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26172_1993.txt	26172_1993	1993	26172	ITEM 1. BUSINESS ~~~~~~~ ~~~~~~~~ OVERVIEW ~~~~~~~~ Cummins Engine Company, Inc. ("Cummins" or "the Company") is a leading worldwide designer and manufacturer of fuel-efficient diesel engines and related products. Engines ranging from 76 to 2,000 horsepower serve a wide variety of equipment in Cummins' key markets: heavy-duty truck, midrange truck, power generation, bus and light commercial vehicles, industrial products, government and marine. In addition, Cummins produces strategic components and subsystems critical to the engine, including filters, turbochargers and electronic control systems. Cummins sells its products to original equipment manufacturers ("OEMs"), distributors and other customers worldwide and conducts manufacturing, sales, distribution and service activities in most areas of the world. In 1993, approximately 56 percent of net sales were made in the United States. Major international markets include the United Kingdom and Europe (14 percent of net sales); Asia, the Far East and Australia (13 percent of net sales); and Mexico and South America (8 percent of net sales). Cummins' growing presence in international markets and its significant investment in emissions technology have created opportunities for cooperative arrangements with vertically integrated manufacturers worldwide. In addition to agreements with major US equipment manufacturers, Cummins recently developed alliances with Scania of Sweden to develop a fuel system for heavy-duty diesel engines; with Tata Engineering and Locomotive Company ("TELCO") of India to manufacture Cummins B Series engines for TELCO trucks; and with Komatsu of Japan to produce Cummins B Series engines in Japan and to adapt for production high-horsepower Komatsu-designed engines in the United States. BUSINESS MARKETS ~~~~~~~~~~~~~~~~ Heavy-duty Truck ~~~~~~~~~~~~~~~~ The Company has a complete product line of 8-, 10-, 11- and 14-litre diesel engines that range from 260 to 500 horsepower serving the heavy-duty truck market. Cummins' heavy-duty diesel engines are offered as standard or optional power by most major heavy-duty truck manufacturers in North America. The seven largest US heavy-duty truck OEMs produced approximately 98 percent of the heavy-duty trucks sold in North America in 1993. The loss of certain of these customers could have an adverse effect on the Company's business. The Company's largest customer for heavy-duty truck engines in 1993 was Navistar International Corporation, which represented 7.5 percent of the Company's 1993 net sales. In 1993, the Company accounted for 62.7 percent of Navistar's heavy-duty engine purchases. In the heavy-duty truck market, the Company competes with independent engine manufacturers as well as truck producers who manufacture diesel engines for their own products. Certain of these integrated manufacturers also are customers of the Company. In North America, the Company's primary competitors in the heavy-duty truck engine market are Caterpillar, Inc., Detroit Diesel Corporation and Mack Trucks, Inc. The Company's principal competitors in international markets vary from country to country, with local manufacturers generally predominant in each geographic market. Other diesel engine manufacturers in international markets include Mercedes Benz, AB Volvo, Renault Vehicles Industriels, Iveco Diesel Engines, Hino Motors, Ltd., Mitsubishi Heavy Industries, Ltd., Isuzu Motors, Ltd., DAF Group N.V. and SAAB-Scania A.B. The North American heavy-duty truck market is affected significantly by the overall level of economic activity. In 1993, North American heavy-duty truck production grew by 34 percent from the previous year's level. Production was 174,000 trucks in 1993 compared to 130,000 in 1992 and 96,000 in 1991. The Company's share of the North American heavy-duty truck engine market was 35 percent in 1993, which was significantly higher than its nearest competitor. The Company's share of the North American heavy-duty truck engine market was 37 percent in 1992 and 38 percent in 1991. While the European truck market continued at depressed levels during 1993, the UK market began to recover, producing at total of 13,300 units, compared to 10,000 in 1992. Cummins' share of the UK market was approximately 14 percent in 1993. The Mexican heavy-duty truck market declined approximately 18 percent in 1993, from 7,900 units in 1992 to 6,500 units in 1993, due primarily to high interest rates and restrictive economic policies imposed by the Mexican government to reduce inflation. The Company's share of this market was nearly 80 percent in 1993. Midrange Truck ~~~~~~~~~~~~~~ The Company has a product line of diesel engines ranging from 160 to 300 horsepower serving midrange and intercity delivery truck customers. The Company entered the North American midrange diesel engine truck market in 1990. Production of medium-duty trucks in North America grew 5 percent in 1993 from 105,000 units in 1992 to 110,000 units in 1993. The Company's share of the market in 1993 was 30 percent, a major factor of which was sales to Ford Motor Company. In 1993, Ford completed its introduction of the Company's B and C Series engines as exclusive diesel power in its medium-duty truck line. Ford was the Company's largest customer for midrange engines for this market in 1993, representing approximately 5 percent of the Company's net sales. The Company also sells its B and C Series engines and engine components outside North America to midrange truck markets in Asia, Europe and South America. Cummins and TELCO, India's largest truck manufacturer, formed a joint venture in 1993 to manufacture B Series engines in India for TELCO vehicles. Cummins engines will be phased into these vehicles beginning in 1994, with production to begin at the joint venture's plant in 1995. In the midrange truck market, the Company competes with independent engine manufacturers as well as truck producers who manufacture diesel engines for their own products. Certain of these integrated manufacturers also are customers of the Company. Primary engine competitors in the midrange truck market in North America are Navistar International Corporation and Caterpillar, Inc. The Company's principal competitors in international markets vary from country to country, with local manufacturers generally predominant in each geographic market. Other diesel engine manufacturers in international markets include Mercedes Benz, AB Volvo, Renault Vehicles Industriels, Iveco Diesel Engines, Hino-Motors Ltd., Mitsubishi Heavy Industries, Ltd., Isuzu Motors, Ltd., DAF Group N.V., SAAB-Scania A.B., Perkins Engines Ltd., and Nissan. Power Generation ~~~~~~~~~~~~~~~~ In 1993, power generation continued to represent over 20 percent of the Company's net sales. Products include the complete line of Cummins' engines, Onan's gasoline engines, generator sets and switches and Newage alternators. These products serve the stationary power, mobile and alternator markets. In stationary power, Onan's industrial business and Cummins' G-drive groups provide electrical and engine power generation products and services to essentially all major markets worldwide. The product line is the broadest in the industry, ranging from 5 to 1500 kW. In the mobile business, Onan is a leading supplier of power generation sets for the recreational vehicle market in the United States. As part of a Department of Energy contract, Onan recently was selected to develop a 35 kW auxiliary power unit for passenger hybrid electric vehicles. Bus and Light Commercial Vehicles ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ This market includes Cummins-powered pickup trucks, school buses, urban transit buses, delivery trucks and recreational vehicles. In 1993, sales increased almost 20 percent over the 1992 level. Chrysler, which offers the Cummins B Series engines in its Dodge Ram pickup truck, was the Company's largest customer for midrange engines in this market, representing 5.4 percent of the Company's net sales in 1993. Cummins' share of the US transit bus market was 40 percent in 1993, due in part to the introduction of the C Series engines and Cummins' natural gas L10 engine. Cummins' natural gas engine was the first natural gas fueled heavy-duty engine certified by the California Air Resources Board. In 1993, sales of engines for school buses, recreational vehicles and light commercial vehicles, including delivery trucks and panel vans, also were strong. In these markets, the Company also competes with both independent manufacturers of diesel engines and vehicle producers who manufacture diesel engines for their own products. Primary manufacturers of diesel engines for the bus and light commercial truck markets are Detroit Diesel Corporation, General Motors Corporation, Navistar International Corporation, Perkins Engines Ltd., MAN, AB Volvo, Mercedes Benz and SAAB-Scania A.B. Industrial Products ~~~~~~~~~~~~~~~~~~~ Cummins' engines power more than 3,000 models of equipment for the construction, logging, mining, agricultural, petroleum and rail markets. Worldwide sales of Cummins products to this market increased approximately 3 percent in 1993, compared to 1992. The increase in sales was primarily in international markets. Industrial markets are recovering modestly in the United States. Cummins introduced the B Series engine at 200 horsepower in 1993. It was the first engine to be introduced to the marketplace which meets the stringent 1996 California off-highway emissions regulations. In 1993, Cummins and Komatsu formed joint ventures to produce Cummins' B Series engines in Japan and Komatsu's 30-litre engine in the United States. Production at both joint venture sites is expected to commence in 1996. Government ~~~~~~~~~~ Cummins sells engines for a variety of military and civilian applications. Government sales continued to decline in 1993 from a peak of $236 million in 1991. The Company believes that this market may decline further due to reductions in US military expenditures. Cummins Military Systems Co. ("CMSC"), which specialized in rebuilt military vehicles, was one of two bidders competing for a production contract to remanufacture up to 10,000 US Army 2-1/2 ton trucks. CMSC was unsuccessful in its bid and, as a result, the Company has closed CMSC and will dispose of its assets. Marine ~~~~~~ Product applications span 76 to 1,400 horsepower for recreational, commercial and military markets. In 1993, marine sales were approximately 6 percent higher than in 1992, with Asia representing the most rapidly growing market for these products. Fleetguard, Holset and Cummins Electronics ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Sales of filters, turbochargers and electronic systems represented approximately 11 percent of the Company's sales in 1993, compared to approximately 12 percent in 1992 and 1991. Effective at the beginning of the third quarter of 1993, the Company transferred its 80-percent interest in McCord Heat Transfer Corp., to Behr America Holding, Inc., for a 35-percent interest in Behr America Holding, Inc., a company that also holds all of the North American operations of Julius F. Behr of Germany. The Company's minority interest in Behr America Holding, Inc., has been reported as an unconsolidated company since the third quarter of 1993. Fleetguard is a leading manufacturer of products for the North American heavy-duty filter industry. Its products also are produced and sold in international markets, including Europe, Mexico, India, Australia and the Far East. Holset's products also are sold worldwide. In 1993, Holset introduced a new viscous damper and coupling design, as well as an air compressor for the heavy-duty market. In 1993, Holset also completed the acquisition of Kompressorenbau Bannewitz GmbH near Dresden, Germany, which produces turbochargers for high-horsepower diesel engines. Cummins Electronics provides controls for Cummins' engines and on- board business information and specialized electronics systems for Cummins' customers. BUSINESS OPERATIONS ~~~~~~~~~~~~~~~~~~~ Research and Development ~~~~~~~~~~~~~~~~~~~~~~~~ Cummins conducts an extensive research and engineering program to achieve product improvements, innovations and cost reductions, as well as to satisfy legislated emissions requirements. As disclosed in Note 1 to the Consolidated Financial Statements, research and development expenditures approximated $158 million in 1993, $129 million in 1992 and $99 million in 1991. Sales and Distribution ~~~~~~~~~~~~~~~~~~~~~~ While the Company has several supply contracts for its products in on- and off-highway markets, much of its business is done on open purchase orders. These purchase orders usually may be canceled on reasonable notice without cancellation charges. Therefore, while incoming orders generally are indicative of anticipated future demand, the actual demand for the Company's products may change at any time. The Company's products compete on a number of factors, including price, delivery, quality, warranty and service. Cummins believes that its continued focus on cost, quality and delivery, its extensive technical investment, its full product line and customer-led service and support programs are key elements of its competitive position. The Company's major markets typically experience modest seasonal declines in production during the third quarter of the year, which has an effect on the demand for Cummins' products during that quarter of each year. Cummins warrants its engines, subject to proper use and maintenance, against defects in factory workmanship or materials for either a specified time period or mileage or hours of use. Warranty periods vary by engine family and market segment and are subject to competitive pressures. Cummins sells engines, parts and related products through distributorships worldwide. The Company believes its distribution system is an important part of its marketing strategy and competitive position. Most of its North American distributors are independently owned and operated. The Company has agreements with each of these distributors, which typically are for a term of three years, subject to certain termination provisions. Upon termination or expiration of the agreement, the Company is obligated to purchase various assets of the distributorship. Through an arrangement with Citicorp Dealer Finance, a unit of Citicorp North America, the Company also guarantees certain financing obligations of some of these distributors. There are approximately 5,700 locations in North America, primarily owned and operated by OEMs or their dealers, at which Cummins-trained service personnel and parts are available to maintain and repair Cummins engines. The Company's parts distribution centers are located strategically throughout the world. Supply ~~~~~~ The Company machines many of the components used in its engines, including blocks, heads, rods, turbochargers, crankshafts and fuel systems. Cummins has adequate sources of supply of raw materials and components required for its operations. International ~~~~~~~~~~~~~ Cummins sells its products to major international firms outside North America by exports directly from the United States and shipments from foreign facilities (operated through subsidiaries, affiliates, joint ventures or licensees) which manufacture and/or assemble Cummins' products. The Company's international operations are subject to risks such as currency controls and fluctuations, import restrictions and changes in national governments and policies. The Company has entered into license agreements that provide for the manufacture and sale of licensed engines and engine components for use in certain territories prescribed in the respective agreements. In addition, licensees produce engines and engine components which are available to help meet demand for Cummins' products in the rest of the world. The paragraph under Item 1, "Overview", on page 2 on international markets and operations is incorporated herein by reference. Employment ~~~~~~~~~~ At December 31, 1993, Cummins employed 23,600 persons worldwide, approximately 10,200 of whom are represented by various unions. The Company has labor agreements covering employees in North America, South America and the United Kingdom. In 1993, members of the Diesel Workers Union in Southern Indiana approved an 11-year contract. Production workers at Atlas, Inc., in Fostoria, Ohio, and office and technical workers in Southern Indiana also ratified 3-year contracts during 1993. ENVIRONMENTAL COMPLIANCE ~~~~~~~~~~~~~~~~~~~~~~~~~ Product Environmental Compliance ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Cummins' engines are subject to extensive statutory and regulatory requirements that directly or indirectly impose standards with respect to emissions and noise. Cummins' products comply with emissions standards that the US Environmental Protection Agency ("EPA") and California Air Resources Board ("CARB") have established for emissions for on-highway diesel engines produced through 1994. Cummins' ability to comply with these and future emissions standards is an essential element in maintaining its leadership position in the North American heavy-duty truck and other automotive markets, as well as in supplying other markets. The Company will make significant capital and research expenditures to comply with these standards. Failure to comply could result in adverse effects on future financial results. Cummins has completed successfully the certification of its 1994 on- highway products, which include both midrange and heavy-duty engines. All of these products underwent extensive laboratory and field testing prior to their release. Emissions Averaging, Banking and Trading regulations were promulgated by the EPA in July 1990. By selling 1991, 1992 and 1993 model year engines with emissions levels below applicable standards and by introducing several of the Company's 1994 configurations early, Cummins generated both nitric oxide and particulate matter credits. Certain of the Company's 1994 products which do not meet 1994 emissions standards will be sold by using these emissions credits. The next major change in emissions requirements for heavy-duty diesel engines occurs in 1998, when the nitric oxide standard is lowered from 5.0 to 4.0 g/bhp-hr. Design and development activity toward meeting this standard is well underway. In 1996, the particulate matter standard for engines used in urban buses changes from 0.07 to 0.05 g/bhp-hr. Contained in the environmental regulations are several means for the EPA to ensure and verify compliance with emissions standards. Two of the principal means are tests of new engines as they come off the assembly line, referred to as selective enforcement audits ("SEA"), and tests of field engines, commonly called in-use compliance tests. The SEA provisions have been used by the EPA to verify the compliance of heavy-duty engines for several years. In 1993, three such audit tests were performed on Cummins engines, all of which passed. The failure of an SEA could result in cessation of production of the noncompliant engines and the recall of engines produced prior to the audit. In the product development process, Cummins anticipates SEA requirements when it sets emissions design targets. No Cummins engines were chosen for in-use compliance testing in 1993. It is anticipated that the EPA will increase the in-use test rate in 1994 and subsequent years, raising the probability that one or more of the Company's engines will be selected. As with SEA testing, if an in-use test is failed, an engine recall may be necessary. Cummins believes that its engines meet the EPA's in-use criteria. In November, 1990, the Clean Air Act Amendments of 1990 were signed into law. These amendments include special provisions for certain truck fleets in nonattainment metropolitan areas and instruct the EPA to consider regulating emissions from engines used in mobile off- highway applications. The EPA completed the mandated study of these sources and concluded that regulations are required. Promulgation of the final rule is anticipated to occur in the second quarter of 1994. Effective in 1995, CARB has promulgated new emissions standards for vehicles from 8,500 to 14,000 pounds gross vehicle weight. Cummins' B Series engines compete in this category. Design and development activity toward meeting these standards is well underway. In January 1992, CARB promulgated regulations for mobile off-highway applications that use engines rated at or above 175 horsepower. The effective date of the first tier of regulations is January 1, 1996. The Company expects that its products will comply with these regulations before the effective date. More stringent emissions standards also are being adopted in international markets, including Europe and Japan. Given the Company's experience in meeting US emissions standards, it believes that it is well positioned to take advantage of opportunities in these markets as the need for emissions-control capability grows. There are several Federal and state regulations which encourage and, in some cases, mandate the use of alternatively fueled heavy-duty engines. The Company currently offers a natural gas fueled version of its L10 engine and has several development programs underway to expand its alternatively fueled product offering. Vehicles and certain industrial equipment in which diesel engines are installed must meet Federal noise standards. The Company believes that applications in which its engines are now installed meet these noise standards and that future installations also will be in compliance. Other Environmental Statutes and Regulations ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ With respect to environmental statutes and regulations applicable to the plants and operations of the Company and its subsidiaries, Cummins believes it is in compliance in all material aspects with applicable laws and regulations. During the last five years, expenditures for environmental control facilities and environmental remediation projects at the Company's operating facilities in the United States have not been a major portion of annual capital outlays and are not expected to be material in 1994. The Company or its subsidiaries have been identified as potentially responsible parties ("PRPs") pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended or similar state laws, at a number of waste