Company's combined revenues in fiscal 1996, 1995 and 1994, respectively. PRECISION GRINDING AND ABRASIVES. The Company develops and produces precision grinding systems and equipment for the global manufacturing market. A key area of the Company's expertise is the application of precision cylindrical and disc grinding technologies to medium- and high-volume production of car engines and transmission components such as camshafts, crankshafts or connecting rods. Precision Grinding and Abrasives accounted for 17%, 20% and 16% of the Company's combined revenues in fiscal 1996, 1995 and 1994, respectively. RECENT DEVELOPMENTS The Company acquired Norand Corporation ("Norand") on March 3, 1997, and United Barcode Industries ("UBI") on April 4, 1997. Norand designs, manufactures and markets mobile computing systems and wireless data communications networks using radio frequency technology. UBI is a European-based ADC company headquartered in Sweden, with fiscal 1996 sales of approximately $100 million. These companies are currently being integrated into the ADS segment. Both transactions were funded using a combination of Western Atlas' committed credit facilities, short-term uncommitted credit lines and excess cash, and are being accounted for under the purchase method of accounting. Accordingly, the acquisition costs (approximately $280 million and $107 million for Norand and UBI, respectively) have been allocated to the net assets acquired based upon their relative fair values. Such allocation resulted in $203 million assigned to in-process research and development activities; $156 million assigned to goodwill (to be amortized over 25 years); and $29 million assigned to other intangibles (to be amortized over periods ranging from 4 to 18 years). During the period ended June 30, 1997, the Company expensed the amounts assigned to in-process research and development in accordance with Financial Accounting Standards Board Interpretation No. 4. 27 RESULTS OF OPERATIONS Sales and service revenues and segment operating profit for the six months ended June 30, 1997 (excluding the $203 million charge for acquired in-process research and development described above) and 1996, and each of the three years ended December 31, were as follows:
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, -------------------- ------------------------------- 1997 1996 1996 1995 1994 --------- --------- --------- --------- --------- (MILLIONS OF DOLLARS) SALES AND SERVICE REVENUES Automated Data Systems................................................ $ 282 $ 175 $ 367 $ 321 $ 303 Industrial Automation Systems......................................... 450 329 798 622 668 --------- --------- --------- --------- --------- Total Sales and Service Revenues...................................... $ 732 $ 504 $ 1,165 $ 943 $ 971 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- SEGMENT OPERATING PROFIT Automated Data Systems................................................ $ 12 $ 13 $ 30 $ 13 $ 24 Industrial Automation Systems......................................... 49 29 70 62 56 --------- --------- --------- --------- --------- Total Segment Operating Profit........................................ $ 61 $ 42 $ 100 $ 75 $ 80 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO 1996 Total sales and service revenues increased $228 million, or 45% for the six months ended June 30, 1997 compared with the corresponding prior period. Total segment operating profit, excluding a $203 million charge for acquired in-process research and development, increased $19 million, or 45% for the six months ended June 30, 1997 compared to the corresponding prior period. ADS revenues increased by $107 million, or 61% due to the acquisitions of Norand and UBI. However, ADS operating profit declined by $1 million, or 8% due primarily to the process of integrating the newly acquired companies with Intermec. Operating profit margins, which declined from 7.4% in 1996 to 4.3% in 1997, are expected to improve to historical levels following the completion of the integration efforts in late 1997. IAS revenues increased $121 million, or 37% and related operating profit increased $20 million, or 69% for the six months ended June 30, 1997 compared with the corresponding prior period. IAS experiences lower profit margins in the early stages of long-term contracts (until the development risks have been mitigated). During 1997 the Integrated Manufacturing Systems operations experienced a higher level of revenues and profits from contracts in the final delivery and installation phase. These projects contributed to an increase in operating margins for IAS from 8.8% in 1996 to 10.9% in 1997. Accordingly, IAS backlog declined from $545 million at December 31, 1996 to $407 million at June 30, 1997. Net interest expense was $7.1 million and $3.1 million for the six months ended June 30, 1997 and 1996, respectively. The increase is primarily due to an increase in the level of Western Atlas allocated debt from $113 million at June 30, 1996 to $228 million at June 30, 1997. The increase in allocated debt is primarily attributable to the 1997 acquisitions of Norand and UBI. 28 YEAR ENDED DECEMBER 31, 1996 COMPARED TO 1995 Total sales and service revenues increased $222 million, or 24%, and related segment operating profit increased $25 million, or 33% for the year ended December 31, 1996 compared with the corresponding prior period. ADS revenues increased by $46 million, or 14% as a result of the success of new product introductions and increased deliveries on Intermec's five-year purchase agreement with the U.S. Government. Revenues attributable to new product introductions rose by $23 million, or 209%, and related unit shipments increased 213% over 1995 levels. Revenues under the purchase agreement with the U.S. Government increased $16 million, primarily attributable to a 38% increase in unit hardware shipments. ADS operating profit increased by $17 million in 1996, and operating margins improved from 4.0% in 1995 to 8.2% in 1996. In 1995 margins were adversely impacted by changes in product mix and competitive pressure on pricing of certain mature product lines. Approximately one percentage point of the 1996 increase was due to improved margins on media products (labels and printer ribbons), while the remaining improvement resulted from the Company responding to factors contributing to the 1995 decrease. The 1995 decrease in margins was affected by the cost of a shift from proprietary to open architecture systems which caused an approximate two percentage point decrease, while pricing pressure contributed to an additional decrease of approximately two percentage points. IAS revenues increased by $176 million, or 28% in 1996, and its operating profit increased by 13% to $70 million. Operating margins declined from 10.0% in 1995 to 8.8% in 1996 as a result of lower profit recognition in the early stages of certain 1996 contracts. Backlog improved to $545 million at December 31, 1996 compared to $501 million at the prior year-end. Net interest expense decreased from $9.3 million in 1995 to $7.1 million in 1996 because of lower levels of allocated Western Atlas debt, as well as reduced interest income attributable to lower average balances in cash and marketable securities. YEAR ENDED DECEMBER 31, 1995 COMPARED TO 1994 Total sales and service revenues decreased $28 million, or 3%, and related segment operating profit decreased $5 million, or 6% for the year ended December 31, 1995 compared with the corresponding prior period. ADS revenues increased by $18 million, or 6% in 1995. However, related operating profit declined by $11 million, or 46%, and ADS operating margins dropped from 7.9% to 4.0% for the reasons discussed above. IAS revenues decreased $46 million, or 7%, and related operating profit increased $6 million, or 11% for the year ended December 31, 1995 compared with the corresponding prior period. The decrease in sales and service revenues from 1994 compared with 1995 resulted from several large programs with automobile customers being completed by the Integrated Manufacturing Systems operations and shipped near the end of 1994. The increase in operating profit is partially attributable to improvements in the operational performance of the Material Handling Systems division in 1995 compared with 1994. This division was included with IAS until it was sold in 1996. IAS backlog increased to $501 million at December 31, 1995, from $353 million at December 31, 1994. Net interest expense decreased from $15.7 million in 1994 to $9.3 million in 1995. Allocated Western Atlas debt declined following the sale of 6.9 million Western Atlas common shares in September 1994, the proceeds of which ($286 million) were used primarily to pay down debt. 29 FOREIGN CURRENCY TRANSACTIONS The Company is subject to the effects of international currency fluctuations due to the global nature of its operations. Currency fluctuations did not have a significant impact on operations during fiscal years 1996, 1995 and 1994. It is not possible to predict the Company's exposure to foreign currency fluctuations beyond the near term because revenues generated from particular foreign jurisdictions vary widely over time. The Company hedges transactions from time to time, but the amount and volume of such transactions are not material. For fiscal year 1996, the Company derived approximately 18% of its revenues and approximately 22% of its operating profits (exclusive of corporate overhead) from non-U.S. operations. However, at December 31, 1996, identifiable assets attributable to foreign operations comprised 14% of total assets (of which the largest components were attributable to European operations). Therefore, exposure of identifiable assets to foreign currency fluctuations or expropriations is not significant, even after considering the 1997 acquisitions of Norand and UBI. LIQUIDITY AND CAPITAL RESOURCES Cash and marketable securities decreased from $149.5 million at December 31, 1996 to $21.8 million at June 30, 1997 primarily as a result of the Norand acquisition. The net accounts receivable balance was $495.1 million at June 30, 1997, and $394.6 million and $284.1 million as of December 31, 1996 and 1995, respectively. The change from December 31, 1995 to 1996 and continuing on through June 30, 1997 is due primarily to an increase in unbilled recoverable costs and accrued profit on progress completed on long-term contracts. The unbilled amounts are generally billed upon completion and shipping of the project. Fluctuation of unbilled amounts is a normal aspect of long-term contracts, and the Company does not foresee any adverse liquidity implications resulting from this activity. The net accounts receivable increase from December 31, 1996 to June 30, 1997 is primarily attributable to trade receivables of the recently acquired Norand and UBI companies. Total debt increased from $151.5 million at December 31, 1996 to $302.9 million at June 30, 1997 due primarily to an increase in Western Atlas allocated debt attributable to the use of a combination of Western Atlas' committed credit facilities and short-term uncommitted credit lines to fund the Norand and UBI acquisitions. The remaining increase is primarily attributable to capital expenditures and working capital needs of the operations. WAI short-term borrowings currently bear interest at an annual rate of approximately 5.75% and have maturities of up to 60 days. The Company expects that cash flow from operations, along with available borrowing capacity, will be adequate to meet working capital requirements. After payment of an intercompany dividend to Western Atlas immediately prior to the Distribution, the Company expects to have unused committed credit facilities of approximately $170 million. The Company does not anticipate any material adverse decline in cash flow from operations nor any significant changes in capital expenditures required to support ongoing operations. INFLATION In the opinion of management, inflation has not been a significant factor in the markets in which the Company operates and has not had a significant impact upon the results of its operations. 30 MANAGEMENT DIRECTORS OF THE COMPANY Immediately following the Distribution, the Board of Directors of the Company is expected to consist of the five persons named below. Directors for each class will be elected at the annual meeting of shareholders held the year in which the term for such class expires and will serve thereafter for three years. The expiration of the initial term of each director is indicated below.
POSITION WITH THE COMPANY AND PRINCIPAL BUSINESS AFFILIATIONS DURING NAME AGE PAST FIVE YEARS - --------------------------------------------- --- ------------------------------------------------------------ Alton J. Brann............................... 55 Chairman of the Board and Chief Executive Officer of the Company. Chairman of the Board and Chief Executive Officer and a director of Western Atlas since March 1994; prior thereto President from November 1990 and Chief Executive Officer of Litton from December 1992 to March 1994. A director of Litton since December 1990. Stephen E. Frank............................. 55 President and Chief Operating Officer of Southern California Edison, a subsidiary of Edison International since June 1995; prior to that President and Chief Operating Officer of Florida Power and Light Company since August 1990. Mr. Frank is also a director of Washington Mutual, Inc. Orion L. Hoch................................ 68 Chairman of the Executive Committee and a member of the Western Atlas Board since March 1994; prior thereto Chairman of the Board of Litton from March 1988 to March 1994; Chief Executive Officer of Litton from December 1986 to December 1992 and a director of Litton since June 1982. Steven B. Sample............................. 56 President of the University of Southern California since March 1991. Dr. Sample is also a member of the Board of Directors of Wm. Wrigley Jr. Company, Santa Catalina Company and Presley Companies. He has been a director of Western Atlas since March 1994. William D. Walsh............................. 67 Partner of Sequoia Associates, a private investment firm, since June 1982. Mr. Walsh is also a director of American Ireland Fund, BVP, Inc., Crown Vantage, Inc., Newcourt Credit Group, Inc. and URS Corporation. He is Chairman of the Board of Golden Valley Produce, LLC, Clayton Group, Inc., Consolidated Freightways Corporation, Newell Manufacturing Corporation and Newell Industrial Corporation.
On the Distribution Date, Dr. Sample will resign as a member of the Board of Directors of Western Atlas. Mr. Brann and Dr. Hoch are expected to continue as directors of Western Atlas, and Mr. Brann will be elected non-executive Chairman of the Board of Western Atlas effective as of the Distribution Date. The Certificate of Incorporation and By-laws of the Company provide that the Company's Board will be divided into three classes of directors, with the classes to be as nearly equal in number as possible. Of the initial directors, Mr. Frank and Dr. Hoch will serve until the 1999 Annual Meeting of Shareholders; Dr. Sample and Mr. Walsh will serve until the 2000 Annual Meeting of Shareholders; and Mr. Brann will serve until the 2001 Annual Meeting of Shareholders. Starting with the 1999 Annual Meeting of Shareholders, one class of directors will be elected each year for a three-year term. See "Certain Antitakeover 31 Effects of Certain Provisions of the Certificate of Incorporation, the By-laws, State Law and the Rights Plan -- Classified Board of Directors." EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth certain information concerning the persons who currently serve as executive officers of the Company. Each such person was elected to the indicated office with the Company in anticipation of the Distribution and serves at the pleasure of the Board of Directors. Those persons who have been officers and/or employees of Western Atlas will relinquish such positions in connection with the Distribution.
POSITION WITH THE COMPANY AND PRINCIPAL BUSINESS AFFILIATIONS DURING NAME AGE PAST FIVE YEARS - --------------------------------------------- --- ------------------------------------------------------------ Alton J. Brann............................... 55 Chairman of the Board and Chief Executive Officer; for prior business experience see "Directors of the Company" above. Charles A. Cusumano.......................... 51 Vice President, Finance. Vice President, Finance, of Western Atlas since October 1, 1996. Prior thereto, Vice President and Controller of Western Atlas from March 1994 to September 30, 1996. Vice President, Finance, of Litton's Industrial Automation Systems Group from October 1988 to March 1994. Michael E. Keane............................. 41 Senior Vice President and Chief Financial Officer. Senior Vice President and Chief Financial Officer of Western Atlas since October 1, 1996. Prior thereto, Vice President and Treasurer of Western Atlas from March 1994 to September 30, 1996. Director of Pensions and Insurance of Litton from February 1991 to March 1994. Michael Ohanian.............................. 65 Senior Vice President and Group Executive, Automated Data Systems. Senior Vice President of Western Atlas since July 8, 1997, Vice President of Western Atlas from May 1996 to July 1997 and President of Intermec since May 1995. Prior thereto, an independent consultant from September 1994 to May 1995 and Vice President, Strategic and Government Programs, of Intermec from April 1988 to September 1994. Norman L. Roberts............................ 62 Senior Vice President and General Counsel. Senior Vice President and General Counsel of Western Atlas since March 1994. Prior thereto, Senior Vice President and General Counsel of Litton from March 1990 to March 1994. Clayton A. Williams.......................... 63 Senior Vice President and Group Executive, Industrial Automation Systems. Senior Vice President of Western Atlas since May 7, 1996 and Group Executive of Western Atlas' Manufacturing Systems Group since December 1995. Prior thereto, Vice President of Western Atlas from December 9, 1995 to May 7, 1996. Vice President of Litton from June 1992 to December 1995 and President of its Applied Technology division from January 1990 to December 1995.
32 THE BOARD AND CERTAIN BOARD COMMITTEES The Company's Board of Directors (the "Board") is expected to establish an Audit and Compliance Committee, a Compensation Committee and a Nominating Committee. The duties and membership of such committees will be established at the initial meeting of the Board following the Distribution. DIRECTORS' COMPENSATION AND RETIREMENT POLICIES Directors who are not employees of the Company are expected to be paid an annual fee for Board service of $30,000, payable in quarterly installments, and an attendance fee of $2,000 for each Board meeting attended and each meeting of a committee of the Board attended. In addition, any nonemployee director serving as Chair of the Audit and Compliance Committee or the Compensation Committee will receive a separate annual fee of $4,000, and any nonemployee director serving as Chair of the Nominating Committee will receive a separate annual fee of $3,000. Directors may elect prior to the Distribution Date (for fees earned in 1997) and prior to the commencement of the calendar year for each year thereafter, to receive 50% or more of the fees described in the two preceding sentences in Company Common Stock pursuant to the Director Stock Option and Fee Plan described below; PROVIDED, that new directors may make such election during the 30-day period immediately following commencement of service as a director. The number of shares of Company Common Stock which may be received in lieu of cash fees shall equal the quarterly fees earned which the director has elected to convert into Company Common Stock, divided by the average for the quarter of the average of the high and low prices of the Company Common Stock on each trading day during the quarter. Directors who are employees of the Company are not paid any fee or additional remuneration for services as members of the Board or any committee thereof. Director fees, including fees elected to be paid in Company Common Stock, may be deferred pursuant to the Director Stock Option and Fee Plan described below. The Company is expected to adopt a policy establishing the mandatory retirement date of each director and advisory director as the date of the Annual Meeting of the shareholders of the Company next following his or her 72nd birthday. DIRECTOR STOCK OPTION AND DEFERRED FEE PLAN Under the terms of the UNOVA, Inc. Director Stock Option and Fee Plan (the "Director Plan"), directors (including advisory directors, if any) who are not employees of the Company or any subsidiary thereof automatically receive annual grants of options to purchase shares of the Company Common Stock at the fair market value of such stock on the date of grant. The initial grants under the Director Plan will be made as of the Distribution Date (for purposes of the initial grants made as of the Distribution Date, fair market value shall be based on the average of the high and low daily prices of the Company Common Stock as reported in the NYSE Composite Tape on the sixth through tenth trading dates, inclusive, following the Distribution Date). Each of these initial grants will cover 25,000 shares of the Company Common Stock. Any person who joins the Board as a nonemployee director subsequent to the date of the initial grant of options under the Director Plan and who neither received options under the 1997 Plan during the two-year period preceding the date of commencement of Board membership nor was an employee of the Company or a subsidiary of the Company during such two-year period will receive an initial grant of options to purchase 25,000 shares upon joining the Board. Commencing in 1999, on the first business day following the Company's annual shareholders' meeting for each year during the term of the Director Plan, each nonemployee director automatically will receive a grant of an option for 2,500 shares. All options granted under the Director Plan become fully exercisable on the first anniversary of the grant thereof; however, if a director dies or becomes permanently disabled while serving on the Board, or if the director retires pursuant to the policy for mandatory retirement of directors described below, then all options held by such director become exercisable in full. In addition, if a change in control of the Company (as defined in the 1997 Stock Incentive Plan as described below) occurs, then all options granted under the Director Plan become fully exercisable. An aggregate of 500,000 shares of 33 Company Common Stock, subject to adjustment for certain events affecting the Company's capitalization, are authorized for issuance under the Director Plan. Options granted under the Director Plan shall remain exercisable until three years following the first to occur of the retirement or resignation of the director from the Board (or the director's failure to be re-elected to the Board), the total and permanent disability of the director, or the death of the director. Pursuant to the Director Plan, nonemployee directors may elect to defer all or a portion of their fees described under the caption "Directors' Compensation and Retirement Policies" to either a deferred stock account or cash account. The deferred stock account will enable directors to defer their fees into phantom Company Common Stock, and the cash account will provide a deferral into an interest-based account. An election to defer fees must be made prior to the Distribution Date (for fees earned in 1997) and prior to the commencement of the calendar year for fees earned in each year thereafter; provided, that new directors may make such election during the 30-day period following commencement of service as a director. The deferred stock account will be a bookkeeping account credited with share units representing shares of Company Common Stock. Dividends paid on Company Common Stock will be treated as paid on the number of share units in the deferred stock account and as reinvested in share units credited to the deferred stock account. The cash account will accrue interest at a rate equal to the prime rate as reported by Morgan Guaranty Trust Company of New York on the first business day of the applicable quarter. Credits to the deferred stock and cash accounts shall be made on the first business day following the end of each quarter. A director's stock account will be credited with the number of shares of Company Common Stock into which the director's fees would be converted pursuant to an election to receive Company Common Stock in lieu of cash fees, and are the subject of a deferral election. Transfers between the stock account and the cash account will not be permitted. Deferred amounts will be paid to each director commencing in the January following the director's termination of service with the Board. Such payments may be made in a lump sum or in two to fifteen annual installments as elected by the director at the time of the deferral election. Notwithstanding the foregoing, upon a change in control of the Company, all deferred accounts will be paid out immediately. The deferred stock account will be paid in shares of Company Common Stock equal to the number of share units credited to such account, and the cash account will be paid in cash. The Director Plan will be administered by the Board, which will have authority to interpret, and make rules and regulations relating to, the Director Plan and to determine the provisions of the individual option agreements to be entered into under the Director Plan. The Director Plan will terminate on December 15, 2007 (unless earlier discontinued by the Board), but such termination will not affect the rights of the holder of any option or participant in a deferred stock or cash account outstanding on such date of termination. The Board may suspend or discontinue the Director Plan or amend it in any respect whatsoever; PROVIDED, HOWEVER, that no such amendment shall adversely affect the rights of any director without such director's consent or shall be made without stockholder approval if such approval is required by any regulation, law or stock exchange rule. Of the individuals named on page 31, all except Mr. Brann are expected to be eligible to participate in the Director Plan immediately following the Distribution Date. The foregoing summary of the Director Plan is qualified by reference to the text of the Director Plan which is attached to this Information Statement as Annex A. 34 ANNUAL MEETING The Company's By-laws provide that annual meetings of shareholders shall be held at such place and time as may be fixed by resolution of the Board. The first annual meeting for which proxies will be solicited from shareholders is expected to be held in May 1999. HISTORICAL COMPENSATION The following table sets forth, for the chief executive and the four other executive officers of the Company who, based upon employment by Western Atlas and its subsidiaries, received the highest compensation with respect to the fiscal year ended December 31, 1996 (the "Named Executive Officers"), information concerning compensation paid in fiscal 1996 to such persons by Western Atlas or its subsidiaries. The principal positions listed in the table are those expected to be held by the Named Executive Officers following the Distribution. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION -------------------- --------------------------- AWARDS SECURITIES UNDERLYING ALL OTHER SALARY BONUS OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($)(A) (#) ($)(B) - -------------------------------------------------- --------- --------- --------- ----------- -------------- Alton J. Brann 1996 687,030 928,125 50,000 17,382 Chairman of the Board and 1995 649,065 669,638 50,000 17,130 Chief Executive Officer 1994 573,092 625,000 175,000 157,994 Charles A. Cusumano 1996 226,289 174,242 15,000 4,936 Vice President, Finance Michael Ohanian 1996 269,232 269,232 11,000 9,250 Senior Vice President Norman L. Roberts 1996 295,846 292,887 15,000 9,057 Senior Vice President 1995 285,774 220,455 15,000 10,090 and General Counsel 1994 267,027 210,000 25,000 39,289 Clayton A. Williams 1996 257,500 321,875 12,000 45,540 Senior Vice President 1995 15,385(c) 0 25,000 0
- ------------------------ (a) Bonuses awarded to the Named Executive Officers, with respect to 1996 were paid as follows: an amount equal to 50% of the recipient's annual base pay in effect on January 1, 1996, was paid in February 1997, and the remainder will be paid one year later provided the recipient is then in the employ of the Company, or has terminated employment by reason of death, disability, or retirement or is on an approved leave of absence. Where a bonus exceeded 100% of the recipient's base pay at January 1, 1996, an amount equal to one half of such base pay was paid in February 1997; and, subject to satisfaction of the conditions set forth in the preceding sentence, an additional amount equal to 50% of such base pay will be paid in February 1998; and the remainder, in February 1999. (b) Included in this column for 1996 are the following: (i) present value costs of Western Atlas' portion of the 1996 premium for split-dollar life insurance for Mr. Brann of $1,936; (ii) the amount of $2,793 representing premiums paid by Western Atlas with respect to the participation in Western Atlas' Executive Medical Plan of each of Messrs. Brann and Roberts; (iii) the following amounts representing interest imputed to and taxable to the holder of loans from Western Atlas: Mr. Brann, $10,903, Mr. Cusumano, $3,186, and Mr. Roberts, $4,514; (iv) Western Atlas matching contributions of $1,750 made to the respective accounts of Messrs. Brann, Cusumano, Ohanian and Roberts under 35 Western Atlas' 401(k) plan; and (v) the amount of $7,500 paid to Mr. Ohanian by a subsidiary of Western Atlas pursuant to an executive flexible benefits plan; and (vi) the amount of $45,540 paid to Mr. Williams as relocation expenses and relocation bonus in connection with his move from San Francisco to the Detroit area in December 1995, to assume the position of Group Executive for Western Atlas' Manufacturing Systems Operations. (c) Represents salary paid to Mr. Williams from the date of his employment by Western Atlas, December 9, 1995, through December 31, 1995. The following table shows stock option grants with respect to shares of Western Atlas Common Stock under employee stock option plans of Western Atlas to the Named Executive Officers during the 1996 fiscal year. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS NUMBER OF PERCENTAGE OF SECURITIES TOTAL OPTIONS GRANT DATE UNDERLYING GRANTED TO EXERCISE PRESENT OPTIONS EMPLOYEES IN PRICE EXPIRATION VALUE NAME GRANTED (#)(A) FISCAL YEAR ($/SH) DATE ($)(B) - --------------------------------------- -------------- ------------------- ----------- ------------ ----------- Alton J. Brann......................... 1,731(c) 0.29% 57.75 8/15/2006 54,653 48,269(d) 7.98% 57.75 8/15/2006 1,523,990 Charles A. Cusumano.................... 1,731(c) 0.29% 57.75 8/15/2006 54,653 13,269(e) 2.19% 57.75 8/15/2006 418,940 Michael Ohanian........................ 8,655(f) 1.43% 57.75 8/15/2006 273,263 2,345(g) 0.39% 57.75 8/15/2006 74,038 Norman L. Roberts...................... 1,731(c) 0.29% 57.75 8/15/2006 54,653 13,269(e) 2.19% 57.75 8/15/2006 418,940 Clayton A. Williams.................... 1,731(c) 0.29% 57.75 8/15/2006 54,653 10,269(h) 1.70% 57.75 8/15/2006 324,222
- ------------------------ (a) All options granted to the Named Executive Officers were granted at the prevailing market price of the Western Atlas Common Stock on the date of grant. These options permit payment of the exercise price and any withholding tax due upon exercise by the surrender of already owned shares of Western Atlas Common Stock having a fair market value equal to the exercise price or the amount of withholding tax, as the case may be, or payment of withholding tax by applying shares otherwise receivable upon exercise. All such options become immediately exercisable upon the occurrence of certain events resulting in a change in control of Western Atlas, and accelerated vesting schedules become applicable in the event of the death of the optionee while in the employ of Western Atlas. Change in control has the meaning described on page 47. (b) The Black-Scholes model was used to determine the grant date present value of stock options. This method requires the assumption of certain values that affect the option price. The values which were used in this model are the volatility of Western Atlas' stock price and the estimate of the risk-free interest rate. Since Western Atlas does not pay a dividend, no yield on the Western Atlas Common Stock was assumed. For purposes of the model used to value the options in this table, a volatility factor of 26%, determined from historical stock price fluctuations, and a 6.7% risk-free interest rate, determined from market information prevailing on the grant date, were used. No adjustments were made for the nontransferability or risk of forfeiture of the stock options. This model assumed all options are exercised on their respective expiration dates. There is no assurance that these assumptions will prove true in the future. The actual value of the options depends on the market price of the Western Atlas Common Stock at the date of exercise, which may vary from the theoretical value indicated in the table. 36 (c) Incentive Stock Options. These options become 100% exercisable on the fifth anniversary of the date of grant. (d) Nonqualified Stock Options. These options become exercisable in four installments of 10,000 shares each on the first through the fourth anniversaries of the date of grant, and in one installment of 8,269 shares on the fifth anniversary of the date of grant. (e) Nonqualified Stock Options. These options become exercisable in four installments of 3,000 shares each on the first through the fourth anniversaries of the date of grant, and one installment of 1,269 shares on the fifth anniversary of the date of grant. (f) Incentive Stock Options. These options become exercisable in five equal installments of 1,731 shares on each of the first through the fifth anniversaries of the date of grant. (g) Nonqualified Stock Options. These options become exercisable in five equal installments of 469 shares each on the first through the fifth anniversaries of the date of grant. (h) Nonqualified Stock Options. These options become exercisable in four installments of 2,400 shares each on the first through the fourth anniversaries of the date of grant, and one installment of 669 shares on the fifth anniversary of the date of grant. 37 The following table provides information with respect to options to purchase Western Atlas Common Stock exercised by any of the Named Executive Officers during 1996 and with respect to the number and value of unexercised options held by each Named Executive Officer at December 31, 1996. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES(A)
NUMBER OF SECURITIES SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED ACQUIRED OPTIONS AT IN-THE-MONEY OPTIONS AT ON VALUE DECEMBER 31, 1996(#) DECEMBER 31, 1996($) EXERCISE REALIZED ---------------------------- ---------------------------- NAME (#)(B) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------------------------------- ----------- --------- ------------ -------------- ------------ -------------- Alton J. Brann......................... 12,644 498,880 72,196 273,440 2,605,610 7,440,925 Charles A. Cusumano.................... 0 0 18,640 37,360 984,220 885,010 Michael Ohanian........................ 0 0 3,390 12,110 167,809 201,379 Norman L. Roberts...................... 0 0 17,600 59,400 795,780 1,604,768 Clayton A. Williams.................... 0 0 5,000 32,000 104,675 576,200
- ------------------------ (a) The number and value of unexercised options to purchase Western Atlas Common Stock at the end of 1996 are shown in the table. In addition, Messrs. Brann, Cusumano, Ohanian and Roberts held options to purchase shares of Litton common stock, adjusted on account of the 1994 distribution of the Western Atlas Common Stock to the shareholders of Litton and granted to them prior to such distribution, as follows:
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY LITTON OPTIONS LITTON OPTIONS AT AT DECEMBER 31, 1996 (#) DECEMBER 31,1996 ($) ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------------------------------------- ------------ -------------- ------------ -------------- Alton J. Brann............................... 0 33,440 0 887,569 Charles A. Cusumano.......................... 9,940 2,560 326,878 82,604 Michael Ohanian.............................. 3,390 1,110 108,760 37,108 Norman L. Roberts............................ 14,600 7,400 460,596 233,951
- ------------------------ (b) During 1996 Mr. Brann exercised Litton options to purchase 49,840 shares, thereby realizing $1,388,406. ADJUSTMENTS TO OUTSTANDING WESTERN ATLAS OPTIONS AS A RESULT OF THE DISTRIBUTION. Western Atlas has granted outstanding options to purchase Western Atlas Common Stock under the Western Atlas Inc. 1993 Stock Incentive Plan and the Western Atlas Inc. Director Stock Option Plan (collectively, the "Western Atlas Options"). Upon the Distribution, each Western Atlas Option will be adjusted by (i) multiplying the number of shares of Western Atlas Common Stock subject to the option by the Adjustment Factor and (ii) dividing the exercise price per share of the option by the Adjustment Factor. For these purposes, the "Adjustment Factor" is defined as the quotient obtained by dividing (x) the Average Market Price of the Western Atlas Common Stock plus the Average Market Price of the Company Common Stock by (y) the Average Market Price of the Western Atlas Common Stock. The "Average Market Price" of Western Atlas Common Stock or Company Common Stock, as the case may be, is defined to be the average of the high and low daily prices of such security as reported on the NYSE Composite Tape on the sixth through tenth trading days, inclusive, following the date of the Distribution. The Western Atlas Options will be amended to provide that, (i) for purposes of the vesting, exercisability and duration of these options, service with the Company as an employee (or as a director, with respect to Western Atlas Options granted under the Western Atlas Inc. Director Stock Option Plan) shall be deemed to be service with Western Atlas, and (ii) upon the occurrence of certain events resulting in a change of control of the Company, these options will become immediately vested and exercisable to the extent not previously vested and exercisable. 38 EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS Messrs. Brann, Cusumano, Keane, Roberts and certain additional officers of the Company have entered into change in control agreements with the Company (collectively, the "Agreements"). The Agreements are operative only upon the occurrence of a change in control, which includes substantially those events described below. Absent a change in control, the Agreements do not require the Company to retain the executives or pay them any specified level of compensation or benefits. Generally, under the Agreements, a change in control is deemed to have occurred if: (a) a majority of the Board becomes composed of persons other than persons for whose election proxies have been solicited by the Board, or other than persons who are then serving as directors appointed by the Board to fill vacancies caused by death or resignation (but not removal) of a director or to fill newly created directorships; (b) another party becomes the beneficial owner of at least 30% of the Company's outstanding voting stock, other than as a result of a repurchase by the Company of its voting stock; (c) the approval by the shareholders of the Company of a merger, reorganization, or consolidation with another party (other than certain limited types of mergers) or sells or otherwise disposes of all or substantially all of the Company's assets; or (d) the shareholders approve the liquidation or dissolution of the Company. Each Agreement provides that for three years after a change in control there will be no adverse change in the executive's salary, bonus opportunity, benefits, or location of employment. If, during this three-year period, the executive's employment is terminated by the Company other than for cause, or if the executive terminates his or her employment for good reason as such terms are defined in the Agreements (including compensation reductions, demotions, relocation, and requiring excessive travel), or voluntarily during the 30-day period following the first anniversary of the change in control, the executive is entitled to receive an accrued salary and annual incentive payment through the date of the termination and, except in the event of death or disability, a lump-sum severance payment equal to three times the sum of the executive's base salary and annual bonus (and certain pension credit and insurance and other welfare plan benefits). Further, an additional payment is required in such amount that after the payment of all taxes, income and excise, the executive will be in the same after-tax position as if no excise tax under the Code had been imposed. In the event of termination of employment by reason of death or disability or for cause, the Agreements terminate and the sole obligation of the Company is to pay any amounts theretofore accrued thereunder. The Agreements will terminate effective as of the Distribution, but it is expected that the Company will enter into agreements with these individuals and other officers and key employees with substantially identical terms. The Company has entered into an employment agreement with Clayton A. Williams whereby Mr. Williams has agreed to accept employment from the period from the Distribution Date to February 13, 1999, initially as Group Executive of the Company's Industrial Automation Systems operations and Senior Vice President of the Company. Under this agreement, Mr. Williams will receive a current annual salary of not less than $280,000 and is entitled to participate in the cash bonus plan or plans for which he is eligible. In the event of Mr. Williams' termination of employment without cause, he is entitled to receive the remaining installments of base salary payable during the term of the agreement and a pro rata portion of the bonus for which he would have qualified had he remained employed throughout the year of any such termination. Mr. Ohanian has an employment contract with Intermec Corporation, a subsidiary of the Company, which provides for his employment through February 28, 1998, for a base salary of $300,000 and provides that he is eligible to receive an annual bonus, subject to the satisfaction of performance goals established by the Compensation Committee of the Company's Board of Directors, in accordance with the terms of any cash bonus plan in which he is eligible to participate. 39 RETIREMENT BENEFITS Prior to the Distribution, the Company's management will be participants in the tax-qualified and non-qualified retirement plans of Western Atlas (the "Western Atlas Retirement Plans"). Effective at the time of the Distribution, the Company will adopt tax-qualified and non-qualified retirement plans that will replicate, in all material respects, the Western Atlas Retirement Plans (the "Company Retirement Plans"). The following is a description of the expected terms of the Company Retirement Plans. THE FSSP AND RELATED RETIREMENT PLAN. Messrs. Brann, Cusumano, Ohanian and Roberts are expected to participate in the Company's Financial Security and Savings Program (the "FSSP"), a defined contribution plan intended to qualify under Sections 401(a) and 401(k) of the Code. Participation in the FSSP is generally available to employees of the Company located in the United States. A participant in the FSSP may elect to defer from 2% to 18% of his or her covered compensation for investment in the trust established under the FSSP, but the maximum amount which the employee may contribute to the FSSP for any calendar year is limited by provisions of the Code relating to the maximum amount, as adjusted for inflation, which may be contributed to plans qualified under Section 401(k) of the Code (the "401(k) Maximum Amount"), which is $9,500 for 1997. Deposits of 2% to 4% of the participant's compensation are invested in the FSSP Retirement Fund, while deposits in excess of 4% are invested in one or more investment funds as designated by the participant. The Company adds to the investment fund account of an FSSP participant an amount (not to exceed 2% of the participant's compensation) equal to 50% of the participant's deposits in excess of 4% of his or her compensation. In the case of employees who are classified as highly compensated pursuant to applicable Treasury releases (those earning over $80,000 for 1997), such employees' permissible contributions may be reduced further and the amount of the employer's matching contributions may be limited if certain nondiscrimination tests set forth in the Code are not achieved. A participant is entitled to receive his or her entire FSSP account, to the extent it has become vested, upon retirement or earlier termination of employment with the Company. Benefits under the FSSP are intended to supplement benefits under the Company's related retirement plan, which is a defined benefit plan. Although deposits to the FSSP do not comprise part of the retirement plan's trust (except for transfers of assets made at the request of a participant in connection with a distribution, as described below), the extent of an employee's participation in the Retirement Fund of the FSSP will affect the amount of such employee's benefit under the related retirement plan. The employee's contribution to the FSSP of 2% to 4% of his or her gross earnings causes the employee (if eligible to participate in the Company's retirement plan) to become eligible to accrue benefits under such retirement plan. Covered compensation for purposes of both the retirement plans and the FSSP Retirement Fund is aggregate cash compensation including bonuses and commissions but would, in the case of Messrs. Brann, Cusumano, Ohanian and Roberts be limited to $160,000 pursuant to provisions of the Code. The amount of a participant's annual retirement benefit at his or her normal retirement date (generally age 65) under the Company's defined benefit retirement plan is the higher of (A) 60% of the participant's deposits to the Retirement Fund of the FSSP (during the entire period of his or her employment) or (B) 85% of such deposits minus 75% of the participant's estimated Social Security primary benefit at age 65, with adjustments in the amount of the benefit to take into account factors such as age at retirement, degree of vesting, and form of benefit selected. In the case of Company employees who transferred directly from Western Atlas to the Company, contributions to the Retirement Fund of the FSSP will be included in the computation of a participant's total deposits for purposes of the formula set forth above. The annual retirement benefit at normal retirement age is reduced by the actuarial equivalent of lump sum distributions made (at the request of the participant) of the participant's Retirement Fund account in the FSSP. Should a participant wish to receive the entire benefit described in the formula set forth above, 40 the participant may direct that his or her Retirement Fund balance consisting of deposits with earnings be transferred to the retirement plan trust. RESTORATION PLAN.The limitations in the Code establishing the 401(k) Maximum Amount cause certain participants in the FSSP to lose Company-provided benefits which they could otherwise have derived from the deposit of a full 8% of their covered compensation to the FSSP. Consequently, the Company has adopted a noncontributory and unfunded plan (the "Restoration Plan") designed to restore the approximate amount of lost employer-provided benefits to those employees who participate in the FSSP to the fullest extent permitted by the applicable Code provisions but who are unable (as a result of the 401(k) Maximum Amount limitation) to contribute 8% of their compensation to the FSSP. Such lost employer-provided benefits which are restored under this plan consist of (i) all or part of the 50% matching contribution to the investment fund account of the FSSP participant and (ii) except in the case of Mr. Brann, who participates in a supplemental contractual arrangement (as described below), a portion of the full benefit under the Company's retirement plan if the participant's contributions to the FSSP Retirement Fund are limited to less than 4% of his or her compensation. Amounts that would have been deposited to the employee's Retirement Fund account by the employee and to his or her investment fund account by the Company are projected with interest to the participant's normal retirement date. Based upon these amounts, the participant's lost benefits from the Company's retirement plan and lost Company contributions to the investment fund are determined and converted to, and payable upon the participant's retirement as, a single life annuity if the participant is unmarried at such time or as a 100% joint and survivor annuity if the participant is then married; however, no payment will commence until the participant reaches the age of 62. SUPPLEMENTAL ARRANGEMENT FOR MR. BRANN. In addition to the FSSP, the related retirement plan, and the Restoration Plan, the Company has a noncontributory and unfunded supplemental contractual arrangement (the "Supplemental Arrangement") designed to provide additional retirement benefits to Mr. Brann. If Mr. Brann retires on or after age 65 following 25 years of service with the Company (including prior service with Western Atlas and Litton), his annual benefit (computed as a single life annuity) under the Supplemental Arrangement is 55% of his final average compensation, less amounts payable to Mr. Brann under Social Security and less that portion of pension benefits deemed to have been provided by the employer's (as opposed to Mr. Brann's) contributions which would have been received by Mr. Brann under any other retirement plan sponsored by the Company, Western Atlas or Litton if he was eligible to participate and had participated at all times in any such plan to the maximum extent permitted (regardless of the degree of actual participation). Final average compensation means one-third of covered cash compensation (including salary and bonus) deemed to have been awarded to or received by Mr. Brann during any three periods of 12 consecutive months specified by Mr. Brann occurring during the 60-month period preceding his retirement. Salary is deemed to have been received when paid and bonuses are deemed to have been received when determined and awarded to Mr. Brann by the Compensation Committee, regardless of when paid. For purposes of the Supplemental Arrangement, Mr. Brann had 24 credited years of service at August 1, 1997. If Mr. Brann's employment is terminated before he has completed 25 years of service or attained the age of 65, then the percentage of 55% referred to above is reduced in accordance with a schedule relating to age and length of service; however, payment of retirement benefits to Mr. Brann under the Supplemental Arrangement will, in no event, commence until he reaches age 62. The Supplemental Arrangement also provides for certain salary continuation payments in the event of Mr. Brann's disability and certain survivors' benefits in the event of his death while employed by the Company and prior to the commencement of the payment of retirement benefits. The following table indicates the approximate annual combined benefit which would be received by Mr. Brann representing the sum of (a) the benefit under the Company's basic retirement plan deemed to have been provided by the employer's contributions and (b) the benefit under the Supplemental Arrangement, based on the following assumptions: (i) participation in the voluntary retirement plans to the maximum extent permitted during the entire period of Mr. Brann's employment, (ii) retirement at age 65, and (iii) election of the benefit in the form of a single life annuity. 41 PENSION PLAN TABLE
YEARS OF SERVICE ------------------------------------- REMUNERATION 15 20 25 OR MORE - -------------------------------------------------------------------------- ----------- ----------- ----------- $1,200,000................................................................ $ 420,000 $ 570,000 $ 660,000 1,400,000................................................................ 490,000 665,000 770,000 1,600,000................................................................ 560,000 760,000 880,000 1,800,000................................................................ 630,000 855,000 990,000 2,000,000................................................................ 700,000 950,000 1,100,000
Although, as indicated above, the amount of such combined benefit would be reduced by Mr. Brann's Social Security primary benefit, the foregoing table does not give effect to such offset. Covered compensation under the Supplemental Arrangement is aggregate cash compensation, including salary and bonus, actually paid to Mr. Brann during the fiscal year. Since Mr. Brann received incentive awards from Western Atlas payable in installments, and since Mr. Brann's bonus awarded by Western Atlas for fiscal 1996 was not paid during 1996, the cash compensation paid to Mr. Brann during 1996 was $1,312,000, rather than the amount shown in the Summary Compensation Table. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. Messrs. Cusumano, Ohanian and Roberts participate in the Company's Supplemental Executive Retirement Plan, an unfunded plan which provides additional retirement benefits to key executive employees designated by the Compensation Committee of the Board after nomination by the Chief Executive Officer. A participant in this plan does not ordinarily vest in a retirement benefit until reaching the age of 60 and completing 15 years of service following the participant's 40th birthday and may not ordinarily begin receiving a retirement benefit thereunder until reaching age 62. Under this plan a participant's annual retirement benefit is the actuarial equivalent, as of the age of the participant at retirement, of the following computation (a) 1.6% of "average earnings" of the participant up to $125,000 (which amount is adjusted annually for inflation) plus (b) 2.2% of "average earnings" in excess of such amount, the sum of (a) plus (b) then being multiplied by the participant's number of years of service (not to exceed 25) following the participant's 40th birthday. Average earnings for purposes of this plan is the average of base salary and cash bonus awarded by the Company to the participant in the three periods of 12 consecutive months in which the participant's compensation was highest during the final 60 months of the participant's employment. There is offset from the benefit calculated in the manner described above the participant's Social Security primary benefit as well as all amounts of "Company-provided" retirement benefit which the participant receives (or could have received assuming full participation at all times of eligibility) under other retirement plans sponsored by the Company. For purposes of this plan, Mr. Roberts had 22 credited years of service, Mr. Ohanian had 9 credited years of service and Mr. Cusumano had 11 credited years of service at August 1, 1997. The following table indicates the approximate combined annual retirement benefit which would be received by a participant in this plan representing the sum of (a) the Company-provided benefit under the Company's basic retirement plan; (b) the benefit under the Restoration Plan; and (c) the benefit under the Supplemental Executive Retirement Plan based on retirement at age 65, full participation at all relevant times in the basic retirement plans, and election of a benefit in the form of a single life annuity. The table does not give effect to the offset of the participant's Social Security benefit. 42 PENSION PLAN TABLE
YEARS OF SERVICE ------------------------------------- REMUNERATION 15 20 25 OR MORE - -------------------------------------------------------------------------- ----------- ----------- ----------- $ 600,000................................................................. $ 177,739 $ 236,986 $ 296,232 800,000................................................................. 243,739 324,986 406,232 1,000,000................................................................ 309,739 412,986 516,232 1,200,000................................................................ 375,739 500,986 626,232
In addition to retirement benefits, certain benefits are payable under this plan in the event of the death or disability of the participant. In the event of a change of control of the Company, a participant is immediately vested in the retirement benefit and is entitled to receive a lump sum payment equal to the actuarial equivalent, as of the age of the participant on the date of the change of control of the Company, of the retirement benefit which would have been payable at age 65, unless the committee which then administers the plan elects to defer such lump sum payment. INDEBTEDNESS OF MANAGEMENT TO THE COMPANY As a form of additional incentive for its key employees, Western Atlas provides loans to certain such employees located in the United States. Under such program, loans in the aggregate principal amount of $1,196,000 were outstanding at August 1, 1997 to four executive officers of the Company, as follows: Alton J. Brann, $616,000; Charles A. Cusumano, $225,000; Michael E. Keane, $100,000; and Norman L. Roberts, $255,000. These loans are unsecured, currently bear interest at the rate of 4% per annum, and are payable on the Company's demand, but, in any event, not later than the earlier of (i) termination of the borrower's employment with the Company or any subsidiary thereof, or (ii) December 31, 1998. The foregoing amounts represent the largest amount of indebtedness of each such executive officer and present executive officers as a group under such loan program outstanding since December 31, 1995. It is anticipated that the Company will establish a similar program effective as of the Distribution Date, and that the receivables of Western Atlas representing such loans will be transferred to the Company. The final maturity date of these loans is expected to be extended to December 31, 2002. INCENTIVE COMPENSATION PLANS FOLLOWING THE DISTRIBUTION The following are descriptions of the incentive compensation plans that are expected to provide benefits to management employees of the Company after the Distribution. 1997 STOCK INCENTIVE PLAN The UNOVA, Inc. 1997 Stock Incentive Plan (the "1997 Plan") has been adopted by the Board of Directors of the Company and approved by Western Atlas as the Company's sole shareholder. The Company's Board believes that the adoption of the 1997 Plan will help the Company to attract, retain and provide appropriate incentives for management personnel. The description of the 1997 Plan set forth below is a summary only and is qualified in its entirety by reference to the text of the 1997 Plan, which is attached to this Information Statement as Annex B. GENERAL. The 1997 Plan provides that the total number of shares available for grant shall be 5,500,000 shares of Company Common Stock plus a number of shares of Company Common Stock equal to 1% of the number of shares of Company Common Stock outstanding as of January 1 of each year beginning in 1999; any amount not used in a given year may be carried over into the next year. In addition to the foregoing limitation, no more than 5,000,000 shares of Company Common Stock may be granted over the life of the 1997 Plan for incentive stock options (within the meaning of Section 422 of the Code) ("ISOs"), and no more than 30% of the shares of Company Common Stock available for grant under the plan as of the first day of any fiscal year during which the 1997 Plan is in effect may be utilized in that 43 fiscal year for awards in the form of restricted stock ("Company Restricted Stock"). Shares subject to an option or award may be authorized but unissued shares or treasury shares. In each calendar year, no individual may be granted awards covering more than 1,000,000 shares of Company Common Stock. If an award granted under the 1997 Plan expires, terminates or lapses for any reason, without the issuance of shares of Company Common Stock thereunder, such shares will again be available under the 1997 Plan. In the event of a merger, reorganization, consolidation, recapitalization, spin-off, stock dividend, stock split, extraordinary distribution with respect to the Company Common Stock or any other similar event, the Board or its Compensation Committee (the "Compensation Committee") shall make such adjustments in the aggregate number and kind of shares reserved for issuance, the maximum number of shares that can be granted to any participant in any single year, the number of shares covered by outstanding awards and the exercise prices specified therein and make such other equitable adjustments as may be determined to be appropriate. An employee may satisfy a tax withholding requirement by applying shares to which the employee is entitled as a result of the exercise of a nonqualified stock option or the termination of the restricted period with respect to any shares of Company Restricted Stock awarded under the 1997 Plan. ELIGIBILITY AND PARTICIPATION. Participants in the 1997 Plan will be selected by the Compensation Committee, which will administer the 1997 Plan. The 1997 Plan contemplates that awards will be granted to officers and other key employees of the Company and that participants will be such employees of the Company and its subsidiaries and affiliates, including officers of the Company, as from time to time are designated as such by the Compensation Committee. ADMINISTRATION. The 1997 Plan requires that the Compensation Committee consist solely of at least two directors of the Company who are "non-employee directors," as such term is used in Rule 16b-3 under the Exchange Act and are "outside directors" within the meaning of Section 162(m) of the Code. Accordingly, members of the Compensation Committee may not be current employees of the Company, former officers of the Company or be receiving fees from the Company other than in their capacity as directors and may not be engaged in any transaction or business relationship with the Company which would require disclosure under the proxy rules of the Commission. Under the 1997 Plan and subject to the limitations thereunder, the Compensation Committee is authorized (i) to select participants in the 1997 Plan, (ii) to determine whether and to what extent awards are to be made, (iii) to determine the number of shares of Company Common Stock to be covered by each award, (iv) to determine the terms and conditions of any award, (v) to adjust the terms and conditions of any award, (vi) to determine to what extent and under what circumstances Company Common Stock and other amounts payable with respect to an award are to be deferred and (vii) to determine under what circumstances an award may be settled in cash or stock under the plan. The Compensation Committee also has authority to adopt, alter and repeal administrative rules, guidelines and practices, to interpret the terms and provisions of the 1997 Plan and any award issued thereunder, and to otherwise supervise the administration of the 1997 Plan. AMENDMENT AND TERMINATION. The 1997 Plan will terminate on September 24, 2007. Under the 1997 Plan, options to purchase Company Common Stock ("Company Options") or other awards granted and outstanding as of the date the 1997 Plan terminates are not affected or impaired by such termination. The Board may amend, alter or discontinue the 1997 Plan in such respects as the Board may deem advisable; but no such amendment, alteration or discontinuation may be made without shareholder approval to the extent such approval is required by law or agreement. No such amendment, alteration or discontinuation may impair the rights of participants under outstanding awards without the consent of the participants affected thereby (except for any amendment made to cause the plan to qualify for an exemption provided by Rule 16b-3) or make any change that would disqualify the 1997 Plan from the exemption provided by Rule 16b-3. 44 The Compensation Committee may amend any award theretofore granted, prospectively or retroactively. No such amendment or modification may impair the rights of any participant under any award without the consent of such participant (except for any amendment made to cause the plan to qualify for an exemption provided by Rule 16b-3). However, the Compensation Committee may not lower the exercise price of a previously granted option or replace an option with a new option having a lower exercise price. PRICING OF OPTIONS. Under the 1997 Plan, an employee to whom a Company Option is granted will have the right to purchase the number of shares of Company Common Stock covered by the Company Option, subject to the terms and provisions of the 1997 Plan. The exercise price to be paid by a participant, which may not be less than the fair market value of the Company Common Stock subject thereto on the date of grant, is determined by the Compensation Committee and will be set forth in a Company Option agreement between the Company and the participant. Under the 1997 Plan, the purchase price of a Company Option is payable, (i) in cash or (ii) by the surrender, at the fair market value on the date on which the Company Option is exercised, of shares of unrestricted Company Common Stock already owned by the optionee for at least six months. STOCK APPRECIATION RIGHTS. The 1997 Plan authorizes the Compensation Committee to grant stock appreciation rights ("SARs") in connection with all or part of any Company Option. An SAR entitles its holder to receive from the Company, at the time of exercise of such right, an amount equal to the excess of the fair market value (determined in accordance with procedures to be established by the Compensation Committee) at the date of exercise of a share of Company Common Stock over the exercise price of the related Company Option multiplied by the number of shares as to which the holder is exercising the SAR. The amount payable may be paid by the Company in Company Common Stock (valued at its fair market value on the date of exercise), cash or a combination thereof, as the Compensation Committee may determine, which determination may be made after considering any preference expressed by the holder. To the extent an SAR is exercised, any related Company Option will be cancelled and, to the extent the related Company Option is exercised, any SAR will be cancelled. INCENTIVE STOCK OPTIONS. ISOs may be granted at the discretion of the Compensation Committee under the 1997 Plan. No term of the 1997 Plan relating to ISOs may be interpreted or authority exercised so as to disqualify the plan under Section 422 of the Code. EXERCISABILITY OF OPTIONS AND SARS. Company Options and SARs will become fully exercisable upon a Change in Control (as defined below). Otherwise, the 1997 Plan provides that if such participant's employment by the Company or its subsidiaries is terminated for any reason, other than death, disability or retirement, such participant may exercise a Company Option or SAR to the extent then exercisable, or on such accelerated basis as the Compensation Committee may determine, within the period ending on the earlier of three months after such termination (seven months if the termination follows a Change in Control) or the date the Company Option or SAR expires in accordance with its terms; provided, however, that if the optionee dies within such three-month period, any unexercised Company Option or SAR held by such optionee shall, notwithstanding the expiration of such three-month period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of twelve months from the date of such death or until the expiration of the stated term of such Company Option or SAR, whichever period is shorter. Unless otherwise determined by the Compensation Committee, if such participant dies prior to termination of employment, his legatees, executors, distributees or personal representatives may, subject to the provisions of the 1997 Plan, exercise the Company Option or SAR granted to such participant within the period ending on the earlier of (i) twelve months after the date of such death or (ii) the date the Company Option or SAR expires in accordance with its terms. Unless otherwise determined by the Compensation Committee, if an optionee's employment terminates by reason of disability, any Company Option or SAR held by such optionee may thereafter be exercised 45 by the optionee, to the extent it was exercisable at the time of termination or on such accelerated basis as the Compensation Committee may determine, for a period of three years (or such other period as the Compensation Committee may prescribe in the option agreement) from the date of such termination of employment or until the expiration of the stated term of such Company Option or SAR, whichever period is the shorter, provided, however, that if the optionee dies within such three-year (or other) period, any unexercised Company Option or SAR held by such optionee shall, notwithstanding the expiration of such three-year (or other) period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of twelve months from the date of such death or until the expiration of the stated term of such Company Option or SAR, whichever period is the shorter. Unless otherwise determined by the Compensation Committee, if an optionee's employment terminates by reason of retirement, any Company Option or SAR held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of such retirement or on such accelerated basis as the Compensation Committee may determine, until the expiration of the stated term of such Company Option or SAR. The right of any participant to exercise a Company Option may not be transferred in any way other than (i) by will or the laws of descent and distribution or (ii) as otherwise expressly permitted under the applicable option agreement including, if so permitted, pursuant to a gift to the optionee's family, whether directly or indirectly or by means of a trust or partnership or otherwise. All Company Options are exercisable by a participant during his or her lifetime only, by the optionee, or any guardian or legal representative or permitted transferee. AWARDS OF RESTRICTED STOCK. The 1997 Plan also permits the Compensation Committee to grant shares of Company Restricted Stock to a participant subject to the terms and conditions imposed by the Compensation Committee. Each certificate for Company Restricted Stock will be evidenced in such manner as the Compensation Committee may deem appropriate, including book entry registration or issuance of one or more certificates registered in the name of the participant. The Compensation Committee may require that such certificate be legended and deposited with the Company. There will be established for each award of Company Restricted Stock a restriction period (the "restriction period") of such length as is determined by the Compensation Committee. Shares of Company Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered, except as described below, during the restriction period. Except for such restrictions on transfer and such other restrictions as the Compensation Committee may impose, the participant will have all the rights of a holder of Stock as to such Company Restricted Stock including, if applicable, the right to vote the shares and the right to receive any cash dividends. If so determined by the Compensation Committee in the applicable Company Restricted Stock Agreement, the Compensation Committee may require the payment of cash dividends to be deferred and reinvested in additional Company Restricted Stock. At the expiration of the restriction period, the Company will redeliver to the participant unlegended certificates. Except as provided by the Compensation Committee at the time of grant or otherwise, upon a termination of employment for any reason during the restriction period, all shares still subject to restriction are forfeited by the participant. The 1997 Plan provides that shares of Company Restricted Stock will cease to be subject to restrictions on transfer upon a Change in Control. The vesting of Company Restricted Stock may, in the discretion of the Committee, be conditioned upon the achievement by the participant of pre-established performance goals determined by the Committee or upon the continued service of the participant, or may be conditioned upon a combination of both such criteria. It is expected that the award of Company Restricted Stock to participants, the deductibility of whose compensation may be limited by the limitation on deductibility imposed by Section 162(m) of the Code will require the achievement of such performance goals by the recipient of the award, such that the compensation received thereunder will not be subject to such limitation on deductibility. The 1997 Plan provides that in the case of an award of Company Restricted Stock the vesting of which is conditioned only upon the continued service of the participant, such award will not vest earlier than the 46 first, second and third anniversaries of the date of grant thereof, on each of which dates a maximum of one-third of the shares subject to the award may vest. In the case of an award of Company Restricted Stock the vesting of which is conditioned upon the attainment of a specified performance goal or goals, such award will not vest earlier than the first anniversary of the date of grant thereof. CHANGE IN CONTROL. For purposes of the 1997 Plan, a "Change in Control" means (i) the acquisition by, any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30 percent or more of either (a) the then outstanding shares of Company Common Stock (the "Outstanding Company Common Stock") or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); except that the following acquisitions of stock will not constitute a Change in Control: (1) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege, unless the security being so converted was itself acquired directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (4) any acquisition by any corporation pursuant to a transaction which complies with subclauses (a), (b) and (c) of clause (iii) of this paragraph; or (ii) individuals who, as of the effective date of the Plan, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; except that any individual becoming a director subsequent to such date whose election, or nomination for election by the shareholders of the Company, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board will be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-II of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board; or (iii) approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination") or, if consummation of such Business Combination is subject at the time of such approval by shareholders to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation), unless following such Business Combination, (a) more than 60 percent of, respectively, the then outstanding shares of common stock, and the combined voting power of the then outstanding voting securities, entitled to vote generally, in the election of directors, of the corporation resulting from such Business Combination (including, without limitation, a corporation which, as a result of such transaction owns the Company or all or substantially all of the Company's assets) will be beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (b) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) will beneficially own, directly or indirectly, 30 percent or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors except to the extent that such ownership existed prior to the Business Combination and (c) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination will be members of the Incumbent Board at the time of the execution of the initial agreement, or action of the Board providing for such Business Combination; or (iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 47 In the event of a Change in Control: (i) any Company Options and SARs outstanding as of the date such Change in Control is determined to have occurred and not then exercisable and vested shall become fully, exercisable and vested to the full extent of the original grant; and (ii) the restrictions applicable to any Company Restricted Stock shall lapse, and such Company Restricted Stock shall become free of all restrictions and become fully vested and transferable to the full extent of the original grant. The 1997 Plan further provides that during the 60-day period following a Change in Control, the holder of a Company Option has the right to surrender such option for cash in an amount equal to the difference between the "change in control price" (as defined in the 1997 Plan) and the exercise price. Notwithstanding the foregoing, if the receipt of cash upon surrender of an option would make a Change in Control transaction ineligible for pooling-of-interests accounting treatment, the Committee may substitute for the cash payment common stock with a fair market value equal to the cash that would otherwise be payable. 48 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF COMPANY COMMON STOCK BY MANAGEMENT The following table sets forth the number of shares of Company Common Stock expected to be beneficially owned following the Distribution, directly or indirectly, by each director, each Named Executive Officer and all directors and executive officers as a group, based upon the ownership by such persons of Western Atlas Common Stock as of September 30, 1997 and based upon the expected participation of certain directors in the Director Plan. A list of current executive officers of the Company is set forth on page 32 of this Information Statement. Except as otherwise indicated, each individual named is expected to have sole investment and voting power with respect to the securities shown.
AMOUNT AND NATURE OF BENEFICIAL PERCENT PERCENT OF NAME OF BENEFICIAL OWNER OWNERSHIP CLASS - --------------------------------------------------------------------------------- ------------ --------------- Alton J. Brann................................................................... 16,199 * Charles A. Cusumano.............................................................. 2,053 * Stephen E. Frank................................................................. 25,000(a) * Orion L. Hoch.................................................................... 126,657( (b) * Michael E. Keane................................................................. 1,355 * Michael Ohanian.................................................................. 472 * Norman L. Roberts................................................................ 8,715 * Steven B. Sample................................................................. 25,500(a) * William D. Walsh................................................................. 25,000(a) * Clayton A. Williams.............................................................. 400 * All directors and executive officers (10 persons)................................ 231,351 *
- ------------------------ (*) Less than 1%. (a) Includes options to purchase 25,000 shares expected to be granted on the Distribution Date pursuant to the Director Plan. (b) Includes 1,080 shares expected to be owned by Dr. Hoch's wife, as to which shares Dr. Hoch will disclaim beneficial ownership. BY OTHERS The following table sets forth each person or entity that is expected to beneficially own more than 5% of the Company Common Stock outstanding immediately following the Distribution, based upon the 49 ownership of Western Atlas Common Stock as reported to the Company (except as noted) as of December 31, 1996.