disposal sites. Under such laws, PRPs typically are jointly and severally liable for any investigation and remediation costs incurred with respect to such sites. The Company's ultimate responsibility, therefore, could be greater than the share of waste contributed by the Company would otherwise indicate. While the Company is unable at this time to determine the aggregate cost of remediation at these sites or the Company's ultimate liability with respect thereto, the Company has attempted to analyze its proportionate and actual liability by analyzing the amounts of hazardous materials contributed by the Company to such sites, the estimated costs, the number and identities of other PRPs and the level of insurance coverage. The Company has entered into administrative agreements at certain of these sites to perform remedial actions. Onan Corporation, a subsidiary of the Company, has entered into an administrative agreement to participate in remediation of the Waste Disposal Engineering landfill in Andover, Minnesota, along with 28 other PRPs. The cost of remediation at this site is estimated to range from $10 million to $15 million, of which Onan expects to contribute approximately $600,000, which has been reserved fully. The parties to the remediation agreement are in the process of seeking contributions from third parties, which may reduce Onan's proportionate share of the remediation costs. Onan also has entered into an administrative agreement for the Oak Grove Sanitary Landfill in Oak Grove Township, Minnesota. The estimated cost to remediate this site is approximately $6 million. Onan has agreed to contribute $127,000 to cover its share of the cost of remediation. Onan is in the process of seeking insurance reimbursement (which is being contested by the insurers) and contributions from other PRPs, which could reduce this amount. At the Old City Landfill in Columbus, Indiana, the Company and two other PRPs have entered into a Consent Order with the Indiana Department of Environmental Management to implement the Record of Decision issued by EPA in 1992. The cost to implement the Consent Order is estimated to be approximately $300,000 based upon current conditions at the site. The Company's share of this expense will be approximately 50 percent. At the Purity Oil Site located in Fresno, California, a subsidiary of the Company has been identified as a PRP and is one of several PRPs who have been issued an order by EPA to undertake remedial action at the site. The Company's subsidiary has contributed $150,000 toward the first phase of remedial action at the site. While the subsidiary's liability for future expenditures has not been determined, the Company estimates that its percentage contribution of hazardous waste to the site was less than 1 percent. It is unclear whether the Company's share of future remediation cost will be based upon its proportionate share of waste contributed to the site. The costs of future remediation have not yet been determined but are likely to exceed the cost of the first phase of remedial action. As a result, the Company's share of such future expenses is likely to exceed amounts spent to date at this site. The Company believes that it has adequate reserves to cover its share of future expenses at each of these sites. With respect to other sites at which the Company or its subsidiaries have been named as PRPs, the Company cannot estimate reasonably the future remediation costs. At several sites, the remedial action to be implemented has not been determined for the site or the Company has been named only recently as a PRP. In addition, the Company presently is contesting any liability at several of these sites. Based upon the Company's prior experiences at similar sites, however, the aggregate future cost of all PRPs to remediate these sites is likely to be significant. While the Company believes that it has good defenses at several of these sites, that its percentage contribution at other sites is likely to be de minimis and that other PRPs will bear most of the future remediation costs, the Company's ultimate responsibility will be based on many factors outside the Company's control and, therefore, could be material in the event that the Company becomes obligated to pay a significant portion of those expenses. Based upon information presently available, the Company believes that such liability is unlikely and that its actual and proportionate costs of participating in the remediation of these sites will not be material. ITEM 2. ITEM 2. PROPERTIES ~~~~~~~ ~~~~~~~~~~ Cummins' worldwide manufacturing facilities occupy approximately 13 million square feet, including approximately 5 million square feet outside the United States. Principal engine manufacturing facilities in the United States include the Company's plants in Southern Indiana and Jamestown, New York, as well as an engine plant in Rocky Mount, North Carolina, which is operated in partnership with J I Case. Countries of manufacture outside of the United States include England, Scotland, Brazil, Mexico, France, Spain, Australia and Germany. In addition, engines and engine components are manufactured by joint ventures or independent licensees at plants in China, India, Japan, Pakistan, South Korea and Turkey. Cummins believes that all of its plants have been maintained adequately, are in good operating condition and are suitable for its current needs through productive utilization of the facilities. ITEM 3. ITEM 3. LEGAL PROCEEDINGS ~~~~~~~ ~~~~~~~~~~~~~~~~~ The information appearing in Note 15 to the Consolidated Financial Statements is incorporated herein by reference. On April 5, 1990, Raphael Warkel and Alan J. Stransky filed a complaint in the US District Court for the Southern District of Indiana against the Company, all of its then-current directors and one past director. The complaint purported to be brought as a class action on behalf of persons who purchased the Company's common stock between May 1, 1989 and September 21, 1989. The complaint alleged that the Company and the other defendants violated Section 10(b) and Section 20 of the Securities Exchange Act of 1934 by failing to disclose material financial information concerning the Company in an effort to "artificially inflate" the market price of the Company's common stock. The complaint sought compensatory damages of unspecified amount, costs and attorneys' fees. All defendants answered denying the substantive allegations of the complaint. The plaintiffs moved for class certification, which motion was opposed by the defendants. On November 30, 1992, the court granted defendants' motion for judgment on the pleading and dismissed the complaint. The court held that the complaint failed to state a claim for relief under the Federal securities laws. The court gave the plaintiffs 30 days to file an amended complaint. On December 29, 1992, plaintiffs filed an amended complaint against the same defendants. The amended complaint, which alleges the Company and other defendants violated Section 10(b) and Section 20 of the Securities Exchange Act by failing to disclose material financial information concerning the Company in an effort to "artificially inflate" the market price of the Company's common stock, is also brought as a class action and seeks compensatory damages of unspecified amount, costs and attorneys' fees. On March 3, 1993, defendants moved to dismiss the amended complaint. On September 13, 1993, the court dismissed the claims of plaintiff Stransky with prejudice. The court also dismissed the claims of plaintiff Warkel except for a claim based on an allegedly false and misleading press release issued by the Company in July 1989. Warkel was given until December 13, 1993 to file an amended complaint, which time has passed and no amended complaint has been filed. Plaintiff Stransky has moved the court for reconsideration of the order dismissing his claims, which motion remains pending. Defendants believe the remaining allegations in the amended complaint are without merit and intend to defend the action vigorously. The material in Item 1 "Other Environmental Statutes and Regulations" is incorporated herein by reference. ITEM 4. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS ~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ None. PART II ~~~~~~~ ITEM 5. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The Company's common stock is listed on the New York Stock Exchange and the Pacific Stock Exchange under the symbol "CUM". On October 12, 1993, the Board of Directors authorized a two-for-one stock split of the common stock, which was effected by a stock dividend payable to holders of record on October 25, 1993. The following table sets forth, for the calendar quarters shown, the range of high and low composite prices of the common stock on the New York Stock Exchange and the cash dividends declared on the common stock. The information in the table has been adjusted to give effect to the stock split. High Low Dividends Declared ~~~~~~~ ~~~~~~~ ~~~~~~~~~~~~~~~~~~ ~~~~ First quarter $48 3/4 $37 3/8 $.025 Second quarter 49 5/16 38 1/2 .025 Third quarter 45 39 .025 Fourth quarter 54 3/8 38 7/8 .125 ~~~~ First quarter $33 $26 5/8 $.025 Second quarter 38 3/8 28 3/8 .025 Third quarter 35 7/8 30 5/16 .025 Fourth quarter 40 7/16 29 11/16 .025 During the fourth quarter of 1993, the Board of Directors of the Company increased the common stock dividend from $.025 to $.125 per quarter. The declaration and payment of future dividends by the Board of Directors of the Company will be dependent upon the Company's earnings and financial condition, economic and market conditions and other factors deemed relevant by the Board of Directors. At December 31, 1993, the approximate number of holders of record of the Company's common stock was 4,400. Certain of the Company's loan indentures and agreements contain provisions which permit the holders to require the Company to repurchase the obligations upon a change of control of the Company, as defined in the applicable debt instruments. As more fully described in Note 13 to the Consolidated Financial Statements, which information is incorporated herein by reference, the Company has a Shareholders' Rights Plan. The Company's bylaws provide that Cummins is not subject to the provisions of the Indiana Control Share Act. However, Cummins is governed by certain other laws of the State of Indiana applicable to transactions involving a potential change of control of the Company. ITEM 6. ITEM 6. SELECTED FINANCIAL DATA (Dollars in Millions, except per share amounts) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 1993 1992 1991 1990 1989 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ Net sales $4,247.9 $3,749.2 $3,405.5 $3,461.8 $3,519.5 Earnings (loss) before extraordinary items & cumulative effect of accounting changes 182.6 67.1 (65.6) (165.1) (6.1) Net earnings (loss) 177.1 (189.5) (14.1) (137.7) (6.1) Primary earnings (loss) per common share: Before extraordinary items & cumulative effect of accounting changes 4.95 1.77 (2.48) ( 7.23) (.76) Net 4.79 ( 6.01) ( .75) ( 6.13) (.76) Fully diluted earnings (loss) per common share: Before extraordinary items & cumulative effect of accounting changes 4.77 1.77 (2.48) ( 7.23) (.76) Net 4.63 ( 6.01) ( .75) ( 6.13) (.76) Cash dividends per common share .20 .10 .35 1.10 1.10 Total assets 2,390.6 2,230.5 2,041.2 2,086.3 2,030.8 Long-term debt and redeemable preferred stock 189.6 412.4 443.2 411.4 473.7 All pre-share data have been restated to give effect to the October 1993 two-for-one stock split. In December 1993, the Company sold 2.6 million shares of its common stock in a public offering and used a portion of the proceeds to redeem $77.2 in principal amount of the Company's outstanding 9-3/4 percent sinking fund debentures. This early extinguishment of debt resulted in an extraordinary charge of $5.5. In 1992, the Company sold 4.6 million shares of its common stock in a public offering and used a portion of the proceeds to extinguish $71.1 of debt of Consolidated Diesel Company, an unconsolidated, 50-percent owned partnership, $8.2 of the Company's 8-7/8 percent sinking fund debentures and $11.4 of a 15-percent note payable to an insurance company. These early extinguishments of debt resulted in an extraordinary charge of $5.5. In 1992, the Company's results also included a charge of $251.1 for the cumulative effect of changes in accounting as prescribed by SFAS Nos. 106, 109 and 112 related to accounting of retirees' health care and life insurance benefits, income taxes and postemployment benefits. The Company's results for 1991 included a credit of $51.5 for the cumulative effect of changes in accounting to include in inventory certain production-related costs previously charged directly to expense and to adopt a modified units-of-production depreciation method for substantially all engine production equipment. ITEM 7. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Dollars in Millions, unless otherwise stated) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ OVERVIEW ~~~~~~~~ Cummins recorded net sales of $4,248 in 1993, the highest level in the Company's history. This was 13 percent higher than in 1992 and 25 percent higher than in 1991. The increase in sales during 1993 was primarily attributable to higher sales of midrange engines worldwide and the strong North American heavy-duty truck market. The Company continued to achieve improvements in its financial results in 1993, generating net earnings of $177.1, or $4.79 per share, due to the increase in sales, continued cost-improvement measures and operating efficiencies, and the ability to reduce a portion of its tax valuation allowance. Effective January 1, 1992, the Company adopted three new accounting rules, which resulted in a one-time, non-cash, after-tax charge of $251.1. This resulted in a net loss of $189.5, or $6.01 per share, in 1992. In both 1993 and 1992, the Company recorded extraordinary charges of $5.5 related to early retirement of debt. The Company reported a net loss of $14.1 in 1991, including a credit of $51.5 for the cumulative effect of changes in accounting for inventory and depreciation. RESULTS OF OPERATIONS ~~~~~~~~~~~~~~~~~~~~~ The percentage relationship between net sales and other elements of the Company's Consolidated Statement of Operations for each of the last three years was: Percent of Net Sales 1993 1992 1991 ~~~~~~~~~~~~~~~~~~~~ ~~~~~ ~~~~~ ~~~~~ Net sales 100.0 100.0 100.0 Cost of goods sold 75.6 77.5 81.5 ~~~~~ ~~~~~ ~~~~~ Gross profit 24.4 22.5 18.5 Selling & administrative expenses 13.6 14.2 13.9 Research & engineering expenses 4.9 4.8 4.3 Interest expense .9 1.1 1.2 Other expenses .2 .4 .4 ~~~~ ~~~~ ~~~~ Earnings (loss) before income taxes 4.8 2.0 (1.3) Provision for income taxes .5 .2 .5 Minority interest - - .1 ~~~~ ~~~~ ~~~~~ Earnings (loss) before extraordinary items & cumulative effect of accounting changes 4.3 1.8 (1.9) Extraordinary items ( .1) ( .1) - Cumulative effect of accounting changes - (6.7) 1.5 ~~~~~ ~~~~~ ~~~~~ Net earnings (loss) 4.2 (5.0) ( .4) ~~~~~ ~~~~~ ~~~~~ Sales by Market ~~~~~~~~~~~~~~~ The Company's sales for each of its key markets during the last three years were: 1993 1992 1991 ~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~ Dollars Percent Dollars Percent Dollars Percent ~~~~~~~ ~~~~~~~ ~~~~~~~ ~~~~~~~ ~~~~~~~ ~~~~~~~ Heavy-duty truck 1,230 29 1,081 29 940 28 Midrange truck 482 11 221 6 69 2 Power generation 963 23 914 24 813 24 Bus & light commercial vehicles 498 12 423 11 417 12 Industrial products 438 10 425 11 450 13 Government 109 3 173 5 236 7 Marine 68 1 64 2 61 2 Fleetguard, Holset and Cummins Electronics (a) 460 11 448 12 420 12 ~~~~~ ~~ ~~~~~ ~~ ~~~~~ ~~ Net sales 4,248 100 3,749 100 3,406 100 ~~~~~ ~~~ ~~~~~ ~~~ ~~~~~ ~~~ (a) Included sales of McCord prior to the third quarter of 1993. Sales to the heavy-duty truck market in 1993 were 14 percent higher than in 1992 and 31 percent higher than the 1991 level. The increase in sales since 1991 has been due to increasing demand for engines in the North American heavy-duty truck market. In 1993, the Company's heavy-duty engine shipments in this market increased approximately 30 percent over 1992 and were more than double the 1991 level. The Company continued to lead this market with a 35-percent market share in 1993. The Company's market share was 37 percent in 1992 and 38 percent in 1991. Heavy-duty truck engine shipments in international markets in 1993 were approximately 10 percent lower than in 1992 but 5 percent above the 1991 level. While markets in the United Kingdom are showing signs of emerging from recessionary levels, no significant recovery is apparent in European markets. The Company's operations in Brazil were moderately profitable due to cost reductions and operating efficiencies that resulted in their lowering the break-even point. Even though there have been signs that the Brazilian truck market is recovering, uncertainty continues to exist in this market due to inflationary and other economic pressures. The heavy-duty truck market in Mexico also remains depressed due to the tightening of credit, which has limited the ability of fleets to purchase new trucks. Sales to the midrange truck market have more than doubled since 1991. In 1993, the Company completed the first full year of a contract with Ford Motor Company to provide exclusive diesel power for Ford's medium-duty trucks. While some customers made advance purchases of midrange engines at the end of 1993, the current level of demand indicates continued growth in this market. Power generation sales of $963 in 1993 increased 5 percent over the 1992 level and were 18 percent higher than in 1991. During 1993, power generation sales continued to benefit from strong demand for industrial generator sets in international markets, particularly in China where sales were double the 1992 level. The Company also benefited from an increase in demand for generator sets for recreational vehicles in 1993 over 1992. In the bus and light commercial vehicle market, the Company's sales were approximately 18 percent higher than in both 1992 and 1991. Engine shipments for the bus market in North America were significantly higher than prior year's levels. The Company's sales to this market also benefited in 1993 from continued strong demand for midrange engines for Chrysler's Dodge Ram pickup truck. Sales to industrial markets in 1993 were essentially level with those of the two prior years, although sales of engine parts and components, primarily to China and Turkey, increased significantly. Engine shipments to construction and agricultural markets in North America also showed modest gains in 1993; however, there was no improvement in shipments for logging or mining markets, which continue at low levels. Government sales continue to be lower than prior years' levels due primarily to the reduction in US government expenditures. Sales have declined from 1991 peak of 7 percent of the Company's net sales to 5 percent of net sales in 1992 and 3 percent of net sales in 1993. The Company believes this market may decline further due to reductions in US military expenditures. Sales for the marine business continued to increase but represented less than 2 percent of the Company's net sales in the three years' reporting periods. Engine shipments for all markets in 1993 were 263,000, compared to 222,000 in 1992 and 200,600 in 1991. Shipments by engine family for the comparative periods were: 1993 1992 1991 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ Midrange engines 167,900 139,800 129,700 Heavy-duty engines 86,500 73,900 62,800 High-horsepower engines 8,600 8,300 8,100 ~~~~~~~ ~~~~~~~ ~~~~~~~ Total engine shipments 263,000 222,000 200,600 ~~~~~~~ ~~~~~~~ ~~~~~~~ Sales of filters, turbochargers and electronic systems increased from the 1992 level and were approximately 10 percent higher than in 1991. These businesses have benefited from an increase in sales for both the midrange and heavy-duty engine markets in North America. European markets for these products remained at depressed levels. Prior to the third quarter of 1993, sales of McCord Heat Transfer Co., were reported in this business market. Effective at the beginning of the third quarter of 1993, the Company transferred its 80-percent interest in McCord to Behr America Holding, Inc., for a 35-percent interest in Behr America Holding, Inc. The Company's minority interest in Behr America Holding, Inc., has been reported as an unconsolidated company since the transfer. Gross Profit ~~~~~~~~~~~~ The Company's gross profit percentage increased to 24.4 percent of net sales in 1993 from 22.5 percent in 1992 and 18.5 percent in 1991. The Company continued to benefit from improved margins across all of its engine families during 1993. The key factor contributing to the improved margin in 1993 was the increase in demand for the Company's products, which represented approximately 50 percent of the increase in gross profit. Other factors included the effects of cost- improvement measures implemented since 1991 to improve production systems and throughput time, engine and parts pricing actions subsequent to the first quarter of 1992, and lower costs associated with product coverage programs. The cost of product coverage programs, which includes both warranty and extended coverage, improved to 2.1 percent of net sales in 1993, compared to 2.4 percent in 1992 and 3.8 percent in 1991. Improvements included reduced warranty rates for engines sold in 1993 and adjustments to reduce the product coverage liability for engines previously placed in service. In 1993, members of the Diesel Workers Union in Southern Indiana approved an 11-year contract. The contract provided for a team-based work system designed to increase flexibility, employee involvement and efficiency in exchange for improved pension and health care benefits for future retirees. Based upon the composition of age and service of the labor force, the increased expense associated with prior service of these employees will be recognized during the early years of the contract. In 1991, the Company's margin contribution was low due to a decline in sales of heavy-duty engines, as well as higher costs related to introduction of the 1991 product line, which incorporated electronic controls for the first time. Operating Expenses ~~~~~~~~~~~~~~~~~~ Selling and administrative expenses were $579.2 in 1993, compared to $532.5 in 1992 and $472.3 in 1991. The increase in these expenditures in 1993 was primarily attributable to variable operating expenses to support the higher sales volumes. Research and engineering expenses were $209.6 in 1993, compared to $179.5 in 1992 and $147.0 in 1991. The increase in 1993 of 17 percent compared to 1992 and 43 percent compared to 1991 was due to continued expenditures for fuel systems development, electronic systems and future technology developments. Other Expenses ~~~~~~~~~~~~~~ Interest expense of $36.3 in 1993 was $4.7 lower than in 1992 and $6.2 lower than in 1991 due to the Company's early retirement and redemption of debt obligations during 1993 and 1992 and an overall decline in interest rates. In 1993, the decrease in other expense of $6.3 compared to 1992 and $5.9 compared to 1991 was due to a reduction in interest expense as a result of debt retirement at Consolidated Diesel Company, an unconsolidated 50-percent owned partnership, in the fourth quarter of 1992. This was offset partially by lower income from unconsolidated companies. Provision for Income Taxes ~~~~~~~~~~~~~~~~~~~~~~~~~~ As described in Note 9 to the Consolidated Financial Statements, the Company reduced its valuation allowance for tax benefit carryforwards during 1993 and 1992. The tax provision also included a one-time credit of $4.4 in 1993 as a result of the Omnibus Budget Reconciliation Act of 1993. In 1991, Cummins' effective tax rate varied from the US statutory rate because of operating losses for which no tax benefit was recorded and the recognition of foreign and state taxes. Extraordinary Items ~~~~~~~~~~~~~~~~~~~ As disclosed in Note 7 to the Consolidated Financial Statements, the Company extinguished certain indebtedness in 1993 and 1992 that resulted in an extraordinary charge of $5.5 in each year. Accounting Changes ~~~~~~~~~~~~~~~~~~ As disclosed more fully in Note 1 to the Consolidated Financial Statements, in 1992, the Company changed its method of accounting for retirees' health care and life insurance benefits, postemployment benefits and income taxes, all of which were required by new accounting rules released by the Financial Accounting Standards Board. In 1991, the Company changed its method of accounting for inventory and depreciation. FINANCIAL CONDITION AN CASH FLOW ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ During 1993, the Company's financial position improved significantly. Shareholders' investment increased from $501.1 at year-end 1992 to $821.1 at December 31, 1993. The improvement in financial position was the result of the issuance of 2.6 million shares of common stock, which produced net proceeds of $124.5, the conversion by holders of $48.5 of convertible debt into 1.0 million shares of common stock and the generation of net earnings of $177.1 during the year. In addition, the proceeds from the common stock offering and net cash flow from operations were applied to reduce the Company's indebtedness from $488.0 at December 31, 1992 to $235.6 at December 31, 1993, a 52- percent decrease. The combination of the significantly strengthened equity position and reduced debt level lowered the Company's debt-to- capital ratio from 49.3 percent at December 31, 1992 to 22.3 percent at December 31, 1993. At December 31, 1993, "Other liabilities" in the Consolidated Statement of Financial Position increased $86.8 compared to December 31, 1992. This increase reflects the minimum liability related to improved pension benefits that were granted in 1993 for prior service of employees covered by collectively bargained pension plans. An intangible asset of $68.1 was recorded in "Intangibles, deferred taxes and deferred charges" related to this liability. Key elements of the Consolidated Statement of Cash Flows were: 1993 1992 1991 ~~~~~~ ~~~~~~ ~~~~~~ Net cash provided by (used for): Operating activities $285.6 $197.7 $106.7 Investing activities (148.8) (296.5) (136.3) Financing activities (113.5) 104.9 2.2 Effect of exchange rate changes on cash ( .2) ( 3.4) ( 1.1) ~~~~~~~ ~~~~~~~ ~~~~~~~ Net change in cash and cash equivalents $ 23.1 $ 2.7 $ 28.5) ~~~~~~ ~~~~~~ ~~~~~~~ Net cash flow from operating and investing activities totaled $136.8 in 1993, compared to a net cash outflow of $98.8 in 1992 and $29.6 in 1991. The cash outflow in 1992 included $65.1 to acquire the remaining 36-percent interest in Onan Corporation and a capital contribution of $71.1 to Consolidated Diesel Company to retire indebtedness. Capital expenditures during 1993 increased to $174.2 compared to $139.3 in 1992 and $123.9 in 1991. The increase in 1993 was related to investments for new product introductions and fuel systems. The Company expects that capital expenditures will increase in 1994 to fund continued investments in these areas. The Company also expects to make investments in 1994 in joint ventures announced during 1993, including the joint venture with TELCO to produce midrange engines in India for TELCO vehicles and with Komatsu to produce midrange engines in Japan and high-horsepower engines in the United States. During the fourth quarter of 1993, the Company split its common stock on a two-for-one basis through the declaration of a stock dividend. Concurrently, the common stock dividend was increased from 2.5 cents per share per quarter, on a post-split basis, to 12.5 cents per share. Cash at year-end 1993 was $77.3, an increase of $23.1 above the 1992 year-end level. In addition, the Company had no borrowings outstanding on its $300 revolving credit agreement at December 31, 1993. In 1993, the term of this credit facility was extended to 1997. On January 24, 1994, the Company announced that its outstanding Convertible Exchangeable Preference Stock, which had a face value of $112.2 at December 31, 1993, would be redeemed on February 23, 1994 at a price of $51.05 per depositary share, plus accrued dividends. Holders of the stock elected to convert their shares into 2.9 million shares of common stock. ITEM 8. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA ~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ See index to Financial Statements and Schedules on page 25. ITEM 9. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ None. PART III ~~~~~~~~ ITEM 10. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The information appearing under the caption "Election of Directors" of the Company's definitive Proxy Statement, dated March 4, 1994, for the Annual Meeting of the Shareholders to be held on April 5, 1994 (hereinafter the "Proxy Statement") is incorporated by reference in partial answer to this item. The executive officers of the Company at December 31, 1993 are set forth below. The Chairman of the Board and President are elected annually by the Board of Directors at the Board's first meeting following the Annual Meeting of the Shareholders. Other officers hold office for such period as the Board of Directors or Chairman of the Board may prescribe. Present Position & Business Experience During Name Age Last 5 Years ~~~~~~~~~~~~~~ ~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ M. E. Chesnut 47 Vice President - Quality & Organizational Effectiveness (1992 to present), Vice President- Human Resources & Organizational Effectiveness (1989-1992) C. R. Cordaro 44 Group Vice President - Marketing (1990 to present), Vice President - Automotive Marketing (1988 to 1990) J. K. Edwards 49 Vice President - International (1989 to present) R. L. Fealy 42 Vice President - Treasurer (1988 to present) P. B. Hamilton 47 Vice President & Chief Financial Officer (1988 to present) J. A. Henderson 59 President & Chief Operating Officer (1977 to present) M. D. Jones 47 Vice President - Aftermarket Group (1989 to present) F. J. Loughrey 44 Group Vice President - Worldwide Operations (1990 to present), Vice President - Heavy-Duty Engines (1988 to 1990) J. McLachlan 61 Vice President - Corporate Controller (1991 to present), Vice President - Engine Business Controller (1989-1991) G. D. Nelson 53 Vice President - Alternate Fueled Products (1993 to present), Vice President - Research & Development & Chief Technical Officer (1984 to 1993) H. B. Schacht 59 Chairman of the Board of Directors and Chief Executive Officer (1977 to present) T. M. Solso 47 Executive Vice President - Operations (1992 to present), Vice President & General Manager Engine Business (1988 to 1992) R. B. Stoner-Jr. 47 Vice President - Cummins Power Generation Group and President - Onan Corporation (1992 to present), Managing Director - Holset (1986-1992) S. L. Zeller 37 Vice President - Law & External Affairs & Corporate Secretary (1992 to present), Vice President - General Counsel & Secretary (1990 to 1992), Vice President - General Counsel (1989 to 1990) ITEM 11. ITEM 11. EXECUTIVE COMPENSATION ~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~ The information appearing under the following captions in the Company's Proxy Statement is hereby incorporated by reference: "The Board of Directors and Its Committees", "Executive Compensation -- Compensation Tables and Other Information" (including the tables and information contained at pages 16 to 18 of the Proxy Statement), "Executive Compensation -- Change of Control Arrangements" and "Executive Compensation -- Compensation Committee Interlocks and Insider Participation". Except as otherwise specifically incorporated by reference, the Proxy Statement is not to be deemed filed as part of this report. The Company has adopted various benefit and compensation plans covering officers and other key employees under which certain benefits become payable upon a change of control of the Company. Cummins also has adopted an employee retention program covering approximately 350 employees of the Company and its subsidiaries, which provides for the payment of severance benefits in the event of termination of employment following a change of control of Cummins. The Company and its subsidiaries also have severance programs for other exempt employees of the Company whose employment is terminated following a change of control of the Company. Certain of the pension plans covering employees of the Company provide, upon a change of control of Cummins, that excess plan assets become dedicated solely to fund benefits for plan participants. ITEM 12. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ A discussion of the security ownership of certain beneficial owners and management appearing under the captions "Principal Security Ownership", "Election of Directors" and "Executive Compensation -- Security Ownership of Management" in the Proxy Statement is incorporated herein by reference. ITEM 13. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The information appearing under the captions "The Board of Directors and Its Committees", "Executive Compensation - Compensation Committee Interlocks and Insider Participation" and "Other Transactions and Agreements with Directors, Officers and Certain Shareholders" in the Proxy Statement is incorporated herein by reference. Reference is made to the information on related parties appearing in Note 4 to the Consolidated Financial Statements. PART IV ~~~~~~~ ITEM 14. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Documents filed as a part of this report: 1. See Index to Financial Statements and Schedules on page 25 for a list of the financial statements and schedules filed as a part of this report. 2. See Exhibit Index on page 59 for a list of the exhibits filed or incorporated herein as a part of this report. No reports on Form 8-K were filed during the fourth quarter of 1993. (page INDEX TO FINANCIAL STATEMENTS AND SCHEDULES ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Page ~~~~ Management's Responsibility for Financial Statements 26 Report of the Independent Public Accountants 27 Consolidated Statement of Operations 28 Consolidated Statement of Financial Position 29 Consolidated Statement of Cash Flows 31 Consolidated Statement of Shareholders' Investment 33 Notes to Consolidated Financial Statements 35 Quarterly Financial Data 51 Property, Plant and Equipment 52 Accumulated Depreciation of Property, Plant & Equipment 53 Valuation and Qualifying Accounts 54 Short-term Borrowings 55 Supplementary Income Statement Information 56 (page) MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Management is responsible for the preparation of the Company's consolidated financial statements and all related information appearing in this Form 10-K. The statements and notes have been prepared in conformity with generally accepted accounting principles and include some amounts which are estimates based upon currently available information and management's judgment of current conditions and circumstances. The Company engaged Arthur Andersen & Company, independent public accountants, to examine the consolidated financial statements. Their report appears on page 27. To provide reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition and that accounting records are reliable for preparing financial statements, management maintains a system of accounting and controls, including an internal audit program. The system of accounting and controls is improved and modified in response to changes in business conditions and operations and to recommendations made by the independent public accountants and the internal auditors. The Board of Directors has an Audit Committee whose members are not employees of the Company. The committee met four times in 1993 with management, internal auditors and representatives of the Company's independent public accountants to review the Company's program of internal controls, audit plans and results and the recommendations of the internal and external auditors and management's responses to those recommendations. (page) REPORT OF THE INDEPENDENT PUBLIC ACCOUNTANTS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ To the Shareholders and Board of Directors of Cummins Engine Company, Inc.: We have audited the accompanying consolidated statement of financial position of Cummins Engine Company, Inc., (an Indiana corporation) and subsidiaries as of December 31, 1993 and 1992 and the related consolidated statements of operations, cash flows and shareholders' investment for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of Cummins Engine Company, Inc., and subsidiaries as of December 31, 1993 and 1992 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. As explained in Note 1 to the financial statements, effective January 1, 1992, the Company changed its method of accounting for the cost of retirees' health care and life insurance benefits, postemployment benefits and income taxes. Also, as disclosed in Note 1, effective January 1, 1991, the Company changed its method of accounting for inventory and depreciation. Our audits were made for the purpose of forming an opinion on the consolidated statements taken as a whole. The schedules listed under Item 14 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied to the audit of the basic consolidated financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen & Co. Chicago, Illinois, January 26, 1994. (page) CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in Millions, except per share amounts) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 1993 1992 1991 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ NET SALES $4,247.9 $3,749.2 $3,405.5 Cost of goods sold 3,211.0 2,906.7 2,776.7 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ Gross profit 1,036.9 842.5 628.8 Selling & administrative expenses 579.2 532.5 472.3 Research & engineering expenses 209.6 179.5 147.0 Interest expense 36.3 41.0 42.5 Other expenses 6.8 13.1 12.7 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ Earnings (loss) before income taxes 205.0 76.4 (45.7) Provision for income taxes 22.3 8.9 16.9 Minority interest .1 .4 3.0 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~~ EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 182.6 67.1 (65.6) Extraordinary items (Note 7) (5.5) (5.5) - Cumulative effect of accounting changes (Note 1) - (251.1) 51.5 ~~~~~~~~~ ~~~~~~~~~ ~~~~~~~~~ NET EARNINGS (LOSS) 177.1 (189.5) (14.1) Preference stock dividends 8.0 8.0 8.0 ~~~~~~~~ ~~~~~~~~~ ~~~~~~~~~ EARNINGS (LOSS) AVAILABLE FOR COMMON SHARES $ 169.1 $ (197.5) $ (22.1) ~~~~~~~~ ~~~~~~~~~ ~~~~~~~~~ ~~~~~~~~ ~~~~~~~~~ ~~~~~~~~~ Primary earnings (loss) per common share: Before extraordinary items and cumulative effect of accounting changes $ 4.95 $ 1.77 $ (2.48) Net 4.79 (6.01) (.75) Fully diluted earnings (loss) per common share: Before extraordinary items and cumulative effect of accounting changes $ 4.77 $ 1.77 $ (2.48) Net 4.63 (6.01) ( .75) The accompanying notes are an integral part of this statement. (page) CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Millions, except per share amounts) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ December 31, 1993 1992 ~~~~~~~~ ~~~~~~~~ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 77.3 $ 54.2 Receivables less allowances of $9.5 & $11.8 426.3 372.7 Inventories 440.2 440.4 Other current assets 127.9 128.3 ~~~~~~~~ ~~~~~~~~ 1,071.7 995.6 ~~~~~~~~ ~~~~~~~~ INVESTMENTS AND OTHER ASSETS: Investments in and advances to unconsolidated companies 101.9 146.2 Other assets 88.8 71.7 ~~~~~~~~ ~~~~~~~~ 190.7 217.9 PROPERTY, PLANT AND EQUIPMENT: ~~~~~~~~ ~~~~~~~~ Land and buildings 357.9 351.9 Machinery, equipment and fixtures 1,689.9 1,680.7 Construction in progress 132.7 89.7 ~~~~~~~~ ~~~~~~~~ 2,180.5 2,122.3 Less accumulated depreciation 1,222.3 1,193.6 ~~~~~~~~ ~~~~~~~~ 958.2 928.7 ~~~~~~~~ ~~~~~~~~ INTANGIBLES, DEFERRED TAXES & DEFERRED CHARGES 170.0 88.3 ~~~~~~~~ ~~~~~~~~ TOTAL ASSETS $2,390.6 $2,230.5 ~~~~~~~~ ~~~~~~~~ LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES: Loans payable $ 13.4 $ 50.5 Current maturities of long-term debt 32.6 25.1 Accounts payable 267.5 255.3 Accrued salaries and wages 78.1 71.4 Accrued product coverage & marketing expenses 123.5 139.9 Income taxes payable 21.2 11.5 Other accrued expenses 164.0 170.5 ~~~~~~~~ ~~~~~~~~ 700.3 724.2 ~~~~~~~~ ~~~~~~~~ LONG-TERM DEBT 189.6 412.4 ~~~~~~~~ ~~~~~~~~ OTHER LIABILITIES 679.6 592.8 ~~~~~~~~ ~~~~~~~~ SHAREHOLDERS' INVESTMENT: Convertible preference stock, no par value, .2 shares outstanding 112.2 114.9 Common stock, $2.50 par value, 40.6 & 36.5 shares issued 101.5 91.3 Additional contributed capital 822.8 654.4 Retained earnings (deficit) 4.1 (146.1) Common stock in treasury, at cost, 2.1 shares ( 67.3) ( 67.3) Unearned ESOP compensation ( 59.3) ( 63.5) Cumulative translation adjustments ( 92.9) ( 82.6) ~~~~~~~~~ ~~~~~~~~~ 821.1 501.1 ~~~~~~~~~ ~~~~~~~~~ TOTAL LIABILITIES & SHAREHOLDERS' INVESTMENT $2,390.6 $2,230.5 ~~~~~~~~~ ~~~~~~~~ The accompanying notes are an integral part of this statement. (page) CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in Millions) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 1993 1992 1991 ~~~~~~~ ~~~~~~~~ ~~~~~~~~ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 177.1 $(189.5) $( 14.1) ~~~~~~~ ~~~~~~~~ ~~~~~~~~ Adjustments to reconcile net earnings (loss) to net cash from operating activities: Depreciation and amortization 125.1 122.5 127.2 Extraordinary items & cumulative effect of accounting changes 5.5 256.6 ( 51.5) Accounts receivable ( 59.4) ( 30.9) 5.3 Inventories .9 ( 18.8) 31.1 Accounts payable and accrued expenses 6.6 14.1 ( 10.8) Other 29.8 43.7 19.5 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ Total adjustments 108.5 387.2 120.8 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ Net cash provided by operating activities 285.6 197.7 106.7 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ CASH FLOWS FROM INVESTING ACTIVITIES: Property, plant and equipment: Additions (174.2) (139.3) (123.9) Disposals 12.0 22.9 2.2 Acquisition of new business activities 3.4 ( 66.8) - Net cash proceeds from the disposition of certain business activities - 1.9 19.0 Investments in and advances to affiliates and unconsolidated companies 10.0 (115.2) ( 33.6) ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ Net cash used for investing activities (148.8) (296.5) (136.3) ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 56.5 112.3 48.4 Payments on borrowings (247.5) (128.3) ( 26.2) Net borrowings under credit agreements ( 25.5) 16.2 ( .6) Net proceeds from common stock issuances 124.5 126.1 - Payments of dividends ( 15.0) ( 11.3) ( 18.4) Other ( 6.5) ( 10.1) ( 1.0) ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ Net cash (used for) provided by financing activities (113.5) 104.9 2.2 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ EFFECT OF EXCHANGE RATE CHANGES ON CASH ( .2) ( 3.4) ( 1.1) ~~~~~~~~ ~~~~~~~~ ~~~~~~~~ NET CHANGE IN CASH AND CASH EQUIVALENTS 23.1 2.7 ( 28.5) Cash & cash equivalents at beginning of year 54.2 51.5 80.0 ~~~~~~~ ~~~~~~~ ~~~~~~~ CASH & CASH EQUIVALENTS AT END OF YEAR $ 77.3 $ 54.2 $ 51.5 ~~~~~~~ ~~~~~~~ ~~~~~~~ Cash payments during the year for: Interest $ 39.5 $ 41.5 $ 40.6 Income taxes 18.1 20.6 26.8 The accompanying notes are an integral part of this statement. (page) CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT (Millions, except per share amounts) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 1993 1992 1991 ~~~~~~ ~~~~~~ ~~~~~~ CONVERTIBLE PREFERENCE STOCK, no par value, 1.0 shares authorized (.2 shares): Beginning balance $114.9 $114.9 $114.9 Converted to common stock ( 2.7) - - ~~~~~~ ~~~~~~ ~~~~~~ Ending balance 112.2 114.9 114.9 ~~~~~~ ~~~~~~ ~~~~~~ COMMON STOCK, $2.50 par value, 50.0 shares authorized: Beginning balance (36.5, 31.8 & 31.8 shares) 91.3 79.4 79.4 Retired (.2, .2 and .1 shares) ( .6) ( .6) ( .1) Issued in public offerings (2.6 & 4.6 shares) 6.6 11.5 - Conversion of LYONs and preference stock (1.1 shares) 2.8 - - Other (.6, .3 and .1 shares) 1.4 1.0 .1 ~~~~~~ ~~~~~~ ~~~~~~ Ending balance (40.6, 36.5 & 31.8 shares) 101.5 91.3 79.4 ~~~~~~ ~~~~~~ ~~~~~~ ADDITIONAL CONTRIBUTED CAPITAL: Beginning balance 654.4 537.5 533.0 Retired ( 9.9) ( 7.3) ( 1.1) Issued in public offerings 117.9 114.6 - Conversion of LYONs & preference stock 48.0 - - Other 12.4 9.6 5.6 ~~~~~~ ~~~~~~ ~~~~~~ Ending balance 822.8 654.4 537.5 ~~~~~~ ~~~~~~ ~~~~~~ RETAINED EARNINGS (DEFICIT): Beginning balance (146.1) 48.0 82.0 Net earnings (loss) for the year 177.1 (189.5) (14.1) Cash dividends declared: Convertible preference stock ( 8.0) ( 8.0) ( 8.0) Common stock ( 7.0) ( 3.3) (10.4) Additional minimum liability for pensions ( 11.9) 6.7 ( 1.5) ~~~~~~~ ~~~~~~~ ~~~~~~~ Ending balance 4.1 (146.1) 