AMOUNT AND NATURE OF BENEFICIAL PERCENT PERCENT OF NAME OF BENEFICIAL OWNER OWNERSHIP CLASS - ------------------------------------------------------------------- ------------- --------- Unitrin, Inc....................................................... 12,657,764(a) 23.58% One East Wacker Dr. Chicago, IL 60601 FMR Corp........................................................... 4,145,115(b) 7.71% 82 Devonshire Street Boston, MA 02109 The Capital Group Companies, Inc................................... 5,558,100(c) 10.31% 333 South Hope Street Los Angeles, CA 90071 Merrill Lynch & Co., Inc........................................... 3,125,031(d) 5.82% World Financial Center, North Tower 250 Vesey Street New York, NY 10281
- ------------------------ (a) Unitrin, Inc., ("Unitrin"), has reported in a filing on Schedule 13D under the Exchange Act that these shares are owned by two of its subsidiaries, Trinity Universal Insurance Company (7,206,776 shares) and United Insurance Company of America (5,450,988 shares). Unitrin reported that it had sole voting power and sole dispositive power with respect to all such shares. Based upon the foregoing, Unitrin would beneficially own 12,657,764 shares of Company Common Stock immediately following the Distribution. (b) FMR Corp. ("FMR") has reported in a filing on Schedule 13G under the Exchange Act that, as of July 31, 1997, it has sole dispositive power with respect to these shares and sole voting power with respect to 237,491 of such shares. Based upon the foregoing, FMR would beneficially own 4,145,115 shares of Company Common Stock immediately following the Distribution. (c) In a filing on Schedule 13G under the Exchange Act, The Capital Group Companies, Inc., stated that, as of July 9, 1997, it has sole voting power with respect to 1,068,000 shares and sole dispositive power with respect to 5,558,100 shares. The Capital Group Companies, Inc., has advised Western Atlas that 4,111,800 of such shares are beneficially owned by its wholly owned subsidiary Capital Research and Management Company, which acts as investment manager for institutional investors such as pension funds and mutual funds, and the remainder of such shares are beneficially owned by others of its subsidiaries. The Capital Group Companies, Inc., disclaims beneficial ownership of these shares. (d) In a filing on Schedule 13G under the Exchange Act, Merrill Lynch & Co., Inc. stated that it held shared voting power and shared dispositive power with respect to 3,125,031 shares. The filing further discloses that the beneficial owner of the shares reported is a registered investment company advised by Merrill Lynch Asset Management known as Merrill Lynch Growth Fund for Investment and Retirement. Merrill Lynch & Co. and various of its affiliates disclaim beneficial ownership of the shares of Western Atlas reported. 50 DESCRIPTION OF CAPITAL STOCK AUTHORIZED CAPITAL STOCK The Company's authorized capital stock consists of 50,000,000 shares of preferred stock, par value $.01 per share (the "Company Preferred Stock"), and 250,000,000 shares of Company Common Stock. No shares of Company Preferred Stock will be issued in connection with the Distribution. Based on the number of shares of Western Atlas Common Stock outstanding at , 1997, up to approximately 53.9 million shares of Company Common Stock will be issued to shareholders of Western Atlas in the Distribution. All of the shares of Company Common Stock issued in the Distribution will be validly issued, fully paid and nonassessable. COMPANY COMMON STOCK The holders of Company Common Stock will be entitled to one vote for each share on all matters voted on by shareholders, including elections of directors, and, except as otherwise required by law or provided in any resolution adopted by the Board with respect to any series of Company Preferred Stock, the holders of such shares exclusively will possess all voting power. The Certificate of Incorporation of the Company (the "Certificate") does not provide for cumulative voting in the election of directors. Subject to any preferential rights of any outstanding series of Company Preferred Stock created by the Board from time to time, the holders of Company Common Stock will be entitled to such dividends as may be declared from time to time by the Board from funds available therefor, and upon liquidation will be entitled to receive pro rata all assets of the Company available for distribution to such holders. See "Risk Factors -- Dividend Policies." DIRECT REGISTRATION SYSTEM. The Company maintains a direct registration system ("DRS") for the Company Common Stock. Under the DRS, which will be operational at the time of the Distribution, the transfer agent will establish a book-entry account for each shareholder of record of Western Atlas who is entitled to receive shares of Company Common Stock in the Distribution. The transfer agent will mail an account statement to each such shareholder promptly following the Distribution. The DRS permits each shareholder to maintain the registration of his or her shares of Company Common Stock in his or her own name without the need for the Company to issue, or for the shareholder to maintain or store, a physical stock certificate. The Company believes that the DRS will enable the Company to reduce the costs of maintaining shareholder accounts and will enable shareholders to eliminate the costs of storing and safeguarding stock certificates and facilitate the timely settlement of trading in the Company Common Stock. Any shareholder who wants to receive a physical certificate evidencing his or her shares of Company Common Stock will be able to obtain a certificate at no charge by contacting the transfer agent. Additional information concerning the DRS is contained in the separate printed materials being distributed with this Information Statement. Copies of such information can also be obtained by contacting UNOVA, Inc. Shareholder Services at (310) 888-2660. COMPANY PREFERRED STOCK Under the Certificate, the Board will be authorized to provide for the issue of shares of Company Preferred Stock, in one or more series, and to fix for each such series such powers, designations, preferences and relative, participating, optional and other special rights, and such qualifications, limitations or restrictions, as are stated in the resolution adopted by the Board providing for the issue of such series and are permitted by the Delaware General Corporation Law (the "Delaware Law"). See "Certain Antitakeover Effects of Certain Provisions of the Certificate of Incorporation, the By-laws, State Law and the Rights Plan -- Preferred Stock." 51 CERTAIN ANTITAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION, THE BY-LAWS, STATE LAW AND THE RIGHTS PLAN The Certificate, the By-laws of the Company (the "By-laws") and the Rights Plan contain certain provisions that could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest or otherwise. The description set forth below is intended as a summary only and is qualified in its entirety by reference to the Certificate and the By-laws, which are attached to this Information Statement as Annex C and Annex D, respectively. CLASSIFIED BOARD OF DIRECTORS The Certificate and By-laws provide that the Board will be divided into three classes of directors, with the classes to be as nearly equal in number as possible. The Board consists of the persons referred to in "Management -- Directors of the Company" above. The Certificate and the By-laws provide that, of the initial directors of the Company, approximately one-third will continue to serve until the 1999 Annual Meeting of Shareholders, approximately one-third will continue to serve until the 2000 Annual Meeting of Shareholders, and approximately one-third will continue to serve until the 2001 Annual Meeting of Shareholders. Of the initial directors, Mr. Frank and Dr. Hoch will serve until the 1999 Annual Meeting of Shareholders, Dr. Sample and Mr. Walsh will serve until the 2000 Annual Meeting of Shareholders and Mr. Brann will serve until the 2001 Annual Meeting of Shareholders. Starting with the 1999 Annual Meeting of Shareholders, one class of directors will be elected each year for a three-year term. The classification of directors will have the effect of making it more difficult for shareholders to change the composition of the Board. At least two annual meetings of shareholders, instead of one, will generally be required to effect a change in a majority of the Board. Such a delay may help ensure that the Company's directors, if confronted by a holder attempting to force a proxy contest, a tender or exchange offer, or an extraordinary corporate transaction, would have sufficient time to review the proposal as well as any available alternatives to the proposal and to act in what they believe to be the best interest of the shareholders. The classification provisions will apply to every election of directors, however, regardless of whether a change in the composition of the Board would be beneficial to the Company and its shareholders and whether or not a majority of the Company's shareholders believe that such a change would be desirable. The classification provisions could also have the effect of discouraging a third party from initiating a proxy contest, making a tender offer or otherwise attempting to obtain control of the Company, even though such an attempt might be beneficial to the Company and its shareholders. The classification of the Board could thus increase the likelihood that incumbent directors will retain their positions. In addition, because the classification provisions may discourage accumulations of large blocks of the Company's stock by purchasers whose objective is to take control of the Company and remove a majority of the Board, the classification of the Board could tend to reduce the likelihood of fluctuations in the market price of the Company Common Stock that might result from accumulations of large blocks for such a purpose. Accordingly, shareholders could be deprived of certain opportunities to sell their shares of Company Common Stock at a higher market price than might otherwise be the case. NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES The Certificate provides that, subject to any rights of holders of Company Preferred Stock to elect additional directors under specified circumstances, the number of directors will be fixed from time to time exclusively pursuant to a resolution adopted by the Board. In addition, the By-laws provide that, subject to any rights of holders of Preferred Stock, and unless the Board otherwise determines, any vacancies will be filled only by the affirmative vote of a majority of the remaining directors, though less 52 than a quorum. Accordingly, the Board could prevent any shareholder from enlarging the Board and filling the new directorships with such shareholder's own nominees. Under the Delaware Law, unless otherwise provided in the Certificate, directors serving on a classified board may only be removed by the shareholders for cause. In addition, the Certificate and the By-laws provide that directors may be removed only for cause and only upon the affirmative vote of holders of at least 80 percent of the voting power of all the then outstanding shares of stock entitled to vote generally in the election of directors ("Voting Stock"), voting together as a single class. NO SHAREHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS The Certificate and the By-laws provide that, subject to the rights of any holders of Company Preferred Stock to elect additional directors under specified circumstances, shareholder action can be taken only at an annual or special meeting of shareholders and prohibit shareholder action by written consent in lieu of a meeting. The By-laws provide that special meetings of shareholders can be called only upon a written request stating the purpose of such meeting delivered to the Chairman of the Board, the President (if any) or the Secretary, signed by a majority of the Board or by resolution of the Board or the Executive Committee (if any). Shareholders are not permitted to call a special meeting or to require that the Board call a special meeting of shareholders. Moreover, the business permitted to be conducted at any special meeting of shareholders is limited to the business brought before the meeting pursuant to the notice of meeting given by the Company. The provisions of the Certificate and the By-laws prohibiting shareholder action by written consent may have the effect of delaying consideration of a shareholder proposal until the next annual meeting unless a special meeting is called at the request of a majority of the Board or by resolution of the Board or the Executive Committee thereof. These provisions would also prevent the holders of a majority of the voting power of the Voting Stock from unilaterally using the written consent procedure to take shareholder action and from taking action by consent. Moreover, a shareholder could not force shareholder consideration of a proposal over the opposition of the Chairman and the Board by calling a special meeting of shareholders prior to the time the Chairman or a majority of the Board believes such consideration to be appropriate. FAIR PRICE PROVISION Article IX of the Certificate ("Article IX") places certain limitations on the Company's ability to effect a Business Combination with an Interested Shareholder (as each such term is defined therein). DEFINITIONS. Article IX confers upon a majority of the Whole Board, or, if a majority of the Whole Board does not consist of Continuing Directors (as hereinafter defined), a majority of the then Continuing Directors, the power and duty to determine, on the basis of information known after reasonable inquiry, the applicability of certain defined terms used in Article IX as well as all other facts necessary to determine compliance with Article IX. A summary of the definitions of certain of these terms follows. An "Interested Shareholder" is any person (other than the Company or a subsidiary) who or which is (a) the beneficial owner (as defined below) of ten percent or more of the voting power of the outstanding Voting Stock, or (b) an "Affiliate" or an "Associate" (as defined in Article IX) of the Company or at any time within the two-year period immediately prior to the date in question was the beneficial owner of ten percent or more of the voting power of the then outstanding Voting Stock, or (c) an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question Beneficially Owned (as defined below) by a person described in (a) or (b) above (other than shares acquired through a public offering). Notwithstanding the foregoing, neither Unitrin nor any of its subsidiaries will be an Interested Shareholder as long as such entities in the aggregate beneficially own less than 12,658,000 shares of Company Common Stock. 53 A person is the "beneficial owner" of, or "Beneficially Owns," any shares of Voting Stock which such person or any of its Affiliates or Associates (as defined in Article IX) directly or indirectly owns or has the right to acquire or vote or which are beneficially owned by any member of any group of such persons having any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. A "Business Combination" includes the following transactions: (a) a merger or consolidation of the Company or any of its subsidiaries with an Interested Shareholder or any corporation (whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate of such Interested Shareholder; (b) the sale or other disposition (in one transaction or a series of transactions) by the Company or any of its subsidiaries of assets having an aggregate "Fair Market Value" (as defined in Article IX) of $10 million or more if an Interested Shareholder or any Affiliate or Associate of an Interested Shareholder is a party to the transaction; (c) the issuance or transfer (in one transaction or a series of transactions) of any securities of the Company or of any of its subsidiaries to an Interested Shareholder or any Affiliate or Associate of an Interested Shareholder in exchange for cash or property (including stock or other securities) having an aggregate Fair Market Value of $10 million or more; (d) the adoption of any plan or proposal for the liquidation or dissolution of the Company proposed by or on behalf of an Interested Shareholder or any Affiliate or Associate of an Interested Shareholder; (e) any reclassification of securities, recapitalization, merger with a subsidiary or other transaction which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding stock of any class of the Company or any of its subsidiaries Beneficially Owned by an Interested Shareholder or any Affiliate or Associate of an Interested Shareholder. A "Continuing Director" is any member of the Company's Board, who is not affiliated with the Interested Shareholder in question and was a director of the Company prior to the time such Interested Shareholder became an Interested Shareholder, and any director who is thereafter appointed to fill any vacancy on the Company's Board or who is elected and who, in either event, is not affiliated with an Interested Shareholder and in connection with his or her initial assumption of office was recommended by a majority of the Continuing Directors then on the Company's Board. SHAREHOLDER VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS. Article IX requires the approval of the holders of 80 percent of the voting power of all of the then outstanding shares of the Voting Stock, voting together as a single class, as a condition to Business Combinations, except in cases in which one of the two alternatives described under "Exceptions to Higher Vote Requirement" were applicable and were satisfied. In the event that either of such alternatives were applicable and satisfied with respect to the particular Business Combination, the affirmative vote otherwise required by the Delaware Law and the other provisions of the Certificate and by the terms of any class or series of stock of the Company which might be outstanding at the time of the Business Combination would apply. (Although the Certificate authorizes 50,000,000 shares of preferred stock, no such shares will be outstanding immediately after the Distribution and the Board has no present intention of issuing any such shares, other than the shares reserved for issuance in connection with the Company's Share Purchase Rights Plan. If any authorized preferred stock were in the future issued, its terms might be such as to require the approval of a Business Combination by its holders, voting as a series or class. That requirement would be in addition to, and would not be affected by, Article IX.) Thus, depending upon the circumstances, Article IX may require an 80 percent shareholder vote for a Business Combination in cases in which either a majority vote or no vote would presently be required under the Delaware Law. Even if an Interested Shareholder could obtain a 80 percent affirmative shareholder vote in favor of a Business Combination under the Delaware Law such Business Combination may nevertheless (depending upon its nature) require approval by the Company's Board prior to its submission to a shareholder vote (such would be the case, for instance, with respect to a merger or consolidation involving the Company). In that case, the Interested Shareholder could not effect such Business Combination, regardless of its ability to assure an 80 percent shareholder vote, without Board action. Further, even were an Interested Shareholder able to obtain votes sufficient to effect a repeal of such provisions, it 54 could not, under the Certificate, exercise its power by written consent or compel the Board to call a special meeting of shareholders for the purpose of voting on such repeal. As discussed above, as a result of the classified board provisions in the Certificate, an interested shareholder could not be assured of gaining control of the Board until at least two shareholder meetings had been held. In addition, Section 203 of the Delaware Law ("Section 203"), which restricts second-step mergers with "Interested Shareholders" (and is described more fully below) might also operate to prevent the ability of an Interested Shareholder to effect a Business Combination. EXCEPTIONS TO HIGHER VOTE REQUIREMENT. In the case of a Business Combination that involved the receipt of cash or other consideration by the Company's shareholders, solely in their capacity as shareholders, the 80 percent affirmative shareholder vote requirement would not apply if either (a) the Business Combination were approved by a majority of the Continuing Directors of the Company (in order for this condition to be satisfied there must be at least three Continuing Directors), or (b) all of the requirements described in paragraphs (1), (2) and (3) below were satisfied. If the Business Combination did not involve the receipt of consideration by the Company's shareholders solely as shareholders (E.G., because it took the form of a sale of assets or an original issuance of the Company's securities to an Interested Shareholder), only approval by a majority of the Continuing Directors would avoid the requirement for such 80 percent shareholder vote, although, as noted above (see "--Shareholder Vote Required for Certain Business Combinations"), such Business Combination might, depending upon the circumstances, otherwise require a lesser or no shareholder vote. If there were fewer than three Continuing Directors, such Business Combination would necessarily require such 80 percent shareholder vote. On the other hand, approval by a majority of the Continuing Directors would, with respect to any Business Combination, avoid both the 80 percent shareholder vote requirement and the need to satisfy all of the requirements described below. As noted above, under the Delaware Law a particular Business Combination may, depending upon its nature, require approval of the Board and/or less-than-80-percent shareholder approval. Neither the approval of such Business Combination by a majority of the Continuing Directors nor the satisfaction of the form of consideration, minimum price and procedural requirements of Article IX with respect to such Business Combination would supersede such other approval requirements of the Delaware Law or any class voting requirements with respect to any series or class of stock of the Company then outstanding. It also would not supersede the requirements of Section 203, discussed below. Rather, such approval or satisfaction of such form of consideration, minimum price and procedural requirements would eliminate only the requirement for the 80 percent shareholder vote otherwise required by Article IX. In order to avoid the requirement of an 80 percent shareholder vote or approval by a majority of the Continuing Directors in the case of a Business Combination that involved the receipt of cash or other consideration by the Company's shareholders, the following conditions must be met: (1) FORM OF CONSIDERATION REQUIREMENT. The consideration to be received by holders of a particular class (or series) of capital stock in the Business Combination would be required to be either cash or the same type of consideration used by the Interested Shareholder and its Affiliates in acquiring the largest portion of their interest in such class (or series) of capital stock. If the Interested Shareholder and its Affiliates have not previously purchased any shares of such class (or series) of capital stock, the consideration paid to holders of shares of that class (or series) in the Business Combination would be required to be cash. (2) MINIMUM PRICE REQUIREMENTS. The aggregate of (x) the cash and (y) the Fair Market Value, as of the date of consummation of the Business Combination (the "Consummation Date"), of any consideration other than cash to be received per share by holders of Company Common Stock, in the Business Combination would have to be at least equal to the higher of (i) the highest per share price paid by the Interested Shareholder or any of its Affiliates in acquiring any shares of Company Common Stock during the two years immediately prior to the date of the first public announcement of the proposal of the 55 Business Combination (the "Announcement Date") or in any transaction in which the Interested Shareholder became an Interested Shareholder (whichever is higher), plus interest compounded annually from the first date on which the Interested Shareholder became an Interested Shareholder (the "Determination Date") through the Consummation Date at the publicly announced base rate of interest of Morgan Guaranty Trust Company of New York, or such other major bank headquartered in New York, New York, as may be selected by the Continuing Directors, from time to time in effect in New York, New York, LESS the aggregate dividends paid on each share of Company Common Stock from the Determination Date through the Consummation Date up to but not exceeding the amount of interest so payable per share of Company Common Stock, and (ii) the Fair Market Value per share of Company Common Stock on the Announcement Date or the Determination Date, as the case may be, whichever is higher. The higher of (i) and (ii) above would have to be paid in respect of all outstanding shares of Company Common Stock, whether or not the Interested Shareholder or any of its Affiliates had previously acquired any shares of Company Common Stock. If the Interested Shareholder and its Affiliates did not purchase any shares of Company Common Stock, as the case may be, during the two-year period prior to the Announcement Date or in the transaction in which the Interested Shareholder became an Interested Shareholder (E.G., if the Interested Shareholder became an Interested Shareholder by purchasing shares of any then-outstanding class of voting Preferred Stock), the minimum price would be as determined under (ii). Under (i), interest and dividends would be computed from the Determination Date whether the highest price during the two-year period prior to the Announcement Date were higher than the price paid in the transaction on the Determination Date or vice versa and whether the Determination Date occurred before or after the beginning of such two-year period. Thus, for instance, if the highest price per share paid by the Interested Shareholder and its Affiliates during such two-year period was higher than the price paid in the transaction on the Determination Date and the Determination Date occurred before the beginning of such two-year period, interest and dividends would nevertheless be required to be computed on such highest price from the Determination Date. Since (ii) does not include an interest factor, if (ii) exceeded (i) no interest would be included in computing the per share amount required to be paid in the Business Combination. The following example illustrates the application of the form of consideration and minimum price requirements to a Business Combination with an Interested Shareholder acting alone which (x) acquired in the open market, during the two-year period prior to the Announcement Date, 4.9 percent of the outstanding Company Common Stock (the only then outstanding class of Voting Stock), for which its highest per share price was $40, (y) became an Interested Shareholder by purchasing 45 percent of the outstanding Company Common Stock in a cash tender offer at $50 per share, and (z) then announced a proposed Business Combination with the Company at a time when the Company Common Stock was trading at $55 per share: (i) highest price paid by the Interested Shareholder per share of Company Common Stock during the two-year period prior to the Announcement Date ($40) or on the Determination Date in the transaction in which the Interested Shareholder became such ($50), whichever is higher (I.E., $50), plus the net amount (assumed herein to be $2) representing interest (on $50), less dividends paid or declared (if ultimately paid) per share of Company Common Stock, from the Determination Date through the Consummation Date: $52. (ii) Fair Market Value per share of Company Common Stock on the Announcement Date: $55. Accordingly, in the above example, in order to comply with Article IX's minimum price requirements, the Interested Shareholder would be required to pay at least $55 per share (the higher of the two alternatives above) and, in order to comply with Article IX's form of consideration requirement, such price would have to be paid in cash. 56 The per share prices and interest assumptions used in the foregoing example were selected for illustrative purposes only and are not intended, and should not be treated, as estimates of future prices of Company Common Stock or future interest rates. Such prices and interest rates will be determined in the marketplace and cannot be predicted. As indicated above, none of the Company Preferred Stock will be outstanding immediately after the Distribution and the Board has no present plans to issue any thereof, other than the shares reserved for issuance in connection with the Company's Share Purchase Rights Plan. If any series of the Company Preferred Stock were in the future issued with voting rights and were outstanding at the time of consummation of the Business Combination, then unless such series were excluded from the provisions of Article IX by the terms of the resolution authorizing such series, the payments to holders of shares of such series of Preferred Stock would have to be at least equal to the higher of (x) the highest per share price determined with respect to such series in the same manner as described above with respect to Company Common Stock, and (y) the highest preferential amount per share to which the holders of such class or series of Preferred Stock would be entitled in the event of a voluntary or involuntary liquidation, dissolution or winding up of the Company. The minimum price requirement would have to be met with respect to each class or series of outstanding Voting Stock whether or not the Interested Shareholder was a beneficial owner of shares of that class or series prior to the Business Combination. Under the minimum price requirements, the Fair Market Value of non-cash consideration to be received by holders of shares of any class of Voting Stock in a Business Combination is to be determined as of the Consummation Date. Where the definitive terms of such non-cash consideration were established in advance of the Consummation Date, intervening adverse developments, either in the economy or the market generally or in the financial condition or business of the Interested Shareholder, could result in a decline in the originally anticipated Fair Market Value of such consideration, so that, on the date scheduled for its consummation, the Business Combination, which had theretofore been considered as not requiring an 80 percent shareholder vote or approval by a majority of the Continuing Directors (I.E., because it was expected to satisfy the minimum price requirements and it satisfied the form of consideration and procedural requirements), could not be consummated because it had not received such vote or approval (even if it had received any less-than-80-percent shareholder vote required by the Delaware Law, and any separate class vote required by the terms of any class or series of then-outstanding stock of the Company) and did not, in fact, meet the minimum price requirements on such date. However, an Interested Shareholder could avoid such a situation by establishing, in advance, terms for the Business Combination whereby the non-cash consideration was to be finalized by reference to its Fair Market Value on the Consummation Date. Such an approach, which has in fact been used in connection with mergers and similar second-step transactions in the past, would assure that the Interested Shareholder would bear the risk of a decline in the Fair Market Value of the offered consideration prior to the consummation of the Business Combination. Article IX uses the Consummation Date as the determination date of the Fair Market Value of non-cash consideration to be paid in a Business Combination in order to ensure that the Interested Shareholder uses this approach so that the Interested Shareholder, and not the other shareholders, would bear this risk. In addition, since the minimum price requirements call for a determination to be made with respect to interest at the base rate compounded, and dividends per share paid, through the Consummation Date, in a particular case it might not be possible to determine with certainty whether, at the time a Business Combination was submitted for shareholder approval, it would ultimately satisfy the minimum price requirements on the Consummation Date. Accordingly, it might not be possible to determine with certainty whether the Business Combination would require an 80 percent shareholder vote or the lesser vote otherwise applicable under the Delaware Law and, until the Consummation Date, there might be uncertainty as to whether the Business Combination, if it in fact received less than an 80 percent affirmative shareholder vote, could be consummated under Article IX. This uncertainty could deter an Interested Shareholder who did not own (and was not assured of obtaining the affirmative votes of) 80 percent of the voting power of the Voting Stock from going forward with a Business Combination that 57 had not been approved by a majority of the Continuing Directors. However, Western Atlas and the Company consider that it is appropriate, for the reasons indicated above, to use the Consummation Date as the determination date with respect to the minimum price requirements of Article IX and that this will benefit shareholders by encouraging the Interested Shareholder to negotiate with the Continuing Directors (and to refrain from taking action which would result in there being fewer than three Continuing Directors) and obtain their approval of the Business Combination, since such approval would avoid the applicability of both the 80 percent shareholder approval requirement and the minimum price requirement. (3) PROCEDURAL REQUIREMENTS. In order to avoid the requirement of an 80 percent affirmative shareholder vote or approval by a majority of the Continuing Directors, after an Interested Shareholder became an Interested Shareholder and prior to the Consummation Date, all of the following procedural requirements, as well as the form of consideration and minimum price requirements, must be complied with. The first procedural requirement would be that the Company, after the Determination Date, not have failed to pay full quarterly dividends on any then-outstanding Company Preferred Stock and not have reduced the rate of dividends paid on Company Common Stock, unless such failure or reduction was approved by a majority of the Continuing Directors. This provision is designed to prevent an Interested Shareholder from attempting to depress the market price of the Voting Stock prior to proposing a Business Combination by reducing dividends thereon, and thereby reducing the consideration required to be paid pursuant to the minimum price requirements of Article IX. The second procedural requirement would be that the Interested Shareholder and its Affiliates not have acquired any additional shares of the Voting Stock, directly from Company, or otherwise, in any transaction subsequent to the transaction pursuant to which the Interested Shareholder became an Interested Shareholder (other than any such acquisition pursuant to a stock split or similar transaction that does not increase the Interested Shareholder's proportionate share of any class or series of stock of the Company). This provision is intended to prevent an Interested Shareholder from purchasing additional shares of Voting Stock at prices which are lower than those set by the minimum price requirements of Article IX. Since all of the forms of consideration, minimum price and procedural requirements must be satisfied in order for the Interested Shareholder to avoid the need for either an 80 percent affirmative shareholder vote or the approval of a majority of any Continuing Directors, an effect of this provision, where the Interested Shareholder or any of its Affiliates acquired additional shares of Voting Stock after the Interested Shareholder became an Interested Shareholder, is that the Interested Shareholder could only acquire all of the Voting Stock by means of a Business Combination if such Business Combination either satisfied the 80 percent shareholder approval requirements or were approved by a majority of the Continuing Directors. The third procedural requirement would be that the Interested Shareholder and its Affiliates not have received, at any time after the Interested Shareholder became an Interested Shareholder, whether in connection with the Business Combination or otherwise, the benefit of any loans or other financial assistance or tax advantages provided by the Company (other than proportionately, solely in its capacity as a shareholder). This provision is intended to deter an Interested Shareholder from self-dealing or otherwise taking advantage of its equity position in the Company by using the Company's resources to finance the Business Combination or otherwise for its own purposes in a manner not proportionately available to all shareholders. The fourth procedural requirement would be that a proxy or information statement disclosing the terms and conditions of the Business Combination and complying with the requirements of the proxy rules promulgated under the Exchange Act or any replacement legislation be mailed to all shareholders of the Company at least 30 days prior to the consummation of the Business Combination, whether or not such proxy or information statement is required to be mailed pursuant to the Exchange Act or any such replacement legislation. This provision is intended to ensure that shareholders will be fully informed of the terms and conditions of the Business Combinations even if the Interested Shareholder were not otherwise required by law to disclose such information to shareholders. 58 The final procedural requirements would be that the Interested Shareholder have supplied the Company with all information requested by the Continuing Directors pursuant to Article IX. Under Article IX, the Continuing Directors have the right to request information as to the beneficial ownership of stock by the Interested Shareholder and other factual matters relating to the applicability and effect of Article IX. ADVANCE NOTICE PROVISIONS FOR SHAREHOLDER NOMINATIONS AND SHAREHOLDER PROPOSALS The By-laws establish an advance notice procedure for shareholders to make nominations of candidates for election as directors, or bring other business before an annual meeting of shareholders of the Company (the "Shareholder Notice Procedure"). The Shareholder Notice Procedure provides that only persons who are nominated by, or at the direction of, the Board, or by a shareholder who has given timely written notice to the Secretary of the Company prior to the meeting at which directors are to be elected, will be eligible for election as directors of the Company. The Shareholder Notice Procedure provides that at an annual meeting only such business may be conducted as has been brought before the meeting by, or at the direction of, the Chairman or the Board or by a shareholder who has given timely written notice to the Secretary of the Company of such shareholder's intention to bring such business before such meeting. Under the Shareholder Notice Procedure, for notice of shareholder nominations to be made at an annual meeting to be timely, such notice must be received by the Company not less than 70 days nor more than 90 days prior to the first anniversary of the previous year's annual meeting (or if the date of the annual meeting is advanced by more than 20 days, or delayed by more than 70 days, from such anniversary date, not earlier than the 90th day prior to such meeting and not later than the later of (x) the 70th day prior to such meeting and (y) the 10th day after public announcement of the date of such meeting is first made). Notwithstanding the foregoing, in the event that the number of directors to be elected is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board made by the Company at least 80 days prior to the first anniversary of the preceding year's annual meeting, a shareholder's notice will be timely, but only with respect to nominees for any new positions created by such increase, if it is received by the Company not later than the 10th day after such public announcement is first made by the Company. Under the Shareholder Notice Procedure, for notice of a shareholder nomination to be made at a special meeting at which directors are to be elected to be timely, such notice must be received by the Company not earlier than the 90th day before such meeting and not later than the later of (x) the 70th day prior to such meeting and (y) the 10th day after public announcement of the date of such meeting is first made. Under the Shareholder Notice Procedure, a shareholder's notice to the Company proposing to nominate a person for election as a director must contain certain information, including, without limitation, the identity and address of the nominating shareholder, the class and number of shares of stock of the Company which are owned by such shareholder, and all information regarding the proposed nominee that would be required to be included in a proxy statement soliciting proxies for the proposed nominee. Under the Shareholder Notice Procedure, a shareholder's notice relating to the conduct of business other than the nomination of directors must contain certain information about such business and about the principal shareholders, including, without limitation, a brief description of the business the shareholder proposed to bring before the meeting, the reasons for conducting such business at such meeting, the name and address of such shareholder, the class and number of shares of stock of the Company beneficially owned by such shareholder, and any material interest of such shareholder in the business so proposed. If the Chairman of the Board or other officer presiding at a meeting determines that a person was not nominated, or other business was not brought before the meeting, in accordance with the Shareholder Notice Procedure, which person will not be eligible for election as a director, or such business will not be conducted at such as the case may be. By requiring advance notice of nominations by shareholders, the Shareholder Notice Procedure will afford the Board an opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the Board, to inform shareholders about such qualifications. 59 By requiring advance notice of other proposed business, the Shareholder Notice Procedure will also provide a more orderly procedure for conducting annual meetings of shareholders and, to the extent deemed necessary or desirable by the Board, will provide the Board with an opportunity to inform shareholders, prior to such meetings, of any business proposed to be conducted at such meetings, together with any recommendations as to the Board's position regarding action to be taken with respect to such business, so that shareholders can better decide whether to attend such a meeting or to grant a proxy regarding the disposition of any such business. Although the By-laws do not give the Board any power to approve or disapprove shareholder nominations for the election of directors or proposals for action, they may have the effect of precluding a contest for the election of directors or the consideration of shareholder proposals if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, without regard to whether consideration of such nominees or proposals might be harmful or beneficial to the Company and its shareholders. PREFERRED STOCK The Certificate authorizes the Board to establish one or more series of Company Preferred Stock and to determine, with respect to any series of Company Preferred Stock, the terms and rights of such series, including (i) the designation of the series, (ii) the number of shares of the series, which number the Board may thereafter (except where otherwise provided in the Preferred Stock Designation) increase or decrease (but not below the number of shares thereof then outstanding), (iii) whether dividends, if any, will be cumulative or noncumulative and the dividend rate of the series, (iv) the dates at which dividends, if any, will be payable, (v) the redemption rights and price or prices, if any, for shares of the series, (vi) the terms and amounts of any sinking fund provided for the purchase or redemption of shares of the series, (vii) the amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, (viii) whether the shares of the series will be convertible into shares of any other class or series, or any other security, of the Company or any other corporation, and, if so, the specification of such other class or series or such other security, the conversion price or prices or rate or rates, any adjustments thereof, the date or dates as of which such shares shall be convertible and all other terms and conditions upon which such conversion may be made, (ix) restrictions on the issuance of shares of the same series or of any other class or series, and (x) the voting rights, if any, of the holders of such series. Western Atlas and the Company believe that the ability of the Board to issue one or more series of Company Preferred Stock will provide the Company with flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs which might arise. The authorized shares of Company Preferred Stock, as well as shares of Company Common Stock, will be available for issuance without further action by the Company's shareholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which the Company's securities may be listed or traded. The NYSE currently requires shareholder approval as a prerequisite to listing shares in several instances, including where the present or potential issuance of shares could result in an increase in the number of shares of common stock, or in the amount of voting securities outstanding, of at least 20 percent. If the approval of the Company's shareholders is not required for the issuance of shares of Company Preferred Stock or Company Common Stock, the Board may determine not to seek shareholder approval. Although the Board has no intention at the present time of doing so, it could issue a series of Company Preferred Stock that could, depending on the terms of such series, impede the completion of a merger, tender offer or other takeover attempt. The Board will make any determination to issue such shares based on its judgment as to the best interests of the Company and its shareholders. The Board, in so acting, could issue Company Preferred Stock having terms that could discourage an acquisition attempt through which an acquirer may be able to change the composition of the Board, including a tender offer or other transaction that some, or a majority, of the Company's shareholders might believe to be in their 60 best interests or in which shareholders might receive a premium for their stock over the then current market price of such stock. AMENDMENT OF CERTAIN PROVISIONS OF THE CERTIFICATE AND BY-LAWS Under the Delaware Law, the shareholders have the right to adopt, amend or repeal the By-laws and, with the approval of the board of directors, the certificate of incorporation of a corporation. In addition, if the certificate of incorporation so provides, the By-laws may be adopted, amended or repealed by the board of directors. The Certificate provides that the affirmative vote of the holders of at least 80 percent of the voting power of the outstanding shares of Voting Stock, voting together as a single class, is required to amend provisions of the Certificate relating to the prohibition of shareholder action without a meeting; the number, election and term of the Company's directors; or the removal of directors. The vote of the holders of a majority of the voting power of the outstanding shares of Voting Stock is required to amend all other provisions of the Certificate. The Certificate further provides that the By-laws may be amended by the Board or by the affirmative vote of the holders of at least 80 percent of the voting power of the outstanding shares of Voting Stock, voting together as a single class. These 80 percent voting requirements will have the effect of making more difficult any amendment by shareholders of the By-laws or of any of the provisions of the Certificate described above, even if a majority of the Company's shareholders believe that such amendment would be in their best interests. ANTITAKEOVER LEGISLATION Section 203 of the Delaware Law provides that, subject to certain exceptions specified therein, a corporation shall not engage in any business combination with any "interested shareholder" for a three-year period following the date that such shareholder becomes an interested shareholder unless (i) prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder, (ii) upon consummation of the transaction which resulted in the shareholder becoming an interested shareholder, the interested shareholder owned at least 85 percent of the voting stock of the corporation outstanding at the time the transaction commenced (excluding certain shares), or (iii) on or subsequent to such date, the business combination is approved by the board of directors of the corporation and by the affirmative vote of at least 66 2/3 percent of the outstanding voting stock which is not owned by the interested shareholder. Except as specified in Section 203 of the Delaware Law, an interested shareholder is defined to include (x) any person that is the owner of 15 percent or more of the outstanding voting stock of the corporation, or is an affiliate or associate of the corporation and was the owner of 15 percent or more of the outstanding voting stock of the corporation, at any time within three years immediately prior to the relevant date and (y) the affiliates and associates of any such person. Under certain circumstances, Section 203 of the Delaware Law makes it more difficult for a person who would be an "interested shareholder" to effect various business combinations with a corporation for a three-year period, although the shareholders may elect to exclude a corporation from the restrictions imposed thereunder. The Certificate does not exclude the Company from the restrictions imposed under Section 203 of the Delaware Law. It is anticipated that the provisions of Section 203 of the Delaware Law may encourage companies interested in acquiring the Company to negotiate in advance with the Board, since the shareholder approval requirement would be avoided if a majority of the directors then in office approve, prior to the time the shareholder becomes an interested shareholder, either the business combination or the transaction which results in the shareholder becoming an interested shareholder. RELATIONSHIP OF ARTICLE IX TO SECTION 203 Each of Article IX and Section 203 should encourage persons interested in acquiring the Company to negotiate in advance with the Board of Directors since the higher shareholder voting requirements imposed would not be invoked if, (i) in the case of Article IX, such person obtains the approval of a majority of the Continuing Directors for the proposed business combination transaction, and (ii) in the 61 case of Section 203, such person, prior to acquiring 15 percent of the Company's voting stock, obtains the approval of the Board for such stock acquisition or for the proposed business combination transaction (unless such person acquires 85 percent or more of the Company's voting stock in such transaction excluding certain shares as described above). As stated above, in the event of a proposed acquisition of the Company, the Boards of Western Atlas and the Company believe that the interests of the Company's shareholders will best be served by a transaction that results from negotiations based upon careful consideration of the proposed terms, such as the price to be paid to minority shareholders, the form of consideration paid and tax effects of the transaction. The protection afforded the remaining shareholders by Section 203 is stronger in some respects than the protection that would be afforded by Article IX in situations in which the provisions of both apply. This is because, unless the requisite Board or shareholder approval is obtained or the acquiror succeeds in obtaining at least 85% of the target corporation's voting stock in the initial transaction, Section 203 would prevent any of the specified business combination transactions which could be used by an acquiror to eliminate such remaining shareholders, use the assets of the company to finance its acquisition or otherwise abuse its equity position from occurring for a period of three years thereafter, whereas Article IX would merely require that the specified minimum price and procedural conditions be satisfied. Nonetheless, Article IX has been included in the Certificate for several reasons. First, the term "Business Combination" is defined differently in Article IX than it is in Section 203 and, as a result, Article IX may afford protection to the Company's shareholders in certain situations in which Section 203 would not apply. In addition, Article IX would apply to transactions with or for the benefit of any person (together with such person's affiliates and associates) beneficially owning 10 percent of the Company's voting stock while Section 203 would only apply to transactions involving persons (together with their affiliates and associates) beneficially owning 15 percent or more of the Company's voting stock. Second, although the constitutionality of Section 203 has so far been upheld in the courts, it is possible that a higher court might yet find Section 203 to be unconstitutional. If Section 203 were to be challenged and struck down as unconstitutional prior to or in connection with any acquisition of the Company, Article IX would continue to afford its protections to shareholders. Neither Article IX nor Section 203 will prevent a hostile takeover of the Company. They may, however, make more difficult or discourage a takeover of the Company or the acquisition of control of the Company by a significant shareholder and thus the removal of incumbent management. Such effect will be enhanced by the fact that the Company will have a Share Purchase Rights Plan. Some shareholders may find this disadvantageous in that they may not be afforded the opportunity to participate in takeovers which are not approved by the Continuing Directors but in which they might receive, for at least some of their shares, a substantial premium above the market price at the time of a tender offer or other acquisition transaction. Article IX should not prevent or discourage transactions in which the acquiring person is willing to negotiate in good faith with the Board and is prepared to pay the same price to all shareholders of each class of the Company's voting stock. RIGHTS PLAN As of the Distribution Date, the Board of Directors of the Company will have adopted a Share Purchase Rights Plan (the "Rights Plan") under which the Board of Directors declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock. Each share of Company Common Stock distributed on the Distribution will have attached to it (as described below) an associated Right. Rights are issuable in respect of all shares of Company Common Stock issued after the Distribution Date and prior to the earliest of (i) the Rights Distribution Date (as defined below), (ii) the date on which the Rights are redeemed or exchanged as discussed below or (iii) ______, 2007. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $.01 per share (the "Preferred Shares"), of the Company 62 at a price of $70 (the "Purchase Price"), subject to adjustment. The terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agents (the "Rights Agent"). The Rights Agreement provides that, until the Rights Distribution Date (or earlier redemption or expiration of the Rights), the Rights will be transferred with and only with the shares of Company Common Stock. The Rights Distribution Date is the earlier to occur of (i) ten days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired beneficial ownership of 15 percent or more of the outstanding shares of Company Common Stock or (ii) ten business days (or such later date as may be determined by action of the Board of Directors prior to such time as any person or group of affiliated persons becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 15 percent or more of the outstanding shares of Company Common Stock. As soon as practicable following the Rights Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the shares of Company Common Stock as of the close of business on the Rights Distribution Date and such separate Rights Certificates alone will evidence the Rights. In the event that any person or group of affiliated or associated persons becomes an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise that number of shares of Company Common Stock having a market value of two times the exercise price of the Right. At any time prior to the time a person or group of affiliated or associated persons becomes an Acquiring Person, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right (the "Redemption Price"). The redemption of the Rights may be made effective at such time on such basis with such conditions as the Board of Directors in its sole discretion may establish. If the Rights are not redeemed as provided above and in the event that the Company is acquired in a merger or other business combination transaction or 50 percent or more of its consolidated assets or earning power are sold after a person or group has become an Acquiring Person, each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. At any time after any person or group becomes an Acquiring Person and prior to the acquisition by such person or group of 50 percent or more of the outstanding shares of Company Common Stock, the Board of Directors of the Company may exchange the Rights (other than Rights owned by such person or group which will have become void), in whole or in part, at an exchange ratio of one share of Company Common Stock, or one-hundredth of a Preferred Share, per Right (subject to adjustment). Preferred Shares which are purchasable under the Rights Plan will not be redeemable. Each Preferred Share will be entitled to an aggregate dividend of 100 times the dividend declared per share of Company Common Stock but in no event shall such minimum preferential quarterly payment be less than $1 per share. In the event of liquidation, the holders of the Preferred Shares will be entitled to an aggregate payment of 100 times the payment made per share of Company Common Stock, but in no event shall they receive less than $100 per share. Each Preferred Share will have 100 votes, voting together with the shares of Company Common Stock. Finally, in the event of any merger, consolidation, or other transaction in which shares of Company Common Stock are exchanged, each Preferred Share will be entitled to receive 100 times the amount received per share of Company Common Stock. These rights are protected by customary antidilution provisions. Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. While the distribution of 63 the Rights is not taxable, shareholders may recognize taxable income upon the occurrence of subsequent events -- for example, upon the redemption, sale, or other disposition of the Rights, or upon the Rights becoming exercisable with respect to an acquiror's stock whether or not exercised. The Rights will expire on , 2007 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company. As of December 31, 1996, Unitrin and its subsidiaries owned 23.6 percent of the outstanding shares of Western Atlas Common Stock, and on that assumption would own an identical percentage of the shares of Company Common Stock immediately following the Distribution. The Rights Plan does not affect the Unitrin companies so long as they do not purchase additional shares of Company Common Stock or their shares are not transferred to a third party or group which would thereby beneficially own 15 percent or more of the outstanding shares of Company Common Stock. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights, including an amendment to lower the 15 percent thresholds described above to not less than the greater of (i) the sum of .001 percent and the largest percentage of the outstanding Company Common Stock then known to the Company to be beneficially owned by any person or group or affiliated or associated persons (other than Unitrin and its subsidiaries) and (ii) 10 percent, except that from and after such time as any person or group of affiliated or associated persons becomes an Acquiring Person no such amendment may adversely affect the interest of the holders of the Rights. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company without conditioning the offer on the Rights being redeemed or a substantial number of Rights being acquired. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is incorporated by reference as an exhibit to the Registration Statement which includes this Information Statement. COMPARISON WITH RIGHTS OF HOLDERS OF WESTERN ATLAS COMMON STOCK The Company's Certificate, By-laws and Rights Plan are essentially identical to the corresponding instruments of Western Atlas except that (i) any amendment by shareholders of the Company's By-laws requires the vote of 80 percent of the outstanding Company Common Stock, while amendments by shareholders to the Western Atlas By-laws require either a majority of the votes cast at a meeting at which a quorum is present or 80 percent of the outstanding Western Atlas Common Stock, depending on which By-law is being amended, and (ii) Western Atlas does not have in its certificate of incorporation any provision analogous to Article IX of the Certificate. LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS ELIMINATION OF LIABILITY OF DIRECTORS The Certificate provides that a director of the Company will not be personally liable to the Company or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware Law, which concerns unlawful payments of dividends, stock purchases or redemptions, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware Law is amended after the approval by the shareholders of the Certificate to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the 64 Company shall be eliminated or limited to the fullest extent permitted by the Delaware Law, as so amended from time to time. While the Certificate provides directors with protection from awards for monetary damages for breaches of their duty of care, it does not eliminate such duty. Accordingly, the Certificate will have no effect on the availability of equitable remedies such as an injunction or rescission based on a director's breach of his or her duty of care. The provisions of the Certificate described above apply to an officer of the Company only if he or she is a director of the Company and is acting in his or her capacity as director, and do not apply to officers of the Company who are not directors. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Certificate provides that each person who is or was a director or officer of the Company or who is or was serving or who had agreed to serve at the request of the Board or an officer of the Company as a director, officer or employee of another Corporation, Partnership, joint venture, trust or other enterprise, will be indemnified by the Company, in accordance with the By-laws, to the full extent permitted from time to time by Delaware Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law permitted the Company to provide prior to such amendment) or any other applicable laws as presently or hereafter in effect. In addition, the Certificate provides that the Company may provide indemnification to other persons as provided in the By-laws and may enter into one or more agreements with any person which provide for indemnification greater as different than that provided in the Certificate. The By-laws provide that each person who was or is made a party or is threatened to be made a party or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative is or was a director or officer of the Company or is or was serving at the request of the Company, as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans maintained or sponsored by the Company, whether the basis of such Proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, will be indemnified and held harmless by the Company to the fullest extent authorized by Delaware law as the same exists or may in the future be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law permitted the Company to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification will continue as to a person who has ceased to be a director, officer, employee or agent and will inure to the benefit of his or her heirs, executors and administrators; however, except as described in the following paragraph with respect to Proceedings to enforce rights to indemnification, the Company will indemnify any such person seeking indemnification in connection with a Proceeding (or part thereof) initiated by such person only if such Proceeding (or part thereof) was authorized by the Board. Pursuant to the By-laws, if a claim described in the preceding paragraph is not paid in full by the Company within thirty days after a written claim has been received by the Company, the claimant may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant will be entitled to be paid also the expense of prosecuting such claim. The By-laws provide that it will be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any Proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Company) that the claimant has not met the standards of conduct which make it permissible under the Delaware Law for the Company to indemnify the claimant for the amount claimed, but the burden of proving such defense will 65 be on the Company. Neither the failure of the Company (including the Board, independent legal counsel or shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware Law, nor an actual determination by the Company (including the Board, independent legal counsel or shareholders) that the claimant has not met such applicable standard of conduct, will be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. The By-laws provide that the right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in the Certificate will not be exclusive of any other right which any person may have or may in the future acquire under any statute, provision of the Certificate, the By-laws, agreement, vote of shareholders or disinterested directors or otherwise. The Certificate permits the Company to maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Company or any person serving at the request of the Company, as a director, officer, employee or agent of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans maintained or sponsored by the Company, against any such expense, liability or loss, whether or not the Company would have the power to indemnify such person against such expense, liability or loss under the Delaware Law. The Company intends to obtain directors' and officers' liability insurance providing coverage to its directors and officers. The Certificate provides that the right to indemnification conferred therein is a contract right and includes the right to be paid by the Company the expenses incurred in defending any such Proceeding in advance of its final disposition, except that if Delaware law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a Proceeding, will be made only upon delivery to the Company of an undertaking by or on behalf of such director or officer, to repay all amounts so advanced if it is ultimately determined that such director or officer is not entitled to be indemnified under the Certificate or otherwise. 66 INDEX TO FINANCIAL STATEMENTS
PAGE --------- UNOVA, INC. Independent Auditors' Report............................................................................. F-2 Combined Statements of Operations for the three years ended December 31, 1996............................ F-3 Combined Balance Sheets at December 31, 1996 and December 31, 1995....................................... F-4 Combined Statements of Cash Flows for the three years ended December 31, 1996............................ F-5 Notes to Combined Financial Statements................................................................... F-6 Combined Statements of Operations for the six-month periods ended June 30, 1997 (unaudited) and June 30, 1996 (unaudited)....................................................................................... F-21 Combined Balance Sheets at June 30, 1997 (unaudited) and December 31, 1996............................... F-22 Combined Statements of Cash Flows for the six-month periods ended June 30, 1997 (unaudited) and June 30, 1996 (unaudited)....................................................................................... F-23 Notes to Combined Financial Statements (unaudited)....................................................... F-24 NORAND CORPORATION Report of Independent Public Accountants................................................................. F-27 Consolidated Balance Sheet at August 31, 1996............................................................ F-28 Consolidated Statement of Operations for the fiscal year ended August 31, 1996........................... F-29 Consolidated Statement of Stockholders' Equity at August 31, 1996........................................ F-30 Consolidated Statement of Cash Flows for the fiscal year ended August 31, 1996........................... F-31 Notes to Consolidated Financial Statements............................................................... F-32 Consolidated Balance Sheet at March 1, 1997 (unaudited).................................................. F-44 Consolidated Statements of Operations for the six-month periods ended March 1, 1997 (unaudited) and March 2, 1996 (unaudited).................................................................................... F-45 Consolidated Statements of Cash Flows for the six-month periods ended March 1, 1997 (unaudited) and March 2, 1996 (unaudited).................................................................................... F-46 Notes to Consolidated Financial Statements (unaudited)................................................... F-47
F-1 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholder UNOVA, Inc. Beverly Hills, California We have audited the accompanying combined balance sheets of the businesses comprising UNOVA, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related combined statements of operations, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such combined financial statements present fairly, in all material respects, the financial position of UNOVA, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As described in Note A, the accompanying combined financial statements have been prepared from the separate records maintained by the Western Atlas Inc. divisions comprising UNOVA, Inc. and may not necessarily be indicative of the conditions that would have existed or the results of operations if UNOVA, Inc. had been operated as a separate company. Portions of debt, interest, and corporate expenses represent allocations made from Western Atlas Inc. DELOITTE & TOUCHE LLP Los Angeles, California August 13, 1997 F-2 UNOVA, INC. COMBINED STATEMENTS OF OPERATIONS (THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 ------------- ----------- ----------- Sales and Service Revenues............................................... $ 1,164,682 $ 942,852 $ 971,138 ------------- ----------- ----------- Costs and Expenses Cost of sales.......................................................... 841,820 669,279 689,852 Selling, general and administrative.................................... 218,672 194,069 199,927 Depreciation and amortization.......................................... 27,043 26,116 28,727 Interest--net.......................................................... 7,111 9,347 15,691 ------------- ----------- ----------- Total Costs and Expenses................................................. 1,094,646 898,811 934,197 ------------- ----------- ----------- Earnings before Taxes on Income.......................................... 70,036 44,041 36,941 Taxes on Income.......................................................... (28,014) (17,837) (15,367) ------------- ----------- ----------- Net Earnings............................................................. $ 42,022 $ 26,204 $ 21,574 ------------- ----------- ----------- ------------- ----------- ----------- Pro Forma Net Earnings per Share......................................... $ .78 ------------- -------------
See accompanying notes to combined financial statements. F-3 UNOVA, INC. COMBINED BALANCE SHEETS (THOUSANDS OF DOLLARS)
DECEMBER 31, ---------------------------- 1996 1995 ------------- ------------- ASSETS Current Assets Cash and cash equivalents......................................................... $ 149,467 $ 103,501 Accounts receivable less allowance for doubtful accounts of $5,124 (1996) and $4,810 (1995)................................................................... 394,572 284,056 Inventories less progress billings................................................ 94,452 113,769 Deferred tax assets............................................................... 53,636 41,741 Other current assets.............................................................. 3,664 3,445 ------------- ------------- Total Current Assets................................................................ 695,791 546,512 Property, Plant and Equipment, Net.................................................. 132,508 137,337 Goodwill and Other Intangibles, Net of Amortization of $42,095 (1996) and $40,603 (1995)............................................................................ 178,810 182,850 Other Assets........................................................................ 66,684 52,325 ------------- ------------- Total Assets........................................................................ $ 1,073,793 $ 919,024 ------------- ------------- ------------- ------------- LIABILITIES AND EQUITY Current Liabilities Accounts payable.................................................................. $ 242,168 $ 161,903 Payrolls and related expenses..................................................... 50,567 55,275 Due to Western Atlas Inc.......................................................... 109,574 112,429 Notes payable and current portion of long-term obligations........................ 27,461 22,214 ------------- ------------- Total Current Liabilities........................................................... 429,770 351,821 Long-term Obligations............................................................... 14,507 14,099 Deferred Tax Liabilities............................................................ 22,727 20,883 Other Long-term Liabilities......................................................... 32,281 29,562 Commitments and Contingencies Equity--Investment by Western Atlas Inc............................................. 574,508 502,659 ------------- ------------- Total Liabilities and Equity........................................................ $ 1,073,793 $ 919,024 ------------- ------------- ------------- -------------
See accompanying notes to combined financial statements. F-4 UNOVA, INC. COMBINED STATEMENTS OF CASH FLOWS (THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 ----------- ----------- ---------- Cash and Cash Equivalents at Beginning of Year............................. $ 103,501 $ 29,190 $ 2,618 ----------- ----------- ---------- Cash Flows from Operating Activities: Net earnings............................................................. 42,022 26,204 21,574 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization........................................ 27,043 26,116 28,727 Deferred taxes....................................................... (9,803) 7,519 (4,817) Change in accounts receivable........................................ (142,159) 47,712 (25,830) Change in inventories................................................ 21,986 (19,613) 8,338 Change in other current assets....................................... (804) 4,012 1,479 Change in accounts payable........................................... 73,701 (11,572) 30,406 Change in payrolls and related expenses.............................. (2,382) (99) 25,989 Other operating activities........................................... (446) (1,253) (6,225) ----------- ----------- ---------- Net cash provided by operating activities.................................. 9,158 79,026 79,641 ----------- ----------- ---------- Cash Flows from Investing Activities: Capital expenditures................................................... (22,541) (23,944) (22,625) Proceeds from sale of businesses....................................... 31,100 Acquisition of businesses net of cash acquired......................... (5,916) Other investing activities............................................. 1,049 775 (1,717) ----------- ----------- ---------- Net cash provided by (used in) investing activities........................ 9,608 (29,085) (24,342) ----------- ----------- ---------- Cash Flows from Financing Activities: Net transactions with Western Atlas Inc................................ 25,747 38,195 36,356 Due to Western Atlas Inc............................................... (2,855) (352) (98,204) Repayment of long-term obligations..................................... (649) (1,280) Short-term obligations, net............................................ 3,818 (20,848) 34,402 Other financing activities............................................. 1,139 7,375 (1) ----------- ----------- ---------- Net cash provided by (used in) financing activities........................ 27,200 24,370 (28,727) ----------- ----------- ---------- Resulting in Increase in Cash and Cash Equivalents......................... 45,966 74,311 26,572 ----------- ----------- ---------- Cash and Cash Equivalents at End of Year................................... $ 149,467 $ 103,501 $ 29,190 ----------- ----------- ---------- ----------- ----------- ----------
See accompanying notes to combined financial statements. F-5 UNOVA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS NOTE A: SIGNIFICANT ACCOUNTING POLICIES GENERAL INFORMATION. On May 4, 1997, the Board of Directors of Western Atlas Inc. ("WAI") approved in principle, subject to formal declaration of a dividend at a later date, a plan for the distribution (the "Distribution") to holders of WAI common stock of all of the outstanding shares of common stock of UNOVA, Inc. ("UNOVA" or the "Company"), a wholly-owned subsidiary of WAI. At the time of the Distribution the Company will own substantially all of WAI's industrial automation businesses. The Distribution is expected to occur before December 31, 1997 and will be made on the basis of one share of Company common stock for each share of WAI common stock outstanding on the record date for the Distribution. The Distribution will be reported by WAI as a tax-free dividend for tax reporting purposes. In connection with the Distribution, the Company and WAI have entered into various agreements, including a Distribution and Indemnity Agreement, a Tax Sharing Agreement and certain agreements relating to employee benefits and intellectual property. The Distribution and Indemnity Agreement provides for, among other items, the transfer to the Company of WAI's interest in the assets, liabilities and businesses that will constitute UNOVA and the payment by the Company of approximately $230 million as a dividend to WAI. In connection therewith, the Company will obtain financing in the form of loans from a group of banks adequate to pay the aforementioned dividend to WAI and to meet its other capital requirements. The combined pro forma financial statements included elsewhere in this Information Statement have been presented as if this financing had been in effect as of January 1, 1996. For purposes of historical presentation, total UNOVA debt has been adjusted based on the historical capital needs of the UNOVA businesses compared to that of other WAI businesses. The Distribution Agreement also provides for the division between WAI and the Company of certain other liabilities and certain other agreements governing the relationship between the Company and WAI following the Distribution. In general, the Tax Sharing Agreement provides that WAI will be liable for consolidated federal income tax and joint state income tax liabilities, including any such liabilities resulting from the audit of or other adjustment to previously filed tax returns, which are attributable to the Company and its domestic subsidiaries (the "Company Group") through the date of the Distribution. WAI will be entitled to tax benefits resulting from any audit or other adjustments to the Company's pre-date of the Distribution consolidated federal income tax and joint state income tax liabilities, when and if realized by the Company. The Company Group will generally be liable for all other state, local and foreign tax liabilities which are attributable to the Company Group through the date of the Distribution and the pre-acquisition tax liabilities of Norand. NATURE OF OPERATIONS. UNOVA is an industrial technologies company providing global customers with solutions for improving their efficiency and productivity. The Automated Data Systems business segment is comprised of automated data collection ("ADC") and mobile computing products and services, principally serving the industrial market. Customers are the global distribution and transportation companies, food and beverage operations, manufacturing industries, health care providers and government agencies. The Industrial Automation Systems business segment includes integrated manufacturing systems, body welding and assembly systems, and precision grinding and abrasives, primarily serving the worldwide automotive, off-road and diesel engine manufacturing industries. F-6 UNOVA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE A: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A different automotive industry customer was significant to the Company's revenues in each of the three years ended 1996. One such customer represented 15% of revenues in 1996, another represented 11% of revenues in 1995, and another represented 28% of revenues in 1994. PRINCIPLES OF COMBINATION. The historical combined financial statements for the Company have been presented as if the operations included herein have been operating as one entity for the periods presented. They include, at their historical amounts, the assets, liabilities, revenues and expenses directly related and those allocated to the businesses which will comprise the Company's operations. A pro rata share of certain general and administrative corporate costs incurred by WAI have been allocated to the Company based on the relative ratio of such projected costs to be incurred by WAI and the Company individually. Such costs include general management, legal, tax, treasury, insurance, financial audit, financial reporting, human resources and real estate services. The Company's historical debt includes an allocation of a portion of WAI's corporate debt, based on the Company's estimated past capital requirements. Interest expense related thereto has been included in the Company's statements of operations at WAI's estimated blended historical rate of interest on long- term borrowings of 7.5%. Management believes the above stated allocations were made on a reasonable basis; however, they do not necessarily reflect the results of operations which would have occurred had the Company been an independent entity nor are they necessarily indicative of future expenses or income (see Note J). The Company consolidates its subsidiaries and companies in which it has a controlling interest. Investments in companies over which UNOVA has influence but not a controlling interest are accounted for using the equity method. All material intercompany transactions have been eliminated. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for each reporting period. Actual results could differ from those estimates. EARNINGS PER SHARE. Earnings per share computations in each year were based on 53,891,534 shares of WAI common stock outstanding at June 30, 1997. Management estimates that this amount is representative of the number of shares that will be issued upon the Distribution. Historical Western Atlas common stock equivalents arising from various stock option plans have been excluded from the Company's earnings per share calculation as such options will not be converted into UNOVA stock options (see Note F). CASH EQUIVALENTS. The Company considers time deposits and commercial paper purchased within three months of their date of maturity to be cash equivalents. INVENTORIES. Inventories are stated at the lower of cost (first-in, first-out method) or market. REVENUE RECOGNITION. Revenues are generally recognized when products are shipped or as services are performed. Revenues and profits on long-term contracts associated with the Company's operations are F-7 UNOVA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE A: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) recorded under the percentage-of-completion method of accounting. Any anticipated losses on contracts are charged to operations as soon as they are determinable. General and administrative costs are expensed as incurred. RESEARCH AND DEVELOPMENT. Research and development costs are charged to expense as incurred. Worldwide expenditures on research and development activities amounted to $29.7 million, $27.5 million and $31.7 million, in the years ended December 31, 1996, 1995 and 1994, respectively. PROPERTY, PLANT AND EQUIPMENT. Investment in property, plant and equipment is stated at cost. Depreciation, computed generally by the straight-line method for financial reporting purposes, is provided over the estimated useful lives of the related assets. INCOME TAXES. The Company measures tax assets and liabilities based on a balance sheet approach. Tax assets and liabilities are stated at the tax rate in effect when the estimated assets and liabilities will be realized. For further discussion of accounting policies for taxes see Note G. The Company's domestic operations and their foreign branches have been included in WAI's consolidated tax return. Any tax benefits related to these operations have been recorded in these financial statements if such were realizable by WAI on a consolidated basis. Foreign entities included in these financial statements provide taxes in accordance with local laws and regulations. Earnings of these entities are deemed permanently invested in their operating environments and U.S. taxes have not been provided. CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and trade receivables. The Company places its cash and cash equivalents with high credit quality institutions and limits the amount of credit exposure with any one institution. Concentrations of credit risk with respect to trade receivables are limited because a large number of geographically diverse customers make up the Company's customer base, thus spreading the trade credit risk. The Company evaluates the creditworthiness of its customers and maintains allowance for anticipated losses. FOREIGN CURRENCIES. The currency effects of translating the financial statements of those non-U.S. entities of the Company which operate in local currency environments are included in the "cumulative currency translation adjustment" component of equity. Currency transaction gains and losses are included in the combined statements of operations and were not material for any periods presented herein. GOODWILL AND OTHER INTANGIBLES. Goodwill is amortized on a straight-line basis over periods ranging from 15 to 40 years. Other intangibles are amortized on a straight-line basis over periods ranging from four to 18 years. The Company assesses the recoverability of goodwill at the end of each fiscal year or as circumstances warrant. Factors considered in evaluating recoverability include management's plans with respect to the operations to which the goodwill relates, particularly the historical earnings and projected undiscounted cash flows of such operations. IMPAIRMENT OF LONG-LIVED ASSETS. The Company regularly reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. Impairment is recognized in the event that the undiscounted cash flows estimated to be generated by the asset are less than its carrying amount. F-8 UNOVA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE A: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ENVIRONMENTAL COSTS. Provisions for environmental costs are recorded when the Company determines its responsibility for remedial efforts and such amounts are reasonably estimable. NEW ACCOUNTING PRONOUNCEMENTS. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings per Share" which will be effective for the Company beginning with the period ending December 31, 1997. SFAS 128 replaces the presentation of primary earnings per share with a presentation of basic earnings per share based upon the weighted average number of common shares for the period. It also requires dual presentation of basic and diluted earnings per share of companies with complex capital structures. Pro forma basic and diluted EPS for all historical periods presented, assuming SFAS No. 128 was effective at the beginning of each such historical period, would not differ from the presentations herein. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 REPORTING FOR COMPREHENSIVE INCOME and No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. These statements are effective for financial statements issued for periods beginning after December 15, 1997. The Company is evaluating what, if any, additional disclosures may be required upon the implementation of SFAS Nos. 130 and 131. NOTE B: BUSINESS ACQUISITIONS, INVESTMENTS AND DISPOSITIONS ACQUISITIONS AND INVESTMENTS The Company acquired Norand Corporation ("Norand") on March 3, 1997, and United Barcode Industries ("UBI") on April 4, 1997. Norand designs, manufactures and markets mobile computing systems and wireless data communications networks using radio frequency technology. UBI is a European-based ADC company headquartered in Sweden. These companies are currently being integrated into the Automated Data Systems segment. Both transactions were funded using a combination of WAI's committed credit facilities, short-term uncommitted credit lines and excess cash, and are being accounted for under the purchase method of accounting. Accordingly, the acquisition costs (approximately $280 million and $107 million for Norand and UBI, respectively) have been allocated to the net assets acquired based upon their relative fair values. Such allocation resulted in $203 million assigned to in-process research and development activities; $156 million assigned to goodwill (to be amortized over 25 years using the straight-line method); and $29 million assigned to other intangibles (to be amortized over periods ranging from four to 18 years using the straight-line method). During the period ended June 30, 1997, the Company expensed the amounts assigned to in-process research and development projects that have not yet achieved technological feasibility in accordance with Financial Accounting Standards Board Interpretation No. 4. The Norand acquisition added increased knowledge and capabilities in wireless data communication using radio frequency ("RF") technology and mobile computing solutions for the logistics markets. In the communications area, Norand brings advanced axis point and docking station technology, communication software, product configuration and ergonomics. This acquisition also expands the Company's offering in the RF spread-spectrum technology. The mobile computing technology allows the Company to enter the route accounting, meter reading, and field service markets. Norand provides the Company with pen-based, hand-held computers with desktop PC performance that is important to these markets. The UBI acquisition provides two major product line technologies: bar code on-demand printers with labels and ribbons, and hand-held scanners. UBI's printer technology complements the Company's existing printer offerings with low-end, low cost printers and high-end, high speed printers. UBI also provides enhanced media-handling systems, such as linerless adhesive labels and software. The scanner technology includes scanners based on charge- F-9 UNOVA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE B: BUSINESS ACQUISITIONS, INVESTMENTS AND DISPOSITIONS (CONTINUED) coupled device ("CCD") technology, which is an alternative to laser scanners in many applications. UBI also brings software that improves laser scanning for one- and two-dimensional symbologies. In addition to the amount charged to in-process research and development, the Company expects to expend an additional $30 million over the next three years to develop these technologies into commercially viable products. These expenditures include engineering labor, material costs, overhead charges, and software development, as well as general and administrative expenses. The allocation of the acquisition cost of Norand and UBI is preliminary and subject to revision upon receipt of pending information, such as final assessment of certain legal and environmental exposures and the completion of certain appraisals. Any such revisions are not expected to have a material impact on the Company's combined financial statements. The Company made several acquisitions and investments during 1995, including 49% of Honsberg, a German machine tool maker. Cranfield Precision Engineering, a grinding technology company located in the United Kingdom, was also acquired in 1995. The remaining 51% of Honsberg was acquired in the second quarter of 1997. These acquisitions are integral to the Company's goals, though not material in the aggregate to the Company's combined financial statements. DISPOSITIONS The Company sold its Material Handling Systems operations in November of 1996 and received cash proceeds of approximately $31 million. The activities of the division were not considered a core business of the Company. NOTE C: CASH AND CASH EQUIVALENTS, DEBT AND INTEREST Cash and cash equivalents amounted to $149.5 million and $103.5 million at December 31, 1996 and December 31, 1995, respectively, and consisted mainly of time deposits and commercial paper. Notes payable and long-term obligations consist of the following:
DECEMBER 31, -------------------- 1996 1995 --------- --------- (THOUSANDS OF DOLLARS) Short-term notes payable with average interest at 6.3% (1996) and 6.9% (1995)........................................................... $ 27,045 $ 21,894 Other, with average interest at 5.6% (1996) and 5.5% (1995), due through 2005........................................................ 14,923 14,419 --------- --------- 41,968 36,313 Less short-term notes payable and current portion of long-term obligations................................................. (27,461) (22,214) --------- --------- $ 14,507 $ 14,099 --------- --------- --------- ---------
F-10 UNOVA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE C: CASH AND CASH EQUIVALENTS, DEBT AND INTEREST (CONTINUED) Notes payable and long-term obligations at December 31, 1996 mature as follows:
YEAR ENDING DECEMBER 31, (THOUSANDS OF DOLLARS) - ---------------------------------------------------------------------- 1997.................................................................. $ 27,461 1998.................................................................. 234 1999.................................................................. 234 2000.................................................................. 250 2001.................................................................. 182 Thereafter............................................................ 13,607 -------- $ 41,968 -------- --------
Financial instruments on the Company's combined balance sheet include accounts receivable, notes payable, accounts payable, and payrolls and related expenses, which approximate their market values due to their short maturity. The fair market value of long-term obligations does not differ significantly from their carrying value as of December 31, 1996, based on comparisons to similar types of debt in the market. As discussed in Note I, WAI also has off-balance-sheet guarantees and letter-of-credit agreements relating to UNOVA customers with face values totaling $95 million at December 31, 1996 relating principally to the guarantee of future performance on contracts. Such guarantees and letters-of-credit will be assumed by the Company upon the Distribution. Debt allocated from WAI was $109.6 million and $112.4 million as of December 31, 1996 and 1995, respectively. Interest expense related thereto of $8.3 million, $8.4 million, and $12.1 million of WAI's corporate debt for the years ended December 31, 1996, 1995 and 1994, respectively, has been included in the Company's statements of operations at WAI's estimated blended historical rate of interest on long-term borrowings of 7.5%. Net interest expense is composed of the following:
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- (THOUSANDS OF DOLLARS) Interest expense............................................................... $ 11,533 $ 12,174 $ 17,496 Interest income................................................................ (4,422) (2,827) (1,805) --------- --------- --------- Net interest expense........................................................... $ 7,111 $ 9,347 $ 15,691 --------- --------- --------- --------- --------- ---------
The Company made interest payments to non-related parties of $2.6 million, $3.8 million, and $5.8 million in the years ended December 31, 1996, 1995 and 1994, respectively. Capitalized interest costs in each of the periods presented were not material. F-11 UNOVA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE D: ACCOUNTS RECEIVABLE AND INVENTORIES Following are the details of net accounts receivable:
DECEMBER 31, ------------------------ 1996 1995 ----------- ----------- (THOUSANDS OF DOLLARS) Trade receivables....................................................................... $ 132,814 $ 143,462 Receivables related to long-term contracts Amounts billed........................................................................ 49,538 65,352 Unbilled recoverable costs and accrued profit on progress completed and retentions............................................................ 212,220 75,242 ----------- ----------- $ 394,572 $ 284,056 ----------- ----------- ----------- -----------
The unbilled recoverable costs and retentions at December 31, 1996 are expected to be entirely billed and collected in fiscal year 1997. Summarized below are the components of inventory balances:
DECEMBER 31, ---------------------- 1996 1995 --------- ----------- (THOUSANDS OF DOLLARS) Raw materials and work in process........................................................ $ 65,016 $ 79,845 Finished goods........................................................................... 18,697 21,803 Inventoried costs related to long-term contracts......................................... 35,062 33,549 Less progress billings................................................................... (24,323) (21,428) --------- ----------- Net inventories.......................................................................... $ 94,452 $ 113,769 --------- ----------- --------- -----------
NOTE E: PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
DECEMBER 31, -------------------------- 1996 1995 ------------ ------------ (THOUSANDS OF DOLLARS) Property, plant and equipment, at cost Land................................................................................ $ 23,283 $ 23,617 Buildings and improvements.......................................................... 105,445 107,246 Machinery and equipment............................................................. 165,257 165,172 Less accumulated depreciation......................................................... (161,477) (158,698) ------------ ------------ Net investment in property, plant and equipment....................................... $ 132,508 $ 137,337 ------------ ------------ ------------ ------------
The net book value of assets utilized under capital leases was not material at December 31, 1996 and 1995. F-12 UNOVA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE E: PROPERTY, PLANT AND EQUIPMENT (CONTINUED) The range of estimated useful lives for determining depreciation and amortization of the major classes of assets are: Buildings.................................................... 10-45 years Building improvements........................................ 2-20 years Machinery and equipment...................................... 2-15 years
As of December 31, 1996, minimum rental commitments under noncancellable operating leases were:
YEAR ENDING DECEMBER 31, - --------------------------------------------------------------------------- OPERATING LEASES ----------------- (THOUSANDS OF DOLLARS) 1997..................................................................... $ 6,180 1998..................................................................... 4,056 1999..................................................................... 2,455 2000..................................................................... 1,624 2001..................................................................... 1,180 Thereafter............................................................... 5,359 -------- $ 20,854 -------- --------
Rental expense for operating leases, including amounts for short-term leases with nominal, if any, future rental commitments, was $10.4 million, $9.8 million and $10.8 million, for the years ended December 31, 1996, 1995 and 1994, respectively. The minimum future rentals receivable under subleases and the contingent rental expenses were not significant. NOTE F: EQUITY--INVESTMENT BY WESTERN ATLAS INC. At the date of the Distribution, holders of WAI common stock will receive one share of Company common stock for each share held of WAI common stock. If the Distribution had occurred on June 30, 1997, approximately 53.9 million shares of Company common stock would have been issued. F-13 UNOVA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE F: EQUITY--INVESTMENT BY WESTERN ATLAS INC. (CONTINUED) Changes in equity are summarized below:
RETAINED EARNINGS AND CUMULATIVE CUMULATIVE TRANSACTIONS WITH CURRENCY NET INVESTMENT WESTERN ATLAS, TRANSLATION BY WESTERN INC. ADJUSTMENT ATLAS INC. ------------------ ----------- --------------- (THOUSANDS OF DOLLARS) Balance at December 31, 1993.................................. $ 385,124 $ (4,216) $ 380,908 Net earnings.................................................. 21,574 21,574 Currency translation adjustment............................... 577 577 Net transactions with Western Atlas Inc....................... 36,356 36,356 ---------- ----------- --------------- Balance at December 31, 1994.................................. 443,054 (3,639) 439,415 Net earnings.................................................. 26,204 26,204 Currency translation adjustment............................... (1,155) (1,155) Net transactions with Western Atlas Inc....................... 38,195 38,195 ---------- ----------- --------------- Balance at December 31, 1995.................................. 507,453 (4,794) 502,659 Net earnings.................................................. 42,022 42,022 Currency translation adjustment............................... 4,080 4,080 Net transactions with Western Atlas Inc....................... 25,747 25,747 ---------- ----------- --------------- Balance at December 31, 1996.................................. $ 575,222 $ (714) $ 574,508 ---------- ----------- --------------- ---------- ----------- ---------------
STOCK OPTION INFORMATION Under the UNOVA, Inc. 1997 Stock Incentive Plan (the "Plan"), an aggregate of 5,500,000 shares of Company common stock will initially be available for the issuance of stock options, stock appreciation rights and restricted stock. The number of shares available under the Plan increases by one percent of the total number of shares of common stock outstanding as of the first day of each calendar year beginning after December 31, 1999. Under the Plan, stock options may not be granted at a price less than the fair market value of the Company's common stock on the date of grant. There have been no issuances made under the Plan to date, but it is expected that the initial issuances will occur soon after the date of the Distribution. The Distribution Agreement provides that all employee and director options to purchase WAI common stock outstanding immediately prior to the Distribution will be adjusted by increasing the number of shares subject to the option and decreasing the exercise price per share so as to preserve the difference between the aggregate exercise price of the option and the aggregate market value of the shares subject to the option. NOTE G: TAXES ON INCOME See Note K for earnings by geographic area. F-14 UNOVA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE G: TAXES ON INCOME (CONTINUED) The components of taxes on income consist of the following provisions (benefits):
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- (THOUSANDS OF DOLLARS) Currently Payable: U.S. taxes................................................................ $ 31,619 $ 8,926 $ 28,450 International taxes....................................................... 6,446 1,392 7,506 ---------- ---------- ---------- 38,065 10,318 35,956 ---------- ---------- ---------- Deferred: U.S. taxes................................................................ (9,685) 8,220 (17,379) International taxes....................................................... (366) (701) (3,210) ---------- ---------- ---------- (10,051) 7,519 (20,589) ---------- ---------- ---------- $ 28,014 $ 17,837 $ 15,367 ---------- ---------- ---------- ---------- ---------- ----------
Deferred taxes result from the effect of transactions which are recognized in different periods for financial and tax reporting purposes and relate primarily to employee benefits, depreciation and other valuation allowances. The primary components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995 -------------------- -------------------- ASSET LIABILITY ASSET LIABILITY --------- --------- --------- --------- (THOUSANDS OF DOLLARS) Accrued liabilities................................................ $ 32,197 $ 21,025 Receivables and inventory.......................................... 8,426 7,326 Retiree medical benefits........................................... 4,501 5,871 Pensions........................................................... $ 11,239 $ 7,834 Accelerated depreciation........................................... 6,892 6,756 Other items........................................................ 8,512 4,596 7,519 6,293 --------- --------- --------- --------- $ 53,636 $ 22,727 $ 41,741 $ 20,883 --------- --------- --------- --------- --------- --------- --------- ---------
The following is a reconciliation of income taxes at the U.S. statutory rate to the provision for income taxes:
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- (THOUSANDS OF DOLLARS) Tax at U.S. statutory rate..................................................... $ 24,513 $ 15,414 $ 12,929 State income taxes net of federal benefit...................................... 1,382 1,285 1,513 Amortization of nondeductible goodwill......................................... 1,916 1,916 1,902 Foreign earnings taxed at other than U.S. statutory rate....................... 60 100 Other items.................................................................... 143 (878) (977) --------- --------- --------- $ 28,014 $ 17,837 $ 15,367 --------- --------- --------- --------- --------- ---------
The Company made tax payments of $26.1 million, $15.1 million and $25.8 million, in the years ended December 31, 1996, 1995 and 1994, respectively. F-15 UNOVA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE H: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS Benefit plans covering employees of the Company are sponsored by WAI. These plans include retirement and pension plans which cover most of its employees. Most of the Company's U.S. employees are covered by a contributory defined benefit plan. Under a contributory defined benefit plan generally available to U.S. employees of the Company, annual contributions are made to the extent such contributions are actuarially determined. There are also defined contribution voluntary savings programs generally available for U.S. employees, which are intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code. These plans are designed to enhance the retirement programs of participating employees. Under these plans, the Company matches up to 50% of a certain portion of participants' contributions. The Company's non-U.S. subsidiaries also have WAI sponsored retirement and savings plans for employees. The pension liabilities and their related costs are computed in accordance with the laws of the individual nations and appropriate actuarial practices. For employees of the Company, who are participants in any of WAI's various benefit plans, new benefit plans will be established effective as of the date of the Distribution. Assets will be transferred to such plans from corresponding WAI plans based upon actuarial determinations made in conformity with regulatory requirements. U.S. PENSION PLANS A summary of the components of net periodic pension cost for the U.S. defined benefit plans and defined contribution plans for the years ended December 31, 1996, 1995 and 1994, is as follows:
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- (THOUSANDS OF DOLLARS) Defined benefit plans Service cost--benefits earned during the period........................... $ 6,507 $ 4,565 $ 3,867 Interest cost on projected benefit obligation............................. 10,107 9,619 7,710 Actual return on plan assets.............................................. (41,727) (58,985) (3,562) Net amortization and deferral............................................. 19,371 37,439 (16,643) ---------- ---------- ---------- Net periodic pension income............................................... (5,742) (7,362) (8,628) Defined contribution plans.................................................. 2,983 2,414 2,338 ---------- ---------- ---------- Net periodic pension income................................................. $ (2,759) $ (4,948) $ (6,290) ---------- ---------- ---------- ---------- ---------- ----------
Actuarial assumptions for the Company's U.S. defined benefit plans included an expected long-term rate of return on plan assets of 9 1/4% for fiscal years 1996 and 1995. The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7 1/2% at December 31, 1996 and 1995. The rate of increase in future compensation levels was 5% at December 31, 1996 and 1995. F-16 UNOVA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE H: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED) The following table sets forth the funded status of the Company's U.S. plans and amounts recognized in the Company's balance sheet at December 31, 1996 and 1995.