48.0 ~~~~~~~ ~~~~~~~ ~~~~~~~ COMMON STOCK IN TREASURY, at cost (2.1 (shares) ( 67.3) ( 67.3) (67.3) ~~~~~~~ ~~~~~~~ ~~~~~~~ UNEARNED ESOP COMPENSATION: Beginning balance ( 63.5) ( 67.9) (72.2) Shares allocated to participants 4.2 4.4 4.3 ~~~~~~~ ~~~~~~~ ~~~~~~~ Ending balance ( 59.3) ( 63.5) (67.9) ~~~~~~~ ~~~~~~~ ~~~~~~~ CUMULATIVE TRANSLATION ADJUSTMENTS: Beginning balance ( 82.6) ( 20.8) ( .5) Adjustments ( 10.3) ( 61.8) (20.3) ~~~~~~ ~~~~~~ ~~~~~~ Ending balance ( 92.9) ( 82.6) (20.8) ~~~~~~~ ~~~~~~~ ~~~~~~~ SHAREHOLDERS' INVESTMENT $821.1 $501.1 $623.8 ~~~~~~~ ~~~~~~~ ~~~~~~~ The accompanying notes are an integral part of this statement. (page) CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, unless otherwise stated) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ NOTE 1. SUMMARY OF ACCOUNTING POLICIES: Principles of Consolidation: The consolidated financial statements include the accounts of Cummins Engine Company, Inc., and its majority-owned subsidiaries. Affiliated companies in which Cummins does not have a controlling interest or in which control is expected to be temporary are accounted for using the equity method. Stock Split: On October 12, 1993, the Company announced a two-for-one common stock split that was distributed on November 11, 1993 to shareholders of record on October 25, 1993. All references to the number of shares issued or outstanding and to per-share information have been adjusted to reflect the stock split on a retroactive basis. Foreign Currency: The Company uses the local currency as the functional currency for its significant manufacturing operations outside the United States, except those in Brazil and Mexico for which it uses the US dollar. At operations which use the local currency as the functional currency, results are translated into US dollars using average exchange rates for the year, while assets and liabilities are translated into US dollars using year-end exchange rates. The resulting translation adjustments are recorded in a separate component of shareholders' investment. Gains and losses from foreign currency transactions are included in net earnings. The financial statements of operations in Brazil and Mexico are translated into US dollars using both current and historical exchange rates, with the resulting translation adjustments reflected in net earnings. The Company enters into forward exchange contracts to hedge the effects of fluctuation currency rates on certain assets and liabilities, such as accounts receivable and payable, that are denominated in foreign currencies. The contracts typically provide for the exchange of different currencies at specified future dates and rates. The gain or loss due to the difference between the forward exchange rates of the contracts and current rates offsets in whole or in part the loss or gain on the assets or liabilities being hedged. Cash Equivalents: Cash equivalents are investments that are readily convertible to known amounts of cash and have original maturities of three months or less. Inventories: The company accounts for substantially all of its US heavy-duty and high-horsepower engine and engine parts inventories on the last-in, first-out (LIFO) cost method. All other inventories are valued at the lower of first-in, first-out (FIFO) cost or net realizable value. LIFO inventories were $144.9 at December 31, 1993 and $147.8 at December 31, 1992. The current cost of these inventories was $49.8 higher than LIFO cost at December 31, 1993 and $52.9 higher than LIFO cost at December 31, 1992. During 1993, 1992 and 1991, certain of the Company's LIFO inventory investment was reduced, resulting in the liquidation of low-cost LIFO inventory layers. The effect of the LIFO liquidation was to reduce cost of goods sold by $2.0 in 1993, $1.4 in 1992 and $6.3 in 1991. Inventory values include the combined costs of purchased materials, labor and manufacturing overhead. Effective January 1, 1991, the Company recognized a credit of $25.0 as a result of a change in accounting to include in inventory certain production-related costs previously charged directly to expense. The Company's operations are integrated vertically, which makes it impracticable to distinguish between raw material and work-in-process on a consolidated basis. At December 31, 1993 and 1992, the FIFO value of finished goods, which represented products available for shipment to the Company's customers, approximated $273 and $251, respectively. Futures Contracts and Interest Rate Swaps: The Company has entered into forward exchange and commodity futures contracts which are accounted for as hedges. The gains or losses on forward exchange contracts are reflected in earnings concurrently with the hedged items while gains or losses on commodity futures contracts are charged or credited to earnings when the contracts are settled. The Company also has entered into interest rate swap agreements that have the effect of fixing interest rates on certain of the Company's floating rate indebtedness. The net difference to be paid or received on the interest rate swaps is charged or credited to interest expense as interest rates change. Property, Plant and Equipment: Property, plant and equipment are recorded at cost. Effective January 1, 1991, the Company changed its accounting for depreciation of substantially all engine production equipment to a modified units-of-production method, which is based upon units produced subject to a minimum level. The cumulative effect of this change in accounting was a credit of $26.5 in 1991. Depreciation of all other equipment is computed using the straight- line method for financial reporting purposes. The estimated service lives to compute depreciation range from 20 to 40 years for buildings and 3 to 20 years for machinery, equipment and fixtures. Where appropriate, the Company uses accelerated depreciation methods for tax purposes. Maintenance and repair costs are charged to earnings as incurred. Technical Investment: Expenditures associated with research and development of new products and major improvements to existing products, as well as engineering expenditures during early production and ongoing efforts to improve existing products, are charged to earnings as incurred, net of contract reimbursements: 1993 1992 1991 ~~~~~~ ~~~~~~ ~~~~~~ Research & engineering expenses $209.6 $179.5 $147.0 Reimbursements 28.8 36.9 28.6 Other technical spending 38.1 31.0 33.1 ~~~~~~ ~~~~~~ ~~~~~~ Technical investment expenditures $276.5 $247.4 $208.7 ~~~~~~ ~~~~~~ ~~~~~~ Included above in research and engineering expenses are research and development costs approximating $158 in 1993, $129 in 1992 and $99 in 1991. Product Coverage Programs: Estimated costs of warranty and extended coverage are charged to earnings at the time the Company sells its products. Retirement and Postemployment Benefits: The Company charges the cost of all retirement benefits to earnings during employees' active service as a form of deferred compensation. The change in accounting from a cash basis to this policy for health care and life insurance, effective January 1, 1992, resulted in an after-tax charge of $228.6 for prior service. This change resulted in an incremental annual expense of $11.4, net of taxes, during 1992. The cost of postemployment benefits, such as long-term disability, is charged to earnings at the time employees leave active service. The cumulative effect of the change to this accounting from a cash basis, effective January 1, 1992, was $22.5, net of taxes. This change resulted in an incremental expense of $3.2, net of taxes, in 1992. Income Tax Accounting: Deferred tax assets and liabilities are recognized for the future tax effects of temporary differences between the financial statement basis and the tax basis of assets and liabilities. Future tax benefits of tax loss and tax credit carryforwards also are recognized as deferred tax assets. Deferred tax assets are offset by a valuation allowance to the extent the Company concludes there is uncertainty as to their ultimate realization. Earnings (Loss) Per Common Share: Primary earnings per share of common stock are computed by subtracting preference stock dividend requirements from net earnings (loss) and dividing that amount by the weighted average number of common shares outstanding during each year. The weighted average number of shares, which includes the exercise of certain stock options granted to employees, was 35.3 million in 1993, 32.9 million in 1992 and 29.7 million in 1991. Fully diluted earnings per share are computed by dividing net earnings (loss) by the weighted average number of shares assuming the exercise of stock options and the conversion of debt and preference stock to common stock. NOTE 2. SUBSEQUENT EVENT: On January 24, 1994, the Company announced that its outstanding Convertible Exchangeable Preference Stock, which had a face value of $112.2 at December 31, 1993, would be redeemed on February 23, 1994 at a price of $51.05 per depositary share, plus accrued dividends. Holders of the stock elected to convert their shares into 2.9 million shares of common stock. Had the stock conversion and cash redemption occurred on January 1, 1993, pro forma net earnings per share would have approximated $4.63 in 1993. NOTE 3. ACQUISITION: On June 15, 1992, the Company acquired for $64 in cash the remaining 36 percent of Onan Corporation from Hawker Siddeley Overseas Investments Limited, a UK company. Cummins had owned the majority interest in Onan since 1986. The acquisition was accounted for as a purchase. Had the acquisition occurred as of January 1, 1991, the pro forma net loss per share for 1992 would have approximated $6.00 and the pro forma net loss per share for 1991 would have approximated 63 cents. Such pro forma per share information is not necessarily indicative of what the results of operations would have been had the acquisition actually occurred earlier, nor is it indicative of what may occur in the future. NOTE 4. RELATED PARTIES: In 1990, Ford Motor Company and Tenneco Inc., each purchased from Cummins 3.2 million shares of the Company's common stock. The shares were purchased pursuant to separate investment agreements between Cummins and the investors. Both Ford and Tenneco have agreed to certain voting, standstill and other provisions and each has the right to designate a representative to the Company's Board of Directors. The Company also entered into an option agreement with Ford pursuant to which Ford has the right, exercisable until 1996, to purchase up to 2.96 million additional shares of the Company's common stock at a price equal to 120 percent of the market price of the common stock for the 30 trading days prior to the exercise of the option but for no less than $31.25 per share. In December 1993, Tenneco transferred the shares of Cummins common stock it held to a trust that funds pension plans sponsored by Tenneco. The shares will continue to be subject to the terms of the investment agreement, and the trust has agreed to assume all of Tenneco's rights and obligations under such agreement. Cummins' sales of diesel engines and parts and related products to Ford approximated $343 in 1993, $182 in 1992 and $56 in 1991. In addition, Cummins' purchases of gasoline engines and parts from Ford approximated $4 in 1993 and $3 in both 1992 and 1991. At December 31, 1993 and 1992, the Company had accounts receivable outstanding of approximately $27 and $20, respectively, with Ford. Cummins and J I Case, a subsidiary of Tenneco Inc., are partners in the manufacture of midrange diesel engines at Consolidated Diesel Company. In 1993, 1992 and 1991, Cummins' sales of heavy-duty midrange diesel engines, components, service parts and related products and services to J I Case and other subsidiaries of Tenneco approximated $43, $52 and $61, respectively. Cummins' purchases from J I Case approximated $1 in both 1993 and 1992 and $7 in 1991. At both December 31, 1993 and 1992, the Company had accounts receivable outstanding of $6 with subsidiaries of Tenneco. NOTE 5. SALE OF RECEIVABLES: The Company has an agreement to sell, without recourse, up to $110.0 of eligible trade receivables. The amount of receivables outstanding was $108.0 under this agreement at December 31, 1993 and $100.0 at December 31, 1992. As collections reduce previously sold receivables, new receivables customarily are sold up to the $110.0 level. NOTE 6. INVESTMENTS IN UNCONSOLIDATED COMPANIES: December 31, Location Ownership 1993 1992 ~~~~~~~~~~~~~ ~~~~~~~~~ ~~~~~~ ~~~~~~ Consolidated Diesel Company United States 50% $ 50.9 $100.1 Kirloskar Cummins Limited India 50% 16.9 17.3 Behr America Holding, Inc. United States 35% 12.1 - Other investments Various Various 22.0 28.8 ~~~~~~ ~~~~~~ $101.9 $146.2 ~~~~~~ ~~~~~~ Included above in other investments at December 31, 1993 and 1992 were $18.5 and $21.8, respectively, related to temporarily owned distributorships. Cummins' sales to temporarily owned distributorships approximated $57 in 1993, $49 in 1992 and $143 in 1991. Summary financial information for Consolidated Diesel Company, Kirloskar Cummins Limited, Behr America Holding, Inc., and other 50-percent or less owned companies follows: Earnings Statement Data 1993 1992 1991 ~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~ Net sales $746.4 $695.9 $733.1 Earnings before extraordinary item 3.4 14.4 12.4 Earnings 3.4 6.4 12.4 Cummins' share of earnings .4 3.4 6.4 December 31, Balance Sheet Data 1993 1992 ~~~~~~~~~~~~~~~~~~~ ~~~~~~ ~~~~~~ Current assets $151.4 $178.1 Noncurrent assets 207.0 220.6 Current liabilities (127.0) (111.2) Noncurrent liabilities ( 38.2) ( 41.9) ~~~~~~~ ~~~~~~~ Net assets $193.2 $245.6 ~~~~~~ ~~~~~~ Cummins' share of net assets $ 82.7 $123.4 ~~~~~~ ~~~~~~ NOTE 7. LONG-TERM DEBT: December 31, 1993 1992 ~~~~~~ ~~~~~~ Senior debt: 9.74%-10.65% medium-term notes, due 1993 to 1998 $126.2 $136.2 9-3/4% sinking fund debentures, due 1998 to 2016 - 77.2 8.76% guaranteed notes of ESOP Trust, due 1998 70.7 71.8 9.45% note payable to insurance company, due through 1999 - 18.6 3.875%-10.4% notes payable to banks due through 1998 8.0 63.4 Mortgage, capitalized leases and other notes, due through 2005 17.3 25.1 Subordinated debt: LYONs - 45.2 ~~~~~~ ~~~~~~ Total indebtedness 222.2 437.5 Less current maturities 32.6 25.1 ~~~~~~ ~~~~~~ Long-term debt $189.6 $412.4 ~~~~~~ ~~~~~~ Aggregate maturities of long-term debt for the five years subsequent to December 31, 1993 are $32.6, $36.3, $41.5, $23.7 and $16.7. In December 1993, the Company sold 2.6 million shares of its common stock in a public offering for $49 per share. A portion of the proceeds was used to redeem $77.2 in principal amount of the Company's outstanding 9-3/4 percent sinking fund debentures. This early extinguishment of debt resulted in an extraordinary charge of $5.5. The Company also called for redemption of all the outstanding LYONs. Holders submitted 112,808 LYONs with an accreted value of $48.5 for conversion into 1.0 million shares of common stock, and the remaining were redeemed for $.2. Had the stock issuance, debt repayments and conversion of LYONs occurred as of January 1, 1993, pro forma net earnings per share would have approximated $4.65 in 1993. In April 1992, the Company sold 4.6 million shares of its common stock in a public offering for $28.50 per share. A portion of the net proceeds was used at the time of the issuance to repay borrowings under the Company's revolving credit agreement. During the fourth quarter of 1992, the Company extinguished $71.1 of debt of Consolidated Diesel Company, an unconsolidated, 50-percent owned partnership, $8.2 of the Company's 8-7/8 percent sinking fund debentures and $11.4 of a 15-percent note payable to an insurance company. These early extinguishments of debt resulted in an extraordinary charge of $5.5. Had the stock issuance and debt repayments occurred as of January 1, 1992, the pro forma net loss per share would have approximated $5.80 in 1992. The Company maintains a $300 revolving credit agreement, under which there were no outstanding borrowings at December 31, 1993. At December 31, 1992, there were $90.0 outstanding borrowings under the revolving credit agreement. In 1993, the term of the revolving credit agreement was extended to 1997. The Company also maintains other domestic and international credit lines with approximately $170 available at December 31, 1993. The Company has guaranteed the outstanding borrowings of its ESOP Trust. The ESOP was established for certain of the Company's domestic salaried employees who participate in the qualified benefit savings plans. The Company's cash contributions to the ESOP Trust, together with the dividends accumulated on the common stock held by the ESOP Trust, are used to pay interest and principal due on the notes. Cash contributions and dividends to the ESOP Trust approximated $7 in 1993 and 1992 to fund its principal payment of $1 and interest payment of $6. The Company's compensation expense was $10.0 in 1993, $10.3 in 1992 and $9.9 in 1991. The unearned compensation, which is reflected as a reduction to shareholders' investment, represents the historical cost of the ESOP Trust's shares of common stock that have not yet been allocated to participants. Based on borrowing rates currently available to the Company for bank loans and similar terms and average maturities, the fair value of total indebtedness approximated $237 at December 31, 1993 and $436 at December 31, 1992. NOTE 8. OTHER LIABILITIES: December 31, 1993 1992 ~~~~~~ ~~~~~~ Accrued retirement & postemployment benefits $521.8 $436.4 Accrued product coverage & marketing expenses 90.5 102.9 Deferred taxes 17.3 9.3 Accrued compensation expenses 5.6 4.3 Other 44.4 39.9 ~~~~~~ ~~~~~~ Other liabilities $679.6 $592.8 ~~~~~~ ~~~~~~ NOTE 9. INCOME TAXES: Income Tax Provision 1993 1992 1991 ~~~~~~~~~~~~~~~~~~~~ ~~~~~ ~~~~~ ~~~~~ Current: US federal and state $ 4.7 $ 1.8 $(4.2) Foreign 19.1 15.6 23.6 ~~~~~ ~~~~~ ~~~~~ 23.8 17.4 19.4 ~~~~~ ~~~~~ ~~~~~ Deferred: US federal and state (12.3) (8.5) (1.9) Foreign 10.8 - ( .6) ~~~~~~ ~~~~~~ ~~~~~~ ( 1.5) (8.5) (2.5) ~~~~~~ ~~~~~~ ~~~~~~ Income tax provision $22.3 $ 8.9 $16.9 ~~~~~~ ~~~~~~ ~~~~~~ Prior to 1992, losses at the Company's operations in the United States and United Kingdom had eliminated the need for virtually all deferred income taxes. Effective January 1, 1992, the Company adopted an asset and liability approach to income tax accounting. At the same time, the Company recorded substantial obligations for retirement and other postemployment benefits that are tax deductible only on a cash basis. The tax benefit of the future tax deduction represented by these accruals is recognized as a deferred asset along with the effect of all other temporary differences between the tax basis and financial statement basis of assets and liabilities. Deferred income taxes also reflect the value of the tax benefit carryforwards and an offsetting valuation allowance. December 31, Net Deferred Tax Asset 1993 1992 ~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~ ~~~~~~ Tax effects of future tax deductible differences related to: Accrued health care, life insurance & postemployment benefits $174.0 $161.6 Other accrued employee benefit expenses 29.9 31.1 Accrued product coverage & marketing expenses 63.4 67.3 Other net deductible differences 19.3 9.7 Tax effects of future taxable differences related to: Accelerated tax depreciation & other tax over book deductions related to US plant & equipment (114.1) (107.9) Net UK taxable differences related primarily to plant and equipment ( 10.2) - Miscellaneous net foreign taxable differences ( 1.3) ( .7) ~~~~~~~ ~~~~~~~ Net tax effects of temporary differences 161.0 161.1 ~~~~~~~ ~~~~~~~ Tax effects of carryforward benefits: US federal net operating loss carryforwards, expiring 2006 to 2007 18.7 58.6 US federal foreign tax credits, expiring 1998 4.7 - US federal general business tax credits, expiring 1996 to 2008 71.6 58.4 US federal minimum tax credits with no expiration 7.1 3.1 UK net tax benefit carryforwards with no expiration - 4.1 ~~~~~~ ~~~~~~~ Tax effects of carryforwards 102.1 124.2 ~~~~~~ ~~~~~~~ Tax effects of temporary differences & carryforwards 263.1 285.3 Less valuation allowance (100.7) (124.4) ~~~~~~~ ~~~~~~~ Net deferred tax asset $162.4 $160.9 ~~~~~~~ ~~~~~~~ Classified in the Consolidated Statement of Financial Position as: Current assets $ 89.2 $ 96.4 Noncurrent assets 90.5 73.8 Noncurrent liabilities ( 17.3) ( 9.3) ~~~~~~~ ~~~~~~~ Net deferred tax asset $162.4 $160.9 ~~~~~~~ ~~~~~~~ While the company believes all tax assets ultimately will be realized, such realization is dependent upon future earnings in specific tax jurisdictions. Dependent upon the level of profitability, the Company's net operating loss carryforwards may be utilized but replaced with foreign tax credit carryforwards, which have a shorter life and significant limitations on utilization. The Company's other carryforwards also have significant usage limitations which can be overcome only by generating earnings at considerably higher levels than have been generated in all but the most recent two years. The Company, therefore, has recorded a full valuation allowance against those tax assets which represent carryforwards of tax benefits because of previous unprofitable operations. While the need for this valuation allowance is subject to periodic review, it is expected that the allowance will be reduced and the tax benefits of the carryforwards will thereby be recorded in future operations as a reduction of income tax expense as the carryforwards actually are realized by future earnings. Such reductions in the valuation allowance and realizations of carryforwards amounted to $41.5 in 1993 and $17.4 in 1992. The Omnibus Budget Reconciliation Act ("OBRA") of 1993 retroactively extended the research tax credit from its 1992 expiration date through June 30, 1995. Research tax credits of $6.1 for 1992 and an estimated $8.0 for 1993 have increased both the general business credit carryforwards and the offsetting valuation allowance disclosed above as of December 31, 1993. Earnings (loss) before income taxes and differences between the effective tax rate at US federal income tax rate were: 1993 1992 1991 ~~~~~~ ~~~~~~ ~~~~~~ Earnings (loss) before income taxes: Domestic $110.7 $(36.4) $(142.7) Foreign 94.3 112.8 97.0 ~~~~~~ ~~~~~~~ ~~~~~~~~ $205.0 $ 76.4 $( 45.7) ~~~~~~ ~~~~~~ ~~~~~~~~ Tax (benefit) at US statutory tax