DECEMBER 31, -------------------------- 1996 1995 ------------ ------------ (THOUSANDS OF DOLLARS) Actuarial present value of benefit obligations Vested benefit obligation........................................................... $ (125,121) $ (123,933) ------------ ------------ ------------ ------------ Accumulated benefit obligation...................................................... $ (126,092) $ (124,648) ------------ ------------ ------------ ------------ Projected benefit obligation........................................................ $ (139,026) $ (136,526) Fair value of plan assets............................................................. 267,956 234,874 Unrecognized net transition asset..................................................... (16,268) (18,432) Unrecognized net gain................................................................. (87,550) (58,239) ------------ ------------ Prepaid pension cost.................................................................. $ 25,112 $ 21,677 ------------ ------------ ------------ ------------
The above table includes prepaid pension cost presented net of pension liabilities for plans in which accumulated benefits exceed plan assets. As of December 31, 1996 and 1995, these liabilities amounted to $13.5 million and $7.4 million, respectively. Plan assets consist primarily of equity securities and U.S. Government securities. The excess of plan assets over the projected benefit obligation at August 1, 1986 (when the Company adopted SFAS No. 87) and subsequent unrecognized gains and losses are fully amortized over the average remaining service period of active employees expected to receive benefits under the plans, generally 15 years. NON-U.S. PENSION PLANS For the principal non-U.S. pension plans located in the United Kingdom, the weighted-average discount rate used was approximately 8% at December 31, 1996. The rate of increase in future compensation used was approximately 5%, and the rate of return on assets was 8 1/2% at December 31, 1996. Pension costs for non-U.S. plans were not material for any of the periods presented herein. The actuarial present value of projected benefits at December 31, 1996 was $42.3 million compared with net assets available for benefits of $47.2 million. OTHER POSTRETIREMENT BENEFITS In addition to pension benefits, certain of the Company's U.S. employees are covered by postretirement health care and life insurance benefit plans provided by WAI. These benefit plans are unfunded. The net periodic postretirement benefit costs were not material for any of the periods presented herein. The accumulated benefit obligation at December 31, 1996 was $18.5 million, of which $14.7 million was attributable to retirees and $3.8 million to other active plan participants. The accumulated benefit obligation at December 31, 1995 was $18.0 million, of which $14.7 million was attributable to retirees and $3.3 million was attributable to active plan participants. Actuarial assumptions used to measure the accumulated benefit obligation include a discount rate of 7 1/2% at December 31, 1996 and 1995. The assumed health care cost trend rate for fiscal year 1996 was F-17 UNOVA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE H: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED) 12.7% and is projected to decrease over 20 years to 6%, where it is expected to remain thereafter. The effect of a one-percentage-point increase in the assumed health care cost trend rate on the service cost and interest cost components of the net periodic postretirement benefit cost is not material. A one- percentage-point increase in the assumed health care cost trend rate on the accumulated benefit obligation results in an increase of approximately $1.5 million. NOTE I: LITIGATION, COMMITMENTS AND CONTINGENCIES The Company is currently, and is from time to time, subject to claims and suits arising in the ordinary course of its business. In the opinion of the Company's General Counsel, the ultimate resolution of currently pending proceedings will not have a material adverse effect on the Company's consolidated financial statements. WAI has off-balance-sheet guarantees and letter of credit agreements relating to UNOVA customers with face values totaling $95 million at December 31, 1996 relating principally to the guarantee of future performance on contracts. Such guarantees and letters-of-credit will be assumed by the Company upon the Distribution. NOTE J: RELATED PARTY TRANSACTIONS Included in other assets are amounts due from related parties of $1.6 million and $2.1 million at December 31, 1996 and 1995, respectively. Included in general and administrative costs are allocated charges from WAI of $22.2 million, $19.9 million and $27.6 million, for the years ended December 31, 1996, 1995 and 1994, respectively. Included in interest expense are allocated charges from WAI of $8.3 million, $8.4 million and $12.1 million, for the years ended December 31, 1996, 1995 and 1994, respectively. NOTE K: BUSINESS SEGMENT REPORTING The Company reports its operations in two business segments: the Automated Data Systems segment and the Industrial Automation Systems segment. Material Handling Systems and VantageWare divisions were sold during the fourth quarter of 1996. Figures for these divisions were reported as part of the Industrial Automation Systems segment. Activities are primarily product sales oriented. Export sales are not material. Corporate and other amounts include corporate operating costs, net interest expense and currency transaction gains and losses (see Notes A and J). Assets classified as corporate and other amounts consist primarily of cash and cash equivalents and deferred taxes. F-18 UNOVA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) NOTE K: BUSINESS SEGMENT REPORTING (CONTINUED) OPERATIONS BY BUSINESS SEGMENT (MILLIONS OF DOLLARS)
AUTOMATED INDUSTRIAL CORPORATE YEAR ENDED DATA AUTOMATION AND OTHER DECEMBER 31, SYSTEMS SYSTEMS AMOUNTS TOTAL --------------- ------------- ------------- ----------- --------- Sales.................................................. 1996 $ 367 $ 798 $ 1,165 1995 321 622 943 1994 303 668 971 Operating profit (loss)................................ 1996 30 70 $ (23) 77 1995 13 62 (22) 53 1994 24 56 (27) 53 Capital expenditures................................... 1996 9 14 23 1995 8 16 24 1994 9 12 2 23 Depreciation and amortization expense.................. 1996 11 15 1 27 1995 12 13 1 26 1994 12 16 1 29 Identifiable assets at year end........................ 1996 271 636 167 1,074 1995 279 533 107 919 1994 280 558 23 861
OPERATIONS BY GEOGRAPHIC AREA (MILLIONS OF DOLLARS)
CORPORATE YEAR ENDED UNITED OTHER AND OTHER DECEMBER 31, STATES EUROPE NATIONS AMOUNTS --------------- ----------- ----------- ----------- ------------- Sales..................................................... 1996 $ 950 $ 193 $ 22 1995 771 151 21 1994 811 144 16 Operating profit (loss)................................... 1996 78 22 $ (23) 1995 70 4 1 (22) 1994 71 5 4 (27) Identifiable assets at year end........................... 1996 761 136 10 167 1995 695 105 12 107 1994 709 115 14 23 TOTAL --------- Sales..................................................... $ 1,165 943 971 Operating profit (loss)................................... 77 53 53 Identifiable assets at year end........................... 1,074 919 861
F-19 UNOVA, INC. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
GROSS NET SALES PROFIT EARNINGS --------- --------- ----------- (MILLIONS OF DOLLARS) YEAR ENDED DECEMBER 31, 1996 First Quarter...................................................................... $ 240.4 $ 68.0 $ 8.2 Second Quarter..................................................................... 264.1 73.4 8.7 Third Quarter...................................................................... 310.0 81.0 11.0 Fourth Quarter..................................................................... 350.2 88.0 14.1 YEAR ENDED DECEMBER 31, 1995 First Quarter...................................................................... $ 208.7 $ 62.5 $ 6.1 Second Quarter..................................................................... 240.3 66.1 5.6 Third Quarter...................................................................... 246.4 64.5 6.5 Fourth Quarter..................................................................... 247.5 67.0 8.0
F-20 UNOVA, INC. COMBINED STATEMENTS OF OPERATIONS (THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 1997 1996 ------------ ----------- Sales and Service Revenues.......................................................... $ 732,343 $ 504,471 ------------ ----------- Costs and Expenses Cost of sales..................................................................... 512,516 356,532 Selling, general and administrative............................................... 152,671 103,783 In-process research and development charge........................................ 203,300 Depreciation and amortization..................................................... 17,035 12,889 Interest--net..................................................................... 7,099 3,075 ------------ ----------- Total Costs and Expenses............................................................ 892,621 476,279 ------------ ----------- (Loss) Earnings before Taxes on Income.............................................. (160,278) 28,192 Taxes on Income..................................................................... (17,208) (11,277) ------------ ----------- Net (Loss) Earnings................................................................. $ (177,486) $ 16,915 ------------ ----------- ------------ ----------- Pro Forma Net (Loss) per Share...................................................... $ (3.29) ------------ ------------
See accompanying notes to combined financial statements. F-21 UNOVA, INC. COMBINED BALANCE SHEETS (THOUSANDS OF DOLLARS)
JUNE 30, DECEMBER 31, 1997 1996 ------------- -------------- (UNAUDITED) ASSETS Current Assets Cash and cash equivalents........................................................ $ 21,839 $ 149,467 Accounts receivable, net......................................................... 495,051 394,572 Inventories less progress billings............................................... 142,120 94,452 Deferred tax assets.............................................................. 95,365 53,636 Other current assets............................................................. 12,583 3,664 ------------- -------------- Total Current Assets............................................................... 766,958 695,791 Property, Plant and Equipment, Net................................................. 152,523 132,508 Goodwill and Other Intangibles, Net................................................ 368,942 178,810 Other Assets....................................................................... 62,879 66,684 ------------- -------------- Total Assets....................................................................... $ 1,351,302 $ 1,073,793 ------------- -------------- ------------- -------------- LIABILITIES AND EQUITY Current Liabilities Accounts payable................................................................. $ 332,159 $ 242,168 Payrolls and related expenses.................................................... 65,740 50,567 Due to Western Atlas Inc......................................................... 228,244 109,574 Notes payable and current portion of long-term obligations....................... 57,400 27,461 ------------- -------------- Total Current Liabilities.......................................................... 683,543 429,770 Long-term Obligations.............................................................. 17,267 14,507 Deferred Tax Liabilities........................................................... 16,770 22,727 Other Long-term Liabilities........................................................ 43,512 32,281 Commitments and Contingencies...................................................... Equity--Investment by Western Atlas Inc. .......................................... 590,210 574,508 ------------- -------------- Total Liabilities and Equity....................................................... $ 1,351,302 $ 1,073,793 ------------- -------------- ------------- --------------
See accompanying notes to combined financial statements. F-22 UNOVA, INC. COMBINED STATEMENTS OF CASH FLOWS (THOUSANDS OF DOLLARS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 1997 1996 ------------ ----------- Cash and Cash Equivalents at Beginning of Period.................................... $ 149,467 $ 103,501 ------------ ----------- Cash Flows from Operating Activities: Net (loss) earnings............................................................... (177,486) 16,915 Adjustments to reconcile net (loss) earnings to net cash used in operating activities: Charge for in-process research and development costs.......................... 203,300 Depreciation and amortization................................................. 17,035 12,889 Deferred taxes................................................................ (834) (2,142) Change in accounts receivable................................................. (15,297) (42,215) Change in inventories......................................................... (4,224) (565) Change in other current assets................................................ 4,767 (1,003) Change in accounts payable.................................................... (28,958) (3,212) Change in payrolls and related expenses....................................... 360 (12,374) Other operating activities.................................................... (9,620) (2,444) ------------ ----------- Net cash used in operating activities............................................... (10,957) (34,151) ------------ ----------- Cash Flows from Investing Activities: Acquisition of businesses, net of cash acquired................................... (377,546) Capital expenditures.............................................................. (11,011) (9,464) Other investing activities........................................................ 5,061 32 ------------ ----------- Net cash used in investing activities............................................... (383,496) (9,432) ------------ ----------- Cash Flows from Financing Activities: Net transactions with Western Atlas Inc........................................... 195,566 (17,944) Due to Western Atlas Inc.......................................................... 118,670 305 Repayment of borrowings........................................................... (62,134) Short-term obligations, net....................................................... 14,723 1,289 Other financing activities........................................................ (176) ------------ ----------- Net cash provided by (used in) financing activities................................. 266,825 (16,526) ------------ ----------- Resulting in Decrease in Cash and Cash Equivalents.................................. (127,628) (60,109) ------------ ----------- Cash and Cash Equivalents at End of Period.......................................... $ 21,839 $ 43,392 ------------ ----------- ------------ -----------
See accompanying notes to combined financial statements. F-23 UNOVA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) 1. The amounts included in these interim financial statements are unaudited; however in the opinion of management, all adjustments necessary for a fair statement of results for the stated periods have been included. These adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the audited financial statements and notes thereto included in this information statement. The results of operations for the six months ended June 30, 1997 are not necessarily indicative of operating results for the entire year. 2. The Company acquired Norand Corporation ("Norand") on March 3, 1997, and United Barcode Industries ("UBI") on April 4, 1997. Norand designs, manufactures and markets mobile computing systems and wireless data communications networks using radio frequency technology. UBI is a European-based ADC company headquartered in Sweden, with fiscal 1996 sales of approximately $100 million. These companies are currently being integrated into the Automated Data Systems segment. Both transactions were funded using a combination of WAI's committed credit facilities, short-term uncommitted credit lines and excess cash, and are being accounted for under the purchase method of accounting. Accordingly, the acquisition costs (approximately $280 million and $107 million for Norand and UBI, respectively) have been allocated to the net assets acquired based upon their relative fair values. Such allocation resulted in $203 million assigned to in-process research and development activities; $156 million assigned to goodwill (to be amortized over 25 years using the straight-line method); and $29 million assigned to other intangibles (to be amortized over periods ranging from four to 18 years using the straight-line method). During the period ended June 30, 1997, the Company expensed the amounts assigned to in-process research and development projects that have not yet achieved technological feasibility in accordance with Financial Accounting Standards Board Interpretation No. 4. The Norand acquisition added increased knowledge and capabilities in wireless data communication using radio frequency ("RF") technology and mobile computing solutions for the logistics markets. In the communications area, Norand brings advanced axis point and docking station technology, communication software, product configuration and ergonomics. This acquisition also expands the Company's offering in the RF spread-spectrum technology. The mobile computing technology allows the Company to enter the route accounting, meter reading, and field service markets. Norand provides the Company with pen-based, hand-held computers with desktop PC performance that is important to these markets. The UBI acquistion provides two major product line technologies: bar code on-demand printers with labels and ribbons, and hand-held scanners. UBI's printer technology complements the Company's existing printer offerings with low-end, low cost printers and high-end, high speed printers. UBI also provides enhanced media-handling systems, such as linerless adhesive labels and software. The scanner technology includes scanners based on charge-coupled device ("CCD") technology, which is an alternative to laser scanners in many applications. UBI also brings software that improves laser scanning for one- and two-dimensional symbologies. In addition to the amount charged to in-process research and development, the Company expects to expend an additional $30 million over the next three years to develop these technologies into commercially viable products. These expenditures include engineering labor, material costs, overhead charges, and software development, as well as general and administrative expenses. F-24 UNOVA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) The allocation of the acquisition cost of Norand and UBI is preliminary and subject to revision upon receipt of pending information, such as final assessment of certain legal and environmental exposures, and the completion of certain appraisals. Any such revisions are not expected to have a material impact on the Company's combined financial statements. The following unaudited pro forma financial information for the Company reflects the Norand acquisition as if it had occurred on January 1, 1996, after giving effect to certain pro forma adjustments, including amortization of goodwill and other intangibles, and interest associated with the increase in allocated WAI debt. The 1997 pro forma information excludes the $203 million charge for acquired in-process research and development activities. The unaudited pro forma information is not necessarily indicative of what results would have been if the combination had occurred on the above-mentioned date. Pro forma sales and services revenues, net earnings and earnings per share for the six months ended June 30, 1997 are $769.1 million, $21.2 million and $0.39, respectively. Pro forma sales and service revenues, net earnings and earnings per share for the year ended December 31, 1996 are $1,405.8 million, $27.9 million and $0.52, respectively. The Company acquired the remaining 51% of Honsberg, a German machine tool maker, in the second quarter of 1997. The original 49% of Honsberg was acquired during 1995. The fair values of Norand, UBI and Honsberg assets and liabilities at their respective acquisition dates are presented below for supplemental cash flow disclosure purposes:
(THOUSANDS OF DOLLARS) ---------------------- Current assets........................................................ $ 150,911 Net property, plant and equipment..................................... 22,820 Goodwill and other intangibles........................................ 193,943 Other non-current assets.............................................. 55,325 Total debt............................................................ (84,163) Other current liabilities............................................. (142,349) Other non-current liabilities......................................... (11,642) In-process research and development................................... 203,300 ---------- Purchase price...................................................... 388,145 Less: Cash acquired................................................... (10,599) ---------- Purchase price, net of cash acquired................................ $ 377,546 ---------- ----------
F-25 UNOVA, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) 3. Sales and service revenues and segment operating profit for the six months ended June 30, 1997 (excluding the $203 million charge for acquired in-process research and development described above) and 1996 were as follows:
SIX MONTHS ENDED JUNE 30, -------------------- 1997 1996 --------- --------- (MILLIONS OF DOLLARS) SALES AND SERVICE REVENUES Automated Data Systems................................................................. $ 282 $ 175 Industrial Automation Systems.......................................................... 450 329 --------- --------- Total Sales and Service Revenues....................................................... $ 732 $ 504 --------- --------- --------- --------- SEGMENT OPERATING PROFIT Automated Data Systems................................................................. $ 12 $ 13 Industrial Automation Systems.......................................................... 49 29 --------- --------- Total Segment Operating Profit......................................................... $ 61 $ 42 --------- --------- --------- ---------
4. General and administrative costs include allocated charges from WAI of $9.1 million and $10.8 million for the six months ended June 30, 1997 and 1996, respectively. Interest expense includes allocated charges from WAI of $6.3 million and $4.1 million for the six months ended June 30, 1997 and 1996, respectively. 5. The components of inventory balances are summarized below:
JUNE 30, DECEMBER 31, 1997 1996 -------------- -------------- (THOUSANDS OF DOLLARS) Raw materials and work in process............................................. $ 109,096 $ 100,078 Finished goods................................................................ 48,706 18,697 Less progress billings........................................................ (15,682) (24,323) -------------- -------------- Net inventories............................................................... $ 142,120 $ 94,452 -------------- -------------- -------------- --------------
6. Net interest expense is composed of the following:
SIX MONTHS ENDED JUNE 30, ------------------------------ 1997 1996 -------------- -------------- (THOUSANDS OF DOLLARS) Interest expense.............................................................. $ 9,264 $ 5,764 Interest income............................................................... (2,165) (2,689) -------------- -------------- Net interest expense.......................................................... $ 7,099 $ 3,075 -------------- -------------- -------------- --------------
F-26 NORAND CORPORATION REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS OF NORAND CORPORATION We have audited the accompanying consolidated balance sheet of Norand Corporation (a Delaware corporation) and Subsidiaries as of August 31, 1996, and the related consolidated statement of operations, stockholders' equity and cash flows for the year ended August 31, 1996. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Norand Corporation and Subsidiaries as of August 31, 1996, and the results of operations and cash flows for the year ended August 31, 1996, in conformity with generally accepted accounting principles. Arthur Andersen LLP Chicago, Illinois October 15, 1996 (except with respect to the matter discussed in Note 7, as to which the date is November 20, 1996) F-27 NORAND CORPORATION CONSOLIDATED BALANCE SHEET (THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
AUGUST 31, 1996 ---------------- ASSETS Current assets: Cash and cash equivalents..................................................................... $ 3,604 Accounts receivable, net of allowances for doubtful accounts and estimated sales returns of $9,278....................................................... 69,841 Inventories................................................................................... 33,565 Deferred tax assets........................................................................... 8,523 Prepaid expenses and other current assets..................................................... 8,011 ---------------- Total current assets........................................................................ 123,544 Noncurrent assets: Property, plant and equipment, net............................................................ 25,601 Deferred tax assets........................................................................... 9,318 Patents and intellectual properties, net...................................................... 6,157 Goodwill, net................................................................................. 3,112 Other noncurrent assets....................................................................... 4,333 ---------------- Total assets................................................................................ $ 172,065 ---------------- ---------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt............................................................................... $ 52,460 Accounts payable.............................................................................. 23,195 Accrued payroll and employee benefits......................................................... 9,809 Other accrued liabilities..................................................................... 33,449 Deferred income............................................................................... 10,418 ---------------- Total current liabilities................................................................... 129,331 ---------------- Stockholders' equity: Common stock, $.01 par value: Authorized 15,000,000 shares; issued and outstanding 7,664,535 shares..................................................... 77 Additional paid-in capital.................................................................... 75,237 Accumulated deficit........................................................................... (28,482) Equity adjustment from foreign currency translation........................................... (4,098) ---------------- Total stockholders' equity.................................................................. 42,734 ---------------- Total liabilities and stockholders' equity.................................................. $ 172,065 ---------------- ----------------
See accompanying notes to the consolidated financial statements. F-28 NORAND CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS (THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
FISCAL YEAR ENDED AUGUST 31, 1996 ------------------ REVENUES: Product sales revenue....................................................................... $ 193,249 Customer service revenue.................................................................... 42,251 ---------- Total revenues............................................................................ 235,500 Cost of products and services................................................................. 141,744 ---------- Gross profit.............................................................................. 93,756 OPERATING EXPENSES: Product development and engineering expenses................................................ 22,898 Selling expenses............................................................................ 58,347 General and administrative expenses......................................................... 17,006 Restructuring charge........................................................................ 4,392 ---------- Total operating expenses.................................................................. 102,643 ---------- Loss from operations...................................................................... (8,887) Interest and other expenses................................................................... 6,256 Litigation settlement......................................................................... 5,100 ---------- Loss before income taxes.................................................................. (20,243) Income tax benefit............................................................................ (6,073) ---------- Net loss.................................................................................. $ (14,170) ---------- ---------- Net loss per common share..................................................................... $ (1.87) ---------- ---------- Average number of common and common equivalent shares outstanding............................. 7,573,017
See accompanying notes to the consolidated financial statements. F-29 NORAND CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
EQUITY ADJUSTMENT COMMON STOCK ADDITIONAL FROM FOREIGN ------------------------ PAID-IN ACCUMULATED CURRENCY SHARES AMOUNT CAPITAL DEFICIT TRANSLATION ----------- ----------- ----------- ------------- ------------- Balances, August 31, 1995..................... 7,534,846 $ 75 $ 73,150 $ (14,312) $ (3,642) Exercises of stock options.................... 129,689 2 2,087 Foreign currency translation.................. (456) Net loss...................................... (14,170) ----------- --- ----------- ------------- ------------- Balances, August 31, 1996..................... 7,664,535 $ 77 $ 75,237 $ (28,482) $ (4,098) ----------- --- ----------- ------------- ------------- ----------- --- ----------- ------------- -------------
See accompanying notes to the consolidated financial statements. F-30 NORAND CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (THOUSANDS OF DOLLARS)
FISCAL YEAR ENDED AUGUST 31, 1996 ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................................................... $ (14,170) -------- Adjustments to reconcile net loss to net cash used in operating activities: Depreciation.............................................................................. 7,792 Amortization.............................................................................. 4,282 Amortization of deferred royalty income................................................... (1,877) Deferred tax benefit...................................................................... (8,220) Provision for doubtful accounts and sales returns......................................... 7,216 Changes in assets and liabilities: Accounts receivable..................................................................... (8,171) Inventories............................................................................. 3,323 Prepaid expenses and other assets....................................................... (3,101) Deferred income......................................................................... 2,699 Accounts payable and accrued liabilities................................................ 8,018 Accrued restructuring, net.............................................................. 1,596 -------- Total adjustments..................................................................... 13,557 -------- Net cash used in operating activities................................................. (613) -------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment.................................................. (10,183) Additions to software, patents, and intellectual properties................................. (3,296) -------- Net cash used in investing activities................................................. (13,479) -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line of credit agreement............................................... 12,565 Issuances of common stock................................................................... 2,089 Payments of refinancing expenses............................................................ (680) -------- Net cash provided by financing activities............................................. 13,974 -------- Effect of exchange rate changes on cash....................................................... (87) -------- Net decrease in cash and cash equivalents..................................................... (205) -------- CASH AND CASH EQUIVALENTS: Beginning of period......................................................................... 3,809 -------- End of period............................................................................... $ 3,604 -------- -------- Supplemental disclosures of cash flow information: Interest paid on all debt obligations....................................................... $ 5,281 Net income taxes refunded................................................................... $ (1,591)
See accompanying notes to the consolidated financial statements. F-31 NORAND CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS Norand designs, manufactures and markets mobile computing systems and wireless data communications networks using radio frequency technology. Norand systems allow businesses worldwide to apply information technology to industrial and field automation settings. Typical applications include route accounting, field sales automation, and inventory database management in manufacturing, warehouse and retail settings. Norand provides hardware, application software, systems integration and support to thousands of customers in dozens of industries to improve accountability, productivity and management control. 2. ITALIAN SUBSIDIARY IRREGULARITIES On September 25, 1995, the Company announced that it had discovered irregularities during the course of the year-end audit at its Italian subsidiary. At that time the managing director of the Italian subsidiary was removed. The Company's investigation of the irregularities in its Italian subsidiary continued following the initial announcement. The investigation revealed a complex set of irregularities, which took place over a period of time. The irregularities were facilitated by third parties, certain of which were associated with the former managing director. As a result of the investigation attributable to the Italian subsidiary, the Company recorded in its 1995 and 1994 financial statements pretax charges and costs related to sales returns, inventory losses, certain local taxes which may not be recoverable, professional costs for the investigation, and the settlement or anticipated settlement of numerous third party claims against the Italian subsidiary. In total, after restatement for irregular sales and costs, pretax charges and costs related to the irregularities included in the financial statements amounted to $8.3 million in 1995 and $1.5 million in 1994. The Company believes that a thorough investigation has been completed in order to determine the aggregate losses due to the irregularities. The Company has continued to pursue potential further recoveries from third parties and insurance. Such potential recoveries have not been reflected in the accompanying financial statements. During 1996, the Company settled numerous previously identified third party claims for costs which approximated previous estimates. No new claims have been presented that would have a material adverse financial impact on the Company. Based upon the results of its investigation and the claim settlements, the Company does not believe that the aggregate charges and operating losses relating to these known facts and circumstances will materially exceed the amount of recorded losses and costs already recorded. However, there can be no assurances that additional third party claims will not be discovered in future periods which will result in further losses related to this matter. Such losses could be material to the consolidated results of operations in any future period. Management does not believe that any such losses will be material to the Company's consolidated financial position. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying financial statements have been prepared on a consolidated basis to include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany amounts and transactions have been eliminated in consolidation. INVENTORIES Inventories are stated at the lower of cost or market with cost determined on a first-in, first-out basis. F-32 NORAND CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation of plant and equipment is provided over the estimated useful lives of the assets. Production machinery and equipment (including molds and dies) is depreciated using the units of production method. All other property, plant and equipment is depreciated using the straight-line method. The ranges of the estimated useful lives are as follows: buildings, ten to thirty years; machinery and equipment and office furniture and equipment, three to ten years; computer equipment and software purchased to support the Company's business processes, two to five years; and leasehold improvements, the shorter of the useful lives of the assets or the term of the leases. Costs of renewals and betterments are capitalized; repairs and maintenance are expensed as incurred. SOFTWARE DEVELOPMENT COSTS The Company capitalizes internal software development costs and qualifying purchased product software, both of which are developed or acquired for sale to the Company's customer. The Company capitalized internal software development costs of $1.5 million in 1996. As of August 31, 1996, capitalized software development costs, net of amortization were $3.7 million. The capitalization of these costs begins when a product's economic and technological feasibility has been established and ends when the product is available for general release to customers. Amortization is computed on an individual product basis over a three year period. Capitalized software development costs are included in other noncurrent assets. PATENTS AND INTELLECTUAL PROPERTIES Patents include the direct costs of the patents and costs to maintain and protect the patents. Patents are being amortized over the remaining lives of the patents, a weighted average of approximately four years. Intellectual properties include the direct costs of acquisition and are amortized over the useful lives of the underlying technology, generally three to five years. GOODWILL Goodwill from the acquisition of Infolink Group Limited in August 1995, the acquisition of the Company in October 1988, and other acquisitions, represents the excess of cost over the fair value of net assets acquired and is being amortized over 15 and 40 years, respectively, using the straight-line method. The Company periodically reviews the value of its goodwill to determine if an impairment has occurred. The Company bases its determination on the performance, on an undiscounted basis, of the underlying businesses. Based on its review, the Company does not believe that an impairment of its goodwill has occurred. In March 1995, the Financial Accounting Standards Board issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". The statement becomes effective in fiscal 1997. The Company does not believe that the adoption of this statement will be material to the Company's consolidated financial statements. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109. Deferred income taxes are recorded to reflect the tax consequences on future years of F-33 NORAND CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) differences between the basis of assets and liabilities for income tax and for financial reporting purposes. In addition, the amount of any future tax benefits are reduced by a valuation allowance until it is more likely than not that such benefits will be realized. Deferred income taxes have not been provided for any income tax liability which could be incurred upon the repatriation of undistributed earnings of the Company's consolidated foreign subsidiaries as the Company expects to indefinitely reinvest these earnings outside the U.S. However, if the Company were to repatriate the undistributed earnings of the consolidated foreign subsidiaries, the potential income tax liability would not be material. INCOME PER COMMON SHARE The computation of primary and fully diluted earnings per share is based on the weighted average number of common stock and common stock equivalent shares outstanding during the period. Common stock equivalents consist primarily of options outstanding under the Company's stock option plans and shares to be purchased under the employee stock purchase plan. FOREIGN CURRENCY TRANSLATION The financial statements of foreign operations are translated into U.S. dollars in accordance with Statement of Financial Accounting Standard No. 52. Accordingly, all assets and liabilities are translated at year-end exchange rates. The gains and losses that result from this process are shown in the accumulated translation adjustment account in the shareholders' equity section of the balance sheet. Operating transactions are translated at weighted average rates during the year. Transaction gains and losses are reflected in net loss. During 1996, the Company did not enter into foreign exchange forward contracts or foreign exchange option contracts to hedge the effect of foreign currency fluctuations on the financial statements. REVENUE RECOGNITION Revenues from product sales are generally recognized at the time of shipment of the product. Revenues from customer service sales are recognized ratably over the maintenance contract period or as the services are performed for repairs not under warranty or maintenance contracts. Included in deferred income at August 31, 1996, is deferred maintenance revenue of $10.2 million. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RISKS AND UNCERTAINTIES The Company is subject to various potential risks and uncertainties which include, without limitation, continued pressures in the marketplace, the Company's ability to realize the benefits of the implemented restructuring, the future need for restructuring (see Note 11), the Company's ability to achieve increased revenues from new products and achieve lower operating expenses as a percent of revenues, the Company's ability to obtain debt financing, remain in compliance with debt covenants and maintain F-34 NORAND CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) liquidity (see Note 7). Additionally, the Company is subject to potential risks and uncertainties related to foreign operations, the effect of technological changes on the carrying value of inventories and specialized manufacturing equipment, the estimated realization of deferred tax assets (see Note 8), the potential for additional third party claims against the Company's Italian subsidiary (see Note 2) and the possible adverse effects of certain pending litigation (see Note 13). A summary discussion of risks and uncertainties is included in Management's Discussion and Analysis of Financial Condition and Results of Operations under the caption "Safe Harbor Statement." RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses included in the caption "Product development and engineering expenses" in the consolidated statement of operations in the fiscal year ended in 1996 are $18.5 million. 4. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market, and consist of the following:
AUGUST 31, 1996 ---------------------- (THOUSANDS OF DOLLARS) Parts and materials................................................... $ 16,383 Work in process....................................................... 8,246 Finished goods........................................................ 5,382 Field service and sales supplies...................................... 3,554 -------- Total........................................................... $ 33,565 -------- --------
F-35 NORAND CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. NONCURRENT ASSETS Noncurrent assets include the following:
AUGUST 31, 1996 ---------------------- (THOUSANDS OF DOLLARS) Property, plant and equipment: Land................................................................ $ 225 Buildings........................................................... 3,394 Machinery and equipment............................................. 30,132 Office furniture and equipment...................................... 26,690 Leasehold improvements.............................................. 703 -------- Subtotal, at cost................................................... 61,144 Less accumulated depreciation....................................... 35,543 -------- Total, net........................................................ $ 25,601 -------- -------- Patents and intellectual properties................................... $ 10,786 Less accumulated depreciation and amortization........................ 4,629 -------- Total, net........................................................ $ 6,157 -------- -------- Goodwill.............................................................. $ 3,588 Less accumulated amortization......................................... 476 -------- Total, net........................................................ $ 3,112 -------- --------
6. ACQUISITION On August 8, 1995, the Company acquired all the outstanding stock of Infolink Group Limited (Infolink), a distributor in Australia, for 9,817 shares of the Company's common stock valued at $0.4 million. The acquisition was accounted for using the purchase method. Accordingly, the purchase price was allocated to the assets and liabilities acquired based on their estimated fair values. This treatment resulted in approximately $1.3 million of estimated goodwill. The goodwill is being amortized over fifteen years. The prior operations and financial position of Infolink were not material. 7. SHORT-TERM DEBT At August 31, 1995, the Company had $39.5 million of borrowings outstanding under a credit facility (the "Agreement") with a group of lending banks. The Agreement allowed for $60 million of maximum borrowings. In October 1995, as a result of anticipated non-compliance with the Agreement, the Company and the lending group amended and recollateralized the Agreement resulting in an increase in the effective interest rate by 1.0 percent on LIBOR borrowings and 0.5 percent on prime rate borrowings. As a result of the losses for the year ended August 31, 1995 and losses for the quarter ended December 2, 1995, the Company was not in compliance with certain covenants under the amended Agreement. Borrowings under the amended Agreement to fund operations and capital additions had increased to $57.4 million in early December, 1995. Due to covenant violations, in December 1995, available borrowings under the amended Agreement were frozen at $57.4 million. F-36 NORAND CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SHORT-TERM DEBT (CONTINUED) On January 25, 1996, the Company and the lending group amended and restated the Agreement (the "Restated Agreement") wherein the lending group agreed to waive any defaults under or violations of the Agreement occurring on or before January 25, 1996. The Restated Agreement provided for an amortizing term loan beginning at $52.0 million and amortizing by $1.0 million per month beginning September 15, 1996 to $48.0 million on December 15, 1996, and up to $11.5 million in borrowing base revolving loans. The Restated Agreement was limited to $63.5 million in aggregate borrowings. Obligations under the Restated Agreement were to mature on December 31, 1996. The Company's obligations under the Restated Agreement were secured by substantially all of the assets of the Company. The effective interest rate, effective January 25, 1996, under the Restated Agreement was the agent's alternate base rate (ABR) plus 1.75% for all borrowings up to $57.4 million and ABR +2.75% for borrowings above $57.4 million. The Restated Agreement contained financial covenants, measured at varying dates, including covenants relating to tangible net worth, capital additions and cash flows. The Company paid a commitment fee at closing amounting to 0.5% of the total facility. At August 31, 1996, the Company had $52.0 million of borrowings outstanding under the Restated Agreement. In November 1996, as a result of noncompliance with certain covenants under the Restated Agreement due to losses incurred for the year ended August 31, 1996, the Company and its lenders amended the Restated Agreement (the "Amended and Restated Agreement") wherein the lending group has agreed to waive any defaults under or violations of the Restated Agreement occurring on or before August 31, 1996. The Amended and Restated Agreement provides for maximum borrowings of $60.5 million. Maximum allowable borrowings decline to $59.5 million on December 16, 1996 and then decline periodically over the period to $48.25 million on September 15, 1997. Obligations under the Amended and Restated Agreement will mature on September 30, 1997. Obligations under the Amended and Restated Agreement will continue to be secured by substantially all of the assets of the Company. No foreign currency borrowings are permitted under the Amended and Restated Agreement. The effective interest rate increases periodically September 15, 1996 to ABR plus 4% on December 31, 1996 for all borrowings. The Amended and Restated Agreement will continue to contain financial covenants relating to tangible net worth, capital additions, earnings and cash flows. In addition to a fee amounting to $0.3 million which was paid on September 15, 1996 to maintain the aggregate borrowing capacity under the Restated Agreement, the Company will be required to pay additional fees to maintain aggregate borrowings under the Amended and Restated Agreement amounting to 0.1% of the total facility due at closing, 0.1% of the total facility due monthly from January 31, 1997 to April 30, 1997, and 0.25% of the total facility due June 30, 1997. Concurrently with entering into the Amended and Restated Agreement, the Company issued to its lending group Series A Warrants exercisable for an aggregate of 250,000 shares of the Company's common stock (the "Series A Warrants") and Series B Warrants exercisable for an aggregate of 300,000 shares of the Company's common stock (the "Series B Warrants"), in each case at an exercise price of $21.15. The Series A Warrants and Series B Warrants are not exercisable until May 31, 1997 and August 31, 1997, respectively, and may be repurchased by the Company for an aggregate of one dollar ($1) for the Series A Warrants and an aggregate of one dollar ($1) for the Series B Warrants in the event that, with respect to each of the Class A Warrants and Class B Warrants, prior to such dates, all indebtedness under the Amended and Restated Agreement has been repaid in full. Additionally, with respect to the Series B Warrants, the Company may repurchase such Warrants before August 31, 1997, for an aggregate of one dollar ($1) if it has received at least $20 million in net cash proceeds from additional equity. F-37 NORAND CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SHORT-TERM DEBT (CONTINUED) The Company is currently seeking alternative sources of capital which will be more advantageous to the Company. Management believes that they will be able to replace the Amended and Restated Agreement with such sources during fiscal 1997. As of August 31, 1996, the Company had borrowings outstanding at its Australian subsidiary which amounted to $0.5 million. The carrying amount for the short-term borrowing recorded in the financial statements approximates fair value. The weighted average interest rate paid under the above agreements was 11.57% in fiscal 1996. The average month-end balance outstanding was $53.7 million in fiscal 1996. The maximum amount outstanding in fiscal 1996 was $63.0 million. 8. INCOME TAXES The components of loss before income taxes are:
AUGUST 31, 1996 ---------------------- (THOUSANDS OF DOLLARS) Domestic.............................................................. $ (19,748) International......................................................... (495) -------- $ (20,243) -------- --------
The provision (benefit) for income taxes consisted of the following:
AUGUST 31, 1996 ---------------------- (THOUSANDS OF DOLLARS) Current: Federal............................................................. $ -- State............................................................... 87 Foreign............................................................. 2,060 -------- 2,147 Deferred.............................................................. (8,220) -------- Total............................................................... $ (6,073) -------- --------
F-38 NORAND CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES (CONTINUED) The income tax benefit differs from a benefit computed at the U.S. statutory rate as follows:
AUGUST 31, 1996 ---------------------- (THOUSANDS OF DOLLARS) Statutory rate benefit................................................ $ (6,883) State income taxes (net of federal benefit)........................... 57 Foreign income taxes.................................................. 688 Increase in valuation allowance....................................... 2,792 Research and development tax credit carryforwards..................... (2,615) Refund from NOL carryback............................................. (2,323) Additional reserves................................................... 1,213 Deemed dividend from subsidiary....................................... 820 Other................................................................. 178 -------- $ (6,073) -------- --------
The consolidated balance sheet includes the following:
AUGUST 31, 1996 ---------------------- (THOUSANDS OF DOLLARS) Current income tax payable: Federal............................................................. $ 2,716 State and local..................................................... 86 Foreign............................................................. 5,201 -------- $ 8,003 -------- --------
AUGUST 31, 1996 ---------------------- (THOUSANDS OF DOLLARS) Net deferred tax assets (liabilities): Capitalized software................................................ $ 2,874 Noncompete covenant................................................. 2,121 Domestic net operating loss......................................... 7,559 Foreign net operating losses........................................ 5,913 Depreciation and amortization....................................... (3,081) Inventory obsolescence reserve and capitalization................... 1,832 Vacation accruals................................................... 1,154 Research and development tax credit carryforwards................... 3,827 AMT tax credit carryforwards........................................ 1,365 Deferred maintenance revenue........................................ 1,126 Other............................................................... 2,177 -------- Subtotal.............................................................. 26,867 Valuation allowance................................................... (9,026) -------- Net deferred tax assets............................................... $ 17,841 -------- --------
In March 1996, the Company effectively wrote off its investment in its Italian subsidiary, for tax purposes, resulting in a net operating loss (NOL) which was carried back to prior years. The NOL carryback F-39 NORAND CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES (CONTINUED) generated a $2.3 million refund. The Company has determined that based on its domestic profitability, that it is more likely than not (except for certain foreign NOLs which expire in the years 2000 and 2001 and remaining research and development tax credits) that recorded deferred tax assets will be realized in future periods. In 1996, the Company increased the deferred tax asset valuation allowance to offset the increase in certain foreign NOLs and research and development tax credits. The Company also provided additional reserves for income taxes related to fiscal years which remain subject to potential examination of respective taxing jurisdictions. Income taxes payable are included in other current liabilities. 9. EMPLOYEE BENEFIT PLANS Employees of the Company who meet certain eligibility requirements can participate in the Company's 401(k) Savings and Investment Plan. Under the Plan, the Company may, at its discretion, match the employee contributions. The Company recorded expenses related to its matching contributions for fiscal 1996 of $1.2 million. In 1994, the Company established the Norand Employee Stock Purchase Plan (the Plan) which enables eligible employees to purchase the Company's common stock at 85% of its fair market value. The fair market value of the common stock used to determine the purchase price is based on the lower of the closing price of the stock on the first or last business day of the Plan year which ends on December 31. Employee contributions, which are made through payroll deductions throughout the Plan year, are limited to 10 percent of total compensation. In March 1996, 77,984 shares were purchased under the Plan. The Company has an additional 440,282 shares reserved for future issuance under its Employee Stock Purchase Plan. 10. LEASE COMMITMENTS The Company is obligated as lessee under certain noncancelable operating leases for office space and its manufacturing facility, and is also obligated to pay insurance, maintenance and other operating costs associated with the leases. The leases have various renewable options and terms. Rent expense under these operating leases was $2.9 million in 1996. Future minimum annual lease payments as of August 31, 1996, under agreements classified as operating leases with noncancelable terms in excess of one year are as follows:
(THOUSANDS OF DOLLARS) ---------------------- 1997.................................................................. $ 2,503 1998.................................................................. 1,752 1999.................................................................. 1,083 2000.................................................................. 670 2001 and thereafter................................................... 510 -------- Total............................................................... $ 6,518 -------- --------
11. RESTRUCTURING During the second quarter of 1996, the Company recorded a charge of $5.2 million ($3.6 million after-tax) related to a company-wide restructuring of operations. The restructuring charge was reduced by $0.8 F-40 NORAND CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. RESTRUCTURING (CONTINUED) million in the fourth quarter as a result of favorable experience compared to previous cost estimates. The restructuring charge included $3.7 million for severance and other costs related to reductions in the Company's domestic and international workforce and $0.7 million for lease exit costs associated with the closing or consolidating of certain facilities. The Company believes that annual cost savings resulting from the restructuring charge will be in excess of these charges. However, no assurances can be given as to the actual extent of any savings or improvements that might be realized or that additional actions and additional charges against earnings might not occur in the future. As of August 31, 1996, approximately $1.6 million of the charge has not yet been expended. The Company expects to expend the remaining balance, comprised primarily of amounts due in installments under severance and lease agreements, in fiscal 1997. 12. STOCK OPTIONS The Company has three stock option plans for its officers, directors and other key employees. The options under the plans generally become exercisable in equal installments over a three-to five-year period commencing on the first anniversary date after the date of grant and quarterly thereafter. Options canceled due to terminations or expiration of exercise period are returned to the pool of options available to be granted. The exercise price is equal to the market price for the Company's common stock on the date of grant and ranges from $1.10 to $45.25. The following is a summary of the activity in the Company's common stock option plans for the year ended August 31, 1996 and the outstanding balance of options issued:
AVERAGE PRICE PER SHARES SHARE ----------- ----------- August 31, 1995.................................................... 723,457 $ 25.41 Granted.......................................................... 556,215 16.63 Exercised........................................................ (43,785) 16.34 Canceled......................................................... (171,447) 25.75 ----------- ----------- August 31, 1996.................................................... 1,064,440 $ 21.19 ----------- ----------- ----------- -----------
At August 31, 1996, there were 297,319 shares exercisable and 1,552,278 shares reserved for issuance under the above option plans. In October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock Based Compensation." This statement becomes effective in fiscal 1997 and will require the Company to change its disclosures relating to stock options. The Company currently does not intend to change its accounting for stock options. 13. LITIGATION In October 1995, two class action complaints were filed against the Company and certain of its officers in United States District Court in Cedar Rapids, Iowa, seeking unspecified damages on behalf of a purported class of purchasers of Norand stock on the ground that the defendants violated the federal F-41 NORAND CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. LITIGATION (CONTINUED) securities laws by allegedly making materially false and misleading statements concerning the Company's results of operations and future prospects during the period from March 20, 1995 until September 25, 1995. On November 24, 1995, a third lawsuit was filed in the same court raising substantially the same claims on behalf of a broader purported class of purchasers of Norand stock. All three lawsuits were consolidated under the caption In re Norand Corporation Securities Litigation (Master File No. C 95-323). On December 23, 1995, a single amended and consolidated complaint was filed in the consolidated action, superseding all previous pleadings. The complaint was filed on behalf of a purported class consisting of purchasers of Norand stock from September 26, 1994 through November 17, 1995, and named as defendants the Company, five of its present or former senior officers, and Arthur Andersen LLP, the Company's independent public accountant. The consolidated complaint alleged, among other things, that the Norand defendants materially overstated the Company's revenues and earnings by improperly recording sales in its Italian subsidiary and misled the market by failing to disclose alleged problems with certain of its products that affected its revenues in the fourth quarter of fiscal 1995. On August 28, 1996, the Company announced that it had signed an agreement to settle the consolidated complaint and secure releases for all of the defendants with the exception of Arthur Andersen. The Company believes its officers and directors acted properly regarding this matter and denies any wrongdoing. Nevertheless, the Company feels it is in the best interest of the Company and its shareholders to settle the matter and devote management time and energy to running the business. The settlement, which calls for the payment of $4.5 million in cash and $4.5 million worth of Norand stock, is subject to approval by the District Court, following notice to the class and a hearing on the fairness of the settlement. That hearing is scheduled for December 19, 1996. The cash portion of the settlement is covered by insurance. The Company has the option to pay $4.5 million in cash instead of issuing the stock. The settlement resulted in a fourth quarter charge of $4.8 million including additional legal costs related to the portion of the settlement not covered by insurance. The Company had previously accrued $0.3 million in the first quarter for related legal costs. The Company is also subject to certain legal proceedings and claims which have arisen in the ordinary course of its business and have not been finally adjudicated. In management's opinion, the ultimate resolution of these matters will not be material to the Company's consolidated financial position or results of operations. 14. BUSINESS SEGMENT DATA The Company's operations consist of a single business segment which designs, develops, manufactures, markets and services hand-held data communication computer systems. The Company does not believe it is dependent upon any one customer or group of customers. Transfers between geographic F-42 NORAND CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. BUSINESS SEGMENT DATA (CONTINUED) areas were at cost plus a negotiated mark-up. Sales and selected financial information by geographic area for the fiscal year ended August 31, 1996 were as follows:
UNITED STATES INTERNATIONAL ELIMINATIONS CONSOLIDATED ---------------- ----------------- --------------- ---------------- (THOUSANDS OF DOLLARS) Revenues................................ $ 203,282 $ 57,397 $ (25,179) $ 235,500 Loss from operations.................... (8,008) (809) (70) (8,887) Interest and other expenses............. (6,256) Litigation settlement................... (5,100) Loss before income taxes................ (20,243) Identifiable assets..................... 138,058 34,007 172,065
A substantial portion of the Company's international operations is in Europe. Other geographic areas of operations include Canada, Mexico, Australia and Japan. International operating income does not include the expenses of corporate administration. International identifiable assets are principally trade receivables and inventories. United States revenue includes export sales of $8,217 in 1996, and also includes transfers between geographic areas which are eliminated. 15. SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table sets forth unaudited quarterly financial information for the year ended August 31, 1996:
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ----------------- -------------------- ----------------- ------------------- (THOUSANDS OF DOLLARS) Total revenues.................. $ 49,806 $ 56,032 $ 60,216 $ 69,446 Gross profit.................... 18,840 20,943 25,901 28,072 Income (loss) from operations... (5,507) (9,351) 2,823 3,148 Net income (loss)............... (4,843) (7,721) 789 (2,395) Primary earnings per share...... (0.63) (1.02) 0.10 (0.32) Fully diluted earnings per share......................... (0.63) (1.02) 0.10 (0.32)
16. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES The analysis of the allowance for doubtful accounts and estimated sales returns is as follows:
ADDITIONS ADDITIONS BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER END OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR --------------- --------------- ------------------- -------------- ------------- (THOUSANDS OF DOLLARS) Year ended August 31, 1996..... $ 6,423 $ 7,216 $ 0 $ 4,361 $ 9,278
Deductions include doubtful accounts charged off, net of recoveries, including recoverable cost of returned equipment. F-43 NORAND CORPORATION CONSOLIDATED BALANCE SHEET (THOUSANDS OF DOLLARS) (UNAUDITED)
MARCH 1, 1997 -------------- ASSETS Current assets: Cash and cash equivalents....................................................................... $ 1,682 Accounts receivable, net........................................................................ 48,180 Inventories..................................................................................... 38,686 Deferred tax assets............................................................................. 12,754 Prepaid expenses and other current assets....................................................... 12,117 -------------- Total current assets........................................................................ 113,419 Noncurrent assets: Property, plant and equipment, net.............................................................. 25,196 Deferred tax assets............................................................................. 9,318 Patents and intellectual properties, net........................................................ 5,685 Goodwill, net................................................................................... 3,036 Other noncurrent assets......................................................................... 4,399 -------------- Total assets................................................................................ $ 161,053 -------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt................................................................................. $ 45,238 Accounts payable................................................................................ 19,344 Accrued payroll and employee benefits........................................................... 11,599 Other accrued liabilities....................................................................... 31,026 Deferred income................................................................................. 11,146 -------------- Total current liabilities................................................................... 118,353 -------------- Stockholders' equity: Common stock.................................................................................... 82 Additional paid-in capital...................................................................... 82,923 Accumulated deficit............................................................................. (35,726) Equity adjustment from foreign currency translation............................................. (4,579) -------------- Total stockholders' equity.................................................................. 42,700 -------------- Total liabilities and stockholders' equity.................................................. $ 161,053 -------------- --------------
See accompanying notes to consolidated financial statements. F-44 NORAND CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
SIX MONTHS ENDED ------------------------------ MARCH 1, 1997 MARCH 2, 1996 -------------- -------------- REVENUES: Product sales revenue.......................................................... $ 79,198 $ 84,364 Customer service revenue....................................................... 21,899 21,474 -------------- -------------- Total revenues............................................................... 101,097 105,838 Cost of products and services.................................................... 59,541 66,055 -------------- -------------- Gross profit................................................................... 41,556 39,783 OPERATING EXPENSES: Product development and engineering expenses................................... 11,306 12,584 Selling expenses............................................................... 28,287 27,346 General and administrative expenses............................................ 8,921 15,011 -------------- -------------- Total operating expenses..................................................... 48,514 54,941 -------------- -------------- Loss from operations......................................................... (6,958) (15,158) Interest and other expenses...................................................... 3,389 2,791 -------------- -------------- Loss before income taxes....................................................... (10,347) (17,949) Income tax benefit............................................................... (3,104) (5,385) -------------- -------------- Net loss....................................................................... $ (7,243) $ (12,564) -------------- -------------- -------------- -------------- Net loss per common share........................................................ $ (0.91) $ (1.67) -------------- -------------- -------------- -------------- Average number of common and common equivalent shares outstanding.................................................. 7,916,538 7,543,628
See accompanying notes to consolidated financial statements. F-45 NORAND CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS OF DOLLARS) (UNAUDITED)
SIX MONTHS ENDED ------------------------------ MARCH 1, 1997 MARCH 2, 1996 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss....................................................................... $ (7,243) $ (12,564) ------- -------------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation................................................................. 3,532 3,286 Amortization................................................................. 2,001 1,949 Amortization of deferred royalty income...................................... (1,210) Deferred tax benefit......................................................... (4,231) (5,385) Provision for doubtful accounts and sales returns............................ 2,471 1,717 Changes in assets and liabilities: Accounts receivable........................................................ 17,918 4,876 Inventories................................................................ (5,566) 3,623 Prepaid expenses and other assets.......................................... (4,162) (1,580) Deferred income............................................................ 729 1,125 Accounts payable and accrued liabilities................................... (2,390) (7,971) Accrued reorganization..................................................... (362) 4,844 ------- -------------- Total adjustments........................................................ 9,940 5,274 ------- -------------- Net cash provided by (used in) operating activities...................... 2,697 (7,290) ------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment..................................... (3,320) (6,293) Additions to software, patents, and intellectual properties.................... (1,029) (1,905) ------- -------------- Net cash used in investing activities.................................... (4,349) (8,198) ------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line of credit agreement.................................. (7,215) 14,612 Issuances of common stock...................................................... 7,691 1,264 Payments of refinancing expenses............................................... (595) (635) ------- -------------- Net cash (used in) provided by financing activities...................... (119) 15,241 ------- -------------- Effect of exchange rate changes on cash.......................................... (151) (64) ------- -------------- Net decrease in cash and cash equivalents........................................ (1,922) (311) ------- -------------- CASH AND CASH EQUIVALENTS: Beginning of period.......................................................... 3,604 3,809 ------- -------------- End of period................................................................ $ 1,682 $ 3,498 ------- -------------- ------- -------------- Supplemental disclosures of cash flow information: Interest paid on all debt obligations........................................ $ 2,917 $ 2,554 Net income taxes paid........................................................ -- $ 889
See accompanying notes to the consolidated financial statements. F-46 NORAND CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED MARCH 1, 1997 (UNAUDITED) 1. The amounts included in these consolidated financial statements are unaudited; however, in the opinion of management, all adjustments necessary for a fair statement of results for the stated period have been included. These adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited financial statements and notes thereto included in this information statement. The results of operations for the six months ended March 1, 1997 are not necessarily indicative of operating results for the entire year. 2. The components of the inventory balance are summarized below:
MARCH 1, 1997 ---------------------- (THOUSANDS OF DOLLARS) Parts and materials................................................... $ 17,958 Work in progress...................................................... 2,727 Finished goods........................................................ 14,163 Field service and sales supplies...................................... 3,838 -------- Total................................................................. $ 38,686 -------- --------
F-47 ANNEX A UNOVA, INC. DIRECTOR STOCK OPTION AND FEE PLAN 1. PURPOSE. The UNOVA, Inc. Director Stock Option and Fee Plan (the "Plan") is intended to provide an incentive to members of the board of directors of UNOVA, Inc., a Delaware corporation (the "Company"), who are neither officers nor employees of the Company, to remain in the service of the Company and increase their efforts for the success of the Company and to encourage such directors to own shares of the Company's stock, thereby aligning their interests more closely with the interests of the Company's shareholders. The Plan is also intended to assist the Company in attracting experienced and qualified candidates to become members of the Board. The Plan is being adopted in connection with the distribution (the "Distribution") of the shares of the common stock of the Company to the shareholders of Western Atlas Inc. 2. DEFINITIONS. (a) "Board" means the Board of Directors of the Company. (b) "Cash Account" means the bookkeeping account established by the Company for the deferrals of Fees by Directors which will be credited with interest pursuant to Section 6(d) hereof. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Common Stock" means the common stock, par value $.01 per share, of the Company. (e) "Deferral Election" means an election pursuant to Section 6 hereof to defer receipt of Fees into a Share Account or Cash Account. (f) "Deferred Amounts" mean the amounts credited to a Director's Share Account or Cash Account pursuant to a Deferral Election or otherwise pursuant to Section 6(h). (g) "Director" means a member of the Board who is neither an officer nor an employee of the Company. A director of the Company shall not be deemed to be an employee of the Company solely by reason of the existence of a consulting contract between such director and the Company or any subsidiary thereof pursuant to which the director agrees to provide consulting services as an independent consultant to the Company or its subsidiaries on a regular or occasional basis for a stated consideration. The term "Director" as used in this Plan shall include any person who may hereafter become an advisory director of the Company, as that term is used in the Company's By-laws. (h) "Distribution" shall have the meaning set forth in Section 1 hereof. (i) "Distribution Date" means the date on which the Distribution is effected. (j) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (k) "Fair Market Value" means, as of any given date, the mean between the highest and lowest reported sales prices of the Common Stock on the New York Stock Exchange Composite Tape or, if not listed on such exchange, on any other national securities exchange on which the Common Stock is listed or on NASDAQ. If there is no regular public trading market for such Common Stock, the Fair Market Value of the Common Stock shall be determined by the Board in good faith. (l) "Fees" mean the annual retainer scheduled to be paid to a Director for the calendar year, additional annual fees scheduled to be paid for serving as chairman of a Board committee and fees scheduled to be paid for attendance at Board or committee meetings. (m) "Share Account" means the bookkeeping account established by the Company for the deferrals of Fees by Directors which will be credited with Share Units pursuant to Section 6(a) hereof. A-1 (n) "Share Election" means the election by a Director to receive shares of Common Stock in lieu of Fees as set forth in Section 5(a) hereof. (o) "Share Unit" means a share of Common Stock credited as a bookkeeping entry to a Director's Share Account. Each Share Unit shall represent the right to receive one share of Common Stock. 3. ADMINISTRATION OF THE PLAN. Subject to the express provisions of the Plan, the Board will have complete authority to interpret the Plan; to prescribe, amend, and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the respective option agreements (which need not be identical); and to make all other determinations necessary or advisable for the administration of the Plan. The Board's determination on the matters referred to in this Section 3 shall be conclusive. 4. STOCK RESERVED FOR THE PLAN. The number of shares of Common Stock authorized for issuance under the Plan is 500,000, subject to adjustment pursuant to Section 10 hereof. Shares of Common Stock delivered hereunder may be either authorized but unissued shares or previously issued shares reacquired and held by the Company. 5. TERMS AND CONDITIONS OF SHARE ELECTIONS. (a) SHARE ELECTION. Subject to Section 5(c) hereof, each Director may make an annual election (the "Share Election") to receive in the form of Common Stock (subject to a Deferral Election) any or all of his or her Fees earned in each calendar year; PROVIDED, that such Share Election must be made with respect to at least 50% of the Director's Fees, in multiples of 10%. The shares of Common Stock (and cash in lieu of fractional shares) issuable pursuant to a Share Election shall be transferred quarterly in accordance with Section 5(b) hereof. The Share Election must be in writing and delivered to the Secretary of the Company on or prior to January 1 of the calendar year in which the applicable Fees are to be earned; PROVIDED, HOWEVER, that any Director who commences service on the Board subsequent to January 1 of a calendar year may make a Share Election during the thirty-day period immediately following the commencement of his or her directorship. Notwithstanding the foregoing, Share Elections for 1997 shall be effective if made prior to the Distribution Date. A Share Election, once made, shall be irrevocable for the calendar year with respect to which it is made and shall remain in effect for future calendar years unless modified or revoked by a subsequent Share Election in accordance with the provisions hereof. (b) TRANSFER OF SHARES. Shares of Common Stock issuable to a Director with respect to Share Elections shall be transferred to such Director on the first business day following the end of each calendar quarter. The total number of shares of Common Stock to be so transferred shall be determined by dividing (x) the dollar amount of the Director's Fees for the preceding calendar quarter (for 1997, the portion of the final calendar quarter following the Distribution Date) to which the Share Election applies, by (y) the average of the Fair Market Value of Common Stock on each trading date of such calendar quarter. In no event shall the Company be required to issue fractional shares. In the event that a fractional share of Common Stock would otherwise be required to be issued, an amount in lieu thereof shall be paid in cash based upon the Fair Market Value of such fractional share on the last business day of the preceding calendar quarter. (c) TERMINATION OF SERVICES. If a Director ceases to be a Board member before the end of a calendar quarter, the Director shall receive in cash the Fees such Director would otherwise have been entitled to receive for such quarter in the absence of this Plan. 6. TERMS AND CONDITIONS OF DEFERRAL ELECTIONS. (a) IN GENERAL. Each Director may irrevocably elect annually to defer receiving all or a portion of (i) the shares of Common Stock that would otherwise be transferred upon a Share Election or (ii) such Director's Fees in respect of a calendar year (for 1997, the portion of the calendar year following the Distribution Date) that are not subject to a Share Election (a "Deferral Election"). A Director who has made a Deferral Election with respect to shares of Common Stock subject to a Share Election shall have the amount of shares of Common Stock that are the subject of the Deferral Election credited to a Share Account in the form of Share Units. A Director who has made a Deferral Election with respect to Fees that are not subject to a Share Election shall have the amount of Deferred Fees credited to a Cash Account. A-2 (b) TIMING OF DEFERRAL ELECTION. The Deferral Election shall be in writing and delivered to the Secretary of the Company prior to January 1 of the calendar year in which the applicable Fees are to be earned; PROVIDED, HOWEVER, that a Director who commences service on the Board subsequent to January 1 of a calendar year may make a Deferral Election during the thirty-day period immediately following the commencement of his or her directorship. Notwithstanding the foregoing, Deferral Elections for 1997 shall be effective if made prior to the Distribution Date. A Deferral Election, once made, shall be irrevocable for the calendar year with respect to which it is made and shall remain in effect for future calendar years unless modified or revoked by a subsequent Deferral Election in accordance with the provisions hereof. (c) SHARE ACCOUNTS. Each Share Account shall be deemed to be invested in shares of Common Stock. Whenever regular cash dividends are paid by the Company on outstanding Common Stock, there shall be credited to the Director's Share Account additional Share Units equal to (i) the aggregate dividend that would be payable on outstanding shares of Common Stock equal to the number of Share Units in such Share Account on the record date for the dividend, divided by (ii) the Fair Market Value of the Common Stock on the payment date of the dividend. (d) CASH ACCOUNTS. Each Director's Cash Account shall be credited with interest on the last day of each calendar quarter calculated on the basis of the average daily balance in the Cash Account during the calendar quarter. The interest rate for any calendar quarter shall be the prime rate as reported by Morgan Guaranty Trust Company of New York as its prime rate on the first business day of the calendar quarter. (e) COMMENCEMENT OF PAYMENTS. Except as otherwise provided in Sections 6(g) hereof, a Director's Deferred Amounts shall become payable in the January following the year in which the Director terminates service as a Director. Payments from a Share Account shall be made by converting Share Units into Common Stock on a one-for-one basis, with payment of fractional shares to be made in cash based upon the Fair Market Value of such fractional share on the last business day of the preceding calendar quarter. (f) TIMING OF PAYMENTS. Each Director shall elect in his or her Deferral Election to receive payment of his or her Deferred Amounts either in a lump sum or in two to fifteen substantially equal annual installments. In the event of a Director's death, payment of the remaining portion of the Director's Deferred Amounts will be made to the Director's beneficiary (or, if no beneficiary has been designated, to the Director's estate or other legal representative) in a lump sum as soon as practicable following the Director's death. (g) HARDSHIP DISTRIBUTION. Notwithstanding any Deferral Election, in the event of severe financial hardship to a Director resulting from a sudden and unexpected illness, accident or disability of the Director or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Director, all as determined by the Board, a Director may withdraw any portion of the Share Units in his or her Share Account (in an equivalent number of shares of Common Stock) or cash in his or her Cash Account by providing written notice to the Secretary of the Company. (h) NO ACCOUNT TRANSFERS. Except as provided in this Section 6(h), a Director may not transfer or convert a Share Account to a Cash Account or vice versa. Any current Director participating in the Western Atlas Inc. Deferred Compensation Plan for Directors (the "Western Atlas Plan") as of the Distribution Date or receiving a lump sum payment under the Western Atlas retirement program for non-employee directors as a result of the Distribution (a "Retirement Payout"), shall automatically have his or her account balance in the Western Atlas Plan and Retirement Payout, as the case may be, converted into an account balance in the Cash Account under the Plan. Any such Director may convert all or a portion of his or her deferred fee account balance in the Western Atlas Plan and Retirement Payout, as the case may be, to a Share Account under the Plan, in lieu of a Cash Account, by giving written notice of an irrevocable election to do so to the Secretary of the Company no later than the Distribution Date. Such election shall be effective on the tenth business day following the Distribution Date (the "Transfer Date"), and such Director's Share Account shall be credited as of the Transfer Date with a number of Share Units equal to (a) the portion of the deferred fee account and/or Retirement Payout subject to the Share Account election divided by (b) the average of the Fair Market Value of Common Stock on the sixth through tenth trading days, inclusive, following the Distribution Date. To the extent such an election to transfer the deferred fee account balance in the Western Atlas Plan or the Retirement Payout into the A-3 Share Account is not made, the remaining balance of the Director's deferred fee account in the Western Atlas Plan or Retirement Payout, to the extent applicable, shall be transferred into the Cash Account under the Plan effective as of the Distribution Date. Prior to the Distribution Date, any Director subject to this Section 6(h) shall make an election (as described in Section 6(f)) with respect to the timing of the payouts of the Deferred Amounts under this Section 6(h). (i) STATUS OF ACCOUNTS. The Share and Cash Accounts shall not be funded, and all Deferred Amounts shall be held in the general assets of the Company and be subject to the general creditors of the Company. 7. STOCK OPTIONS. (a) INITIAL GRANT. Effective as of the Distribution Date, each Director shall be granted an option to purchase 25,000 shares of Common Stock (the "Initial Grant"). The option price per share for the Initial Grant shall equal the average of the Fair Market Value of Common Stock on the sixth through tenth trading days, inclusive, following the Distribution Date. (b) SUBSEQUENT GRANTS. Each person who first becomes a Director after the Distribution Date, shall be granted an option to purchase 25,000 shares of Common Stock as of the date such person is elected or is appointed as a Director; PROVIDED, that no such grant shall be made to any Director who either (i) received a stock option grant under the Company's 1997 Stock Incentive Plan during the two-year period immediately preceding the date of such election or appointment to the Board or (ii) was an employee of the Company or a subsidiary of the Company at any time during the two-year period referred to in (i) above. Grants under this Section 7(b) shall be in addition to any annual grants of options under Section 7(c) hereof. (c) ANNUAL GRANTS. Commencing in 1999, an option to purchase 2,500 shares of Common Stock shall be granted to each Director automatically on the first business day following the Company's Annual Meeting of Shareholders for such year. (d) OPTION PRICE PER SHARE. Options granted under Sections 6(b) and 6(c) hereof shall be exercisable at a price per share equal to the Fair Market Value of the Common Stock on the date of the grant of the option. (e) PERIOD OF OPTION. Each option granted under the Plan shall become exercisable on the first anniversary of the date upon which it is granted; PROVIDED, HOWEVER, that all options granted pursuant to the Plan shall become exercisable in full upon the first to occur of (i) the retirement of the Director in accordance with the mandatory retirement policy for members of the Board, (ii) the total and permanent disability of the Director, or (iii) the death of the Director while a member of the Board. Each option granted pursuant to the Plan shall remain exercisable until the expiration of three years following the first to occur of the retirement or resignation of the optionee as a director of the Company (or the failure of the optionee to be re-elected a director of the Company), the total and permanent disability of the optionee, or the death of the optionee. (f) EXERCISE OF OPTIONS. Options may be exercised only by written notice to the Company at its corporate office accompanied by payment of the full consideration for the shares as to which they are exercised. The purchase price is to be paid in full to the Company upon the exercise of the option (i) by cash, including a personal check payable to the order of the Company, or (ii) by delivering Common Stock already owned by the optionee for a period of at least six months (valued at Fair Market Value as of the date of delivery), or (iii) any combination of cash and Common Stock so valued. (g) NONSTATUTORY OPTIONS. No option granted hereunder shall constitute an "incentive stock option" as that term is defined in the Code. 8. MODIFICATION, EXTENSION, AND RENEWAL OF OPTIONS. The Board shall have the power to modify, extend, or renew outstanding options and authorize the grant of new options in substitution therefor, provided that such power may not be exercised in a manner which would (i) alter or impair any rights or obligations of any option previously granted without the written consent of the optionee or (ii) adversely affect the qualification of the Plan or any other stock-related plan of the Company under Rule 16b-3 under the Exchange Act, as amended. A-4 9. LIMITATION OF RIGHTS. (a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan, nor the granting of an option or the making of a Share Election or Deferral Election, or any other action taken pursuant to the Plan, shall constitute or be evidence of any agreement or understanding, express or implied, that the Company will retain a Director for any period of time, or at any particular rate of compensation. (b) NO SHAREHOLDERS' RIGHTS. An optionee or a Director who has made a Share Election or Deferral Election (or his or her representative) shall have no rights as a shareholder with respect to the shares covered by his or her options or Share Election or to any Share Units with respect to a Deferral Election until the date of the actual issuance to him or her (or such representative) of shares of Common Stock (either through the Company's Direct Registration System or by certification) and, subject to Sections 6(c) and 10 hereof, no adjustment will be made for dividends or other rights for which the record date is prior to the date such shares are issued. 10. EFFECT OF CERTAIN CHANGES IN CAPITALIZATION. In the event of any change in corporate capitalization (such as a stock split), any corporate transaction (such as any merger, consolidation or separation (including a spin-off)), any other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code) or any partial or complete liquidation of the Company, the Board shall equitably adjust the Share Account to reflect any such transaction, and shall make such substitution or adjustments in the aggregate number and kind of shares reserved for issuance under the Plan, in the number, kind and option price of shares subject to outstanding options, in the number and kind of shares subject to automatic option grants under Section 6 and/or such other equitable substitution or adjustments in the terms of options as it may determine to be appropriate in its sole discretion; PROVIDED, HOWEVER, that the number of shares subject to any option shall always be a whole number. 11. CHANGE IN CONTROL. (a) For purposes of the Plan, a "Change in Control" shall mean the occurrence of any of the following events: (i) an acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of either (1) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); excluding, however, the following acquisitions of Outstanding Company Common Stock and Outstanding Company Securities: (1) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Company controlled by the Company, or (4) any acquisition by any Person pursuant to a transaction which complies with clauses (1), (2) and (3) of subsection (iii) of this Section 11(a); or (ii) individuals who, as of the effective date of the Plan, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; PROVIDED, HOWEVER, that any individual who becomes a member of the Board subsequent to such effective date of the Plan, whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; but, PROVIDED FURTHER, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board; or A-5 (iii) the approval by the shareholders of the Company of a reorgani-zation, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company ("Business Combination") or if consummation of such Business Combination is subject, at the time of such approval of shareholders, to the consent of any government or governmental agency, obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (1) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (other than any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the corporation or such company resulting from such Business Combination) will beneficially own, directly or indirectly, 30% or more of, respectively, the outstanding shares of common stock of the Company resulting from such Business Combination or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors except to the extent that such ownership existed with respect to the Company prior to the Business Combination and (3) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination will have been members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) the approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (b) Notwithstanding anything in the Plan to the contrary, upon the occurrence of a Change in Control: (i) all Share Units credited to a Share Account shall be converted into Common Stock and together with all Deferred Amounts credited to a Cash Account shall be transferred as soon as practicable to each Director; (ii) Fees earned in respect of the calendar quarter in which the Change in Control occurs, shall be paid in cash as soon as practicable; and (iii) all options shall immediately vest and become exercisable in full. 12. TERM OF PLAN. This Plan shall become effective as of the date of approval of the Plan by the sole stockholder of the Company. The Plan shall terminate on December 15, 2007, unless earlier terminated by the Board. Notwithstanding the Plan's termination, amounts shall be delivered pursuant to any Deferral Election made prior to the Plan's termination in accordance with such election. Options may be granted under the Plan at any time prior to the termination of the Plan. Deferral Elections and Share Elections may not be made for any Fees which would be paid following the date of the termination of the Plan. 13. AMENDMENT; TERMINATION. The Board may at any time and from time to time alter, amend, suspend, or terminate the Plan in whole or in part; PROVIDED, HOWEVER, that no amendment which is required by any regulation, law or stock exchange rule to be approved by shareholders shall be effective unless it is approved by the shareholders of the Company entitled to vote thereon. Notwithstanding the foregoing, no amendment shall affect adversely any of the rights of any Director, under any option or under any A-6 election theretofore in effect under the Plan, or with respect to Deferred Amounts, without such Director's consent. 14. NONTRANSFERABILITY. No option, or right or interest of any Director in Deferred Amounts, shall be transferable by a Director other than (i) by will or by the laws of descent and distribution, (ii) pursuant to a qualified domestic relations order (as defined in the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended), or (iii) in the case of an option, as otherwise expressly permitted under the applicable option agreement including, if so permitted, pursuant to a gift to such optionee's family, whether directly or indirectly or by means of a trust or partnership or otherwise. All options or rights with respect to Deferred Amounts shall be exercisable, during the Director's lifetime, only by the Director or by the guardian or legal representative of the Director or an alternate payee pursuant to a qualified domestic relations order or, in the case of an option, by any person to whom such option is transferred pursuant to the preceding sentence. Under the Plan, it is understood that the term "optionee" includes the guardian and legal representative of the Director named in the option agreement and any person to whom an option is transferred by will or the laws of descent and distribution, pursuant to a qualified domestic relations order or as otherwise described above. 15. BENEFICIARIES. The Board shall establish such procedures as it deems appropriate for a Director to designate a beneficiary to whom any amounts payable in the event of a Director's death are to be paid or by whom any options held by a Director may be exercised following his or her death. Directors shall make a beneficiary election with respect to Deferred Amounts at the same time that a Deferral Election is made. 16. COMPLIANCE WITH LAW, ETC. Notwithstanding any other provision of the Plan or agreements made pursuant hereto, the Company shall not be required to issue or deliver any certificate or certificates for shares of Common Stock under the Plan prior to fulfillment of all of the following conditions: (i) The listing, or approval for listing upon notice of issuance, of such shares on the New York Stock Exchange, Inc., or such other securities exchange or NASDAQ as may at the time be the principal market for Common Stock; (ii) Any registration or other qualification of such shares of the Company under any state or federal law or regulation, or the maintaining in effect of any such registration or other qualification which the Board shall, in its absolute discretion upon the advice of counsel, deem necessary or advisable; and (iii) The obtaining of any other consent, approval, or permit from any state or federal governmental agency, which the Board shall, in its absolute discretion after receiving the advice of counsel, determine to be necessary or advisable. 17. NOTICE. Any written notice to the Company required by any of the provisions of the Plan shall be addressed to the Secretary of the Company and shall become effective when it is received. 18. GOVERNING LAW. The Plan and all determinations made and actions taken pursuant hereto shall be governed by the law of the State of Delaware, without reference to principles of conflict of laws, and shall be construed accordingly. 19. HEADINGS. The headings of sections and subsections herein are included solely for convenience of reference and shall not affect the meaning of any of the provisions of the Plan. A-7 ANNEX B UNOVA, INC. 1997 STOCK INCENTIVE PLAN SECTION 1. PURPOSE; DEFINITIONS The purpose of the Plan is to give the Company a competitive advantage in attracting, retaining and motivating officers and employees and to provide the Company and its subsidiaries with a stock plan providing incentives directly linked to the profitability of the Company's businesses and increases in shareholder value. For purposes of the Plan, the following terms are defined as set forth below: a. "AFFILIATE" means a corporation or other entity controlled by the Company and designated by the Committee from time to time as such. b. "AWARD" means a Stock Appreciation Right, Stock Option, or Restricted Stock. c. "BOARD" means the Board of Directors of the Company. d. "CHANGE IN CONTROL" and "Change in Control Price" have the meanings set forth in Sections 8(b) and (c), respectively. e. "CODE" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. f. "COMMISSION" means the Securities and Exchange Commission or any successor agency. g. "COMMITTEE" means the Committee referred to in Section 2. h. "COMPANY" means UNOVA, Inc., a Delaware corporation. i. "COVERED EMPLOYEE" means a participant designated prior to the grant of shares of Restricted Stock by the Committee who is or may be a "covered employee" within the meaning of Section 162(m)(3) of the Code in the year in which Restricted Stock is expected to be taxable to such participant. j. "DISABILITY" means permanent and total disability as determined for purposes of the Company's Long Term Disability Plan for the staff of the Company's corporate headquarters. k. "EARLY RETIREMENT" means retirement from active employment with the Company, a subsidiary or an Affiliate pursuant to the early retirement provisions of the applicable pension plan of such employer. l. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. m. "FAIR MARKET VALUE" means, as of any given date, the mean between the highest and lowest reported sales prices of the Stock on the New York Stock Exchange Composite Tape or, if not listed on such exchange, on any other national securities exchange on which the Stock is listed or on NASDAQ. If there is no regular public trading market for such Stock, the Fair Market Value of the Stock shall be determined by the Committee in good faith. n. "INCENTIVE STOCK OPTION" means any Stock Option designated as, and qualified as, an "incentive stock option" within the meaning of Section 422 of the Code. B-1 o. "NON-EMPLOYEE DIRECTOR" means a member of the Board who qualifies as a Non-Employee Director as defined in Rule 16b-3(b)(3), as promulgated by the Commission under the Exchange Act, or any successor definition adopted by the Commission. p. "NON-QUALIFIED STOCK OPTION" means any Stock Option that is not an Incentive Stock Option. q. "NORMAL RETIREMENT" means retirement from active employment with the Company, a subsidiary or an Affiliate at or after age 65. r. "QUALIFIED PERFORMANCE-BASED AWARD" means an Award of Restricted Stock designated as such by the Committee at the time of grant, based upon a determination that (i) the recipient is or may be a "covered employee" within the meaning of Section 162(m)(3) of the Code in the year in which the Company would expect to be able to claim a tax deduction with respect to such Restricted Stock and (ii) the Committee wishes such Award to qualify for the Section 162(m) Exemption. s. "PERFORMANCE GOALS" means the performance goals established by the Committee in connection with the grant of an Award. In the case of Qualified Performance-Based Awards, (i) such Performance Goals shall be based on the attainment of specified levels of one or more of the following measures: return on capital utilized ("ROCU"), return on tangible equity ("ROTE"), return on equity ("ROE"), return on assets ("ROA"), return on capital ("ROC"), cash flow ("CF"), revenue growth ("RG") or return on revenue ("ROR") of the Company or of any business unit thereof within which the participant is primarily employed, or that are based on the attainment of specified levels of Basic Earnings per Share ("BEPS") or Diluted Earnings per Share ("DEPS") of the Company or that are based, in whole or in part, on a level or levels of increase in the Fair Market Value of the Stock, and that are intended to qualify under Section 162(m)(4)(c) of the Code, and (ii) such Performance Goals shall be set by the Committee within the time period prescribed by Section 162(m) of the Code and related regulations. For purposes of the Plan, ROCU, ROTE, ROE, ROA, ROC, CF, RG, ROR, BEPS and DEPS shall have the meanings set forth in Exhibit A hereto. t. "PLAN" means the UNOVA, Inc. 1997 Stock Incentive Plan, as set forth herein and as hereinafter amended from time to time. u. "RESTRICTED STOCK" means an Award granted under Section 7. v. "RETIREMENT" means Normal or Early Retirement. w. "RULE 16B-3" means Rule 16b-3, as promulgated by the Commission under Section 16(b) of the Exchange Act, as amended from time to time. x. "SECTION 162(M) EXEMPTION" means the exemption from the limitation on deductibility imposed by Section 162(m) of the Code that is set forth in Section 162(m)(4)(C) of the Code. y. "STOCK" means the common stock, par value $.01 per share, of the Company. z. "STOCK APPRECIATION RIGHT" means a right granted under Section 6. aa. "STOCK OPTION" means an option granted under Section 5. bb. "TERMINATION OF EMPLOYMENT" means the termination of the participant's employment with the Company and any subsidiary or Affiliate. A participant employed by a subsidiary or an Affiliate shall also be deemed to incur a Termination of Employment if the subsidiary or Affiliate ceases to be such a subsidiary or an Affiliate, as the case may be, and the participant does not immediately thereafter become an employee of the Company or another subsidiary or Affiliate. Temporary absences from employment because of illness, vacation or leave of absence and transfers among the Company and its subsidiaries and Affiliates shall not be considered Terminations of Employment. In addition, certain other terms used herein have definitions given to them in the first place in which they are used. B-2 SECTION 2. ADMINISTRATION The Plan shall be administered by the Compensation Committee or such other committee of the Board as the Board may from time to time designate (the "Committee"), which shall be composed of not less than two Non-Employee Directors, each of whom shall be an "outside director" for purposes of Section 162(m)(4) of the Code and shall be appointed by and serve at the pleasure of the Board. The Committee shall have plenary authority to grant Awards pursuant to the terms of the Plan to officers and employees of the Company and its subsidiaries and Affiliates. Among other things, the Committee shall have the authority, subject to the terms of the Plan: (a) To select the officers and employees to whom Awards may from time to time be granted; (b) To determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock or any combination thereof are to be granted hereunder; (c) To determine the number of shares of Stock to be covered by each Award granted hereunder; (d) To determine the terms and conditions of any Award granted hereunder (including, but not limited to, the option price (subject to Section 5(a)), any vesting condition, restriction or limitation (which may be related to the performance of the participant, the Company or any subsidiary or Affiliate) and any vesting acceleration or forfeiture waiver regarding any Award and the shares of Stock relating thereto, based on such factors as the Committee shall determine; (e) To modify, amend or adjust the terms and conditions of any Award, at any time or from time to time, including but not limited to Performance Goals; provided, however, that the Committee may not adjust upwards the amount payable with respect to a Qualified Performance-Based Award or waive or alter the Performance Goals associated therewith; (f) To determine to what extent and under what circumstances Stock and other amounts payable with respect to an Award shall be deferred; and (g) To determine under what circumstances an Award may be settled in cash or Stock under Sections 5(j), 5(k) and 6(b)(ii), except as otherwise therein provided. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall from time to time deem advisable, to interpret the terms and provisions of the Plan and any Award issued under the Plan (and any agreement relating thereto) and to otherwise supervise the administration of the Plan. Any determination made by the Committee pursuant to the provisions of the Plan with respect to any Award shall be made in the sole discretion of the Committee at the time of the grant of the Award or, unless in contravention of any express term of the Plan, at any time thereafter. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. Any authority granted to the Committee may also be exercised by the full Board, except to the extent that the grant or exercise of such authority would cause any Award or transaction to become subject to (or lose an exemption under) the short-swing profit recovery provisions of Section 16 of the Exchange Act. To the extent that any permitted action taken by the Board conflicts with action taken by the Committee, the Board action shall control. B-3 SECTION 3. STOCK SUBJECT TO PLAN Subject to adjustment as provided herein, the total number of shares of Stock available for grant under the Plan shall be five million five hundred thousand (5,500,000) plus (i) a number of shares of Stock equal to one percent of the total number of shares of Stock outstanding as of the first day of each calendar year beginning after December 31, 1998 for which the Plan is in effect--provided that any shares available for grant in a particular calendar year which are not, in fact, granted in such year shall be added to the shares available for grant in any subsequent calendar year. However, no more than five million (5,000,000) shares of Stock shall be cumulatively available for grant of Incentive Stock Options over the life of the Plan, and no more than 30 percent of the shares of Stock available for grant under the Plan as of the first day of any calendar year during which the Plan is in effect shall be utilized in that fiscal year for the grant of Awards in the form of Restricted Stock. No participant may be granted Awards covering more than one million (1,000,000) shares of Stock in any calendar year during which the Plan is in existence. Shares subject to an Award under the Plan may be authorized and unissued shares or may be treasury shares. If any shares of Restricted Stock are forfeited, or if any Stock Option (and related Stock Appreciation Right, if any) terminates without being exercised, or if any Stock Appreciation Right is exercised for cash, shares subject to such Awards shall again be available for distribution in connection with Awards under the Plan. In the event of any change in corporate capitalization, such as a stock split or any corporate transaction (such as any merger, consolidation or separation (including a spin-off)), any other distribution of stock or property of the Company, any reorganization (whether or not such reorganization comes within the definition of such term in Section 368 of the Code) or any partial or complete liquidation of the Company, the Committee or Board may make such substitution or adjustments in the aggregate number and kind of shares reserved for issuance under the Plan, in the individual limits on Awards under the Plan, in the number, kind and exercise price of shares subject to outstanding Stock Options and Stock Appreciation Rights, in the number and kind of shares subject to outstanding Awards in the form of Restricted Stock granted under the Plan and/or such other equitable substitution or adjustments as it may determine to be appropriate in its sole discretion; PROVIDED, HOWEVER, that the number of shares subject to any Award shall always be a whole number. Such adjusted exercise price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. SECTION 4. ELIGIBILITY Officers and employees of the Company, its subsidiaries and Affiliates who are responsible for or contribute to the management, growth and profitability of the business of the Company, its subsidiaries and Affiliates are eligible to be granted Awards under the Plan. No grant shall be made under this Plan to a director who is not an officer or a salaried employee of the Company, its subsidiaries or Affiliates. SECTION 5. STOCK OPTIONS Stock Options may be granted alone or in addition to other Awards granted under the Plan and may be of two types: Incentive Stock Options and Non-Qualified Stock Options. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Committee shall have the authority to grant any optionee Incentive Stock Options, Non-Qualified Stock Options or both types of Stock Options (in each case with or without Stock Appreciation Rights); PROVIDED, HOWEVER, that grants hereunder are subject to the annual limit on grants to individual participants set forth in Section 3. Incentive Stock Options may be granted only to employees of the Company and its subsidiaries (within the meaning of Section 424(f) of the Code). To the extent that any Stock Option is not designated as an Incentive Stock Option or even if so designated does not qualify as an Incentive Stock Option, it shall constitute a Non-Qualified Stock Option. B-4 Stock Options shall be evidenced by option agreements, the terms and provisions of which may differ. An option agreement shall indicate on its face whether it is intended to be an agreement for an Incentive Stock Option or a Non-Qualified Stock Option. The grant of a Stock Option shall occur on the date the Committee selects an individual to be a participant in any grant of a Stock Option, determines the number of shares of Stock to be subject to such Stock Option to be granted to such individual and specifies the terms and provisions of the Stock Option. The Company shall notify a participant of any grant of a Stock Option, and a written option agreement or agreements shall be duly executed and delivered by the Company to the participant. Such agreement or agreements shall become effective upon execution by the Company and the participant. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered nor shall any discretion or authority granted under the Plan be exercised so as to disqualify the Plan under Section 422 of the Code. Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions as the Committee shall deem desirable: (a) OPTION PRICE. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee and set forth in the option agreement, and shall not be less than the Fair Market Value of the Stock subject to the Stock Option on the date of grant. (b) OPTION TERM. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than 10 years after the date the Stock Option is granted. (c) EXERCISABILITY. Except as otherwise provided herein, Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee. The exercisability of a Stock Option may be conditional upon the attainment of Performance Goals, which need not be the same for all optionees. If the Committee provides that any Stock Option is exercisable only in installments, the Committee may at any time waive such installment exercise provisions, in whole or in part, based on such factors as the Committee may determine. In addition, the Committee may at any time accelerate the exercisability of any Stock Option. (d) METHOD OF EXERCISE; ISSUANCE OF STOCK. Subject to the provisions of this Section 5, Stock Options may be exercised, in whole or in part, at any time during the option term by giving written notice of exercise to the Company specifying the number of shares of Stock subject to the Stock Option to be purchased. Such notice shall be accompanied by payment in full of the purchase price by certified or bank check or such other instrument as the Company may accept. Payment, in full or in part, may also be made in the form of unrestricted Stock already owned by the optionee for a period of at least six months prior to the date of exercise (based on the Fair Market Value of the Stock on the date the Stock Option is exercised). In the discretion of the Committee, payment for any shares subject to a Stock Option may also be made by delivering a properly executed exercise notice to the Company, together with a copy of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds necessary to pay the purchase price, and, if requested, the amount of any federal, state, local or foreign withholding taxes. To facilitate the foregoing, the Company may enter into agreements for coordinated procedures with one or more brokerage firms. No shares of Stock shall be issued until full payment therefor has been made. Except as otherwise provided in Section 5(l) below, an optionee shall have all of the rights of a shareholder of the Company holding the class or series of Stock that is subject to such Stock Option (including, if applicable, the right to vote the shares and the right to receive dividends), when the optionee has given written notice of exercise, has paid in full for such shares and, if requested, has given the representation described in B-5 Section 11(a). Upon exercise of a Stock Option, a participant shall be entitled (unless the participant has given a broker the irrevocable instructions referred to in the preceding paragraph) to receive a certificate representing the Stock issuable upon exercise of the Stock Option or such other evidence of ownership as the Company may then generally provide to its shareholders of record. (e) NONTRANSFERABILITY OF STOCK OPTIONS. No Stock Option shall be transferable by the optionee other than (i) by will or by the laws of descent and distribution; or (ii) in the case of a Non-Qualified Stock Option, as otherwise expressly permitted under the applicable option agreement including, if so permitted, pursuant to a gift to such optionee's family, whether directly or indirectly or by means of a trust or partnership or otherwise. All Stock Options shall be exercisable, subject to the terms of this Plan, only by the optionee, the guardian or legal representative of the optionee, or any person to whom such option is transferred pursuant to the preceding sentence, it being understood that the term "holder" and "optionee" include such guardian, legal representative and other transferee. (f) TERMINATION BY DEATH. Unless otherwise determined by the Committee, if an optionee's employment terminates by reason of death, any Stock Option held by such optionee may thereafter be exercised, to the extent then exercisable, or on such accelerated basis as the Committee may determine, for a period of one year (or such other period as the Committee may specify in the option agreement) from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. (g) TERMINATION BY REASON OF DISABILITY. Unless otherwise determined by the Committee, if an optionee's employment terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of termination, or on such accelerated basis as the Committee may determine, for a period of three years (or such shorter period as the Committee may specify in the option agreement) from the date of such termination of employment or until the expiration of the stated term of such Stock Option, whichever period is the shorter; provided, however, that if the optionee dies within such period, any unexercised Stock Option held by such optionee shall, notwithstanding the expiration of such period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of 12 months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (h) TERMINATION BY REASON OF RETIREMENT. Unless otherwise determined by the Committee, if an optionee's employment terminates by reason of Retirement, any Stock Option held by such optionee may thereafter be exercised by the optionee, to the extent it was exercisable at the time of such Retirement, or on such accelerated basis as the Committee may determine until the expiration of the stated term of such Stock Option, PROVIDED, HOWEVER, that if the optionee dies within such period any unexercised Stock Option held by such optionee shall, notwithstanding the expiration of such period, continue to be exercisable to the extent to which it was exercisable at the time of death for a period of 12 months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (i) OTHER TERMINATION. Unless otherwise determined by the Committee, if an optionee incurs a Termination of Employment for any reason other than death, Disability or Retirement, any Stock Option held by such optionee, to the extent then exercisable, or on such accelerated basis as the Committee may determine, may be exercised for the lesser of three months from the date of such Termination of Employment or the balance of the term of such Stock Option; provided, however, that if the optionee dies within such three-month period, any unexercised Stock Option held by such optionee shall, notwithstanding the expiration of such three-month period, continue to be exercisable to the extent to which it B-6 was exercisable at the time of death for a period of 12 months from the date of such death or until the expiration of the stated term of such Stock Option, whichever period is the shorter. In the event of Termination of Employment, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (j) CASHING OUT OF STOCK OPTION. On receipt of written notice of exercise, the Committee may elect to cash out all or part of the portion of the shares of Stock for which a Stock Option is being exercised by paying the optionee an amount, in cash or Stock, equal to the excess of the Fair Market Value of the Stock over the option price times the number of shares of Stock for which the Option is being exercised on the effective date of such cash-out. (k) CHANGE IN CONTROL CASH-OUT. Notwithstanding any other provision of the Plan, during the 60-day period from and after a Change in Control (the "Exercise Period"), unless the Committee shall determine otherwise at the time of grant, an optionee shall have the right, whether or not the Stock Option is fully exercisable and in lieu of the payment of the exercise price for the shares of Stock being purchased under the Stock Option and by giving notice to the Company, to elect (within the Exercise Period) to surrender all or part of the Stock Option to the Company and to receive cash, within 30 days of such notice, in an amount equal to the amount by which the Change in Control Price per share of Stock on the date of such election shall exceed the exercise price per share of Stock under the Stock Option (the "Spread") multiplied by the number of shares of Stock granted under the Stock Option as to which the right granted under this Section 5(k) shall have been exercised. Notwithstanding the foregoing, if any right granted pursuant to this Section 5(k) would make a Change in Control transaction ineligible for pooling-of-interests accounting under APB No. 16 that but for the nature of such grant would otherwise be eligible for such accounting treatment, the Committee shall have the ability to substitute for the cash payable pursuant to such right Stock with a Fair Market Value equal to the cash that would otherwise be payable hereunder. (l) DEFERRAL OF OPTION SHARES. The Committee may from time to time establish procedures pursuant to which an optionee may elect to defer, until a time or times later than the exercise of an Option, receipt of all or a portion of the Shares subject to such Option and/or to receive cash at such later time or times in lieu of such deferred Shares, all on such terms and conditions as the Committee shall determine. If any such deferrals are permitted, then notwithstanding Section 5(d) above, an optionee who elects such deferral shall not have any rights as a stockholder with respect to such deferred Shares unless and until Shares are actually delivered to the optionee with respect thereto, except to the extent otherwise determined by the Committee. SECTION 6. STOCK APPRECIATION RIGHTS (a) GRANT AND EXERCISE. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of grant of such Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of grant of such Stock Option. A Stock Appreciation Right shall terminate and no longer be exercisable upon the termination or exercise of the related Stock Option. A Stock Appreciation Right may be exercised by an optionee in accordance with Section 6(b) by surrendering the applicable portion of the related Stock Option in accordance with procedures established by the Committee. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in Section 6(b). Stock Options which have been so surrendered shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. B-7 (b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to such terms and conditions as shall be determined by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate are exercisable in accordance with the provisions of Section 5 and this Section 6. (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive an amount in cash, shares of Stock or both, in value equal to the excess of the Fair Market Value of one share of Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. (iii) Stock Appreciation Rights shall be transferable only to permitted transferees of the underlying Stock Option in accordance with Section 5(e). (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 on the number of shares of Stock to be issued under the Plan, but only to the extent of the number of shares covered by the Stock Appreciation Right at the time of exercise based on the value of the Stock Appreciation Right at such time. SECTION 7. RESTRICTED STOCK (a) ADMINISTRATION. Shares of Restricted Stock may be awarded either alone or in addition to other Awards granted under the Plan. The Committee shall determine the officers and employees to whom and the time or times at which grants of Restricted Stock will be awarded, the number of shares to be awarded to any participant (subject to the annual limit on grants to individual participants set forth in Section 3), the conditions for vesting, the time or times within which such Awards may be subject to forfeiture and any other terms and conditions of the Awards, in addition to those contained in Section 7(c). (b) AWARDS AND CERTIFICATES. Shares of Restricted Stock shall be evidenced in such manner as the Committee may deem appropriate, including book-entry registration or issuance of one or more stock certificates. Any certificate or other evidence of ownership issued in respect of shares of Restricted Stock shall be registered in the name of such participant and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award, substantially in the following form: "The transferability of the shares of stock represented hereby [referred to herein] are subject to the terms and conditions (including forfeiture) of the UNOVA, Inc. 1997 Stock Incentive Plan and a Restricted Stock Agreement. Copies of such Plan and Agreement are on file at the offices of UNOVA, Inc., 360 North Crescent Drive, Beverly Hills, California 90210." The Committee may require that any certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed and that, as a condition of any Award of Restricted Stock, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such Award. (c) TERMS AND CONDITIONS. Shares of Restricted Stock shall be subject to the following terms and conditions: (i) The Committee may, prior to or at the time of grant, designate an Award of Restricted Stock as a Qualified Performance-Based Award, in which event it shall condition the grant or vesting, as applicable, of such Restricted Stock upon the attainment of Performance Goals. If the Committee does not designate an Award of Restricted Stock as a Qualified Performance-Based Award, it may also condition the grant or vesting thereof upon the attainment of Performance Goals. Regardless of B-8 whether an Award of Restricted Stock is a Qualified Performance-Based Award, the Committee may also condition the grant or vesting thereof upon the continued service of the participant. The conditions for grant or vesting and the other provisions of Restricted Stock Awards (including without limitation any applicable Performance Goals) need not be the same with respect to each recipient. The Committee may at any time, in its sole discretion, accelerate or waive, in whole or in part, any of the foregoing restrictions; PROVIDED, HOWEVER, that in the case of Restricted Stock that is a Qualified Performance-Based Award, the applicable Performance Goals shall have been satisfied. (ii) Subject to the provisions of the Plan and the Restricted Stock Agreement referred to in Section 7(c)(vi), during the period, if any, set by the Committee, commencing with the date of such Award for which such participant's continued service is required (the "Restriction Period"), and until the later of (i) the expiration of the Restriction Period and (ii) the date the applicable Performance Goals (if any) are satisfied, the participant shall not be permitted to sell, assign, transfer, pledge or otherwise encumber shares of Restricted Stock; PROVIDED that the foregoing shall not prevent a participant from pledging Restricted Stock as security for a loan, the sole purpose of which is to provide funds to pay the option price for Stock Options. (iii) Except as provided in this paragraph (iii) and Sections 7(c)(i) and 7(c)(ii) and the Restricted Stock Agreement, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Company holding the class or series of Stock that is the subject of the Restricted Stock, including, if applicable, the right to vote the shares and the right to receive any cash dividends. If so determined by the Committee in the applicable Restricted Stock Agreement and subject to Section 11(e) of the Plan, (A) cash dividends on the class or series of Stock that is the subject of the Restricted Stock Award shall be automatically deferred and reinvested in additional Restricted Stock, held subject to the vesting of the underlying Restricted Stock, or held subject to meeting Performance Goals applicable only to dividends, and (B) dividends payable in Stock shall be paid in the form of Restricted Stock of the same class as the Stock with which such dividend was paid, held subject to the vesting of the underlying Restricted Stock, or held subject to meeting Performance Goals applicable only to dividends. (iv) Except to the extent otherwise provided in the applicable Restricted Stock Agreement and Sections 7(c)(i), 7(c)(ii), 7(c)(v) and 8(a)(ii), upon a participant's Termination of Employment for any reason during the Restriction Period or before the applicable Performance Goals are satisfied, all shares still subject to restriction shall be forfeited by the participant. (v) Except to the extent otherwise provided in Section 8(a)(ii), in the event that a participant retires or such participant's employment is involuntarily terminated, the Committee shall have the discretion to waive, in whole or in part, any or all remaining restrictions (other than, in the case of Restricted Stock with respect to which a participant is a Covered Employee, satisfaction of the applicable Performance Goals unless the participant's employment is terminated by reason of death or Disability) with respect to any or all of such participant's shares of Restricted Stock. (vi) If and when any applicable Performance Goals are satisfied and the Restriction Period expires without a prior forfeiture of the Restricted Stock, unlegended certificates or other evidence of ownership for such shares shall be delivered to the participant upon surrender of the legended certificates or other evidence of ownership. (vii) Each Award shall be confirmed by, and be subject to, the terms of a Restricted Stock Agreement. (viii) Notwithstanding the foregoing, but subject to the provisions of Section 8 hereof, no Award in the form of Restricted Stock, the vesting of which is conditioned only upon the continued service of the participant, shall vest earlier than the first, second and third anniversaries of the date of grant thereof, on each of which dates a maximum of one-third of the shares of Stock subject to the Award may vest, and no award in the form of Restricted Stock, the vesting of which is conditioned B-9 upon the attainment of a specified Performance Goal or Goals, shall vest earlier than the first anniversary of the date of grant thereof. SECTION 8. CHANGE IN CONTROL PROVISIONS (a) IMPACT OF EVENT. Notwithstanding any other provision of the Plan to the contrary, in the event of a Change in Control: (i) Any Stock Options and Stock Appreciation Rights outstanding as of the date such Change in Control is determined to have occurred, and which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant. (ii) The restrictions and deferral limitations applicable to any Restricted Stock shall lapse, and such Restricted Stock shall become free of all restrictions and become fully vested and transferable to the full extent of the original grant. (b) DEFINITION OF CHANGE IN CONTROL. For purposes of the Plan, a "Change in Control" shall mean the happening of any of the following events: (i) An acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30 percent or more of either (1) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (2) the combined voting power of the outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); excluding, however, the following acquisitions of Outstanding Company Common Stock and Outstanding Company Voting Securities: (1) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (4) any acquisition by any Person pursuant to a transaction which complies with clauses (1), (2) and (3) of subsection (iii) of this Section 8(b); or (ii) Individuals who, as of the effective date of the Plan, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; PROVIDED, HOWEVER, that any individual who becomes a member of the Board subsequent to such effective date of the Plan, whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; but, PROVIDED FURTHER, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board; or (iii) The approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company ("Business Combination") or if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (1) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination will beneficially own, directly or indirectly, more than 60 percent of, respectively, the outstanding shares of common stock, and the combined voting power of the outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business B-10 Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (other than any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or such corporation resulting from such Business Combination) will beneficially own, directly or indirectly, 30 percent or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors except to the extent that such ownership existed with respect to the Company prior to the Business Combination and (3) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination will have been members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) The approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. (c) CHANGE IN CONTROL PRICE. For purposes of the Plan, "Change in Control Price" means the higher of (i) the highest reported sales price, regular way, of a share of Common Stock in any transaction reported on the New York Stock Exchange Composite Tape or other national exchange on which such shares are listed or on NASDAQ during the 60-day period prior to and including the date of a Change in Control or (ii) if the Change in Control is the result of a tender or exchange offer or a Business Combination, the highest price of a share of Stock paid in such tender or exchange offer or Business Combination; PROVIDED, HOWEVER, that in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, the Change in Control Price shall be in all cases the Fair Market Value of the Stock on the date such Incentive Stock Option or Stock Appreciation Right is exercised. To the extent that the consideration paid in any such transaction described above consists all or in part of securities or other noncash consideration, the value of such securities or other noncash consideration shall be determined in the sole discretion of the Board. SECTION 9. TERM, AMENDMENT AND TERMINATION The Plan will terminate 10 years after the effective date of the Plan. Under the Plan, Awards outstanding as of such date shall not be affected or impaired by the termination of the Plan. The Board may amend, alter or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which would impair the rights of an optionee under a Stock Option or a recipient of a Stock Appreciation Right, or Restricted Stock Award theretofore granted without the optionee's or recipient's consent, except such an amendment made to cause the Plan to qualify for any exemption provided by Rule 16b-3. In addition, no such amendment shall be made without the approval of the Company's shareholders to the extent such approval is required by law or agreement. The Committee may amend the terms of any Stock Option or other Award theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any holder without the holder's consent except such an amendment made to cause the Plan or Award to qualify for any exemption provided by Rule 16b-3 ; provided, however, that such power of the Committee shall not extend to the reduction of the exercise price of a previously granted Stock Option, except as provided in Section 3 hereof, nor may the Committee substitute new Stock Options for previously granted Stock Options having higher option prices. B-11 Subject to the above provisions, the Board shall have authority to amend the Plan to take into account changes in law and tax and accounting rules as well as other developments, and to grant Awards which qualify for beneficial treatment under such rules without stockholder approval. SECTION 10. UNFUNDED STATUS OF PLAN It is presently intended that the Plan constitute an "unfunded" plan for incentive and deferred compensation. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or make payments; PROVIDED, HOWEVER, that unless the Committee otherwise determines, the existence of such trusts or other arrangements is consistent with the "unfunded" status of the Plan. SECTION 11. GENERAL PROVISIONS (a) The Committee may require each person purchasing or receiving shares pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to the distribution thereof. The certificates or evidence of ownership for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. Notwithstanding any other provision of the Plan or agreements made pursuant thereto, the Company shall not be required to issue or deliver any certificate or certificates for shares of Stock under the Plan prior to fulfillment of all of the following conditions: (1) Listing or approval for listing upon notice of issuance, of such shares on the New York Stock Exchange, Inc., or such other securities exchange as may at the time be the principal market for the Stock; (2) Any registration or other qualification of such shares of Stock under any state or federal law or regulation, or the maintaining in effect of any such registration or other qualification which the Committee shall, in its absolute discretion upon the advice of counsel, deem necessary or advisable; and (3) Obtaining any other consent, approval or permit from any state or federal governmental agency which the Committee shall, in its absolute discretion after receiving the advice of counsel, determine to be necessary or advisable. (b) Nothing contained in the Plan shall prevent the Company or any subsidiary or Affiliate from adopting other or additional compensation arrangements for its employees. (c) Adoption of the Plan shall not confer upon any employee any right to continued employment, nor shall it interfere in any way with the right of the Company or any subsidiary or Affiliate to terminate the employment of any employee at any time. (d) No later than the date as of which an amount first becomes includable in the gross income of the participant for federal income tax purposes with respect to any Award under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Company, withholding obligations may be settled with Stock, including Stock that is part of the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company and its Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the participant. The Committee may establish such procedures as it deems appropriate for the settlement of withholding obligations with Stock. B-12 (e) Reinvestment of dividends in additional Restricted Stock at the time of any dividend payment shall only be permissible if sufficient shares of Stock are available under Section 3 for such reinvestment (taking into account then outstanding Stock Options and other Awards). (f) The Committee shall establish such procedures as it deems appropriate for a participant to designate a beneficiary to whom any amounts payable in the event of the participant's death are to be paid or by whom any rights of the participant, after the participant's death, may be exercised. (g) In the case of a grant of an Award to any employee of a subsidiary of the Company, the Company may, if the Committee so directs, issue or transfer the shares of Stock, if any, covered by the Award to the subsidiary, for such lawful consideration as the Committee may specify, upon the condition or understanding that the subsidiary will transfer the shares of Stock to the employee in accordance with the terms of the Award specified by the Committee pursuant to the provisions of the Plan. (h) The Plan and all Awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. SECTION 12. EFFECTIVE DATE OF PLAN The Plan shall be effective as of the date it is approved by the sole stockholder of the Company. B-13 ANNEX C CERTIFICATE OF INCORPORATION OF UNOVA, INC. ARTICLE I The name of the corporation (which is hereinafter referred to as the "Corporation") is: UNOVA, Inc. ARTICLE II The address of the Corporation's registered office in the State of Delaware is Corporation Service Company, 1013 Centre Road, in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at such address is Corporation Service Company. ARTICLE III The purpose of the Corporation shall be to engage in any lawful act or activity for which corporations may be organized and incorporated under the General Corporation Law of the State of Delaware. ARTICLE IV The total number of shares of stock which the Corporation shall have authority to issue is 300,000,000, consisting of 50,000,000 shares of Preferred Stock, par value $.01 per share (hereinafter referred to as "Preferred Stock"), and 250,000,000 shares of Common Stock, par value $.01 per share (hereinafter referred to as "Common Stock"). A. PREFERRED STOCK. The Preferred Stock may be issued from time to time in one or more series. In addition to a series of Preferred Stock designated as "Series A Junior Participating Preferred Stock", the terms of which are set forth herein, the Board of Directors is hereby authorized to provide for the issuance of shares of Preferred Stock in series and, by filing a certificate pursuant to the applicable law of the State of Delaware (hereinafter referred to as a "Preferred Stock Designation"), to establish from time to time the number of shares to be included in each such series, and to fix the designation, power, preferences and rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (i) The designation of the series, which may be by distinguishing number, letter or title. (ii) The number of shares of the series, which number the Board of Directors may thereafter (except where otherwise provided in the Preferred Stock Designation) increase or decrease (but not below the number of shares thereof then outstanding). (iii) Whether dividends, if any, shall be cumulative or noncumulative and the dividend rate of the series. (iv) The dates at which dividends, if any, shall be payable. (v) The redemption rights and price or prices, if any, for shares of the series. C-1 (vi) The terms and amount of any sinking fund provided for the purchase or redemption of shares of the series. (vii) The amounts payable on shares of the series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation. (viii) Whether the shares of the series shall be convertible into shares of any other class or series, or any other security, of the Corporation or any other corporation, and, if so, the specification of such other class or series or such other security, the conversion price or prices or rate or rates, any adjustments thereof, the date or dates as of which such shares shall be convertible and all other terms and conditions upon which such conversion may be made. (ix) Restrictions on the issuance of shares of the same series or of any other class or series. (x) The voting rights, if any, of the holders of shares of the series. B. SERIES A JUNIOR PARTICIPATING PREFERRED STOCK. The qualifications, limitations or restrictions of the Series A Junior Participating Preferred Stock shall be as follows: Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be 3,000,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; PROVIDED, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. Section 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the C-2 Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Section 3. VOTING RIGHTS. The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in any other Certificate of Designations creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. CERTAIN RESTRICTIONS. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; C-3 (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. REACQUIRED SHARES. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein or in any Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law. Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. C-4 Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. NO REDEMPTION. The shares of Series A Preferred Stock shall not be redeemable. Section 9. RANK. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all other series and classes of the Corporation's Preferred Stock. Section 10. AMENDMENT. The Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single class. C. COMMON STOCK. The Common Stock shall be subject to the express terms of the Preferred Stock and any series thereof. Each share of Common Stock shall be equal to each other share of Common Stock. The holders of shares of Common Stock shall be entitled to one vote for each such share upon all questions presented to the stockholders. Except as may be provided in this Certificate of Incorporation or in a Preferred Stock Designation, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, and holders of Preferred Stock shall not be entitled to receive notice of any meeting of stockholders at which they are not entitled to vote. The Corporation shall be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Corporation shall have notice thereof, except as expressly provided by applicable law. ARTICLE V The name and the mailing address of the incorporator is as follows:
NAME MAILING ADDRESS - -------------------------------------------------------- -------------------------------------------------------- Leonie S. Pan 360 North Crescent Drive Beverly Hills, CA 90210
ARTICLE VI The Corporation is to have perpetual existence. C-5 ARTICLE VII The Board of Directors is hereby authorized to create and issue, whether or not in connection with the issuance and sale of any of its stock or other securities or property, rights entitling the holders thereof to purchase from the Corporation shares of stock or other securities of the Corporation or any other corporation. The times at which and the terms upon which such rights are to be issued will be determined by the Board of Directors and set forth in the contracts or instruments that evidence such rights. The authority of the Board of Directors with respect to such rights shall include, but not be limited to, determination of the following: (a) The initial purchase price per share or other unit of the stock or other securities or property to be purchased upon exercise of such rights. (b) Provisions relating to the times at which and the circumstances under which such rights may be exercised or sold or otherwise transferred, either together with or separately from, any other stock or other securities of the Corporation. (c) Provisions which adjust the number or exercise price of such rights or amount or nature of the stock or other securities or property receivable upon exercise of such rights in the event of a combination, split or recapitalization of any stock of the Corporation, a change in ownership of the Corporation's stock or other securities or a reorganization, merger, consolidation, sale of assets or other occurrence relating to the Corporation or any stock of the Corporation, and provisions restricting the ability of the Corporation to enter into any such transaction absent an assumption by the other party or parties thereto of the obligations of the Corporation under such rights. (d) Provisions which deny the holder of a specified percentage of the outstanding stock or other securities of the Corporation the right to exercise such rights and/or cause the rights held by such holder to become void. (e) Provisions which permit the Corporation to redeem such rights. (f) The appointment of a rights agent with respect to such rights. ARTICLE VIII In furtherance of, and not in limitation of, the powers conferred by law, the Board of Directors is expressly authorized and empowered: (a) to adopt, amend or repeal the By-Laws of the Corporation; provided, however, that the By-Laws adopted by the Board of Directors under the powers hereby conferred may be amended or repealed by the Board of Directors or by the stockholders having voting power with respect thereto; provided further that in the case of amendments by stockholders, the affirmative vote of the holders of at least 80 percent of the voting power of the then outstanding Voting Stock, voting together as a single class, shall be required to alter, amend or repeal any provision of the By-Laws; and (b) from time to time to determine whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the Corporation, or any of them, shall be open to inspection of stockholders; and, except as so determined or as so provided in any Preferred Stock Designation, no stockholder shall have any right to inspect any account, book or document of the Corporation other than such rights as may be conferred by applicable law. The Corporation may in its By-Laws confer powers upon the Board of Directors in addition to the foregoing and in addition to the powers and authorities expressly conferred upon the Board of Directors by applicable law. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80 percent of the then outstanding Voting Stock, voting C-6 together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with paragraph (a) of this Article VIII. For the purposes of this Certificate of Incorporation, "Voting Stock" shall mean the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors. ARTICLE IX Subject to the rights of the holders of any series of Preferred Stock as set forth in a Preferred Stock Designation to elect additional directors under specific circumstances, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing of such stockholders. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of at least 80 percent of the then outstanding Voting Stock, voting together as a single class, shall be required to amend, repeal, or adopt any provision inconsistent with this Article IX. ARTICLE X Section 1. NUMBER, ELECTION AND TERMS OF DIRECTORS. Subject to the rights of any series of Preferred Stock as set forth in a Preferred Stock Designation to elect additional directors under specified circumstances, the number of directors of the Corporation shall be fixed by the By-Laws of the Corporation and may be increased or decreased from time to time in such a manner as may be prescribed by the By-Laws. Unless and except to the extent that the By-Laws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot. The directors, other than those who may be elected by the holders of any series of Preferred Stock, shall be divided into three classes, as nearly equal in number as possible. One class of directors shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 1999, another class shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 2000, and another class shall be initially elected for a term expiring at the annual meeting of stockholders to be held in 2001. Members of each class shall hold office until their successors are elected and qualified. At each succeeding annual meeting of the stockholders of the Corporation, the successors of the class of directors whose term expires at that meeting shall be elected by a majority vote of all votes cast at such meeting to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. Section 2. REMOVAL OF DIRECTORS; VACANCIES. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, any director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80 percent of the then outstanding Voting Stock, voting together as a single class. Section 3. AMENDMENT. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80 percent of the then outstanding Voting Stock, voting together as a single class, shall be required to amend, repeal or adopt any provision inconsistent with this Article X. C-7 ARTICLE XI A. (1) In addition to any affirmative vote required by law, by this Certificate of Incorporation or by any Preferred Stock Designation, and except as otherwise expressly provided in Section B of this Article XI: (i) any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (a) any Interested Stockholder (as hereinafter defined) or (b) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of $10 million or more; or (iii) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $10 million or more; or (iv) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of any Interested Stockholder or any Affiliate of any Interested Stockholder; or (v) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving any Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is Beneficially Owned (as hereinafter defined) by any Interested Stockholder or any Affiliate of any Interested Stockholder; shall require the affirmative vote of the holders of at least 80 percent of the voting power of all of the then outstanding shares of the Voting Stock, voting together as a single class. Such affirmative vote shall be required notwithstanding any other provisions of this Certificate of Incorporation or any provision of law or of any agreement with any national securities exchange or otherwise which might otherwise permit a lesser vote or no vote. (2) The term "Business Combination" as used in this Article XI shall mean any transaction which is referred to in any one or more of subparagraphs (i) through (v) of paragraph (1) of this Section A. B. The provisions of Section A of this Article XI shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law, any other provision of this Certificate of Incorporation and any Preferred Stock Designation, if, in the case of a Business Combination that does not involve any cash or other consideration being received by the stockholders of the Corporation, solely in their respective capacities as stockholders of the Corporation, the condition specified in the following paragraph (1) is met or, in the case of any other Business Combination, the conditions specified in either of the following paragraph (1) or paragraph (2) are met: (1) The Business Combination shall have been approved by a majority of the Continuing Directors (as hereinafter defined); provided however, that this condition shall not be capable of satisfaction unless there are at least three Continuing Directors. (2) All of the following conditions shall have been met: C-8 (i) The consideration to be received by holders of shares of a particular class (or series) of outstanding capital stock (including Common Stock and other than Excluded Preferred Stock (as hereinafter defined)) shall be in cash or in the same form as the Interested Stockholder or any of its Affiliates has previously paid for shares of such class (or series) of capital stock. If the Interested Stockholder or any of its Affiliates have paid for shares of any class (or series) of capital stock with varying forms of consideration, the form of consideration to be received per share by holders of shares of such class (or series) of capital stock shall be either cash or the form used to acquire the largest number of shares of such class (or series) of capital stock previously acquired by the Interested Stockholder or any of its Affiliates. (ii) The aggregate amount of (x) the cash and (y) the Fair Market Value, as of the date (the "Consummation Date") of the consummation of the Business Combination, of the consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher of the following (in each case appropriately adjusted in the event of any stock dividend, stock split, combination of shares or similar event): (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder or any of its Affiliates for any shares of Common Stock acquired by them within the two-year period immediately prior to the date of the first public announcement of the proposal of the Business Combination (the "Announcement Date") or in any transaction in which the Interested Stockholder became an Interested Stockholder, whichever is higher, plus interest compounded annually from the first date on which the Interested Stockholder became an Interested Stockholder (the "Determination Date") through the Consummation Date at the publicly announced base rate of interest of Morgan Guaranty Trust Company of New York (or such other major bank headquartered in New York, New York as may be selected by the Continuing Directors) from time to time in effect in New York, New York, less the aggregate amount of any cash dividends paid or declared (if ultimately paid), and the Fair Market Value of any dividends paid in other than cash, on each share of Common Stock from the Determination Date through the Consummation Date in an amount up to but not exceeding the amount of interest so payable per share of Common Stock; and (b) the Fair Market Value per share of Common Stock on the Announcement Date or the Determination Date, whichever is higher. (iii) The aggregate amount of (x) the cash and (y) the Fair Market Value, as of the Consummation Date, of the consideration other than cash to be received per share by holders of shares of any class (or series), other than Common Stock or Excluded Preferred Stock, of outstanding capital stock shall be at least equal to the highest of the following (in each case appropriately adjusted in the event of any stock dividend, stock split, combination of shares or similar event), it being intended that the requirements of this paragraph (2)(iii) shall be required to be met with respect to every such class (or series) of outstanding capital stock whether or not the Interested Stockholder or any of its Affiliates has previously acquired any shares of a particular class (or series) of capital stock: (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder or any of its Affiliates for any shares of such class (or series) of capital stock acquired by them within the two-year period immediately prior to the Announcement Date or in any transaction in which it became an Interested Stockholder, whichever is higher, plus interest compounded annually from the Determination Date through the Consummation Date at the publicly announced base rate of interest of Morgan Guaranty Trust Company of New York (or such other major bank headquartered in New York, New York as may be selected by the Continuing Directors) from time to time in effect in New York, New York less the aggregate amount of any cash dividends paid, and the Fair Market Value of any dividends paid in other than cash, on each share of such C-9 class (or series) of capital stock from the Determination Date through the Consummation Date in an amount up to but not exceeding the amount of interest so payable per share of such class (or series) of capital stock; (b) the Fair Market Value per share of such class (or series) of capital stock on the Announcement Date or on the Determination Date, whichever is higher; and (c) the highest preferential amount per share, if any, to which the holders of shares of such class (or series) of capital stock would be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation. (iv) After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (a) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding Preferred Stock; (b) there shall have been (I) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Continuing Directors, and (II) an increase in such annual rate of dividends as is necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, except as approved by a majority of the Continuing Directors; and (c) neither such Interested Stockholder nor any of its Affiliates shall have become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder; provided, however, that no approval by Continuing Directors shall satisfy the requirements of this subparagraph (iv) unless at the time of such approval there are at least three Continuing Directors. (v) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder and any of its Affiliates shall not have received the benefit, directly or indirectly (except proportionately, solely in such Interested Stockholder's or Affiliate's capacity as a stockholder of the Corporation), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (vi) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to all stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). (vii) Such Interested Stockholder shall have supplied the Corporation with such information as shall have been requested pursuant to Section E of this Article XI within the time period set forth therein. C. For the purposes of this Article XI: (1) A "person" means any individual, limited partnership, general partnership, corporation or other firm or entity. (2) "Interested Stockholder" means any person (other than the Corporation or any Subsidiary) who or which: (i) is the beneficial owner (as hereinafter defined), directly or indirectly, of ten percent or more of the voting power of the outstanding Voting Stock; or (ii) is an Affiliate or an Associate (as hereinafter defined) of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial C-10 owner, directly or indirectly, of ten percent or more of the voting power of the then-outstanding Voting Stock; or (iii) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, as amended. Notwithstanding the foregoing, neither Unitrin, Inc., a Delaware corporation, nor any of its subsidiaries shall be an Interested Stockholder as long as such entities in the aggregate Beneficially Own less than 12,658,000 shares of Common Stock. (3) A person shall be a "beneficial owner" of or shall "Beneficially Own", any Voting Stock: (i) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as in effect on August 13, 1997; or (ii) which such person or any of its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding (but neither such person nor any such Affiliate or Associate shall be deemed to be the beneficial owner of any shares of Voting Stock solely by reason of having a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, and with respect to which shares neither such person nor any such Affiliate or Associate is otherwise deemed the beneficial owner); or (iii) which are beneficially owned, directly or indirectly, within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as in effect on August 13, 1997, by any other person with whom such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (other than solely by reason of a revocable proxy as described in subparagraph (ii) of this paragraph (3)) or disposing of any shares of Voting Stock; PROVIDED, HOWEVER, that in the case of any employee stock ownership or similar plan of the Corporation or of any Subsidiary in which the beneficiaries thereof possess the right to vote any shares of Voting Stock held by such plan, no such plan nor any trustee with respect thereto (nor any Affiliate of such trustee), solely by reason of such capacity of such trustee, shall be deemed, for any purposes hereof to beneficially own any shares of Voting Stock held under any such plan. (4) For the purposes of determining whether a person is an Interested Stockholder pursuant to paragraph (2) of this Section C, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of paragraph (3) of this Section C but shall not include any other unissued shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. (5) "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on August 13, 1997. (6) "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in paragraph (2) of this Section C, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. C-11 (7) "Continuing Director" means any member of the Board of Directors of the Corporation who is unaffiliated with the Interested Stockholder and was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder, and any director who is thereafter chosen to fill any vacancy on the Board of Directors or who is elected and who, in either event, is unaffiliated with the Interested Stockholder and in connection with his or her initial assumption of office is recommended for appointment or election by a majority of Continuing Directors then on the Board. (8) "Fair Market Value" means: (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange Listed Stocks, or, if such stock is not listed on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board in accordance with Section D of this Article XI; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board in accordance with Section D of this Article XI. (9) In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in paragraphs (2)(ii) and (2)(iii) of Section B of this Article XI shall include the shares of Common Stock and/or the shares of any other class (or series) of outstanding capital stock retained by the holders of such shares. (10) "Whole Board" means the total number of directors which the Corporation would have if there were no vacancies. (11) "Excluded Preferred Stock" means any series of Preferred Stock with respect to which the Preferred Stock Designation creating such series expressly provides that the provisions of this Article XI shall not apply. (12) "Voting Stock" means capital stock of the Corporation entitled to vote generally in the election of directors. D. A majority of the Whole Board, but only if a majority of the Whole Board shall then consist of Continuing Directors or, if a majority of the Whole Board shall not then consist of Continuing Directors, a majority of the then Continuing Directors, shall have the power and duty to determine, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Article XI, including, without limitation, (i) whether a person is an Interested Stockholder, (ii) the number of shares of Voting Stock beneficially owned by any person, (iii) whether a person is an Affiliate or Associate of another, (iv) whether the applicable conditions set forth in paragraph (2) of Section B have been met with respect to any Business Combination, (v) the Fair Market Value of stock or other property in accordance with paragraph (8) of Section C of this Article XI, and (vi) whether the assets which are the subject of any Business Combination referred to in paragraph (1)(ii) of Section A have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination referred to in paragraph (1)(iii) of Section A has, an aggregate Fair Market Value of $10 million or more. E. A majority of the Whole Board shall have the right to demand, but only if a majority of the Whole Board shall then consist of Continuing Directors, or, if a majority of the Whole Board shall not then consist of Continuing Directors a majority or the then Continuing Directors shall have the right to demand, that any person who it is reasonably believed is an Interested Stockholder (or holds of record shares of Voting C-12 Stock Beneficially Owned by any Interested Stockholder) supply the Corporation with complete information as to (i) the record owner(s) of all shares Beneficially Owned by such person who it is reasonably believed is an Interested Stockholder, (ii) the number of and class or series of shares Beneficially Owned by such person who it is reasonably believed is an Interested Stockholder and held of record by each such record owner and the number(s) of the stock certificate(s) evidencing such shares, and (iii) any other factual matter relating to the applicability or effect of this Article XI, as may be reasonably requested of such person, and such person shall furnish such information within 10 days after receipt of such demand. F. Nothing contained in this Article XI shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. G. Notwithstanding any other provisions of this Restated Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least 80 percent of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend, repeal or adopt any provision inconsistent with this Article XI. ARTICLE XII Each person who is or was or had agreed to become a director or officer of the Corporation, or each such person who is or was serving or who had agreed to serve at the request of the Board of Directors or an officer of the Corporation as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise (including the heirs, executor, administrators or estate of such person), shall be indemnified by the Corporation, in accordance with the By-Laws of the Corporation, to the full extent permitted from time to time by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment) or any other applicable laws as presently or hereafter in effect. Without limiting the generality or the effect of the foregoing, the Corporation may indemnify other persons as provided in the By-Laws, and the Corporation may enter into one or more agreements with any person which provide for indemnification greater or different than that provided in this Article XII. Any amendment or repeal of this Article XII shall not adversely affect any right or protection existing hereunder immediately prior to such amendment or repeal. ARTICLE XIII A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to either the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. Any amendment or repeal of this Article XIII shall not adversely affect any right or protection of a director of the Corporation existing immediately prior to such amendment or repeal. ARTICLE XIV The Corporation reserves the right at any time and from time to time to amend, alter, change or repeal any provision contained in this Certificate of Incorporation or a Preferred Stock Designation, and any other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed herein or by applicable law, and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons C-13 whomsoever by and pursuant to this Certificate of Incorporation in its present form or as hereafter amended are granted subject to the right reserved in this Article XIV; PROVIDED, HOWEVER, that any amendment or repeal of Article XII or Article XIII of this Certificate of Incorporation shall not adversely affect any right or protection existing hereunder immediately prior to such amendment or repeal; and provided further that no Preferred Stock Designation shall be amended after the issuance of any shares of the series of Preferred Stock created thereby, except in accordance with the terms of such Preferred Stock Designation and the requirements of applicable law. Executed on August 13, 1997 By:______________________________________ /s/ Leonie S. Pan Incorporator C-14 ANNEX D BY-LAWS OF UNOVA, INC. ARTICLE I OFFICES AND RECORDS SECTION 1.1. DELAWARE OFFICE. The principal office of the Corporation in the State of Delaware shall be located in the City of Wilmington, County of New Castle, and the name and address of its registered agent is Corporation Service Company, 1013 Centre Road, Wilmington, Delaware. SECTION 1.2. OTHER OFFICES. The Corporation may have such other offices, either within or without the State of Delaware, as the Board of Directors may designate or as the business of the Corporation may from time to time require. SECTION 1.3. BOOKS AND RECORDS. The books and records of the Corporation may be kept outside the State of Delaware at such place or places as may from time to time be designated by the Board of Directors. ARTICLE II STOCKHOLDERS SECTION 2.1. ANNUAL MEETING. The annual meeting of the stockholders of the Corporation shall be held on such date commencing in the year 1999 and at such place and time as may be fixed by resolution of the Board of Directors. SECTION 2.2. SPECIAL MEETING. Subject to the rights of the holders of any series of stock having a preference over the Common Stock of the Corporation as to dividends or upon liquidation ("Preferred Stock") with respect to such series of Preferred Stock, special meetings of the stockholders may be called only by the Chairman of the Board or by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors which the Corporation would have if there were no vacancies (the "Whole Board"). SECTION 2.3. PLACE OF MEETING. The Board of Directors or the Chairman of the Board, as the case may be, may designate the place of meeting for any annual meeting or for any special meeting of the stockholders called by the Board of Directors or the Chairman of the Board. If no designation is so made, the place of meeting shall be the principal office of the Corporation. SECTION 2.4. NOTICE OF MEETING. Written or printed notice, stating the place, day, and hour of the meeting and the purpose or purposes for which the meeting is called, shall be delivered by the Corporation not less than ten (10) days nor more than sixty (60) days before the date of the meeting, either personally or by mail, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, addressed to the stockholder at his, D-1 her, or its address as it appears on the stock transfer books of the Corporation. Such further notice shall be given as may be required by law. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Meetings may be held without notice if all stockholders entitled to vote are present, or if notice is waived by those not present in accordance with Section 7.4 of these By-Laws. Any previously scheduled meeting of the stockholders may be postponed, and (unless the Certificate of Incorporation otherwise provides) any special meeting of the stockholders may be canceled, by resolution of the Board of Directors upon public notice given prior to the date previously scheduled for such meeting of stockholders. SECTION 2.5. QUORUM AND ADJOURNMENT. Except as otherwise provided by law or by the Certificate of Incorporation, the holders of a majority of the outstanding shares of the Corporation entitled to vote generally in the election of directors (the "Voting Stock"), represented in person or by proxy, shall constitute a quorum at a meeting of stockholders, except that when specified business is to be voted on by a class or series of stock voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum of such class or series for the transaction of such business. The Chairman of the meeting or a majority of the shares so represented may adjourn the meeting from time to time, whether or not there is such a quorum. No notice of the time and place of adjourned meetings need be given except as required by law. The stockholders present at a duly called meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. SECTION 2.6. PROXIES. At all meetings of stockholders, a stockholder may vote by proxy executed in writing (or in such other manner prescribed by the General Corporation Law of the State of Delaware) by the stockholder, or by his duly authorized attorney in fact. SECTION 2.7. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS. A. ANNUAL MEETINGS OF STOCKHOLDERS. (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the Board of Directors, or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this By-Law, who is entitled to vote at the meeting, and who complies with the notice procedures set forth in this By-Law. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph A.(1) of this By-Law, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new D-2 time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph A.(2) of this By-Law to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. B. SPECIAL MEETINGS OF STOCKHOLDERS. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this By-Law, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this By-Law. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph A.(2) of this By-Law shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. C. GENERAL. (1) Only such persons who are nominated in accordance with the procedures set forth in this By-Law shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this By-Law. Except as otherwise provided by law, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business D-3 proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this By-Law and, if any proposed nomination or business is not in compliance with this By-Law, to declare that such defective proposal or nomination shall be disregarded. (2) For purposes of this By-Law, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press, or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14, or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights (a) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (b) of the holders of any series of Preferred Stock to elect directors under specified circumstances. SECTION 2.8. PROCEDURE FOR ELECTION OF DIRECTORS; REQUIRED VOTE. Election of directors at all meetings of the stockholders at which directors are to be elected shall be by ballot, and, subject to the rights of the holders of any series of Preferred Stock to elect directors under specified circumstances, a plurality of the votes cast thereat shall elect directors. Except as otherwise provided by law, the Certificate of Incorporation, or these By-Laws, in all matters other than the election of directors, the affirmative vote of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote on the matter shall be the act of the stockholders. SECTION 2.9. INSPECTORS OF ELECTIONS; OPENING AND CLOSING THE POLLS. The Board of Directors by resolution shall appoint one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives, to act at the meetings of stockholders and make a written report thereof. One or more persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed to act or is able to act at a meeting of stockholders, the Chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector(s) shall have the duties prescribed by law. The Chairman or the Secretary of the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting. SECTION 2.10. NO STOCKHOLDER ACTION BY WRITTEN CONSENT. Subject to the rights of the holders of any series of Preferred Stock with respect to such series of Preferred Stock, any action required or permitted to be taken by the stockholders of the Corporation must be effected at an annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. ARTICLE III BOARD OF DIRECTORS SECTION 3.1. GENERAL POWERS. The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. In addition to the powers and authorities by these By-Laws expressly conferred upon them, D-4 the Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws required to be exercised or done by the stockholders. SECTION 3.2. NUMBER, TENURE, AND QUALIFICATIONS. Subject to the rights of the holders of any series of Preferred Stock to elect directors under specified circumstances, the number of directors shall be fixed from time to time exclusively pursuant to a resolution adopted by a majority of the Whole Board. The directors, other than those who may be elected by the holders of any series of Preferred Stock under specified circumstances, shall be divided, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as is reasonably possible, with the term of office of the first class to expire at the 1999 annual meeting of stockholders, the term of office of the second class to expire at the 2000 annual meeting of stockholders and the term of office of the third class to expire at the 2001 annual meeting of stockholders, with each director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders, commencing with the 1999 annual meeting, (i) directors elected to succeed those directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified, and (ii) if authorized by a resolution of the Board of Directors, directors may be elected to fill any vacancy on the Board of Directors, regardless of how such vacancy shall have been created. SECTION 3.3. REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held immediately after the annual meeting of stockholders without other notice than this By-Law. Regular meetings of the directors may be held without notice at such place and times as shall be determined from time to time by the Board of Directors. SECTION 3.4. SPECIAL MEETINGS. Special meetings of the Board of Directors shall be called at the request of the Chairman of the Board, the President, or a majority of the Board of Directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix the place and time of the meetings. SECTION 3.5. NOTICE. Notice of any special meeting of directors shall be given to each director at his or her business or residence in writing by hand delivery, first-class or overnight mail or courier service, telegram or facsimile transmission, electronic mail, or orally by telephone. If mailed by first-class mail, such notice shall be deemed adequately delivered when deposited in the United States mails so addressed, with postage thereon prepaid, at least five (5) days before such meeting. If by telegram, overnight mail, or courier service, such notice shall be deemed adequately delivered when the telegram is delivered to the telegraph corporation or the notice is delivered to the overnight mail or courier service corporation at least twenty-four (24) hours before such meeting. If by facsimile transmission or electronic mail, such notice shall be deemed adequately delivered when the notice is transmitted at least twelve (12) hours before such meeting. If by telephone or by hand delivery, the notice shall be given at least twelve (12) hours prior to the time set for the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice of such meeting, except for amendments to these By-Laws, as provided under Section 8.1. A meeting may be held at any time without notice if all the directors are present or if those not present waive notice of the meeting in accordance with Section 7.4 of these By-Laws. D-5 SECTION 3.6. ACTION BY CONSENT OF BOARD OF DIRECTORS. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. SECTION 3.7. CONFERENCE TELEPHONE MEETINGS. Members of the Board of Directors, or any committee thereof, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. SECTION 3.8. QUORUM. Subject to Section 3.9, a whole number of directors equal to at least a majority of the Whole Board shall constitute a quorum for the transaction of business, but if at any meeting of the Board of Directors there shall be less than a quorum present, a majority of the directors present may adjourn the meeting from time to time without further notice. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. The directors present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum. SECTION 3.9. VACANCIES. Subject to applicable law and the rights of the holders of any series of Preferred Stock with respect to such series of Preferred Stock, and unless the Board of Directors otherwise determines, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until any such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Whole Board shall shorten the term of any incumbent director. SECTION 3.10. EXECUTIVE AND OTHER COMMITTEES. The Board of Directors may, by resolution adopted by a majority of the Whole Board, designate an Executive Committee to exercise, subject to applicable provisions of law, all the powers of the Board in the management of the business and affairs of the Corporation when the Board is not in session, including without limitation the power to declare dividends, to authorize the issuance of the Corporation's capital stock and to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of the State of Delaware, and may, by resolution similarly adopted, designate one or more other committees. The Executive Committee and each such other committee shall consist of two or more directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, other than the Executive Committee (the powers of which are expressly provided for herein), may to the extent permitted by law exercise such powers and shall have such responsibilities as shall be specified in the designating resolution. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not constituting a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified D-6 member. Each committee shall keep written minutes of its proceedings and shall report such proceedings to the Board when required. A majority of any committee may determine its action and fix the time and place of its meetings, unless the Board shall otherwise provide. Notice of such meetings shall be given to each member of the committee in the manner provided for in Section 3.5 of these By-Laws. The Board shall have power at any time to fill vacancies in, to change the membership of, or to dissolve any such committee. Nothing herein shall be deemed to prevent the Board from appointing one or more committees consisting in whole or in part of persons who are not directors of the Corporation; provided, however, that no such committee shall have or may exercise any authority of the Board. SECTION 3.11. REMOVAL. Subject to the rights of the holders of any series of Preferred Stock with respect to such series of Preferred Stock, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80 percent of the voting power of all of the then outstanding shares of Voting Stock, voting together as a single class. SECTION 3.12. RECORDS. The Board of Directors shall cause to be kept a record containing the minutes of the proceedings of the meetings of the Board and of the stockholders, appropriate stock books and registers and such books of records and accounts as may be necessary for the proper conduct of the business of the Corporation. SECTION 3.13. ADVISORY DIRECTORS. The Board of Directors may elect one or more advisory directors who shall have such powers and shall perform such duties as the directors shall assign to them. Advisory directors shall, upon election, serve until the next annual meeting of stockholders. Advisory directors shall receive notices of all meetings of the Board of Directors in the same manner and at the same time as the directors. They shall attend said meetings referred to in said notices in an advisory capacity, but will not cast a vote or be counted to determine a quorum. Any advisory directors may be removed either with or without cause, by a majority of the directors at the time in office, at any regular or special meeting of the Board of Directors. Nothing herein contained shall be construed to preclude any advisory director from serving the Corporation in any other capacity as an officer, agent, or otherwise. ARTICLE IV OFFICERS SECTION 4.1. OFFICERS. The officers of the Corporation shall consist of a Chairman of the Board, a Chief Executive Officer, a Secretary, a Treasurer, and, if deemed necessary, expedient, or desirable by the Board of Directors, a President, a Vice Chairman of the Board, one or more Chief Operating Officers, one or more Vice Presidents (one or more of whom may be designated Executive or Senior Vice President), one or more Assistant Secretaries, and one or more Assistant Treasurers. Except as may otherwise be provided in the resolution of the Board of Directors choosing him or her, no officer other than the Chairman or Vice Chairman of the Board, if any, need be a director. Except as may be limited by law, any number of offices may be held by the same person, as the directors may determine. Unless otherwise provided for in the resolution choosing him or her, each officer shall be chosen for a term that shall continue until the meeting of the Board of Directors following the next annual meeting of stockholders and until his or her successor shall have been chosen and qualified. D-7 All officers of the Corporation shall have such authority and perform such duties as shall be prescribed in the By-Laws or in the resolutions of the Board of Directors designating and choosing such officers and shall have such additional authority and duties as are incident to their office except to the extent that such resolutions may be inconsistent therewith. Any officer may be removed, with or without cause, by the Board of Directors. Any vacancy in any office may be filled by the Board of Directors. SECTION 4.2. OTHER OFFICERS AND AGENTS. The Board of Directors may appoint such other officers and agents as it may deem advisable, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. The Chief Executive Officer may appoint key executives to the position of staff vice president. Such staff vice presidents shall not be corporate officers and shall exercise such powers and perform such duties as are assigned to them by the Chief Executive Officer or the President, if any, or by any other officer of the Corporation designated for such purpose by the Chief Executive Officer or President, if any. ARTICLE V CAPITAL STOCK SECTION 5.1. SHARES. The shares of the capital stock of the Corporation shall be represented by certificates or shall be uncertificated. Each registered holder of shares of capital stock, upon request to the Corporation, shall be provided with a stock certificate, representing the number of shares owned by such holder. Absent specific request for such a certificate by the registered owner or transferee thereof, all shares shall be uncertificated upon the original issuance thereof by the Corporation or upon the surrender for transfer of the certificate representing such shares to the Corporation or its transfer agent. SECTION 5.2. CERTIFICATES FOR SHARES OF STOCK. The certificates for shares of stock of the Corporation shall be in such form, not inconsistent with the Certificate of Incorporation, as shall be approved by the Board of Directors. All certificates shall be signed, countersigned, and registered in such manner as the Board of Directors may by resolution prescribe, which resolution may permit any of all of the signatures on such certificates to be in facsimile. In case any officer, transfer agent, or registrar who shall have signed or whose facsimile signature has been placed upon any such certificate or certificates shall cease to be such officer, transfer agent, or registrar of the Corporation, whether because of death, resignation, or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be issued and delivered as though the person or persons who signed such certificate or certificates had not ceased to be such officer, transfer agent, or registrar of the Corporation. All certificates for shares of stock shall be consecutively numbered as the same are issued. The name of the person owning the shares represented thereby with the number of such shares and the date of issue thereof shall be entered on the books of the corporation. Except as hereinafter provided, all certificates surrendered to the Corporation for transfer shall be canceled and no new certificates or uncertificated shares shall be issued until former certificates for the same number of shares have been surrendered and canceled. D-8 SECTION 5.3. LOST, STOLEN, OR DESTROYED CERTIFICATES. No certificate for shares of stock in the Corporation shall be issued in place of any certificate alleged to have been lost, destroyed, or stolen, except on production of such evidence of such loss, destruction, or theft and on delivery to the Corporation of a bond of indemnity in such amount, upon such terms, and secured by such surety, as the Board of Directors or the Secretary of the Corporation may in its, his, or her discretion require. SECTION 5.4. TRANSFER OF SHARES. Upon surrender to the Corporation or to the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation, or authority to transfer, the Corporation shall issue or cause to be issued uncertificated shares or, if requested by the appropriate person, a new certificate to the person entitled thereto, cancel the surrendered certificate, and record the transaction upon its books. Upon receipt of proper transfer instructions from the registered owner of uncertificated shares, such uncertificated shares shall be canceled and issuance of new equivalent uncertificated shares shall be made to the person entitled thereto and the transaction shall be recorded upon the books of the Corporation. SECTION 5.5. REGULATIONS. The Board of Directors shall have power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer, and registration of uncertificated shares or certificates for shares of stock of the Corporation. SECTION 5.6. STATEMENTS RELATING TO UNCERTIFICATED SECURITIES. Within two business days after an issuance, transfer, pledge, or release from a pledge of uncertificated shares has been registered, the Corporation shall send to the registered owner thereof and, if shares are or were subject to a registered pledge, to the registered pledgee, a written notice, signed in the same manner as a certificate for shares may be signed in accordance with Section 5.2 of this Article V, stating (a) that the Corporation shall furnish to such person(s) upon request and without charge a full statement of the designation, relative rights, preferences and limitations of the shares of each class of the Corporation's stock authorized to be issued and the designation, relative rights, preferences and limitations of each series of preferred stock so far as the same has been fixed and the authority of the Board of Directors to designate and fix the relative rights, preferences and limitations of other series; (b) that the Corporation is formed under the laws of the State of Delaware; (c) the number of shares and a description of the issue of which such shares are a part including the class of shares, and the designation of the series, if any, which have been issued, transferred, pledged or released from a pledge, as the case may be; (d) the name, address, and taxpayer identification number, if any, of the person or persons to which such shares have been issued or transferred, and, in the case of registration of a pledge or a release from a pledge, of the registered owner and the registered pledgee whose interest is being granted or released, (e) any liens or restrictions of the Corporation, and any adverse claims (i) which are embodied in a restraining order, injunction, or other legal process served upon the Corporation at a time and in a manner which afforded it a reasonable opportunity to act on it in accordance with applicable law, (ii) of which the Corporation has received written notification from the registered owner or the registered pledgee at a time and in a manner which afforded it a reasonable opportunity to act on it in accordance with applicable law, (iii) to which the registration of transfer to the present registered owner was subject and so noted in a statement sent to such person under this paragraph including restrictions on transfer not imposed by the Corporation, and (iv) of which the Corporation is charged with notice from a controlling instrument which the Corporation has elected to require as assurance that a necessary endorsement or instruction is genuine and effective, to which the shares are subject or a statement that there are no such liens, restrictions, or adverse claims; and (f) the date the issuance, transfer, pledge, or release from a pledge, as the case may be, was registered. The Corporation shall maintain a printed D-9 copy of the most recent statement sent to a person with respect to uncertificated shares pursuant to this paragraph. Within two business days after a transfer of uncertificated shares has been registered, the Corporation shall send to the former registered owner and the former registered pledgee, if any, a written notice stating (a) the number of shares and a description of the issue of which such shares are a part, including the class of shares, and the designation of the series, if any, which have been transferred; (b) the name, address and taxpayer identification number, if any; of the former registered owner and of the former registered pledgee, if any; and (c) the date the transfer was registered. The Corporation shall send to each registered holder and registered pledgee of uncertificated shares, no less frequently than annually, and at any time upon the written request of any such person, a dated written notice stating (a) if such notice is to the registered owner, the number of shares and a description of the issue of which such shares are a part, including the class of shares, and the designation of the series, if any, registered in the name of such registered owner on the date of the statement; (b) the name, address, and taxpayer identification number, if any, of the registered owner; (c) the name, address and taxpayer identification number, if any, of any registered pledgee and the number of shares subject to the pledge; and (d) any liens or restrictions of the Corporation and any adverse claims (i) which are embodied in a restraining order, injunction, or other legal process served upon the Corporation at a time and in a manner which afforded it a reasonable opportunity to act on it in accordance with applicable law, (ii) of which the Corporation has received written notification from the registered owner or the registered pledgee at a time and in a manner which afforded it a reasonable opportunity to act on it in accordance with applicable law, (iii) to which the registration of transfer to the present registered owner was subject and so noted in a statement sent to such person under this paragraph, including restrictions on transfer not imposed by the Corporation, and (iv) of which the Corporation is charged with notice from a controlling instrument which the Corporation has elected to require as assurance that a necessary endorsement or instruction is genuine and effective, to which the shares are subject or a statement that there are no such liens, restrictions or adverse claims. Each notice sent pursuant to this Section 5.6 shall bear a conspicuous legend reading substantially as follows: "This statement is merely a record of the rights of the addressee as of the time of its issuance. Delivery of the statement, of itself, confers no rights upon the recipient. This statement is neither a negotiable instrument nor a security." ARTICLE VI INDEMNIFICATION; ADVANCE OF EXPENSES SECTION 6.1. RIGHT TO INDEMNIFICATION. A. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit, or proceeding, whether civil, criminal, administrative, or investigative (hereinafter a "proceeding") by reason of the fact that he or she or a person of whom he or she is the legal representative is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation or of a partnership, joint venture, trust, or other enterprise, including service with respect to employee benefit plans maintained or sponsored by the Corporation, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee, or agent or in any other capacity while serving as a director, officer, employee, or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability, and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person D-10 who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of his or her heirs, executors, and administrators; PROVIDED, HOWEVER, that except as provided in Section 6.2.B. of this Article VI, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors. B. Each person referred to in Section 6.1.A. of this Article VI shall be paid by the Corporation the expenses incurred in connection with any proceeding in advance of its final disposition, such advances to be paid by the Corporation within 20 days after the receipt by the Corporation of a statement or statements from the claimant requesting such advance or advances from time to time; PROVIDED, HOWEVER, that if the General Corporation Law of the State of Delaware requires, the advancement of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) prior to the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Article VI or otherwise. C. The right to indemnification conferred in this Article VI and the right to be paid by the Corporation the expenses incurred in connection with any such proceeding in advance of its final disposition conferred in this Article VI each shall be a contract right. SECTION 6.2. PROCEDURE TO OBTAIN INDEMNIFICATION. A. To obtain indemnification under this Article VI, a claimant shall submit to the Corporation a written request, including therein or therewith such documentation and information as is reasonably available to the claimant and is reasonably necessary to determine whether and to what extent the claimant is entitled to indemnification. Upon written request by a claimant for indemnification pursuant to the first sentence of this Section 6.2.A., a determination, if required by applicable law, with respect to the claimant's entitlement thereto shall be made as follows: (1) if requested by the claimant, by Independent Counsel (as hereinafter defined) or (2) if no request is made by the claimant for a determination by Independent Counsel, (a) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined) or (b) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to the claimant, or (c) if a quorum of Disinterested Directors so directs, by the stockholders of the Corporation. In the event the determination of entitlement to indemnification is to be made by Independent Counsel at the request of the claimant, the Independent Counsel shall be selected by the Board of Directors unless there shall have occurred within six years prior to the date of the commencement of the action, suit, or proceeding for which indemnification is claimed a "Change of Control" as defined in the Corporation's 1997 Stock Incentive Plan, in which case the Independent Counsel shall be selected by the claimant unless the claimant shall request that such selection be made by the Board of Directors. If it is so determined that the claimant is entitled to indemnification, payment to the claimant shall be made within 10 days after such determination. B. If a claim under Section 6.1 of this Article VI is not paid in full by the Corporation within 30 days after a written claim pursuant to Section 6.2.A. of this Article VI has been received by the Corporation or, in the case of a claim pursuant to Section 6.1.B., within the 20-day period provided therein, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standard of conduct which makes it permissible under the General Corporation Law of the State of D-11 Delaware for the Corporation to indemnify the claimant for the amount of the claims, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, Independent Counsel, or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Corporation (including its Board of Directors, Independent Counsel, or stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. C. If a determination shall have been made pursuant to Section 6.2.A. of this Article VI that the claimant is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding commenced pursuant to Section 6.2.B. of this Article VI. D. The Corporation shall be precluded from asserting in any judicial proceeding commenced pursuant to Section 6.2.B. of this Article VI that the procedures and presumptions of this Article VI are not valid, binding, and enforceable and shall stipulate in such proceeding that the Corporation is bound by all the provisions of this Article VI. SECTION 6.3. NO DIMINUTION OF RIGHTS. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article VI shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, By-Laws, agreement, vote of stockholders or Disinterested Directors, or otherwise. No repeal or modification of this Article VI shall in any way diminish or adversely affect the rights of any director, officer, employee, or agent of the Corporation hereunder in respect of any occurrence of matter arising prior to any such repeal or modification. SECTION 6.4. INSURANCE. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee, or agent of the Corporation or any person serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against any expense, liability, or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability, or loss under the General Corporation Law of the State of Delaware. To the extent that the Corporation maintains any policy or policies providing such insurance, each such director or officer, and each such agent or employee to which rights to indemnification have been granted as provided in Section 6.5 of this Article VI, shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage thereunder for any such director, officer, employee, or agent. SECTION 6.5. DISCRETIONARY INDEMNIFICATION. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and rights to be paid by the Corporation and the expenses incurred in defending any proceeding in advance of its final disposition, to any employee or agent of the Corporation to the fullest extent of the provisions of this Article VI with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. SECTION 6.6. ENFORCEABILITY. If any provision or provisions of this Article VI shall be held to be invalid, illegal, or unenforceable for any reason whatsoever: (a) the validity, legality, and enforceability of the remaining provisions of this Article VI (including, without limitation, each portion of any section of this Article VI containing any such D-12 provision held to be invalid, illegal, or unenforceable, that is not itself held to be invalid, illegal, or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Article VI (including, without limitation, each such portion of any section of this Article VI containing any such provision held to be invalid, illegal, or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal, or unenforceable. SECTION 6.7. CERTAIN DEFINITIONS. For purposes of this Article VI: (a) "Disinterested Director" means a director of the Corporation who is not and was not a party to the matter in respect of which indemnification is sought by the claimant. (b) "Independent Counsel" means a law firm that is nationally recognized for its experience in matters of Delaware corporation law and shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Corporation or the claimant in an action to determine the claimant's rights under this Article VI. SECTION 6.8. NOTICES. Any notice, request, or other communication required or permitted to be given to the Corporation under this Article VI shall be in writing and either delivered in person or sent by telecopy, telex, telegram, electronic mail, overnight mail or courier service, or certified or registered mail, postage prepaid, return receipt requested, to the Secretary of the Corporation. ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 7.1. FISCAL YEAR. The fiscal year of the Corporation shall begin on the first day of January and end on the thirty-first day of December of each year. SECTION 7.2. DIVIDENDS. The Board of Directors may from time to time declare, and the Corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and the Certificate of Incorporation. SECTION 7.3. SEAL. The corporate seal shall have inscribed thereon the words "Corporate Seal," the year of incorporation and around the margin thereof the words "UNOVA, Inc.--Delaware." SECTION 7.4. WAIVER OF NOTICE. Whenever any notice is required to be given to any stockholder or director of the Corporation under the provisions of the General Corporation Law of the State of Delaware or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at, nor the purpose of, any annual or special meeting of the stockholders or the Board of Directors or committee thereof need be specified in any waiver of notice of such meeting. D-13 SECTION 7.5. AUDITS. The accounts, books, and records of the Corporation shall be audited upon the conclusion of each fiscal year by an independent certified public accountant selected by the Board of Directors, and it shall be the duty of the Board of Directors to cause such audit to be done annually. SECTION 7.6. RESIGNATIONS. Any director of any officer, whether elected or appointed, may resign at any time by giving written notice of such resignation to the Chairman of the Board, the President, if any, or the Secretary, and such resignation shall be deemed to be effective as of the close of business on the date said notice is received by the Chairman of the Board, the President, if any, or the Secretary, or at such later time as is specified therein. No formal action shall be required of the Board of Directors or the stockholders to make any such resignation effective. SECTION 7.7. PROXIES. Unless otherwise provided by resolution adopted by the Board of Directors, the Chairman of the Board, the President, if any, or any Vice President may from time to time appoint an attorney or attorneys or agent or agents of the Corporation, in the name and on behalf of the Corporation, to cast the votes which the Corporation may be entitled to cast as the holder of stock or other securities in any other corporation, any of whose stock or other securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporation, or to consent in writing, in the name of the Corporation as such holder, to any action by such other corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal or otherwise, all such written proxies or other instruments as he or she may deem necessary or proper in the premises. ARTICLE VIII AMENDMENTS SECTION 8.1. AMENDMENTS. These By-Laws may be altered, amended, or repealed at any meeting of the Board of Directors or of the stockholders, provided notice of the proposed change was given in the notice of the meeting and, in the case of a meeting of the Board of Directors, in a notice given not less than two days prior to the meeting; provided, however, that, in the case of amendments by stockholders, notwithstanding any other provisions of these By-Laws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the capital stock of the Corporation required by law, the Certificate of Incorporation or these By-Laws, the affirmative vote of the holders of at least 80 percent of the voting power of all the then outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend, or repeal any provision of these By-Laws. D-14 EXHIBIT A DEFINITIONS RETURN ON CAPITAL UTILIZED (ROCU) Business Operating Profit (BOP) divided by average Capital Utilized (computed on a monthly basis). CAPITAL UTILIZED Total equity, plus Notes Payable, plus Current Portion of Long-Term Debt plus Long-Term Debt, plus Advances from Corporate (less if net Advances are to Corporate), less Investments in Consolidated Subsidiaries. BUSINESS OPERATING PROFIT (BOP) Total Sales less Total Cost of Sales less Marketing expense less General and Administrative Expenses plus Other Income or minus Other Expense. RETURN ON TANGIBLE EQUITY (ROTE) Net Income divided by beginning tangible equity. CONSOLIDATED PRE-TAX INCOME Net income of the Company and its Consolidated Subsidiaries before taxes and before giving effect to extraordinary items. CASH FLOW (CF) The sum of net income plus depreciation and amortization. REVENUE Revenue as reported on the Company's annual financial statements. REVENUE GROWTH (RG) The increase in revenue for the current fiscal year, expressed as a percent, above a specified base line period. RETURN ON ASSETS (ROA) BOP divided by average assets (computed on a monthly basis). CAPITAL The sum of all interest-bearing debt, including debt with imputed interest, and total equity. RETURN ON CAPITAL (ROC) Income before interest and taxes divided by average annual capital (computed on a monthly basis). 1 RETURN ON EQUITY (ROE) Net income divided by beginning equity. RETURN ON REVENUE (ROR) BOP divided by total Net Revenue expressed as a percent. NET REVENUE Total net sales and service revenue after adjustments for all discounts, returns, and allowances. BASIC EARNINGS PER SHARE (BEPS) Income available to common stockholders of the Company divided by the weighted-average number of common shares of the Company outstanding during the applicable period. Shares issued during the applicable period and shares reacquired during the applicable period shall be weighted for the portion of the period that they were outstanding. DILUTED EARNINGS PER SHARE (DEPS) DEPS is computed in the same manner as BEPS; however, the weighted-average number of common shares of the Company outstanding during the applicable period is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares resulting from stock options or other common stock equivalents had been issued. 2 Item 15. Financial Statements and Exhibits. (b) Exhibits:
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------------------------------- 2 Form of Distribution and Indemnity Agreement 3A Certificate of Incorporation of UNOVA, Inc. (attached to Information Statement as Annex C) 3B By-laws of UNOVA, Inc. (attached to Information Statement as Annex D) 3C* Form of Rights Agreement 10A Form of 1997 Stock Incentive Plan (attached to Information Statement as Annex B) 10B Form of Tax Sharing Agreement 10C Form of Distribution and Indemnity Agreement (filed as Exhibit 2) 10D Form of Benefits Agreement 10E Form of Intellectual Property Agreement 10F* Form of Change of Control Employment Agreement with certain executive officers of UNOVA, Inc. 10G Form of Director Stock Option and Fee Plan (attached to Information Statement as Annex A) 10H UNOVA, Inc. Supplemental Executive Retirement Plan 10I* UNOVA, Inc. Restoration Plan 10J* Employment Agreement between Intermec Corporation and Michael Ohanian, dated May 18, 1995, as amended 10K Employment Agreement between UNOVA Inc. and Clayton A. Williams dated August, 1997 10L Supplemental Executive Retirement Agreement between UNOVA, Inc. and Alton J. Brann 10M Credit Agreement dated as of September 24, 1997 among UNOVA, Inc., and the banks listed therein and Morgan Guaranty Trust Company of New York, as Agent 21 Subsidiaries of UNOVA, Inc.
- ------------------------ * Previously filed. EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE - --------- -------------------------------------------------------------------------------------------------- --------- 2 Form of Distribution and Indemnity Agreement...................................................... 3A Certificate of Incorporation of UNOVA, Inc. (attached to Information Statement as Annex C) 3B By-laws of UNOVA, Inc. (attached to Information Statement as Annex D) 3C* Form of Rights Agreement.......................................................................... 10A Form of 1997 Stock Incentive Plan (attached to Information Statement as Annex B) 10B Form of Tax Sharing Agreement..................................................................... 10C Form of Distribution and Indemnity Agreement (filed as Exhibit 2) 10D Form of Benefits Agreement........................................................................ 10E Form of Intellectual Property Agreement........................................................... 10F* Form of Change of Control Employment Agreement with certain executive officers of UNOVA, Inc. ................................................................ 10G Form of Director Stock Option and Fee Plan (attached to Information Statement as Annex A) 10H UNOVA, Inc. Supplemental Executive Retirement Plan................................................ 10I* UNOVA, Inc. Restoration Plan...................................................................... 10J* Employment Agreement between Intermec Corporation and Michael Ohanian, dated May 18, 1995, as amended........................................................... 10K Employment Agreement between UNOVA, Inc. and Clayton A. Williams dated August, 1997............... 10L Supplemental Executive Retirement Agreement between UNOVA, Inc. and Alton J. Brann................ 10M Credit Agreement dated as of September 24, 1997 among UNOVA, Inc., the banks listed therein and Morgan Guaranty Trust Company of New York, as Agent............................................... 21 Subsidiaries of UNOVA, Inc. ......................................................................
- ------------------------ * Previously filed. EX-2 2 EXHIBIT 2 EXHIBIT 2 DISTRIBUTION AND INDEMNITY AGREEMENT BETWEEN WESTERN ATLAS INC. AND UNOVA, INC. DISTRIBUTION AND INDEMNITY AGREEMENT TABLE OF CONTENTS
PAGE ----- ARTICLE I. DEFINITIONS............................................................................ 1 Section 1.1 General................................................................................ 1 ARTICLE II. THE DISTRIBUTION....................................................................... 2 Section 2.1 The Distribution....................................................................... 2 Section 2.2 Cooperation Prior to the Distribution.................................................. 3 Section 2.3 Conditions to Distribution............................................................. 3 ARTICLE III. TRANSACTIONS RELATING TO THE DISTRIBUTION.............................................. 4 Section 3.1 Intercorporate Reorganization.......................................................... 4 Section 3.2 Dividend; Cancellation of Intercompany Indebtedness.................................... 4 Section 3.3 Other Agreements....................................................................... 4 Section 3.4 The UNOVA Board........................................................................ 4 Section 3.5 UNOVA Charter and By-laws.............................................................. 4 Section 3.6 Insurance.............................................................................. 4 Section 3.7 Western Atlas Employees Good Government Fund........................................... 6 Section 3.8 Western Atlas Foundation............................................................... 6 ARTICLE IV. INDEMNIFICATION........................................................................ 6 Section 4.1 Indemnification by Western Atlas....................................................... 6 Section 4.2 Indemnification by UNOVA............................................................... 7 Section 4.3 Limitations on Indemnification Obligations............................................. 7 Section 4.4 Procedures for Indemnification of Third-Party Claims................................... 7 Section 4.5 Remedies Cumulative.................................................................... 9 Section 4.6 Survival of Indemnities................................................................ 9 ARTICLE V. ACCESS TO INFORMATION; SERVICES........................................................ 10 Section 5.1 Access to Information.................................................................. 10 Section 5.2 Production of Witnesses................................................................ 10 Section 5.3 Retention of Records................................................................... 10 Section 5.4 Confidentiality........................................................................ 10 Section 5.5 Provision of Services.................................................................. 11 Section 5.6 Costs.................................................................................. 11 ARTICLE VI. MISCELLANEOUS.......................................................................... 11 Section 6.1 Complete Agreement; Construction....................................................... 11 Section 6.2 Survival of Agreements................................................................. 12 Section 6.3 Expenses............................................................................... 12 Section 6.4 Governing Law.......................................................................... 12 Section 6.5 Notices................................................................................ 12 Section 6.6 Amendments............................................................................. 12 Section 6.7 Successors and Assigns................................................................. 12 Section 6.8 Termination............................................................................ 13 Section 6.9 No Third-Party Beneficiaries........................................................... 13 Section 6.10 Titles and Headings.................................................................... 13 Section 6.11 Legal Enforceability................................................................... 13 Section 6.12 Arbitration............................................................................ 13