rate $ 71.8 $ 25.9 $( 15.5) Increase in the value of net US deferred tax assets as a result of the OBRA change in the tax rate from 34% to 35% ( 4.4) - - Utilization of net operating loss and tax credit carryforwards from prior years (41.5) (17.4) - Current year operating losses & tax credits for which no benefit has been recognized - - 31.7 Other ( 3.6) .4 .7 ~~~~~~~ ~~~~~~ ~~~~~~~ Income tax provision $ 22.3 $ 8.9 $ 16.9 ~~~~~~~ ~~~~~~ ~~~~~~~ NOTE 10. OPERATING LEASES: Certain of the Company's manufacturing plants, warehouses and offices are leased facilities. The Company also leases automobiles and manufacturing and office equipment. Most of these leases require fixed rental payments, expire over the next 10 years and can be renewed or replaced with similar leases. Rental expense under these leases in 1993, 1992 and 1991 was $50.8, $45.3 and $44.0, respectively. Future minimum payments for operating leases with original terms of more than one year are $28.7 in 1994, $22.8 in 1995, $17.6 in 1996, $16.1 in 1997, $14.5 in 1998 and $114.4 thereafter. NOTE 11. RETIREMENT PLANS: The Company and its subsidiaries have several contributory and noncontributory pension plans covering substantially all employees. Benefits for salaried plans generally are based upon the employee's compensation during the three to five years preceding retirement. Under the hourly plans, benefits generally are based upon various monthly amounts for each year of credited service. It is the Company's policy to make contributions to these plans sufficient to meet the funding requirements of applicable laws and regulations, plus such additional amounts, if any, as the Company deems appropriate. Plan assets consist principally of equity securities and corporate and Government fixed-income obligations. Net Periodic Pension Cost 1993 1992 1991 ~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~ Service cost for benefits earned during the year $ 30.9 $ 28.7 $ 28.2 Interest cost on projected benefit obligation 80.7 78.1 82.1 Return on plan assets: Actual (202.5) (79.6) (235.4) Deferred gain (loss) 99.5 (26.2) 135.0 Amortization of transition asset ( 9.2) ( 9.6) ( 9.6) Other amortization, net 2.4 ( 2.2) 3.1 ~~~~~~~~ ~~~~~~~ ~~~~~~~ Net periodic pension cost (credit) $ 1.8 $(10.8) $ 3.4 ~~~~~~~~ ~~~~~~~ ~~~~~~~ Funded Status Overfunded Underfunded Combined ~~~~~~~~~~~~~ ~~~~~~~~~~ ~~~~~~~~~~~ ~~~~~~~~ ~~~~ Actuarial present value of: Vested benefit obligation $(569.2) $(425.5) $( 994.7) ~~~~~~~~ ~~~~~~~~ ~~~~~~~~~~ Accumulated benefit obligation $(642.3) $(522.8) $(1,165.1) ~~~~~~~~ ~~~~~~~~ ~~~~~~~~~~ Projected benefit obligation $(736.0) $(539.8) $(1,275.8) Plan assets at fair value 780.8 401.2 1,182.0 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~~~ Excess of assets over (under) projected benefit obligation 44.8 (138.6) ( 93.8) Unrecognized net experience loss 17.6 3.1 20.7 Unrecognized prior service cost 22.7 98.5 121.2 Additional minimum liability - ( 87.7) ( 87.7) Unamortized transition asset ( 36.1) ( 11.5) ( 47.6) ~~~~~~~~ ~~~~~~~~ ~~~~~~~~~~ Accrued pension asset (liability) $ 49.0 $(136.2) $( 87.2) ~~~~~~~~ ~~~~~~~~ ~~~~~~~~~~ ~~~~ Actuarial present value of: Vested benefit obligation $(358.5) $(393.0) $ (751.5) ~~~~~~~~ ~~~~~~~~ ~~~~~~~~~~ Accumulated benefit obligation $(414.2) $(480.7) $ (894.9) ~~~~~~~~ ~~~~~~~~ ~~~~~~~~~~ Projected benefit obligation $(468.6) $(529.8) $ (998.4) Plan assets at fair value 542.4 481.1 1,023.5 ~~~~~~~~ ~~~~~~~~ ~~~~~~~~~~ Excess of assets over (under) projected benefit obligation 73.8 ( 48.7) 25.1 Unrecognized net experience gain ( 23.1) ( 28.1) ( 51.2) Unrecognized prior service cost 9.7 66.8 76.5 Additional minimum liability - ( 4.3) ( 4.3) Unamortized transition asset ( 32.8) ( 24.2) ( 57.0) ~~~~~~~~ ~~~~~~~~ ~~~~~~~~~~ Accrued pension asset (liability) $ 27.6 $( 38.5) $ ( 10.9) ~~~~~~~~ ~~~~~~~~ ~~~~~~~~~~ In 1993, the projected benefit obligation was determined using weighted average discount rates ranging from 6.75 percent for the US plans to 8 percent for the international plans and in 1992 rates ranging from 8 percent to 9 percent, respectively. The assumed long- term rates of compensation increase for salaried plans approximated expected inflation in both 1993 and 1992. The long-term rates of return on assets were assumed to be 9.25 percent in 1993 and 9.6 percent in 1992 for the US plans and 10 percent in 1993 and 11 percent in 1992 for the international plans. The Company has a non-qualified excess benefit plan that provides certain employees with defined retirement benefits in excess of qualified plan limits imposed by US tax law. In addition, the Company has a supplementary life insurance plan that provides officers and other key employees with term life protection during their active employment and supplemental retirement benefits upon retirement. The cost of these plans was $3.6 in 1993, $3.2 in 1992 and $2.7 in 1991. At December 31, 1993 and 1992, the accrued pension liability for these plans was $18.7 and $15.9, respectively. In addition to the pension plans, the Company provides certain health care and life insurance benefits to eligible retirees and their dependents. The plans are contributory, with retirees' contributions adjusted annually, and contain other cost-sharing features, such as deductibles, coinsurance and spousal contributions. The general policy is to fund these benefits as claims and premiums are incurred. In 1992, Cummins adopted a new accounting rule for these benefits and chose to recognize immediately the unfunded liability for prior service. Prior to 1992, the cost of benefits for eligible retirees and their dependents was included in costs as funded and totaled $13.6 in 1991. Net Periodic Cost 1993 1992 ~~~~~~~~~~~~~~~~~ ~~~~~~ ~~~~~~ Service cost for benefits earned during the year $ 5.7 $ 5.2 Interest cost on benefit obligation 29.5 29.7 Other (.1) - ~~~~~~~ ~~~~~~ Net periodic cost $ 35.1 $ 34.9 ~~~~~~~ ~~~~~~ Funded Status ~~~~~~~~~~~~~ Actuarial present value of accumulated benefit obligation for: Retirees $210.0 $241.7 Employees eligible to retire 102.1 55.6 Other active plan participants 191.7 99.9 Unrecognized prior service cost (24.5) - Unrecognized net experience loss (69.2) (1.9) ~~~~~~~ ~~~~~~~ Accrued benefit liability $410.1 $395.3 ~~~~~~~ ~~~~~~~ The weighted average discount rate used in determining the accumulated benefit obligation was 6.75 percent in 1993 and 8 percent in 1992. The trend rate for medical benefits provided prior to Medicare eligibility is 15.5 percent, grading down to an ultimate rate of 4.5 percent by 2006. For medical benefits provided after Medicare eligibility, the trend rate is 8 percent, grading down to an ultimate rate of 4.5 percent by 1997. The health care cost trend rate assumption has a significant effect on the determination of the accumulated benefit obligation. For example, increasing the rate by 1 percent would increase the accumulated benefit obligation by $29 and net periodic cost by $2. NOTE 12. EMPLOYEE STOCK PLANS: The Company has various stock incentive plans under which officers and other eligible employees may be awarded stock options, stock appreciation rights and restricted stock during the next 10 years. Under the provisions of the plans, up to 1 percent of the Company's outstanding shares of common stock on December 31 of the preceding year is available for issuance under the plans each year. At December 31, 1993, there were 439,820 shares of common stock available for grant under the plans. There were 78,220 options exercisable under the plans at December 31, 1993. Number of Shares Option Price per Share ~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~ Outstanding options at 12/31/91 261,360 $15.94 to $38.91 Granted 4,900 $30.94 to $35.28 Exercised (67,260) $15.94 to $31.38 Canceled or expired ( 3,740) $20.88 to $30.72 ~~~~~~~~ Outstanding options at 12/31/92 195,260 $15.94 to $38.91 Granted 456,150 $37.41 to $52.56 Exercised (123,740) $15.94 to $40.25 Canceled or expired ( 2,600) $24.20 to $31.63 ~~~~~~~~~ Outstanding options at 12/31/93 525,070 $15.94 to $52.56 ~~~~~~~~ NOTE 13. SHAREHOLDERS' RIGHTS PLAN: The Company has a Shareholders' Rights Plan which it first adopted in 1986. The Rights Plan provides that each share of the Company's common stock has associated with it a stock purchase right. The Rights Plan becomes operative when a person or entity acquires 15 percent of the Company's common stock or commences a tender offer to purchase 20 percent or more of the Company's common stock without the approval of the Company's Board of Directors. In the event a person or entity acquires 15 percent of the Company's common stock, each right, except for the acquiring person's rights, can be exercised to purchase $400 worth of the Company's common stock for $200. In addition, for a period of 10 days after such acquisition, the Board of Directors can exchange such right for a new right which permits the holders to purchase one share of the Company's common stock for $1 per share. If a person or entity commences a tender offer to purchase 20 percent or more of the Company's common stock, unless the Board of Directors redeems the rights within 10 days of the event, each right can be exercised to purchase one share for $200. If the person or entity becomes an acquiring person, the provisions noted above apply. The Rights Plan also allows holders of the rights to purchase shares of the acquiring person's stock at a discount if the Company is acquired or 50 percent of the assets or earnings power of the Company is transferred to an acquiring person. NOTE 14. SEGMENTS OF THE BUSINESS: The Company operates in a single industry segment -- designing, manufacturing and marketing diesel engines and related products. Manufacturing, marketing and technical operations are maintained in major areas of the world. Summary financial information is listed below for each geographic area. Earnings (loss) for each area may not be a meaningful representation of each area's contribution to consolidated operating results because of significant sales of products between and among the Company's various domestic and foreign operations. UK/ All Corp. Items & US Europe Other Eliminations Combined 1993 ~~~~~~ ~~~~~~ ~~~~~ ~~~~~~~~~~~~ ~~~~~~~~ ~~~~ Net sales: To customers in the area $2,374 $590 $439 $ - $3,403 To customers outside the area 589 251 5 - 845 Intergeographic transfers 317 149 84 (550) - ~~~~~~ ~~~~ ~~~~ ~~~~~~ ~~~~~~ Total $3,280 $990 $528 $(550) $4,248 ~~~~~~ ~~~~ ~~~~ ~~~~~~ ~~~~~~ Earnings (loss) before income taxes $ 140 $ 89 $ 19 $( 43) $ 205 ~~~~~~ ~~~~ ~~~~ ~~~~~~ ~~~~~~ Identifiable assets $1,487 $407 $340 $ 157 $2,391 ~~~~~~ ~~~~ ~~~~ ~~~~~~ ~~~~~~ ~~~~ Net sales: To customers in the area $1,996 $616 $418 $ - $3,030 To customers outside the area 508 209 2 - 719 Intergeographic transfers 273 129 69 (471) - ~~~~~~ ~~~~ ~~~~ ~~~~~~ ~~~~~~ Total $2,777 $954 $489 $(471) $3,749 ~~~~~~ ~~~~ ~~~~ ~~~~~~ ~~~~~~ Earnings (loss) before income taxes $ 32 $ 93 $ 5 $( 54) $ 76 ~~~~~~ ~~~~ ~~~~ ~~~~~~ ~~~~~~ Identifiable assets $1,432 $404 $322 $ 72 $2,230 ~~~~~~ ~~~~ ~~~~ ~~~~~~ ~~~~~~ ~~~~ Net sales: To customers in the area $1,946 $568 $427 $ - $2,941 To customers outside the area 276 188 1 - 465 Intergeographic transfers 250 117 80 (447) - ~~~~~~ ~~~~ ~~~~ ~~~~~~ ~~~~~~ Total $2,472 $873 $508 $(447) $3,406 ~~~~~~ ~~~~ ~~~~ ~~~~~~ ~~~~~~ Earnings (loss) before income taxes $ (74) $ 62 $ 21 $( 55) $ (46) ~~~~~~~ ~~~~ ~~~~ ~~~~~~ ~~~~~~~ Identifiable assets $1,148 $462 $322 $ 109 $2,041 ~~~~~~~ ~~~~ ~~~~ ~~~~~~ ~~~~~~~ Total sales for each geographic area are classified by manufacturing source and include sales to customers within and outside the area and intergeographic transfers. Transfer prices for sales between the Company's various operating units generally are at arm's length, based upon business conditions, distribution costs and other costs which are expected to be incurred in producing and marketing products. Corporate items include interest and other income and expense. Identifiable assets are those resources associated with the operations in each area. Corporate assets are principally cash and investments. The Company generally sells its products on open account under credit terms customary to the region of distribution. The Company performs ongoing credit evaluations of its customers and generally does not require collateral to secure its customers' receivables. Net Sales by Marketing Territory 1993 1992 1991 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~ United States $2,389 $2,016 $1,955 United Kingdom/Europe 600 629 582 Asia/Far East/Australia 559 455 340 Mexico/South America 330 355 290 Canada 257 187 161 Africa/Middle East 113 107 78 ~~~~~~ ~~~~~~ ~~~~~~ Net sales $4,248 $3,749 $3,406 ~~~~~~ ~~~~~~ ~~~~~~ NOTE 15. GUARANTEES, COMMITMENTS AND CONTINGENT LIABILITIES: In connection with the disposition of certain products and operations in 1989, the Company sold substantially all of the loan and lease portfolios of its former finance subsidiary. Under the terms of the sale, the purchaser has recourse to Cummins should certain amounts of the loans or leases prove to be uncollectible. At December 31, 1993, the loan and lease portfolios amounted to $14.3. Accounts receivable that have been sold with recourse amounted to $26.5 at December 31, 1993. At December 31, 1993, the Company was a party to interest rate swap agreements, maturing in 1994 and having an aggregate notional amount of $12.0. The Company had $258.3 of foreign exchange contracts outstanding at December 31, 1993. The foreign exchange contracts mature through 1995 and are denominated primarily in UK sterling, Japanese yen and European currencies. The Company had a currency swap with a notional amount of $202.6 at December 31, 1993, which matures in 1994. Commodity futures contracts of $5.2 were outstanding at December 31, 1993. These contracts mature through 1995. At December 31, 1993, commitments under outstanding letters of credit, guarantees and contingencies approximated $100. Cummins and its subsidiaries are defendants in a number of pending legal actions, including actions relating to use and performance of the Company's products. The Company carries product liability insurance covering significant claims for damages involving personal injury and property damage. The Company also has been identified as a potentially responsible party at several waste disposal sites under US and related state environmental statutes and regulations. The Company denies liability with respect to many of these legal actions and environmental proceedings and vigorously is defending such actions or proceedings. The Company has established reserves for its expected future liability in such actions and proceedings when the nature and extent of such liability can be estimated reasonably based upon presently available information. In the event the Company is determined to be liable for damages in connection with such actions and proceedings, the unreserved and uninsured portion of such liability is not expected to be material. NOTE 16. QUARTERLY FINANCIAL DATA (unaudited): First Second Third Fourth Full 1993 Quarter Quarter Quarter Quarter Year ~~~~ ~~~~~~~ ~~~~~~~ ~~~~~~~ ~~~~~~~ ~~~~~~~~ Net sales $1,048.4 $1,093.4 $988.3 $1,117.8 $4,247.9 Gross profit 251.0 260.6 239.4 285.9 1,036.9 Earnings before the extraordinary item 41.1 48.2 40.7 52.6 182.6 Net earnings 41.1 48.2 40.7 47.1 177.1 Primary earnings per common share: Before the extra- ordinary item $ 1.12 $ 1.32 $ 1.11 $ 1.42 $ 4.95 Net 1.12 1.32 1.11 1.26 4.79 Fully diluted earnings per common share: Before the extra- ordinary item 1.07 1.25 1.06 1.36 4.77 Net 1.07 1.25 1.06 1.22 4.63 ~~~~ Net sales $ 881.3 $ 948.1 $903.6 $1,016.2 $3,749.2 Gross profit 190.4 211.7 202.7 237.7 842.5 Earnings before the extraordinary item & cumulative effect of accounting changes 5.0 18.8 13.8 29.5 67.1 Net earnings (loss) (246.1) 18.8 13.8 24.0 (189.5) Primary & fully diluted earnings (loss) per common share: Before the extra- ordinary item & cumulative effect of accounting changes $ .10 $ .50 $ .34 $ .79 $ 1.77 Net (8.33) .50 .34 .63 (6.01) Net earnings in the third quarter of 1993 included a one-time tax credit of $4.4 resulting from the OBRA. As disclosed in Note 7, net earnings in the fourth quarter of 1993 and 1992 included extraordinary charges of $5.5 related to early extinguishments of debt. (page) CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES SCHEDULE V PROPERTY, PLANT AND EQUIPMENT (Dollars in Million) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Balance Retirements Balance Jan. 1 Adds. or Sales Other Dec. 31 ~~~~~~~~ ~~~~~~ ~~~~~~~~ ~~~~~~ ~~~~~~~~ ~~~~ Land and buildings $ 351.9 $ 8.3 $ 5.5 $ 3.2 $ 357.9 Machinery, equipment and fixtures 1,680.7 46.4 109.5 72.3 1,689.9 Construction in progress 89.7 129.0 2.0 (84.0) 132.7 ~~~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~~ ~~~~~~~~ Total $2,122.3 $183.7 $117.0 $( 8.5) $2,180.5 ~~~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~~ ~~~~~~~~ ~~~~ Land and buildings $ 354.3 $ 1.4 $ .4 $( 3.4) $ 351.9 Machinery, equipment and fixtures 1,666.8 38.4 56.9 32.4 1,680.7 Construction in progress 89.9 100.8 .4 (99.6) 89.7 ~~~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~~ ~~~~~~~~ Total $2,110.0 $140.6 $ 57.7 $(70.6) $2,122.3 ~~~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~~ ~~~~~~~~ ~~~~ Land and buildings $ 330.7 $ 19.5 $ 2.5 $ 6.6 $ 354.3 Machinery, equipment and fixtures 1,588.9 34.1 44.9 88.7 1,666.8 Construction in progress 107.7 88.6 2.3 (105.1) 88.9 ~~~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~~~ ~~~~~~~~ Total $2,027.3 $142.2 $ 49.7 $( 9.8) $2,110.0 ~~~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~~ ~~~~~~~~ The net change in "Other" primarily represents translation adjustments per SFAS No. 52. (page) CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES SCHEDULE VI ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT (Dollars in Millions) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Balance Retirements Balance Jan. 1 Adds. or Sales Other Dec. 31 ~~~~~~~~ ~~~~~~ ~~~~~~~~ ~~~~~~ ~~~~~~~~ ~~~~ Buildings $ 156.8 $ 11.9 $ 2.5 $( 1.9) $ 164.3 Machinery, equipment and fixtures 1,036.8 110.0 86.5 ( 2.3) 1,058.0 ~~~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~~ ~~~~~~~~ Total $1,193,6 $121.9 $ 89.0 $( 4.2) $1,222.3 ~~~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~~ ~~~~~~~~ ~~~~ Buildings $ 149.1 $ 11.9 $ .1 $( 4.1) $ 156.8 Machinery, equipment and fixtures 1,007.9 108.5 52.2 (27.4) 1,036.8 ~~~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~~ ~~~~~~~~ Total $1,157.0 $120.4 $ 52.3 $(31.5) $1,193.6 ~~~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~~ ~~~~~~~~ ~~~~ Buildings $ 139.2 $ 11.7 $ 1.3 $( .5) $ 149.1 Machinery, equipment and fixtures 966.9 113.3 42.0 ( 30.3) 1,007.9 ~~~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~~ ~~~~~~~~ Total $1,106.1 $125.0 $ 43.3 $(30.8) $1,157.0 ~~~~~~~~ ~~~~~~ ~~~~~~ ~~~~~~~ ~~~~~~~~ The net change in "Other" primarily represents translation adjustments per SFAS No. 52. (page) CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS (Dollars in Millions) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 1993 1992 1991 ~~~~ ~~~~ ~~~~ Allowance for Doubtful Accounts: ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Balance beginning of period $11.8 $14.4 $14.6 Additions: Provisions 4.9 1.8 2.8 Recoveries and translation adjustments .1 (.1) .7 Deductions: Write-offs 7.3 4.3 3.7 ~~~~ ~~~~ ~~~~ Balance end of period $ 9.5 $11.8 $14.4 ~~~~~ ~~~~~ ~~~~~ Tax Valuation Allowance: ~~~~~~~~~~~~~~~~~~~~~~~~ Balance beginning of period $124.4 Additions to offset increases in deferred tax assets related to: Tax benefit carryforwards recognized as assets upon the initial January 1, 1992 adoption of SFAS No. 109 - $139.9 Additional general business tax credits for 1992 and 1993 research tax credits generated 14.1 - Increase in the value of net operating tax carryforwards as a result of the OBRA tax rate increase 1.7 - Reduction in the utilization of net operating loss carryforwards due to extraordinary charges for early extinguishment of debt 1.9 1.9 Deductions to reflect reductions in deferred tax assets related to actual utilization of tax benefit carryforwards (41.5) (17.4) Other .1 - ~~~~~~ ~~~~~~ $100.7 $124.4 ~~~~~~ ~~~~~~ (page) CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES SCHEDULE IX SHORT-TERM BORROWINGS (Dollars in Millions) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ At Year-end During the Year ~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Average Average Interest Maximum Average Interest Borrowed Rate Outstanding Outstanding Rate ~~~~~~~~ ~~~~~~~~ ~~~~~~~~~~~ ~~~~~~~~~~~ ~~~~~~~~ ~~~~ Domestic $ - - $40.0 $25.9 4.0% Foreign 13.4 18.4% 42.2 11.6 11.5% ~~~~~ ~~~~~ ~~~~~ Total $13.4 $82.2 $37.5 ~~~~~ ~~~~~ ~~~~~ ~~~~ Domestic $40.0 4.8% $61.0 $38.9 4.4% Foreign 10.5 11.9% 12.5 17.7 13.0% ~~~~~ ~~~~~ ~~~~~ Total $50.5 $73.5 $56.6 ~~~~~ ~~~~~ ~~~~~ ~~~~ Domestic $10.0 6.4% $35.3 $26.6 6.5% Foreign 11.3 12.3% 17.7 15.0 12.7% ~~~~~ ~~~~~ ~~~~~ Total $21.3 $53.0 $41.6 ~~~~~ ~~~~~ ~~~~~ Average outstanding borrowings during the year were calculated for each entity based on the sum of daily outstanding balances divided by 365 days, or using the average monthly balances. Average interest rates during the year were calculated by dividing related interest expense for the year by average outstanding borrowings. Short-term borrowings are payable to banks and include amounts outstanding under various formal and informal credit arrangements including certain amounts where related interest rates are subsidized to promote trade exports. The Company also maintains a $300 revolving credit agreement available for short- and/or long-term borrowings with banks. At December 31, 1993, there were no outstanding borrowings under this agreement. At December 31, 1992, the Company had $40.0 outstanding short-term borrowings and $50.0 outstanding long-term borrowings under this agreement. At December 31, 1991, the Company had $20.0 of outstanding long-term borrowings under this agreement. (page) CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES SCHEDULE X SUPPLEMENTARY INCOME STATEMENT INFORMATION (Dollars in Millions) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 1993 1992 1991 ~~~~~~ ~~~~~~ ~~~~~~ Maintenance and repairs $145.0 $125.1 $118.7 Depreciation & amortization of intangibles $125.1 $122.5 $127.2 (page) SIGNATURES ~~~~~~~~~~ Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CUMMINS ENGINE COMPANY, INC. By /s/Peter B. Hamilton By /s/John McLachlan ~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~ P. B. Hamilton J. McLachlan Vice President & Chief Vice President - Corporate Financial Officer Controller (Principal (Principal Financial Accounting Officer) Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signatures Title Date ~~~~~~~~~~ ~~~~~ ~~~~ Director & Chairman of the Board 3/4/94 * of Directors & Chief Executive ~~~~~~~~~~~~~~~~~~~~~ Officer (Principal Executive Officer) (H. B. Schacht) * Director and President & Chief 3/4/94 ~~~~~~~~~~~~~~~~~~~~~ Operating Officer (J. A. Henderson) * 3/4/94 ~~~~~~~~~~~~~~~~~~~~~ Director (H. Brown) * ~~~~~~~~~~~~~~~~~~~~~ Director 3/4/94 (R. J. Darnall) * ~~~~~~~~~~~~~~~~~~~~~ Director 3/4/94 (J. D. Donaldson) * ~~~~~~~~~~~~~~~~~~~~~ Director 2/24/94 (W. Y. Elisha) * ~~~~~~~~~~~~~~~~~~~~~ Director 2/22/94 (H. H. Gray) ~~~~~~~~~~~~~~~~~~~~~ Director (D. G. Mead) * ~~~~~~~~~~~~~~~~~~~~~ Director 3/4/94 (J. I. Miller) * ~~~~~~~~~~~~~~~~~~~~~ Director 2/22/94 (W. I. Miller) * ~~~~~~~~~~~~~~~~~~~~~ Director 3/4/94 (D. S. Perkins) ~~~~~~~~~~~~~~~~~~~~~ Director (W. D. Ruckelshaus) * ~~~~~~~~~~~~~~~~~~~~~ Director 2/22/94 (F. A. Thomas) * 3/4/94 ~~~~~~~~~~~~~~~~~~~~~ Director (J. L. Wilson) By /s/Steven L. Zeller ~~~~~~~~~~~~~~~~~~~ Steven L. Zeller Attorney-in-fact (page) CUMMINS ENGINE COMPANY, INC., AND SUBSIDIARIES EXHIBIT INDEX ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 3(a) Restated Articles of Incorporation of Cummins Engine Company, Inc., as amended (incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended October 1, 1989 and by reference to Form 8-K, dated July 16, 1990). 3(b) By-laws, as amended and restated, of the Company (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1988 and by reference to Quarterly Report on Form 10-Q for the quarter ended April 2, 1980). 4(b) Revolving Credit Agreement dated as of June 4, 1993, among Cummins Engine Company, Inc., certain banks, Chemical Bank as Administrative Agent and Morgan Guaranty Trust Company of New York as Co-Agent (incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended July 4, 1993). 4(c) Rights Agreement, as amended (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1989, by reference to Form 8-K, dated July 26, 1990, by reference to Form 8, dated November 6, 1990, by reference to Form 8-A12B/A, dated November 1, 1993, and by reference to Form 8-A12B/A, dated January 12, 1994). 10(a) Target Bonus Plan (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1992). 10(b) Five-Year Performance Plan, as amended (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1988). 10(c) Key Employee Stock Investment Plan, as amended (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1988). 10(d) Supplemental Life Insurance and Deferred Income Program, as amended (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1988). 10(e) Financial Counseling Program, as amended (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1983). 10(f) 1986 Stock Option Plan (incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 30, 1986). 10(g) Deferred Compensation Plan for Non-Employee Directors, as amended (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1988). 10(h) Key Executive Compensation Protection Plan (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1988). 10(i) Excess Benefit Retirement Plan, as amended (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1988). 10(j) Performance Share Plan, as amended (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1988). 10(k) Restated Sponsors Agreement between Case Corporation and Cummins Engine Company, Inc., dated December 7, 1990, together with the Restated Partnership Agreement between Case Engine Holding Company, Inc., and Cummins Engine Holding Company, Inc., dated December 7, 1990 (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1990). 10(l) Retirement Plan for Non-Employee Directors of Cummins Engine Company, Inc., (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1989). 10(m) Stock Unit Appreciation Plan (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1990). 10(n) Investment Agreement between Ford Motor Company and Cummins Engine Company, Inc., dated July 16, 1990 (incorporated by reference to Form 8-K, dated July 26, 1990). 10(o) Investment Agreement between Tenneco Inc., and Cummins Engine Company, Inc., dated July 16, 1990 (incorporated by reference to Form 8-K, dated July 26, 1990). 10(p) Investment Agreement between Kubota Corporation and Cummins Engine Company, Inc., dated July 16, 1990 (incorporated by reference to Form 8-K, dated July 26, 1990). 10(q) Three Year Performance Plan (incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1992). 10(r) Consulting Arrangement with Harold Brown (incorporated by reference to the description thereof provided in the Company's definitive Proxy Statement, dated March 4, 1994). 10(s) 1992 Stock Incentive Plan (incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended April 4, 1993). 11 Schedule of Computation of Per Share Earnings for each of the three years ended December 31, 1993 (filed herewith). 21 Subsidiaries of the Registrant (filed herewith). 23 Consent of Arthur Andersen & Co. (filed herewith). 24 Powers of Attorney (filed herewith).	18,357	120,931
106535_1993.txt	106535_1993	1993	106535	Item 1. Business - ----------------------------------------------------------------------------- DESCRIPTION OF THE BUSINESS OF THE COMPANY Weyerhaeuser Company (the company) was incorporated in the state of Washington in January 1900, as Weyerhaeuser Timber Company. It is principally engaged in growing and harvesting of timber and the manufacture, distribution and sale of forest products, real estate development and construction, and financial services. Its principal business segments include timberlands and wood products, pulp and paper products, real estate, and financial services. A description of each of these business segments follows. Timberlands and Wood Products The company owns approximately 5.5 million acres of commercial forestland in the United States (50% in the South and 50% in the Pacific Northwest), most of it highly productive and located extremely well to serve both domestic and international markets. The company has, additionally, long-term license arrangements in Canada covering approximately 17.8 million acres (of which 14 million acres are considered to be productive forestland). The combined total timber inventory on these U.S. and Canadian lands is approximately 245 million cunits (a cunit is 100 cubic feet of solid wood), of which approximately 75% is softwood species. The relationship between cubic measurement and the quantity of end products that may be produced from timber varies according to the species, size and quality of timber, and will change through time as the mix of these variables changes. To sustain the timber supply from its fee timberland, the company is engaged in extensive planting, suppression of nonmerchantable species, precommercial and commercial thinning and fertilization and operational pruning, all of which increase the yield from its fee timberland acreage. Weyerhaeuser Company and Subsidiaries Part I Item 1. Business - Continued - ----------------------------------------------------------------------------- The company's wood products businesses produce and sell softwood lumber, plywood and veneer; composite panels; oriented strand board; hardboard; hardwood lumber and plywood; doors; treated products; logs; chips and timber. These products are sold primarily through the company's own sales organizations. Building materials are sold to wholesalers, retailers and industrial users. Sales by volumes by major product class are as follows (millions): Selected product prices: Weyerhaeuser Company and Subsidiaries Part I Item 1. Business - Continued - ----------------------------------------------------------------------------- Pulp and Paper Products The company's pulp and paper products businesses include: Pulp, which manufactures chemical wood pulp for world markets; Newsprint, which manufactures newsprint at the company's North Pacific Paper Corporation mill and markets it to West Coast and Japanese newspaper publishers; Paper, which manufactures and markets a range of both coated and uncoated fine papers through paper merchants and printers; Containerboard Packaging, which manufactures linerboard and corrugating medium, which is primarily used in the production of corrugated shipping containers and manufactures and markets corrugated shipping containers for industrial and agricultural packaging; Paperboard, which manufactures bleached paperboard that is used for production of liquid containers and is marketed to West Coast and Pacific Rim customers; Recycling, which operates an extensive wastepaper collection system and markets it to company mills and worldwide customers; Chemicals, which produces chlorine, caustic and tall oil, which are used principally by the company's pulp and paper operations; and Personal Care Products, which manufactures disposable diapers sold under the private-label brands of many of North America's largest retailers (this business was sold in February 1993 through an initial public offering of stock). Sales volumes by major product class are as follows (thousands): Selected product prices (per ton): Weyerhaeuser Company and Subsidiaries Part I Item 1. Business - Continued - ----------------------------------------------------------------------------- Real Estate The company, through its real estate subsidiary, Weyerhaeuser Real Estate Company, is a builder/developer of for-sale housing and apartments, develops commercial and residential lots for sale to users and other builders, builds commercial buildings for sale to institutional investors, and is an investor in joint ventures and limited partnerships. Volumes sold: Financial Services The company, through its financial services subsidiary, Weyerhaeuser Financial Services, Inc., is involved in a range of financial services. The principal operating unit is Weyerhaeuser Mortgage Company, which has origination offices in 12 states, with a servicing portfolio of $8.4 billion covering approximately 112,000 loans throughout the country. Mortgages are resold in the secondary market through mortgage-backed securities to financial institutions and investors. Through its insurance services organization, it also offers a broad line of property, life and disability insurance. GNA Corporation, a subsidiary that specialized in the sale of life insurance annuities and mutual funds to the customers of financial institutions, was sold in April 1993. Republic Federal Savings & Loan Association, a subsidiary that operated in Southern California through 1991, was dissolved in 1992. Volume information (millions): Weyerhaeuser Company and Subsidiaries Part I Item 2. Item 2. Properties - ----------------------------------------------------------------------------- Timberlands and Wood Products Facilities and annual production are summarized by major product class as follows (millions): Principal manufacturing facilities are located as follows: Softwood lumber and plywood Hardwood doors Alabama, Arkansas, Georgia, Idaho, Wisconsin Mississippi, North Carolina, Oklahoma, Oregon, Composite panels Washington, and Georgia, North Carolina, Alberta, British Columbia, and Oregon and Wisconsin Saskatchewan, Canada Oriented strand board Hardwood lumber Michigan, North Carolina, Arkansas, Oklahoma, Pennsylvania, and Alberta, Canada Washington, and Wisconsin Hardboard Oregon Weyerhaeuser Company and Subsidiaries Part I Item 2. Properties - Continued - ------------------------------------------------------------------------------ Pulp and Paper Products Facilities and annual production are summarized by major product class as follows (thousands): Principal manufacturing facilities are located as follows: Pulp Containerboard Georgia, Mississippi, North North Carolina, Oklahoma, Carolina, Washington, and Oregon, and Washington Alberta, British Columbia, and Saskatchewan, Canada Packaging Arizona, California, Florida, Newsprint Georgia, Hawaii, Illinois, Washington Indiana, Iowa, Kentucky, Maine, Michigan, Minnesota, Paper Mississippi, Missouri, Nebraska, Mississippi, North Carolina, New Jersey, New York, North Washington, Wisconsin, and Carolina, Ohio, Oregon, Saskatchewan, Canada Tennessee, Texas, Virginia, Washington, and Wisconsin Paperboard Washington Recycling California, Colorado, Iowa, Kansas, Maryland, North Carolina, Oklahoma, Oregon, Texas, Virginia, Washington, and British Columbia, Canada Chemicals Georgia, Mississippi, North Carolina, Oklahoma, Washington, and Saskatchewan, Canada Weyerhaeuser Company and Subsidiaries Part I Item 2. Properties - Continued - ----------------------------------------------------------------------------- Real Estate Principal operations are located as follows: Weyerhaeuser Company and Subsidiaries Part I Item 2. Properties - Continued - ----------------------------------------------------------------------------- Financial Services Principal operations are located as follows: Weyerhaeuser Company and Subsidiaries Part I Item 3. Item 3. Legal Proceedings - ------------------------------------------------------------------------------ Trial began in May 1992 in a federal income tax refund case that the company filed in July 1989 in the United States Claims Court. The complaint seeks a refund of federal income taxes that the company contends it overpaid in 1977 through 1983. The alleged overpayments are the result of the disallowance of certain timber casualty losses and certain deductions claimed by the company arising from export transactions. The refund sought was approximately $29 million, plus statutory interest from the dates of the alleged overpayments. The company has reached an agreement with the United States Department of Justice to settle the portion of the case relating to export transactions. That settlement has been approved by the Joint Committee on Taxation of the U.S. Congress. The tax refund remaining in dispute is approximately $9 million plus statutory interest from the dates of the alleged overpayments. The court has not entered a decision on the remaining issue. On March 6, 1992, the company filed a complaint in the Superior Court for King County, Washington against a number of insurance companies. The complaint seeks a declaratory judgment that the insurance companies named as defendants are obligated under the terms and conditions of the policies sold by them to the company to defend the company and to pay, on the company's behalf, certain claims asserted against the company. The claims relate to alleged environmental damage to third-party sites and to some of the company's own property to which allegedly toxic material was delivered or on which allegedly toxic material was placed in the past. Since December 1992, the company has agreed to settlements with six of the defendants. In July 1993, the trial court dismissed fourteen of the thirty-five sites named in the complaint. Appeal of those dismissals was heard by the Washington State Supreme Court on February 22, 1994. Trial on two sites is scheduled for October 1994. In April 1991, the United States Environmental Protection Agency (EPA) issued an amended complaint adding the company as an additional defendant in an administrative proceeding under the Toxic Substances Control Act (TSCA). The proceeding seeks penalties of $171,000 from all defendants with respect to alleged improper storage and record keeping between 1980 and 1989 for certain transformers which contained polychlorinated biphenyls. The transformers, which the company sold in 1980, were located at the company's former hardboard siding mill in Doswell, Virginia. The company is currently negotiating with the EPA to settle the matter with no admission of liability or penalties. In April 1992, the Georgia Department of Natural Resources, Environmental Protection Division issued a Notice of Violation to the company's Adel, Georgia particleboard plant citing violations of particulate emission standards. A consent order was entered into on September 18, 1992 assessing a $35,000 penalty and a stipulated penalty of $100 per day until the facility is in full compliance with particulate emission requirements. The Consent Order sets a compliance deadline of January 31, 1994. The Consent Order also requires that the company demonstrate that the facility is in compliance with regulations under the Prevention of Significant Deterioration (PSD) regulations under the Clean Air Act. The company has submitted compliance data and is awaiting the State's concurrence that it satisfies the consent order requirements. The company has undertaken a review of all its wood products facilities for compliance with the PSD regulations and has disclosed PSD compliance issues to certain state agencies and the EPA. The company and the State of Mississippi Department of Environmental Quality (DEQ) have entered into a consent agreement concerning PSD regulations at two company facilities in Mississippi involving penalties of $170,000. The State of Alabama has issued a compliance order with penalties totaling $100,000 for noncompliance with PSD regulations at the company's Millport facility. The company and North Carolina's Division of Environmental Management have entered into a consent agreement for its Elkin, North Carolina facility involving penalties of $140,000 and are currently negotiating a separate consent agreement for its Moncure, North Carolina facility involving penalties of $140,000. The company has signed a consent agreement including penalties of $140,000 relating to PSD issues at the company's Wright City, Oklahoma facility with the State of Oklahoma Department of Environmental Quality. The company is negotiating a consent agreement with the State of Arkansas concerning PSD related issues for two facilities in that state involving $375,000 in total penalties for both facilities. Region V of the EPA has issued a Notice of Violation for permit violations at the company's Grayling, Michigan facility. The company is negotiating settlement of those alleged permit violations and other PSD related issues with the Michigan Department of Natural Resources and the EPA that may involve penalties of up to $416,000. In September 1992, the EPA issued a Section 114 Request for Information concerning PSD compliance at the company's oriented strand board and medium density fiberboard mills. In June 1993, the EPA issued a similar Section 114 request for the company's plywood and particleboard mills. The company is also undertaking a review of its pulp and paper facilities for PSD compliance. Weyerhaeuser Company and Subsidiaries Part I Item 3. Legal Proceedings - Continued - ------------------------------------------------------------------------------ On April 9, 1993, the company entered into a Stipulated Final Order (SFO) with the Oregon Department of Environmental Quality for alleged air emissions in excess of permit levels and PSD noncompliance at the company's North Bend, Oregon containerboard facility. The SFO establishes a compliance schedule for installing control technology. A supplemental SFO assessed upfront penalties of $247,000 and penalties of $500 per day until compliance is demonstrated. The SFO requires demonstrated compliance by December 1993 and a historical evaluation of the facility's PSD status. The company has submitted a plant site PSD review to the state and is awaiting its review. In August 1992, the EPA issued an administrative complaint for the assessment of $215,000 in civil penalties against the company's Longview, Washington facility. The penalties are based upon alleged violations of the record keeping and storage provisions of the polychlorinated biphenyls rules contained in the TSCA. The company and the EPA settled the complaint for a maximum penalty of $118,150, 50% of which was paid when the settlement was signed. Payment of the remaining 50% was deferred and will be eliminated based on the expenditure of more than $118,150 by the company to dispose of PCB contaminated transformers at Longview during 1993. On November 2, 1992, an action was filed against the company in the Circuit Court for the First Judicial District of Hinds County, Mississippi on behalf of a purported class of riparian property owners in Mississippi and Alabama whose properties are located on the Tennessee Tombigbee Waterway, Aliceville Lake, Cedar Creek and the Magoway Creek. The complaint seeks $1 billion in compensatory and punitive damages for diminution in property value, personal injuries and mental anguish allegedly resulting from the discharge of purported hazardous substances, including dioxins and furans, by the company's pulp and paper mill in Columbus, Mississippi and the alleged fraudulent concealments of such discharge. The complaint also seeks an injunction prohibiting future releases and the removal of hazardous substances allegedly released in the past. On August 20, 1993, a companion action was filed in Green County, Alabama on behalf of a similar purported class of riparian owners with essentially the same claims as the Mississippi case. The action was removed to the Federal District Court for the Northern District of Alabama, which subsequently remanded the case to state court. Trial began in January 1994 in the United States District Court for the District of Alaska of claims filed against Weyerhaeuser by two corporations with which Weyerhaeuser had entered into financing arrangements, a marketing agreement, and a technical assistance agreement. The plaintiffs claim that Weyerhaeuser breached contractual and common law duties by allegedly failing to adequately market and ship the plaintiffs' products, misrepresenting its marketing and shipping capabilities, and acting to further its interests at the plaintiffs' expense. The plaintiffs in the First Amended Complaint, filed in May 1992, seek an unstated amount of damages described as more than $50 million in compensatory damages plus not less than $75 million in punitive damages. The claim for punitive damages has been dismissed by the trial court. The company is also a party to various proceedings relating to the clean up of hazardous waste sites under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as "Superfund," and similar state laws. The Environmental Protection Agency and/or various state agencies have notified the company that it may be a potentially responsible party with respect to other hazardous waste sites as to which no proceedings have been instituted against the company. The company is also a party to other legal proceedings generally incidental to its business. Although the final outcome of any legal proceeding is subject to a great many variables and cannot be predicted with any degree of certainty, the company presently believes that any ultimate liability resulting from the legal proceedings discussed herein, or all of them combined, would not have a material effect on the company's financial position. Weyerhaeuser Company and Subsidiaries Part III Item 10. Directors and Executive Officers of the Registrant - ---------------------------------------------------------------------------- Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ----------------------------------------------------------------------------- Financial Statements Weyerhaeuser Company and Subsidiaries 1 Financial Statement Schedules Schedule V - Property and Equipment Schedule VI - Allowance for Depreciation and Amortization of Property and Equipment Schedule VIII - Valuation and Qualifying Accounts Schedule IX - Short-term Borrowings Schedule X - Supplementary Income Statement Information Exhibits Exhibit 3 - Articles of Incorporation and Bylaws Exhibit 10 - Material Contracts (a) Agreement with N. E. Johnson (b) Agreement with W. R. Corbin Exhibit 11 - Statement Re: Computation of Per Share Earnings (incorporated by reference to page 52 of the 1993 Weyerhaeuser Company Annual Report) Exhibit 13 - Portions of the 1993 Weyerhaeuser Company Annual Report specifically incorporated by reference herein Exhibit 22 - Subsidiaries of the Registrant Exhibit 24 - Consents of Experts and Counsel Reports on Form 8-K The registrant has not filed a report on Form 8-K during the last fiscal quarter of the period for which this Form 10-K is filed. 1 Incorporated in Part II, Item 8	2,727	19,304