i DISTRIBUTION AND INDEMNITY AGREEMENT DISTRIBUTION AND INDEMNITY AGREEMENT (this "Agreement"), dated as of , 1997, between WESTERN ATLAS INC., a Delaware corporation ("Western Atlas"), and UNOVA, INC., a Delaware corporation and, as of the date hereof, a wholly owned subsidiary of Western Atlas ("UNOVA"). WHEREAS, the Western Atlas Board has determined that it is appropriate and desirable to spin off its holdings of UNOVA by distributing all outstanding shares of UNOVA Common Stock on a pro rata basis to holders of Western Atlas Common Stock; and WHEREAS, Western Atlas and UNOVA have determined that it is appropriate and desirable to set forth the principal corporate transactions required to effect such distribution and certain other agreements that will govern certain matters relating to such distribution and the relationships thereafter between Western Atlas and UNOVA; and WHEREAS, Western Atlas and UNOVA are entering into this Agreement in the spirit of mutual benefit and good faith. NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, and the benefits to be derived from the distribution by Western Atlas and UNOVA, the parties hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 GENERAL. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): ACTION: any action, suit, arbitration, inquiry, proceeding or investigation by or before any court, any governmental or other regulatory or administrative agency or commission or any arbitration tribunal. AFFILIATE: as defined in Rule 12b-2 under the Exchange Act, including, with respect to Western Atlas, any Western Atlas Subsidiary and, with respect to UNOVA, any UNOVA Subsidiary. AGENT: ChaseMellon Shareholder Services, L.L.C., as distribution agent. BENEFITS AGREEMENT: the Benefits Agreement between UNOVA and Western Atlas, the form of which is attached hereto as Annex A. CODE: the Internal Revenue Code of 1986, as amended. COMMISSION: the Securities and Exchange Commission. DISTRIBUTION: the distribution to holders of Western Atlas Common Stock of the shares of UNOVA Common Stock owned by Western Atlas on the Distribution Date. DISTRIBUTION DATE: the date determined by the Western Atlas Board on which the Distribution shall be effected. EXCHANGE ACT: the Securities Exchange Act of 1934, as amended. FORM 10: the registration statement on Form 10 filed by UNOVA with the Commission to effect the registration of the UNOVA Common Stock pursuant to the Exchange Act. INFORMATION STATEMENT: the information statement to be sent to the holders of Western Atlas Common Stock in connection with the Distribution. INSURANCE PROCEEDS: those monies (i) received by an insured from an insurance carrier on an insurance claim or (ii) paid by an insurance carrier on behalf of the insured on an insurance claim, in either case net of any applicable deductibles, retentions, or costs paid by such insured, but such term does not refer to proceeds received from an insurer on an employee benefits group insurance policy. INTELLECTUAL PROPERTY AGREEMENT: the Intellectual Property Agreement between UNOVA and Western Atlas, the form of which is attached hereto as Annex B. IRS: the Internal Revenue Service. LIABILITIES: any and all debts, liabilities and obligations, absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising and whether or not the same would be reflected on a balance sheet (unless otherwise specified in this Agreement), including all costs and expenses relating thereto, and including, without limitation, those debts, liabilities and obligations arising under any law, rule, regulation, Action, threatened Action, order or consent decree of any governmental entity or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking. LOSSES: any and all losses, Liabilities, claims, damages, obligations, fines, penalties, payments, costs and expenses, matured or unmatured, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, known or unknown (including, without limitation, the costs and expenses of any and all Actions, threatened Actions, demands, assessments, judgments, settlements and compromises relating thereto and attorneys' fees and any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any such Actions or threatened Actions). RECORD DATE: the close of business on the date to be determined by the Western Atlas Board as the record date for the Distribution. SUBSIDIARIES: the term "subsidiaries" as used herein with respect to any entity shall be deemed to refer to other entities in which such entity owns or controls a majority of the voting power and shall, unless otherwise indicated, be deemed to refer to both direct and indirect subsidiaries of such entity. TAX SHARING AGREEMENT: the Tax Sharing Agreement between UNOVA and Western Atlas, the form of which is attached hereto as Annex C. UNOVA COMMON STOCK: the Common Stock, par value $.01 per share, of UNOVA. UNOVA SUBSIDIARY: any direct or indirect subsidiary of UNOVA that will remain a direct or indirect subsidiary of UNOVA immediately following the Distribution Date, and any other direct or indirect subsidiary of UNOVA that thereafter may be organized or acquired. WAI INSURANCE PROGRAM: the insurance policies and self-insurance program of Western Atlas referred to in Section 3.6 hereof. WESTERN ATLAS BOARD: the Board of Directors of Western Atlas. WESTERN ATLAS COMMON STOCK: the Common Stock, $1.00 par value, of Western Atlas. WESTERN ATLAS SUBSIDIARY: any direct or indirect subsidiary of Western Atlas other than UNOVA or any UNOVA Subsidiary. ARTICLE II THE DISTRIBUTION Section 2.1 THE DISTRIBUTION. Subject to Section 2.3 hereof, on the Distribution Date, Western Atlas will deliver to the Agent, for the benefit of holders of record of Western Atlas Common Stock on the Record Date, a single stock certificate, endorsed by Western Atlas in blank, representing all of the then outstanding shares of UNOVA Common Stock owned by Western Atlas, and shall instruct the Agent to distribute on the Distribution Date (or as soon as practicable thereafter) the appropriate number of such shares of UNOVA Common Stock to each such holder or designated transferee or transferees of such holder. The Distribution shall be effective on the Distribution Date. UNOVA will provide to the Agent all information or documents necessary to effect direct registration, and Western Atlas will provide to the 2 Agent any information required in order to complete the Distribution on the basis of one share of UNOVA Common Stock for each share of Western Atlas Common Stock outstanding on the Record Date. Section 2.2 COOPERATION PRIOR TO THE DISTRIBUTION. (a) Western Atlas and UNOVA have prepared, and Western Atlas shall mail, prior to the Distribution Date, to the holders of Western Atlas Common Stock, the Information Statement, which shall set forth appropriate disclosure concerning UNOVA, the Distribution and other matters. Western Atlas and UNOVA have prepared, and UNOVA has filed with the Commission, the Form 10, which includes or incorporates by reference the Information Statement. Western Atlas and UNOVA shall use reasonable efforts to cause the Form 10 to become effective under the Exchange Act as soon as practicable. (b) Western Atlas and UNOVA shall cooperate in preparing, filing with the Commission and causing to become effective any registration statements or amendments thereof which are required to reflect the establishment of, or amendments to, any employee benefit and other plans contemplated by the Benefits Agreement. (c) Western Atlas and UNOVA shall take all such action as may be necessary or appropriate under the securities or blue sky laws of states or other political subdivisions of the United States, in connection with the transactions contemplated by this Agreement. (d) Western Atlas and UNOVA have prepared, and UNOVA has filed in preliminary form and shall seek to make effective, applications to list the UNOVA Common Stock on the New York Stock Exchange (the "NYSE"). Section 2.3 CONDITIONS TO DISTRIBUTION. This Agreement and the consummation of each of the transactions provided for herein shall be subject to approval of the Western Atlas Board. The Western Atlas Board shall in its discretion establish the Record Date and the Distribution Date and all appropriate procedures in connection with the Distribution, but in no event shall the Distribution Date occur prior to such time as each of the following have occurred or have been waived by the Western Atlas Board in its sole discretion: (i) the Western Atlas Board shall have formally approved the Distribution; (ii) the Form 10 shall have been declared effective by the Commission; (iii) Western Atlas shall have received a statement from the Staff of the Commission that the Distribution may be effected without registration of the UNOVA Common Stock under the Securities Act of 1933; (iv) the Western Atlas Board shall have received opinions of counsel satisfactory to it that the Distribution will be a tax-free "spin-off" under Sections 355 and/or 368(a)(1)(D) of the Code; (v) the Board of Directors of UNOVA, constituted as contemplated by Section 3.4, shall have been duly elected, and the Certificate of Incorporation and the By-laws of UNOVA, as described in Section 3.5, shall have been adopted and be in effect; (vi) the UNOVA Common Stock shall have been authorized for listing on the NYSE; (vii) the transactions contemplated by Sections 3.1, 3.2 and 3.3 shall have been consummated in all material respects; (viii) UNOVA shall have arranged for a bank credit facility or comparable source of funding for its capital needs; and (ix) no preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a government, regulatory or administrative agency or commission, and no statute, rule, regulation or executive order promulgated or enacted by any governmental authority, shall be in effect preventing the payment of the Distribution; PROVIDED that the satisfaction of such conditions shall not create any obligation on the part of Western Atlas or any other party hereto to effect the Distribution or in any way limit Western Atlas' power of termination set forth in Section 6.8 or alter the consequences of any such termination from those specified in such Section. 3 ARTICLE III TRANSACTIONS RELATING TO THE DISTRIBUTION Section 3.1 INTERCORPORATE REORGANIZATION. (a) At or prior to the Distribution, there shall have been transferred to UNOVA Automation Systems, Inc. all of the assets and liabilities of Western Atlas Landis USA Division (MIS # M02610), including all the assets and liabilities of Gardner Division; all the assets and liabilities of Western Atlas Lamb Technicon Body & Assembly Systems Division (MIS # M02415), including all outstanding shares of Grand Design and J.S. McNamara; all the assets and liabilities of Western Atlas Lamb Technicon Machining Systems Division (MIS # M02410); and all the outstanding shares of M M & E, Inc. At or prior to the Distribution, there shall have been transferred to UNOVA all of the outstanding shares of UNOVA Automation Systems, Inc., Standard Components Corp., Limited Partner I Corporation, General Partner I Corporation, Energy Equity Ventures Inc., Stanko Western Atlas Corporation; Western Atlas Industries Inc.; Canadian Western Atlas Inc., Western Atlas U.K. Limited, and Intermec Corporation. At or prior to the Distribution, there shall have been transferred to Lamb-Unima Maschinenbau GmbH the stock of Honsberg Lamb Sonderwerkzeugmachinen GmbH, and Western Atlas' 80% interest in the stock of Lamb-Unima Maschinbau GmbH shall have been transferred to UNOVA. At or prior to the Distribution, there shall have been transferred to UNOVA certain assets and liabilities of Western Atlas Corporate Division (MIS # Z00050), certain assets and liabilities of Western Atlas Reserves (MIS # Z00900), and all the assets and liabilities of Western Atlas IAS Administration Division (MIS # M09010). The transfer of real property shall be effected by grant deed, limited or special warranty deed or the equivalent statutorily approved form which conveys the property without encumbrances or conveyances to another party by the grantor or a person claiming under the grantor. The transfer of capital stock shall be effected by means of delivery of stock certificates duly endorsed or accompanied by duly executed stock powers and notation on the stock record books of the corporations or other legal entities involved. Following the Distribution Date, Western Atlas and UNOVA shall cooperate and, if requested, assist each other in perfecting title to various properties referred to in this paragraph, at the expense of the party requesting such assistance. (b) Prior to the Distribution Date, Western Atlas and UNOVA shall take all steps necessary to increase the outstanding shares of UNOVA Common Stock so that immediately prior to the Distribution, Western Atlas will hold a number of shares of UNOVA Common Stock equal to the number of shares of Western Atlas Common Stock outstanding on the Record Date. Section 3.2 DIVIDEND; CANCELLATION OF INTERCOMPANY INDEBTEDNESS. Immediately prior to the Distribution, UNOVA shall pay a dividend to Western Atlas in the amount of $230 million, which amount shall be utilized by Western Atlas to repay short-term debt. Any intercompany indebtedness owed by UNOVA and the UNOVA Subsidiaries to Western Atlas and the Western Atlas Subsidiaries shall be canceled as a contribution to the capital of UNOVA. Section 3.3 OTHER AGREEMENTS. On or prior to the date of the Distribution, Western Atlas and UNOVA will execute and deliver agreements substantially in the form of Annexes A through C. Section 3.4 THE UNOVA BOARD. Western Atlas and UNOVA shall take all actions that may be required to elect or otherwise appoint as directors of UNOVA, on or prior to the Distribution Date, the persons named in the Form 10 to constitute the Board of Directors of UNOVA on the Distribution Date. Section 3.5 UNOVA CHARTER AND BY-LAWS. Prior to the Distribution Date, (a) Western Atlas shall cause the Certificate of Incorporation of UNOVA, substantially in the form of Annex B to the Form 10, to be filed with the Secretary of State of Delaware and to be in effect on the Distribution Date, and (b) the Board of Directors of UNOVA shall adopt the By-laws of UNOVA substantially in the form of Annex C to the Form 10. Section 3.6 INSURANCE. 4 (a) Western Atlas will continue to provide coverage for workers' compensation, general liability, automobile liability, other liability, property and other insurable business risks and exposures to UNOVA and the UNOVA Subsidiaries in the same manner and to the same extent as in effect on the date of this Agreement (the "WAI Insurance Program") for incidents, acts, omissions or occurrences occurring from the date such coverage first commenced until 12:00 midnight on the Distribution Date or such later date as may be agreed to in writing by Western Atlas and UNOVA, and UNOVA and the UNOVA Subsidiaries shall pay Western Atlas the costs, fees and expenses for such coverage in accordance with the past and current practices established between Western Atlas, UNOVA and the UNOVA Subsidiaries. Such costs include, but are not limited to, premiums, deductibles, retrospective rating adjustments, assessments paid and audit adjustments completed. (b) Western Atlas shall cooperate and, if requested, shall assist UNOVA and the UNOVA Subsidiaries in obtaining their own separate insurance coverage and self-insurance coverage for UNOVA and the UNOVA Subsidiaries, effective with respect to incidents, acts, omissions or occurrences occurring from and after the Distribution Date. Following the Distribution Date, each of the parties shall cooperate with and assist the other party in the prevention of conflicts or gaps in insurance coverage and/or collection of Insurance Proceeds. (c) Western Atlas and UNOVA agree that UNOVA and the UNOVA Subsidiaries shall have the right to present claims directly to Western Atlas' insurers under the WAI Insurance Program for insured and self-insured incidents, acts, omissions or occurrences occurring from the date said coverage first commenced until the Distribution Date. Any such claims shall be subject to the terms and conditions of the WAI Insurance Program which for this purpose shall include the so-called "tail" coverage referred to below in this subsection (c). All such claims by UNOVA or the UNOVA Subsidiaries against Western Atlas' insurers shall be presented when known by UNOVA and in any event by the reporting requirements specified under an insurance policy with respect to a specific claim. The parties acknowledge that any such policies written on a "claims made" rather than "occurrence" basis may not, in their present form, provide coverage to UNOVA and the UNOVA Subsidiaries for incidents, acts, omissions or occurrences occurring prior to the Distribution Date but which are first reported after the Distribution Date and, accordingly, the parties have agreed that Western Atlas shall cooperate and, if requested, assist UNOVA and the UNOVA Subsidiaries in acquiring "tail" insurance coverage, effective upon the Distribution Date. (d) With respect to any insured Losses or retrospective premium adjustments relating to assets and/or operations of UNOVA and/or the UNOVA Subsidiaries prior to the Distribution Date: (i) Western Atlas shall pay over to UNOVA within 60 days of receipt any Insurance Proceeds it receives on account of such Losses and any such retrospective premium reductions (all subject to support documentation); and (ii) UNOVA and the UNOVA Subsidiaries shall reimburse Western Atlas within 60 days of Western Atlas' request for all costs, expenses or payments (all subject to support documentation) made by Western Atlas after the Distribution Date to insurers or incurred by Western Atlas with respect to self-insurance on account of such Losses and any such retrospective premium increases, except that self-insured Losses shall be funded directly by UNOVA through a Western Atlas bank account maintained to fund such Losses. The defense of and the responsibility for any litigation or claims pending at the Distribution Date, or commenced after the Distribution Date (as respects Losses which occurred prior to the Distribution Date), relating to UNOVA or the UNOVA Subsidiaries and covered by the WAI Insurance Program shall continue to be managed by UNOVA and the UNOVA Subsidiaries. UNOVA shall advise Western Atlas when there is a reasonable expectation that any such litigation will exceed the policy limits of the current WAI Insurance Program or result in a loss not covered by such program. (e) Western Atlas shall maintain as part of the WAI Insurance Program the Directors and Officers insurance program with the same insurance carriers, limits of liability, terms and conditions through May 31, 1999. UNOVA shall obtain and maintain a similar Directors and Officers insurance program at least through May 31, 1999. Material modification to either party's Directors and Officers insurance program prior to May 31, 1999 shall require the prior approval of the other party, which shall not be 5 unreasonably withheld. Material modifications include adverse changes in terms and conditions, decreased limits of liability and the substitution of insurance carriers. (f) Western Atlas maintains various bonding facilities on behalf of itself and its various subsidiaries, including UNOVA and the UNOVA Subsidiaries. UNOVA and the UNOVA Subsidiaries shall have the right to continue to have the benefit of such bonding facilities after the Distribution Date until UNOVA is able to arrange its own bonding facilities; provided, however, that UNOVA shall reimburse Western Atlas for the amount of any Losses on Western Atlas bonds covering UNOVA and the UNOVA Subsidiaries and shall also reimburse Western Atlas for all fees and out-of-pocket costs incurred by Western Atlas with respect to Western Atlas bonds covering UNOVA and the UNOVA Subsidiaries. (g) In recognition that premiums, premium adjustments, retrospective rating adjustments, assessments and audit adjustments have been paid or charged to UNOVA and the UNOVA Subsidiaries prior to the Distribution Date, and that similar such payments and charges will be made by and to UNOVA and the UNOVA Subsidiaries after the Distribution Date, Western Atlas agrees to cooperate with UNOVA and the UNOVA Subsidiaries in insured litigation. Furthermore, in insured litigation in which the reasonable expectation is that UNOVA and/or UNOVA Subsidiaries will be financially responsible for the entire result in the litigation (a "UNOVA Responsibility Case"), UNOVA shall have the right to participate and control at its cost the defense of such litigation, to the extent that Western Atlas would be able to do so. In such event, Western Atlas shall cooperate with UNOVA in all reasonable respects in the defense and resolution of such UNOVA Responsibility Case. (h) For purposes of this Section 3.6, the term Distribution Date means 12:00 midnight on the later of the date determined by the Western Atlas Board on which the Distribution shall be effected or the later date agreed upon pursuant to subsection 3.6(a). (i) For purposes of this Section 3.6, the terms "self-insured" and "self-insurance" refer only to those incidents, omissions or occurrences related to the self-insured portion of the State of Washington Workers' Compensation exposures. Section 3.7 WESTERN ATLAS EMPLOYEES GOOD GOVERNMENT FUND. Prior to the Distribution Date, (i) UNOVA shall undertake to sponsor a political committee by establishing a nonprofit, unincorporated association in the State of California (the "UNOVA Fund"), and (ii) the parties shall cause all moneys in the Western Atlas Inc. Employees Good Government Fund that relate to the employees of UNOVA or any UNOVA Subsidiary to be transferred to the UNOVA Fund. Section 3.8 WESTERN ATLAS FOUNDATION. Prior to the Distribution Date, the parties shall cause The Western Atlas Foundation, a private foundation under the Code and a nonprofit public benefit corporation organized under the laws of the State of California, to change its name to "The UNOVA Foundation," and UNOVA will be substituted for Western Atlas as the sponsor of The UNOVA Foundation from and after such name change. ARTICLE IV INDEMNIFICATION Section 4.1 INDEMNIFICATION BY WESTERN ATLAS. Except with respect to employee benefits or other Liabilities to employees, which shall be governed by the Benefits Agreement, and except with respect to insurance and self-insurance claims, which shall be governed by Sections 3.6 and 4.3 hereof, Western Atlas shall indemnify, defend and hold harmless UNOVA, each Affiliate of UNOVA and each of their respective directors, officers, employees and agents (in their capacities as directors, officers, employees and agents of UNOVA and its Affiliates) and each of the heirs, executors, successors and assigns of any of the foregoing (the "UNOVA Indemnitees") from and against any and all Losses of the UNOVA Indemnitees arising out of or due to the failure of Western Atlas or any of its Affiliates to pay, perform or otherwise discharge in due course any item set forth on Schedule A. Anything in this Section 4.1 to the contrary notwithstanding, 6 neither Western Atlas nor any Western Atlas Subsidiary shall have any liability whatsoever to either UNOVA or any UNOVA Subsidiary in respect of any Tax (as such term is defined in the Tax Sharing Agreement), except as otherwise provided in Schedule A hereto or in the Tax Sharing Agreement. Section 4.2 INDEMNIFICATION BY UNOVA. Except with respect to employee benefits or other Liabilities to employees, which shall be governed by the Benefits Agreement, and except with respect to insurance and self-insurance claims, which shall be governed by Sections 3.6 and 4.3 hereof, UNOVA shall indemnify, defend and hold harmless Western Atlas, each Affiliate of Western Atlas and each of their respective directors, officers, employees and agents (in their capacities as directors, officers, employees and agents of Western Atlas and its Affiliates) and each of the heirs, executors, successors and assigns of any of the foregoing (the "Western Atlas Indemnitees") from and against any and all Losses of the Western Atlas Indemnitees arising out of or due to the failure of UNOVA or any of its Affiliates to pay, perform or otherwise discharge in due course any item set forth on Schedule B. Anything in this Section 4.2 to the contrary notwithstanding, neither UNOVA nor any UNOVA Subsidiary shall have any liability whatsoever to either Western Atlas or any Western Atlas Subsidiary in respect of any Tax, except as otherwise provided in Schedule B hereto or in the Tax Sharing Agreement. Section 4.3 LIMITATIONS ON INDEMNIFICATION OBLIGATIONS. The amount that any party (an "Indemnifying Party") is or may be required to pay to any other party (an "Indemnitee") pursuant to Section 4.1 or Section 4.2 shall be reduced (including, without limitation, retroactively) by any Insurance Proceeds or other amounts actually recovered by or on behalf of such Indemnitee, in reduction of the related Loss. If an Indemnitee shall have received the payment required by this Agreement from an Indemnifying Party in respect of any Loss and the Indemnitee shall subsequently actually receive Insurance Proceeds or other amounts in respect of such Loss, then such Indemnitee shall pay to such Indemnifying Party a sum equal to the amount of such Insurance Proceeds or other amounts actually received (up to but not in excess of the amount of any indemnity payment made hereunder). An insurer who would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto, or, solely by virtue of the indemnification provisions hereof, have any subrogation rights with respect thereto, it being expressly understood and agreed that no insurer or any other third party shall be entitled to a "windfall" (i.e., a benefit they would not be entitled to receive in the absence of the indemnification provisions hereof) by virtue of the indemnification provisions hereof. Section 4.4 PROCEDURES FOR INDEMNIFICATION OF THIRD-PARTY CLAIMS. Procedures for Indemnification of Third-Party Claims shall be as follows: (a) If an Indemnitee shall receive notice or otherwise learn of the assertion or probable assertion by a person (including, without limitation, any governmental entity) who is not a party to this Agreement or to any of the agreements in the form of Annexes A through C hereto (hereinafter referred to as the "Other Agreements") of any claim or of the commencement by any such person of any Action (a "Third-Party Claim") with respect to which an Indemnifying Party may be obligated to provide indemnification pursuant to Section 4.1, 4.2 or any other Section of this Agreement or pursuant to the Other Agreements, such Indemnitee shall give such Indemnifying Party written notice thereof promptly after becoming aware of such Third-Party Claim; PROVIDED that the failure of any Indemnitee to give notice as provided in this Section 4.4(a) shall not relieve the related Indemnifying Party of its obligations under this Article IV, unless the notice was intentionally withheld and such Indemnifying Party is prejudiced by such failure to give notice. Such notice shall describe the Third-Party Claim in reasonable detail and, if reasonably ascertainable, shall indicate the amount (estimated if necessary) of the Loss that has been or may be sustained by such Indemnitee. (b) An Indemnifying Party may elect to defend or to seek to settle or compromise, at such Indemnifying Party's own expense and by such Indemnifying Party's own counsel, any Third-Party Claim. Within 30 days of the receipt of notice from an Indemnitee in accordance with Section 4.4(a) (or sooner, if the nature of such Third-Party Claim so requires), the Indemnifying Party shall notify the Indemnitee of its 7 election whether the Indemnifying Party will assume responsibility for defending such Third-Party Claim, which election shall specify any reservations or exceptions. After notice from an Indemnifying Party to an Indemnitee of its election to assume the defense of a Third-Party Claim, such Indemnifying Party shall not be liable to such Indemnitee under this Article IV for any legal or other expenses (except expenses approved in advance by the Indemnifying Party) subsequently incurred by such Indemnitee in connection with the defense thereof; PROVIDED that if the defendants in any such claim include both the Indemnifying Party and one or more Indemnitees and in any Indemnitee's reasonable judgment a conflict of interest between one or more of such Indemnitees and such Indemnifying Party exists in respect of such claim or if the Indemnifying Party shall have assumed responsibility for such claim with any reservations or exceptions, such Indemnitees shall have the right to employ separate counsel to represent such Indemnitees and in that event the reasonable fees and expenses of such separate counsel (but not more than one separate counsel reasonably satisfactory to the Indemnifying Party) shall be paid by such Indemnifying Party; provided, however, if and to the extent that there is a conflict of defenses or positions among the Indemnitees, the Indemnitees shall have the right to retain such number of additional separate counsel, reasonably satisfactory to the Indemnifying Party, as is reasonably necessary to avoid such conflicts, and the Indemnifying Party shall be responsible for the reasonable fees and expenses of such additional separate counsel. If an Indemnifying Party elects not to assume responsibility for defending a Third-Party Claim, or fails to notify an Indemnitee of its election as provided in this Section 4.4(b), such Indemnitee may defend or (subject to the remainder of this Section 4.4(b)) seek to compromise or settle such Third-Party Claim. Notwithstanding the foregoing, neither an Indemnifying Party nor an Indemnitee may settle or compromise any claim over the objection of the other; PROVIDED, HOWEVER, that consent to settlement or compromise shall not be unreasonably withheld or delayed; and PROVIDED FURTHER, HOWEVER, if the Indemnifying Party has not affirmatively elected by written notice to the Indemnitee within 30 days of notice from the Indemnitee to assume the defense of, or to seek to settle or compromise the Third-Party Claim, and the Indemnifying Party has not similarly acknowledged, within such 30-day period, its responsibility to indemnify the Indemnitee against the Third-Party Claim, the Indemnitee may settle or compromise the Third-Party Claim over the objections of the Indemnifying Party without prejudice to the Indemnitee's claim against the Indemnifying Party. Neither an Indemnifying Party nor an Indemnitee shall consent to entry of any judgment or enter into any settlement of any Third-Party Claim which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnitee, in the case of a consent or settlement by an Indemnifying Party, or the Indemnifying Party, in the case of a consent or settlement by the Indemnitee, of a written release from all liability in respect to such Third-Party Claim. (c) If an Indemnifying Party chooses to defend or to seek to compromise or settle any Third-Party Claim, the related Indemnitee shall make available to such Indemnifying Party any personnel or any books, records or other documents within its control or which it otherwise has the ability to make available that are necessary or appropriate for such defense, settlement or compromise, and shall otherwise cooperate in the defense, settlement or compromise of such Third-Party Claims. The Indemnifying Party shall promptly reimburse the Indemnitee its out-of-pocket costs incurred in providing assistance pursuant to the foregoing sentence and for the Indemnitee's personnel costs on any occasion on which personnel of the Indemnitee spend one full day or more in providing such assistance. (d) Notwithstanding anything else in this Section 4.4 to the contrary, if an Indemnifying Party notifies the related Indemnitee in writing of such Indemnifying Party's desire to settle or compromise a Third-Party Claim on the basis set forth in such notice (provided that such settlement or compromise includes as an unconditional term thereof the giving by the claimant or plaintiff of a written release of the Indemnitee from all liability in respect thereof) and the Indemnitee shall notify the Indemnifying Party in writing that such Indemnitee declines to accept any such settlement or compromise, such Indemnitee may continue to contest such Third-Party Claim, free of any participation by such Indemnifying Party, at such Indemnitee's sole expense. In such event, the obligation of such Indemnifying Party to such Indemnitee with respect to such Third-Party Claim shall be equal to (i) the costs and expenses of such Indemnitee prior to the date such Indemnifying Party notifies such Indemnitee of the offer to settle or compromise (to the extent such 8 costs and expenses are otherwise indemnifiable hereunder) plus (ii) the lesser of (A) the amount of any offer of settlement or compromise that such Indemnitee declined to accept and (B) the actual out-of-pocket amount such Indemnitee is obligated to pay subsequent to such date as a result of such Indemnitee's continuing to pursue such Third-Party Claim. (e) Any claim on account of a Loss that does not result from a Third-Party Claim shall be asserted by written notice given by the Indemnitee to the related Indemnifying Party. Such Indemnifying Party shall have a period of 30 days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such 30-day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment. If such Indemnifying Party does not respond within such 30-day period or rejects such claim in whole or in part, such Indemnitee shall be free to pursue such remedies as may be available to such party under this Agreement or under applicable law except as otherwise required by Section 6.12. (f) In addition to any adjustments required pursuant to Section 4.3, if the amount of any Loss shall, at any time subsequent to the payment required by this Agreement, be reduced by recovery, settlement or otherwise, the amount of such reduction that has been received by the Indemnitee, less any expenses incurred in connection therewith, shall promptly be repaid by the Indemnitee to the Indemnifying Party. (g) In the event of payment by an Indemnifying Party to any Indemnitee in connection with any Third-Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right or claim relating to such Third-Party Claim against any claimant or plaintiff asserting such Third-Party Claim or against any other person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right or claim. Section 4.5 REMEDIES CUMULATIVE. The remedies provided in this Article IV shall be cumulative and shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party under Article IV of this Agreement or under Western Atlas' directors and officers liability insurance policy. Section 4.6 SURVIVAL OF INDEMNITIES. The obligations of each of Western Atlas and UNOVA under this Article IV shall survive the sale or other transfer by it of any assets, businesses or Liabilities. 9 ARTICLE V ACCESS TO INFORMATION; SERVICES Section 5.1 ACCESS TO INFORMATION. From and after the Distribution Date, Western Atlas shall afford to UNOVA and its authorized accountants, counsel and other designated representatives (collectively, "Representatives") reasonable access (including using reasonable efforts to give access to persons or firms possessing information) and duplicating rights during normal business hours to all records, books, contracts, instruments, computer data and other data and information (collectively, "Information") within Western Atlas' possession relating to UNOVA or any UNOVA Subsidiary, insofar as such access is reasonably required by UNOVA or any UNOVA Subsidiary, without cost to UNOVA. Similarly, UNOVA shall afford to Western Atlas and its Representatives reasonable access (including using reasonable efforts to give access to persons or firms possessing information) and duplicating rights during normal business hours to Information within UNOVA's possession or in the possession of the UNOVA Subsidiaries relating to Western Atlas or any Western Atlas Subsidiary and insofar as such access is reasonably required by Western Atlas or any Western Atlas Subsidiary, without cost to Western Atlas. For purposes of this Section 5.1 only, Information is limited to information relating to periods ending on or preceding the Distribution Date. Information may be requested under this Article V for, without limitation, audit, accounting, claims, litigation and tax purposes, as well as for purposes of fulfilling disclosure and reporting obligations and for performing this Agreement and the transactions contemplated hereby. After the Distribution Date, (i) to the extent that Western Atlas has in its possession Information relating solely to UNOVA or any UNOVA Subsidiary, Western Atlas shall deliver the originals of such Information to UNOVA within a reasonable time following the Distribution Date, and (ii) to the extent that UNOVA or any UNOVA Subsidiary has in its possession Information relating solely to Western Atlas, UNOVA or such UNOVA Subsidiary shall deliver the originals of such Information to Western Atlas within a reasonable time following the Distribution Date. Section 5.2 PRODUCTION OF WITNESSES. After the Distribution Date, each of Western Atlas and UNOVA and its respective subsidiaries shall use reasonable efforts to make available to the other party and its subsidiaries, upon written request, its directors, officers, employees and agents as witnesses to the extent that any such person may reasonably be required (giving consideration to business demands of such Representatives) in connection with any legal, administrative or other proceedings in which the requesting party may from time to time be involved, without cost to the requesting party. Section 5.3 RETENTION OF RECORDS. Except as otherwise required by law or agreed to in writing, each of Western Atlas and UNOVA shall retain, and shall cause its subsidiaries to retain following the Distribution Date, for a period consistent with the document retention policies in effect at Western Atlas and UNOVA, respectively, all significant Information relating to the business of the other and the other's subsidiaries, but not less than the three-year period following the Distribution Date. In addition, such Information shall not be destroyed or otherwise disposed of if during such period a party shall request in writing that any of the Information be retained for additional specific and reasonable periods of time at the expense of the party so requesting. Section 5.4 CONFIDENTIALITY. Each of UNOVA and the UNOVA Subsidiaries on the one hand, and Western Atlas and the Western Atlas Subsidiaries on the other hand, shall hold, and shall cause its Representatives to hold, in strict confidence, all Information concerning the other in its possession or furnished by the other or the other's Representatives pursuant to this Agreement or any of the Other Agreements (except to the extent that such Information has been (a) in the public domain through no fault of such party or (b) later lawfully acquired from other sources by such party or subsequently developed by such party), and each party shall not release or disclose such Information to any other person, except to its auditors, attorneys, financial advisors, bankers and other consultants and 10 advisors, and on terms and conditions substantially the same as the terms and conditions on which such party releases its own Information, unless compelled to disclose by judicial or administrative process or, as advised by its counsel, by other requirements of law. Section 5.5 PROVISION OF SERVICES. (a) Western Atlas shall make available to UNOVA, during normal business hours and in a manner that will not unreasonably interfere with Western Atlas' business, its tax, internal audit, accounting, treasury, legal, risk management and similar staff services (collectively "Services") whenever and to the extent that they may be reasonably required in connection with the preparation of tax returns, audits, claims or litigation, and otherwise to assist in effecting an orderly transition following the Distribution. Western Atlas shall be entitled to receive from UNOVA, upon the presentation of invoices therefor, reimbursement for all direct costs of providing the Services, including such amounts relating to supplies, disbursements and other out-of-pocket expenses. (b) UNOVA shall make available to Western Atlas, during normal business hours and in a manner that will not unreasonably interfere with UNOVA's business, Services whenever and to the extent that they may be reasonably required in connection with the preparation of tax returns, audits, claims or litigation, and otherwise to assist in effecting an orderly transition following the Distribution. UNOVA shall be entitled to receive from Western Atlas, upon the presentation of invoices therefor, reimbursement for all direct costs of providing the Services, including such amounts relating to supplies, disbursements and other out-of-pocket expenses. (c) UNOVA shall make available to Western Atlas, during normal business hours and in a manner that will not interfere with UNOVA's business, risk management Services, similar to the Services currently being provided to the Oilfield Services group to the extent that they may be reasonably required in connection with the WAI Insurance Program, and otherwise to assist in effecting an orderly transition following the Distribution. UNOVA shall be entitled to receive from Western Atlas, upon presentation of invoices therefor, reimbursement for all direct costs of providing such Services, including such amounts relating to supplies, disbursements and other out-of-pocket expenses. (d) For a period of not less than one year following the Distribution, UNOVA shall provide to Western Atlas, during normal business hours and in a manner that will not interfere with UNOVA's business, stock option administration services, similar to the services currently being provided to the executives of Western Atlas and its subsidiaries who participate in the WAI Stock Option Program, and otherwise to assist in the administration of such program following the Distribution. UNOVA shall be entitled to receive from Western Atlas, upon presentation of invoices therefor, reimbursement for all direct costs of providing such services, including such amounts relating to personnel, supplies, disbursements and other out-of-pocket expenses. Section 5.6 COSTS. Unless otherwise provided in this Agreement, each party shall bear all costs and expenses of that party in its performance of its obligations under this Agreement. ARTICLE VI MISCELLANEOUS Section 6.1 COMPLETE AGREEMENT; CONSTRUCTION. This Agreement, the Benefits Agreement and the Tax Sharing Agreement, including any schedules and exhibits hereto or thereto, and other agreements and documents referred to herein, shall constitute the entire agreement between the parties with respect to the subject matter hereof and shall supersede all previous negotiations, commitments and writings with respect to such subject matter. Notwithstanding any other provisions in this Agreement to the contrary, in the event and to the extent that there shall be a conflict between the provisions of this Agreement and the provisions of any of the Other Agreements, the provisions of the Other Agreements shall control. 11 Section 6.2 SURVIVAL OF AGREEMENTS. Except as otherwise contemplated by this Agreement, all covenants and agreements of the parties contained in this Agreement shall survive the Distribution Date. Section 6.3 EXPENSES. Except as otherwise set forth in this Agreement or any of the Other Agreements, all costs and expenses arising on or prior to the Distribution Date (whether or not then payable) in connection with the Distribution (other than the costs incurred in printing the stock certificates of UNOVA) shall be paid by Western Atlas to the extent that appropriate documentation concerning such costs and expenses shall be provided to Western Atlas. Section 6.4 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the principles of conflicts of laws thereof. Section 6.5 NOTICES. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be delivered by hand, mailed by registered or certified mail (return receipt requested), or sent by cable, telegram, telex or telecopy (confirmed by regular, first-class mail), to the parties at the following addresses (or at such other addresses for a party as shall be specified by like notice) and shall be deemed given on the date on which such notice is received: if to Western Atlas: Western Atlas Inc. 10205 Westheimer Road Houston, Texas 77042 Attention: General Counsel Fax No.: (713) 266-1717 or to such other person or place as Western Atlas shall have specified to UNOVA in a notice in accordance with this Section 6.5, if to UNOVA: UNOVA, Inc. 360 North Crescent Drive Beverly Hills, California 90210 Attention: General Counsel Fax No.: (310) 888-2848 or to such other person or place as UNOVA shall have specified to Western Atlas in a notice in accordance with this Section 6.5. Section 6.6 AMENDMENTS. This Agreement may not be modified or amended except by an agreement in writing signed by the parties. Section 6.7 SUCCESSORS AND ASSIGNS. Neither party shall have the right to assign this Agreement or any of its rights or interests herein without the written consent of the other party, and any attempted assignment without such consent shall be null and void; provided, however, that Western Atlas shall have the right to assign this Agreement to a purchaser or acquirer of substantially all of the business, properties, and assets of Western Atlas or to the survivor of a statutory merger or consolidation to which Western Atlas is a constituent party; provided, however, that UNOVA shall have the right to assign this Agreement to a purchaser or acquirer of substantially all of the business, properties and assets of UNOVA or to the survivor of a statutory merger or consolidation to which UNOVA is a constituent party; and provided further, however, that in the event of any such assignment by Western Atlas or UNOVA, Western Atlas or UNOVA, as the case may be, shall nevertheless remain liable and obligated under this Agreement. This Agreement and the Agreements in the form of Annexes A through C hereof, as the same may be amended or modified, and the provisions hereof and thereof, shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. 12 Section 6.8 TERMINATION. This Agreement may be terminated and the Distribution abandoned at any time prior to the Distribution Date by and in the sole discretion of the Western Atlas Board without the approval of UNOVA or Western Atlas' shareholders. In the event of such termination, no party shall have any liability of any kind to any other party on account of such termination except that expenses incurred in connection with the transactions contemplated hereby shall be paid as provided in Section 6.3. Section 6.9 NO THIRD-PARTY BENEFICIARIES. Except for the provisions of Article IV relating to Indemnitees, and except as may be otherwise provided for in any of the Agreements in the form of Annexes A through C hereto, as the same may be amended or modified, this Agreement is solely for the benefit of the parties hereto and their respective Affiliates and should not be deemed to confer upon third parties (including any employee of Western Atlas or UNOVA or any Western Atlas or UNOVA Subsidiary) any remedy, claim, reimbursement, claim of action or other right in excess of those existing without reference to this Agreement. Section 6.10 TITLES AND HEADINGS. Titles and headings to sections herein are inserted for the convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. Section 6.11 LEGAL ENFORCEABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 6.12 ARBITRATION. Any dispute hereunder which is not resolved by agreement of the parties, shall be subject to resolution by arbitration in accordance with the Rules of the American Arbitration Association but subject to the procedural stipulation set forth on Schedule C. Any decision or award in such arbitration shall be legally enforceable between the parties by any Court of competent jurisdiction. Such arbitration proceeding shall be conducted before a single arbitrator unless either party requests a panel of three arbitrators. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. WESTERN ATLAS INC. By:_________________________________________ UNOVA, INC. By:_________________________________________ 13 SCHEDULE A Items with respect to which Western Atlas will indemnify the UNOVA Indemnitees in accordance with Section 4.1 of the Agreement: (1) All Losses arising out of the businesses conducted or to be conducted by Western Atlas or any Western Atlas Subsidiary, whether such Losses relate to events occurring, or whether such Losses are asserted, before or after the Distribution Date (excluding the businesses conducted or to be conducted by UNOVA (whether directly or through a subsidiary or Affiliate of UNOVA) and the UNOVA Subsidiaries) and all Losses arising out of, or attributable to, any and all of the businesses or operations of Western Atlas or any of Western Atlas' current or former subsidiaries which have been discontinued, designated discontinued (excluding UNOVA's inclusion in such account), liquidated, sold or otherwise disposed of at any time on or prior to the Distribution Date and which relate or did relate to the businesses to be conducted by Western Atlas and the Western Atlas Subsidiaries following the Distribution Date (the "Western Atlas Discontinued Operations"), including without limitation the Core Laboratories Division, the manufacturing operations of the Western Geophysical Division and the Western Atlas Software Division (except to the extent provided for in the Benefits Agreement); and (2) All of Western Atlas' and any Western Atlas Subsidiary's Liabilities arising out of this Agreement or any of the Other Agreements, except as otherwise provided for in such Other Agreements; (3) All Losses arising out of or based upon any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information set forth in the following sections of the Information Statement or any preliminary or final Form 10 or any amendment thereto: "Introduction"; "The Distribution"; "Arrangements Between Western Atlas and UNOVA Relating to the Distribution"; "Summary of Certain Information" (only to the extent that such summary includes information also contained in the foregoing sections); and any letter to shareholders from an officer of Western Atlas; and (4) Any Liability arising in connection with any Action brought by or on behalf of any governmental entity for reimbursement, surrender or delivery to a governmental entity of unclaimed property under the escheat laws of any State or Country, to the extent that such Liability is attributable to the businesses conducted or to be conducted by Western Atlas or any Western Atlas Subsidiary following the Distribution Date (excluding the businesses conducted or to be conducted by UNOVA (whether directly or through a subsidiary or Affiliate of UNOVA) and the UNOVA Subsidiaries or to any of the "UNOVA Discontinued Operations" (as defined in Schedule B)) or to any of the Western Atlas Discontinued Operations, whether such liability arose before or arises after the Distribution Date. SCHEDULE B Items with respect to which UNOVA will indemnify the Western Atlas Indemnitees in accordance with Section 4.2 of the Agreement: (1) All Losses arising out of any guarantees, indemnities, or obligations to third parties including, without limitation, letters of credit and surety bonds, of Western Atlas or any Western Atlas Subsidiary with respect to any obligations of UNOVA or any UNOVA Subsidiary to third parties or with respect to the obligations of Western Atlas to third parties arising out of or attributable to any and all of the businesses or operations of Western Atlas or any of Western Atlas' current or former subsidiaries which have been discontinued, designated discontinued, liquidated, sold or otherwise disposed of at any time on or prior to the Distribution Date and which relate or did relate to the businesses to be conducted by UNOVA and the UNOVA Subsidiaries following the Distribution Date, including without limitation the Material Handling Systems Division, the VantageWare Division, the Automated Guided Vehicles Division, Pro-Tac System AB, Lamb-Unima and Western Atlas Filtration Systems (collectively, the "UNOVA Discontinued Operations"); and the Liabilities of UNOVA under the Benefits Agreement which shall be included within UNOVA's indemnity of Western Atlas and the Western Atlas Subsidiaries; (2) All Losses arising out of the businesses conducted or to be conducted by UNOVA (whether directly or through a subsidiary or Affiliate of UNOVA) and the UNOVA Subsidiaries, and any Liability of UNOVA or of any of the UNOVA Subsidiaries with respect to the UNOVA Discontinued Operations, whether such Losses relate to events occurring, or whether such Losses are asserted before or after the Distribution Date; (3) The liability and obligation of Western Atlas or of any Western Atlas Subsidiary under or with respect to any Revenue Bond financing related to any of the properties and assets utilized by UNOVA or any of the UNOVA Subsidiaries in their respective businesses, irrespective of whether or not Western Atlas has suffered actual loss; (4) All of UNOVA's and any of the UNOVA Subsidiaries' Liabilities arising out of this Agreement or any of the Other Agreements, except as otherwise provided for in such Other Agreements; and (5) All Losses arising out of or based upon any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, with respect to all information contained in the Information Statement or any preliminary or final Form 10 or any amendment thereto; provided, however, that such indemnification shall not apply to any Losses that arise out of or are based upon any statement or omission made in any of the sections of the Information Statement or Form 10 that are listed in paragraph (3) of Schedule A; (6) Any Liability arising in connection with any Action brought by or on behalf of any governmental entity for reimbursement, surrender or delivery to a governmental entity of unclaimed property under the escheat laws of any State or Country, to the extent that such Liability is attributable to the businesses conducted or to be conducted by UNOVA or any UNOVA Subsidiary or to any of the UNOVA Discontinued Operations, whether such liability arose before or arises after the Distribution Date. SCHEDULE C ARBITRATION PROCEDURAL RULES 1. ADMINISTRATION AND CONDUCT OF ARBITRATION. (a) At the discretion of the Arbitrator, an administrative conference with the Arbitrator and the parties and/or their representatives will be scheduled in appropriate cases to expedite the Arbitration proceedings. (b) It is intended that the Arbitration be conducted in an expeditious manner and without evidentiary hearing or oral presentation and argument, unless the Arbitrator determines that an evidentiary hearing, and/or oral presentation or argument is required for the rendition of an award or a decision. However, any such evidentiary hearing shall be limited to not more than fifteen days, and oral presentation and argument shall be limited to eight hours, with time equally divided between the parties. (c) On such schedule as may be established by the Arbitrator, each of the parties shall submit simultaneous briefs, including exhibits, to the Arbitrator supporting their respective positions. There shall be no limit to the number of pages included in such briefs or to the number of exhibits. Each party shall have a reasonable opportunity, as determined by the Arbitrator, to reply to the brief of the other. The Arbitrator shall have the right to request additional written statements of all or any of the parties; provided that each party shall have the reasonable opportunity to reply to any such additional statements submitted in response to the request of the Arbitrator. (d) The Arbitrator shall render its award or decision within two months of the Arbitrator's appointment. 2. FIXING OF LOCALE. The parties may mutually agree to the locale where the Arbitration is to be held. If the parties cannot agree on the locale, the Arbitrator shall have the power to determine the locale and its decision shall be final and binding. 3. DATE, TIME AND PLACE OF HEARING. The Arbitrator shall set the date, time, and place for any hearing. The Arbitrator shall mail to each party notice thereof at least ten days in advance, unless the parties by mutual agreement waive such notice or modify the terms thereof. 4. POSTPONEMENTS. The Arbitrator for good cause shown may postpone any hearing upon the request of a party or upon the Arbitrator's own initiative, and shall also grant such postponement when all of the parties agree thereto. 5. OATHS. Before proceeding with the first hearing, the Arbitrator may take an oath of office and, if required by law, shall do so. The Arbitrator may require witnesses to testify under oath administered by any duly qualified person and, if it is required by law, shall do so. 6. ORDER OF PROCEEDINGS AND COMMUNICATION WITH ARBITRATOR. (a) A hearing shall be opened by the filing of the oath of the Arbitrator, where required, and by the recording of the date, time, and place of the hearing, and the presence of the Arbitrator, the parties, and their representatives, if any. (b) The Arbitrator may, at the beginning of the hearing, ask for statements clarifying the issues involved. (c) The complaining party shall then present evidence and/or argument, as required by the Arbitrator, to support its claim. The defending party shall then present evidence and/or argument supporting its position and responding to the position of the other. Witnesses, if any, for each party shall submit to questions or other examination. The Arbitrator has the discretion to vary this procedure but, within the time limits specified above, shall afford a full and equal opportunity to all parties for the presentation of any material and relevant evidence. 2 (d) Exhibits, when offered by either party, may be received in evidence by the Arbitrator. The names and addresses of any witnesses and a description of the exhibits in the order received shall be made a part of the record. (e) There shall be no direct communication between either of the parties and the Arbitrator other than at oral hearing, unless the parties and the Arbitrator agree in writing. 7. ARBITRATION IN THE ABSENCE OF A PARTY OR REPRESENTATIVE. Unless the law provides to the contrary, the Arbitration may proceed in the absence of any party or representative who, after due notice, fails to be present or fails to obtain a postponement ("absent in default"). An award shall not be made solely on the default of a party. The Arbitrator shall require the party who is present to submit such evidence as the Arbitrator may require for the making of an award. 8. EVIDENCE. (a) The parties may offer such evidence as is relevant and material to the dispute and shall produce such evidence as the Arbitrator may deem necessary to an understanding and determination of the dispute. (b) The Arbitrator shall be the judge of the relevance and materiality of the evidence offered, and conformity to legal rules of evidence shall not be necessary. All evidence shall be taken in the presence of the Arbitrator and all of the parties, except where any of the parties is absent in default or has waived the right to be present. 9. EVIDENCE BY AFFIDAVIT AND POST-HEARING FILING OF DOCUMENTS OR OTHER EVIDENCE. (a) The Arbitrator may receive and consider the evidence of witnesses by affidavit, but shall give it only such weight as the Arbitrator deems it to be entitled to after consideration of any objection made to its admission. (b) If the parties agree or the Arbitrator directs that documents or other evidence be submitted to the Arbitrator after the hearing, the documents or other evidence shall be filed with the Arbitrator. All parties shall be afforded an opportunity to examine such documents or other evidence. 10. CLOSING OF HEARING. If satisfied that the record is complete, the Arbitrator shall declare the hearing closed and a minute thereof shall be recorded. If briefs are to be filed, the hearing shall be declared closed as of the final date set by the Arbitrator for the receipt of briefs. If documents are to be filed as provided in Section 9 and the date set for their receipt is later than that set for the receipt of briefs, the later date shall be the date of closing and the hearing. 11. REOPENING OF HEARING. The hearing may be reopened on the Arbitrator's initiative at any time before the award is made. If reopening the hearing would prevent the making of the award within the specified time limit, the matter may not be reopened unless the parties agree on an extension of time. 12. WAIVER OF ORAL HEARING. The parties may provide, by written agreement, for the waiver of oral hearing in any case. 13. WAIVER OF RULES. Any party who proceeds with the Arbitration after knowledge that any provision or requirement of these rules has not been complied with and who fails to state an objection thereto in writing shall be deemed to have waived the right to object. 14. EXTENSIONS OF TIME. The parties may modify any period of time by mutual agreement. The Arbitrator may for good cause extend any period of time established by these rules, except the time for making the award. The Arbitrator shall notify the parties of any extension. 15. SERVING OF NOTICE. Each party shall be deemed to have consented that any papers, notices, or process necessary or proper for the initiation or continuation of an Arbitration under these rules, for any court action in connection therewith, or for the entry of judgment on any award made under these rules may be served on a party by mail addressed to the party or its representative at the address specified 3 in Section 6.15 or by personal service, in or outside the state where the Arbitration is to be held, provided that reasonable opportunity to be heard with regard thereto has been granted to the party. 16. TIME OF THE AWARD. The award shall be made promptly by the Arbitrator and, unless otherwise agreed by the parties in writing or specified by law, no later than thirty days from the date of closing the hearing, or, if oral hearings have not been held, from the date of the transmittal of the final briefs, statements and proofs to the Arbitrator. 17. AWARD UPON SETTLEMENT. If the parties settle their dispute during the course of the Arbitration, the Arbitrator may set forth the terms of the agreed settlement in an award. Such an award is referred to as a consent award. 18. DELIVERY OF AWARD TO PARTIES. Parties shall accept as legal delivery of the award the placing of the award or a true copy thereof in the mail addressed to a party or its representative at the last known address, personal service of the award, or the filing of the award in any other manner that is permitted by law. 19. APPLICATIONS TO COURT AND EXCLUSION OF LIABILITY. (a) No judicial proceeding by a party relating to the subject matter of the Arbitration shall be deemed a waiver of the party's right to arbitrate. (b) Parties to these rules shall be deemed to have consented that judgment upon the Arbitration award may be entered in any federal or state court having jurisdiction thereof. 20. INTERPRETATION AND APPLICATION OF RULES. The Arbitrator shall interpret and apply these rules insofar as they relate to the Arbitrator's powers and duties. If there is more than one Arbitrator and a difference arises among them concerning the meaning or application of these rules, it shall be decided by a majority vote. 21. COMPLEX PROCEDURES. Notwithstanding the foregoing, if the parties mutually agree, any Arbitration to be conducted between the parties may be conducted in the manner provided for in the Supplementary Procedure for Large Complex Disputes of the American Arbitration Association. 4 EX-10.B 3 FORM OF TAX SHARING AGREEMENT TAX SHARING AGREEMENT This Tax Sharing Agreement (the "Agreement") is being entered into this ____ day of ______, 1997, in connection with a Distribution and Indemnity Agreement (the "Distribution Agreement") dated as of ______ __, 1997 by and between Western Atlas Inc., a Delaware corporation ("Western Atlas"), and UNOVA, Inc., a Delaware corporation ("UNOVA"), pursuant to which, among other things, Western Atlas will distribute to holders of its common stock all the issued and outstanding common stock of UNOVA (the "UNOVA Distribution"). Western Atlas, on behalf of itself and its present and future subsidiaries (the "Western Atlas Group"), and UNOVA on behalf of itself and its present and future subsidiaries (the "UNOVA Group"), are entering into this Agreement to provide for the allocation between the Western Atlas Group and the UNOVA Group of all responsibilities, liabilities and benefits relating to or affecting Taxes (as hereinafter defined) paid or payable by either of them for all taxable periods, whether beginning before or after the Distribution Date (as hereinafter defined) and to provide for certain other matters. ARTICLE I DEFINITIONS ----------- As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and the plural forms of the terms defined): "1997 Stub Period" shall have the meaning assigned to such term in Section 3.1(a) of this Agreement. "Accounting Firm" shall have the meaning assigned to such term in Section 3.1(b)(2)(B) of this Agreement. "Acquisition" shall have the meaning assigned to such term in Section 3.6(b) of this Agreement. "Calendar Year" means the 52-53 week year ending on the Sunday nearest December 31. "Carryback Item" shall have the meaning assigned to such term in Section 3.8(b) of this Agreement. "Code" means the Internal Revenue Code of 1986, as amended, or any successor statute, and shall include corresponding provisions of any subsequently enacted federal tax laws. "Distribution Agreement" shall have the meaning assigned to such term in the preface to this Agreement. "Distribution Date" means the date determined by Western Atlas Board of Directors as of which the UNOVA Dis- -2- tribution shall be effected, which is presently contemplated to be ______ __, 1997. "Filed UNOVA Group Separate Tax Liability" means the amount determined pursuant to Section 3.1(b) for the Year 1997 Stub Period. "Filed UNOVA Group Separate Joint Tax Liability" means that amount determined pursuant to Section 3.2(b) for the 1997 Stub Period. "Final Determination" shall mean the final resolution of liability for any tax for a taxable period (i) by IRS Form 870 or 870-AD (or any successor forms thereto), on the date of acceptance by or on behalf of the IRS, or by a comparable form under the laws of other jurisdictions; except that a Form 870 or 870-AD or comparable form that reserves (whether by its terms or by operation of law) the right of the taxpayer to file a claim for refund and/or the right of the taxing authority to assert a further deficiency shall not constitute a Final Determination; (ii) by a decision, judgment, decree, or other order by a court of competent jurisdiction, which has become final and unappealable; (iii) by a closing agreement or accepted offer in compromise under Section 7121 or 7122 of the Code, or comparable agreements under -3- the laws of other jurisdictions; (iv) by any allowance of a refund or credit in respect of an overpayment of Tax, but only after the expiration of all periods during which such refund may be recovered (including by way of offset) by the Tax imposing jurisdiction; or (v) by any other final disposition of liability in respect of a Tax provided for under applicable law, including by reason of the expiration of the applicable statute of limitations. "IRS" means the Internal Revenue Service. "Joint Return" means a state income tax return, including, but not limited to, a unitary, combined or consolidated state income tax return, that includes at least one Western Atlas Business and at least one UNOVA Business. "Litton Agreement" shall have the meaning assigned to such term in Section 5.4 of this Agreement. "Norand Tax" shall have the meaning assigned to such term in Section 3.11 of this Agreement. "Notification Date" shall have the meaning assigned to such term in Section 3.1(b)(2)(B) of this Agreement. -4- "Other Tax Return" means any Tax Return other than (1) a federal income tax return, (2) a state or local tax return and (3) a foreign tax return. "Pre-Distribution Year" means any taxable year beginning before the Distribution Date during which any member of the UNOVA Group was included in the Western Atlas Consolidated Group. "Restructuring Taxes" means any Taxes, including related interest, penalties and additions to Tax and reasonable attorneys' fees, resulting from (1) the failure of the UNOVA Distribution to qualify as a distribution described in Sections 355 and/or 368(a)(1)(D) of the Code or corresponding provisions of state tax law or (2) the application of Sections 355(e) of the Code to the UNOVA Distribution. "Tax" means any of the Taxes. "Taxes" means all forms of taxation, whenever created or imposed, and whether of the United States or elsewhere, and whether imposed by a local, municipal, governmental, state, federation or other body, and without limiting the generality of the foregoing, shall include income, sales, use, ad valorem, gross receipts, value added, franchise, transfer, recording, withholding, payroll, employment, -5- excise, occupation, premium and property taxes, together with any related interest, penalties and additions to any such tax, or additional amounts imposed by any taxing authority (domestic or foreign) upon the UNOVA Group, the Western Atlas Group or any of their respective members or divisions or branches. "Tax Benefit" means any item of loss, deduction, credit or any other Tax Item which decreases Taxes paid or payable, other than Tax Items resulting from an adjustment pursuant to Section 3.1(d) or 3.2(c). "Tax Detriment" means any item of income, gain, recapture of credit or any other Tax Item which increases Taxes paid or payable, including taxes paid or payable to Litton pursuant to the Litton Agreement, other than Tax Items previously taken into account pursuant to Section 3.1(d) and/or 3.2(c). "Tax Item" means any item of income, gain, loss, deduction, credit, recapture of credit or any other item which increases or decreases Taxes paid or payable, including an adjustment under Code Section 481 resulting from a change in accounting method. -6- "Tax Reserves" shall have the meaning assigned to such term in Section 5.1 of this Agreement. "Tax Return" means any return, filing, questionnaire or other document required to be filed, including requests for extensions of time, filings made with estimated tax payments, claims for refund and amended returns that may be filed, for any period with any taxing authority (whether domestic or foreign) in connection with any Tax or Taxes (whether or not a payment is required to be made with respect to such filing). "UNOVA Business" means any present or future subsidiary, division or business of any member of the UNOVA Group which is not, or is not contemplated by the Distribution Agreement to be, part of the Western Atlas Group immediately after the UNOVA Distribution. UNOVA Business shall include any subsidiary, division or business listed on Schedule A hereto. "UNOVA Distribution" shall have the meaning assigned to such term in the preface to this Agreement. "UNOVA Group" shall have the meaning assigned to such term in the preface to this Agreement. -7- "UNOVA Group Separate Joint Tax Liability" shall have the meaning assigned to such term in Section 3.2(b) of this Agreement. "UNOVA Group Separate Taxable Income" means, with respect to Calendar Year 1996 or the 1997 Stub Period, the sum of (i) the consolidated federal taxable income of the UNOVA Group members that were members of the Western Atlas Consolidated Group at any time during Calendar Year 1996 or Calendar Year 1997, determined as though such UNOVA Group members constituted a separate consolidated group of which UNOVA was the common parent and (ii) the UNOVA Group's portion of the federal taxable income of the FSC. "UNOVA Group Separate Tax Liability" means, with respect to Calendar Year 1996 or the 1997 Stub Period, the sum of (i) the consolidated federal income tax liability of UNOVA Group members that were members of the Western Atlas Consolidated Group at any time during such year, determined as though such UNOVA Group members constituted a separate consolidated group of which UNOVA was the common parent, reduced by the tax benefit of any loss or credit that is limited at the UNOVA level but utilized at the Western Atlas Consolidated Group level and increased by the tax benefit of any loss or credit that is limited at the Western Atlas Consolidated Group level but utilized at the UNOVA level; and (ii) the UNOVA Group's portion of the federal income tax liability of the FSC. -8- "UNOVA Indemnity Issue" shall have the meaning assigned to such term in Section 4.1(a) of this Agreement. "UNOVA Issue" shall have the meaning assigned to such term in Section 3.4(a) of this Agreement. "UNOVA Notice" shall have the meaning assigned to such term in Section 3.1(b)(2)(B) of this Agreement. "Unrelated Person" means any person (within the meaning of Section 7701(a)(1) of the Code) other than a party hereto or a corporation that is a controlled subsidiary (within the meaning of Section 368(c) of the Code) of such party immediately prior to the Acquisition of such party's stock or assets. "Western Atlas Adjustment" shall have the meaning assigned to such term in Section 3.1(b)(2)(A) of this Agreement. "Western Atlas Business" means any present or future subsidiary, division or business of any member of the Western Atlas Group, other than a present or future subsidiary, division or business of any member of the UNOVA Group. Western Atlas Business also shall include any former subsidi- -9- ary, division or business of Western Atlas not listed on Schedule A hereto. "Western Atlas Consolidated Group" means with respect to any taxable period, the affiliated group of corporations of which Western Atlas is the common parent (within the meaning of Section 1504 of the Code). "Western Atlas Group" shall have the meaning assigned to such term in the preface to this Agreement. "Western Atlas Issue" shall have the meaning assigned to such term in Section 3.4(a) of this Agreement. "Western Atlas Revision" shall have the meaning ascribed to such term in Section 3.1(e) of this Agreement. ARTICLE II FILING OF TAX RETURNS --------------------- Section 2.1. MANNER OF FILING. All Tax Returns filed after the Distribution Date shall be prepared on a basis which is consistent with any opinion of counsel obtained by Western Atlas in connection with the UNOVA Distribution and shall be filed on a timely basis (including extensions) by the party responsible for such filing under this Agreement. In the absence of a change in controlling -10- law, all Tax Returns filed after the date of this Agreement shall be prepared on a basis consistent with the elections, accounting methods, conventions, and principles of taxation used for the most recent taxable periods for which Tax Returns involving similar Tax Items have been filed, except to the extent that an inconsistent position would not result in a Tax Detriment to the other party; provided, however, that any deduction attributable to the exercise after the Distribution Date of a stock option (with respect to either Western Atlas stock or Litton Industries, Inc. stock) under section 83(h) of the Code or Treasury Regulation section 1.83-6, or any deduction attributable to the disqualifying disposition of incentive stock option stock (with respect to either Western Atlas stock or Litton Industries, Inc. Stock) or ithe disqualifying disposition of stock acquired through the Western Atlas Inc. 1996 Employee Stock Purchase Plan (with respect to either Western Atlas stock or UNOVA Stock) under Section 421(b) of the Code, shall be claimed on the Tax Return of the UNOVA Group in the case of an employee, independent contractor, or director (other than a director who is an employee of Western Atlas) of any member of the UNOVA Group and on the Tax Return of the Western Atlas Group in the case of an employee, independent contractor or director (other than a director who is an employee of UNOVA) of any member of the Western Atlas Group. Subject to the provisions of this Agreement, all decisions relating to the preparation of Tax Returns shall be made in the sole discretion of the party responsible under this Agreement for such preparation. -11- Section 2.2. PRE-DISTRIBUTION TAX RETURNS. (a) Except as otherwise provided in this Section 2.2, all Tax Returns required to be filed for periods beginning before the Distribution Date shall be filed by UNOVA or the appropriate UNOVA Business. (b) State and local tax returns (other than Joint Returns) and Other Tax Returns for all taxable periods beginning before the Distribution Date shall be filed by the Western Atlas Business or UNOVA Business, as the case may be, which had responsibility for filing such return for the last taxable period ending prior to the Distribution Date. (c) All foreign Tax Returns for taxable periods beginning before the Distribution Date shall be filed by the legal entity which had responsibility for filing such return for the last taxable period ending prior to the Distribution Date, regardless of whether such entity was a member of the Western Atlas Group or the UNOVA Group before or after the Distribution Date. (d) The United States consolidated federal income Tax Return for the Western Atlas Consolidated Group for the 1996 Calendar Year, if not filed before the Distribution Date, shall be filed by UNOVA. The United States consoli- -12- dated federal income Tax Return for the Western Atlas Consolidated Group for the 1997 Calendar Year shall be filed by Western Atlas. All Joint Returns for the 1996 Calendar Year, if not filed before the Distribution Date, shall be filed by Western Atlas, and all Joint Returns for the 1997 Calendar Year shall be filed by Western Atlas. (e) IRS Form 8697, Interest Computation Under the Look-Back Method for Completed Long-Term Contracts, and any comparable state forms, for the Western Atlas Consolidated Group for the 1997 Calendar Year shall be prepared by UNOVA and filed by Western Atlas. Section 2.3. POST-DISTRIBUTION TAX RETURNS. All Tax Returns of the UNOVA Group for periods beginning after the Distribution Date shall be filed by UNOVA or the appropriate UNOVA Business and all Tax Returns of the Western Atlas Group for periods beginning after the Distribution Date shall be filed by Western Atlas or the appropriate Western Atlas Business. ARTICLE III PAYMENT OF TAXES ---------------- Section 3.1. UNFILED FEDERAL TAXES FOR PRE-DISTRIBUTION PERIODS. (a) On or about October 15, 1997, Western Atlas shall pay to or receive from, as appropriate, the UNOVA -13- Group a sum equal to the difference between (i) the UNOVA Group Separate Tax Liability for Calendar Year 1996, and (ii) an amount equal to all payments previously made by the UNOVA Group or any member thereof. On or about March 31, 1998, UNOVA shall deliver to Western Atlas an estimate of the UNOVA Group Separate Taxable Income for the period beginning on December 30, 1996 and ending on the last day in which the members of the UNOVA Group are includible in the Western Atlas Consolidated Group (the "1997 Stub Period"). On or about April 30, 1998, UNOVA shall pay to Western Atlas, or Western Atlas shall pay to UNOVA, as appropriate, a sum equal to the difference (if any) between (i) Western Atlas's estimate of the UNOVA Group Separate Tax Liability for the 1997 Stub Period, and (ii) an amount equal to all payments previously made by the UNOVA Group or any member thereof. Not later than one business day before April 15, 1998, Western Atlas shall deliver to UNOVA a schedule showing its estimate of the UNOVA Group Separate Tax Liability for the 1997 Stub Period and the amount payable by UNOVA to Western Atlas, or by Western Atlas to UNOVA, as the case may be, pursuant to this Section 3.1(a). (b) UNOVA shall pay to Western Atlas, or Western Atlas shall pay to UNOVA, as appropriate, an amount reflect- -14- ing the difference (if any) between (i) the Filed UNOVA Group Separate Tax Liability for the 1997 Stub Period and (ii) an amount equal to all federal income tax payments made by the UNOVA Group with respect to such period. Such payment shall be made on or before November 15, 1998. Amounts due or refunds receivable from IRS Form 8697 and any comparable state forms which relate to the UNOVA Group shall be allocated to UNOVA for all periods. The Filed UNOVA Group Separate Tax Liability for the 1997 Stub Period shall be determined pursuant to the following procedures: (1) On or before June 30, 1998, UNOVA shall deliver to Western Atlas all information (including without limitation, Federal Form 1120, prepared on a separate basis in accordance with past practice, together with schedules, statements and supporting documentation) as Western Atlas may reasonably request from time to time, with respect to each member of the UNOVA Group that was a member of the Western Atlas Consolidated Group at any time in Calendar Year 1997, for the preparation of the federal income Tax Return of the Western Atlas Consolidated Group for Calendar Year 1997. All information provided by UNOVA pursuant to this paragraph shall correctly reflect the facts regarding the income, properties, operations and status of each such -15- member of the UNOVA Group and shall be prepared applying elections and methods of accounting that are consistent with those made or used by such member in prior taxable periods or such other elections and methods as may be reasonably agreed upon by the parties. (2) (A) Western Atlas shall make any adjustments to the information so submitted that it deems appropriate (individually, a "Western Atlas Adjustment") and shall prepare and file the consolidated federal income Tax Return for the Western Atlas Consolidated Group for Calendar Year 1997. Western Atlas shall determine, in good faith, the UNOVA Group Separate Tax Liability for 1997 Stub Year, including amounts due or refunds receivable with respect to IRS Form 8697. Western Atlas shall notify UNOVA in writing of the amount of such liability no later than October 15, 1998. Such notification shall include an explanation of the basis for any Western Atlas Adjustments and a copy of the calculations of the UNOVA Group Separate Tax Liability. (B) On or before November 15, 1998, UNOVA shall provide Western Atlas with written notice (the "UNOVA Notice") of all Western Atlas Adjustments with which UNOVA disagrees, together with the grounds for such disagreement and any supporting documentation. -16- If and to the extent that any Western Atlas Adjustments remain in dispute, Western Atlas shall provide to any branch of a nationally recognized accounting firm not then engaged by either party as its primary auditor (hereinafter, "Accounting Firm") all portions of the UNOVA Notice pertaining to the disputed Western Atlas Adjustments, together with a statement of Western Atlas's position with respect to each such adjustment and any supporting documentation. Accounting Firm's fees and expenses shall be borne equally by Western Atlas and UNOVA. Western Atlas shall provide such information to Accounting Firm no later than December 15, 1998. Accounting Firm shall resolve all -17- disputed Western Atlas Adjustments and shall notify the parties of such resolution, which shall be binding on the parties hereto. Such notification shall be given on or before January 15, 1999 (the "Notification Date"). Any communication by either party with Accounting Firm prior to the applicable Notification Date shall be in writing, with a copy simultaneously furnished to the other party. If Accounting Firm cannot resolve a disputed Western Atlas Adjustment by the applicable Notification Date, Western Atlas shall use its sole discretion in reflecting such disputed Western Atlas Adjustment on its federal income Tax Return. Accounting Firm shall be directed to proceed to a resolution of such disputed Western Atlas Adjustment as soon as practicable, and, if such resolution differs from the manner in which the disputed Western Atlas Adjustment was reflected on Western Atlas's federal income Tax Return, Western Atlas shall file an amended return reflecting such difference within two months of such resolution. Western Atlas shall make the appropriate adjustments to the amount of the Filed UNOVA Group Separate Tax Liability for the 1997 Stub Period, and shall promptly pay UNOVA any balance otherwise due UNOVA within three months of such resolution. -18- (c) Either party may extend any date referenced in this Section 3.1 with the consent of the other party, and such consent shall not be unreasonably withheld and shall be deemed to be given unless the other party objects to such extension in writing within a reasonable time after the request therefor. (d) For all known adjustments, including credits, for the UNOVA Group for which an amended federal return has not been filed as of the Distribution Date, UNOVA shall notify Western Atlas within 90 days of the Distribution Date of these known adjustments and resulting tax liabilities or refunds. The resulting tax liabilities or refunds shall be an amount by which the actual Taxes paid or payable Western Atlas shall increase or decrease. Within 30 days of such notification, Western Atlas shall pay to UNOVA, or UNOVA shall pay to Western Atlas, as appropriate, such liability or refund as the case may be. (e) (A) Western Atlas shall make any revisions to the known adjustments so submitted that it deems appropriate (individually, a "Western Atlas Revision") and shall determine, in good faith, a resulting tax liability of the known adjustments including any Western Atlas Revisions. Western Atlas shall notify UNOVA of the amount of such -19- liability including an explanation for any Western Atlas Revision no later than 180 days from the Distribution Date. (B) Within 30 days of such notice from Western Atlas, UNOVA shall provide Western Atlas with a response of all Western Atlas Revisions with which UNOVA disagrees, together with an explanation. If and to the extent that any Western Atlas Revisions remain in dispute, Western Atlas and UNOVA shall jointly meet with Accounting Firm. The parties shall discuss all explanations, notices and calculations provided under this Subsection. Accounting Firm's fees and expenses shall be borne equally by Western Atlas and UNOVA. Accounting Firm shall resolve all disputed Western Atlas Revisions and shall notify the parties of such resolution, which shall be binding on the parties hereto. Such notification shall be given within 30 days of such meeting. Any communication with the Accounting Firm will include Western Atlas and UNOVA. If Accounting Firm cannot resolve a disputed Western Atlas Revision within the applicable period, an extension of time may be granted upon agreement of all parties. Western Atlas shall make the appropriate adjustments to the resulting tax liability, and Western Atlas or UNOVA, as the case may be, shall promptly -20- pay any balance otherwise due UNOVA or Western Atlas, as appropriate, within 30 days of such resolution. Section 3.2. UNFILED JOINT RETURNS FOR PRE-DISTRIBUTION PERIODS. (a) On or about November 15, 1997, Western Atlas shall pay to or receive from, as appropriate, the UNOVA Group a sum equal to the difference between (i) the UNOVA Group Separate Joint Tax Liability for Calendar Year 1996, and (ii) an amount equal to all payments previously made by the UNOVA Group or any member thereof. On or about April 30, 1998, UNOVA shall pay to Western Atlas, or Western Atlas shall pay to UNOVA, as appropriate, a sum equal to the difference (if any) between (i) Western Atlas's estimate of the UNOVA Group Separate Joint Tax Liability for the 1997 Stub Period, computed using 1996 apportionment factors and the taxable income numbers supplied in Section 3.1(a), and (ii) an amount equal to all payments previously made by the UNOVA Group or any member thereof. Not later than one business day before April 15, 1998, Western Atlas shall deliver to UNOVA a schedule showing its estimate of the UNOVA Group Separate Joint Tax Liability for the 1997 Stub Period and the amount payable by UNOVA to Western Atlas, or by -21- Western Atlas to UNOVA, as the case may be, pursuant to this Section 3.2(a). (b) UNOVA shall pay to Western Atlas, or Western Atlas shall pay to UNOVA, as appropriate, an amount reflecting the difference (if any) between (i) the Filed UNOVA Group Separate Joint Tax Liability for the 1997 Stub Period and (ii) an amount equal to all tax payments made by the UNOVA Group with respect to such period. Such payment shall be made on or before December 15, 1998. Amounts due or refunds receivable from any state or other taxing jurisdiction with regard to the interest computations under the look-back method for completed long-term contracts which relate to the UNOVA Group shall be allocated to UNOVA for all periods. The Filed UNOVA Group Separate Joint Tax Liability for the 1997 Stub Period shall be determined pursuant to the following procedures: (1) On or before July 31, 1998, UNOVA shall deliver to Western Atlas all information (including without limitation, schedules, statements and supporting documentation) as Western Atlas may reasonably request from time to time, with respect to each member of the UNOVA Group that Western Atlas, in its sole discretion, deems includible in the filing of a Joint Return for Calendar Year 1997. All information provided by UNOVA pursuant to this paragraph shall correctly reflect the facts regarding the income, properties, operations and status of each such member of the UNOVA Group and shall be prepared applying elections and methods of accounting -22- that are consistent with those made or used by such member in prior taxable periods or such other elections and methods of accounting as may be reasonably agreed upon by the parties. (2) (A) Western Atlas shall adjust the information so submitted in good faith and shall prepare and file all Joint Returns for Calendar Year 1997. Western Atlas shall determine, in good faith, the UNOVA Group Separate Joint Tax Liability of the UNOVA Group for each state in which UNOVA is included in a Joint Return for Calendar Year 1997, reduced by the tax benefit of any loss or credit that is limited at the UNOVA level but utilized in the Joint Return and increased by the tax benefit of any loss or credit that is limited at the Western Atlas Consolidated Group level but utilized at the UNOVA level (the "UNOVA Group Separate Joint Tax Liability"). Western Atlas shall notify UNOVA in writing of the amount of such liability no later than November 30, 1998. Such notification shall include an explanation of the basis for any Western Atlas Adjustments and a copy of the calculations of the UNOVA Group Separate Joint Tax Liability. (B) Any adjustments made by Western Atlas under Section 3.2(b) (2) (A) shall be revised in the manner set forth in Section 3.1(b) (2) (B) in accordance with the procedures set forth therein and moving the dates specified therein one month forward or substituting for the dates specified therein such other dates as may be mutually agreed upon by the parties. (c) For all known tax adjustments, including credits, for the UNOVA Group for which an amended Joint Return has not been filed as of the Distribution Date, UNOVA shall notify Western Atlas within 120 days of the Distribution Date of those known adjustments and resulting tax liabilities or refunds. The resulting tax liabilities or refunds shall be an amount by which actual Tax paid or payable by Western Atlas shall increase or decrease or, if both parties agree, an amount calculated using an agreed-upon effective state tax rate. Within 30 days after such notification, Western Atlas shall pay to UNOVA, or UNOVA shall pay to Western Atlas, as appropriate, such liability or refund, as the case may be. The know tax adjustments so submitted shall be revised in the manner described in Section 3.1(e) in accordance with the procedures set forth therein. -23- (d) Either party may extend any date referenced in this Section 3.2 with the consent of the other party, and such consent shall not be unreasonably withheld and shall be deemed to be given unless the other party objects in writing within a reasonable time after the request therefor. Section 3.3. CHANGE IN FEDERAL RETURNS AND JOINT RETURNS. (a) The parties acknowledge that there has not yet been a Final Determination of the federal income tax liability of the Western Atlas Group for any taxable year after the fiscal year ended August 1, 1982 and that certain members of the UNOVA Group were included in the Western Atlas Consolidated Group from March 18, 1994 through the Distribution Date. Except as otherwise provided in this Agreement, Western Atlas and each member of the Western Atlas Group shall jointly and severally indemnify UNOVA and each member of the UNOVA Group against and hold them harmless from federal income taxes and all Taxes with respect to Joint Returns for all periods beginning before the Distribution Date and shall be entitled to receive and retain all refunds of federal income taxes and Taxes with respect to Joint Returns with respect to periods beginning before the Distribution Date. -24- (b) Except as otherwise provided in this Agreement, if as a result of any audit, amendment or other change in a federal income tax return or a Joint Return as filed by Western Atlas or UNOVA with respect to any period, the Final Determination of an adjustment to any Tax Item generates a Tax Detriment to Western Atlas or any Western Atlas Business for any period and a corresponding Tax Benefit for UNOVA or any of the UNOVA Businesses for any period (a "Reimbursable Adjustment"), then Western Atlas shall notify UNOVA of such Reimbursable Adjustment. (c) If UNOVA receives a notice of a Reimbursable Adjustment, UNOVA shall use reasonable efforts to have the Tax Benefit to UNOVA flow through to Western Atlas. (d) If UNOVA is unable to have a Tax Benefit flow through to Western Atlas as described in Section 3.3(c), within ninety (90) days of receiving notice of a Reimbursable Adjustment that generates a Tax Benefit for UNOVA or any member of the UNOVA Group for any taxable period(s) with respect to which (i) a federal income tax return or a Joint Return has been filed, and (ii) the applicable statute of limitations has not expired, UNOVA (or the appropriate member of the UNOVA Group) shall file a refund claim pursuant to Code Section 6511 reflecting such Tax Benefit (or a comparable provision of state law in the case of a Joint Return). UNOVA -25- shall, within 30 days after receipt, pay to Western Atlas any refunds received by UNOVA resulting from the filing of a refund claim pursuant to the preceding sentence, together with any interest refunded with respect thereto. In the event that UNOVA would have received a refund with respect to such claim had such refund not been offset by the United States Government (or the relevant state government in the case of a Joint Return) against deficiencies, interest or penalties assessed against UNOVA or any member of the UNOVA Group, UNOVA shall pay to Western Atlas, within 30 days after receipt of written notice of such offset, an amount equal to the amount of such offset, together with interest at the overpayment rate established under Section 6621 of the Code. If, for any taxable year, UNOVA is required to and does make a repayment to the IRS (or a state governmental authority in the case of a Joint Return) of any portion of a refund described herein, then Western Atlas shall pay to UNOVA, within 30 days following the date UNOVA notifies Western Atlas of such repayment, the amount of such repayment, including related interest. (e) In the event that UNOVA receives notice of a Reimbursable Adjustment that generates a Tax Benefit for UNOVA or any member of the UNOVA Group for any taxable -26- period(s) with respect to which a federal income tax return or a Joint Return has not been filed and UNOVA is unable to have such Tax Benefit flow through to Western Atlas as described in Section 3.3(c), then UNOVA (or the appropriate member of the UNOVA Group) shall file federal Form 1120(s) (or corresponding form under relevant state law in the case of a Joint Return) reflecting such Tax Benefit and shall pay to Western Atlas, no later than thirty (30) days after the filing of such return(s), the amount by which such Tax Benefit actually reduces the federal income taxes and/or Taxes with respect to a Joint Return payable by UNOVA or such member of the UNOVA Group with respect to such taxable period(s), using the appropriate statutory income tax rate applicable to such period(s). If, pursuant to a Final Determination for any taxable year, UNOVA is required to and does make a payment to the IRS (or a state governmental authority in the case of a Joint Return) representing any portion of the amount paid to Western Atlas pursuant to the preceding sentence, then Western Atlas shall pay to UNOVA, within 30 days following the date UNOVA notifies Western Atlas of such payment to the IRS (or a state governmental authority in the case of a Joint Return), the amount of such payment, including related interest. -27- (f) Western Atlas may notify UNOVA of a Reimbursable Adjustment prior to the Final Determination of such adjustment if Western Atlas, in its sole discretion, determines that such Reimbursable Adjustment may, upon Final Determination, generate a Tax Benefit for UNOVA with respect to which a refund claim may be barred by the applicable statute of limitations. If Western Atlas so requests, UNOVA shall file a refund claim for the appropriate taxable period(s) reflecting such Tax Benefit, and shall pay to Western Atlas any Tax and interest refunded with respect thereto under the terms and conditions set forth in subsection (c) of this Section 3.3. All refund claims filed by UNOVA pursuant to this Section 3.3(e) shall be prepared in cooperation with Western Atlas, shall fully explain the circumstances giving rise to the claim and shall be identified with the notation "Protective Claim". (g) If as a result of any audit, amendment or other change in a federal income Tax Return or a Joint Return filed by Western Atlas or UNOVA with respect to any period beginning after the Distribution Date, the Final Determination of an adjustment to any Tax Item generates a Tax Detriment to UNOVA or any UNOVA Business and a corresponding Tax Benefit for Western Atlas or any Western Atlas Business for any period, then the provisions of -28- subsections (b), (c), (d), (e) and (f) of this Section 3.3 shall be applied by substituting Western Atlas for UNOVA and UNOVA for Western Atlas, as the context requires. (h) Any payment not made on or before the last day on which such payment could be timely made under this Section 3.3 shall thereafter bear interest at the rate established for large corporate underpayments pursuant to Section 6621(c)(1) of the Code. (i) Notwithstanding any provision of this Agreement to the contrary, the total amount payable by UNOVA to Western Atlas with respect to any Reimbursable Adjustment pursuant to subsections (c), (d) and/or (e) of this Section 3.3 shall not exceed the amount of the Taxes paid by Western Atlas with respect to such adjustment. Section 3.4. CHANGE IN OTHER PRE-DISTRIBUTION YEAR STATE, LOCAL OR OTHER RETURN. (a) Except as otherwise provided in this Section 3.4, if as a result of any audit, amendment or other change in a state or local tax return (other than a Joint Return) or any Other Tax Return filed with respect to any period beginning before the Distribution Date, there is an adjustment to any Tax Item, then Western Atlas shall be responsible for and shall hold UNOVA harmless -29- from any such adjustment generated by or attributable to Western Atlas or any Western Atlas Business (a "Western Atlas Issue"), and UNOVA shall be responsible for and shall hold Western Atlas harmless from any such adjustment generated by or attributable to UNOVA or any UNOVA Business (a "UNOVA Issue"). Upon request by Western Atlas, UNOVA or any member of the UNOVA Group shall use its reasonable best efforts to cooperate in any contest of such UNOVA Issue. (b) Any payment required to be made under this Section 3.4 shall be inclusive of interest and penalties and shall be made no later than 30 days after the party required to make such payment receives written notice of a Final Determination of the Western Atlas Issue or UNOVA Issue, as the case may be, giving rise to such payment; provided, however, that no payment shall be due under this Section 3.4 unless the total amount payable with respect to any individual state or local return (other than a Joint Return) or Other Tax Return by Western Atlas or by UNOVA, as the case may be, equals or exceeds $10,000 exclusive of interest and penalties. Any payment not made within the 30-day period described in the preceding sentence shall thereafter bear interest at the rate established for large corporate underpayments pursuant to Section 6621(c)(1) of the Code. -30- Section 3.5. CHANGE IN PRE-DISTRIBUTION YEAR FOREIGN RETURN. Any legal entity responsible for filing a foreign Tax Return with respect to any taxable period beginning prior to the Distribution Date shall be responsible for the payment of all Taxes, penalties and interest whenever assessed, due or payable in connection therewith and shall be entitled to all refunds, whenever granted, attributable thereto, regardless of whether such legal entity is a member of the Western Atlas Group or the UNOVA Group before or after the Distribution Date. Notwithstanding the foregoing, if a decrease in foreign Taxes results in a Tax Detriment to Western Atlas and a corresponding Tax Benefit to UNOVA or any of the UNOVA Businesses, UNOVA shall pay Western Atlas an amount equal to such Tax Detriment. In the event that an increase in foreign Taxes results in a Tax Benefit to Western Atlas and a corresponding Tax Detriment to UNOVA or any of the UNOVA Businesses, Western Atlas shall pay UNOVA an amount equal to the amount by which such Tax Benefit actually reduces the Taxes of Western Atlas. Section 3.6. RESTRUCTURING TAXES. (a) Notwithstanding any other provision of this Agreement to the contrary, and except as otherwise provided in this Section 3.6, Western Atlas shall pay fifty percent (50%) of all Restructuring Taxes and UNOVA shall pay fifty percent (50%) of all Restruc- -31- turing Taxes. UNOVA and each member of the UNOVA Group will jointly and severally indemnify Western Atlas and each member of the Western Atlas Group against and hold them harmless from any payment of Restructuring Taxes in excess of fifty percent (50%) of such taxes, and Western Atlas and each member of the Western Atlas Group will jointly and severally indemnify UNOVA and each member of the UNOVA Group against and hold them harmless from any payment of Restructuring Taxes in excess of fifty percent (50%) of such taxes. (b) In the event that any Restructuring Taxes are attributable to the acquisition ("Acquisition") of fifty percent (50%) or more of the stock or assets of Western Atlas or UNOVA by an Unrelated Person, then the party so acquired, or the party whose assets were so acquired, as the case may be, shall pay and shall indemnify and hold harmless the other party to this Agreement from and against any and all Restructuring Taxes and from and against any costs whatsoever connected with such Restructuring Taxes. For purposes of this Section 3.6(b), a Restructuring Tax is attributable to an Acquisition if the Acquisition occurs prior to the assessment of such Restructuring Tax. -32- (c) Any payment required to be made pursuant to this Section 3.6 shall be made no later than 30 days after the payor receives written notice of a Final Determination of such Restructuring Taxes. Any payment not so made within 30 days shall thereafter bear interest at the rate established for large corporate underpayments pursuant to Section 6621(c)(1) of the Code. (d) Neither Western Atlas nor UNOVA shall engage in any acts, other than an Acquisition, which would result in any Restructuring Taxes. In the event that any Restructuring Taxes are attributable to such acts, the party so engaged shall pay and shall indemnify and shall hold harmless the other party to this Agreement from and against any such Restructuring Taxes. Section 3.7. DUAL CONSOLIDATED LOSS CLOSING AGREEMENT. Prior to the filing of the 1997 federal income tax return of the Western Atlas Consolidated Group, in accordance with Treasury Regulation section 1.1503-2(g) (2) (iv) (B) (2) (i), WAI and UNOVA will enter into a closing agreement with the IRS providing that WAI and UNOVA will be jointly and severally liable for the total amount of the recapture of dual consolidated loss and interest charge required in Treasury Regulation section 1.1503-2(g) (2) (vii) related to Norand's dual consolidated losses, if there is a triggering event described in Treasury Regulation section 1.1503-2 (g) (2) (iii). In accordance with Treasury Regulation section 1.1503-2 (g) (2) (iv) (B) (2) (ii), WAI will agree with the IRS to treat any potential recapture amount under Treasury Regulation section 1.1503-2(g) (2) (vii) related to Norand's dual consolidated losses as unrealized built in gain for -33- purposes of Section 384(a) of the Code, subject to any applicable exceptions thereunder. In accordance with Treasury Regulation section 1.1503-2(g) (2) (iv) (B) (2) (iii), WAI will file, with the timely filed 1997 federal income tax return of the Western Atlas Consolidated Group, the agreement described in Treasury Regulation section 1.1503-2(g) (2) (i). Prior to the filing of the 1997 federal income tax return of the Western Atlas Consolidated Group, in accordance with Treasury Regulation section 1.1503-2(g) (2) (iv) (B) (2) (i), WAI and UNOVA will enter into a closing agreement with the IRS providing that WAI and UNOVA will be jointly and severally liable for the total amount of the recapture of dual consolidated loss and interest charge required in Treasury Regulation section 1.1503-2(g) (2) (vii) related to UNOVA Business' dual consolidated losses, if there is a triggering event described in Treasury Regulation section 1.1503-2(g) (2) (iii). In accordance with Treasury Regulation section 1.1503-2(g) (2) (iv) (B) (2) (ii), UNOVA will agree with the IRS to treat any potential recapture amount under Treasury Regulation section 1.1503-2(g) (2) (vii) related to Norand's and UNOVA Business' dual consolidated losses as unrealized -34- built-in gain for purposes of Section 384(a) of the Code, subject to any applicable exceptions therunder. In accordance with Treasury Regulation section 1.1503-2(g) (2) (iv) (B) (2) (iii), UNOVA will file, with its 1997 UNOVA Group Consolidated Tax Return for the short period beginning the day after the Distribution Date and ending on December 28, 1997, the agreement described in Treasury Regulation Section 1.1503-2(g) (2) (i). Section 3.8. LIABILITY FOR TAXES WITH RESPECT TO POST-DISTRIBUTION PERIODS. Unless otherwise provided in this Agreement, the Western Atlas Group shall pay all Taxes and shall be entitled to receive and retain all refunds of Taxes with respect to periods beginning after the Distribution Date which are attributable to Western Atlas Businesses. Unless otherwise provided in this Agreement, the UNOVA Group shall pay all Taxes and shall be entitled to receive and retain all -35- refunds of Taxes with respect to periods beginning after the Distribution Date which are attributable to UNOVA Businesses. Section 3.9. CARRYBACKS. (a) If, for any taxable year beginning on or after the Distribution Date, a member of the UNOVA Group (or a successor to such member) incurs a net operating loss that may be carried back to a Pre-Distribution Year in which such member was a member of the Western Atlas Consolidated Group, such member shall make an election pursuant to Section 172(b)(3) of the Code, unless Western Atlas, in its sole discretion, consents to treat such net operating loss as a Carryback Item pursuant to paragraph (b) of this Section 3.9. (b) If, for any taxable year beginning on or after the Distribution Date, a member of the UNOVA Group (or a successor to such member) incurs a net capital loss, business tax credit, or foreign tax credit (each a "Carryback Item") that may be carried back to a consolidated federal income tax return which was filed by the Western Atlas Consolidated Group, UNOVA (or such member of the UNOVA Group) may file a refund claim pursuant to Code section 6411 reflecting such Carryback Item. In the event that UNOVA (or such member of the UNOVA Group) shall not elect to file such a claim (or shall not be eligible to file such claim under applicable -36- law), Western Atlas shall, at the request and expense of UNOVA, file amended returns or refund claims reflecting such Carryback Item. Western Atlas shall, within 30 days after receipt, pay to UNOVA any refunds received by Western Atlas resulting from the filing of a refund claim pursuant to the foregoing provisions of this Section 3.9(b)(without regard to whether the income or tax in the Pre-Distribution Year was earned or paid, as the case may be, by Western Atlas or by UNOVA), together with any interest refunded with respect thereto. In the event that Western Atlas would have received a refund with respect to such claim had such refund not been offset by the United States Government against deficiencies, interest or penalties assessed against the Western Atlas Consolidated Group or any member thereof (other than deficiencies, interest or penalties attributable to (i) the operations of the UNOVA Group and with respect to which the UNOVA Group would otherwise be responsible under the terms of this Agreement or (ii) a taxable year of the Western Atlas Consolidated Group for which the statute of limitations has expired), Western Atlas shall pay to UNOVA, within 30 days after receipt of notice of such offset, an amount equal to the amount of such offset, together with interest at the overpayment rate established under Section 6621 of the Code. To the extent that a member of the Western Atlas Group or a member of the UNOVA Group receives a double benefit as a result of this Section 3.9(b) and the operation of the Code, Western Atlas or UNOVA, -37- respectively, will compensate UNOVA or Western Atlas, respectively, for the duplication of the benefit. If, for any taxable year, Western Atlas is required to and does make a repayment to the IRS of any portion of a refund described herein, then UNOVA shall pay to Western Atlas, within 30 days following the date Western Atlas notifies UNOVA of such repayment, the amount of such repayment, including interest. (C) Rules similar to those provided in Sections 3.9(a) and 3.9(b) with respect to federal income Tax Returns shall be applied to Joint Returns. Section 3.10. STATUTES OF LIMITATIONS. (a) Except as otherwise provided in this Agreement, UNOVA or Western Atlas may allow a statute of limitations to expire, extend a statute, or make exceptions for any Tax Item in a final agreement with the IRS or other taxing authority in respect of any taxable period ending after the Distribution Date, as UNOVA or Western Atlas in its sole discretion may determine. (b) At least six months prior to the expiration of the statute of limitations with respect to any consolidated federal income Tax Return or any Joint Return of UNOVA for any taxable period, UNOVA shall advise Western Atlas in writing of the date of such expiration. Section 3.11. EARNINGS AND PROFITS. The allocation of earnings and profits described in Section 312(h) of the Code and Treasury Regulation Section 1.312-10 shall be made by Western -38- Atlas in its sole discretion and its good faith determination shall be binding on the parties hereto. Western Atlas shall provide such allocation to UNOVA on or before the second anniversary of the Distribution Date. Section 3.12. LIABILITY FOR NORAND TAXES. Notwithstanding any other provision of this Agreement to the contrary, UNOVA shall represent Norand Corporation in connection with, and shall pay and hold harmless Western Atlas from and against any and all Taxes, together with related penalties and interest, assessed in respect of any audit, amendment or other change in a Tax Return filed by or on behalf of Norand Corporation for any taxable period ending prior to the date upon which Norand Corporation became a member of the Western Atlas Consolidated Group (hereinafter, "Norand Taxes"). Section 3.13. BREACH. Western Atlas shall indemnify and hold harmless each member of the UNOVA Group and UNOVA shall indemnify and hold harmless each member of the Western Atlas Group from and against any Taxes, penalties or interest required to be paid as a result of the breach by a member of the Western Atlas Group or the UNOVA Group, as the case may be, of any obligation under this Agreement. -39- ARTICLE IV INDEMNITY: COOPERATION AND EXCHANGE OF INFORMATION --------------------------------------------------- Section 4.1. INDEMNITY. (a) Western Atlas shall have full responsibility and discretion in the handling of any federal income tax controversy or controversy with respect to a Joint Return, including, without limitation, any audit, protest to the Appeals Division of the IRS, or litigation in Tax Court or any other court of competent jurisdiction or comparable state governmental authority in the case of any Joint Return of the Western Atlas Consolidated Group. Upon request by Western Atlas, UNOVA or any member of the UNOVA Group shall use its reasonable best efforts to cooperate in a defense in any such federal income tax controversy or Joint Return controversy with respect to any Reimbursable Adjustment, or any Restructuring Tax, for which UNOVA could be liable under Section 3.3 or 3.6 of this Agreement (hereinafter, a "UNOVA Indemnity Issue"). (b) Western Atlas shall (i) promptly notify UNOVA of any inquiries by any taxing authority or any other administrative, judicial or other governmental authority that relate to any UNOVA Indemnity Issue or any liability of any -40- member of the UNOVA Group that might arise under this Agreement, (ii) shall provide UNOVA with such notice and information as is necessary to keep UNOVA reasonably apprised of the progress of any audit or proceeding involving a UNOVA Indemnity Issue and (iii) shall in good faith consider all reasonable suggestions of UNOVA with respect to the contest of such issue. UNOVA shall promptly notify Western Atlas of any inquiries by any taxing authority or any other administrative, judicial or other governmental authority that relate to any Tax that may be imposed on any member of the Western Atlas Group or any liability of any member of the Western Atlas Group that might arise under this Agreement. Section 4.2. COOPERATION AND EXCHANGE OF INFORMATION. (a) Western Atlas, on behalf of itself and each member of the Western Atlas Group, agrees to provide the UNOVA Group, and UNOVA, on behalf of itself and each member of the UNOVA Group, agrees to provide the Western Atlas Group, with such cooperation and information as the other shall reasonably request in connection with the preparation or filing of any Tax Return or claim for refund contemplated by this Agreement or in conducting any audit or other proceeding in respect of Taxes. Such cooperation and information shall include without limitation promptly forwarding copies of -41- appropriate notices and forms or other communications received from or sent to any taxing authority which relate to Western Atlas Businesses in the case of the UNOVA Group and UNOVA Businesses in the case of the Western Atlas Group, or which relate to any Tax Item for which the other party may bear responsibility under the terms of this Agreement, and providing copies of all relevant Tax Returns, together with accompanying schedules and related workpapers, documents relating to rulings or other determinations by taxing authorities, including, without limitation, foreign taxing authorities, and records concerning the ownership and tax basis of property, which either party may possess. Western Atlas shall make available to UNOVA any information in Western Atlas's possession that would enable UNOVA to compute the tax basis of its assets or stock. UNOVA shall collect and make available to Western Atlas foreign tax receipts with respect to periods beginning before the Distribution Date, regardless of when such foreign tax receipts are issued. Each party shall make its employees and facilities available on a mutually convenient basis to provide explanation of any documents or information provided hereunder. However, neither party or its employees shall make any voluntary disclosures to any taxing authority, respecting any taxable period or Tax Item for which the other party may bear -42- responsibility under the terms of this Agreement, without the specific prior consent of such other party, which consent shall not be unreasonably withheld. (b) Subject to subsection (d) of this Section 4.2, UNOVA and Western Atlas agree to retain all Tax Returns, related schedules and workpapers, and all material records and other documents relating thereto existing on the date hereof or created through or with respect to periods ending on or before the first anniversary of the Distribution Date, until the expiration of the statute of limitations (including extensions) of the taxable years to which such Tax Returns and other documents relate and until the Final Determination of any payments which may be required in respect of such years under this Agreement. Western Atlas and UNOVA agree to advise each other promptly of any such Final Determination. (c) If any member of the Western Atlas Group or the UNOVA Group, as the case may be, fails to provide any information requested pursuant to Section 3.1(b)(1), Section 3.2(a) or this Section 4.2 by (i) the date(s) specified in such Section or (ii) if no date is specified, within a reasonable period, as determined in good faith by the party requesting the information, then the requesting party shall have the right to engage a public accountant of its choice to -43- gather such information. UNOVA and Western Atlas, as the case may be, agree upon 24 hours' notice, in the case of a failure to provide information pursuant to Section 3.1(b)(1) or Section 3.2(a) of this Agreement, and otherwise upon 30 days' notice after the expiration of such reasonable period, to permit any such public accountant full access to all appropriate records or other information in the possession of any member of the Western Atlas Group or the UNOVA Group, as the case may be, during reasonable business hours and to reimburse or pay directly all costs and expenses in connection with the engagement of such public accountant. (d) Upon the expiration of any statute of limitations, the documentation of Western Atlas or UNOVA or any member of their respective groups, including, without limitation, books, records, Tax Returns and all supporting schedules and information relating thereto, may be destroyed or disposed of unless (i) the other party requests that such documentation be retained, by written notice describing in reasonable detail the documentation to be retained, and (ii) the recipient of such notice agrees in writing to such retention. If the recipient of such notice objects, then the party proposing the retention shall promptly offer to take -44- delivery of such materials from the objecting party at the expense of the objecting party. Section 4.3. RELIANCE ON EXCHANGED INFORMATION. If either Western Atlas or UNOVA, or a member of their respective groups, supplies information to another party upon such party's request, and an officer of the requesting party intends to sign a statement or other document under penalties of perjury in reliance upon the accuracy of such information, then a duly authorized officer of the party supplying such information shall certify, to the best of such party's knowledge, the accuracy and completeness of the information so supplied. ARTICLE V MISCELLANEOUS ------------- Section 5.1. RESERVES. The parties agree that all accrued taxes, tax reserves and other tax balances in the balance sheet accounts of Western Atlas and its subsidiaries as of the Distribution Date, including but not limited to Financial Consolidations accounts (hereinafter, "Tax Reserves"), shall remain with the Western Atlas Group after the UNOVA Distribution, except for those Tax Reserves which -45- shall belong to the UNOVA Group upon the UNOVA Distribution, as set forth by company and division on Schedule B hereto. Section 5.2. EXPENSES. Unless otherwise expressly provided in this Agreement or in the Distribution Agreement, each party shall bear any and all expenses that arise from their respective obligations under this Agreement. Section 5.3. PAYMENTS. All payments to be made under this Agreement shall be made in immediately available funds. Section 5.4. ENTIRE AGREEMENT; TERMINATION OF PRIOR AGREEMENTS OTHER THAN LITTON AGREEMENT. Except for that certain Tax Sharing Agreement dated as of March 17, 1994 by and between Litton Industries, Inc. and Western Atlas (the "Litton Agreement"), this Agreement constitutes the entire agreement of the parties concerning the subject matter hereof and supersedes all other agreements, whether or not written, in respect of any Tax between or among any member or members of the Western Atlas Group, on the one hand, and any member or members of the UNOVA Group, on the other hand. All such agreements other than the Litton Agreement are hereby canceled and any rights or obligations existing thereunder are hereby fully and finally settled without any payment by any -46- party thereto. This Agreement may not be amended except by an agreement in writing, signed by the parties hereto. Anything in this Agreement or the Distribution Agreement to the contrary notwithstanding, in the event and to the extent that there shall be a conflict between the provisions of this Agreement and the Distribution Agreement, the provisions of this Agreement shall control. In the event and to the extent that there shall be a conflict between the provisions of this Agreement and the Litton Agreement, the provisions of the Litton Agreement shall control. Section 5.5. NOTICES. All notices and other communications hereunder shall be in writing and shall be personally delivered (provided a receipt is obtained therefor); or mailed by registered or certified mail (return receipt requested); transmitted by telex or telecopy; or sent by private messenger or carrier that issues delivery receipts, to the parties at the following addresses (or at such other addresses for a party as shall be specified by like notice) and shall be deemed given on the date on which such notice is received: To Western Atlas or any member of the Western Atlas Group: -47- General Counsel Western Atlas Inc. 10205 Westheimer Road Houston, TX 77042 To UNOVA or any member of the UNOVA Group: General Counsel UNOVA Inc. 360 North Crescent Drive Beverly Hills, CA 90210 Section 5.6. APPLICATION TO PRESENT AND FUTURE SUBSIDIARIES. This Agreement is being entered into by Western Atlas and UNOVA on behalf of themselves and each member of the Western Atlas Group and UNOVA Group, respectively. This Agreement shall constitute a direct obligation of each such member and shall be deemed to have been readopted and affirmed on behalf of any corporation which becomes a member of the Western Atlas Group and UNOVA Group in the future. Western Atlas and UNOVA hereby guarantee the performance of all actions, agreements and obligations provided for under this Agreement of each member of the Western Atlas Group and the UNOVA Group, respectively. Western Atlas and UNOVA shall, upon the written request of the other, cause any of their respective group members formally to execute this Agreement. This Agreement shall be binding upon, and shall inure to the benefit of, the successors, assigns and persons controlling any of the corporations bound hereby for so long -48- as such successors, assigns or controlling persons are members of the Western Atlas Group or the UNOVA Group or their successors and assigns. Section 5.7. TERM. This Agreement shall commence on the date of execution indicated below and shall continue in effect until otherwise agreed to in writing by Western Atlas and UNOVA or their successors. Section 5.8. TITLES AND HEADINGS. Titles and headings to sections herein are inserted for the convenience of reference only and are not intended to be a part or to affect the meaning or interpretation of this Agreement. Section 5.9. LEGAL ENFORCEABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provisions in any other jurisdiction. Without prejudice to any rights or remedies otherwise available to any party hereto, each party hereto acknowledges that damages would be an inadequate remedy for any breach of the provisions of this Agreement and -49- agrees that the obligations of the parties hereunder shall be specifically enforceable. Section 5.10. FURTHER ASSURANCES. Subject to the provisions hereof, the parties hereto shall make, execute, acknowledge and deliver such other instruments and documents, and take all such other actions, as may be reasonably required in order to effectuate the purposes of this Agreement and to consummate the transactions contemplated hereby. Subject to the provisions hereof, each of the parties shall, in connection with entering into this Agreement, perform its obligations hereunder and take any and all actions relating hereto, comply with all applicable laws, regulations, orders, and decrees, obtain all required consents and approvals and make all required filings with any governmental agency, other regulatory or administrative agency, commission or similar authority and promptly provide the other parties with all such information as they may reasonably request in order to be able to comply with the provisions of this sentence. Section 5.11. PARTIES IN INTEREST. Except as herein otherwise specifically provided, nothing in this Agreement expressed or implied is intended to confer any right or benefit upon any person, firm or corporation other -50- than the parties and their respective successors and permitted assigns. Section 5.12. SETOFF. All payments to be made under this Agreement shall be made without setoff, counterclaim or withholding, all of which are expressly waived. Section 5.13. CHANGE OF LAW. If, due to any change in applicable law or regulations or the interpretation thereof by any court of law or other governing body having jurisdiction subsequent to the date of this Agreement, performance of any provision of this Agreement or any transaction contemplated thereby shall become impracticable or impossible, the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such provision. Section 5.14. GOVERNING LAW AND INTERPRETATION. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware applicable to agreements made and to be performed in the State of Delaware, without regard to conflict of laws principles thereof. -51- Section 5.14. RESOLUTION OF CERTAIN DISPUTES. (a) Disagreements between Western Atlas, on the one hand, and the members of the UNOVA Group, on the other, with respect to amounts that Western Atlas claims are owed by the UNOVA Group, or that the UNOVA Group claims are owed by Western Atlas, under Sections 3.3, 3.4 or 3.6 of this Agreement shall be resolved as follows: No later than the last day on which a disputed payment could be timely made pursuant to Section 3.3, 3.4 or 3.6 of this Agreement, as the case may be, the complaining party shall provide written notice to the other party of the amount of the payment with which it disagrees and the basis for such disagreement. Any disagreement that is not resolved by mutual agreement within 30 days of such notice shall be resolved by arbitration pursuant to this Section 5.15. Upon the commencement of the 30-day dispute resolution period specified in the preceding sentence until the time of a final resolution by the arbitrator, the applicable time period for making a disputed payment pursuant to Section 3.3, 3.4 or 3.6 shall be tolled. Such tolling shall not affect the accrual of interest pursuant to Section 3.3(h), 3.4(b) or 3.6(c). (b) Any arbitrator selected pursuant to this Section 5.15 shall have at least five years of experience in the -52- field of corporate taxation, shall be an attorney licensed to practice law in any state of the United States and shall not be or have been employed by or affiliated with either party. The parties shall first attempt to agree on a mutually satisfactory arbitrator. If the parties are unable to agree on a mutually satisfactory arbitrator within 15 days after expiration of the 30-day dispute resolution period specified in subsection (a) of this Section 5.15, such arbitrator shall be selected by the American Arbitration Association. If the position of an arbitrator is vacated, the person or persons who originally selected the arbitrator to fill such position shall select a new arbitrator to fill the position. The arbitrator's fees and expenses shall be borne equally by Western Atlas and UNOVA. (c) Arbitration Procedure. (i) The arbitration shall be conducted in accordance with the rules set forth in Exhibit A. The arbitration shall not be conducted under the auspices of the American Arbitration Association. (ii) Each party within 30 days after engagement of the arbitrator shall submit to the arbitrator a written statement of the party's position (including the total net amount it -53- asserts is owed by it or is due to it) regarding the total amount in dispute, which position shall be consistent with any notice provided by such party pursuant to subsection (a) of this Section 5.15, together with a copy of such notice. (iii) The arbitrator shall base his decision on the following standards. In the case of a factual dispute between the parties, the arbitrator shall make a determination of the correct facts. In the case of a dispute regarding a legal issue or a settlement amount, the arbitrator shall consider the strength of Western Atlas's and UNOVA's litigation positions (with respect to all issues raised by the taxing authority with whom the settlement was made in a Revenue Agent's Report or similar document) relative to the costs and risks of litigation. Upon making determinations with respect to all issues in dispute the arbitrator shall find in favor of the party whose statement submitted pursuant to paragraph (ii) above proposed the amount closest to the aggregate of the amounts so determined. (iv) The arbitrator shall render a written decision stating only the amount of such decision as soon as practicable. The arbitrator shall also orally explain the bases of such decision to both parties as soon as practicable. If and only if both parties request, the arbitrator shall state the bases -54- of such decision in writing. The arbitrator's decision shall be in an amount equal to one of the total amounts asserted by one of the parties in the written statements submitted pursuant to paragraph (ii) above. The arbitrator shall not, and is not authorized to, render a decision in any other amount. (v) The arbitrator's decision shall be final and binding on the parties. Section 5.16. CONFIDENTIALITY. Each party shall hold and shall cause its consultants and advisors to hold in strict confidence, unless compelled to disclose by judicial or administrative process or, in the opinion of its counsel, by other requirements of law, all information (other than any such information relating solely to the business or affairs of such party) concerning the other parties hereto furnished it by such other party or its representatives pursuant to this Agreement (except to the extent that such information can be shown to have been (i) previously known by the party to which it was furnished, (ii) in the public domain through no fault of such party, or (iii) later lawfully acquired from other sources by the party to which it was furnished), and each party shall not release or disclose such information to any other person, except its auditors, attorneys, financial -55- advisors, bankers and other consultants and advisors who shall be advised of the provisions of this Agreement. Each party shall be deemed to have satisfied its obligation to hold confidential information concerning or supplied by the other party if it exercises the same care as it takes to preserve confidentiality for its own similar information. Section 5.17. LIMITATION ON WAIVERS. The provisions of this Agreement may be waived only if the waiver is in writing and signed by the party making the waiver. No delay or omission in exercising any right under this Agreement will operate as a waiver of the right on any further occasion. No waiver of any particular provision of this Agreement will be treated as a waiver of any other provision, and no waiver of any rights will be deemed a continuing waiver of the same right with respect to subsequent occurrences that give rise to it. All rights given by this Agreement are cumulative to other rights provided for in this Agreement and to any other rights available under applicable law. Section 5.18. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. -56- Section 5.19. FAIR MEANING. This Agreement shall be construed in accordance with its fair meaning and shall not be construed strictly against the drafter. Section 5.20. CONSTRUCTION. In this Agreement, unless the context otherwise requires, the terms "herein," "hereof," "hereto," and "hereunder" refer to this Agreement. Section 5.21. TERMINATION. This Agreement may be terminated at any time prior to the Distribution Date, without the approval of UNOVA, by and in the sole discretion of the Western Atlas Board of Directors. In the event of such termination, no party shall have any liability to the other party from or for the terminated Agreement, except that expenses incurred in connection with the preparation of this Agreement shall be paid as provided in Section 5.2 hereof. -57- IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. WESTERN ATLAS INC. By: --------------------------- Title: UNOVA INC. By: --------------------------- Title: -58- EXHIBIT "A" ARBITRATION PROCEDURAL RULES 1. Administration and Conduct of Arbitration. (a) At the discretion of the Arbitrator, an administrative conference with the Arbitrator and the parties and/or their representatives will be scheduled in appropriate cases to expedite the Arbitration proceedings. (b) It is intended that the Arbitration be conducted in an expeditious manner and without evidentiary hearing or oral presentation and argument, unless the Arbitrator determines, at any time, that an evidentiary hearing, and/or oral presentation or argument is desired by the Arbitrator for the rendition of an award or a decision. However, the Arbitrator shall fix limits on the duration of any such evidentiary hearing and/or oral presentation and argument, in advance, with time equally divided between the parties. (c) On such schedule as may be established by the Arbitrator, each of the parties shall submit simultaneous briefs, including exhibits, to the Arbitrator supporting their respective positions. There shall be no limit to the number of pages included in such briefs or to the number of exhibits. Each party shall have a reasonable opportunity, as determined by the Arbitrator, to reply to the brief of the other. The Arbitrator shall have the right to request additional written statements of all or any of the parties; provided that each party shall have the reasonable opportunity to reply to any such additional statements submitted in response to the request of the Arbitrator. 2. Fixing of Locale. The parties may mutually agree to the locale where the Arbitration is to be held. If the parties cannot agree on the locale, the Arbitrator shall have the power to determine the locale and its decision shall be final and binding. 3. Date, Time and Place of Hearing. The Arbitrator shall set the date, time, and place for any hearing. The Arbitrator shall mail to each party notice thereof at least ten days in advance, unless the parties by mutual agreement waive such notice or modify the terms thereof. 4. Postponements. The Arbitrator for good cause show may postpone any hearing upon the request of a party or upon the Arbitra- -2- tor's own initiative, and shall also grant such postponement when all of the parties agree thereto. 5. Oaths. Before proceeding with the first hearing, the Arbitrator may take an oath of office and, if required by law, shall do so. The Arbitrator may require witnesses to testify under oath administered by any duly qualified person and, if it is required by law, shall do so. 6. Order of Proceedings and Communication with Arbitrator. (a) A hearing shall be opened by the filing of the oath of the Arbitrator, where required, and by the recording of the date, time, and place of the hearing, and the presence of the Arbitrator, the parties, and their representatives, if any. (b) The Arbitrator may, at the beginning of the hearing, ask for statements clarifying the issues involved. (c) The complaining party shall then present evidence and/or argument, as required by the Arbitrator, to support its claim. The defending party shall then present evidence and/or argument supporting its position and responding to the position of the other. Witnesses, if any, for each party shall submit to questions or other examination. The -3- Arbitrator has the discretion to vary this procedure but, within the time limits specified above, shall afford a full and equal opportunity to all parties for the presentation of any material and relevant evidence. (d) Exhibits, when offered by either party, may be received in evidence by the Arbitrator. The names and addresses of any witnesses and a description of the exhibits in the order received shall be made a part of the record. (e) There shall be no direct communication between the parties and the Arbitrator other than at oral hearing, unless the parties and the Arbitrator agree in writing. 7. Arbitration in the Absence of a Party or Representative. Unless the law provides to the contrary, the Arbitration may proceed in the absence of any party or representative who, after due notice, fails to be present or fails to obtain a postponement ("absence in default"). An award shall not be made solely on the default of a party. The Arbitrator shall require the party who is present to submit such evidence as the Arbitrator may require for the making of an award. -4- 8. Evidence. (a) The parties may offer such evidence as is relevant and material to the dispute and shall produce such evidence as the Arbitrator may deem necessary to an understanding and determination of the dispute. (b) The Arbitrator shall be the judge of the relevance and materiality of the evidence offered, and conformity to legal rules of evidence shall not be necessary. All evidence shall be taken in the presence of the Arbitrator and all of the parties, except where any of the parties is absent in default or has waived the right to be present. 9. Evidence by Affidavit and Post-Hearing Filing of Documents or Other Evidence. (a) The Arbitrator may receive and consider the evidence of witnesses by affidavit, but shall give it only such weight as the Arbitrator deems it to be entitled to after consideration of any objection made to its admission. (b) If the parties agree or the Arbitrator directs that documents or other evidence be submitted to the Arbitrator after the hearing, the documents or other evidence shall be -5- filed with the Arbitrator. All parties shall be afforded an opportunity to examine such documents or other evidence. 10. Closing of Hearing. If satisfied that the record is complete, the Arbitrator shall declare the hearing closed and a minute thereof shall be recorded. If briefs are to be filed, the hearing shall be declared closed as of the final date set by the Arbitrator for the receipt of briefs. If documents are to be filed as provided in Section 9 and the date set for their receipt is later than that set for the receipt of briefs, the later date shall be the date of closing of the hearing. 11. Reopening of Hearing. The hearing may be reopened on the Arbitrator's initiative at any time before the award is made. If reopening the hearing would prevent the making of the award within the specified time limit, the matter may not be reopened unless the parties agree on an extension of time. 12. Waiver of Oral Hearing. The parties may provide, by written agreement, for the waiver of oral hearing in any case. -6- 13. Waiver of Rules. Any party who proceeds with the Arbitration after knowledge that any provision or requirement of these rules has not been complied with and who fails to state an objection thereto in writing shall be deemed to have waived the right to object. 14. Extensions of Time. The parties may modify any period of time by mutual agreement. The Arbitrator may for good cause extend any period of time established by these rules, except the time for making the award. The Arbitrator shall notify the parties of any extension. 15. Serving of Notice. Each party shall be deemed to have consented that any papers, notices, or process necessary or proper for the initiation or continuation of an Arbitration under these rules, for any court action in connection therewith, or for the entry of judgment on any award made under these rules may be served on a party by mail addressed to the party or its representative at the last known address or by personal service, in or outside the state where the Arbitration is to be -7- held, provided that reasonable opportunity to be heard with regard thereto has been granted to the party. 16. Time of the Award. The award shall be made promptly by the Arbitrator and, unless otherwise agreed by the parties in writing or specified by law, no later than thirty days from the date of closing the hearing, or, if oral hearings have not been held, from the date of the transmittal of the final briefs, statements and proofs to the Arbitrator. 17. Award upon Settlement. If the parties settle their dispute during the course of the Arbitration, the Arbitrator may set forth the terms of the agreed settlement in an award. Such an award is referred to as a consent award. 18. Deliver of Award to Parties. Parties shall accept as legal delivery of the award the placing of the award or a true copy thereof in the mail addressed to a party or its representative at the last known address, personal service of the award, or the filing of the award in any other manner that is permitted by law. -8- 19. Applications to Court and Exclusion of Liability. (a) No judicial proceeding by a party relating to the subject matter of the Arbitration shall be deemed a waiver of the party's right to arbitrate. (b) Parties to these rules shall be deemed to have consented that judgment upon the Arbitration award may be entered in any federal or state court having jurisdiction thereof. 20. Interpretation and Application of Rules. The Arbitrator shall interpret and apply these rules insofar as they relate to the Arbitrator's powers and duties. If there is more than one Arbitrator and a difference arises among them concerning the meaning or application of these rules, it shall be decided by a majority vote. 21. Complex Procedures. Notwithstanding the foregoing, if the parties mutually agree, any Arbitration to be conducted between the parties may be concluded in the manner provided for in the Supplementary Procedure for Large Complex Disputes of the American Arbitration Association, with such modification as the parties may agree upon. -9- EX-10.D 4 FORM OF BENEFITS AGREEMENT EXHIBIT 10D EMPLOYEE BENEFITS AGREEMENT EMPLOYEE BENEFITS AGREEMENT (the "Agreement") dated as of October __, 1997 by and between Western Atlas Inc., a Delaware corporation ("Western Atlas") and UNOVA, Inc., a Delaware corporation ("UNOVA"), which, as of the date hereof, is a direct, wholly-owned subsidiary of Western Atlas. WHEREAS, the Board of Directors of Western Atlas has decided to distribute all of the stock of UNOVA to the shareholders of Western Atlas in a transaction intended to qualify under Section 355 of the Code (the "Distribution"); WHEREAS, Western Atlas and UNOVA are entering into a Distribution and Indemnity Agreement (the "Distribution Agreement") which, among other things, together with the annexes to the Distribution Agreement, sets forth the principal corporate transactions required to effect the Distribution and sets forth other agreements that will govern certain other matters following the Distribution; and WHEREAS, in connection with the Distribution, Western Atlas and UNOVA desire to provide for the allocation of assets and liabilities and other matters relating to employee benefit plans and compensation arrangements; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, Western Atlas and UNOVA agree as follows: SECTION 1. DEFINITIONS. Terms used but not defined in this Agreement shall have the meanings set forth in the Distribution Agreement. As used in this Agreement the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the term defined): AFFILIATE: with respect to a Person, any Person controlled by, controlling or under common control with such Person. BENEFIT PLAN: any Plan, existing on or prior to the Distribution Date which was established by any member of the Western Atlas Group or the UNOVA Group, or any predecessor or Affiliate of any of the foregoing, to which any member of the Western Atlas Group or the UNOVA Group contributes, has contributed, is required to contribute or has been required to contribute, or under which any employee, former employee, director or former director of any member of the Western Atlas Group or the UNOVA Group or any beneficiary thereof is covered, is eligible for coverage or has benefits rights. CODE: the Internal Revenue Code of 1986, as amended. CURRENT PLAN YEAR: the plan year during which the Distribution Date occurs. DISTRIBUTION DATE: the date on which the Distribution is effected. ERISA: the Employee Retirement Income Security Act of 1974, as amended. EXISTING RETIREMENT PLANS: the Western Atlas Inc. Retirement Plan, the Landis Tool Pension Plan and the Retirement Plan of the von Gal Operations of Western Atlas Inc. GROUP: the Western Atlas Group or the UNOVA Group. LIABILITY: any debt, liability or obligation, whether absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, and whether or not the same would properly be reflected on a balance sheet, and all costs and expenses related thereto. NONQUALIFIED PLAN: any Plan that provides retirement benefits and is not intended to qualify under Section 401(a) of the Code. PERSON: an individual, a partnership, a joint venture, a corporation, a limited liability company, a trust, an unincorporated organization or a government or any department or agency thereof. PLAN: any bonus, incentive compensation, deferred compensation, pension, profit sharing, retirement, stock purchase, stock option, stock purchase, stock ownership, stock appreciation rights, phantom stock, leave of absence, layoff, vacation, day or dependent care, legal services, cafeteria, life, health (including medical, dental and vision care), accident, disability, severance, pay in lieu of notice, separation, workers' compensation, travel or other employee benefit plan, practice, policy or arrangement of any kind (including, but not limited to, any "employee benefit plan" (within the meaning of Section 3(3) of ERISA)). -2- PRIOR PLAN YEAR: to the extent applicable with respect to any Plan, any plan year that ended on or prior to the Distribution Date. QUALIFIED PLAN: a Plan which is an employee benefit pension plan (within the meaning of Section 3(2) of ERISA) and which is intended to qualify under Section 401(a) of the Code. SUBSIDIARY: a corporation more than 50% of the voting power of whose outstanding voting securities are owned directly or indirectly by another specified corporation. UNOVA COMMON STOCK: the Common Stock, par value $.01 per share, of UNOVA. UNOVA-ONLY DIRECTOR: any director of UNOVA immediately after the Distribution Date who was a director of Western Atlas immediately prior to the Distribution Date, but who ceases to be a director of Western Atlas in connection with the Distribution. UNOVA EMPLOYEE: any individual who immediately after the Distribution Date is an officer or employee of the UNOVA Group. UNOVA FORMER EMPLOYEE: any terminated employee of Western Atlas who was principally employed in the business which will be conducted by the UNOVA Group and any beneficiary or dependent of such terminated employee. UNOVA GROUP: UNOVA and the UNOVA Subsidiaries and Affiliates. UNOVA INC. PENSION PLAN: the Western Atlas Inc. Retirement Plan assumed by UNOVA on or prior to the Distribution Date and renamed the UNOVA Inc. Pension Plan. UNOVA OPTION PLAN: the UNOVA 1997 Stock Incentive Plan. UNOVA PARTICIPANT: any individual, with respect to a particular Plan maintained by the UNOVA Group or the Western Atlas Group, who (i) is a UNOVA Employee and who is eligible to participate in such Plan, (ii) at any time after the Distribution Date is or becomes an officer or employee of any member of the UNOVA Group and is eligible to participate in such Plan or (iii) is a beneficiary or dependent of any individual described in clause (i) or (ii). -3- UNOVA SUBSIDIARIES: any direct or indirect Subsidiary of UNOVA at or after the Distribution. WELFARE PLAN: any Plan, other than a Qualified Plan, which provides medical, health, disability, accident, life insurance, death, dental or other welfare benefits, including any post-employment benefits or retiree medical, life insurance or other such benefits. WESTERN ATLAS BONUS PLAN: the Western Atlas Inc. 1995 Incentive Compensation Plan and the Western Atlas Inc. Individual Performance Award Plan, and any other cash incentive plan in which both UNOVA Employees and Western Atlas Employees participated. WESTERN ATLAS EMPLOYEE: any individual who immediately after the Distribution Date is an officer or employee of a member of the Western Atlas Group. WESTERN ATLAS FORMER EMPLOYEE: any terminated employee of Western Atlas other than a UNOVA Former Employee. WESTERN ATLAS FSSP: the Western Atlas Financial Security and Savings Program. WESTERN ATLAS GROUP: Western Atlas and the Subsidiaries and Affiliates of Western Atlas, other than UNOVA and the UNOVA Subsidiaries and Affiliates. WESTERN ATLAS INDEMNITEE: each member of the Western Atlas Group and each of their respective directors, officers, employees and agents (but only in their capacities as such) and each of the heirs, executors, successors and assigns of any of the foregoing. WESTERN ATLAS MISCELLANEOUS PLANS: any Benefit Plan, other than any Qualified Plan, Nonqualified Plan, Welfare Plan, Western Atlas Bonus Plan or Western Atlas Stock Option Plan. WESTERN ATLAS OPTION: an option to purchase shares of Western Atlas Common Stock granted pursuant to a Western Atlas Stock Option Plan. WESTERN ATLAS PARTICIPANT: any individual who is a participant in any Benefit Plan and is not a UNOVA Participant or UNOVA Former Employee, and any beneficiary or dependent of such individual. -4- WESTERN ATLAS STOCK OPTION PLANS: the Western Atlas Inc. Director Stock Option Plan and the Western Atlas Inc. 1993 Stock Incentive Plan. SECTION 2. OFFERS OF EMPLOYMENT; ASSUMPTION OF EMPLOYMENT, SEVERANCE AND CONSULTING AGREEMENTS. (a) On or prior to the Distribution Date, the UNOVA Group shall offer to employ, to the extent required in this Section 2(a), each employee employed by the Western Atlas Group who is principally employed by Western Atlas in connection with the Western Atlas industrial automations systems businesses which will be conducted by the UNOVA Group following the Distribution and each Western Atlas corporate headquarters employee, except as may otherwise be agreed upon by Western Atlas and UNOVA with respect to any particular Western Atlas corporate headquarters employees. The employees to be offered employment by the UNOVA Group shall include all active and inactive employees of such businesses, including all employees laid-off, disabled or on leave of absence, unless their employment with the Western Atlas Group has been terminated. The UNOVA Group is not obligated to employ any such employees of the Western Atlas Group who decline employment with the UNOVA Group, and Western Atlas shall not be obligated to continue the employment of such employees. (b) Western Atlas and UNOVA agree that with respect to individuals who, in connection with the Distribution, cease to be employees of the Western Atlas Group and become employees of the UNOVA Group, such cessation shall not be deemed a severance of employment from either Group for purposes of any Plan or agreement that provides for the payment of severance, salary continuation or similar benefits or stock repurchase rights and, in connection with the Distribution, if and to the extent appropriate, Western Atlas and UNOVA shall use their best efforts (without payment of monetary compensation) to obtain waivers from individuals against any such assertion. (c) The UNOVA Group shall assume and be solely responsible for, and shall indemnify the Western Atlas Group against, all liabilities and obligations whatsoever in connection with claims made by or on behalf of UNOVA Employees or UNOVA Former Employees in respect of severance pay, salary continuation and similar obligations relating to the termination or alleged termination of any such person's employment either before, on or after the Distribution Date. -5- SECTION 3. CASH BONUS PLANS. (a) Western Atlas shall be responsible for the payment of all Liabilities for benefits due and payable but unpaid as of and through the Distribution Date under each Western Atlas Bonus Plan with respect to any Prior Plan Year (other than the Current Plan Year), other than with respect to benefits due and payable to UNOVA Participants or UNOVA Former Employees. (b) Except as provided in paragraph (c) below, under each Western Atlas Bonus Plan, the UNOVA Group shall be responsible for the payment of all Liabilities for benefits to UNOVA Participants and UNOVA Former Employees due and payable after the Distribution Date or due and payable but unpaid as of and through the Distribution Date, including the portions of awards made prior to the Distribution Date which are not payable prior to the Distribution Date. (c) Prior to the Distribution Date, Western Atlas shall determine 1997 annual bonus awards under the Western Atlas Bonus Plans for UNOVA Employees who are Western Atlas corporate headquarters employees. Such awards shall be pro rated based upon the portion of the 1997 bonus year which had expired as of the Distribution Date. Western Atlas shall pay a portion of the cash bonus prior to the Distribution Date (the bonus amount that is up to 50% of the employee's base salary earned for 1997 prior to the Distribution Date), and UNOVA shall pay the balance of the bonus following the Distribution Date in installments pursuant to the terms of the Western Atlas Bonus Plans. (d) Following the end of 1997, UNOVA shall determine 1997 annual bonus awards for UNOVA Employees who were not Western Atlas corporate headquarters employees, and shall make such payments to such UNOVA Employees. (e) For purposes of the Western Atlas Bonus Plans, individuals who, in connection with the Distribution, cease to be employees of Western Atlas and become UNOVA Employees shall not be deemed to have terminated employment under such Plans as a result of becoming UNOVA Employees for purposes of receiving installments of prior year "Final Awards" under the Western Atlas Bonus Plans. To the extent applicable, for purposes of receiving payments of installments of prior year "Final Awards" under the Western Atlas Bonus Plans, UNOVA Employees must at the time such payment is due (i) be in the active employ of UNOVA or a Subsidiary or Affiliate of UNOVA, (ii) have terminated employment with UNOVA by reason of death, or "Disability" or "Retirement" (as defined in the UNOVA Option Plan) or (iii) be on an "Approved Leave of Absence" (as determined by -6- the UNOVA Compensation Committee or, prior to the Distribution, by the Western Atlas Compensation Committee but including, without limitation, a leave of absence for purposes of service in the Armed Services of the United States). SECTION 4. STOCK OPTIONS. Western Atlas shall take all action necessary to amend (if necessary), or otherwise provide for adjustments of outstanding awards under, the Western Atlas Stock Option Plan, so that each outstanding Western Atlas Option will be adjusted by (i) multiplying the number of shares of Western Atlas Common Stock subject to the option by the Adjustment Factor and (ii) dividing the exercise price per share of the option by the Adjustment Factor. For these purposes, the "Adjustment Factor" is defined as the quotient obtained by dividing (x) the Average Market Price of the Western Atlas Common Stock plus the Average Market Price of the UNOVA Common Stock by (y) the Average Market Price of the Western Atlas Common Stock. The "Average Market Price" of Western Atlas Common Stock or UNOVA Common Stock, as the case may be, is defined to be the average of the high and low daily prices of such security as reported on the NYSE Composite Tape (or, if not listed on such exchange, on any other national securities exchange on which the Western Atlas Common Stock or the UNOVA Common Stock is listed or on NASDAQ) on the sixth through tenth trading days, inclusive, following the Distribution Date. Each Western Atlas Option held by a UNOVA Employee or UNOVA-only Director who, in (a) connection with the Distribution, ceases to be a Western Atlas Employee or director of Western Atlas and becomes a UNOVA Employee or UNOVA-only Director, respectively, shall be amended to provide that (i) service with UNOVA shall be deemed continuous service with Western Atlas for purposes of vesting, exercisability and the duration of such Western Atlas Option and (ii) to avoid the potential loss of the opportunity to exercise such Western Atlas Option following a "Change in Control" of UNOVA (as defined in the UNOVA Option Plan), such Western Atlas Option held by UNOVA Employees or UNOVA-only Directors shall immediately vest and become exercisable upon a Change in Control of UNOVA. SECTION 5. QUALIFIED PLANS. (a) Effective on or prior to the Distribution Date, UNOVA shall assume sponsorship of the Existing Retirement Plans. The Western Atlas Inc. Retirement Plan shall be renamed the UNOVA, Inc. Pension Plan. The other two Existing Retirement Plans will remain as frozen plans with no further benefit accruals thereunder. The UNOVA, Inc. Pension Plan shall continue to provide benefits for all UNOVA Participants and UNOVA Former Employees who, immediately prior to the Distribution -7- Date, were participants in or otherwise entitled to benefits under the Western Atlas Inc. Retirement Plan. UNOVA agrees that each such UNOVA Participant or UNOVA Former Employee shall be, to the extent applicable, entitled, for all purposes under the UNOVA, Inc. Pension Plan (including, without limitation, eligibility, vesting and benefit accrual), to be credited with the term of service and any accrued benefit credited to such UNOVA Participant or UNOVA Former Employee as of the Distribution Date under the terms of the Western Atlas Inc. Retirement Plan as if such service had been rendered to UNOVA and as if such accrued benefit had originally been credited to such UNOVA Participant or UNOVA Former Employee under the UNOVA, Inc. Pension Plan. Western Atlas shall, as soon as practicable after the Distribution Date, provide UNOVA with such additional information (in the possession of the Western Atlas Group and not already in the possession of the UNOVA Group) as may be reasonably requested by UNOVA and necessary in order for the UNOVA Group to establish and administer effectively the Existing Retirement Plans assumed by UNOVA. (b) Effective on or prior to the Distribution Date, UNOVA shall assume sponsorship of the Western Atlas FSSP and the Western Atlas FSSP shall be renamed the UNOVA, Inc. Financial Security and Savings Program (the "UNOVA FSSP"). UNOVA agrees that all service credited under the Western Atlas FSSP as of the Distribution Date with respect to UNOVA Participants shall be credited under the UNOVA FSSP for all Plan purposes, including eligibility and vesting. (c) From and after the Distribution Date, the Western Atlas Group shall cease to have any Liability whatsoever with respect to UNOVA Participants or UNOVA Former Employees under the Western Atlas Inc. Retirement Plan or the Western Atlas FSSP, and UNOVA and the UNOVA, Inc. Pension Plan and the UNOVA FSSP, as the case may be, shall assume or retain sole responsibility for, and shall indemnify the Western Atlas Indemnitees with respect to, all Liabilities of either Group with respect to UNOVA Participants or UNOVA Former Employees under the UNOVA, Inc. Pension Plan and the UNOVA FSSP. SECTION 6. NONQUALIFIED RETIREMENT PLANS. Effective as of the Distribution Date, UNOVA shall assume and shall indemnify the Western Atlas Indemnitees from and against all Liabilities with respect to UNOVA Participants and UNOVA Former Employees and UNOVA-only Directors under the Western Atlas Inc. Restoration Plan, the Western Atlas Inc. Supplemental Executive Retirement Plan (the "SERP"), the Supplemental Retirement Agreement between Western Atlas Inc. and Alton J. Brann (dated March 17, 1994), and the Western Atlas -8- Inc. Deferred Compensation Plan for Directors (the "Western Atlas Nonqualified Plans"). UNOVA represents that it has established plans on substantially the same terms as the Western Atlas Nonqualified Plans pursuant to which each UNOVA Participant will be credited with the term of service credited to such UNOVA Participant as of the Distribution Date under the Western Atlas Nonqualified Plans, as if such service had been rendered to UNOVA. SECTION 7. DEFERRED COMPENSATION. Effective as of the Distribution Date, UNOVA shall assume and indemnify the Western Atlas Indemnitees from and against all Liabilities with respect to UNOVA Participants and UNOVA Former Employees in connection with any deferred compensation plans. SECTION 8. WELFARE PLANS. (a) Effective on or prior to the Distribution Date, UNOVA shall assume the Western Atlas Inc. Employees Welfare Benefit Trust, and such trust shall be renamed the UNOVA, Inc. Employees Welfare Benefit Trust (the "UNOVA Trust"). Effective as of the Distribution Date, UNOVA shall be responsible for and shall indemnify the Western Atlas Indemnitees from and against all Liabilities arising under any Welfare Plan with respect to claims by UNOVA Participants or UNOVA Former Employees for benefits incurred prior to or after the Distribution Date pursuant to the terms of the applicable Plan. (b) Effective on or prior to the Distribution Date, UNOVA shall assume sponsorship of the Welfare Plans maintained by Western Atlas in which UNOVA Employees participate. In connection with the foregoing, Western Atlas agrees to provide UNOVA or its designated insurance representative with such information (in the possession of the Western Atlas Group and not already in the possession of the UNOVA Group) as may be reasonably requested by UNOVA and necessary for the UNOVA Group to assume or establish any such Welfare Plan, and UNOVA agrees to provide Western Atlas or its designated insurance representative with similar information. Split-dollar insurance policies noted on Exhibit A as UNOVA policies shall be assumed by UNOVA, and split-dollar insurance policies noted on Exhibit A as Western Atlas policies shall remain with Western Atlas. -9- SECTION 9. WESTERN ATLAS MISCELLANEOUS PLANS; POST-DISTRIBUTION LIABILITIES. (a) The Western Atlas Group shall be solely responsible for the payment of all Liabilities whatsoever with respect to any Western Atlas Participant or Western Atlas Former Employee unpaid as of and through the Distribution Date under any Western Atlas Miscellaneous Plan and the UNOVA Group shall assume and be solely responsible for the payment of all Liabilities with respect to any UNOVA Participant or UNOVA Former Employee unpaid as of and through the Distribution Date under any Western Atlas Miscellaneous Plan. (b) Except as otherwise expressly provided herein, the Western Atlas Group shall be solely responsible for the payment of all Liabilities whatsoever arising with respect to any Western Atlas Employee or Western Atlas Former Employee and attributable to any period subsequent to the Distribution Date and the UNOVA Group shall be solely responsible for the payment of all Liabilities whatsoever arising with respect to any UNOVA Employee or UNOVA Former Employee and attributable to any period subsequent to the Distribution Date. SECTION 10. PRESERVATION OF RIGHTS TO AMEND OR TERMINATE PLANS. No provisions of this Agreement, including the agreement or representation of Western Atlas or UNOVA that it, or any member of the Western Atlas Group or the UNOVA Group, will make or has made a contribution or payment to or under any Plan herein referred to for any period, shall be construed as a limitation on the right of Western Atlas or UNOVA or any member of the Western Atlas Group or the UNOVA Group to amend such Plan or terminate its participation therein which Western Atlas or UNOVA or any member of the Western Atlas Group or the UNOVA Group would otherwise have under the terms of such Plan or otherwise, and no provision of this Agreement shall be construed to create a right in any employee or former employee or beneficiary of such employee or former employee under a Plan which such employee or former employee or beneficiary would not otherwise have under the terms of the Plan itself. SECTION 11. REIMBURSEMENT; INDEMNIFICATION. Each of the parties hereto acknowledges that the Western Atlas Group, on the one hand, and the UNOVA Group, on the other hand, may incur costs and expenses (including contributions to Plans and the payment of insurance premiums) arising from or related to any of the Plans which are, as set forth in this Agreement, the responsibility of the other party hereto. -10- Accordingly, Western Atlas and UNOVA agree to reimburse each other, as soon as practicable but in any event within 30 days of receipt from the other party of appropriate verification, for all such costs and expenses. SECTION 12. TRANSFER OF RESERVES. To the extent that any Liability assumed by any member of the UNOVA Group hereunder is secured by a reserve on the books of Western Atlas, such reserve shall be transferred from Western Atlas to the books of UNOVA as soon as practicable on or following the Distribution Date. SECTION 13. FURTHER TRANSFERS. Western Atlas and UNOVA recognize that there may be UNOVA Employees who will, after the Distribution Date, become employed by Western Atlas and there may be Western Atlas Employees who become employed, after the Distribution Date, by UNOVA and there may be UNOVA Former Employees or Western Atlas Former Employees who are hired by Western Atlas or UNOVA, respectively. If Western Atlas and UNOVA so agree with respect to any such individuals, the assets and liabilities with respect to such employees which are associated with the plans and programs described in this Agreement may be transferred and assumed in a manner consistent with this Agreement and such employees will be treated as Western Atlas Employees or UNOVA Employees, as the case may be. Any such transfers or assumptions and treatment of employees will be considered to be governed by the terms of this Agreement and shall not require the agreement of Western Atlas and UNOVA if they occur within 3 months following the Distribution Date. SECTION 14. OFFICERS AND EMPLOYEES. Except as otherwise agreed by the parties hereto, effective as of the Distribution Date, all officers or employees of the UNOVA Group who are acting as directors or officers of the Western Atlas Group and are UNOVA Employees shall resign from such positions with the Western Atlas Group. SECTION 15. OTHER LIABILITIES; GUARANTEE OF OBLIGATIONS. (a) As of the Distribution Date, UNOVA shall assume and be solely responsible for all Liabilities whatsoever of the Western Atlas Group with respect to claims made by the UNOVA Employees or UNOVA Former Employees relating to any Liability not otherwise expressly provided for in this Agreement, including earned salary, wages, bonus, incentive or severance -11- payments or other compensation and accrued sick, holiday, vacation, health, dental or retirement benefits, regardless of whether such Liability was incurred before or after the Distribution Date. (b) Effective immediately after the Distribution, and in connection with the assumption by UNOVA of obligations with respect to employees of the UNOVA Subsidiaries, UNOVA shall cause each corporation which will become an UNOVA Subsidiary, to perform, and guarantees the performance of, each and every obligation of such UNOVA Subsidiaries with respect to the provisions of this Agreement. SECTION 16. COMPLIANCE. Notwithstanding anything to the contrary in this Agreement, to the extent any actions of the parties contemplated in this Agreement are determined prior to the Distribution Date to violate law or result in unintended tax liability for Western Atlas Participants or Western Atlas Former Employees or UNOVA Participants or UNOVA Former Employees, such action may be modified to avoid such violation of law or unintended tax liability. SECTION 17. TERMINATION OF PARTICIPATION. Except as otherwise expressly provided herein, the participation of UNOVA Participants in any Benefit Plan sponsored or maintained by Western Atlas shall cease as of the Distribution Date. SECTION 18. COMPLETE AGREEMENT. This Agreement, together with the Distribution Agreement, and the Annexes and Schedules thereto, shall constitute the entire agreement between the parties hereto with respect to the subject matter hereof and shall supersede all previous negotiations, commitments and writings with respect to such subject matter. SECTION 19. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware (other than the laws regarding choice of laws and conflicts of laws) as to all matters, including matters of validity, construction, effect, performance and remedies. -12- SECTION 20. NOTICES. All notices, requests, claims, demands and other communications hereunder (collectively, "Notices") shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by cable, telegram, telex, telecopy or other standard form of telecommunications, or by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to Western Atlas: Western Atlas Inc. 10205 Westheimer Road Houston, Texas 77042 Attention: General Counsel If to UNOVA: UNOVA, Inc. 360 North Crescent Drive Beverly Hills, California 90210 Attention: General Counsel or to such other address as any party hereto may have furnished to the other parties by a notice in writing in accordance with this Section 20. SECTION 21. AMENDMENT AND MODIFICATION. This Agreement may be amended, modified or supplemented only by a written agreement signed by Western Atlas and UNOVA, Inc. SECTION 22. SUCCESSORS AND ASSIGNS; NO THIRD-PARTY BENEFICIARIES. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their successors and permitted assigns, but neither this Agreement nor any of the rights, interests and obligations hereunder shall be assigned by any party hereto without the prior written consent of each of the other parties (which consent shall not be unreasonably withheld). This Agreement is solely for the benefit of the parties hereto and their Subsidiaries and is not intended to confer upon any other Persons any rights or remedies hereunder. -13- SECTION 23. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. SECTION 24. INTERPRETATION. The Section headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement of the parties hereto and shall not in any way affect the meaning or interpretation of this Agreement. SECTION 25. TERMINATION. Notwithstanding any provision hereof, this Agreement may be terminated at any time prior to the Distribution Date. Any termination of the Distribution Agreement shall result in the termination of this Agreement. In the event of such termination, no party hereto shall have any Liability to any Person by reason of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. WESTERN ATLAS INC. By:____________________________ UNOVA, INC. By:____________________________ -14- EX-10.E 5 FORM OF INTELLECTUAL PROPERTY AGREEMENT EXHIBIT 10E INTELLECTUAL PROPERTY AGREEMENT This Intellectual Property Agreement, dated this day of , 1997, is entered into by and between Western Atlas Inc., a Delaware corporation ("WESTERN"), and UNOVA, Inc., a Delaware corporation ("UNOVA"). WHEREAS, WESTERN proposes the distribution (the "Distribution") to its shareholders in a tax-free spin-off of UNOVA which will own WESTERN's industrial automation systems business, consisting of the automated data collection and mobile computing businesses operated by Intermec Corporation, Norand Corporation and United Barcode Industries and the integrated manufacturing systems, body welding and assembly systems and precision grinding and abrasive systems businesses operated by various WESTERN divisions (collectively, the "UNOVA Businesses"); WHEREAS, WESTERN will retain its oilfield information services businesses (the "Western Businesses"); WHEREAS, WESTERN and UNOVA each desire to allocate intellectual property to the business which is using or holding for use the intellectual property; WHEREAS, WESTERN became a publicly traded company as a result of a tax-free spin-off from Litton Industries, Inc., a Delaware corporation ("Litton"), on March 17, 1994; NOW, THEREFORE, in consideration of the foregoing premises and other good and valuable consideration, receipt of which is hereby acknowledged, WESTERN and UNOVA agree as follows: 1. Definition: "Intellectual Property" is defined to mean patents, patent applications, trademarks, service marks, trade names, copyrights, registrations and applications for registration of trademarks, service marks, trade names and copyrights, software, mask works, trade secrets and technical information and licenses relating thereto. 2. Patents: WESTERN does hereby sell, assign, transfer and convey unto UNOVA, its successors and assigns, the entire right, title and interest in and to the patents and patent applications set forth in Attachment A.1 including any divisions, continuations or continuations-in-part thereof, and any re-examinations or re-issues thereof, not only for, to and in the United States of America, its territories and possessions, but for, to and in all countries foreign thereto, together with the right to recover for past infringement. 3. Trademarks: 3.1 WESTERN does hereby sell, assign, transfer, and convey unto UNOVA, its successors and assigns, the entire right, title and interest in and to the trademark or service mark registrations and applications for registrations set forth in Attachment B.1 including the right to recover for past infringement of said trademarks and service marks and the good will of the business in connection with which said trademarks and service marks are used and which is symbolized thereby. 3.2 UNOVA has adopted and begun to use the name "UNOVA" as a trade name, trademark and service mark. WESTERN is currently the owner of trademark, service mark and/or trade name applications for registration and/or reservations of "UNOVA" in the United States of America, several States within the United States of America and countries foreign thereto. WESTERN does hereby sell, assign, transfer, and convey unto UNOVA, its successors and assigns, the entire right, title and interest in and to such "UNOVA" trademark, service mark, and/or trade name applications and reservations, including the right to recover for past infringement of said marks and the good will in the business in connection with which said marks are used and which is symbolized thereby. 1 3.3 WESTERN shall retain ownership in the corporate name, trademark and service mark "WESTERN ATLAS," including the trademark and service mark applications for registration and registrations of "WESTERN ATLAS" in the United States of America and countries foreign thereto listed in Attachment B.5 whose files shall be transferred from the present corporate headquarters of WESTERN to the Houston Texas, offices of WESTERN upon the Distribution. 4. Assistance: 4.1 The distribution on March 17, 1994, by Litton, which resulted in the tax-free spin-off of WESTERN, included that certain Intellectual Property Agreement, Annex C of the Distribution Agreement, under which Litton was to sell, assign, transfer and convey unto WESTERN certain patents and trademarks. Some of those certain patents may still be assigned of record to Litton and/or its subsidiaries (or a predecessor in interest to Litton and/or its subsidiaries). Attachments A.2, A.3 and A.4 hereto list, respectively, patents owned by Litton Industrial Automation Systems, Inc. (LIAS)(which changed its name to WESTERN); Litton Industrial Products, Inc. (LIPI); and Pratt & Whitney (PW). Some of those certain trademarks may still be assigned of record to Litton and/or its subsidiaries. Attachments B.2, B.3 and B.4 hereto list, respectively, trademarks owned by Litton Industries, Inc. (LII); Litton Industrial Automation Systems, Inc. (LIAS); and Litton Industrial Products, Inc. (LIPI). WESTERN, if requested, will execute documents as reasonably requested by UNOVA, and without expense to WESTERN, to obtain the sale, assignment, transfer and conveyance unto UNOVA, its successors and assigns of the entire right, title and interest in and to the patents and trademarks set forth in Attachments A.2, A.3, A.4, B.2, B.3 and B.4 hereto. 5. Other Intellectual Property: The ownership of Intellectual Property not specifically referred to in Sections 2, 3, 4 and 6 of this Intellectual Property Agreement shall be as follows: 5.1 Intellectual Property owned by each incorporated subsidiary owned in whole or in part, directly or indirectly, by WESTERN or UNOVA will continue to be owned by each such subsidiary. 5.2 Intellectual Property which is used or held for use by a division or other unit of WESTERN in the Western Businesses, including Intellectual Property from discontinued operations of the oilfield information services business, shall continue to be owned by WESTERN. 5.3 Intellectual Property which is used or held for use by a division or other unit of WESTERN in the UNOVA Businesses, including Intellectual Property from discontinued operations of the UNOVA Businesses, shall be owned by, and all WESTERN's right, title and interest is hereby assigned by WESTERN to, UNOVA. 5.4 Intellectual Property used jointly by the Western Businesses and the UNOVA Businesses listed in Attachment C hereto shall be retained by WESTERN. 5.5 Copyrights, software, software services and licenses and agreements relating thereto, presently owned by WESTERN, including e-mail, which have been used at the corporate headquarters of WESTERN and which relate to or are utilized primarily or exclusively by the Western Businesses shall remain the property of WESTERN. Copyrights, software, software services and licenses and agreements relating thereto, presently owned by WESTERN, including e-mail, which have been used at the corporate headquarters of WESTERN, and which relate to or are utilized primarily or exclusively by the UNOVA Businesses shall become the property of UNOVA, to the extent the same may be transferred to UNOVA. If requested, WESTERN will assist with the assignment to UNOVA of any transferable right, title and interest of WESTERN in such copyrights, software, software services and related licenses and agreements which relate to or are utilized primarily or exclusively by the UNOVA Businesses. Copyrights, software, software services and licenses and agreements relating thereto, presently owned by WESTERN, including e-mail, which have been used at the corporate headquarters of WESTERN and which relate to or are utilized by both the Western Businesses and the UNOVA Businesses and not primarily by the Western Businesses shall become the property of UNOVA, to the extent the same may be transferred to UNOVA; 2 provided, however, that UNOVA will cooperate with and, if requested, assist WESTERN to obtain similar copyrights, software, software services and licenses and agreements relating thereto. 6. Licenses: 6.1 In no event shall UNOVA, or any direct or indirect subsidiary or division of UNOVA have any interest in or rights under the non-exclusive license granted to Litton under the Amalgamation Agreement dated April 30, 1987 (including Section ll.9(b), Exhibit M and Schedule M(b)), among Litton Industries, Inc. Research Holdings, Inc., a successor-in-interest to Western Geophysical Company of America, of the first part, Dresser Industries, Inc., of the second part, and Western Atlas International, Inc., of the third part, and the Letter Agreement dated June 10, 1993 among Litton Industries, Inc., Western Atlas Inc. and Western Atlas International, Inc. ("Non-Exclusive License"). The foregoing notwithstanding, WESTERN will cause its subsidiary, Western Atlas International, Inc. (WAII), to enter into a license agreement with the UNOVA subsidiary, Intermec Technologies Corporation (Intermec), granting to Intermec a non-exclusive, nontransferable license under WAII's GPS patents in a specified field of use under such terms as are mutually agreeable to Intermec and WAII at a royalty rate not to exceed five percent (5%), it being understood that this more favorable royalty rate is being made available to Intermec as company currently under common ownership with WAII. 6.2 Promptly following the Distribution Date (as defined in the Distribution and Indemnity Agreement), UNOVA shall cause all UNOVA subsidiaries with names that include the words "Western Atlas" or derivations thereof to change their corporate names to names that do not include such words or derivations. WESTERN grants to UNOVA and the UNOVA subsidiaries the right to leave the Western Atlas name on all buildings, vehicles, inventory and supplies owned by UNOVA or the UNOVA subsidiaries in the form it appears thereon on the Distribution Date, until the sooner of the date on which all inventory and supplies existing on the Distribution Date have been consumed or sold or six months following the Distribution Date; provided, however, that UNOVA shall indemnify WESTERN for any loss incurred by WESTERN in connection with such use by UNOVA and the UNOVA subsidiaries. Nothing in this Section 6.2 shall be construed to grant to UNOVA or the UNOVA subsidiaries any rights whatsoever in the Western Atlas name. WESTERN and UNOVA shall, and shall require their subsidiaries to, take such actions and execute such documents as required to carry out and complete the transfer of Intellectual Property contemplated under this Agreement. After the Distribution should a patent or patent application, or a trademark registration or application for registration of a trademark be discovered which is assigned directly to WESTERN, and which is a part of the UNOVA Businesses, WESTERN will assign such patent, patent application, trademark registration or application for registration of a trademark to UNOVA. IN WITNESS WHEREOF, the parties hereto affix their respective hands as of the date indicated above. WESTERN ATLAS INC. By:___________________________________ ______________________________________ (Print Name) ______________________________________ (Print Title) UNOVA, INC. By:___________________________________ ______________________________________ (Print Name) ______________________________________ (Print Title) 3 EX-10.H 6 UNOVA, INC.SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EXHIBIT 10H UNOVA, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN THIS PLAN CONTAINS ARBITRATION CLAUSES UNOVA, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN TABLE OF CONTENTS PAGE ARTICLE I INTRODUCTION AND PURPOSE...................................1 ARTICLE II DEFINITIONS.....................................................1 Section 2.1 Active Participant...............................1 2.2 Actuarial Equivalent.............................1 2.3 Average Earnings.................................2 2.4 Base Compensation Amount.........................3 2.5 Beneficiary or Beneficiaries.....................3 2.6 Board............................................4 2.7 Bonus or Bonuses.................................4 2.8 Business Combination.............................4 2.9 Change of Control................................4 2.10 Chief Executive Officer..........................6 2.11 Chief Financial Officer..........................6 2.12 Code.............................................6 2.13 Committee........................................6 2.14 Company..........................................7 2.15 Death Benefit....................................7 2.16 Dependent Children...............................7 2.17 Director.........................................7 2.18 Disability or Disabled...........................7 2.19 Disability Benefit...............................7 2.20 Distribution Date................................7 2.21 Employee Benefits Agreement......................7 2.22 ERISA............................................7 2.23 Exchange Act.....................................7 2.24 Litton...........................................7 2.25 Leave of Absence.................................7 2.26 Normal Form......................................8 2.27 Offset Amount....................................8 2.28 Outstanding Company Common Stock.................9 2.29 Participant......................................9 2.30 Person...........................................9 2.31 Qualified Plan...................................9 2.32 Retired Participant..............................9 2.33 Retirement Benefit...............................9 2.34 Special Administrators...........................9 2.35 Successor or Successors..........................9 2.36 Supplemental Plan................................9 ii 2.37 Trust...........................................10 2.38 Trustee.........................................10 2.39 Trust Agreement.................................10 2.40 Western Atlas...................................10 2.41 Western Atlas Plan .............................10 2.42 Years of Service................................10 ARTICLE III PARTICIPATION..................................................11 Section 3.1 General.........................................11 3.2 Entry and Continuing Participation..............11 ARTICLE IV RETIREMENT BENEFITS............................................11 Section 4.1 Eligibility for Retirement Benefit..............11 4.2 Retirement Benefit Formula......................13 4.3 Vesting in Retirement Benefit...................13 4.4 Retirement Benefit Forms........................13 4.5 Normal Form of Retirement Benefit...............13 4.6 Alternative Forms of Benefit....................14 ARTICLE V BENEFITS UPON PARTICIPANT'S DEATH..............................15 Section 5.1 Eligibility for Death Benefit...................15 5.2 Death Benefit...................................15 5.3 Spouse Retirement Benefit.......................15 5.4 Change of Control...............................16 ARTICLE VI BENEFITS OF DISABLED PARTICIPANTS..............................16 Section 6.1 Eligibility for Disability Benefit..............16 6.2 Disability Formula..............................16 6.3 Vesting Disability Benefit......................16 6.4 Disabled Participant's Retirement Benefit.........................................17 ARTICLE VII ELECTIONS, CLAIMS, COMMENCEMENT OF PAYMENTS AND BENEFICIARY DESIGNATIONS...................................17 Section 7.1 General.........................................17 7.2 Commencement of Payments........................17 7.3 Form of Benefit Elections.......................18 7.4 Beneficiaries...................................18 7.5 Failure to Claim................................18 iii ARTICLE VIII ADMINISTRATION.................................................18 ARTICLE IX SOURCE OF PAYMENTS.............................................19 Section 9.1 General Assets of Company............................19 ARTICLE X CLAIMS AND ENFORCEMENT....................................20 Section 10.1 Administrative Procedures............................20 10.2 Enforcement..........................................20 10.3 Arbitration..........................................21 ARTICLE XI AMENDMENT AND TERMINATION......................................22 Section 11.1 Amendment and Termination of the Plan................22 11.2 Contractual Obligation...............................23 ARTICLE XII MISCELLANEOUS..................................................24 Section 12.1 Employment Rights....................................24 12.2 Rights of the Committee..............................24 12.3 Benefit Statements...................................24 12.4 Assignment...........................................24 12.5 Applicable Law.......................................24 12.6 Effective Date.......................................24 12.7 Entire Plan..........................................24 12.8 Terms................................................24 12.9 Waiver...............................................25 ARTICLE XIII BENEFITS FOR RETIRED WESTERN EMPLOYEES.........................25 Section 13.1 Benefit Payments..........................................25 iv UNOVA, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ARTICLE I--INTRODUCTION AND PURPOSE UNOVA, Inc. establishes this UNOVA,Inc. Supplemental Executive Retirement Plan (the "Supplemental Plan") effective as of the Distribution Date. The purpose of the Supplemental Plan is to provide for supplemental retirement benefits to selected key employees of the Company (as that term is defined in Section 2.14 and as used hereinafter such term shall have such defined meaning), and thereby encourage those employees to continue providing services to the Company until retirement. The Supplemental Plan is intended to provide benefits solely for a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Payments under the Supplemental Plan shall be made either from general assets of the Company or from the assets of a trust which may be established hereunder. It is intended that the Supplemental Plan remain at all times an unfunded plan for purposes of ERISA and that the trust, if established, shall constitute a grantor trust under Sections 671 through 679 of the Internal Revenue Code of 1986, as amended (the "Code"). ARTICLE II--DEFINITIONS SECTION 2.1 "ACTIVE PARTICIPANT" shall mean a person who has been designated as a Participant in the Supplemental Plan pursuant to Article III, and who continues to be employed by the Company continuously from such designation, except as provided for in Section 3.2 A Participant (other than a Disabled Participant during the period of Disability) shall be treated as having terminated from employment during any period of Leave of Absence, unless the Committee, in its sole and absolute discretion, and subject to such terms and conditions as the Committee may specify, decides otherwise. However, a Disabled or deceased Participant shall continue to be treated as an Active Participant and, thus, continue to accrue additional Years of Service until the earlier of the date that the Participant attains (or, if deceased, would have attained) age 65, or the date that the Participant is no longer Disabled. A Disabled Participant who returns to active employment with the Company when Disability ends shall thereafter be an Active Participant, so long as such employment continues, without further designation pursuant to Article III. An Active Participant who terminates employment with the Company (other than for Disability) and is subsequently re-employed with the Company shall not be treated as an Active Participant unless such individual is redesignated as an Active Participant pursuant to Article III. SECTION 2.2 "ACTUARIAL EQUIVALENT" shall mean the adjustment of an amount or amounts using actuarial methods and factors identical with those actuarial methods and factors then being used, at the time such calculations are to 1 be made hereunder, under the UNOVA Pension Plan adopted by UNOVA, Inc. as of the Distribution Date and intended to be qualified under Section 401(a) of the Code, as such Plan may be amended from time to time and any retirement plan intended to replace such Plan (the "Qualified Plan"). SECTION 2.3 "AVERAGE EARNINGS" shall mean the average of gross base salary payments plus Bonuses as defined in Section 2.7 (except, for a Retired Participant receiving a Retirement Benfit as of the Distribution Date, Bonuses shall mean gross cash payments of Bonuses) from the Company to the Participant in the three twelve consecutive month periods (with no overlap), in which such Participant's gross base salary payments plus gross Bonuses are the highest, in the Participant's final 60 months of employment. For all purposes of calculating "Average Earnings" under this Supplemental Plan "gross base salary" shall include any amounts deferred pursuant to Section 401(k) or Section 125 of the Code and shall include cash payments, during the relevant period, of commissions payable to a Participant as a regular part of the Participant's compensation, e.g. to a person engaged in sales or marketing; however, commissions not payable as a regular part of a Participant's compensation shall not be included in the calculation of Average Earnings. Commissions or portions thereof otherwise included in the calculation of Average Earnings pursuant to the preceding sentence which are deferred (other than at the election of a Participant) shall be included in the calculation of Average Earnings in the relevant period in which cash payments are made. For purposes of calculating Average Earnings under this Supplemental Plan salary (including relevant commission payments and bonuses) paid in a non-U.S. currency shall be converted to U.S. dollar equivalents using the quarterly UNOVA, Inc. official rates of exchange, as determined by the Chief Financial Officer and as utilized generally for corporate purposes. (a). Average Earnings for purposes of calculating a Disability or Death Benefit for or with respect to a Disabled Participant shall be calculated using the 60 months that include and precede the month that his or her Disability commenced. If a formerly Disabled Participant who has returned to active employment with the Company does not have a minimum of 36 consecutive calendar months of employment with the Company after such return to active employment, then Average Earnings shall be calculated by the Committee in accordance with subparagraph (e). (b). Average Earnings in the case of an Active Participant who dies prior to attaining age 65 shall be calculated using the 60 months that include and precede the month of the Participant's death (or Disability, in the case of a Disabled Participant who dies). For purposes of calculating a lump sum payment pursuant to Section 4.1(d) in the event of a Change of Control, with respect to a person (other than a Disabled or deceased Participant) who is an Active Participant as of the date of such calculation, Average Earnings shall be calculated as if the person's employment with the Company ended on such date. (c). For purposes of calculating Average Earnings, the Participant's gross base salary plus gross Bonuses received while employed by Western Atlas (beginning on or after March 17, 1994) or Litton (prior to such date), if and to the extent such Western Atlas or Litton employment is included 2 within the period of 60 months to be used in such calculation, shall be taken into account, provided that the Participant's benefits under the Western Atlas retirement plans were transferred to the Company pursuant to the Employee Benefits Agreement between Western Atlas and UNOVA,Inc. (the "Employee Benefits Agreement"). (d). If a Participant is eligible to receive payments under the Supplemental Plan but does not have 36 consecutive months of employment with Western Atlas and the Company, then Average Earnings shall be calculated by the Committee in accordance with subparagraph (e). (e). Notwithstanding the foregoing, the Committee may determine Average Earnings for the purposes of this Section by another methodology which it determines to be more appropriate under the facts and circumstances; provided, however, that, following a Change of Control, the authority of the Committee under this subparagraph (e) shall be limited to matters referred to in the last sentence of subparagraph (a) above and the matters referred to in subparagraph (d) above unless the methodology for determining Average Earnings selected by the Committee is more advantageous to the Participant. SECTION 2.4 "BASE COMPENSATION AMOUNT" shall mean the applicable dollar amount on the date that the Active Participant terminates from employment with the Company, calculated as follows: (a). The Base Compensation Amount, as defined under the Western Plan, for the 12-month period ending on December 31, 1997; (b). For each 12-month period following the period described above in Section 2.4(a), the Base Compensation Amount shall be the dollar amount applicable for the immediately preceding 12-month period increased by a percentage, which shall be the sum of: (1) the percentage increase in the U.S. Department of Labor consumer price index for all urban consumers from the index amount in effect at the beginning of the immediately preceding 12-month period to the index amount in effect at the beginning of the current 12-month period, and; (2) one percent. (c). In the case of an Active Participant who dies, the Base Compensation Amount shall be the dollar amount in effect under Section 2.4(a) or (b) for the month in which the Participant died and, in the case of a Disabled Participant (who does not return to active employment with the Company), the Base Compensation Amount shall be the dollar amount in effect under Section 2.4(a) or (b) for the month in which the Disabled Participant becomes disabled. For purposes of calculating a lump sum payment pursuant to Section 4.1(d) in the event of a Change of Control, with respect to a person (other than a Disabled or deceased Participant) who is an Active Participant as of the date of such calculation, the Base Compensation Amount shall be the Base Compensation amount in effect as of the date of such calculation. SECTION 2.5 "BENEFICIARY" or "BENEFICIARIES" shall mean those who are designated under the Supplemental Plan to receive payment of a benefit on 3 account of a Participant's death. If and to the extent the spouse of a deceased Participant is living at the time of the Participant's death, only the spouse may be the Beneficiary. Upon the death of the spouse of a deceased Participant prior to commencement of Retirement Benefit payments, the Dependent Children of the Participant may be Beneficiaries, but only of the Death Benefit. SECTION 2.6 "BOARD" shall mean the Board of Directors of UNOVA,Inc. or of its Successor, as of the time in question, the succession of which did not result from or constitute or follow a Change of Control ("Successor" or "Successors"). SECTION 2.7 "BONUS" or "BONUSES" shall mean the full amount of the bonus or similar cash incentive awarded with respect to any given fiscal year or portion thereof and shall be deemed, for purposes of the calculation of Average Earnings, to have been paid by the Company to the Participant, during the month in which determined and awarded by the Committee (or other body or individual having authority to award such Bonus) (except, for a Retired Participant receiving a Retirement Benefit as of the Distribution Date, Bonus or Bonuses shall mean gross cash payments of Bonuses), under Company-sponsored, formal or informal, incentive compensation or bonus plans, excluding, however, any payments under Company Stock-based option or award plans; provided, however, that, for purposes of calculating Average Earnings, any portion of a Bonus, the payment of which is deferred at the election of the Participant, shall be treated as paid during the month in which such Bonus was determined and awarded, notwithstanding such elected deferral, and payment of the deferred portion shall be disregarded for purposes of calculating Average Earnings. "Bonus or Bonuses" shall not include any bonus, commission or fee paid to a Participant for the accomplishment of a particular non-ordinary course transaction or circumstance as determined by the committee prior to or at the time of the award. SECTION 2.8 "BUSINESS COMBINATION" shall have the meaning specified in Section 2.9(c). SECTION 2.9 "CHANGE OF CONTROL" shall mean: (a). An acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended [the "Exchange Act"] (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30 percent or more of either (1) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); excluding, however, the following acquisitions of Outstanding Company Common Stock and Outstanding Company Voting Securities: (A) any acquisition directly from the Company other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company; (B) any acquisition by the Company; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (D) any 4 acquisition by any Person pursuant to a transaction which complies with clauses (1), (2), and (3) of paragraph (c) below of this Section 2.9; or (b). Individuals who, as of the effective date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual who becomes a member of the Board subsequent to the effective date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but provided further that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board; or (c). The approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company ("Business Combination"),or if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such Business Combination pursuant to which: (1) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination, will beneficially own, directly or indirectly, more than 60 percent of, respectively, the outstanding shares of common stock and the combined voting power of the outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (2) no Person (other than any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or such corporation resulting from such Business Combination) will beneficially own, directly or indirectly, 30 percent or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors except to the extent that such ownership existed with respect to the Company prior to the Business Combination; and (3) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination will have been members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or 5 (d). Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. SECTION 2.10 "CHIEF EXECUTIVE OFFICER" shall mean the chief executive officer of UNOVA,Inc. or of its Successor. SECTION 2.11 "CHIEF FINANCIAL OFFICER" shall mean the chief financial officer of UNOVA, Inc. or of its Successor. SECTION 2.12 "CODE" shall mean the Internal Revenue Code of 1986, as amended. SECTION 2.13 "COMMITTEE" shall mean: (a). The Compensation Committee of the Board. (b). Notwithstanding Section 2.13(a), upon a Change of Control, the Committee shall mean exclusively the "special administrators." The "special administrators" shall be the individuals who constituted the Company's Compensation Committee of the Board immediately prior to the Change of Control. The "special administrators" shall constitute the Committee until the earlier of the termination of the Supplemental Plan or the last day of the 18-month period following the month in which the Change of Control occurred. The "special administrators" shall have all rights and authority reserved to the Committee under the Supplemental Plan, including, but not limited to, the rights specified in Section 12.2. (c). If a "special administrator" dies, becomes disabled, or resigns as "special administrator" during the period that the "special administrators" constitute the Committee, the remaining "special administrator(s)" shall continue to serve as the Committee without interruption, and successor "special administrator(s)" shall be designated, and subject to removal, by the individual who was Chief Executive Officer immediately prior to the Change of Control from among the then remaining Participants, but such Chief Executive Officer shall also have the right to designate himself or herself as a successor "special administrator" but, in the event of the death or disability of such Chief Executive Officer, successor "special administrators" shall be designated by that one of the remaining "special administrators" who has the greatest seniority in terms of years of employment with the Company and Western Atlas including, for this purpose, years of service prior to age 40. No Participant who has been designated as a "special administrator" shall participate in any decision which addresses peculiarly the Benefits of or with respect to such Participant. If at any time there are no remaining "special administrators," the presiding Judge of the Superior Court of the State of California for Los Angeles County shall designate three "special administrators" from among the remaining Participants upon the application of any of the Participants. For purposes of this Section, the term "Participant" means a Participant who has satisfied the conditions 6 of Section 4.1(a)(3) or is a Disabled Participant, or is receiving Retirement Benefits. SECTION 2.14 "COMPANY" shall mean UNOVA,Inc., a Delaware corporation, and its Successors, and their respective subsidiaries. Any reference to stock or securities of the Company shall mean only the stock or securities of UNOVA,Inc. or of its Successor. SECTION 2.15 "DEATH BENEFIT" shall mean the benefit payable pursuant to Article V to the Participant's Beneficiary or Beneficiaries, if any. SECTION 2.16 "DEPENDENT CHILDREN" shall mean a natural or legally adopted son or daughter who either: (a) has not attained age 19; or (b) has attained age 19 but has not attained age 23 and is a full-time student at an accredited educational institution. SECTION 2.17 "DIRECTOR" shall mean a member of the Board of Directors of UNOVA,Inc. or of its Successor. SECTION 2.18 "DISABILITY" or "DISABLED" shall mean the condition of a person, or a person, who has been determined by the Committee to be unable to perform the material and substantive duties of the person's position or profession, to an extent which prevents the person from engaging in the person's regular position or profession, due to injury or sickness for which the person is receiving medical care from, or with respect to which a current certification of disability is received by the Committee from, a professional person appropriate for such injury or sickness. SECTION 2.19 "DISABILITY BENEFIT" shall mean the benefit payable pursuant to Article VI to an Active Participant who becomes Disabled. SECTION 2.20 "DISTRIBUTION DATE" shall mean the date determined by the Board of Directors of Western Atlas on which the shares of the Company are distributed by Western Atlas to the holders of Western Atlas common stock. SECTION 2.21 "EMPLOYEE BENEFITS AGREEMENT" shall have the meaning specified in Section 2.3(c). SECTION 2.22 "ERISA" shall have the meaning specified in Article I. SECTION 2.23 "EXCHANGE ACT" shall have the meaning specified in Section 2.9(a). SECTION 2.24 "LITTON" shall mean Litton Industries, Inc., a Delaware corporation, and its subsidiaries at the time in question. SECTION 2.25 "LEAVE OF ABSENCE," with respect to a person who has been designated a Participant, shall mean and refer to a discontinuance of regular, full-time services by the person for the Company resulting in the discontinuance, 7 in whole or in part, of base salary payments by the Company to such person during such discontinuance of service, provided, however, that, to the extent federal or state so-called "Family Leave Acts" or "Maternity or Pregnancy Leave Acts" may make unlawful the treatment of an absence or a portion of an absence as a termination for purposes of the Supplemental Plan, such absence or portion shall not constitute a Leave of Absence. SECTION 2.26 "NORMAL FORM" shall mean the form of Retirement Benefit payable under Section 4.5 to a Retired Participant. SECTION 2.27 "OFFSET AMOUNT" shall mean the sum of the annual "primary insurance amount" and the annual "Company-provided pension." (a). The "primary insurance amount" shall mean the annual benefit determined under the Social Security Act that is payable to the Participant as of the calendar year that Retirement Benefits to the Participant, if any, would commence under this Supplemental Plan. If no "primary insurance amount" is payable to a Participant, who is otherwise covered by the Social Security Act, as of the calendar year in which Retirement Benefit commences to the Participant, if any, would commence under the Supplemental Plan, then the "primary insurance amount" shall be deemed to be the "primary insurance amount" that would be payable to the Participant at the earliest date thereafter (or would have been payable at the earliest date thereafter, in the case of a deceased Participant); provided, however, that the amount payable under the Social Security Act shall be determined without regard to any election by the Participant or a Beneficiary to defer receipt of a benefit and without regard to any reduction of the amount of the Social Security Act benefit by virtue of the receipt of earned income by the Participant or a Beneficiary. The "primary insurance amount" shall also include any annual retirement benefit payable under any public retirement program of a foreign country that the Committee determines is comparable in purpose to the benefits payable under the Social Security Act. (b). The "Company-provided pension" shall mean the annual amount that would be payable to a Participant under any defined benefit or defined contribution plan sponsored by the Company, which is either intended to qualify under Section 401(a) of the Code or is intended to restore benefits under such plan (excluding only this Supplemental Plan and Part II of the UNOVA, Inc. or Western Atlas Inc. FSSP and Restoration Plan) assuming for purposes of calculating such annual amount that the Participant withdrew his or her actual contributions, if any, and earnings thereon. Any non-United States defined benefit or defined contribution plan of the Company which is not subject to the Code but which is comparable in purpose to plans which would qualify under Section 401(a) of the Code shall be included within the meaning of "Company-provided pension." Annual amounts payable under any retirement plans of a Participant's former employer, assuming for purposes of calculating such annual amount that the Participant withdrew his or her actual contributions, if any, and earnings thereon, shall be included in the calculations of the "Company-provided pension," if such former employer, or substantially all of such former employer's assets, have been acquired by the Company and the Participant's service with such former employer are included in the calculation of "Years of Service"; provided, however, that amounts payable under the Landis Tool Savings Plan shall not be included in the calculation of 8 "Company-provided pension"; and provided further, however, that amounts payable under the Intermec Canada Savings Plan, to the extent attributable to Company contributions or Company matching amounts, shall be included in the calculation of "Company-provided pensions." The amount of the "Company-provided pension" shall be deemed to be the amount which would have been payable if the Participant joined each such plan at the earliest date on which the Participant was eligible to join such plan and participated in the plan to the fullest extent possible and withdrew his or her actual and presumed contributions, plus income thereon. The amount of the "Company-provided pension" shall be calculated under the terms that were in effect during the Participant's actual, if any, and presumed participation, except that a subsequent, retroactive amendment to any of such plans shall be taken into account only to the extent that it actually would have increased the Participant's benefit under that plan. The "Company-provided pension" shall be computed as if the Participant actually received the plan benefits under such "Company-provided pension" as a single life annuity beginning on the date that Retirement Benefits commence under this Supplemental Plan. SECTION 2.28 "OUTSTANDING COMPANY COMMON STOCK" and "OUTSTANDING COMPANY VOTING SECURITIES" shall have the meanings specified for those items in Section 2.9(a). SECTION 2.29 "PARTICIPANT" shall mean a person who has been designated as a Participant in the Supplemental Plan pursuant to Article III and who is either an Active Participant, a Disabled Participant, a Retired Participant, a former Active Participant who has satisfied the condition of Section 4.1(a)(3), or a Participant who died while an Active Participant. SECTION 2.30 "PERSON" shall have the meaning specified in Section 2.9(a). SECTION 2.31 "QUALIFIED PLAN" shall have the meaning specified in Section 2.2. SECTION 2.32 "RETIRED PARTICIPANT" shall mean a Participant who has terminated from employment with the Company, and who has satisfied the conditions of Section 4.1. SECTION 2.33 "RETIREMENT BENEFIT" shall mean the benefits payable to a Retired Participant and, if applicable, the Beneficiary of a Retired Participant, as provided in Article IV. SECTION 2.34 "SPECIAL ADMINISTRATORS" shall have the meaning specified in Section 2.13(b). SECTION 2.35 "SUCCESSOR" or "SUCCESSORS" shall have the meaning specified in Section 2.6. 9 SECTION 2.36 "SUPPLEMENTAL PLAN" shall mean the UNOVA,Inc. Supplemental Executive Retirement Plan that is described in this document, as amended from time to time, and including any rules and regulations promulgated by the Committee for purposes of administering the Supplemental Plan. SECTION 2.37 "TRUST" shall mean a grantor trust under Section 671 through 679 of the Code, if and when established. The decision to establish a Trust shall be in the sole and absolute discretion of the Company. SECTION 2.38 "TRUSTEE" shall mean the trustee of the Trust. SECTION 2.39 "TRUST AGREEMENT" shall mean the terms of the agreement, entered into between UNOVA,Inc. or its Successor and the Trustee, that establishes the Trust. SECTION 2.40 "WESTERN ATLAS" shall mean Western Atlas Inc. and its subsidiaries and affiliates. SECTION 2.41 "WESTERN ATLAS PLAN" shall mean the Western Atlas Inc. Supplemental Executive Retirement Plan, as in effect immediately prior to the Distribution Date. SECTION 2.42 "YEARS OF SERVICE" shall mean the number resulting from: (a). The division of twelve into the number of consecutive and continuous calendar months of employment with the Company (and with an employer, all or substantially all of the assets of which were acquired by the Company only to the extent the Participant was employed by the employer at the date of the acquisition of the employer) that elapse from and including the month that an Active Participant commenced the period of employment with the Company (or such employer) and which ends: (1) upon the Active Participant's death; or (2) upon termination of an Active Participant's employment with the Company other than by death, until and including the earlier of the month of such death or termination; provided, however, the calculation of Years of Service shall not include any calendar months of employment preceding the calendar month in which the Active Participant attained age 40, nor shall such calculation include any calendar months of employment with the Company in any separate period of employment with the Company preceding the most recent and continuous period of employment with the Company; and provided, further, that an Active Participant who dies or becomes Disabled shall continue to accrue Years of Service from the date of such death or Disability until the earlier of the calendar month (x) in which such person attains or, if deceased, would have attained age 65, or (y) in which such Participant is no longer Disabled. (b). For purposes of determining a Participant's Years of Service under the terms of Section 2.42(a), service with Litton and Western Atlas immediately preceding the period of service with the Company referred to in Section 2.42(a) which ends upon the Active Participant's death, or which ends upon an Active Participant's termination of employment with the Company other 10 than by death, and after the Participant attains age 40, shall be taken into account, provided that the Participant's benefits under the Western Atlas retirement plans were transferred to UNOVA,Inc. pursuant to the Employee Benefits Agreement. In addition, service with Litton immediately preceding the period of service with the Western Atlas which ends upon the Active Participant's death, or which ends upon an Active Participant's termination of employment with the Company other than by death, and after the Participant attains age 40, shall be taken into account, provided that the Participant's benefits under the Litton retirement plans were transferred to Western Atlas Inc. (c). In its discretion, the Committee may: (1) compute a Participant's Years of Service by treating separate but not continuous periods of employment with Litton, Western Atlas or the Company as continuous periods of employment; (2) credit a Participant with Years of Service in addition to the Years of Service accrued while actually employed with Litton, Western Atlas or the Company; and (3) credit a Participant for Years of Service solely for purposes of satisfying the vesting requirements of Sections 4.3. (d). For purposes of calculating a lump sum payment pursuant to Section 4.1(d) in the event of a Change of Control, with respect to a person (other than a Disabled or deceased Participant) who is an Active Participant, Years of Service shall be determined as if the person's employment with the Company ended on such date or such later date on which a Participant's employment could be terminated by the Company without cause under a Change of Control Agreement. ARTICLE III--PARTICIPATION SECTION 3.1 GENERAL. Participation in the Supplemental Plan is limited solely to key employees of the Company who are designated by the Committee or the Board, after nomination by the Chief Executive Officer. A key employee shall not be designated as an Active Participant prior to attaining age 40. A key employee shall not be disqualified from becoming an Active Participant solely because the key employee is also a Director. SECTION 3.2 ENTRY AND CONTINUING PARTICIPATION. A key employee shall become an Active Participant as of the date specified by the Committee. A key employee who is designated as an Active Participant shall continue to be an Active Participant until termination of employment with the Company, except as provided in Section 2.1 with respect to Disabled or deceased Participants. ARTICLE IV--RETIREMENT BENEFITS SECTION 4.1 ELIGIBILITY FOR RETIREMENT BENEFIT. (a). GENERAL. A Participant shall be eligible to begin receiving a Retirement Benefit if the Participant has (1) either attained age 65 or satisfied the conditions in Section 4.1(b) or (c) below; (2) filed an election to receive payments under Article VII; (3) satisfied the vesting requirement of Section 4.3; (4) 11 terminated employment with the Company; and, (5) except for a Participant whose employment with the Company is terminated in connection with a Change of Control, the Participant agrees that for a period of five years after commencement of receipt of Retirement Benefits under this Supplemental Plan, not to engage in any activity which interferes with the economic or business interests, or contractual relationships of UNOVA,Inc. or its Successors or of any of its subsidiaries or affiliates with third parties in connection with which the Participant worked for UNOVA,or its subsidiaries or affiliates or to perform services for any entity in competition with a business of UNOVA,Inc. or of its subsidiaries or affiliates for which the Participant worked and with respect to which the Participant possesses trade secrets or business confidential information of UNOVA,or of its subsidiaries or affiliates. In the event that any provision of the covenant provided for in (5) immediately above shall be held invalid or unenforceable by a Court of competent jurisdiction by reason of the geographic or business matter scope, or the duration thereof, such invalidity or unenforceability shall attach only to such provisions and shall not affect or render invalid or unenforceable any other provision of the Supplemental Plan, and this Supplemental Plan shall be construed as if the geographic or subject matter scope, or the duration thereof, had been more narrowly drafted so as not to be invalid or unenforceable. (b). RETIREMENT BENEFITS AT AGE 62. A Participant who has attained age 62, but not yet attained age 65, and who has satisfied the conditions of Section 4.1(a)(2), (3) and (4), and agrees to the covenant provided for in Section 4.1(a)(5), shall be eligible to begin receiving the Actuarial Equivalent, based upon the Participant's age (below 65) and the age of Participant's spouse, if applicable, at which the Participant commences receiving the Retirement Benefit, of the Retirement Benefit payable at age 65. (c). RETIREMENT BENEFITS PRIOR TO AGE 62. A Participant shall not be entitled to begin receiving a Retirement Benefit prior to attainment of age 62, except in the sole and absolute discretion of the Committee, and subject to such terms and conditions, including the imposition of Retirement Benefit reductions, that the Committee may specify. (d). CHANGE OF CONTROL. Except as otherwise provided in any Change of Control Agreement between the Company and a Participant, an Active Participant and a Participant who has satisfied the conditions of Section 4.1(a)(3) and (4) shall be entitled to a lump sum payment equal to the Actuarial Equivalent, at the age of such Participant at the date of the Change of Control, of the Retirement Benefit which would be payable to such Participant at the later of age 65 or, if the Active Participant continued in employment with the Company after attaining age 65 (or would have been entitled to continue employment under a change of Control Agreement), at the earlier of the age at which such employment ended (or could have been terminated by the Company without cause under the terms of a Change of Control Agreement) or at the age of such Participant at the date of such Change of Control, which has been earned by the Participant to the date of Change of Control assuming, for such purposes, that the Retirement Benefit is payable in the form of a single life annuity. In addition, there shall be waived any condition concerning eligibility for payment of a Retirement Benefit that requires: (1) the filing of any election; (2) the attainment of a specified age; (3) an agreement not to engage in competitive activities with the Company; (4) 12 satisfaction, as to such Active Participant, of the conditions of Section 4.1(a)(3) or of any other terms or conditions or the application of any benefit reductions described in Section 4.1(b) or (c); and (5) as to such Active Participant, termination of employment with the Company, in order to begin receiving Retirement Benefits. "Change of Control Agreement" means any agreement between the Company and the Participant which provides for the employment of the Participant and/or payment to the Participant upon or following a Change of Control. SECTION 4.2 RETIREMENT BENEFIT FORMULA. A Participant's annual Retirement Benefit shall be the Actuarial Equivalent of the amount calculated under the formula: [(A + B) x C] - D = Retirement Benefit, where: (a). "A" is Average Earnings up to the Base Compensation Amount multiplied by 1.6 percent; (b). "B" is Average Earnings in excess of the Base Compensation Amount multiplied by 2.2 percent; (c). "C" is Years of Service not in excess of 25; and (d). "D" is the Offset Amount. SECTION 4.3 VESTING IN RETIREMENT BENEFIT. A Participant shall have no vested right to a Retirement Benefit prior to the later of attaining: (1) age 60 while an Active Participant; or (2) 15 Years of Service after attainment of age 40. Upon a Change of Control and thereafter, an Active Participant shall be vested in his or her Retirement Benefit regardless of Years of Service or age. SECTION 4.4 RETIREMENT BENEFIT FORMS. (a). GENERAL RULE. Unless a Participant had made an election to receive payment of Retirement Benefits in an available alternative form, a Participant shall be deemed to have elected the Normal Form. (b). ACTUARIAL EQUIVALENT. All forms of payment of Retirement Benefits shall be the Actuarial Equivalent of a single life annuity payable at age 65, except that, in the case of an Active Participant who remains in continuous employment with the Company after attaining age 65, the amount of the benefit shall be actuarially increased to reflect the commencement of the benefit after age 65. SECTION 4.5 NORMAL FORM OF RETIREMENT BENEFIT. (a). SINGLE LIFE ANNUITY. The Normal Form of payment of a Retirement Benefit for a Participant who is living at the time payment commences shall be a single life annuity for a Participant who is unmarried at the time that payment of the annual Retirement Benefit commences. Under a single life annuity, a Retired Participant shall receive a monthly benefit for life equal to the Actuarial Equivalent of 1/12 of his or her Retirement Benefit and all payments shall cease upon the Retired Participant's death. 13 (b). JOINT AND SURVIVOR ANNUITY. If a Participant is married at the time that payment of the Retirement Benefit commences, the Normal Form of Retirement Benefit shall be a joint and survivor annuity (which shall be the Actuarial Equivalent of a single life annuity) for the benefit of the Participant's spouse as of the date that payment of the Retirement Benefit commences. Under the Normal Form of a joint and survivor annuity, a Participant shall receive a monthly benefit for life and, upon the Participant's death, the spouse, if living, shall receive a monthly benefit for life equal to 100% of the monthly benefit that was payable to the Participant. If a Participant, who has satisfied the conditions of Section 4.1(a)(3) (including consideration of Years of Service accrued for Disabled or deceased Participants pursuant to Section 2.1), dies prior to the commencement of the payment of Retirement Benefits, and was married at the date of death, the spouse Beneficiary of such Participant shall have the right to a survivor Retirement Benefit, commencing at the date such Participant would have attained age 65, if the Participant died prior to attaining age 65, or commencing on the first day of the month following the month in which the Participant died if the Participant continued in continuous employment with the Company after attaining age 65 and until the date of Participant's death, calculated under Section 4.2 as if the Participant had survived to such entitlement date and begun receiving payment of the Retirement Benefit at such entitlement date as a joint and 100% survivor annuity and then died on the following date. SECTION 4.6 ALTERNATIVE FORMS OF BENEFIT. (a). ELECTION OF FORMS OF BENEFIT. Prior to the commencement of payment of a Retirement Benefit, a Participant may file an election designating a payment form other than the Normal Form of Retirement Benefit; provided, however, that any such alternate payment form is a payment form available under the Qualified Plan and, if such Participant is entitled to a benefit under such Qualified Plan, is the same as the payment form elected under such Qualified Plan. If a Participant is married, an election to receive a Retirement Benefit in a form other than the Normal Form shall be valid only if such election includes the written consent of the Participant's spouse in the form and manner specified by the Committee. However, a joint and survivor annuity shall not be available under this Supplemental Plan with respect to any Beneficiary other than the spouse of the Participant as of the date that the Retirement Benefit commences. (b). ADDITIONAL FORMS OF BENEFIT. From time to time, the Committee may, in its sole discretion, make other forms of payment of Retirement Benefits available; provided, however, that once a Participant or the Participant's Beneficiary begins receiving Retirement Benefit payments, no change may be made in the form of payment except as provided for in Section 4.6(c) below. (c). FORM OF BENEFIT ON CHANGE OF CONTROL. Notwithstanding the other provisions of this Section, upon a Change of Control, all Retirement Benefits including, without limitation, benefits payable to Active Participants who remain employed by the Company, shall be paid in the manner set forth in Section 4.1(d). 14 ARTICLE V--BENEFITS UPON PARTICIPANT'S DEATH SECTION 5. 1 ELIGIBILITY FOR DEATH BENEFIT. The Beneficiary or Beneficiaries of an Active or Disabled Participant who dies prior to attaining age 65 and prior to the time Retirement Benefits to such Participant commence, shall be eligible to begin receiving a Death Benefit if the Beneficiary or Beneficiaries have filed a claim under Article VII. The Beneficiary or Beneficiaries of a Participant who is not a Disabled Participant and whose employment with the Company terminated prior to that Participant's death shall not be eligible for a Death Benefit. If there are no Beneficiaries at the date of the Participant's death, no Death Benefit shall be payable. The class of individuals who are eligible to be Beneficiaries of the Death Benefit is limited to the Participant's spouse, as of the date of the Participant's death, and the Participant's Dependent Children as of the date of Participant's death; provided, however, that such term also shall include any natural children of Participant born after Participant's death and any child who is in the process of being adopted by the Participant at the date of Participant's death and the adoption of whom is completed by the spouse of Participant after the date of Participant's death. If there is both a living spouse and Dependent Children as of the date of Participant's death, the Beneficiary shall be the spouse. The Dependent Children shall become the Beneficiaries of the Death Benefit, but only upon the death of Participant's spouse prior to the earlier of the date the Participant would have attained age 65, or the date the Participant's spouse commences to receive a Retirement Benefit. SECTION 5.2 DEATH BENEFIT. (a). SPOUSAL BENEFIT. The Death Benefit for the surviving spouse of an Active or Disabled Participant shall be an annual amount equal to 40% of the Participant's Average Earnings. The spouse Beneficiary shall receive the Death Benefit as a monthly benefit equal to 1/12 of the Death Benefit. The Death Benefit for the spouse Beneficiary shall cease on the earlier of: (1) the death of the spouse Beneficiary; or (2) the date at which the Participant would have attained age 65. (b). DEPENDENT CHILDREN BENEFIT. If a spouse Beneficiary of a deceased Participant dies prior to the date at which the Participant would have attained age 65, then a Death Benefit shall be paid to any then Dependent Children for so long as any such remain Dependent Children. The aggregate amount of any Death Benefit payable to Dependent Children after the death of the spouse for each month is the amount equal to the monthly Death Benefit that would be payable to a spouse Beneficiary multiplied by a fraction (not greater than one), the numerator of which is the number of Dependent Children at the time of each monthly payment and the denominator of which is three. If there are no remaining living Dependent Children Beneficiaries, no further Death Benefit shall be paid. (c). VESTING IN DEATH BENEFIT. An Active or Disabled Participant shall at all times be vested in his or her right to a Death Benefit. 15 SECTION 5.3 SPOUSE RETIREMENT BENEFIT. To the extent that a spouse Beneficiary is receiving a Death Benefit on the date the Participant would have attained age 65, the spouse Beneficiary thereafter shall receive a Retirement Benefit pursuant to Article IV, if eligible, in the amount calculated pursuant to Article IV, and no further Death Benefit payments shall be payable to the spouse Beneficiary or to any Dependent Children Beneficiaries or otherwise. SECTION 5.4 CHANGE OF CONTROL. Upon a Change of Control, after the Participant's death but prior to the date the Participant would have attained age 65, the Participant's spouse, if then living and if otherwise eligible, shall receive a single sum payment that is the Actuarial Equivalent, at the date of such lump sum payment, of the Death Benefit, calculated through the date that Participant would have attained age 65. The spouse Beneficiary, if then living, shall also be entitled to the lump sum payment of the Retirement Benefit, if any, pursuant to Section 4.1(d). Upon a Change of Control occurring after commencement of the payment of Death Benefits to the Dependent Children Beneficiaries pursuant to Section 5.2(b), the Dependent Children shall receive a single sum payment that is the Actuarial Equivalent, based upon the ages of the Dependent Children, of the Death Benefit calculated without regard to the date the Participant would have attained age 65. ARTICLE VI--BENEFITS OF DISABLED PARTICIPANTS SECTION 6.1 ELIGIBILITY FOR DISABILITY BENEFIT. An Active Participant who becomes Disabled prior to attaining age 65 shall be eligible to begin receiving a Disability Benefit if the Disabled Participant has filed a claim under Article VII. The Disability Benefit shall cease on the earlier of: (1) the first day of the calendar month following the Disabled Participant's attainment of age 65; (2) the date on which the Committee determines that the Participant is no longer Disabled; or (3) the date of the Disabled Participant's death (in which case a Death Benefit may be payable under Article V). SECTION 6.2 DISABILITY FORMULA. A Disability Benefit shall be a monthly amount equal to 1/12 of 40% of the Participant's Average Earnings, offset by the sum of: (a) any other payment to the Disabled Participant that would be made by or on behalf of the Company on account of the Disability (including, without limitation, a Company-sponsored disability insurance plan or any other benefit plan of the Company, any amounts payable as sick pay, and any amounts payable under so-called Workers Compensation Acts or similar laws of foreign governments other than lump sum amounts for the loss of an organ or other body member and other than amounts paid for medical expenses), calculated as if the Participant participated to the fullest extent possible in such disability programs; and (b) the Social Security (or comparable foreign government) disability benefits received by the Disabled Participant. For purposes of determining any offset under the preceding sentence, any payments that are not made on a monthly basis shall be converted to monthly payments under a methodology approved by the Committee. 16 SECTION 6.3 VESTING DISABILITY BENEFIT. An Active Participant shall at all times be vested in his or her right to a Disability Benefit. SECTION 6.4 DISABLED PARTICIPANT'S RETIREMENT BENEFIT. If a Disabled Participant attains age 65, then he or she may be eligible to receive a Retirement Benefit subject to the rules of Article IV, as if such Disabled Participant continued his or her employment until age 65 with Average Earnings calculated as provided for in Section 2.3(a). ARTICLE VII--ELECTIONS, CLAIMS, COMMENCEMENT OF PAYMENTS AND BENEFICIARY DESIGNATIONS SECTION 7.1 GENERAL. All elections to receive benefits under this Supplemental Plan must be made in writing to the Committee in the form specified by the Committee and include the information or documentation that the Committee deems necessary. The Committee, in its discretion, may request additional information or reasonable documentation from time to time in order to determine whether a Participant receiving a Disability Benefit continues to be Disabled, and in order to determine whether any Beneficiary who is receiving a Death Benefit is entitled hereunder to continue receiving a Death Benefit or the amount thereof. SECTION 7.2 COMMENCEMENT OF PAYMENTS. Payment of benefits under this Supplemental Plan shall begin as soon as administratively feasible after the Participant (or Beneficiary, if applicable) has provided a claim for benefits in writing to the Committee, including any supporting documentation required by the Committee, and the Committee has determined that the Participant (or Beneficiary, if applicable) satisfies the requirements for payment. Retirement Benefits shall be payable on the later of: (a) the first day of the month following the month in which the Participant satisfies all of the conditions set forth in Section 4.1(a), or (b) if later, the first day of the month following the month in which the Participant attains the earlier of age 65, or the age, below 65, elected by the Participant pursuant to and in accordance with the conditions of Section 4.1(b) or (c); provided, however, that in the event a Participant has satisfied the conditions of Section 4.1(a)(1), (3) and (4) in or as of a particular month (the "Termination Month") and satisfies the conditions of Section 4.1(a)(2) and (5) (effective as of the date of termination of employment) either subsequently or contemporaneously with the Termination Month, and provided that the Participant has attained during the Termination Month age 65 or an age less than 65 but 62 or older, or an age less than 62 with respect to which the Committee has approved retirement pursuant to Section 4.1(c), Retirement Benefits shall be payable to the Participant as of the first day of the month following the Termination Month and, in the case of retirement pursuant to Section 4.1(c), on such terms and conditions as specified by 17 the Committee. Disability and Death Benefits shall be payable from the first day of the month following the month in which the Participant becomes disabled or dies, as the case may be. In the event of any administrative delay in actual payments, payments shall be made retroactively to the first day of the month following the month in which the event which is the basis for the payment occurs but without any payment of interest or other compensation for such delay in payment. Notwithstanding any provision of the Supplemental Plan, upon a Change of Control the Committee may, in its sole discretion, determine to postpone the lump sum payment of Retirement, Death and Disability Benefits payable upon a Change of Control, in which case such Benefit payments shall be made as otherwise provided in the Supplemental Plan, without regard to the Change of Control. In the event the Committee later determines, in its sole discretion, to effect such a lump sum payment of the remainder of such Benefits, it shall have the power and authority to do so. SECTION 7.3 FORM OF BENEFIT ELECTIONS. An election to receive payment of Retirement Benefits in a form other than the Normal Form must be submitted to the Committee in writing at any time prior to the commencement of payments. An election must be made in the form specified by the Committee and include the information or documentation that the Committee deems necessary, including written consent of the spouse in the case of a married Participant who elects a Retirement Benefit in a form other than the Normal Form. The filing of an election as to the form of Retirement Benefits shall revoke any pre-existing election, except that a revocation of an election for a married Participant shall be valid only if accompanied by the spouse's written consent to the subsequent election (other than a subsequent election to receive payments in the Normal Form), and except that once Retirement Benefits have commenced under this Supplemental Plan, the form of the Retirement Benefit payable is irrevocable. SECTION 7.4 BENEFICIARIES. If the Committee makes available alternative benefit forms that provide for payments after a Participant's death, the Participant shall designate the Beneficiary under such payment form in accordance with the procedures set forth by the Committee. SECTION 7.5 FAILURE TO CLAIM. If a Participant whose employment with the Company terminated on or before attaining age 65 fails to claim payment of Retirement Benefits until after such Participant attains age 65, the Retirement Benefits payable to or with respect to such Participant shall be the monthly amount which would have been payable to such Participant at age 65, and such Participant shall be entitled to receive Retirement Benefit payments retroactive to the month such payments would have first accrued following attainment of age 65, but without interest or other payment on account of such deferred receipt. Similarly, if a Participant remains employed by the Company after attaining age 65 but, upon termination of employment by the Company after attaining age 65, fails to claim payment of Retirement Benefits until a date after such termination of employment, the Retirement Benefits payable to or with respect to such person shall, nevertheless, be the monthly amount which would have been payable to such person upon termination of employment with the Company, and such Participant shall be entitled to receive Retirement Benefit payments retroactive to the month 18 such payments would have first accrued following termination of employment, but without interest or other payment on account of such deferred payment. Participants do not have the right to defer payment of Retirement Benefits beyond the date Participants are otherwise eligible to begin receiving Retirement Benefits. ARTICLE VIII--ADMINISTRATION The Committee shall administer the Supplemental Plan in accordance with its terms and purposes. The Committee shall have full authority and discretion to interpret the Supplemental Plan, to determine benefits pursuant to the terms of the Supplemental Plan, to establish rules and procedures necessary to carry out the terms of the Supplemental Plan, and to waive or modify any requirements or conditions on the receipt or calculation of benefits under the Supplemental Plan where the Committee determines that such a waiver or modification is appropriate. In the event a Participant is or was also a participant in a similar supplemental retirement plan for highly-compensated employees within the meaning of Sections 201(2), 301(a), and 401(a)(1) of Title I of ERISA and maintained by UNOVA,Inc. or one of its subsidiaries or affiliates or Western (a "Subsidiary Plan"), the Committee shall have the power and authority to modify and integrate the benefits payable under this Supplemental Plan with the benefits payable under the Subsidiary Plan. All decisions by the Committee shall be final and binding on all parties. The Committee may appoint one or more officers or employees of the Company to act on the Committee's behalf with respect to administrative matters related to the Supplemental Plan. ARTICLE IX--SOURCE OF PAYMENTS SECTION 9.1 GENERAL ASSETS OF COMPANY. Benefits payable under this Supplemental Plan shall be paid directly to the Participant, or to the Participant's Beneficiary, as applicable, from the general assets of the Company, including the assets of the grantor Trust to the extent that such a trust is created and so provides. If any person acquires a right to receive payments from the Company under this Supplemental Plan, such right shall be no greater than the right of any unsecured general creditor of the Company notwithstanding the fact that the Company may establish an advance accrual reserve on its books against its future liability under the Supplemental Plan. 19 ARTICLE X--CLAIMS AND ENFORCEMENT SECTION 10.1 ADMINISTRATIVE PROCEDURES. (a). NOTICE OF DENIAL. If the Committee determines that any person who has submitted a claim for payment of benefits under this Supplemental Plan is not eligible for payment of benefits or, if applicable, is not eligible for payment of benefits in the form or amount requested, then the Committee shall, within a reasonable period of time, but no later than 90 days after receipt of the written claim, notify the claimant of the denial of the claim. Such notice of denial: (1) shall be in writing; (2) shall be written in a manner calculated to be understood by the claimant; and (3) shall contain: (A) the specific reason or reasons for denial of the claim; (B) a specific reference to the pertinent Supplemental Plan provisions or administrative rules and regulations upon which the denial is based; (C) a description of any additional material or information necessary for the claimant to perfect the claim; and (D) an explanation of the Supplemental Plan's appeal procedures. (b). RECONSIDERATION PROCEDURES. Within 90 days of the receipt by the claimant of the written notice of denial of the claim, the claimant may file a written request with the Committee that it conduct a full and fair review of the denial of the claimant's claim for benefits. The claimant's written request must include a statement of the grounds on which the claimant appeals the original claim denial. The Committee shall deliver to the claimant a written decision on the claim promptly, but not later than 60 days after the receipt of the claimant's request for review, except that if there are special circumstances that require an extension of time for processing, the 60-day period shall be extended to 120 days, in which case written notice of the extension shall be furnished to the claimant prior to the end of the 60-day period. SECTION 10.2 ENFORCEMENT. (a). RIGHT TO ENFORCE. Within 90 days after exhaustion of the review and appeal procedures provided for in Section 10.1 or, if the Committee fails to grant or deny the claim within 120 days after the claimant's original claim or fails to provide the written decision of the Committee on any written request for reconsideration within the time period in Section 10.1(b), within 90 days after such failure, the Company's obligations under the Supplemental Plan may be enforced only through binding arbitration as provided for hereinafter, initiated by any Participant or, upon the death of a Participant, by any Participant's surviving spouse, Dependent Child, or personal representative (as the case may be, the "Claimant"). (b). ATTORNEYS' FEES AND COSTS. If, prior to a Change of Control, any Claimant is denied a claim, in whole or in part, for benefits under the Supplemental Plan and the Claimant requests reconsideration under the procedures described in Section 10.1(b), or initiates any other legal proceeding (other than binding arbitration pursuant to the following provisions of this Article X) with respect to such alleged claim, the Company shall have no obligation to pay or 20 reimburse the Claimant for attorneys' fees and costs. If, on or after a Change of Control, any Claimant is denied a claim for benefits under the Supplemental Plan and the Claimant has requested reconsideration under the procedures described in Section 10.1(b), or initiates binding arbitration or both reconsideration and binding arbitration, to enforce any obligation of the Company under the Supplemental Plan the basis of which is alleged failure of the Committee to administer the Supplemental Plan in accordance with its terms or, if following a Change of Control, the Company fails to make payment of Benefits as determined by the Committee, the Company shall pay such Claimant's attorneys' fees and costs incurred in connection with the review and binding arbitration proceedings, provided that the arbitrator determines that the claim is not frivolous; provided, however, that in no case shall the Company be liable for attorneys' fees and costs to the extent incurred relative to any dispute regarding any determination by the Committee made based upon the terms of the Supplemental Plan. All attorneys' fees and costs payable under this Section 10.2(b) shall be paid by the Company as they are incurred by the Claimant, but no later than 30 days from the date that the Claimant submits a bill or other statement to the Company. (c). INTEREST. If any Claimant prevails in a reconsideration procedure described in Section 10.1(b), or if a Claimant prevails in the binding arbitration proceeding pursuant to Section 10.3 to enforce the payment of benefits under the Supplemental Plan, the Company shall pay interest to the Claimant on any unpaid benefits accruing from the date that benefit payments should have commenced and continuing until the date that such owed and unpaid benefits are paid to the Claimant in full. For purposes of the preceding sentence, interest shall accrue at an annual rate equal to one percent, plus the prime rate reported by THE WALL STREET JOURNAL as in effect from time to time, each change in the prime rate to be effective for purposes of any interest computation on the date of publication of such changed prime rate in THE WALL STREET JOURNAL. SECTION 10.3 ARBITRATION. The rights resulting from the designation of a Participant pursuant to Article III are conditional upon the acceptance by the Participant, on the Participant's behalf and on behalf of the Claimants, of all of the terms and conditions of this Supplemental Plan including specifically and without limitation this Article X. Any controversy or claim arising out of or under the Supplemental Plan which is not resolved by the reconsideration referred to in Section 10.1(b) shall be settled by arbitration in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association ("AAA") or the Employment Arbitration Rules of the Judicial Arbitration and Mediation Services/Endispute ("JAMS"), subject to the further provisions of this Section 10.3. Hereinafter the term "Rules" means and refers to the aforesaid AAA Rules or the JAMS Rules, as the case may be. Judgment upon the award rendered by the arbitrator may be rendered in any court having jurisdiction. The Rules are modified or supplemented as follows: (a). There shall be one arbitrator, unless the parties agree to more than one arbitrator; 21 (b). The arbitrator shall be a retired judge or attorney with professional experience and expertise in designing or administering corporate retirement benefits and plans, and resident in the Southern California area, unless the parties agree otherwise; (c). The arbitration shall be conducted within Los Angeles County, California, unless the parties agree otherwise; (d). The party desiring to initiate the arbitration shall advise the other party in writing of such desire; (e) Within 10 days of receipt of a notice pursuant to subparagraph (d) above the party receiving the notice shall designate either the AAA or JAMS as the arbitration agency, but in the event such party fails to designate within such period the initiating party shall have the right to designate the AAA or JAMS; (f). All claims arising under the Supplemental Plan known or which should be known to the party initiating the arbitration shall be included in the issues presented to the AAA or JAMS, as the case may be, for arbitration and any which are not included shall be effectively waived; (g). The expedited procedures of the AAA or JAMS, as the case may be, shall be applied in any case where no disclosed claim or counterclaim exceeds the amount then established by the AAA or JAMS for use of expedited procedures, exclusive of interest and arbitration costs; (h). The decision of the arbitrator shall be rendered within 60 days after the close of hearings; (i). The Company and the Claimant shall furnish to the other, 30 days prior to the first hearing, a list and identification of all witnesses, and copies of all exhibits intended to be submitted by that party. Ten days prior to the first hearing, each party shall have the right to supplement their intended list of witnesses and provide additional exhibits. Only such witnesses and such exhibits identified by one party or the other may be offered in the arbitration hearings; and (j). Any documents, affidavits or other evidence requested by the arbitrator must be submitted within ten days after conclusion of the arbitration hearings, unless the arbitrator grants additional time. ARTICLE XI--AMENDMENT AND TERMINATION SECTION 11.1 AMENDMENT AND TERMINATION OF THE PLAN. (a). GENERAL. Although the Company intends to maintain the Supplemental Plan, the Company reserves the right to amend or terminate the Supplemental Plan at any time for whatever purposes it may deem appropriate, 22 except as specifically limited by this Article XI. The Company shall amend, terminate, or suspend the Supplemental Plan only by the action of the Board, except that the Committee shall have the authority to make any amendments that do not decrease the level of benefits payable and that it deems necessary for the proper administration of the Supplemental Plan. (b). AUTOMATIC TERMINATION. The Supplemental Plan may be terminated or suspended only by authorization of the Board, except that the Supplemental Plan shall terminate automatically if there are no Active Participants remaining and all Retirement Benefits, Death Benefits, and Disability Benefits have been paid. (c). PROTECTION OF BENEFITS. No amendment, termination, or suspension of the Supplemental Plan shall be effective to the extent that it reduces: (1) the Retirement Benefit payable to any Participant who has satisfied the conditions of Section 4.1(a)(3) and (4) immediately prior to such amendment, termination or suspension; or (2) Retirement Benefits, Death Benefits or Disability Benefits, which are being paid immediately prior to such amendment, termination or suspension. (d). PROTECTION OF ACTIVE PARTICIPANTS. No amendment, termination, or suspension of the Supplemental Plan shall be effective to the extent that it reduces the Retirement Benefits that an Active Participant may accrue unless the amendment, termination, or suspension also provides that the Active Participant is immediately vested in a Retirement Benefit calculated as if the Active Participant terminated employment immediately prior to the later of the date that the amendment, termination, or suspension is enacted or is effective. (e). CHANGE OF CONTROL. On or after a Change of Control, any amendment, termination, or suspension of the Supplemental Plan shall be effective only upon the written consent of at least eighty-five percent (85 %) of all Participants. The preceding sentence shall not apply to: (1) a termination that occurs under Section 11.1(b); (2) any amendment, termination, or suspension that affects the accrual of Retirement Benefits and that complies with the terms of Section 11.1(c) and (d); or (3) any amendment, termination, or suspension of the Supplemental Plan that reduces Death or Disability Benefits but that: (i) does not reduce Death or Disability Benefit payments that have commenced; and (ii) does not reduce the Death or Disability Benefit that an Active Participant is eligible to receive, calculated as if he or she died or became Disabled as of the later of the effective date or enactment of the amendment, termination, or suspension. SECTION 11.2 CONTRACTUAL OBLIGATION. The Company makes a contractual obligation that any amendment, suspension, or termination of the Supplemental Plan shall comply with the terms of Section 11.1. 23 ARTICLE XII--MISCELLANEOUS SECTION 12.1 EMPLOYMENT RIGHTS. Nothing contained in the Supplemental Plan shall be construed as a contract of employment between the Company and the Participant, or as a right of any employee to be continued in the employment of the Company, or as a limitation of the right of the Company to discharge any of its employees, with or without cause. SECTION 12.2 RIGHTS OF THE COMMITTEE. To the extent permitted by law, the Company shall indemnify the Committee (including any officers and employees of the Company appointed to act on behalf of the Committee) and hold such individuals harmless from and against any damages, losses, costs, and expenses incurred (including, without limitation, expenses of investigation and the fees and expenses of counsel) in the course of administering the Supplemental Plan. The Company shall bear all expenses of the Committee incurred in the course of administering the Supplemental Plan. SECTION 12.3 BENEFIT STATEMENTS. At least annually, the Company shall provide a statement of benefits under the Supplemental Plan to all Participants (or Beneficiaries) that includes the information necessary to calculate the possible prospective Retirement Benefit, Disability Benefit, and Death Benefit with respect to the Participant, based upon Participant's compensation through such year. SECTION 12.4 ASSIGNMENT. The benefits payable under the Supplemental Plan may not be assigned or alienated. SECTION 12.5 APPLICABLE LAW. The Supplemental Plan shall be governed by the laws of Delaware except to the extent preempted by ERISA. SECTION 12.6 EFFECTIVE DATE. The Supplemental Plan shall take effect as of the Distribution Date. SECTION 12.7 ENTIRE PLAN. This writing is the final expression of the Supplemental Plan and a complete and exclusive statement of its terms, except that to the extent that this Supplemental Plan refers to the Trust, the terms of the Trust Agreement, as of the date immediately preceding a Change of Control, shall be deemed to be incorporated herein. SECTION 12.8 TERMS. Except as required otherwise by the context, capitalized terms that are used in this Supplemental Plan shall have the meaning assigned to them in Article II or elsewhere in this Supplemental Plan. Feminine or neuter pronouns shall be substituted for those of the masculine form and the plural shall be substituted for the singular, in any place or places herein where the context may require such substitution or substitutions. The title and headings of the Sections of this Supplemental Plan are for convenience only, and are not intended to be a part of or to affect the meaning or interpretation of this Supplemental Plan. 24 SECTION 12.9 WAIVER. Any waiver of or failure to enforce any provision of this Supplemental Plan in any instance shall not be deemed a waiver of such provision as to any other or subsequent instance. ARTICLE XIII--BENEFITS FOR RETIRED WESTERN ATLAS EMPLOYEES SECTION 13.1 BENEFIT PAYMENTS. If, as a result of the spin-off of UNOVA, Inc. from Western Atlas, the parties agree that the Company will assume the benefit obligations under the Western Atlas Plan with respect to certain individuals who are in pay status under the Western Atlas Plan, such benefit obligations shall be provided hereunder as if such benefits accrued under this Supplemental Plan, as it may be amended from time to time. IN WITNESS WHEREOF, the Company has caused this Supplemental Plan to be executed by its duly authorized officers as of the ____ day of ___________________, 1997. UNOVA, INC. By: ________________________ Michael E. Keane WITNESS: _________________ By: ________________________ Charles A. Cusumano WITNESS: _________________ 25 EX-10.K 7 EMPLOYMENT AGREEMENT (UNOVA/C.A. WILLIAMS) Exhibit 10.K EMPLOYMENT AGREEMENT -------------------- Agreement made as of August, 1997 by and between UNOVA, Inc,. a Delaware corporation ("UNOVA"), and CLAYTON A. WILLIAMS, an individual residing at 200 Riverfront Drive, Apt. P27K, Detroit, Michigan 48226 ("Executive"). Executive is presently employed by Western Atlas Inc. ("Western Atlas") with the title Corporate Senior Vice President and Group Executive of Western Atlas' Manufacturing Systems Operations. Western Atlas has formed UNOVA, a wholly owned subsidiary, and adopted a plan to distribute 100% of the common stock of UNOVA to the shareholders of Western Atlas, resulting in UNOVA being a company separate from Western Atlas (the "Distribution"). The Industrial Automation Systems Group will be included in UNOVA. Executive has agreed to accept employment with UNOVA for the period commencing on the effective date of the Distribution and ending on December 31, 1998 unless further extended by the parties, with the initial title of Corporate Senior Vice President and Group Executive of the Industrial Automation Systems Group (the "Group"). NOW, THEREFORE, in consideration of the premises and the mutual promises made in this Agreement, intending to be legally bound, UNOVA and Executive do hereby covenant, agree and understand as follows: 1. EMPLOYMENT. UNOVA hereby employs Executive, and Executive hereby accepts such employment, and agrees to perform his duties and responsibilities hereunder, in accordance with the terms and conditions hereinafter set forth. 1.1 EMPLOYMENT TERM. The employment term of this Agreement (the "Employment Term") shall commence on the effective date of the Distribution, and shall continue until and expire on December 31, 1998, unless terminated earlier in accordance with Section 4 hereof, in which event the Employment Term shall expire on such earlier termination date. 1.2 DUTIES AND RESPONSIBILITIES. (a). During the Employment Term, Executive shall serve initially as Corporate Senior Vice President of UNOVA and as Group Executive of the Group and shall perform all duties and accept all responsibilities incidental to such position as may be assigned to him by the Chief Executive Officer of UNOVA (the "CEO") and the Board of Directors of UNOVA (the "Board"), and he shall cooperate fully with the Board and the CEO. (b). As Group Executive of the Group, Executive shall have general supervision over and control of the ordinary course of the business of the Group's operations and activities, subject in all cases to the supervision and control by the Board and the CEO. (c). Executive represents to UNOVA that he is not currently subject or a party to, and agrees that he will not after the effective date hereof become subject or a party to, any employment agreement, noncompetition covenant, nondisclosure agreement or other agreement, covenant, understanding or restriction which would prohibit Executive from executing this Agreement or performing fully his duties and responsibilities hereunder, or which would in any manner, directly or indirectly, limit or affect the duties and responsibilities which may now or in the future be assigned to Executive by UNOVA. 1.3 EXTENT OF SERVICE. During the Employment Term, Executive shall use his best efforts in the business of UNOVA, and he shall devote substantially his full business time, attention and energy to the business of UNOVA and to the performance of his services and the discharge of his duties and responsibilities hereunder. Except as provided in the Intellectual Property Agreement and the Restrictive Covenant, referred to in Section 3 hereof, the foregoing shall not be construed as preventing Executive from making investments in other businesses or enterprises, provided that Executive agrees not to become engaged in any other business activity or investment which may interfere with his ability to discharge, or which may conflict with, his duties and responsibilities hereunder to UNOVA. Executive further agrees not to work on either a part-time or independent contractor basis for any other business or enterprise during the Employment Term without the prior written approval of the Board or the CEO. 1.4 BASE COMPENSATION. (a). For all the services rendered and to be rendered by Executive hereunder, UNOVA shall pay Executive an annual salary at the rate of $280,000, less such withholding and other deductions as may be required by law or any employee benefit plan in which Executive participates, payable in installments at such times as the Group customarily pays its executive officers. (b). During the Employment Term, Executive shall also be: (i) entitled to three (3) weeks of paid vacation and to paid sick leave, as provided for by the Group to senior executives, in each calendar year of the Employment Term; (ii) provided the use of a new Chevrolet Caprice, Ford Crown Victoria, or Chrysler LHS automobile, as selected by Executive, and reimbursement of all reasonable expenses related thereto (but only one automobile for the Employment Term); and (iii) permitted to participate in such life insurance, disability, medical and other fringe benefit programs of the Group as may exist from time to time for which Executive is eligible and subject to the terms of such programs.; provided, however, that Executive hereby acknowledges that he will not be eligible to participate in any Supplemental Executive Retirement Plan and in any Supplemental Medical Plan of UNOVA unless specifically nominated by the CEO and designated by the Compensation Committee of the Board of Directors of UNOVA (the "Compensation Committee") for participation, which nomination is not expected. 1.5 INCENTIVE COMPENSATION. (a). In addition to the base compensation described in Section 1.4(a) above, for each calendar year included within the Employment Term, Executive shall be entitled to participate in the UNOVA Bonus Plan, as the same may be amended, modified, supplemented or replaced from time to time during the Employment Term, for an annual maximum aggregate bonus under such Plans of up to 125% of base compensation and subject to the satisfaction of any performance goals applicable to Executive recommended by the CEO and thereafter established by the Compensation Committee for the relevant periods. To the extent that the Employment Term ends before the end of a calendar year, Executive shall be paid, upon determination of the annual bonus amount, a pro rata portion of the annual bonus which would have been payable to Executive had the Employment Term not ended prior to the end of the calendar year pursuant to 2 such Plans for such calendar year determined by multiplying such annual bonus amount by a fraction, the numerator of which is the number of full calendar months in such calendar year ending on or prior to the date of termination and the denominator of which is 12; and provided, however, that Executive shall not be entitled to any further payments of any such incentive or performance bonus in the event Executive's employment is terminated for "cause" pursuant to Section 4.3. 2. EXPENSES. (a). The Group will reimburse Executive for all ordinary and necessary out-of-pocket business expenses incurred by him in connection with the discharge of his duties and responsibilities hereunder during the Employment Term in accordance with the Group's expense approval procedures then in effect, and upon presentation to the Group of an itemized account and written proof of such expenses. Extraordinary expenses, such as country club or other social club memberships, shall be subject to the prior approval of the CEO. 3. PROPRIETARY AND INTELLECTUAL PROPERTY. Executive covenants to execute the Employee Intellectual Property Agreement, in the form of Exhibit I attached hereto (the "Intellectual Property Agreement") promptly upon the execution of this Agreement by Executive. The parties each acknowledge that the Intellectual Property Agreement as so executed is and shall be incorporated in this Agreement, and is and shall be integrated with and form a part of this Agreement, as if set forth herein. In addition to the covenants included in the Intellectual Property Agreement, Executive covenants and agrees (the "Restrictive Covenant") that, for the period of five (5) years following the later of termination of the Employment Term or termination of Executive's employment by UNOVA, Executive shall not: (1) interfere with any business relationship between UNOVA, or any of its subsidiaries or affiliates, and any customer, vendor, person or other firm; and (ii) directly or indirectly, own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing or control of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with, or use or permit his name to be used in connection with, any business or enterprise engaged in the business of the Group, as the same may be constituted during the period of Executive's employment by UNOVA in any part of the world where the Group conducts business during that period; provided, however, that, notwithstanding the foregoing: (i) this provision shall not be construed to prohibit the passive ownership by Executive of not more than one percent (1%) of the capital stock of any corporation which is engaged in a business competitive with the Group having a class of securities registered pursuant to the Securities Exchange Act of 1934. In the event that the provisions of the Restrictive Covenant should ever be adjudicated to exceed the time, geographic, product or other limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic, product or other limitations permitted by applicable law. Executive irrevocably and unconditionally agrees that, in the event of any violation of the Intellectual Property Agreement or the Restrictive Covenant, UNOVA shall be irreparably harmed and money damages shall not be an adequate remedy and, thus, that UNOVA shall be entitled to preliminary and permanent injunctive relief and other equitable relief as determined by the arbitrator referred to in Section 8 of this Agreement, which may be enforced in any federal or state court of competent jurisdiction. Executive agrees that effective service of process may be made upon him by mail under the notice provisions contained in Section 6 hereof, and that all pleadings, notices and other papers may be served upon him in the same manner. 3 4. TERMINATION. 4.1 PARTIAL OR TOTAL DISABILITY. If, in the judgment of the Board or the CEO, Executive is unable to perform his duties and responsibilities hereunder by reason of illness, injury or incapacity for three consecutive months, or for more than three months in the aggregate during any period of 12 calendar months, during which time UNOVA shall continue to compensate Executive hereunder (with such compensation to be reduced by the amount of any payments due Executive for this time period under any applicable disability benefit programs, including Social Security disability, workers' compensation and UNOVA-sponsored disability benefits), the Employment Term may be terminated by UNOVA, in which event UNOVA shall have no further liability or obligation to Executive except for: (i) unpaid salary and benefits accrued to the date of his termination; (ii) any additional disability or other benefits or payments (excluding any severance benefits or payments) otherwise payable to Executive under any applicable formal policy or plan of, or sponsored by, UNOVA which covers Executive at the time of his termination; and (iii) a pro rata portion of the performance bonus, if any, referred to in Section 1.5(a) hereof in respect of the period prior to the date on which the Employment Term is terminated. Executive agrees, in the event of any dispute under this Section 4.1 and if requested by UNOVA, to submit to a physical examination by a licensed physician mutually agreed upon by UNOVA and Executive, the cost of such examination to be paid by UNOVA. 4.2 DEATH. In the event that Executive dies during the Employment Term, UNOVA shall pay to his executors, administrators or personal representatives, as appropriate, an amount equal to the installment of his salary payable for the month in which he dies. Thereafter, UNOVA shall have no further liability or obligation to Executive's executors, administrators, personal representatives, heirs, assigns or any other person claiming under or through him, except for: (i) any benefits or other payments (excluding any severance benefits or payments) otherwise payable to Executive under any applicable formal policy or plan of, or sponsored by, UNOVA which covered Executive at the time of his death; and (ii) a pro rata portion of the performance bonus, if any, referred to in Section 1.5(a) hereof in respect of the period prior to the date on which Executive died. 4.3 FOR CAUSE. Nothing in this Agreement shall be construed to prevent the termination of the Employment Term by UNOVA at any time for "cause." For purposes of this Agreement, "cause" shall mean: (i) the willful and continued failure of Executive to perform substantially Executive's duties with UNOVA (other than any such failure resulting from disability determined pursuant to Section 4.1 above) after a written demand for substantial performance is delivered to Executive by the Board or the CEO which specifically identifies the manner in which the Board or the CEO believes that Executive has not substantially performed Executive's duties; or (ii) the willful engaging by Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to UNOVA. For purposes of this provision, no act or failure to act on the part of Executive shall be considered "willful" unless it is done, or omitted to be done, by Executive in bad faith or without reasonable belief that Executive's action or omission was in the best interests of UNOVA. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the CEO or an officer of UNOVA superior to Executive, or based upon the advice of counsel for UNOVA, shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of UNOVA. Upon termination of the Employment Term for cause, UNOVA shall have no further liability or 4 obligation to Executive, except for the payment of unpaid salary and benefits (excluding any performance bonus) accrued to the date of his termination. 4.4 WITHOUT CAUSE. UNOVA, by action of the Board or the CEO, may terminate the Employment Term at any time without any cause upon 30 days' prior written notice to Executive, in which event UNOVA shall only be obligated: (i) to pay Executive an amount which equals the salary payments called for by Section 1.4(a) hereof for the balance of the Employment Term specified in Section 1.1 hereof, the same as if such termination of the Employment Term had not occurred; (ii) to pay a pro rata portion of the performance bonus, if any, referred to in Section 1.5(a) hereof in respect of the period prior to and including the date of termination (calculated by taking the amount otherwise payable for the calendar year in question and multiplying that sum by a fraction, the numerator of which would be the number of full calendar months in such calendar year ending on or prior to the date of termination of the Employment Term, and the denominator of which would be 12; and (iii) to pay any severance benefits or payments otherwise payable to Executive under any applicable formal policy or plan of the Group which covers Executive at the time of this termination. The above amounts are agreed to be in lieu of any and all other liabilities or obligations which may in fact or law be due to Executive as a result of a termination of the Employment Term without cause before its normal expiration, provided, however, that the obligations of UNOVA under (i) through (iii) above are subject to Executive's compliance with his obligations under Section 3, Proprietary and Intellectual Property, and the Intellectual Property Agreement. 5. SURVIVAL. Notwithstanding the termination of the Employment Term for any reason whatsoever, the obligations of Executive under the Intellectual Property Agreement and the Restrictive Covenant shall survive and remain in full force and effect to the extent and for the periods therein provided, and the provisions for equitable relief provided in Section 3 shall continue in force. 6. NOTICES. All notices and other communications hereunder shall be in writing and deemed to have been given when hand delivered, in person or by a recognized courier or delivery service, when telexed to the recipient's telefax number (with receipt confirmed), or when mailed by registered or certified mail, return receipt requested, as follows (provided that notice of change of address shall be deemed given only when received): If to UNOVA, to: UNOVA, Inc. 360 North Crescent Drive Beverly Hills, California 90210 ATTENTION: General Counsel or to telefax no. (310) 888-2913 If to Executive, to: Clayton A. Williams 200 Riverfront Drive, Apt. P27K Detroit, MI 48226 or to telefax no. (______) ______________ 5 or to such other name, address or telefax number as any designated recipient shall specify by notice to the other designated recipients in the manner specified in this Section 6. Any communication delivered in another manner shall be deemed given only when actually received by the intended recipient. 7. GOVERNING LAW. This Agreement and the Intellectual Property Agreement shall be governed by and interpreted under the laws of the State of Michigan without giving effect to any conflict of laws provisions. 8. ARBITRATION. In recognition of the fact that differences may arise between UNOVA and Executive that may or may not relate to Executive's employment with UNOVA, and in recognition of the fact that resolution of any differences in the courts is rarely timely or cost effective for either party, UNOVA and Executive hereby agree to arbitration in order to establish and gain the benefits of a speedy, impartial and cost-effective dispute resolution procedure. Arbitration of differences between UNOVA and Executive shall be in accordance with, and pursuant to the terms of the Mutual Agreement to Arbitrate Claims, in the form of Exhibit II attached hereto, which Executive agrees to execute. 9. CONTENTS OF AGREEMENT; AMENDMENT AND ASSIGNMENT. (a). This Agreement, the Intellectual Property Agreement, and the Mutual Agreement to Arbitrate Claims set forth the entire understanding of the parties with respect to the subject matter hereof and may not be changed, modified or terminated except by a written amendment executed by UNOVA and by Executive. Furthermore, and without limitation, nothing in this Agreement shall be construed as giving Executive any right to be retained in the employ of UNOVA beyond the expiration of the Employment Term, and if employed thereafter, Executive specifically acknowledges that unless UNOVA and Executive have either extended this Agreement by a written instrument or entered into a new, written employment agreement, he shall be an employee-at-will and, thus, subject to discharge with or without cause and, in such event, without further compensation of any nature. (b). All of the provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, executors, administrators, personal representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of Executive hereunder are of a personal nature and shall not be assignable or delegable in whole or in part by Executive. 10. SEVERABILILY. If any provision of this Agreement or the application thereof to anyone or any circumstance is held invalid or unenforceable in any jurisdiction, the remainder of this Agreement and the application of such provision to such person or entity or such circumstance in any other jurisdiction or to other persons, entities or circumstances in any jurisdiction, shall not be affected thereby, unless such invalidity or unforceability substantially diminishes or substantially increases the rights and obligations of a party, taken as a whole, and to this end the provisions of this Agreement are severable. 11. REMEDIES CUMULATIVE; NO WAIVER. Except as provided for in Section 8 hereof, no remedy conferred upon any party by this Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and in addition to any other remedy 6 given hereunder or now or hereafter existing at law or in equity. No single waiver by any party of any right, remedy or power under any provision hereof, or existing at law or in equity, with respect to any event or circumstance shall be construed as a waiver of such provision or right as to any other event or circumstance, and any such right, remedy or power may be exercised by such party from time to time, and as often as may be deemed expedient or necessary by such party in its or his sole discretion. 12. COUNSEL TO EXECUTIVE. Executive represents and acknowledges that: (i) he has been advised by UNOVA to consult his own legal counsel in respect of this Agreement; and (ii) he has, prior to execution of this Agreement, reviewed this Agreement thoroughly with his counsel to the extent Executive considers such review necessary and appropriate. 13. MISCELLANEOUS. This Agreement may be executed in several counterparts, each of which shall be an original. It shall not be necessary in making proof of this Agreement or any counterpart hereof to produce or account for any of the other counterparts. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. UNOVA, INC. By: ________________________________ Title: _______________________________ ____________________________________ Clayton A. Williams 7 EX-10.L 8 SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT Exhibit 10.L SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT This Supplemental Executive Retirement Agreement ("Agreement") made and entered into by and between UNOVA, Inc., a Delaware corporation (the "Company") and Alton J. Brann, ("Executive"). WHEREAS, the Executive is presently employed by the Company as its Chairman and Chief Executive Officer; and WHEREAS, the Executive was previously employed by Western Atlas Inc., which corporation previously owned the Company and distributed its shares to the shareholders of Western Atlas through a tax free spin-off pursuant to Section 355 of the Internal Revenue Code; and WHEREAS, the Company and the Executive now desire to have the Company assume the obligations of Western Atlas Inc. as they existed under the Supplemental Executive Retirement Agreement between Western Atlas Inc. and Executive (the "Western Atlas Agreement"); and WHEREAS, the Company and the Executive desire to enter into this Agreement in substitution for, and in place of, the Western Atlas Agreement and in release of all rights of the Executive under the Western Atlas Agreement. NOW THEREFORE, the Company and the Executive covenant, agree, represent, warrant and understand, as follows: ARTICLE I-- PURPOSE ------------------- The purpose of this Agreement is to provide for supplemental retirement, disability and death benefits to Executive, and thereby encourage Executive to continue providing services to the Company. This Agreement is intended to provide benefits solely for a management or highly compensated employee within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Payments under this Agreement shall be made either from general assets of the Company or from the assets of a trust which may be established hereunder. It is intended that this Agreement remain at all times an unfunded plan for purposes of ERISA and that the trust, if established, shall constitute a grantor trust under Sections 671 through 679 of the Internal Revenue Code of 1986, as amended (the "Code"). 1 Alton J. Brann Supplemental Executive Retirement Agreement ARTICLE II--DEFINITIONS ----------------------- SECTION 2.1 "ACTIVE PARTICIPANT" shall mean Executive so long as he remains employed by the Company continuously from the date hereof, except as provided for below as to Disability or death. Other than during a period of Disability, Executive shall be treated as having terminated from employment during any period of Leave of Absence, unless the Committee, in its sole and absolute discretion, and subject to such terms and conditions as the Committee may specify, decides otherwise. However, Executive, while Disabled or if Executive dies while an Active Participant shall continue to be treated as an Active Participant and, thus, continue to accrue additional Years of Service until the earlier of the date that the Executive attains (or, if deceased, would have attained) age 62, or the date that Executive is no longer Disabled. If Executive returns to active employment with the Company when Disability ends, he shall thereafter be an Active Participant, so long as such employment continues, without further action. If Executive terminates employment with the Company (other than for Disability) and is subsequently re-employed with the Company he shall not be treated as an Active Participant unless the Committee determines otherwise. SECTION 2.2 "ACTUARIAL EQUIVALENT" shall mean the adjustment of an amount or amounts using actuarial methods and factors identical with those actuarial methods and factors then being used, at the time such calculations are to be made hereunder, under the UNOVA Retirement Plan adopted by UNOVA, Inc. and intended to be qualified under Section 401(a) of the Code, as such Plan may be amended from time to time and any retirement plan intended to replace such Plan (the "Qualified Plan"). SECTION 2.3 "AVERAGE EARNINGS" shall mean the average of gross base salary payments plus Bonuses as defined in Section 2.6 from the Company (as used in this Section 2.3 and hereinafter the term "Company" shall have the meaning specified in Section 2.12) to the Executive in any three twelve consecutive month periods (with no overlap), in which such Executive's gross base salary payments plus gross Bonuses are the highest, in the Executive's final 60 months of employment. For all purposes of calculating "Average Earnings" under this Supplemental Plan "gross base salary" shall include all payments credited to Executive related to base compensation before subtracting any amounts deferred pursuant to Section 401(k) or 125 of the Code and does not include any amounts credited as compensation to Executive relating to Bonuses or the exercise or award under Company Stock-based option or award plans. . (a). Average Earnings for purposes of calculating a Disability or Death Benefit for or with respect to Executive shall be calculated using the 60 months that include and precede the month that his Disability commenced. If Executive has returned to active employment with the Company after a period of Disability but does not have a minimum of 36 consecutive calendar months of employment with the Company after such return to active employment, then Average Earnings shall be calculated by the Committee in accordance with subparagraph (e). (b). Average Earnings in the case Executive dies while employed by the Company and prior to attaining age 62 shall be calculated using the 60 months that include and precede the month of Executive's death (or Disability, in the case Executive dies while Disabled). 2 Alton J. Brann Supplemental Executive Retirement Agreement (c) For purposes of calculating a lump sum payment pursuant to Section 3.1(c) in the event of a Change of Control, with respect to Executive (other than while Disabled or when deceased) and who is an Active Participant as of the date of such calculation, Average Earnings shall be calculated as if Executive's employment with the Company ended on such date or the date as revised pursuant to the terms of any Change of Control Agreement existing between the Company and the Executive ("Change of Control Agreement" shall mean any agreement between the Company and the Executive which provides for the employment of Executive and/or the payment of compensation to Executive upon or following a Change of Control). (d). For purposes of calculating Average Earnings, Executive's gross base salary plus gross Bonuses received while employed by Western Atlas or Litton, if and to the extent such Western Atlas or Litton employment is included within the period of 60 months to be used in such calculation, shall be taken into account to the extent Executive's benefits under the Western Atlas retirement plans were transferred to the Company pursuant to the Employee Benefits Agreement between Western Atlas and UNOVA, Inc. (the "Employee Benefits Agreement"). (e). Notwithstanding the foregoing, the Committee may determine Average Earnings for the purposes of this Section by another methodology, if that method is more advantageous to Executive. SECTION 2.4 "BENEFICIARY" or "BENEFICIARIES" shall mean those who are designated under this Agreement to receive payment of a benefit on account of Executive's death. If and to the extent the spouse of Executive is living at the time of Executive's death, only the spouse may be the Beneficiary. Upon the death of the spouse after the death of Executive but prior to commencement of Retirement Benefit payments, the Dependent Children of the Participant may be Beneficiaries, but only of the Death Benefit. SECTION 2.5 "BOARD" shall mean the Board of Directors of UNOVA, Inc. or of its Successor, as of the time in question, the succession of which did not result from or constitute or follow a Change of Control ("Successor" or "Successors"). SECTION 2.6 "BONUS" or "BONUSES" shall mean the full amount of the bonus or similar cash incentive awarded with respect to any given fiscal year or portion thereof and shall be taken into account for purposes of determining Average Earnings (i.e. shall be deemed to have been paid to the Executive, regardless whether the amount is actually paid or deferred to a later year) during the month in which the Bonus is determined and awarded by the Committee (or other body or individual having authority to award such Bonus) under Company-sponsored, formal or informal incentive compensation or bonus plans, excluding, however, any payments under Company Stock-based option or award plans. Further, as determined by the Committee at or prior to the award, any payment(s) related to accomplishment of a particular non-ordinary course, transaction or circumstance shall not be included as a "Bonus or Bonuses". SECTION 2.7 "BUSINESS COMBINATION" shall have the meaning specified in Section 2.8(c). 3 Alton J. Brann Supplemental Executive Retirement Agreement SECTION 2.8 "CHANGE OF CONTROL" shall mean: (a). The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended [the "Exchange Act"] (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty percent (30%) or more of either (1) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (2) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of Directors (the "Outstanding Company Voting Securities"); excluding, however, the following acquisitions of Outstanding Company Common Stock and Outstanding Company Voting Securities: (A) any acquisition directly from the Company other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company; (B) any acquisition by the Company; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (D) any acquisition by any Person pursuant to a transaction which complies with clauses (1), (2), and (3) of paragraph (c) below of this Section 2.8; or (b). Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual who becomes a member of the Board subsequent to such effective date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the Directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but provided further that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Regulation 14a-11 of Regulation 14A promulgated under The Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board; or (c). The approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), or, if such consummation of such Business Combination is subject, at the time of such approval by shareholders to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation), excluding, however, such Business Combination pursuant to which (1) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination will beneficially own, directly or indirectly, more than sixty percent (60%) of, respectively, the outstanding shares of common stock and the combined voting power of the outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (2) no Person (other than any employee benefit plan (or related trust) sponsored or maintained by the Company or any 4 Alton J. Brann Supplemental Executive Retirement Agreement corporation controlled by the Company or such corporation resulting from such Business Combination) will beneficially own, directly or indirectly, thirty percent (30%) or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors except to the extent that such ownership existed with respect to the Company prior to the Business Combination; and (3) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination will have been members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d). Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. SECTION 2.9 "CHIEF EXECUTIVE OFFICER" shall mean the chief executive officer of UNOVA, Inc. or of its Successor. SECTION 2.10 "CODE" shall mean the Internal Revenue Code of 1986, as amended. SECTION 2.11 "COMMITTEE" shall mean: (a). The Compensation Committee of the UNOVA, Inc Board of Directors. (b). Notwithstanding Section 2.11(a), upon a Change of Control, the Committee shall mean exclusively the "Special Administrators." The "Special Administrators" shall be the individuals who constituted the Company's Compensation Committee of the Board immediately prior to the Change of Control. The "Special Administrators" shall constitute the Committee until the earlier of the termination of this Agreement or the last day of the 18-month period following the month in which the Change of Control occurred. The "Special Administrators" shall have all rights and authority reserved to the Committee under this Agreement, including, but not limited to, the rights specified in Section 10.2. (c). If a "Special Administrator" dies, becomes disabled, or resigns as "Special Administrator" during the period that the "Special Administrators" constitute the Committee, the remaining "Special Administrator(s)" shall continue to serve as the Committee without interruption, and successor "Special Administrator(s)" shall be designated, by the remaining "Special Administrators". If at any time there are no remaining "Special Administrators," the presiding Judge of the Superior Court of the State of California for Los Angeles County shall designate three "Special Administrators". SECTION 2.12 "COMPANY" shall mean UNOVA, Inc., a Delaware corporation, and its Successors, and their respective subsidiaries. Any reference to stock or securities of the Company shall mean only the stock or securities of UNOVA, Inc. or of its Successor. SECTION 2.13 "DEATH BENEFIT" shall mean the benefit payable pursuant to Article IV to the Executive's Beneficiary or Beneficiaries, if any. 5 Alton J. Brann Supplemental Executive Retirement Agreement SECTION 2.14 "DEPENDENT CHILDREN" shall mean a natural or legally adopted son or daughter who either: (a) has not attained age 19; or (b) has attained age 19 but has not attained age 23 and is a full-time student at an accredited educational institution. SECTION 2.15 "DIRECTOR" shall mean a member of the Board of Directors of UNOVA, Inc. or of its Successor. SECTION 2.16 "DISABILITY" or "DISABLED" shall mean the condition of the Executive, or the Executive, when it has been determined by the Committee that the Executive is unable to perform the material and substantive duties of the Executive's position or profession, to an extent which prevents the Executive from engaging in the Executive's regular position or profession, due to injury or sickness for which the person is receiving medical care from, or with respect to which a current certification of disability is received by the Committee from, a professional person appropriate for such injury or sickness. SECTION 2.17 "DISABILITY BENEFIT" shall mean the benefit payable pursuant to Article V to the Executive because of Disability. SECTION 2.18 "EMPLOYEE BENEFITS AGREEMENT" shall have the meaning specified in Section 2.3(d). SECTION 2.19 "ERISA" shall have the meaning specified in Article I. SECTION 2.20 "EXCHANGE ACT" shall have the meaning specified in Section 2.8(a). SECTION 2.21 "LITTON" shall mean Litton Industries, Inc., a Delaware corporation, and its subsidiaries at the time in question. SECTION 2.22 "LEAVE OF ABSENCE," with respect to Executive, shall mean and refer to a discontinuance of regular, full-time services by the Executive for the Company resulting in the discontinuance, in whole or in part, of base salary payments by the Company to Executive during such discontinuance of service, provided, however, that, to the extent federal or state so-called "Family Leave Acts" or "Maternity or Pregnancy Leave Acts" may make unlawful the treatment of an absence or a portion of an absence as a termination for purposes of this Agreement, such absence or portion shall not constitute a Leave of Absence. SECTION 2.23 "NORMAL FORM" shall mean the form of Retirement Benefit payable under Section 3.5 to a Retired Participant. SECTION 2.24 "OFFSET AMOUNT" shall mean the sum of the annual "primary insurance amount" and the annual "Company-provided pension." (a). The "primary insurance amount" shall mean the annual benefit determined under the Social Security Act that is payable to the Executive as of the calendar year that Retirement Benefits to the Executive, if any, would commence under this Agreement. If no "primary insurance amount" is payable to Executive, who is otherwise covered by the Social Security Act, as of the calendar year in which Retirement Benefits to the Participant, if any, would commence under this Agreement, then the "primary insurance amount" shall be deemed to be the "primary insurance amount" that would be payable to the Executive at the 6 Alton J. Brann Supplemental Executive Retirement Agreement earliest date thereafter or would have been payable at the earliest date thereafter, in the case the Executive is deceased; provided, however, that the amount payable under the Social Security Act shall be determined without regard to any election by the Executive or a Beneficiary to defer receipt of a benefit and without regard to any reduction of the amount of the Social Security Act benefit by virtue of the receipt of earned income by the Executive or a Beneficiary. The "primary insurance amount" shall also include any annual retirement benefit payable under any public retirement program of a foreign country that the Committee determines is comparable in purpose to the benefits payable under the Social Security Act. (b). The "Company-provided pension" shall mean the annual amount that would be payable to the Executive under any defined benefit or defined contribution plan sponsored by the Company, which is either intended to qualify under Section 401(a) of the Code or is intended to restore benefits under such plan (excluding only this Agreement and Part II of the UNOVA or Western Atlas FSSP and Restoration Plan). Any non-United States defined benefit or defined contribution plan of the Company which is not subject to the Code but which is comparable in purpose to plans which would qualify under Section 401(a) of the Code shall be included within the meaning of "Company-provided pension." The amount of the "Company-provided pension" shall be deemed to be the amount which would have been payable if the Executive joined each such plan at the earliest date on which the Executive was eligible to join such plan and participated in the plan to the fullest extent possible and withdrew his actual and presumed contributions, plus income thereon. The amount of the "Company-provided pension" shall be calculated under the terms that were in effect during the Executive's actual, if any, and presumed participation, except that a subsequent, retroactive amendment to any of such plans shall be taken into account only to the extent that it actually would have increased the Executive's benefit under that plan. The "Company-provided pension" shall be computed as if the Executive actually received the plan benefits under such "Company-provided pension" as a single life annuity beginning on the date that Retirement Benefits commence under this Agreement. SECTION 2.25 "OUTSTANDING COMPANY COMMON STOCK" and "OUTSTANDING COMPANY VOTING SECURITIES" shall have the meanings specified for those items in Section 2.8(a). SECTION 2.26 "PERSON" shall have the meaning specified in Section 2.8(a). SECTION 2.27 "QUALIFIED PLAN" shall have the meaning specified in Section 2.2. SECTION 2.28 "RETIREMENT BENEFIT" shall mean the benefits payable to Executive and, if applicable, the Beneficiary of Executive, as provided in Article III. SECTION 2.29 "SPECIAL ADMINISTRATORS" shall have the meaning specified in Section 2.11(b). SECTION 2.30 "SUCCESSOR" or "SUCCESSORS" shall have the meaning specified in Section 2.5. SECTION 2.31 "TRUST" shall mean a grantor trust under Section 671 through 679 of the Code, if and when established. The decision to establish a Trust shall be in the sole and absolute discretion of the Company. 7 Alton J. Brann Supplemental Executive Retirement Agreement SECTION 2.32 "TRUSTEE" shall mean the trustee of the Trust. SECTION 2.33 "TRUST AGREEMENT" shall mean the terms of the agreement, entered into between UNOVA, Inc. or its Successor and the Trustee, that establishes the Trust. SECTION 2.34 "WESTERN ATLAS" shall mean Western Atlas Inc., a Delaware Corporation, and its subsidiaries at the time in question. SECTION 2.35 "YEARS OF SERVICE" shall mean the number resulting from: (a). The division of twelve into the number of consecutive and continuous calendar months of employment with the Company (or immediately prior thereto, the number of consecutive and continuous calendar months of employment with Western Atlas and Litton) that elapse from and include the month that Executive commenced the period of employment with the Company and which ends: (1) upon the Executive's death; or (2) upon termination of Executive's employment with the Company other than by death, until and including the earlier of the month of such death or termination; provided, however, that for an Executive who dies or becomes Disabled while an Active Participant, Executive shall continue to accrue Years of Service from the date of such death or Disability until the earlier of the calendar month (x) in which Executive attains or, if deceased, would have attained age 62, or (y) in which Executive is no longer Disabled. (b). For purposes of determining Executive's Years of Service under the terms of Section 2.35(a), service with Litton and Western Atlas immediately preceding the period of service with the Company referred to in Section 2.35(a) which ends upon the Executive's death, or which ends upon the termination of employment with the Company other than by death, shall be taken into account. (c). In its discretion, the Committee may: (1) compute Executive's Years of Service by treating separate but not continuous periods of employment with Litton, Western Atlas or the Company as continuous periods of employment; (2) credit Executive with Years of Service in addition to the Years of Service accrued while actually employed with Litton, Western Atlas or the Company; and (3) credit Executive for Years of Service solely for purposes of satisfying the vesting requirements of Sections 3.3. (d). For purposes of calculating a lump sum payment pursuant to Section 3.1(c) in the event of a Change of Control, with respect to Executive while an Active Participant, Years of Service shall be determined as if the Executive's employment with the Company ended on such date or, if that date is adjusted pursuant to the terms of any Change of Control Agreement between the Company and the Executive, then that later date. ARTICLE III--RETIREMENT BENEFITS -------------------------------- SECTION 3.1 ELIGIBILITY FOR RETIREMENT BENEFIT. (a). GENERAL. Executive shall be eligible to begin receiving a Retirement Benefit if Executive has (1) either attained age 62 or satisfied the conditions in Section 3.1(b) below; (2) filed an election to receive payments under Article VI; (3) satisfied the vesting requirement of Section 3.3; (4) terminated employment with the Company; and, (5) except 8 Alton J. Brann Supplemental Executive Retirement Agreement when Executive's employment with the Company is terminated in connection with a Change of Control, the Executive agrees that for a period of five years after commencement of receipt of Retirement Benefits under this Agreement, not to engage in any activity which interferes with the economic or business interests, or contractual relationships of UNOVA, Inc. or its Successors or of any of its subsidiaries or affiliates with third parties in connection with which the Participant worked for UNOVA, Inc. or its subsidiaries or affiliates or to perform services for any entity in competition with a business of UNOVA, Inc. or of its subsidiaries or affiliates for which the Executive worked and with respect to which the Executive possesses trade secrets or business confidential information of UNOVA, Inc. or of its subsidiaries or affiliates. In the event that any provision of the covenant provided for in (5) immediately above shall be held invalid or unenforceable by reason of the geographic or business matter scope, or the duration thereof, such invalidity or unenforceability shall attach only to such provisions and shall not affect or render invalid or unenforceable any other provision of this Agreement, and this Agreement shall be construed as if the geographic or subject matter scope, or the duration thereof, had been more narrowly drafted so as not to be invalid or unenforceable. (b). RETIREMENT BENEFITS PRIOR TO AGE 62. Executive shall not be entitled to begin receiving a Retirement Benefit prior to attainment of age 62, except in the sole and absolute discretion of the Committee, and subject to such terms and conditions, including the imposition of Retirement Benefit reductions, as the Committee may specify. (c). CHANGE OF CONTROL. Except as otherwise provided in any Change of Control Agreement between the Company and the Executive, notwithstanding anything herein to the contrary, upon a Change of Control, if Executive is an Active Participant or if Executive has satisfied the conditions of Section 3.1(a)(3) and (4), Executive shall be entitled to a lump sum payment equal to the Actuarial Equivalent, at the age of such Participant at the date of the Change of Control, of the Retirement Benefit which would be payable to such Participant at the later of age 62 or the actual age of Executive as revised pursuant to the terms of any Change of Control Agreement between the Company and the Executive, assuming, for such purposes, that the Retirement Benefit is payable in the form of a single life annuity. In addition, there shall be waived any condition concerning eligibility for payment of a Retirement Benefit that requires: (1) the filing of any election; (2) the attainment of a specified age; (3) an agreement not to engage in competitive activities with the Company; (4) satisfaction, as to the Executive, of the conditions of Section 3.1(a)(3) or of any other terms or conditions or the application of any benefit reductions described in Section 3.1(b); and (5) as to the Executive, termination of employment with the Company, in order to begin receiving Retirement Benefits. SECTION 3.2 RETIREMENT BENEFIT FORMULA. Executive's annual Retirement Benefit shall be the amount resulting from multiplying Average Earnings by the Percentage Factor set forth in Exhibit A attached hereto and made a part hereof corresponding to the age of Executive at the earlier of the date of Executive's retirement or the age of Executive upon Executive's termination of employment for any reason other than a Change of Control or the age of Executive while an Active Participant as of the date of a Change of Control except as such Retirement Benefit is adjusted pursuant to Section 3.1(c) and Section 3.6 (c). In the event of a Change of Control while the Executive is an Active Participant the benefit shall be determined using the age for Executive which is adjusted pursuant to Sections 3.1(c) and 3.6(c). SECTION 3.3 VESTED RETIREMENT BENEFIT. Executive has a vested right to a Retirement Benefit under this Agreement and shall be entitled to receive such Retirement 9 Alton J. Brann Supplemental Executive Retirement Agreement Benefit once Executive has reached age 62 even though Executive shall have terminated employment with the Company for any reason prior to age 62. SECTION 3.4 RETIREMENT BENEFIT FORMS. (a). GENERAL RULE. Unless Executive had made an election to receive payment of Retirement Benefits in an available alternative form, Executive shall be deemed to have elected the Normal Form. (b). ACTUARIAL EQUIVALENT. In the event the Committee permits the Executive to draw a Retirement Benefit before reaching age 62, then all forms of payment of Retirement Benefits shall be the Actuarial Equivalent of a single life annuity payable at age 62. SECTION 3.5 NORMAL FORM OF RETIREMENT BENEFIT. (a). SINGLE LIFE ANNUITY. The Normal Form of payment of a Retirement Benefit for Executive who is living at the time payment commences and who is unmarried on such date shall be a single life annuity. Under a single life annuity, Executive shall receive a monthly benefit for life equal to 1/12 of his Retirement Benefit and all payments shall cease upon Executive's death. (b). JOINT AND SURVIVOR ANNUITY. If Executive is married at the time that payment of the Retirement Benefit commences, the Normal Form of Retirement Benefit shall be a 100% joint and survivor annuity (which shall be the Actuarial Equivalent of a single life annuity) for the benefit of the Executive's spouse as of the date that payment of the Retirement Benefit commences. Under the Normal Form of a joint and survivor annuity, Executive shall receive a monthly benefit for life and, upon the Executive's death, the spouse, if living, shall receive a monthly benefit for life equal to 100% of the monthly benefit that was payable to the Executive. If Executive, who has satisfied the conditions of Section 3.1(a)(3) (including consideration of Years of Service accrued for Disabled or deceased Participants pursuant to Section 2.1), dies prior to the commencement of the payment of Retirement Benefits, and was married at the date of death, the spouse Beneficiary of Executive shall have the right to a survivor Retirement Benefit, commencing at the date Executive would have attained age 62, except for the fact that the Participant died prior to attaining age 62, or commencing on the first day of the month following the month in which the Executive died, if the Executive continued in continuous employment with the Company after attaining age 62 and until the date of Executive's Participant's death, calculated under Section 3.2 as if the Executive had survived to such entitlement date and begun receiving payment of the Retirement Benefit at such entitlement date as a joint and 100% survivor annuity and then died on the following date. SECTION 3.6 ALTERNATIVE FORMS OF BENEFIT. (a). ELECTION OF FORMS OF BENEFIT. Prior to the commencement of payment of a Retirement Benefit, Executive may file an election designating a payment form other than the Normal Form of Retirement Benefit; provided, however, that any such alternate payment form is a payment form available under the Qualified Plan and, if Executive is entitled to a benefit under such Qualified Plan, is the same as the payment form elected under such Qualified Plan. If Executive is married, an election to receive a Retirement Benefit in a form other than the Normal Form shall be valid only if such election includes the written consent of 10 Alton J. Brann Supplemental Executive Retirement Agreement the Executive's spouse in the form and manner specified by the Committee. However, a joint and survivor annuity shall not be available under this Agreement with respect to any Beneficiary other than the spouse of the Executive as of the date that the Retirement Benefit commences. (b). ADDITIONAL FORMS OF BENEFIT. From time to time, the Committee may, in its sole discretion, make other forms of payment of Retirement Benefits available; provided, however, that once Executive or Executive's Beneficiary begins receiving Retirement Benefit payments, no change may be made in the form of payment except as provided for in Section 3.6(c) below. (c). FORM OF BENEFIT ON CHANGE OF CONTROL. Notwithstanding the other provisions of this Section, upon a Change of Control, all Retirement Benefits including, without limitation, benefits payable to Active Participants who remain employed by the Company, shall be paid in a single sum payment that is the Actuarial Equivalent at the age of the Executive as of the date of Change of Control of a single life annuity payable at the later of age 62 or, if the Executive had remained in continuous employment with the Company after attaining age 62, the age of the Executive at the date of Change of Control as adjusted under the provisions of any Change of Control Agreement between the Company and the Executive. ARTICLE IV--BENEFITS UPON EXECUTIVE'S DEATH SECTION 4. 1 ELIGIBILITY FOR DEATH BENEFIT. The Beneficiary or Beneficiaries of Executive in the event Executive dies while an Active Participant or while Disabled and prior to attaining age 62 and prior to the time Retirement Benefits to Executive commence, shall be eligible to begin receiving a Death Benefit if the Beneficiary or Beneficiaries have filed a claim under Article VI. The Beneficiary or Beneficiaries of Executive shall not be eligible for a Death Benefit, if the Executive's employment with the Company terminated prior to Executive's death other than by reason of Disability. If there are no Beneficiaries at the date of the Executive's death, no Death Benefit shall be payable. The class of individuals who are eligible to be Beneficiaries of the Death Benefit is limited to the Executive's spouse, as of the date of the Executive's death, and the Executive's Dependent Children as of the date of Executive's death; provided, however, that such term also shall include any natural children of Executive born after Executive's death and any child who is in the process of being adopted by the Executive at the date of Executive's death and the adoption of whom is completed by the spouse of Executive after the date of Executive's death. If there is both a living spouse and Dependent Children as of the date of Executive's death, the Beneficiary shall be the spouse. The Dependent Children shall become the Beneficiaries of the Death Benefit, but only upon the death of Executive's spouse prior to the earlier of the date the Executive would have attained age 62, or the date the Participant's spouse commences to receive a Retirement Benefit. SECTION 4.2 DEATH BENEFIT. (a). SPOUSAL BENEFIT. The Death Benefit for the surviving spouse of Executive shall be an annual amount equal to 40% of Executive's Average Earnings. The spouse Beneficiary shall receive the Death Benefit as a monthly benefit equal to 1/12 of the Death Benefit. The Death Benefit for the spouse Beneficiary shall cease on the earlier of: (1) 11 Alton J. Brann Supplemental Executive Retirement Agreement the death of the spouse Beneficiary; or (2) the date at which the Executive would have attained age 62. 12 Alton J. Brann Supplemental Executive Retirement Agreement (b). DEPENDENT CHILDREN BENEFIT. If there is no spouse Beneficiary or a spouse Beneficiary of Executive dies prior to the death of Executive and the Executive dies prior to attaining age 62 while an Active Participant or while Disabled, then a Death Benefit shall be paid to any then Dependent Children for so long as any such remain Dependent Children. The aggregate amount of any Death Benefit payable to Dependent Children for each month is the amount equal to the monthly Death Benefit that would be payable to a spouse Beneficiary multiplied by a fraction (not greater than one), the numerator of which is the number of Dependent Children at the time of each monthly payment and the denominator of which is three. If there are no remaining living Dependent Children Beneficiaries, no further Death Benefit shall be paid. (c). VESTING IN DEATH BENEFIT. While an Active Participant or Disabled, Executive shall at all times be vested in his right to a Death Benefit. SECTION 4.3 SPOUSE RETIREMENT BENEFIT. To the extent that a spouse Beneficiary is receiving a Death Benefit on the date the Executive would have attained age 62, the spouse Beneficiary thereafter shall receive a Retirement Benefit pursuant to Article III, if eligible, in the amount calculated pursuant to Article III, and no further Death Benefit payments shall be payable to the spouse Beneficiary or to any Dependent Children Beneficiaries or otherwise. SECTION 4.4 CHANGE OF CONTROL. Upon a Change of Control, after the Executive's death while an Active Participant or after the Executive's death while Disabled but in either case prior to the date the Executive would have attained age 62, the Executive's spouse, if then living, shall receive a single sum payment that is the Actuarial Equivalent, at the date of such lump sum payment, of the Death Benefit, calculated through the date that Executive would have attained age 62. The spouse Beneficiary, if then living, shall also be entitled to the lump sum payment of the Retirement Benefit, if any, pursuant to Section 3.1. Upon a Change of Control occurring after commencement of the payment of Death Benefits to the Dependent Children Beneficiaries pursuant to Section 4.2(b), the Dependent Children shall receive a single sum payment that is the Actuarial Equivalent, based upon the ages of the Dependent Children, of the Death Benefit calculated without regard to the date the Executive would have attained age 62. ARTICLE V--BENEFITS OF DISABLED EXECUTIVE ----------------------------------------- SECTION 5.1 ELIGIBILITY FOR DISABILITY BENEFIT. If while an Active Participant, Executive becomes Disabled prior to attaining age 62, Executive shall be eligible to begin receiving a Disability Benefit. The Disability Benefit shall cease on the earlier of: (1) the first day of the calendar month following the Executive's attainment of age 62; (at which time a Retirement Benefit may be payable under Article III), (2) the date on which the Committee determines that the Executive is no longer Disabled; or (3) the date of the Executive's death (in which case a Death Benefit may be payable under Article IV). SECTION 5.2 DISABILITY FORMULA. A Disability Benefit shall be a monthly amount equal to 1/12 of 40% of the Executive's Average Earnings, offset by the sum of: (a) any other payment to the Executive that would be made by or on behalf of the Company on account of the Disability (including, without limitation, a Company-sponsored disability insurance plan or 13 Alton J. Brann Supplemental Executive Retirement Agreement any other benefit plan of the Company, any amounts payable as sick pay, and any amounts payable under so-called Workers Compensation Acts or similar laws of foreign governments other than lump sum amounts for the loss of an organ or other body member and other than amounts paid for medical expenses), calculated as if the Executive participated to the fullest extent possible in such disability programs; and (b) the Social Security disability benefits received by the Executive. For purposes of determining any offset under the preceding sentence, any payments that are not made on a monthly basis shall be converted to monthly payments under a methodology approved by the Committee. SECTION 5.3 VESTING DISABILITY BENEFIT. Executive, while an Active Participant shall at all times be vested in his right to a Disability Benefit. SECTION 5.4 DISABLED EXECUTIVE'S RETIREMENT BENEFIT. If Executive attains age 62 while Disabled, then he may be eligible to receive a Retirement Benefit subject to the rules of Article III, as if Executive continued his or her employment until age 62 with Average Earnings calculated as provided for in Section 2.3(a). ARTICLE VI--ELECTIONS, CLAIMS, COMMENCEMENT OF PAYMENTS AND BENEFICIARY DESIGNATIONS ---------------------------------------------- SECTION 6.1 GENERAL. All elections to receive benefits under this Agreement must be made in writing to the Committee in the form specified by the Committee and include the information or documentation that the Committee deems necessary. The Committee, in its discretion, may request additional information or reasonable documentation from time to time in order to determine whether Executive receiving a Disability Benefit continues to be Disabled, and in order to determine whether any Beneficiary who is receiving a Death Benefit is entitled hereunder to continue receiving a Death Benefit or the amount thereof. SECTION 6.2 COMMENCEMENT OF PAYMENTS. Payment of benefits under this Agreement shall begin as soon as administratively feasible after the Executive (or Beneficiary, if applicable) has provided a claim for benefits in writing to the Committee, including any supporting documentation required by the Committee, and the Committee has determined that the Executive (or Beneficiary, if applicable) satisfies the requirements for payment. Retirement Benefits shall be payable on the later of: (a) the first day of the month following the month in which the Executive satisfies all of the conditions set forth in Section 3.1(a), or (b) if later, the first day of the month following the month in which the Executive attains the earlier of age 62, or the age, below 62, elected by the Participant pursuant to and in accordance with the conditions of Section 3.1(b), provided, however, that in the event Executive has satisfied the conditions of Section 3.1(a)(1), (3) and (4) in or as of a particular month (the "Termination Month") and satisfies the conditions of Section 3.1(a)(2) and (5) (effective as of the date of termination of employment) either subsequently or contemporaneously with the Termination Month, and provided that the Executive has attained during the Termination Month age 62 or an age less than 62 with respect to which the Committee has approved retirement pursuant to Section 3.1(b), Retirement 14 Alton J. Brann Supplemental Executive Retirement Agreement Benefits shall be payable to the Executive as of the first day of the month following the Termination Month and, in the case of retirement pursuant to Section 3.1(b), on such terms and conditions as specified by the Committee. Disability and Death Benefits shall be payable from the first day of the month following the month in which the Executive becomes disabled or dies, as the case may be. In the event of any administrative delay in actual payments, payments shall be made retroactively to the first day of the month following the month in which the event which is the basis for the payment occurs but without any payment of interest or other compensation for such delay in payment. Notwithstanding any provision of this Agreement, upon a Change of Control the Committee may, in its sole discretion, determine to postpone the lump sum payment of Retirement, Death and Disability Benefits payable upon a Change of Control, in which case such Benefit payments shall be made as otherwise provided in this Agreement, without regard to the Change of Control, provided however, that if Executive is party to a Change of Control Agreement, such Benefit payments shall be calculated using the age of Executive as adjusted pursuant to the Change of Control Agreement. In the event the Committee later determines, in its sole discretion, to effect such a lump sum payment of the remainder of such Benefits, it shall have the power and authority to do so. SECTION 6.3 FORM OF BENEFIT ELECTIONS. An election to receive payment of Retirement Benefits in a form other than the Normal Form must be submitted to the Committee in writing at any time prior to the commencement of payments. An election must be made in the form specified by the Committee and include the information or documentation that the Committee deems necessary, including written consent of the spouse in the case Executive is married and elects a Retirement Benefit in a form other than the Normal Form. The filing of an election as to the form of Retirement Benefits shall revoke any pre-existing election, except that a revocation of an election by Executive while married shall be valid only if accompanied by the spouse's written consent to the subsequent election (other than a subsequent election to receive payments in the Normal Form), and except that once Retirement Benefits have commenced under this Agreement, the form of the Retirement Benefit payable is irrevocable. SECTION 6.4 BENEFICIARIES. If the Committee makes available alternative benefit forms that provide for payments after an Executive's death, the Executive shall designate the Beneficiary under such payment form in accordance with the procedures set forth by the Committee. SECTION 6.5 FAILURE TO CLAIM. If Executive whose employment with the Company terminated on or before attaining age 62 fails to claim payment of Retirement Benefits until after attaining age 62, the Retirement Benefits payable to or with respect to Executive shall be the monthly amount which would have been payable to Executive at age 62, and Executive shall be entitled to receive Retirement Benefit payments retroactive to the month such payments would have first accrued following attainment of age 62, but without interest or other payment on account of such deferred receipt. Similarly, if Executive remains employed by the Company after attaining age 62 but, upon termination of employment by the Company after attaining age 62, fails to claim payment of Retirement Benefits until a date after such termination of employment, the Retirement Benefits payable to or with respect to Executive shall, nevertheless, be the monthly amount which would have been payable to Executive upon termination of employment with the Company, and Executive shall be entitled to receive Retirement Benefit payments retroactive to the month such payments would have first accrued following termination of employment, but without interest or other payment on account of such 15 Alton J. Brann Supplemental Executive Retirement Agreement deferred payment. Executive does not have the right to defer payment of Retirement Benefits beyond the date Executive is otherwise eligible to begin receiving Retirement Benefits. ARTICLE VII--ADMINISTRATION --------------------------- The Committee shall administer the Agreement in accordance with its terms and purposes. The Committee shall have full authority and discretion to interpret the Agreement, to determine benefits pursuant to the terms of the Agreement, to establish rules and procedures necessary to carry out the terms of the Agreement, and to waive or modify any requirements or conditions on the receipt or calculation of benefits under the Agreement where the Committee determines that such a waiver or modification is appropriate. In the event Executive is or was also a participant in a similar supplemental retirement plan for highly-compensated employees within the meaning of Sections 201(2), 301(a), and 401(a)(1) of Title I of ERISA and maintained by UNOVA, Inc. or one of its subsidiaries or affiliates (a "Subsidiary Plan"), the Committee shall have the power and authority to modify and integrate the benefits payable under this Agreement with the benefits payable under the Subsidiary Plan. All decisions by the Committee shall be final and binding on all parties. The Committee may appoint one or more officers or employees of the Company to act on the Committee's behalf with respect to administrative matters related to the Agreement. ARTICLE VIII--SOURCE OF PAYMENTS -------------------------------- SECTION 8.1 GENERAL ASSETS OF COMPANY. Benefits payable under this Agreement shall be paid directly to the Executive, or to the Executive's Beneficiary, as applicable, from the general assets of the Company, including the assets of the grantor Trust to the extent that such a trust is created and so provides. If any person acquires a right to receive payments from the Company under this Agreement, such right shall be no greater than the right of any unsecured general creditor of the Company notwithstanding the fact that the Company may establish an advance accrual reserve on its books against its future liability under this Agreement. ARTICLE IX--CLAIMS AND ENFORCEMENT ---------------------------------- SECTION 9.1 ADMINISTRATIVE PROCEDURES. (a). NOTICE OF DENIAL. If the Committee determines that any person who has submitted a claim for payment of benefits under this Agreement is not eligible for payment of benefits or, if applicable, is not eligible for payment of benefits in the form or amount requested, then the Committee shall, within a reasonable period of time, but no later than 90 days after receipt of the written claim, notify the claimant of the denial of the claim. Such notice of denial: (1) shall be in writing; (2) shall be written in a manner calculated to be understood by the claimant; and (3) shall contain: (A) the specific reason or reasons for denial of the claim; (B) a specific reference to the pertinent Agreement provisions or administrative rules and regulations upon which the denial is based; (C) a description of any additional material or information necessary for the claimant to perfect the claim; and (D) an explanation of the Agreement's appeal procedures. 16 Alton J. Brann Supplemental Executive Retirement Agreement (b). RECONSIDERATION PROCEDURES. Within 90 days of the receipt by the claimant of the written notice of denial of the claim, the claimant may file a written request with the Committee that it conduct a full and fair review of the denial of the claimant's claim for benefits. The claimant's written request must include a statement of the grounds on which the claimant appeals the original claim denial. The Committee shall deliver to the claimant a written decision on the claim promptly, but not later than 60 days after the receipt of the claimant's request for review, except that if there are special circumstances that require an extension of time for processing, the 60-day period shall be extended to 120 days, in which case written notice of the extension shall be furnished to the claimant prior to the end of the 60-day period. SECTION 9.2 ENFORCEMENT. (a). RIGHT TO ENFORCE. Within 90 days after exhaustion of the review and appeal procedures provided for in Section 9.1 or, if the Committee fails to grant or deny the claim within 120 days after the claimant's original claim or fails to provide the written decision of the Committee on any written request for reconsideration within the time period in Section 9.1(b), within 90 days after such failure, the Company's obligations under the Agreement may be enforced only through binding arbitration as provided for hereinafter, initiated by Executive or, upon the death of Executive, by Executive's surviving spouse, Dependent Child, or personal representative (as the case may be, the "Claimant"). (b). ATTORNEYS' FEES AND COSTS. If, prior to a Change of Control, any Claimant is denied a claim, in whole or in part, for benefits under this Agreement and the Claimant requests reconsideration under the procedures described in Section 9.1(b), or initiates any other legal proceeding (other than binding arbitration pursuant to the following provisions of this Article IX) with respect to such alleged claim, the Company shall have no obligation to pay or reimburse the Claimant for attorneys' fees and costs. If, on or after a Change of Control, any Claimant is denied a claim for benefits under this Agreement and the Claimant has requested reconsideration under the procedures described in Section 9.1(b), or initiates binding arbitration or both reconsideration and binding arbitration, to enforce any obligation of the Company under this Agreement the basis of which is alleged failure of the Committee to administer this Agreement in accordance with its terms or, if following a Change of Control, the Company fails to make payment of Benefits as determined by the Committee, the Company shall pay such Claimant's attorneys' fees and costs incurred in connection with the review and binding arbitration proceedings, provided that the arbitrator determines that the claim is not frivolous. All attorneys' fees and costs payable under this Section 9.2(b) shall be paid by the Company as they are incurred by the Claimant, but no later than 30 days from the date that the Claimant submits a bill or other statement to the Company. (c). INTEREST. If any Claimant prevails in a reconsideration procedure described in Section 9.1(b), or if a Claimant prevails in the binding arbitration proceeding pursuant to Section 9.3(a) to enforce the payment of benefits under this Agreement, the Company shall pay interest to the Claimant on any unpaid benefits accruing from the date that benefit payments should have commenced and continuing until the date that such owed and unpaid benefits are paid to the Claimant in full. For purposes of the preceding sentence, interest shall accrue at an annual rate equal to one percent, plus the prime rate reported by THE WALL STREET JOURNAL as in effect from time to time, each change in the prime rate to be effective 17 Alton J. Brann Supplemental Executive Retirement Agreement for purposes of any interest computation on the date of publication of such changed prime rate in THE WALL STREET JOURNAL. SECTION 9.3 ARBITRATION. The rights of Executive hereunder are conditional upon the acceptance by Executive, on the Executive's behalf and on behalf of the Claimants, of all of the terms and conditions of this Agreement including specifically and without limitation this Article IX. Any controversy or claim arising out of or under the Agreement which is not resolved by the reconsideration referred to in Section 9.1(b) shall be settled by arbitration in accordance with the National Rules for the Resolution of Employment Disputes of the American Arbitration Association ("AAA") or the Employment Arbitration Rules of the Judicial Arbitration and Mediation Services/Endispute ("JAMS"), subject to the further provisions of this Section 9.3. Hereinafter the term "Rules" means and refers to the aforesaid AAA Rules or the JAMS Rules, as the case may be. Judgment upon the award rendered by the arbitrator may be rendered in any court having jurisdiction. The Rules are modified or supplemented as follows: (a). There shall be one arbitrator, unless the parties agree to more than one arbitrator; (b). The arbitrator shall be a retired judge or attorney with professional experience and expertise in designing or administering corporate retirement benefits and plans, and resident in the Southern California area, unless the parties agree otherwise; (c). The arbitration shall be conducted within Los Angeles County, California, unless the parties agree otherwise; (d). The party desiring to initiate the arbitration shall advise the other party in writing of such desire; (e) Within 10 days of receipt of a notice pursuant to subparagraph (d) above the party receiving the notice shall designate either the AAA or JAMS as the arbitration agency, but in the event such party fails to designate within such period the initiating party shall have the right to designate the AAA or JAMS; (f). All claims arising under this Agreement known or which should be known to the party initiating the arbitration shall be included in the issues presented to the AAA or JAMS, as the case may be, for arbitration and any which are not included shall be effectively waived; (g). The expedited procedures of the AAA or JAMS, as the case may be, shall be applied in any case where no disclosed claim or counterclaim exceeds the amount then established by the AAA or JAMS for use of expedited procedures, exclusive of interest and arbitration costs; (h). The decision of the arbitrator shall be rendered within 60 days after the close of hearings; (i). The Company and the Claimant shall furnish to the other, 30 days prior to the first hearing, a list and identification of all witnesses, and copies of all exhibits intended 18 Alton J. Brann Supplemental Executive Retirement Agreement to be submitted by that party. Ten days prior to the first hearing, each party shall have the right to supplement their intended list of witnesses and provide additional exhibits. Only such witnesses and such exhibits identified by one party or the other may be offered in the arbitration hearings; and (j). Any documents, affidavits or other evidence requested by the arbitrator must be submitted within ten days after conclusion of the arbitration hearings, unless the arbitrator grants additional time; ARTICLE X--MISCELLANEOUS ------------------------ SECTION 10.1 EMPLOYMENT RIGHTS. Nothing contained in this Agreement shall be construed as a contract of employment between the Company and the Executive, or as a right to continued employment with the Company, or as a limitation of the right of the Company to discharge Executive, with or without cause. SECTION 10.2 RIGHTS OF THE COMMITTEE. To the extent permitted by law, the Company shall indemnify the Committee (including any officers and employees of the Company appointed to act on behalf of the Committee) and hold such individuals harmless from and against any damages, losses, costs, and expenses incurred (including, without limitation, expenses of investigation and the fees and expenses of counsel) in the course of administering this Agreement. The Company shall bear all expenses of the Committee incurred in the course of administering this Agreement. SECTION 10.3 ASSIGNMENT. The benefits payable under this Agreement may not be assigned or alienated. SECTION 10.4 APPLICABLE LAW. This Agreement shall be governed by the laws of Delaware. SECTION 10.5 ENTIRE AGREEMENT. This writing is the final expression of this Agreement and a complete and exclusive statement of its terms, except that to the extent that this Agreement refers to the Trust, the terms of the Trust Agreement, as of the date immediately preceding a Change of Control, shall be deemed to be incorporated herein. SECTION 10.6 TERMS. Except as required otherwise by the context, capitalized terms that are used in this Agreement shall have the meaning assigned to them in Article II or elsewhere in this Agreement. Feminine or neuter pronouns shall be substituted for those of the masculine form and the plural shall be substituted for the singular, in any place or places herein where the context may require such substitution or substitutions. The title and headings of the Sections of this Agreement are for convenience only, and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. SECTION 10.7 WAIVER. Any waiver of or failure to enforce any provision of this Agreement in any instance shall not be deemed a waiver of such provision as to any other or subsequent instance. 19 Alton J. Brann Supplemental Executive Retirement Agreement SECTION 10.8 RELEASE. Executive agrees that this Agreement is in substitution for, and in place of, the similar Supplemental Executive Retirement Agreement between Executive and Western Atlas Inc. and is full release of all rights of the Executive under the Western Atlas Agreement. In Witness Whereof, intending to be legally bound, the parties hereto have executed this Agreement or caused this Agreement to be executed on their respective behalfs on and as of October __, 1997. UNOVA, INC. By: ------------------------------- Virginia S. Young Vice President and Secretary EXECUTIVE By: ------------------------------- Alton J. Brann 20 EX-10.M 9 CREDIT AGREEMENT Exhibit 10.M EXECUTION COPY $400,000,000 CREDIT AGREEMENT dated as of September 24, 1997 among UNOVA, Inc. The Banks Listed Herein and Morgan Guaranty Trust Company of New York, as Agent _______________________________________________________ J.P. Morgan Securities Inc., Arranger Bank of America National Trust and Savings Association The Bank of New York The Chase Manhattan Bank CIBC Inc. The First National Bank of Chicago and NationsBank of Texas, N.A., Co-Agents TABLE OF CONTENTS ARTICLE I DEFINITIONS SECTION 1.01. Definitions.............................................. 1 SECTION 1.02. Accounting Terms and Determinations...................... 17 SECTION 1.03. Types of Borrowings...................................... 17 ARTICLE II THE CREDITS SECTION 2.01. Commitments to Lend...................................... 18 SECTION 2.02. Notice of Committed Borrowings........................... 18 SECTION 2.03. Money Market Borrowings.................................. 19 SECTION 2.04. Notice to Banks; Funding of Loans........................ 23 SECTION 2.05. Notes.................................................... 24 SECTION 2.06. Maturity of Loans........................................ 25 SECTION 2.07. Interest Rates........................................... 25 SECTION 2.08. Facility Fee............................................. 28 SECTION 2.09. Optional Termination or Reduction of Commitments......... 29 SECTION 2.10. Scheduled Termination or Reduction of Commitments........ 29 SECTION 2.11. Optional Prepayments..................................... 29 SECTION 2.12. General Provisions as to Payments........................ 30 SECTION 2.13. Funding Losses........................................... 30 SECTION 2.14. Computation of Interest and Fees......................... 31 SECTION 2.15. Regulation D Compensation................................ 31 SECTION 2.16. Increased Commitments; Additional Banks.................. 32 ARTICLE III CONDITIONS SECTION 3.01. Effectiveness............................................ 33 SECTION 3.02. Borrowings............................................... 34 ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Corporate Existence and Power............................ 35 SECTION 4.02. Corporate and Governmental Authorization; No Contravention...................................................... 35 SECTION 4.03. Binding Effect........................................... 35 SECTION 4.04. Financial Information.................................... 36 SECTION 4.05. Litigation............................................... 36 2 SECTION 4.06. Compliance with ERISA.................................... 37 SECTION 4.07. Environmental Matters.................................... 37 SECTION 4.08. Taxes.................................................... 37 SECTION 4.09. Material Subsidiaries.................................... 38 SECTION 4.10. Not an Investment Company................................ 38 SECTION 4.11. Use of Proceeds.......................................... 38 SECTION 4.12. Full Disclosure.......................................... 38 ARTICLE V COVENANTS SECTION 5.01. Information.............................................. 39 SECTION 5.02. Maintenance of Property; Insurance....................... 41 SECTION 5.03. Conduct of Business and Maintenance of Existence......... 41 SECTION 5.04. Compliance with Laws..................................... 42 SECTION 5.05. Leverage Ratio........................................... 42 SECTION 5.06. Maintenance of Certain Operations........................ 42 SECTION 5.07. Limitation on Subsidiary Debt............................ 42 SECTION 5.08. Negative Pledge.......................................... 42 SECTION 5.09. Consolidations, Mergers and Sales of Assets.............. 43 ARTICLE VI DEFAULTS SECTION 6.01. Events of Default........................................ 44 SECTION 6.02. Notice of Default........................................ 46 ARTICLE VII THE AGENT SECTION 7.01. Appointment and Authorization............................ 46 SECTION 7.02. Agent and Affiliates..................................... 47 SECTION 7.03. Action by Agent.......................................... 47 SECTION 7.04. Consultation with Experts................................ 47 SECTION 7.05. Liability of Agent....................................... 47 SECTION 7.06. Indemnification.......................................... 48 SECTION 7.07. Credit Decision.......................................... 48 SECTION 7.08. Successor Agent.......................................... 48 SECTION 7.09. Agent's Fees............................................. 49 ARTICLE VIII CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair............................................................ 49 SECTION 8.02. Illegality............................................... 50 SECTION 8.03. Increased Cost and Reduced Return........................ 50 SECTION 8.04. Taxes.................................................... 52 3 SECTION 8.05. Base Rate Loans Substituted for Affected Fixed Rate Loans............................................................. 54 SECTION 8.06. Substitution of Bank..................................... 54 ARTICLE IX MISCELLANEOUS SECTION 9.01. Notices.................................................. 55 SECTION 9.02. No Waivers............................................... 55 SECTION 9.03. Expenses; Indemnification................................ 55 SECTION 9.04. Sharing of Set-Offs...................................... 56 SECTION 9.05. Amendments and Waivers................................... 56 SECTION 9.06. Successors and Assigns................................... 57 SECTION 9.07. Collateral............................................... 59 SECTION 9.08. Governing Law; Submission to Jurisdiction................ 59 SECTION 9.09. Counterparts; Integration................................ 59 SECTION 9.10. WAIVER OF JURY TRIAL..................................... 59 4 Schedule I - Pricing Schedule Exhibit A - Note Exhibit B - Money Market Quote Request Exhibit C - Invitation for Money Market Quotes Exhibit D - Money Market Quote Exhibit E - Opinion of Counsel for the Borrower and the Guarantors Exhibit F - Opinion of Special Counsel for the Agent Exhibit G - Assignment and Assumption Agreement Exhibit H - Subsidiary Guarantee Agreement 5 CREDIT AGREEMENT AGREEMENT dated as of September 24, 1997 among UNOVA, INC., the BANKS party hereto and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent. W I T N E S S E T H: WHEREAS, Western Atlas Inc. ("Western Atlas") has announced its intention to distribute to its shareholders 100% of the capital stock of UNOVA, Inc. (the "Spin-Off"); and WHEREAS, in anticipation of the Spin-Off, the parties hereto wish to enter into this agreement to provide UNOVA, Inc. with a committed credit facility to enable it to repay certain inter-company indebtedness owed to Western Atlas and otherwise to provide financing for its general corporate purposes; NOW, THEREFORE, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. DEFINITIONS. The following terms, as used herein, have the following meanings: "Absolute Rate Auction" means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates pursuant to Section 2.03. "Additional Bank" has the meaning set forth in Section 2.16(b). "Adjusted CD Rate" has the meaning set forth in Section 2.07(b). "Administrative Questionnaire" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Agent and submitted to the Agent (with a copy to the Borrower) duly completed by such Bank. "Affiliate" means any Person (other than a Subsidiary) directly or indirectly controlling or controlled by or under direct or indirect common control with the Borrower. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent" means Morgan Guaranty Trust Company of New York in its capacity as agent for the Banks under the Financing Documents, and its successors in such capacity. "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office. "Assessment Rate" has the meaning set forth in Section 2.07(b). "Assignee" has the meaning set forth in Section 9.06(c). "Bank" means each financial institution listed on the signature pages hereof, each Additional Bank which becomes a Bank pursuant to Section 2.16, each Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means a Committed Loan made or to be made by a Bank as a Base Rate Loan in accordance with the applicable Notice of Committed Borrowing or pursuant to Article VIII. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Borrower" means UNOVA, Inc., a Delaware corporation, and its successors. 2 "Borrower's Form 10" means the Borrower's Registration Statement on Form 10, as filed with the Securities and Exchange Commission on August 18, 1997 pursuant to the Securities Exchange Act of 1934. "Borrowing" has the meaning set forth in Section 1.03. "Capital Lease" means a lease that would be capitalized on a balance sheet of the lessee prepared in accordance with generally accepted accounting principles. "CD Base Rate" has the meaning set forth in Section 2.07(b). "CD Loan" means a Committed Loan made or to be made by a Bank as a CD Loan in accordance with the applicable Notice of Committed Borrowing. "CD Margin" has the meaning set forth in Section 2.07(b). "CD Reference Banks" means The Chase Manhattan Bank, CIBC Inc. and Morgan Guaranty Trust Company of New York, or such other bank or banks as the Borrower and the Agent may from time to time mutually designate. "Change of Control" means any of the following: (a) An acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30 percent or more of either (i) the then outstanding shares of common stock of the Borrower (the "Outstanding Borrower Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Borrower entitled to vote generally in the election of directors (the "Outstanding Borrower Voting Securities"); excluding, however, the following acquisitions of Outstanding Borrower Common Stock and Outstanding Borrower Voting Securities: (i) any acquisition by the Borrower, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Borrower or any corporation controlled by the Borrower, or (iii) any acquisition by any Person pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this definition; or 3 (b) Individuals who, as of the Effective Date, constitute the Board of Directors of the Borrower (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; PROVIDED, however, that any individual who becomes a member of the Board subsequent to the Effective Date whose election, or nomination for election by the Borrower's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but provided further that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board shall not be so considered as a member of the Incumbent Board; or (c) The approval by the shareholders of the Borrower of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Borrower (a "Business Combination"), or if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (i) all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Borrower Common Stock and Outstanding Borrower Voting Securities immediately prior to such Business Combination will beneficially own, directly or indirectly, more than 60 percent of, respectively, the then outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Borrower or all or substantially all of the Borrower's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Borrower Common Stock and Outstanding Borrower Voting Securities, as the case may be, (ii) no Person (other than any employee benefit plan (or related trust) sponsored or maintained by the Borrower or any corporation controlled by the Borrower or such corporation resulting from such Business Combination) will beneficially own, directly or indirectly, 30 percent or more of, respectively, the outstanding shares of common 4 stock of the corporation resulting from such Business Combination or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors except to the extent that such ownership existed with respect to the Borrower prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination will have been members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) The approval by the shareholders of the Borrower of a complete liquidation or dissolution of the Borrower. "Commitment" means (i) with respect to each Bank listed on the signature pages hereof, the amount set forth opposite the name of such Bank on the signature pages of this Agreement and (ii) with respect to each Additional Bank or Assignee which becomes a Bank pursuant to Section 2.16 or 9.06(c), the amount of the Commitment thereby assumed by it, in each case as such amount may be changed from time to time pursuant to Sections 2.09, 2.10, 2.16 and 9.06(c). "Committed Loan" means a loan made or to be made by a Bank pursuant to Section 2.01. "Consolidated Current Liabilities" means at any date the consolidated current liabilities of the Borrower and its Consolidated Subsidiaries determined as of such date. "Consolidated Debt" means, at any date, the Debt of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis as of such date. "Consolidated EBITDA" means, for any period, Consolidated Net Income for such period plus, to the extent deducted in the determination of such Consolidated Net Income, (i) interest expense for such period, (ii) the provision for income taxes for such period, (iii) depreciation and amortization expense for such period and (iv) non-cash write-offs of in-process research and development costs during such period in connection with acquisitions; PROVIDED that the aggregate amount of such write-offs subsequent to the date of this Agreement added pursuant to this clause (iv) during the term of this Agreement shall not exceed $250,000,000. 5 "Consolidated Net Assets" means at any date Consolidated Total Assets less Consolidated Current Liabilities, all determined as of such date. "Consolidated Net Income" means, for any period, the net income of the Borrower and its Consolidated Subsidiaries for such period, determined on a consolidated basis. "Consolidated Net Worth" means at any date the shareholders' investment in the Borrower and its Consolidated Subsidiaries determined on a consolidated basis of such date. "Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Borrower in its consolidated financial statements if such statements were prepared as of such date. "Consolidated Total Assets" means at any date the total assets of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis as of such date. "D&P" means Duff & Phelps Credit Rating Co., and its successors. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable and deferred employee compensation obligations arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all unpaid reimbursement obligations of such Person in respect of letters of credit or similar instruments but only to the extent that either (x) the issuer has honored a drawing thereunder or (y) payment of such obligation is otherwise due under the terms thereof, (vi) all Debt secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person, and (vii) all Debt of others Guaranteed by such Person. "Default" means any condition or event which constitutes an Event of Default or which with the giving of 6 notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Derivatives Obligations" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close. "Domestic Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Agent; PROVIDED that any Bank may so designate separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and its CD Loans, on the other hand, in which case all references herein to the Domestic Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Domestic Loans" means CD Loans or Base Rate Loans or both. "Domestic Reserve Percentage" has the meaning set forth in Section 2.07(b). "Effective Date" means the date the Commitments become effective in accordance with Section 3.01. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or 7 land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "Equity Security" means any capital stock or other equity security, or any warrant or other right to purchase such an equity security. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Borrower, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Agent. "Euro-Dollar Loan" means a Committed Loan made or to be made by a Bank as a Euro-Dollar Loan in accordance with the applicable Notice of Committed Borrowing. "Euro-Dollar Margin" has the meaning set forth in Section 2.07(c). "Euro-Dollar Reference Banks" means the principal London offices of The Chase Manhattan Bank, CIBC Inc. and Morgan Guaranty Trust Company of New York, or such other bank or banks as the Borrower and the Agent may from time to time mutually designate. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining 8 the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). "Event of Default" has the meaning set forth in Section 6.01. "Federal Funds Rate" means, for any day (the "accrual date"), the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on the accrual date, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, PROVIDED that (i) if the accrual date is not a Domestic Business Day, the Federal Funds Rate for the accrual date shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for the accrual date shall be the average rate quoted to Morgan Guaranty Trust Company of New York on the accrual date (or next preceding Domestic Business Day) on such transactions as determined by the Agent. "Financing Documents" means this Agreement, the Notes and the Subsidiary Guarantee Agreement. "Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate pursuant to Section 8.01(a)) or any combination of the foregoing. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the 9 purpose of assuring in any other manner the holder of such Debt of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part), PROVIDED that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Guarantor" means each Subsidiary from time to time party to the Subsidiary Guarantee Agreement. "Hazardous Substances" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "Increased Commitments" has the meaning set forth in Section 2.16(a). "Indemnitee" has the meaning set forth in Section 9.03(b). "Interest Period" means: (1) with respect to each Euro-Dollar Borrowing, the period commencing on the date of such Borrowing and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice of Borrowing; PROVIDED that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (2) with respect to each CD Borrowing, the period commencing on the date of such Borrowing and ending 30, 60, 10 90 or 180 days thereafter, as the Borrower may elect in the applicable Notice of Borrowing; PROVIDED that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (b) below) which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (3) with respect to each Base Rate Borrowing, the period commencing on the date of such Borrowing and ending 30 days thereafter; PROVIDED that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (b) below) which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; (4) with respect to each Money Market LIBOR Borrowing, the period commencing on the date of such Borrowing and ending such whole number of months thereafter as the Borrower may elect in accordance with Section 2.03; PROVIDED that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date; 11 (5) with respect to each Money Market Absolute Rate Borrowing, the period commencing on the date of such Borrowing and ending such number of days thereafter (but not less than 7 days) as the Borrower may elect in accordance with Section 2.03; PROVIDED that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Leverage Ratio" means, at any date, the ratio of Consolidated Debt at such date to Consolidated EBITDA for the period of four consecutive fiscal quarters most recently ended on or prior to such date. "LIBOR Auction" means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.03. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Litton" means Litton Industries, Inc., a Delaware corporation. "Loan" means a Domestic Loan or a Euro-Dollar Loan or a Money Market Loan and "Loans" means Domestic Loans or Euro-Dollar Loans or Money Market Loans or any combination of the foregoing. "London Interbank Offered Rate" has the meaning set forth in Section 2.07(c). "Material Debt" means Debt (other than the Notes) of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate principal amount exceeding $25,000,000. 12 "Material Financial Obligations" means a principal amount of Debt and/or payment or collateralization obligations in respect of Derivatives Obligations of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $25,000,000. "Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $25,000,000. "Material Subsidiary" means (i) any Guarantor and (ii) any other Subsidiary, including its Subsidiaries, which meets any of the following conditions: (1) the Borrower's and its other Subsidiaries' investments in and advances to such Subsidiary exceed 5 percent of the total assets of the Borrower and its Subsidiaries consolidated as of the end of the most recently completed fiscal year; or (2) the Borrower's and its other Subsidiaries' proportionate share of the total assets (after intercompany eliminations) of such Subsidiary exceeds 5 percent of the total assets of the Borrower and its Subsidiaries consolidated as of the end of the most recently completed fiscal year; or (3) the Borrower's and its other Subsidiaries' equity in the income from continuing operations before income taxes, extraordinary items and cumulative effect of a change in accounting principle of such Subsidiary exceeds 5 percent of such income of the Borrower and its Subsidiaries consolidated for the most recently completed fiscal year. Computational note: For purposes of making the prescribed income test the following guidance should be applied: 1. When a loss has been incurred by either the Borrower and its Subsidiaries consolidated or the tested Subsidiary, but not both, the equity in the income or loss of the tested Subsidiary should be excluded from the income of the Borrower and its Subsidiaries consolidated for purposes of the computation. 2. If income of the Borrower and its Subsidiaries consolidated for the most recent fiscal year is at least 5 percent lower than the average of the income for the last five fiscal years, such average income should be substituted 13 for purposes of the computation. Any loss years should be omitted for purposes of computing average income. "Money Market Absolute Rate" has the meaning set forth in Section 2.03(d). "Money Market Absolute Rate Loan" means a loan made or to be made by a Bank pursuant to an Absolute Rate Auction. "Money Market Lending Office" means, as to each Bank, its Domestic Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its Money Market Lending Office by notice to the Borrower and the Agent; PROVIDED that any Bank may from time to time by notice to the Borrower and the Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all references herein to the Money Market Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Money Market LIBOR Loan" means a loan made or to be made by a Bank pursuant to a LIBOR Auction (including such a loan bearing interest at the Base Rate pursuant to Section 8.01(a)). "Money Market Loan" means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan. "Money Market Margin" has the meaning set forth in Section 2.03(d). "Money Market Quote" means an offer by a Bank to make a Money Market Loan in accordance with Section 2.03. "Moody's" means Moody's Investors Service, Inc., and its successors. "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions in an amount exceeding $1,000,000 per annum or has within the preceding five plan years made such contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. 14 "Notes" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "Notice of Borrowing" means a Notice of Committed Borrowing (as defined in Section 2.02) or a Notice of Money Market Borrowing (as defined in Section 2.03(f)). "Obligors" means the Borrower and the Guarantors. "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning set forth in Section 9.06(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, a corporation, a partnership, a limited liability company, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Pricing Schedule" means the Schedule attached hereto identified as such. "Prime Rate" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "Rating Agencies" means D&P, Moody's and S&P. 15 "Reference Banks" means the CD Reference Banks or the Euro-Dollar Reference Banks, as the context may require, and "Reference Bank" means any one of such Reference Banks. "Refunding Borrowing" means a Committed Borrowing which, after application of the proceeds thereof, results in no net increase in the outstanding principal amount of Committed Loans made by any Bank. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Required Banks" means at any time Banks having at least 60% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing at least 60% of the aggregate unpaid principal amount of the Loans. "Revolving Credit Period" means the period from and including the Effective Date to but not including the Termination Date. "S&P" means Standard & Poor's Ratings Services, and its successors. "Spin-Off" has the meaning set forth in the recitals hereto. "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Borrower (or, if such term is used with reference to another Person, by such other Person). "Subsidiary Guarantee Agreement" means the Subsidiary Guarantee Agreement among the Borrower, the Agent and the Subsidiaries of the Borrower from time to time parties thereto, substantially in the form of Exhibit H, as the same may be amended from time to time in accordance with the terms thereof. "Termination Date" means September 24, 2002 (or if such date is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day). "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a 16 plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "United States" means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions. "Western Atlas" has the meaning set forth in the recitals hereto. "Wholly-Owned Consolidated Subsidiary" means any Consolidated Subsidiary all of the shares of capital stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by the Borrower. SECTION 1.02. ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks; PROVIDED that, if the Borrower notifies the Agent that the Borrower wishes to amend any covenant in Article V to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Agent notifies the Borrower that the Required Banks wish to amend Article V for such purpose), then the Borrower's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Banks. SECTION 1.03. TYPES OF BORROWINGS. The term "Borrowing" denotes the aggregation of Loans of one or more Banks made or to be made to the Borrower pursuant to Article 17 II on a single date and for a single Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (E.G., a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro-Dollar Loans) or by reference to the provisions of Article II under which participation therein is determined (I.E., a "Committed Borrowing" is a Borrowing under Section 2.01 in which all Banks participate in proportion to their Commitments, while a "Money Market Borrowing" is a Borrowing under Section 2.03 in which the Bank participants are determined on the basis of their bids in accordance therewith). ARTICLE II THE CREDITS SECTION 2.01. COMMITMENTS TO LEND. Subject to the terms and conditions set forth in this Agreement, each Bank severally agrees to make loans to the Borrower from time to time during the Revolving Credit Period in an aggregate principal amount at any time outstanding not to exceed the amount of such Bank's Commitment. Each Borrowing under this Section 2.01 shall be in an aggregate principal amount of $10,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in an aggregate amount equal to the amount available in accordance with Section 3.02(b) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section, repay, or to the extent permitted by Section 2.11, prepay loans and reborrow under this Section at any time during the Revolving Credit Period. SECTION 2.02. NOTICE OF COMMITTED BORROWINGS. The Borrower shall give the Agent notice (a "Notice of Committed Borrowing") not later than 10:30 A.M. (New York City time) on (x) the date of each Base Rate Borrowing, (y) the second Domestic Business Day before each CD Borrowing and (z) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, 18 (c) whether the Loans comprising such Borrowing are to be CD Loans, Base Rate Loans or Euro-Dollar Loans, and (d) in the case of a Committed Fixed Rate Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. SECTION 2.03. MONEY MARKET BORROWINGS. (a) THE MONEY MARKET OPTION. In addition to Committed Borrowings pursuant to Section 2.01, the Borrower may, as set forth in this Section, request the Banks during the Revolving Credit Period to make offers to make Money Market Loans to the Borrower. The Banks may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) MONEY MARKET QUOTE REQUEST. When the Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Agent by telex or facsimile transmission a Money Market Quote Request substantially in the form of Exhibit B hereto so as to be received no later than 10:30 A.M. (New York City time) on (x) the fifth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction, (ii) the aggregate amount of such Borrowing, which shall be $10,000,000 or a larger multiple of $1,000,000, (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and 19 (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate. The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five Euro-Dollar Business Days (or such other number of days as the Borrower and the Agent may agree) of any other Money Market Quote Request. (c) INVITATION FOR MONEY MARKET QUOTES. Promptly upon receipt of a Money Market Quote Request, the Agent shall send to the Banks by telex or facsimile transmission an Invitation for Money Market Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section. (d) SUBMISSION AND CONTENTS OF MONEY MARKET QUOTES. (i) Each Bank may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Agent by telex or facsimile transmission at its offices specified in or pursuant to Section 9.01 not later than (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:30 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); PROVIDED that Money Market Quotes submitted by the Agent (or any affiliate of the Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) 1:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:15 A.M. (New York City time) on the proposed date of Borrowing, in the case of an Absolute Rate Auction. Subject to Articles III and VI, any Money Market Quote so made shall be irrevocable except with 20 the written consent of the Agent given on the instructions of the Borrower. (ii) Each Money Market Quote shall be in substantially the form of Exhibit D hereto and shall in any case specify: (A) the proposed date of Borrowing, (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (w) may be greater than or less than the Commitment of the quoting Bank, (x) must be $5,000,000 or a larger multiple of $1,000,000, (y) may not exceed the principal amount of Money Market Loans for which offers were requested and (z) may be subject to an aggregate limitation as to the principal amount of Money Market Loans for which offers being made by such quoting Bank may be accepted, (C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the "Money Market Margin") offered for each such Money Market Loan, expressed as a percentage (specified to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate, (D) in the case of an Absolute Rate Auction, the rate of interest per annum (specified to the nearest 1/10,000th of 1%) (the "Money Market Absolute Rate") offered for each such Money Market Loan, and (E) the identity of the quoting Bank. A Money Market Quote may set forth up to five separate offers by the quoting Bank with respect to each Interest Period specified in the related Invitation for Money Market Quotes. (iii) Any Money Market Quote shall be disregarded if it: (A) is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection (d)(ii); (B) contains qualifying, conditional or similar language (other than the limitation set forth in clause (ii)(B)(z) above); 21 (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or (D) arrives after the time set forth in subsection (d)(i). (e) NOTICE TO BORROWER. The Agent shall promptly notify the Borrower of the terms (x) of any Money Market Quote submitted by a Bank that is in accordance with subsection (d) and (y) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Agent unless such subsequent Money Market Quote is submitted solely to correct a manifest error in such former Money Market Quote. The Agent's notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote may be accepted. (f) ACCEPTANCE AND NOTICE BY BORROWER. Not later than 10:30 A.M. (New York City time) on (x) the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Borrower and the Agent shall have mutually agreed and shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (a "Notice of Money Market Borrowing") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Money Market Quote in whole or in part; PROVIDED that: (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request, 22 (ii) the principal amount of each Money Market Borrowing must be $10,000,000 or a larger multiple of $1,000,000, (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be, and (iv) the Borrower may not accept any offer that is described in subsection (d)(iii) or that otherwise fails to comply with the requirements of this Agreement. (g) ALLOCATION BY AGENT. If offers are made by two or more Banks with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Agent among such Banks as nearly as possible (in multiples of $1,000,000, as the Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determinations by the Agent of the amounts of Money Market Loans shall be conclusive in the absence of manifest error. SECTION 2.04. NOTICE TO BANKS; FUNDING OF LOANS. (a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 12:00 Noon (New York City time) on the date of each Borrowing, each Bank participating therein shall (except as provided in subsection (c) of this Section) make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in Section 9.01. Unless the Agent determines that any applicable condition specified in Article III has not been satisfied, the Agent will make the funds so received from the Banks available to the Borrower at the Agent's aforesaid address. (c) If any Bank makes a new Loan hereunder on a day on which the Borrower is to repay all or any part of an outstanding Loan from such Bank, such Bank shall apply the proceeds of its new Loan to make such repayment and only an amount equal to the difference (if any) between the amount 23 being borrowed and the amount being repaid shall be made available by such Bank to the Agent as provided in subsection (b), or remitted by the Borrower to the Agent as provided in Section 2.12, as the case may be. (d) Unless the Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Agent such Bank's share of such Borrowing, the Agent may assume that such Bank has made such share available to the Agent on the date of such Borrowing in accordance with subsections (b) and (c) of this Section 2.04 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Agent, such Bank and, if such Bank shall fail to do so within one Domestic Business Day, the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. SECTION 2.05. NOTES. (a) The Loans of each Bank shall be evidenced by a single Note payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. (b) Each Bank may, by notice to the Borrower and the Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "Note" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note pursuant to Section 3.01(b), the Agent shall forward such Note to such Bank. Each Bank shall record the date, amount, type and maturity of each Loan made by it, and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such 24 Loan then outstanding; PROVIDED that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of any Obligor under any Financing Document. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. SECTION 2.06. MATURITY OF LOANS. Each Loan included in any Borrowing shall mature, and the principal amount thereof shall be due and payable, on the last day of the Interest Period applicable to such Borrowing. SECTION 2.07. INTEREST RATES. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable for each Interest Period on the last day thereof. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. (b) Each CD Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to such Interest Period; PROVIDED that if any CD Loan shall, as a result of clause (2)(b) of the definition of Interest Period, have an Interest Period of less than 30 days, such CD Loan shall bear interest during such Interest Period at the rate applicable to Base Rate Loans during such period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than 90 days, at intervals of 90 days after the first day thereof. Any overdue principal of or interest on any CD Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to such Loan and (ii) the rate applicable to Base Rate Loans for such day. "CD Margin" means a rate per annum determined in accordance with the Pricing Schedule. 25 The "Adjusted CD Rate" applicable to any Interest Period means a rate per annum determined pursuant to the following formula: [ CDBR ]* ACDR = [ ---------- ] + AR [ 1.00 - DRP ] ACDR = Adjusted CD Rate CDBR = CD Base Rate DRP = Domestic Reserve Percentage AR = Assessment Rate ------------------- * The amount in brackets being rounded upward, if necessary, to the next higher 1/100 of 1% The "CD Base Rate" applicable to any Interest Period is the rate of interest determined by the Agent to be the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period by two or more New York certificate of deposit dealers of recognized standing for the purchase at face value from each CD Reference Bank of its certificates of deposit in an amount comparable to the principal amount of the CD Loan of such CD Reference Bank to which such Interest Period applies and having a maturity comparable to such Interest Period. "Domestic Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of new non-personal time deposits in dollars in New York City having a maturity comparable to the related Interest Period and in an amount of $100,000 or more. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Domestic Reserve Percentage. "Assessment Rate" means for any day the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund classified as adequately capitalized and within supervisory subgroup "A" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. Section 327.4(a) (or any successor 26 provision) to the Federal Deposit Insurance Corporation (or any successor) for such Corporation's (or such successor's) insuring time deposits at offices of such institution in the United States. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Assessment Rate. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. "Euro-Dollar Margin" means a rate per annum determined in accordance with the Pricing Schedule. The "London Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. (d) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day from and including the date payment thereof was due to but excluding the date of actual payment, at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to such Loan and (ii) the Euro-Dollar Margin for such day plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than three months as the Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above by 27 (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). (e) Subject to Section 8.01(a), each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.07(c) as if the related Money Market LIBOR Borrowing were a Euro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the Bank making such Loan in accordance with Section 2.03. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Bank making such Loan in accordance with Section 2.03. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. Any overdue principal of or interest on any Money Market Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the Base Rate for such day. (f) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrower and the participating Banks of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (g) Each Reference Bank agrees to use its best efforts to furnish quotations to the Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. SECTION 2.08. FACILITY FEE. The Borrower shall pay to the Agent for the account of the Banks ratably in proportion to their Commitments a facility fee at the Facility Fee Rate determined daily in accordance with the Pricing Schedule. Such facility fee shall accrue (i) from and including the earlier of (x) October 31, 1997 and (y) the Effective Date to but excluding the Termination Date (or earlier date of termination of the Commitments in their 28 entirety), on the daily aggregate amount of the Commitments (whether used or unused) and (ii) from and including the Termination Date or earlier date of termination to but excluding the date the Loans shall be repaid in their entirety, on the daily aggregate outstanding principal amount of the Loans. Accrued fees under this subsection (a) shall be payable quarterly in arrears on the last Euro-Dollar Business Day of each March, June, September and December, and upon the date of termination of the Commitments in their entirety (and, if later, the date the Loans shall be repaid in their entirety). SECTION 2.09. OPTIONAL TERMINATION OR REDUCTION OF COMMITMENTS. The Borrower may, upon at least three Domestic Business Days' notice to the Agent (which shall promptly notify the Banks), (i) terminate the Commitments at any time, if no Loans are outstanding at such time or (ii) ratably reduce from time to time by an aggregate amount of $10,000,000 or any larger multiple thereof, the aggregate amount of the Commitments in excess of the aggregate outstanding principal amount of the Loans. SECTION 2.10. SCHEDULED TERMINATION OR REDUCTION OF COMMITMENTS. The Commitments shall terminate on the Termination Date and any Loans then outstanding (together with accrued interest thereon) shall be due and payable on such date. SECTION 2.11. OPTIONAL PREPAYMENTS. (a) The Borrower may (i) upon at least one Domestic Business Day's notice to the Agent, prepay any Base Rate Borrowing (or any Money Market Borrowing bearing interest at the Base Rate pursuant to Section 8.01(a)), (ii) upon at least three Domestic Business Days' notice to the Agent, subject to Section 2.13, prepay any CD Borrowing and (iii) upon at least three Euro-Dollar Business Days' notice to the Agent, subject to Section 2.13, prepay any Euro-Dollar Borrowing, in whole at any time, or from time to time in part in amounts aggregating $10,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Borrowing. (b) Except as provided in Section 2.11(a), the Borrower may not prepay all or any portion of the principal amount of any Money Market Loan prior to the maturity thereof. 29 (c) Upon receipt of a notice of prepayment pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share (if any) of such prepayment and such notice shall not thereafter be revocable by the Borrower. SECTION 2.12. GENERAL PROVISIONS AS TO PAYMENTS. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in Section 9.01. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Domestic Loans or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Money Market Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate. SECTION 2.13. FUNDING LOSSES. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan (pursuant to Article II, VI or VIII or otherwise) 30 on any day other than the last day of the Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.07(d), or if the Borrower fails to borrow or prepay any Fixed Rate Loans after notice has been given to any Bank in accordance with Section 2.04(a) or 2.11(c), the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or failure to borrow or prepay, PROVIDED that such Bank shall have delivered to the Borrower a certificate as to the amount of such loss or expense, setting forth the basis of calculation thereof, which certificate shall be conclusive in the absence of manifest error. SECTION 2.14. COMPUTATION OF INTEREST AND FEES. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and facility fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.15. REGULATION D COMPENSATION. For so long as any Bank maintains reserves against "Eurocurrency liabilities" (or any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of such Bank to United States residents), and as a result the cost to such Bank (or its Euro-Dollar Lending Office) of making or maintaining its Euro-Dollar Loans is increased, then such Bank may require the Borrower to pay, contemporaneously (or at such other time or times as the Borrower and such Bank may mutually agree) with each payment of interest on the Euro-Dollar Loans, additional interest on the related Euro-Dollar Loan of such Bank at a rate per annum up to but not exceeding the excess of (i) (A) the applicable London Interbank Offered Rate divided by (B) one MINUS the Euro-Dollar Reserve Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify the Borrower and the Agent, in which case such additional interest on the Euro-Dollar Loans of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each 31 Interest Period commencing at least three Euro-Dollar Business Days after the giving of such notice and (y) shall furnish to the Borrower at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans (or at such other time or times as the Borrower and such Bank may mutually agree) an officer's certificate setting forth the amount to which such Bank is then entitled under this Section (which shall be consistent with such Bank's good faith estimate of the level at which the related reserves are maintained by it). Each such certificate shall be accompanied by such information as the Borrower may reasonably request as to the computation set forth therein. SECTION 2.16. INCREASED COMMITMENTS; ADDITIONAL BANKS. (a) On a single occasion subsequent to the Effective Date, the Borrower may, upon at least 30 days' notice to the Agent (which shall promptly provide a copy of such notice to the Banks), propose to increase the aggregate amount of the Commitments by an amount not to exceed $100,000,000 (the amount of any such increase, the "Increased Commitments"). Each Bank party to this Agreement at such time shall have the right (but no obligation), for a period of 15 days following receipt of such notice, to elect by notice to the Borrower and the Agent to increase its Commitment by a principal amount which bears the same ratio to the Increased Commitments as its then Commitment bears to the aggregate Commitments then existing. (b) If any Bank party to this Agreement shall not elect to increase its Commitment pursuant to subsection (a) of this Section, the Borrower may designate another bank or other banks (which may be, but need not be, one or more of the existing Banks) which at the time agree to (i) in the case of any such bank that is an existing Bank, increase its Commitment and (ii) in the case of any other such bank (an "Additional Bank"), become a party to this Agreement. The sum of the increases in the Commitments of the existing Banks pursuant to this subsection (b) plus the Commitments of the Additional Banks shall not in the aggregate exceed the unsubscribed amount of the Increased Commitments. (c) An increase in the aggregate amount of the Commitments pursuant to this Section 2.16 shall become effective upon the receipt by the Agent of an agreement in form and substance satisfactory to the Agent signed by the Borrower, by each Additional Bank and by each other Bank whose Commitment is to be increased, setting forth the new Commitments of such Banks and setting forth the agreement of each Additional Bank to become a party to this Agreement and to be bound by all the terms and provisions hereof, together 32 with such evidence of appropriate corporate authorization on the part of the Borrower with respect to the Increased Commitments and such opinions of counsel for the Borrower with respect to the Increased Commitments as the Agent may reasonably request. ARTICLE III CONDITIONS SECTION 3.01. EFFECTIVENESS. The Commitments shall become effective on the date that each of the following conditions shall have been satisfied (or waived in accordance with Section 9.05): (a) receipt by the Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telegraphic, telex or other written confirmation from such party of execution of a counterpart hereof by such party); (b) receipt by the Agent for the account of each Bank of a duly executed Note dated on or before the Effective Date complying with the provisions of Section 2.05; (c) receipt by the Agent of counterparts of the Subsidiary Guarantee Agreement, duly executed by the Borrower and each of Subsidiaries listed on the signature pages thereof; (d) receipt by the Agent of an opinion of the principal legal officer of the Borrower, substantially in the form of Exhibit E hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (e) receipt by the Agent of an opinion of Davis Polk & Wardwell, special counsel for the Agent, substantially in the form of Exhibit F hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (f) receipt by the Agent of a letter from Wachtell Lipton Rosen & Katz authorizing the Agent and the Banks 33 to rely on their opinion rendered to the Borrower as to the Federal income tax treatment of the Spin-Off; (g) receipt by the Agent of evidence satisfactory to it that the Spin-Off shall, substantially simultaneously with the effectiveness of the Commitments and the initial Borrowing hereunder, be consummated in accordance in all material respects with the description set forth in the Bororwer's Form 10; (h) receipt by the Agent of evidence satisfactory to it of the payment of fees as heretofore mutually agreed; and (i) receipt by the Agent of all documents it may reasonably request relating to the existence of the Borrower and the Guarantors, the corporate authority for and the validity of the Financing Documents, and any other matters relevant hereto, all in form and substance satisfactory to the Agent; PROVIDED that the Commitments shall not become effective unless all of the foregoing conditions are satisfied not later than December 31, 1997. The Agent shall promptly notify the Borrower and each Bank of the Effective Date, and such notice shall be conclusive and binding on all parties hereto. SECTION 3.02. BORROWINGS. The obligation of any Bank to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a) receipt by the Agent of a Notice of Borrowing as required by Section 2.02 or 2.03, as the case may be; (b) the fact that, immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitments; (c) the fact that, immediately before and after such Borrowing, no Default shall have occurred and be continuing; and (d) the fact that the representations and warranties of the Borrower contained in the Financing Documents (except (x) in the case of a Refunding Borrowing and (y) in the case of any other Borrowing, solely if on the date of such Borrowing, the Borrower's senior unsecured long-term debt is rated, without third-party credit enhancement, A- or higher by S&P and 34 A3 or higher by Moody's, the representations and warranties set forth in Section 4.04(c) as to any matter which has theretofore been disclosed in writing by the Borrower to the Banks) shall be true on and as of the date of such Borrowing. Each Borrowing hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (b), (c) and (d) of this Section. ARTICLE IV REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: SECTION 4.01. CORPORATE EXISTENCE AND POWER. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.02. CORPORATE AND GOVERNMENTAL AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and performance by each Obligor of the Financing Documents to which it is a party are within its corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of its certificate of incorporation or by-laws or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or any of its Subsidiaries or result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. SECTION 4.03. BINDING EFFECT. This Agreement constitutes a valid and binding agreement of the Borrower and the Notes, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of the Borrower, in each case enforceable against the Borrower in accordance with its terms. When executed and delivered in accordance with this Agreement, the Subsidiary Guarantee Agreement will constitute a valid and binding agreement of each of the Obligors enforceable against such Obligor in accordance with its terms. 35 SECTION 4.04. FINANCIAL INFORMATION. (a) The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 1996 and the related consolidated statements of operations and cash flows for the fiscal year then ended, reported on by Deloitte & Touche LLP and set forth in the Borrower's Form 10, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (b) The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of June 30, 1997 and the related unaudited consolidated statements of operations and cash flows for the six months then ended, set forth in the Borrower's Form 10, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such six month period (subject to normal year-end adjustments). (c) Since June 30, 1997 there has been no material adverse change in the business, financial position, results of operations or prospects of the Borrower. SECTION 4.05. LITIGATION. (a) There is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official which could reasonably be expected to materially and adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries taken as a whole. (b) There is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official which in any manner questions the validity or enforceability of any Financing Document. 36 SECTION 4.06. COMPLIANCE WITH ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. SECTION 4.07. ENVIRONMENTAL MATTERS. In the ordinary course of its business, the Borrower conducts an ongoing review of the effect of Environmental Laws on the business, operations and properties of the Borrower and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs (including, without limitation, any capital or operating expenditures required for clean-up or closure of properties presently or previously owned, any capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a condition of any license, permit or contract, any related constraints on operating activities, including any periodic or permanent shutdown of any facility or reduction in the level of or change in the nature of operations conducted thereat, any costs or liabilities in connection with off-site disposal of wastes or Hazardous Substances, and any actual or potential liabilities to third parties, including employees, and any related costs and expenses). On the basis of this review, and based upon conditions of which the Borrower has knowledge and upon its estimates of the costs of compliance with and/or remediation mandated by Environmental Laws, the Borrower has reasonably concluded that Environmental Laws are unlikely to have a material adverse effect on the business, financial condition, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole. SECTION 4.08. TAXES. All United States federal income tax returns and all other material tax returns which are required to be filed by or in respect of the Borrower or any Subsidiary have been filed by either (i) the Borrower or a Subsidiary thereof or (ii) Western Atlas or Litton in a 37 consolidated or combined return which incorporated the Borrower, and all taxes due pursuant to such returns or pursuant to any assessment received in respect thereof have been paid. SECTION 4.09. MATERIAL SUBSIDIARIES. Each of the Borrower's Material Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.10. NOT AN INVESTMENT COMPANY. Neither the Borrower nor any Guarantor is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 4.11. USE OF PROCEEDS. The proceeds of the loans under this Agreement will be used by the Borrower (i) for working capital purposes, (ii) to refinance certain indebtedness, including the repayment of certain intercompany indebtedness owed to Western Atlas and (iii) to the extent not required for the foregoing purposes, for the Borrower's other general corporate purposes, including acquisitions and stock repurchases. None of such proceeds will be used in violation of Regulation G, T, U or X of the Board of Governors of the Federal Reserve System. SECTION 4.12. FULL DISCLOSURE. All information heretofore furnished by the Borrower or any Guarantor to the Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrower or any Guarantor to the Agent or any Bank will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Borrower has disclosed to the Banks in writing any and all facts which materially and adversely affect or may affect (to the extent the Borrower can now reasonably foresee), the business, operations or financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole, or the ability of any Obligor to perform its obligations under this Agreement or any other Financing Document. 38 ARTICLE V COVENANTS The Borrower agrees that, from and after the Effective Date for so long as any Bank has any Commitment hereunder or any amount payable under any Note remains unpaid: SECTION 5.01. INFORMATION. The Borrower will deliver to each of the Banks: (a) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated financial statements in the form then required to be filed with the Securities and Exchange Commission on Form 10-K or its then equivalent, all reported on by independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated financial statements in the form then required to be filed with the Securities and Exchange Commission on Form 10-Q or its then equivalent, all certified (subject to normal year-end audit adjustments) by the chief financial officer or the chief accounting officer of the Borrower; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer or the chief accounting officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Sections 5.05 to 5.07, inclusive, on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (d) simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a statement of the firm of independent public 39 accountants which reported on such statements whether anything has come to their attention to cause them to believe that any Default existed on the date of such statements; (e) within five days after any officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (f) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (g) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission; (h) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Material Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Material Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer, any Material Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Material Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Material Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to 40 make any payment or contribution to any Material Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Material Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; (i) forthwith, notice of any change of which the Borrower becomes aware in the rating by any Rating Agency of the Borrower's long-term debt; and (j) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Agent, at the request of any Bank, may reasonably request. SECTION 5.02. MAINTENANCE OF PROPERTY; INSURANCE. (a) The Borrower will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Borrower will, and will cause each of its Subsidiaries to, maintain (either in the name of the Borrower or in such Subsidiary's own name) with financially sound and responsible insurance companies, insurance on all their respective properties in at least such amounts and against at least such risks (and with such risk retention) as are usually insured against in the same general area by companies of established repute engaged in the same or a similar business; and will furnish to the Banks, upon request from the Agent, information presented in reasonable detail as to the insurance so carried. SECTION 5.03. CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The Borrower will continue, and will cause each Material Subsidiary to continue, to engage in business of the same general type as now conducted by the Borrower and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Material Subsidiary to preserve, renew and keep in full force and effect their respective existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; PROVIDED that nothing in 41 this Section 5.03 shall prohibit (i) the merger of a Subsidiary into the Borrower or the merger or consolidation of a Subsidiary with or into another Person if the corporation surviving such consolidation or merger is a Subsidiary and if, in each case, after giving effect thereto, no Default shall have occurred and be continuing or (ii) the termination of the existence of any Subsidiary if the Borrower in good faith determines that such termination is in the best interest of the Borrower and is not materially disadvantageous to the Banks. SECTION 5.04. COMPLIANCE WITH LAWS. The Borrower will comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) except where the necessity of compliance therewith is contested in good faith by appropriate proceedings. SECTION 5.05. LEVERAGE RATIO. The Leverage Ratio will not exceed, at any time during any period set forth below, the maximum ratio set forth below for such period: PERIOD MAXIMUM RATIO ------ ------------- Effective Date- September 29, 1998 3.5 to 1.0 September 30, 1998- September 29, 1999 3.0 to 1.0 September 30 1999 and thereafter 2.75 to 1.0 SECTION 5.06. MAINTENANCE OF CERTAIN OPERATIONS. The Borrower will at all times maintain direct or indirect ownership of 80% of the Equity Securities of each Subsidiary which is a Guarantor on the Effective Date. SECTION 5.07. LIMITATION ON SUBSIDIARY DEBT. The aggregate outstanding principal amount of Debt of Subsidiaries of the Borrower (exclusive of Debt owing to the Borrower or another Subsidiary) will at no time exceed 15% of Consolidated Net Assets. SECTION 5.08. NEGATIVE PLEDGE. The Borrower will not, and will not permit any Consolidated Subsidiary to, create, assume or suffer to exist any Lien securing Debt or Derivatives Obligations on any asset now owned or hereafter acquired by it, except: 42 (a) Liens existing on the date of this Agreement securing Debt outstanding on the date of this Agreement in an aggregate principal amount not exceeding $20,000,000; (b) any Lien existing on the assets of any Person at the time such Person becomes a Consolidated Subsidiary; (c) any Lien on any asset securing Debt incurred or assumed for the purpose of financing all or any part of the purchase price or cost of construction of such asset, PROVIDED that such Lien attaches to such asset within 270 days after the acquisition or completion of construction and commencement of full operations thereof; (d) any Lien on any asset of any Person existing at the time such Person is acquired by, merged into or consolidated with the Borrower or a Consolidated Subsidiary; (e) any Lien existing on any asset prior to the acquisition thereof by the Borrower or a Consolidated Subsidiary and not created in contemplation of such acquisition; (f) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, PROVIDED that such Debt is not increased and is not secured by any additional assets; (g) Liens on cash and cash equivalents securing Derivatives Obligations, provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $20,000,000; and (h) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt in an aggregate principal or face amount at any time outstanding not exceeding 10% of Consolidated Net Worth. SECTION 5.09. CONSOLIDATIONS, MERGERS AND SALES OF ASSETS. The Borrower will not (i) consolidate or merge with or into any other Person or (ii) sell, lease or otherwise transfer, directly or indirectly, all or any substantial part of the assets of the Borrower and its Subsidiaries, taken as a whole, to any other Person; PROVIDED that the Borrower may merge with another Person if 43 the Borrower is the surviving corporation and, after giving effect thereto, no Default exists. ARTICLE VI DEFAULTS SECTION 6.01. EVENTS OF DEFAULT. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) the Borrower (i) shall fail to pay when due any principal of any Loan or (ii) shall fail to pay any interest on any Loan, any fees or any other amount payable hereunder within five days after the due date thereof; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.05 through 5.09, inclusive; (c) any Obligor shall fail to observe or perform any covenant or agreement contained in any Financing Document (other than those covered by clause (a) or (b) above) for 30 days after notice thereof has been given to such Obligor by the Agent at the request of any Bank; (d) any representation, warranty, certification or statement made (or deemed made) by any Obligor in any Financing Document or in any certificate, financial statement or other document delivered pursuant to any Financing Document shall prove to have been incorrect in any material respect when made (or deemed made) or delivered; (e) the Borrower or any Subsidiary shall fail to make any payment in respect of any Material Financial Obligations when due or within any applicable grace period; (f) any event or condition shall occur which results in the acceleration of the maturity of any Material Debt or enables (with the giving of appropriate notice if required) the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof; 44 (g) the Borrower or any Material Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against the Borrower or any Material Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Material Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (i) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $25,000,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer, any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more 45 members of the ERISA Group to incur a current payment obligation in excess of $10,000,000; (j) a judgment or order for the payment of money in excess of $25,000,000 shall be rendered against the Borrower or any Material Subsidiary and such judgment or order shall continue unsatisfied and unstayed for a period of 30 days; (k) a Change of Control shall occur; or (l) the Subsidiary Guarantee Agreement shall cease to be a legal, valid, binding and enforceable obligation of any Guarantor (otherwise than in accordance with the terms thereof), or any Guarantor shall so assert in writing; then, and in every such event, the Agent shall (i) if requested by Banks having more than 50% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding Notes evidencing more than 50% in aggregate principal amount of the Loans, by notice to the Borrower declare the Notes (together with accrued interest thereon) to be, and the Notes (together with accrued interest thereon) shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; PROVIDED that in the case of any of the Events of Default specified in clause (g) or (h) above with respect to any Obligor, without any notice to any Obligor or any other act by the Agent or any Bank, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Obligors. SECTION 6.02. NOTICE OF DEFAULT. The Agent shall give notice to an Obligor under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE VII THE AGENT SECTION 7.01. APPOINTMENT AND AUTHORIZATION. Each Bank irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Financing Documents as are delegated to the 46 Agent by the terms thereof, together with all such powers as are reasonably incidental thereto. SECTION 7.02. AGENT AND AFFILIATES. Morgan Guaranty Trust Company of New York shall have the same rights and powers under the Financing Documents as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or Affiliate of the Borrower as if it were not the Agent hereunder. SECTION 7.03. ACTION BY AGENT. The obligations of the Agent hereunder are only those expressly set forth in the Financing Documents. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article VI. SECTION 7.04. CONSULTATION WITH EXPERTS. The Agent may consult with legal counsel (who may be counsel for any Obligor), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.05. LIABILITY OF AGENT. Neither the Agent nor any of its affiliates nor any of the directors, officers, agents or employees of the foregoing shall be liable for any action taken or not taken by it or them in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its or their own gross negligence or willful misconduct. Neither the Agent nor any of its affiliates nor any of the directors, officers, agents or employees of the foregoing shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of any Obligor; (iii) the satisfaction of any condition specified in Article III, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of the Financing Documents or any other instrument or writing furnished in connection herewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex or similar writing) believed by it to be genuine or to be signed by the proper party or parties. 47 Without limiting the generality of the foregoing, the use of the term "agent" in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom and is intended to create or reflect only an administrative relationship between independent contracting parties. SECTION 7.06. INDEMNIFICATION. Each Bank shall, ratably in accordance with its Commitment, indemnify the Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with the Financing Documents or any action taken or omitted by such indemnitees thereunder. SECTION 7.07. CREDIT DECISION. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.08. SUCCESSOR AGENT. The Agent may resign at any time by giving notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Agent, subject to the approval of the Borrower. If no successor Agent shall have been so appointed by the Required Banks, with the approval of the Borrower, and shall have accepted such appointment, within 30 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a Bank, if any Bank is willing to accept such appointment, and in any event shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties 48 of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. SECTION 7.09. AGENT'S FEES. The Borrower shall pay to the Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Agent. ARTICLE VIII CHANGE IN CIRCUMSTANCES SECTION 8.01. BASIS FOR DETERMINING INTEREST RATE INADEQUATE OR UNFAIR. If on or prior to the first day of any Interest Period for any Fixed Rate Borrowing: (a) the Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the relevant market for such Interest Period, or (b) in the case of a Committed Borrowing, Banks having 50% or more of the aggregate amount of the Commitments advise the Agent that the Adjusted CD Rate or the London Interbank Offered Rate, as the case may be, as determined by the Agent will not adequately and fairly reflect the cost to such Banks of funding their CD Loans or Euro-Dollar Loans, as the case may be, for such Interest Period, the Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, the obligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may be, shall be suspended. Unless the Borrower notifies the Agent at least two Domestic Business Days before the date of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (i) if such Fixed Rate Borrowing is a Committed Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing and (ii) if such Fixed Rate Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day 49 from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Base Rate for such day. SECTION 8.02. ILLEGALITY. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans shall be suspended. Before giving any notice to the Agent pursuant to this Section 8.02, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine that it may not lawfully continue to maintain and fund any of its outstanding Euro-Dollar Loans to maturity and shall so specify in such notice, the Borrower shall immediately prepay in full the then outstanding principal amount of each such Euro-Dollar Loan, together with accrued interest thereon. Concurrently with prepaying each such Euro-Dollar Loan, the Borrower shall borrow a Base Rate Loan in an equal principal amount from such Bank (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and such Bank shall make such a Base Rate Loan. SECTION 8.03. INCREASED COST AND REDUCED RETURN. (a) If on or after (x) the date hereof, in the case of any Committed Loan or any obligation to make Committed Loans or (y) the date of the related Money Market Quote, in the case of any Money Market Loan, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request 50 or directive (whether or not having the force of law) of any such authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (i) with respect to any CD Loan any such requirement included in an applicable Domestic Reserve Percentage and (ii) with respect to any Euro-Dollar Loan any such requirement with respect to which such Bank is entitled to compensation during the relevant Interest Period under Section 2.15), special deposit, insurance assessment (excluding, with respect to any CD Loan, any such requirement reflected in an applicable Assessment Rate) or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by 51 such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction; PROVIDED that the Borrower shall not be liable for any such amounts attributable to a period more than three months prior to the date of notice by such Bank to the Borrower of its intention to seek compensation under this subsection (b). (c) Each Bank will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section, setting forth the additional amount or amounts to be paid to it hereunder and the basis of calculation thereof, shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. SECTION 8.04. TAXES. (a) Any and all payments by the Borrower to or for the account of any Bank or the Agent hereunder or under any Note shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, charges and withholdings, and all liabilities with respect thereto, EXCLUDING, in the case of each Bank and the Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Bank or the Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Bank, taxes imposed on its income, and franchise or similar taxes imposed on it, by the jurisdiction of such Bank's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, duties, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to any Bank or the Agent, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 8.04) such Bank or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the 52 full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (iv) the Borrower shall furnish to the Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, or charges or similar levies which arise from any payment made hereunder or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note (hereinafter referred to as "Other Taxes"). (c) The Borrower agrees to indemnify each Bank and the Agent for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes and Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section 8.04) paid by such Bank or the Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be made within 15 days from the date such Bank or the Agent (as the case may be) makes demand therefor. (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter if requested in writing by the Borrower (but only so long as such Bank remains lawfully able to do so), shall provide the Borrower with Internal Revenue Service form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which reduces the rate of withholding tax on payments of interest or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. If the form provided by a Bank at the time such Bank first becomes a party to this Agreement indicates a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from "Taxes" as defined in Section 8.04(a). (e) For any period with respect to which a Bank has failed to provide the Borrower with the form required pursuant to Section 8.04(d), if any (unless such failure is 53 due to a change in treaty, law or regulation occurring subsequent to the date on which a form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.04(a) with respect to Taxes imposed by the United States; PROVIDED, HOWEVER, that should a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, become subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. (f) If the Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section 8.04, then such Bank will change the jurisdiction of its Applicable Lending Office so as to eliminate or reduce any such additional payment which may thereafter accrue if such change, in the judgment of such Bank, is not otherwise disadvantageous to such Bank. SECTION 8.05. BASE RATE LOANS SUBSTITUTED FOR AFFECTED FIXED RATE LOANS. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04 with respect to its CD Loans or Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist: (a) all Loans which would otherwise be made by such Bank as CD Loans or Euro-Dollar Loans, as the case may be, shall be made instead as Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Fixed Rate Loans of the other Banks), and (b) after each of its CD Loans or Euro-Dollar Loans, as the case may be, has been repaid, all payments of principal which would otherwise be applied to repay such Fixed Rate Loans shall be applied to repay its Base Rate Loans instead. SECTION 8.06. SUBSTITUTION OF BANK. If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04, the Borrower shall have the right, with the assistance of the Agent, to seek a mutually satisfactory substitute bank or 54 banks (which may be one or more of the Banks) to purchase the Note and assume the Commitment of such Bank. ARTICLE IX MISCELLANEOUS SECTION 9.01. NOTICES. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower or the Agent, at its address or facsimile or telex number set forth on the signature pages hereof, (y) in the case of any Bank, at its address or facsimile or telex number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address or facsimile or telex number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when delivered at the address specified in this Section; PROVIDED that notices to the Agent under Article II or Article VIII shall not be effective until received. SECTION 9.02. NO WAIVERS. No failure or delay by the Agent or any Bank in exercising any right, power or privilege under any Financing Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies therein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 9.03. EXPENSES; INDEMNIFICATION. (a) The Borrower shall pay (i) all out-of-pocket expenses of the Agent, including fees and disbursements of special counsel for the Agent, in connection with the preparation and administration of the Financing Documents, any waiver or consent thereunder or any amendment thereof or any Default or alleged Default thereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Agent or any Bank, including fees and disbursements of outside counsel (or, in lieu thereof, the allocated cost of in-house counsel), in connection with such Event of Default and collection, 55 bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify the Agent and each Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of the Financing Documents, or any actual or proposed use of proceeds of Loans hereunder; PROVIDED that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct. SECTION 9.04. SHARING OF SET-OFFS. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Note held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Banks shall be shared by the Banks pro rata; PROVIDED that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness under the Notes. Each of the Borrower and the Guarantors agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower or such Guarantor, as the case may be, in the amount of such participation. SECTION 9.05. AMENDMENTS AND WAIVERS. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in 56 writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of the Agent are affected thereby, by the Agent); PROVIDED that no such amendment or waiver shall, unless signed by all the Banks, (i) except as contemplated by Section 2.16, increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of, accrued interest on or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for any scheduled termination of any Commitment or (iv) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of the Financing Documents. SECTION 9.06. SUCCESSORS AND ASSIGNS. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or in any or all of its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; PROVIDED that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 9.05 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Section 2.15 and Article VIII with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the 57 extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part (equivalent to a Commitment of not less than $5,000,000) of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit G hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower and the Agent (which consents shall not be unreasonably withheld); PROVIDED that if an Assignee is a Bank prior to such assignment or is an affiliate of such transferor Bank, no such consent shall be required; PROVIDED FURTHER that such assignment may, but need not, include rights of the transferor Bank in respect of outstanding Money Market Loans; and PROVIDED FURTHER that if an Assignee is another Bank, such consent shall not be unreasonably withheld. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Agent an administrative fee for processing such assignment in the amount of $2,500. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall deliver to the Borrower and the Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.04. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.03 or 8.04 than such Bank would have been entitled to receive with respect to the 58 rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to designate a different Applicable Lending Office under certain circumstances. SECTION 9.07. COLLATERAL. Each of the Banks represents to the Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 9.08. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement and each Note shall be governed by and construed in accordance with the laws of the State of New York. Each of the Borrower and the Guarantors hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to the Financing Documents or the transactions contemplated thereby. Each of the Borrower and the Guarantors irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. SECTION 9.09. COUNTERPARTS; INTEGRATION. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. SECTION 9.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE GUARANTORS, THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THE FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. 59 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. UNOVA, INC. By: ------------------------------------ Title: 360 North Crescent Drive Beverly Hills, California 90210 Telex number: Telecopy number: 60 COMMITMENTS $50,000,000 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: ----------------------------- Name: Title: $35,000,000 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: ----------------------------- Name: Title: $35,000,000 THE BANK OF NEW YORK By: ----------------------------- Name: Title: $35,000,000 THE CHASE MANHATTAN BANK By: ----------------------------- Name: Title: $35,000,000 CIBC INC. By: ----------------------------- Name: Title: 61 $35,000,000 THE FIRST NATIONAL BANK OF CHICAGO By: ----------------------------- Name: Title: $35,000,000 NATIONSBANK OF TEXAS, N.A. By: ----------------------------- Name: Title: $28,000,000 CREDIT SUISSE FIRST BOSTON By: ----------------------------- Name: Title: $28,000,000 DRESDNER BANK A.G., NEW YORK BRANCH AND GRAND CAYMAN BRANCH By: ----------------------------- Name: Title: $28,000,000 THE FUJI BANK, LIMITED By: ----------------------------- Name: Title: 62 $28,000,000 MELLON BANK, N.A. By: ----------------------------- Name: Title: $28,000,000 THE NORTHERN TRUST COMPANY By: ----------------------------- Name: Title: - ----------------- Total Commitments $400,000,000 ================= MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By: ------------------------------ Title: 60 Wall Street New York, New York 10260-0060 Attention: Telex number: 177615 63 PRICING SCHEDULE The "Euro-Dollar Margin", "CD Margin" and "Facility Fee Rate" for any day are the respective percentages set forth below in the applicable row under the column corresponding to the Status that exists on such day: =================== ======== ========= ========= ========= ========= ========== Level Level Level Level Level Level Status I II III IV V VI =================== ======== ========= ========= ========= ========= ========== Euro-Dollar Margin .13% .17% .21% .24% .35% .50% - ------------------- -------- --------- --------- --------- --------- ---------- CD Margin .255% .295% .335% .365% .475% .625% - ------------------- -------- --------- --------- --------- --------- ---------- Facility Fee Rate .07% .08% .09% .11% .15% .25% =================== ======== ========= ========= ========= ========= ========== For purposes of this Schedule, the following terms have the following meanings: "Applicable Leverage Ratio" means, at any date, the Leverage Ratio reflected in the certificate most recently delivered by the Borrower pursuant to Section 5.01(c) prior to such date; PROVIDED that until the delivery of the first such certificate, the Applicable Leverage Ratio shall be deemed to be at a level resulting in Level II Status; and PROVIDED FURTHER that at any date on which a Default exists under Section 5.01(c), the Applicable Leverage Ratio shall be deemed to be greater than 3.0 to 1.0. "Level I Status" exists at any date if, at such date, (A) prior to the Ratings Trigger Date, the Applicable Leverage Ratio is equal to or less than 1.50 to 1.0 or (B) on and after the Ratings Trigger Date, the Borrower's long-term debt is rated A/A2 or higher by at least two Rating Agencies. "Level II Status" exists at any date if, at such date, (i) (A) prior to the Ratings Trigger Date, the Applicable Leverage Ratio is equal to or less than 1.85 to 1.0 or (B) on and after the Ratings Trigger Date, the Borrower's long-term debt is rated A-/A3 or higher by at least two Rating Agencies and (ii) Level I Status does not exist at such date. "Level III Status" exists at any date if, at such date, (i) (A) prior to the Ratings Trigger Date, the Applicable Leverage Ratio is equal to or less than 2.25 to 1.0 or (B) on and after the Ratings Trigger Date, the Borrower's long-term debt is rated BBB+/Baa1 or higher by at least two Rating Agencies and (ii) neither Level I Status nor Level II Status exists at such date. "Level IV Status" exists at any date if, at such date, (i) (A) prior to the Ratings Trigger Date, the Applicable Leverage Ratio is equal to or less than 2.50 to 1.0 or (B) on and after the Ratings Trigger Date, the Borrower's long-term debt is rated BBB/Baa2 or higher by at least two Rating Agencies and (ii) none of Level I Status, Level II Status or Level III Status exists at such date. "Level V Status" exists at any date if, at such date, (i) (A) prior to the Ratings Trigger Date, the Applicable Leverage Ratio is equal to or less than 3.0 to 1.0 or (B) on and after the Ratings Trigger Date,the Borrower's long-term debt is rated BBB-/Baa3 or higher by at least two Rating Agencies and (ii) none of Level I Status, Level II Status, Level III Status or Level IV Status exists at such date. "Level VI Status" exists at any date, if at the close of business on such date, none of Level I Status, Level II Status, Level III Status, Level IV Status or Level V Status exists. "Ratings Trigger Date" means the first date subsequent to the Effective Date on which the Borrower shall have been assigned a senior unsecured long-term debt rating by at least two Rating Agencies. "Status" refers to the determination of which of Level I Status, Level II Status, Level III Status, Level IV Status, Level V Status or Level VI Status exists at any date. The credit ratings to be utilized for purposes of determining a Status hereunder are those assigned to the senior unsecured long-term debt of the Borrower without third-party credit enhancement, and any rating assigned to any other debt of the Borrower shall be disregarded; PROVIDED that if at any time the Borrower's senior unsecured long-term debt is rated by exactly two Rating Agencies and the ratings assigned to such debt by such two Rating Agencies are more than one full rating category apart, Status shall be determined based on a rating one category higher than the lower of such two ratings (E.G., if the S&P rating is A+, the Moody's rating is Baa1 and there is no D&P rating, then Level II Status shall exist); PROVIDED FURTHER that if at any time after the Ratings Trigger Date the 2 Borrower's senior unsecured long-term debt, without third party credit enhancement, is not rated by at least two Rating Agencies, then Status shall be Level VI Status. The rating in effect at any date is that in effect at the close of business on such date. 3 EXHIBIT A NOTE New York, New York ____________, 1997 For value received, UNOVA Inc., a Delaware corporation (the "Borrower"), promises to pay to the order of (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the last day of the Interest Period relating to such Loan. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York. Each Loan made by the Bank, the type and maturity thereof, and all repayments of the principal thereof, shall be recorded by the Bank and, if the Bank so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; PROVIDED that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower or any Guarantor hereunder or under any other Financing Document. This note is one of the Notes referred to in the Credit Agreement dated as of September 24, 1997 among the Borrower, the banks parties thereto and Morgan Guaranty Trust Company of New York, as Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. UNOVA, INC. By ------------------------ Title: Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL - -------------------------------------------------------------------------------- Amount of Amount of Type of Principal Maturity Notation Date Loan Loan Repaid Date Made By - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 EXHIBIT B FORM OF MONEY MARKET QUOTE REQUEST ---------------------------------- [Date] To: Morgan Guaranty Trust Company of New York From: UNOVA, Inc. (the "Borrower") Re: Credit Agreement (as amended from time to time, the "Credit Agreement") dated as of September 24, 1997 among the Borrower, the Banks parties thereto and Morgan Guaranty Trust Company of New York, as Agent We hereby give notice pursuant to Section 2.03 of the Credit Agreement that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ PRINCIPAL AMOUNT INTEREST PERIOD - ---------------- --------------- $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] - ---------------------- *Amount must be $10,000,000 or a larger multiple of $1,000,000. **Not less than one month (LIBOR Auction) or not less than 7 days (Absolute Rate Auction), subject to the provisions of the definition of Interest Period. Terms used herein have the meanings assigned to them in the Credit Agreement. UNOVA, INC. By ------------------------------ Title: 2 EXHIBIT C FORM OF INVITATION FOR MONEY MARKET QUOTES To: [Name of Bank] Re: Invitation for Money Market Quotes to UNOVA, Inc. (the "Borrower") Pursuant to Section 2.03 of the Credit Agreement (as amended from time to time, the "Credit Agreement") dated as of September 24, 1997 among the Borrower, the Banks parties thereto and the undersigned, as Agent, we are pleased on behalf of the Borrower to invite you to submit Money Market Quotes to the Borrower for the following proposed Money Market Borrowing(s): Date of Borrowing: __________________ PRINCIPAL AMOUNT INTEREST PERIOD - ---------------- --------------- $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Please respond to this invitation by no later than [2:00 P.M.] [9:30 A.M.] (New York City time) on [date]. Terms used herein have the meanings assigned to them in the Credit Agreement. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By ----------------------- Authorized Officer EXHIBIT D FORM OF MONEY MARKET QUOTE -------------------------- MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent 60 Wall Street New York, New York 10260-0060 Attention: Re: Money Market Quote to UNOVA, Inc. (the "Borrower") In response to your invitation on behalf of the Borrower dated _____________, 19__, we hereby make the following Money Market Quote on the following terms: 1. Quoting Bank: ________________________________ 2. Person to contact at Quoting Bank: _____________________________ 3. Date of Borrowing: ____________________* 4. We hereby offer to make Money Market Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates: Principal Interest Money Market Amount** Period*** [Margin****] [Absolute Rate*****] - --------- --------- ------------ -------------------- $ $ [Provided, that the aggregate principal amount of Money Market Loans for which the above offers may be accepted shall not exceed $____________.]** __________ * As specified in the related Invitation. (notes continued on following page) We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the Credit Agreement (as amended from time to time, the "Credit Agreement") dated as of September 24, 1997 among the Borrower, the Banks parties thereto and yourselves, as Agent, irrevocably obligates us to make the Money Market Loan(s) for which any offer(s) are accepted, in whole or in part. Terms used herein have the meanings assigned to them in the Credit Agreement. Very truly yours, [NAME OF BANK] Dated:_______________ By:__________________________ Authorized Officer - -------------- ** Principal amount bid for each Interest Period may not exceed principal amount requested. Specify aggregate limitation if the sum of the individual offers exceeds the amount the Bank is willing to lend. Bids must be made for $5,000,000 or a larger multiple of $1,000,000. *** Not less than one month or not less than 7 days, as specified in the related Invitation. No more than five bids are permitted for each Interest Period. (notes continued on following page) **** Margin over or under the London Interbank Offered Rate determined for the applicable Interest Period. Specify percentage (to the nearest 1/10,000 of 1%) and specify whether "PLUS" or "MINUS". ***** Specify rate of interest per annum (to the nearest 1/10,000th of 1%). 2 EXHIBIT E OPINION OF COUNSEL FOR THE BORROWER AND THE GUARANTORS --------------------------- __, 1997 To the Banks and the Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Agent 60 Wall Street New York, New York 10260-0060 Dear Sirs: I am the chief legal officer of UNOVA, Inc. (the "Borrower") and have acted in that capacity in connection with the Credit Agreement (the "Credit Agreement") dated as of September 24, 1997 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Agent. Terms defined in the Credit Agreement are used herein as therein defined. I have examined originals or copies, certified or otherwise identified to my satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as I have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, I am of the opinion that: 1. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 2. The execution, delivery and performance by each Obligor of the Financing Documents to which it is a party are within its corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of its certificate of incorporation or by-laws or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or any of its Subsidiaries or result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. 3. The Credit Agreement constitutes a valid and binding agreement of the Borrower, the Notes constitute valid and binding obligations of the Borrower and the Subsidiary Guarantee Agreement is a valid and binding agreement of each Obligor. 4. There is no action, suit or proceeding pending against, or to the best of my knowledge threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official which could reasonably be expected to materially and adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, taken as a whole. (b) There is no action, suit or proceeding pending against, or to the best of my knowledge threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official which in any manner questions the validity or enforceability of any Financing Document. 5. Each of the Borrower's Material Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. I am a member of the Bar of the State of California, and the foregoing opinion is limited to the laws of the State of California, the General Corporation Law of the State of Delaware and the Federal laws of the United States of America. Inasmuch as the Credit Agreement and the Notes are governed by the law of the State of New York, I have assumed for purposes of the foregoing opinion that such law is the same as the law of the State of California. Very truly yours, 2 EXHIBIT F OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE AGENT -------------------------------------- __, 1997 To the Banks and the Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Agent 60 Wall Street New York, New York 10260-0060 Dear Sirs: We have participated in the preparation of the Credit Agreement (the "Credit Agreement") dated as of September 24, 1997 among UNOVA, Inc., a Delaware corporation (the "Borrower"), the banks listed on the signature pages thereof (the "Banks") and Morgan Guaranty Trust Company of New York, as Agent (the "Agent"), and have acted as special counsel for the Agent for the purpose of rendering this opinion pursuant to Section 3.01(e) of the Credit Agreement. Terms defined in the Credit Agreement are used herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The execution, delivery and performance by the Borrower of the Financing Documents are within the Borrower's corporate powers and have been duly authorized by all necessary corporate action. 2. The Credit Agreement and the Subsidiary Guarantee Agreement constitute valid and binding agreements of the Borrower and each Note constitutes a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. 3. The Subsidiary Guarantee Agreement constitutes a valid and binding agreement of each Guarantor, enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. 4. The documents delivered to the Agent by the Borrower pursuant to Section 3.01 of the Credit Agreement are substantially responsive to the requirements of said Section. In giving the opinion set forth in paragraph 3 above, we have, with your permission, assumed that the execution, delivery and performance by each Guarantor of the Subsidiary Guarantee Agreement are within such Guarantor's corporate powers and have been duly authorized by all necessary corporate action. We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York, the federal laws of the United States of America and the General Corporation Law of the State of Delaware. In giving the foregoing opinion, (i) we express no opinion as to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Bank is located which limits the rate of interest that such Bank may charge or collect and (ii) the opinion expressed in paragraph 3 above is subject to the effect, if any, of Section 548 of the United States Bankruptcy Code and any comparable provisions of applicable state law. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 2 EXHIBIT G ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of _________, 19__ among [ASSIGNOR] (the "Assignor"), [ASSIGNEE] (the "Assignee"), UNOVA, INC. (the "Borrower") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent"). W I T N E S E T H - - - - - - - - - WHEREAS, this Assignment and Assumption Agreement (the "Agreement") relates to the Credit Agreement dated as of September 24, 1997 among the Borrower, the Assignor and the other Banks party thereto, as Banks, and the Agent (as amended from time to time, the "Credit Agreement"); WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Committed Loans to the Borrower in an aggregate principal amount at any time outstanding not to exceed $__________; WHEREAS, Committed Loans made to the Borrower by the Assignor under the Credit Agreement in the aggregate principal amount of $__________ are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of a portion of its Commitment thereunder in an amount equal to $__________ (the "Assigned Amount"), together with a corresponding portion of its outstanding Committed Loans, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. DEFINITIONS. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. SECTION 2. ASSIGNMENT. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement and the other Financing Documents to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the corresponding portion of the principal amount of the Committed Loans made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, the Borrower and the Agent and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement and the other Financing Documents with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. PAYMENTS. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them. It is understood that facility fees accrued to the date hereof are for the account of the Assignor and such fees accruing from and including the date hereof in respect of the Assigned Amount are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement or any other Financing Document which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. SECTION 4. CONSENT OF THE BORROWER AND THE AGENT. This Agreement is conditioned upon the consent of the Borrower and the Agent, pursuant to Section 9.06(c) of the Credit Agreement. The execution of this Agreement by the Borrower and the Agent is evidence of this consent. Pursuant to Section 9.06(c) the Borrower agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein. SECTION 5. NON-RELIANCE ON ASSIGNOR. The Assignor makes no representation or warranty in connection 2 with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of the Borrower or any Guarantor, or the validity and enforceability of the obligations of the Borrower or any Guarantor in respect of any Financing Document. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrower and each Guarantor. SECTION 6. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. COUNTERPARTS. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By_________________________ Title: [ASSIGNEE] By__________________________ Title: UNOVA, INC. By__________________________ Title: 3 MORGAN GUARANTY TRUST COMPANY OF NEW YORK By___________________________ Title: 4 EXHIBIT H SUBSIDIARY GUARANTEE AGREEMENT dated as of , 1997 among UNOVA, Inc. The Guarantors Referred to Herein and Morgan Guaranty Trust Company of New York, as Agent TABLE OF CONTENTS* PAGE ARTICLE I DEFINITIONS 1.01 Definitions................................ 2 ARTICLE II Guarantees 2.01 The Guarantees............................. 3 2.02 Guarantees Unconditional................... 3 2.03 Limit of Liability......................... 4 2.04 Discharge; Reinstatement in Certain Circumstances.................... 4 2.05 Waiver..................................... 4 2.06 Subrogation................................ 5 2.07 Stay of Acceleration....................... 5 ARTICLE III COVENANT OF THE BORROWER 3.01 Additional Guarantors...................... 5 ARTICLE IV MISCELLANEOUS 4.01 Notices.................................... 5 4.02 No Waiver.................................. 6 4.03 Amendments and Waivers..................... 6 4.04 Governing Law; Submission to Jurisdiction; Waiver of a Jury Trial............................... 6 4.05 Successors and Assigns..................... 6 4.06 Counterparts; Effectiveness................ 7 - ----------------- * The Table of Contents is not a part of this Agreement. SUBSIDIARY GUARANTEE AGREEMENT ------------------------------ AGREEMENT dated as of ____________, 1997 among UNOVA, Inc., a Delaware corporation (the "Borrower"), each of the Guarantors listed on the signature pages hereof under the caption "Guarantors" and each Person that shall, at any time after the date hereof, become a "Guarantor" hereunder (collectively, the "Guarantors") and Morgan Guaranty Trust Company of New York, as Agent. WHEREAS, the Borrower has entered into a Credit Agreement dated as of September 24, 1997 (as the same may be amended from time to time, the "Credit Agreement") among the Borrower, the banks parties thereto and Morgan Guaranty Trust Company of New York, as Agent, pursuant to which the Borrower is entitled, subject to certain conditions, to borrow up to $400,000,000; WHEREAS, the Credit Agreement provides, among other things, that one condition to the effectiveness of the Commitments thereunder is the execution and delivery by the Borrower and the Guarantors of a subsidiary guarantee substantially in the form of this Agreement; WHEREAS, in conjunction with the transactions contemplated by the Credit Agreement and in consideration of the financial and other support that the Borrower has provided, and such financial and other support as the Borrower may in the future provide, to the Guarantors, and in order to induce the Banks and the Agent to enter into the Credit Agreement and to make Loans thereunder, the Guarantors are willing to guarantee the obligations of the Borrower under the Credit Agreement and the Notes; NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. DEFINITIONS. Terms defined in the Credit Agreement and not otherwise defined herein are used herein as therein defined. In addition the following terms, as used herein, have the following meanings: "Guaranteed Obligations" means (i) all obligations of the Borrower in respect of principal of and interest on the Loans and the Notes, (ii) all other amounts payable by the Borrower under the Credit Agreement or the Notes and (iii) all renewals or extensions of the foregoing, in each case whether now outstanding or hereafter arising. The Guaranteed Obligations shall include, without limitation, any interest, costs, fees and expenses which accrue on or with respect to any of the foregoing, whether before or after the commencement of any case, proceeding or other action relating to the bankruptcy, insolvency or reorganization of any one or more than one of the Borrower and the Guarantors, and any such interest, costs, fees and expenses that would have accrued thereon or with respect thereto but for the commencement of such case, proceeding or other action. "Material Subsidiary" means (i) each Material Subsidiary (as defined in the Credit Agreement) of the Borrower, (ii) each Subsidiary of the Borrower that the Required Banks have by notice to the Borrower designated as a "Material Subsidiary" for purposes hereof and (iii) all direct or indirect successors in interest to any of the entities described in clauses (i) and (ii) of this definition (including, without limitation, by way of merger or consolidation with, or acquisition of all or a substantial part of the assets of, any such entity). ARTICLE II Guarantees SECTION 2.01. THE GUARANTEES. Subject to Section 2.03, the Guarantors hereby jointly, severally, unconditionally and irrevocably guarantee to the Banks and the Agent and to each of them, the due and punctual payment of all Guaranteed Obligations as and when the same shall 2 become due and payable, whether at maturity, by declaration or otherwise, according to the terms thereof. In case of failure by the Borrower punctually to pay the indebtedness guarantied hereby, the Guarantors, subject to Section 2.03, hereby jointly, severally, unconditionally and irrevocably agree to cause such payment to be made punctually as and when the same shall become due and payable, whether at maturity or by declaration or otherwise, and as if such payment were made by the Borrower. SECTION 2.02. GUARANTEES UNCONDITIONAL. The obligations of each Guarantor under this Article II shall be unconditional and absolute and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (a) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of any other Obligor under any Financing Document, by operation of law or otherwise; (b) any modification or amendment of or supplement to any Financing Document; (c) any modification, amendment, waiver, release, impairment, non-perfection or invalidity of any direct or indirect security, or of any guarantee or other liability of any third party, for any obligation of any other Obligor under any Financing Document; (d) any change in the corporate existence, structure or ownership of any other Obligor, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting any other Obligor or its assets or any resulting release or discharge of any obligation of any other Obligor contained in any Financing Document; (e) the existence of any claim, set-off or other rights which any Obligor may have at any time against any other Obligor, the Agent, any Co-Agent, any Bank or any other Person, whether or not arising in connection with the Financing Documents; PROVIDED that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (f) any invalidity or unenforceability relating to or against any other Obligor for any reason of any Financing Document, or any provision of applicable law or regulation purporting to prohibit the payment by any other Obligor of the principal of or interest on any 3 Note or any other amount payable by any other Obligor under any Financing Document; or (g) any other act or omission to act or delay of any kind by any other Obligor, the Agent, any Bank or any other Person or any other circumstance whatsoever that might, but for the provisions of this paragraph, constitute a legal or equitable discharge of or defense to the obligations of any Guarantor under this Article II. SECTION 2.03. LIMIT OF LIABILITY. Each Guarantor shall be liable under this Agreement only for amounts aggregating up to the largest amount that would not render its obligations hereunder subject to avoidance under Section 548 of the United States Bankruptcy Code or any comparable provisions of any applicable state law. SECTION 2.04. DISCHARGE; REINSTATEMENT IN CERTAIN CIRCUMSTANCES. Each Guarantor's obligations under this Article II shall remain in full force and effect until the Commitments are terminated and the principal of and interest on the Notes and all other amounts payable by the Borrower under the Financing Documents shall have been paid in full. The obligations of any Guarantor under this Article II may only be terminated with the consent of all of the Banks. If at any time any payment of the principal of or interest on any Note or any other amount payable by the Borrower under any Financing Document is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of any other Obligor or otherwise, each Guarantor's obligations under this Article II with respect to such payment shall be reinstated at such time as though such payment had become due but had not been made at such time. SECTION 2.05. WAIVER. Each Guarantor irrevocably waives acceptance hereof, presentment, demand, protest and any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against any other Obligor or any other Person. SECTION 2.06. SUBROGATION. Upon making any payment hereunder, the Guarantor making such payment shall be subrogated to the rights of the payee against the Borrower with respect to such payment; PROVIDED that such Guarantor shall not enforce any payment by way of subrogation until all amounts of principal of and interest on the Notes and all other amounts payable by the Borrower under the Credit Agreement shall have been paid in full. 4 SECTION 2.07. STAY OF ACCELERATION. If acceleration of the time for payment of any amount payable by the Borrower under the Financing Documents is stayed upon the insolvency, bankruptcy or reorganization of the Borrower, all such amounts otherwise subject to acceleration under the terms of the Financing Documents shall nonetheless be payable by each Guarantor hereunder forthwith on demand by the Agent made at the request of the Required Banks. ARTICLE III COVENANT OF THE BORROWER SECTION 3.01. ADDITIONAL GUARANTORS. The Borrower represents and warrants that, as of the date of this Agreement, the Guarantors set forth on the signature pages hereof constitute all Material Subsidiaries. The Borrower agrees, within ten days after any Person hereafter becomes a Material Subsidiary, to cause such Person to become a Guarantor hereunder, and in connection therewith to deliver such opinions of counsel and other documents relating to such Guarantor and its obligations hereunder as the Agent may reasonably request. ARTICLE IV MISCELLANEOUS SECTION 4.01. NOTICES. Unless otherwise specified herein, all notices, requests and other communications to any party hereunder shall be in writing (including facsimile transmission or similar writing) and shall be given to such party at its address or facsimile number set forth on the signature pages hereof (or, in the case of any Guarantor as to which no such address or facsimile number is so set forth, to it at the address or facsimile number of the Borrower set forth on the signature pages hereof) or such other address or facsimile number as such party may hereafter specify for the purpose by notice to the Agent. Each such notice, request or other communication shall be effective (i) if given by facsimile transmission, when such facsimile is transmitted to the facsimile transmission number specified in or pursuant to this Section 4.01, (ii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if 5 given by any other means, when delivered at the address specified in this Section 4.01. SECTION 4.02. NO WAIVER. No failure or delay by the Agent or any Bank in exercising any right, power or privilege under this Agreement or any other Financing Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein and therein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 4.03. AMENDMENTS AND WAIVERS. Any provision of this Agreement may be amended or waived if, and only if, such amendment or waiver is in writing and is signed by the Borrower, each Guarantor and the Agent with the prior written consent of the Required Banks under the Credit Agreement; PROVIDED that the second sentence of Section 2.04 and the PROVISO in Section 4.05 of this Agreement may only be amended with the consent of all of the Banks. SECTION 4.04. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF A JURY TRIAL. This Agreement shall be construed in accordance with and governed by the laws of the State of New York. Each of the Guarantors hereby agrees to be bound by each provision of the Credit Agreement which purports to bind it, including without limitation Sections 8.04, 9.04, 9.08 and 9.10, to the same extent as if it were a signatory party thereto. SECTION 4.05. SUCCESSORS AND ASSIGNS. This Subsidiary Guarantee is for the benefit of the Banks and the Agent and their respective successors and assigns and in the event of an assignment of the Loans, the Notes or other amounts payable under the Financing Documents, the rights hereunder, to the extent applicable to the indebtedness so assigned, shall be transferred with such indebtedness. All the provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; PROVIDED that no Guarantor shall assign its rights and obligations hereunder without the consent of all of the Banks. SECTION 4.06. COUNTERPARTS; EFFECTIVENESS. This Agreement may be signed in any number of counterparts, each of which shall be an original, and all of which taken together shall constitute a single instrument, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when 6 the Agent shall have received a counterpart hereof signed by the Borrower, and one or more of the Guarantors and when the Commitments shall become effective in accordance with the terms of the Credit Agreement. Thereafter, upon execution and delivery of a counterpart of this Agreement on behalf of any other Guarantor, this Agreement shall become effective with respect to such Guarantor as of the date of such delivery. 7 IN WITNESS WHEREOF, the parties hereto have caused this Subsidiary Guarantee Agreement to be duly executed by their respective authorized officers as of the date first above written. UNOVA, INC. By ---------------------------------- Title: 360 North Crescent Drive Beverly Hills, California 90210 Telex number: Telecopy number: GUARANTORS ---------- INTERMEC TECHNOLOGIES CORPORATION By ------------------------------ Title: UNOVA INDUSTRIAL AUTOMATION SYSTEMS, INC. By ------------------------------ Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By ------------------------------ Title: 60 Wall Street New York, New York 10260-0060 Attention: Telex number: 177615 8 EX-21 10 SUBSIDIARIES OF UNOVA EXHIBIT 21 UNOVA, INC. SUBSIDIARIES OF THE REGISTRANT
JURISDICTION PERCENTAGE OF OF NAME OF SUBSIDIARY INCORPORATION OWNERSHIP - ------------------------------------------------------------------------------------- -------------- --------------- Intermec Technologies Corporation.................................................... Washington 100% Norand Corporation................................................................... Delaware 100% UBI Holdings B.V..................................................................... Netherlands 100% UNOVA Industrial Automation Systems, Inc............................................. Delaware 100%
The Registrant has additional operating subsidiaries which, considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary. All above-listed subsidiaries have been consolidated in the Registrant's financial statements upon acquisition. -----END PRIVACY-ENHANCED MESSAGE-----