315213_1993.txt	315213_1993	1993	315213	ITEM 1. BUSINESS OVERVIEW Robert Half International Inc. (the "Company"), a Delaware corporation, primarily operates the nation's largest staffing services organization specializing in the accounting, financial, tax and banking fields. The Company operates through offices in the United States, Canada, the United Kingdom, Belgium and France, offering permanent and temporary personnel services under the names ROBERT HALF-R-and ACCOUNTEMPS-R-, respectively. Currently, the Company operates 153 offices and an additional 7 offices are operated by independent franchisees. The Company also places high-end office and administrative professionals (under the name OFFICETEAM-R-). ACCOUNTING, FINANCIAL, TAX AND BANKING SERVICES The Company provides skilled personnel to virtually all industries for a wide range of accounting, financial, tax, banking and data processing positions. The Company's office network maintains an interoffice referral system which enables the offices to cooperate in fulfilling a client's permanent and temporary employment requirements. The ROBERT HALF permanent placement services complement the ACCOUNTEMPS temporary staffing services by providing customers the ability to obtain both temporary and permanent employees from one source and by attracting applicants for permanent positions who are often willing to accept temporary positions during their search for permanent employment. The ACCOUNTEMPS temporary services division offers customers a reliable and economical means of dealing with uneven or peak work loads caused by such predictable events as vacations, taking inventories, tax work, month-end activities and special projects and such unpredictable events as illnesses and emergencies. Businesses increasingly view the use of temporary employees as a means of controlling personnel costs and converting such costs from fixed to variable. The cost and inconvenience to clients of hiring and firing permanent employees are eliminated by the use of ACCOUNTEMPS temporaries. The temporary workers are employees of ACCOUNTEMPS and are paid by ACCOUNTEMPS only when working on customer assignments. The customer pays a fixed rate only for hours worked. ACCOUNTEMPS clients may fill their permanent employment needs by using an ACCOUNTEMPS employee on a trial basis and, if so desired, "converting" the temporary position to a permanent position. The client typically pays a one-time fee for such conversions. The Company offers permanent placement services through its office network under the name ROBERT HALF. The Company's ROBERT HALF division specializes in placing accounting, financial, tax, banking and data processing personnel. Fees for successful permanent placements are paid only by the employer and are generally a percentage of the new employee's annual compensation. No fee for permanent placement services is charged to employment candidates. OTHER ACTIVITIES The Company's OFFICETEAM division places temporary and permanent high-end office and administrative personnel, ranging from word processors to office managers. OFFICETEAM operates in much the same fashion as the ACCOUNTEMPS and ROBERT HALF divisions. The Company has a small operation involving only a limited number of offices which places temporary and permanent employees in paralegal, legal administrative and legal secretarial positions (operating under the name THE AFFILIATES-R-). ORGANIZATION Management of the Company's offices is coordinated from its headquarters in Menlo Park, California. Office managers are responsible for most activities of their offices, including sales, local advertising and marketing and recruitment. The Company's headquarters provides support and centralized services to Company-owned offices in the administrative, marketing, accounting, training and legal areas, particularly as it relates to the standardization of the operating procedures of Company-owned offices. MARKETING AND RECRUITING The Company markets its services to clients as well as employment candidates. Local marketing and recruiting are generally conducted by each office or related group of offices. Advertising directed to clients and employment candidates consists primarily of yellow pages advertisements, classified advertisements and radio. Direct marketing through mail and telephone solicitation also constitutes a significant portion of the Company's total advertising. National advertising conducted by the Company consists primarily of print advertisements in national newspapers, magazines and certain trade journals. The Company also conducts public relations activities designed to enhance public recognition of the Company and its services. Local employees are encouraged to be active in civic organizations and industry and trade groups. The Company owns many trademarks, service marks and tradenames, including the "ROBERT HALF", "ACCOUNTEMPS" and "OFFICETEAM" marks, which are registered in the United States and in a number of foreign countries. COMPETITION The Company faces competition in its efforts to attract clients as well as high-quality specialized employment candidates. The permanent placement business is highly competitive, with a number of firms offering services similar to those provided by the Company, mostly on a regional or local basis. The temporary services industry is also highly competitive. There are several large nationwide operations, some of which have greater resources than the Company. In many areas the local companies are the strongest competitors. The most significant competitive factors in the permanent placement and temporary personnel service markets are price and the reliability of service, both of which are often a function of the availability and quality of personnel. Customers and employment candidates may use more than one permanent or temporary personnel services company. EMPLOYEES The Company and its subsidiaries presently employ approximately 1,150 regular full-time employees. The Company's offices employed approximately 59,000 different temporary employees on assignments during 1993. The ACCOUNTEMPS and OFFICETEAM temporary employees are the Company's employees for all purposes while they are working on assignments. The Company pays the related costs of employment, such as workers' compensation insurance, state and federal unemployment taxes, social security and certain fringe benefits. The Company provides voluntary health insurance coverage to interested temporary employees. FRANCHISING The Company is not currently seeking to grant additional franchises or to grant licenses for the operation of ROBERT HALF or ACCOUNTEMPS offices. However, the Company is exploring the possibility of using joint ventures or licensing arrangements as a means of expanding its operations. The Company believes its relationships with its independently-owned franchisees are good. Franchisees operate their businesses autonomously, subject to the requirements of the franchise agreements. The franchise agreements authorize franchisees to establish one or more ROBERT HALF and ACCOUNTEMPS offices within designated geographic areas. The agreements provide for monthly payments of royalties to the Company based on the franchisee's cash collections and are generally for a term of twenty years, renewable at the franchisee's option. OTHER INFORMATION The Company's current business constitutes a single business segment. (See Item 8. Financial Statements and Supplementary Data for financial information about the Company.) The Company is not dependent upon a single customer or a limited number of customers. The Company's operations are generally more active in the first and fourth quarters of a calendar year. Order backlog is not a material aspect of the Company's business and no material portion of the Company's business is subject to government contracts. The Company does not have any material expenditures for research and development. Compliance with federal, state or local environmental protection laws has no material effect on the capital expenditures, earnings or competitive position of the Company. Information about foreign operations is contained in Note N of Notes to Consolidated Financial Statements in Item 8. The Company does not have export sales. ITEM 2. ITEM 2. PROPERTIES The Company's headquarters is located in Menlo Park, California. Placement activities are conducted through 153 offices located in the United States, Canada, the United Kingdom, Belgium and France. All of the offices are leased. ITEM 3. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material pending legal proceedings other than routine litigation incidental to its business. ITEM 4. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed for trading on the New York Stock Exchange under the symbol "RHI". On February 28, 1994, there were 1,337 holders of record of the Common Stock. Following is a list by fiscal quarters of the sales prices of the stock as quoted on the New York Stock Exchange: No cash dividends were paid in 1993 or 1992. The Company, as it deems appropriate, may continue to retain all earnings for use in its business or may consider paying a dividend in the future. ITEM 6. ITEM 6. SELECTED FINANCIAL DATA Following is a table of selected financial data of the Company of the last five years: ITEM 7. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1993 Temporary services revenues increased 40% during 1993, including the revenues generated from the Company's OfficeTeam division, which was started in 1991 to provide highly-skilled office and administrative personnel. Permanent placement revenues increased 30% during the year ended December 31, 1993. The positive revenue comparisons reflect strong demand for the Company's specialized personnel services. Net service revenues grew at a slower rate in 1992 compared to 1991, primarily as a result of the general economic recession. Temporary services revenues increased 9% while Robert Half division revenues decreased 21%. Gross margin as a percentage of revenues declined 1% between 1993 and 1992 and equaled 39% of revenue in 1993. In 1992, gross margin equaled 40% of revenue and in 1991, gross margin was 44% of revenue. The percentage declines related principally to a lower mix of the higher permanent placement gross margins and higher unemployment insurance costs associated with the temporary services divisions. Selling, general and administrative expenses were $88 million during 1993 compared to $72 million in 1992 and $73 million in 1991. Selling, general and administrative expenses as a percentage of revenues was 29% in 1993, compared to 33% in 1992 and 35% in 1991. The percentage declines were attributable to revenue growth coupled with the Company's continued cost containment. Amortization of intangible assets increased from 1991 to 1993 due to the acquisitions in each of those years of additional personnel services operations. Interest expense for the years ended December 31, 1993 and 1992 decreased 7% and 35%, respectively, over the comparable prior periods due to the reduction in outstanding indebtedness in both years and declining interest rates in the year ending December 31, 1992. The provision for income taxes was 46% in 1993, as compared to 45% in 1992 and 49% in 1991. The 1993 increase reflects the effect of the 1% increase in the federal corporate income tax rate as a result of the 1993 Tax Act. Because of the increase in pre-tax book income, the effect of the non-deductible intangible amortization on the effective tax rate was reduced in 1993 as compared to 1992. The 1992 reduction relative to 1991 was due primarily to a one-time benefit in the fourth quarter of 1992 for the resolution of tax accounting issues related to previous acquisitions. The Financial Accounting Standards Board issued a new standard on accounting for income taxes, which the Company was required to adopt on January 1, 1993. The cumulative effect of the adoption of the accounting method prescribed by the new standard was immaterial. LIQUIDITY AND CAPITAL RESOURCES The change in the Company's liquidity during the past three years is the net effect of funds generated by operations and the funds used for the personnel services acquisitions, principal payments on outstanding notes payable, and the securities repurchase program. The Company's Board of Directors previously authorized the repurchase, on the open market or in privately-negotiated transactions, of up to 3.25 million shares of the Company's common stock or the equivalent amount of Convertible Debentures or other common stock equivalents. The Company has repurchased approximately 3.1 million shares of the Company's common stock or common stock equivalents. See Note F to the Consolidated Financial Statements. Repurchases of the securities have been funded with cash generated from operations and the bank line of credit. On December 10, 1993, substantially all of its outstanding convertible subordinated debentures were converted into common stock of the Company. See Note E to the Consolidated Financial Statements. The Company's working capital requirements consist primarily of the financing of accounts receivable. While there can be no assurances in this regard, the Company expects that internally generated cash plus the bank revolving line of credit will be sufficient to support the working capital needs of the Company's offices, the Company's fixed payments and other long-term obligations. ITEM 8. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (IN THOUSANDS, EXCEPT SHARE AMOUNTS) The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS) The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The Consolidated Financial Statements include the accounts of Robert Half International Inc. (the "Company") and its subsidiaries, all of which are wholly-owned. The Company is a Delaware corporation. All significant intercompany balances have been eliminated. Certain reclassifications have been made to the 1992 and 1991 financial statements to conform to the 1993 presentation. REVENUE RECOGNITION. Temporary services revenues are recognized when the services are rendered by the Company's temporary employees. Permanent placement revenues are recognized when employment candidates accept offers of permanent employment. Reserves are established to estimate losses due to placed candidates not remaining in employment for the Company's guarantee period, typically 90 days. FOREIGN CURRENCY TRANSLATION. Foreign income statement items are translated at the monthly average exchange rates prevailing during the period. Foreign balance sheets are translated at the current exchange rates at the end of the period, and the related translation adjustments are recorded as part of Stockholders' Equity. Gains and losses resulting from foreign currency transactions are included in the Consolidated Statements of Income. CASH AND CASH EQUIVALENTS. For purposes of the Consolidated Statements of Cash Flows, the Company classifies all highly-liquid investments with a maturity of three months or less as cash equivalents. INTANGIBLE ASSETS. Intangible assets represent the cost of acquired companies in excess of the fair market value of their net tangible assets at acquisition date, and are being amortized on a straight-line basis over a period of 40 years. INCOME TAXES. Effective January 1, 1993, the Company adopted Financial Accounting Standards No. 109, Accounting for Income Taxes (FAS 109). Under FAS 109, deferred taxes are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. As permitted under the provisions of FAS 109, the Company elected not to restate prior years and has determined that the cumulative effect of implementation was immaterial. NOTE B -- ACQUISITIONS In July 1986, the Company acquired all of the outstanding stock of Robert Half Incorporated, the franchisor of the Accountemps and Robert Half operations. Subsequently, in 57 separate transactions the Company acquired all of the outstanding stock of certain corporations operating Accountemps and Robert Half franchised offices in the United States, the United Kingdom and Canada as well as other personnel services businesses. The Company has paid approximately $185 million in cash, stock, notes and other indebtedness in these acquisitions, excluding transaction costs and cash acquired. These acquisitions were accounted for as purchases, and the excess of cost over the fair market value of the net tangible assets acquired is being amortized over 40 years using the straight-line method. Results of operations of the acquired companies are included in the Consolidated Statements of Income from the dates of acquisition. The acquisitions made during 1993 and 1992 had no material impact on the pro forma results of operations. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE C -- NOTES PAYABLE AND OTHER INDEBTEDNESS The Company issued promissory notes as well as other forms of indebtedness in connection with certain acquisitions. These are due in varying installments, carry varying interest rates and in aggregate amount to $2,440,000 at December 31, 1993, and $3,510,000 at December 31, 1992. At December 31, 1993, $1.5 million of the notes were secured by standby letters of credit (see Note D). The following table shows the schedule of maturities for notes payable and other indebtedness at December 31, 1993 (in thousands): At December 31, 1993, all of the notes carried fixed rates of interest ranging from 8.0% to 13.3%. The weighted average interest rate for the above was approximately 11.1% and 8.5% for the years ended December 31, 1993 and 1992, respectively. As part of a Restructuring in 1987, a newly formed corporation, BF Enterprises, Inc., assumed the obligation for certain subordinated debentures issued by a predecessor of the Company. At December 31, 1993, the Company remains contingently liable for $11.3 million of these subordinated debentures, payment of $9.5 million of which has been provided for by the issuance of letters of credit to the trustee for the debentures by BF Enterprises, Inc. Additionally, pursuant to a pledge and security agreement entered into at the time of Restructuring, BF Enterprises, Inc., has agreed to pledge to the Company collateral (consisting of real estate, marketable securities and bank letters of credit) if the net worth of BF Enterprises, Inc., falls below certain minimum levels. NOTE D -- BANK LOAN (REVOLVING CREDIT) On November 1, 1993, the Company replaced the then existing unsecured credit facility. The new credit facility provides a line of credit of up to $80,000,000, which is available to fund the Company's general business and working capital needs, including acquisitions and the purchase of the Company's common stock, and to cover the issuance of debt support standby letters of credit up to $15,000,000. As of December 31, 1993, the Company had borrowed $30,300,000 on the line of credit, and had used $2,780,000 in debt support standby letters of credit. Of the $30,300,000 outstanding balance at December 31, 1993, $29,000,000 carried an interest rate tied to Eurodollar rates plus 1.25% and $1,300,000 carried an interest rate at prime. There is a commitment fee on the unused portion of the entire credit facility of .25%. The loan is subject to certain financial covenants which also affect the interest rates charged. The credit facility has the following scheduled reduction in availability (in thousands): The final maturity date for the credit facility is August 31, 2000. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE D -- BANK LOAN (REVOLVING CREDIT) (CONTINUED) As of December 31, 1992, the Company had borrowed $35,600,000 of the borrowing facility in place at that time and had used $2,700,000 in debt support standby letters of credit. Of the $35,600,000 outstanding loan balance at December 31, 1992, $25,000,000 carried an interest rate tied to Eurodollar rates plus 1.25% and the remaining balance of $10,600,000 carried an interest rate at prime. NOTE E -- CONVERTIBLE SUBORDINATED DEBENTURES On August 6, 1987, the Company issued $74,750,000 principal amount of the Convertible Subordinated Debentures (the "Convertible Debentures"). Prior to 1993, all but $22,745,000 of the Convertible Debentures were repurchased by the Company pursuant to its repurchase program (see Note F). The Convertible Debentures were unsecured obligations of the Company with an original maturity date of August 1, 2012. Interest was payable semi-annually as of February 1 and August 1 of each year to the registered holders as of the preceding January 15 and July 15, respectively. The Convertible Debentures were redeemable at the Company's option at any time on or after August 1, 1990, at declining redemption prices. In December 1993, the Company called for redemption all of its then outstanding Convertible Debentures. Holders of $22,440,000 in principal amount elected to convert their debentures into 1.02 million shares of common stock at the conversion price of $22.00 per share. The remaining $305,000 in principal amount of Convertible Debentures were redeemed at 102.9% of their principal amount plus accrued interest. NOTE F -- SECURITIES REPURCHASE PROGRAM The Company was previously authorized by its Board of Directors to repurchase up to a total of 3.25 million shares of the Company's common stock, or the equivalent amount of Convertible Debentures or other common stock equivalents from time to time on the open market or in privately negotiated transactions. As of December 31, 1993, 3.1 million equivalent shares have been repurchased. There were no repurchases under the program during 1993. During 1992, the Company purchased 15,230 shares of common stock. In 1991, the Company repurchased $1 million face amount of Convertible Debentures and purchased 3,457 shares of common stock for an aggregate of approximately 49,000 shares or share equivalents. These repurchases were financed with internally generated cash and the revolving line of credit. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE G -- INCOME TAXES The provisions for income taxes for the three years ended December 31, 1993 consisted of the following (in thousands): The income taxes shown above varied from the statutory federal income tax rates for these periods as follows: The deferred portion of the tax provisions consisted of the following (in thousands): During the fourth quarter of 1992, the Company recorded a one-time benefit of $400,000 for the resolution of certain tax accounting issues related to previous acquisitions. The deferred income tax liability shown on the balance sheet is comprised of the following (in thousands): No valuation allowances against deferred tax assets were required at December 31, 1993. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE G -- INCOME TAXES (CONTINUED) The components of the net deferred income tax liability at December 31, 1993 were as follows (in thousands): NOTE H -- EMPLOYEE BENEFIT PLANS Under a retirement plan covering one current and one former executive officer of the Company, monthly benefits are payable equal to 25% of the participant's base compensation as defined, increased by an inflation formula. The plan was amended effective May 31, 1992 to provide a fixed supplemental benefit for the current employee during the first 15 years after retirement. The current employee forfeited long-term incentive awards of equal value in exchange for this amendment. The plan was also amended effective May 21, 1991 for the current employee to increase the percentage of base compensation to 30% increasing thereafter by 3% for each year of service beyond the age of 50, up to a maximum of 66%. During 1993, the Company changed its discount rate assumption from 8% to 6%. The effect of both plan amendments and the discount rate change are being amortized over the employee's expected future service period of 15 years and will increase after-tax expense by approximately $76,000 per year. The employee can require the Company to discharge its liability at defined intervals by purchasing annuities. At December 31, 1992 a liability of $1,124,000 was established to cover the estimated unfunded cost of these benefits. This amount was increased to $1,721,000 at December 31, 1993. Pre-tax pension costs for these plans were $188,000, $131,000, and $72,000 for the years ended December 31, 1993, 1992 and 1991, respectively. These charges were computed using certain assumptions regarding salary increases, retirement age and life expectancy. NOTE I -- COMMITMENTS AND CONTINGENCIES Rental expense, primarily for office premises, amounted to $8,457,000, $8,042,000 and $7,616,000 for the years ended December 31, 1993, 1992 and 1991, respectively. The approximate minimum rental commitments for 1994 and thereafter under non-cancelable leases in effect at December 31, 1993, are as follows (in thousands): NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE J -- STOCK PLANS Under various stock plans, officers, employees and outside directors may receive grants of restricted stock or options to purchase common stock. Grants are made at the discretion of the Compensation Committee of the Board of Directors. Grants usually vest over four years. Options granted under the plans have exercise prices ranging from 85% to 100% of the fair market value of the Company's common stock at the date of grant, consist of both incentive stock options and nonstatutory stock options under the Internal Revenue Code, and generally have a term of ten years. Recipients of restricted stock do not pay any cash consideration to the Company for the shares, have the right to vote all shares subject to such grant, and receive all dividends with respect to such shares, whether or not the shares have vested. As of December 31, 1993 the total number of available grants under the plans (consisting of either restricted stock or options) was 396,054. The following table reflects activity under all stock plans from January 1, 1991 through December 31, 1993 and the exercise prices: As of December 31, 1993, an aggregate of 615,965 restricted common stock or options to purchase common stock were vested. NOTE K -- PREFERRED SHARE PURCHASE RIGHTS On July 23, 1990, the Board of Directors declared a dividend distribution of one Preferred Share Purchase Right (the "Rights") on each outstanding share of the Company's common stock. The Rights will be exercisable only if a person or group becomes an Acquiring Person (as such term is defined in the Right's Agreement) or announces a tender offer the consummation of which would result in a person or group becoming an Acquiring Person. Each Right will entitle stockholders to buy one one-hundredth of a share of a new series of junior participating preferred stock at an exercise price of $65 (subject to adjustment) upon certain events. Effective October 28, 1993, Acquiring Person means any person or group of affiliated or associated persons who shall be the beneficial owner of 15% or more of the common stock of the Company then outstanding, but does not include the only shareholder (and affiliates and associates thereof) known by the Company to have beneficial ownership on October 28, 1993, in excess of 15% of the then outstanding common stock, provided that NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE K -- PREFERRED SHARE PURCHASE RIGHTS (CONTINUED) such exclusion terminates immediately in the event that such shareholder (or any such affiliate or associate) increases its beneficial ownership of common stock other than pursuant to certain specified transactions. If, after the Rights become exercisable, the Company is acquired in a merger or other business combination transaction, or sells 50% or more of its assets or earnings power, each Right will entitle its holder to purchase, at the Right's then-current exercise price, a number of the acquiring company's common shares having a market value at the time of twice the Right's exercise price. In addition, if a person or group becomes an Acquiring Person otherwise than pursuant to a cash tender offer for all shares in which such person or group increases its stake to 85% of the outstanding shares of common stock, each Right will entitle its holder (other than such person or members of such group) to purchase, at the Right's then-current exercise price, a number of the Company's common shares (or cash, other securities or property) having a market value of twice the Right's exercise price. At any time after a person or group becomes an Acquiring Person and prior to an acquisition by such person or group of 50% or more of the common stock, the Board of Directors may exchange the Rights (other than Rights owned by such person or group), in whole or in part, at an exchange ratio of one share of common stock (or one one-hundredth of a share of the new series of junior participating preferred stock) per Right. At any time prior to ten days after a person or group becomes an Acquiring Person, the Rights are redeemable for one cent per Right at the option of the Board of Directors. The dividend distribution was made on August 8, 1990, payable to stockholders of record on that date. The Rights will expire on July 23, 2000. NOTE L -- INCOME PER SHARE Income per fully diluted share has been computed using the weighted average number of shares of fully diluted common stock and common stock equivalents outstanding during each period (12,630,000, 12,003,000 and 11,637,000 shares for the years ending December 31, 1993, 1992 and 1991, respectively). An assumed conversion of the Convertible Debentures was not dilutive to income per share in 1993 (see Note E), 1992 or 1991. NOTE M -- QUARTERLY FINANCIAL DATA (UNAUDITED) The following tabulation shows certain quarterly financial data for 1993 and 1992 (in thousands, except per share amounts): NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE N -- SEGMENT REPORTING Information about the Company's operations in different geographic locations for the three fiscal years ended in December 1993, is shown below. The Company's areas of operations outside of the United States include Canada, the United Kingdom, Belgium and France. Revenues represent total net revenues from the respective geographic areas. Operating income is net revenues less operating costs and expenses pertaining to specific geographic areas. Foreign operating income reflects charges for U.S. management fees and amortization of intangibles of $917,000, $854,000 and $650,000 for the years ended December 31, 1993, 1992 and 1991, respectively. Domestic operating income reflects charges for amortization of intangibles of $3,841,000, $3,606,000 and $3,564,000 for the years ended December 31, 1993, 1992 and 1991, respectively. Identifiable assets are those assets used in the geographic areas and are reflected after elimination of intercompany balances. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS AND THE BOARD OF DIRECTORS OF ROBERT HALF INTERNATIONAL INC.: We have audited the accompanying consolidated statements of financial position of Robert Half International Inc. (a Delaware corporation) and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Robert Half International Inc. and subsidiaries as of December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN & CO. San Francisco, California January 28, 1994 ITEM 9. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The information required by Items 10 through 13 of Part III is incorporated by reference from the registrant's Proxy Statement, under the captions "NOMINATION AND ELECTION OF DIRECTORS," "BENEFICIAL STOCK OWNERSHIP," "COMPENSATION OF DIRECTORS," "COMPENSATION OF EXECUTIVE OFFICERS" AND "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION AND CERTAIN TRANSACTIONS," which Proxy Statement will be mailed to stockholders in connection with the registrant's annual meeting of stockholders which is scheduled to be held in May 1994. PART IV ITEM 14. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) 1. FINANCIAL STATEMENTS The following consolidated financial statements of the Company and its subsidiaries are included in Item 8 of this report: Consolidated statements of financial position at December 31, 1993 and 1992. Consolidated statements of income for the years ended December 31, 1993, 1992 and 1991. Consolidated statements of stockholders' equity for the years ended December 31, 1993, 1992 and 1991. Consolidated statements of cash flows for the years ended December 31, 1993, 1992 and 1991. Notes to consolidated financial statements. Report of independent public accountants. Selected quarterly financial data for the years ended December 31, 1993 and 1992 are set forth in Note M - Quarterly Financial Data (Unaudited) included in Item 8 of this report. 2. FINANCIAL STATEMENT SCHEDULES Report of independent public accountants on supporting schedules. II - Amounts receivable from related parties X - Supplementary income statement information Schedules I, III, IV, V, VI, VII, VIII, IX, XI, XII and XIII have been omitted as they are inapplicable. 3. EXHIBITS (b) Reports on Form 8-K The Registrant did not file any reports on Form 8-K during the fiscal quarter ending December 31, 1993. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ROBERT HALF INTERNATIONAL INC. (Registrant) Date: March 22, 1994 By: _______/S/_M. KEITH WADDELL_______ M. Keith Waddell Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and the Board of Directors of Robert Half International Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Robert Half International Inc. and subsidiaries included in this Form 10-K, and have issued our report thereon dated January 28, 1994. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in Item 14 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN & CO. San Francisco, California January 28, 1994 S-1 ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 S-2 ROBERT HALF INTERNATIONAL INC. AND SUBSIDIARIES SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 S-3 INDEX TO EXHIBITS Sequentially Exhibit Numbered No. Exhibit Page ------- ------------------------------------ ---- 3.1 Restated Certificate of Incorporation, incorporated by reference to Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. 3.2 By-Laws. 4.1 Indenture dated as of October 1, 1972, as amended, between IDS Realty Trust and First National Bank of Minneapolis, incorporated by reference to Exhibits 6(t) and 6(v) to the Form S-14 Registration Statement of the Registrant (formerly known as Boothe Interim Corporation) filed with the Securities and Exchange Commission on December 31, 1979. 4.2 Restated Certificate of Incorporation of Registrant (filed as Exhibit 3.1). 4.3 Rights Agreement, dated as of July 23, 1990, between the Registrant and Manufacturers Hanover Trust Company of California, incorporated by reference to (i) Exhibit 1 to the Registrant's Registration Statement on Form 8-A for its Preferred Share Purchase Rights, which Registration Statement was filed with the Commission on July 30, 1990, (ii) Exhibit 19.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1990 and (iii) Exhibit 3 to Registrant's Form 8-A/A Amendment No. 2 filed on December 2, 1993. 10.1 Credit Agreement dated as of November 1, 1993, among the Registrant, NationsBank of North Carolina, N.A. and Bank of America National Trust and Savings Association, incorporated by reference to Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1993. 10.2 Reorganization and Distribution Agreement between the Registrant and BF Enterprises, Inc., incorporated by reference to Exhibit 10.9 to Registrant's Registration Statement on Form S-1 (No. 33-15171). 10.3 Agreement of Assignment and Assumption of Rights and Obligations under the Indenture between the Registrant and BF Enterprises, Inc., incorporated by reference to Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. 10.4 Assumption of Obligations and Liabilities between the Registrant and BF Enterprises, Inc., incorporated by reference to Exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987. 10.5 Pledge and Security Agreement between the Registrant and BF Enterprises, Inc., incorporated by reference to Exhibit 10.10 to Registrant's Registration Statement on Form S-1 (No. 33-15171). 10.6 Tax Sharing Agreement between the Registrant and BF Enterprises, Inc., incorporated by reference to Exhibit 10.11 to Registrant's Registration Statement on Form S-1 (No. 33-15171). 10.7 Employment Agreement dated as of October 2, 1985, between the Registrant and Harold M. Messmer, Jr. The Eighth Amendment to such agreement is filed with this Annual Report on Form 10-K for the fiscal year ended December 31, 1993. The original agreement and the first seven amendments thereto are incorporated by reference to (i) Exhibit 10.(c) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985, (ii) Exhibit 10.2(b) to Registrant's Registration Statement on Form S-1 (No. 33-15171), (iii) Exhibit 10.2(c) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, (iv) Exhibit 10.2(d) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, (v) Exhibit 28.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1990, (vi) Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991 and (vii) Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1993. 10.8 Key Executive Retirement Plan - Level II, incorporated by reference to Exhibit 10.(f) to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985 and Exhibit 19.2 to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1991. 10.9 Key Executive Retirement Plan - Level II Agreement between the Registrant and Harold M. Messmer, Jr. The Sixth Amendment to such agreement is filed with this Annual Report on form 10- K for the fiscal year ended December 31, 1992. The original agreement and the first five amendments thereto are incorporated by reference to (i) Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, (ii) Exhibit 19.3 to Registrant's Quarterly Report on Form 10- Q for the fiscal quarter ended June 30, 1991, (iii) Exhibit 10.10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, and (iv) Exhibit 10.2 to the Registrant's Quarterly Report on Form 10- Q for the fiscal quarter ended June 30, 1993. 10.10 1985 Stock Option Plan, as amended, incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. 10.11 Non-Employee Directors' Option Plan, incorporated by reference to Exhibit 10.(j) to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. 10.12 Outside Directors' Option Plan, incorporated by reference to Exhibit 10.21 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. 10.13 1989 Restricted Stock Plan, as amended, incorporated by reference to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 10.14 StockPlus Plan, as amended, incorporated by reference to Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 10.15 1993 Incentive Plan, as amended. 10.16 Deferred Compensation Plan, incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. 10.17 Annual Performance Bonus Plan. 10.18 Form of Severance Agreement, incorporated by reference to (i) Exhibit 10.26 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and (ii) Exhibit 19.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1990. 10.19 Form of Indemnification Agreement for Directors of the Registrant. The form of agreement is incorporated by reference to Exhibit 10.27 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. Filed herewith is a schedule listing the names of the individuals with whom the agreement has been executed and the date of execution. 10.20 Form of Indemnification Agreement for Executive Officers of Registrant, incorporated by reference to Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989. 11 Statement re computation of per share earnings. 21 Subsidiaries of the Registrant. 23 Accountants' Consent. _____ * Management contract or compensatory plan required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.	6,874	45,107
814046_1993.txt	814046_1993	1993	814046	"ITEM 1. BUSINESS\nAll references to \"Notes\" are to Notes to Consolidated Financial Statements con(...TRUNCATED)	29,579	193,707
353524_1993.txt	353524_1993	1993	353524	"ITEM 1. BUSINESS:\nThe principal business of IBM Credit Corporation (the Company) is financing. All(...TRUNCATED)	18,395	113,561
702165_1993.txt	702165_1993	1993	702165	"Item 1. Business. - ------ -------- and Item 2.\n\n\nItem 2. Properties. - ------ ---------- GENERA(...TRUNCATED)	21,916	146,912
706166_1993.txt	706166_1993	1993	706166	"Item 1. Business.\nCarolina Freight Corporation is a freight transportation holding company whose p(...TRUNCATED)	4,459	30,117
36510_1993.txt	36510_1993	1993	36510	"ITEM 1. BUSINESS\nFirst Maryland Bancorp (the \"Corporation\") is a Maryland corporation incorporat(...TRUNCATED)	24,454	163,957
810578_1993.txt	810578_1993	1993	810578	"ITEM 1. BUSINESS\nGENERAL\nSt. Paul Bancorp, Inc. (the \"Company\") was incorporated under the laws(...TRUNCATED)	19,909	130,371
716039_1993.txt	716039_1993	1993	716039	"ITEM 3 - LEGAL PROCEEDINGS\n( 1 ) The company may face potentially significant financial exposure f(...TRUNCATED)	12,370	81,212

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SEC Annual Reports (Form 10-K) 1993-2024

Dataset Overview

This dataset comprises SEC annual reports (Form 10-K) for the years 1993 to 2024, providing comprehensive coverage of publicly traded companies' financial and business information. The reports are stored in Parquet format, ensuring efficient storage and quick access. This dataset was meticulously compiled using the EDGAR-Crawler toolkit, which facilitates the extraction and processing of SEC filings from the EDGAR database.

Dataset Structure

Data Files

The dataset is organized into separate Parquet files for each year, making it easy to navigate and utilize:

1993.parquet
1994.parquet
1995.parquet
1996.parquet
1997.parquet
1998.parquet
1999.parquet
2000.parquet
2001.parquet
2002.parquet
2003.parquet
2004.parquet
2005.parquet
2006.parquet
2007.parquet
2008.parquet
2009.parquet
2010.parquet
2011.parquet
2012.parquet
2013.parquet
2014.parquet
2015.parquet
2016.parquet
2017.parquet
2018.parquet
2019.parquet
2020.parquet
2021.parquet
2022.parquet
2023.parquet
2024.parquet

Summary Statistics

Across these years, the dataset encapsulates a total of 7,245,966,226 words spread over 245,211 entries, with an average of 34,324.36 words per entry. Notably, there are 4,043 documents with zero words, reflecting the occasional nature of filings that contain no textual content.

Fields Included

Each Parquet file contains detailed fields that provide a comprehensive view of each report:

filename: The filename of the filing document (e.g., "1089297_21929025_2004.htm").
id: A unique identifier for the filing, formatted as "cik_year" (e.g., "1089297_2021").
year: The year of the filing.
cik: The Central Index Key assigned to the company (e.g., "1089297").
text: The full text of the filing.
word_count: The number of words in the filing text.
character_count: The number of characters in the filing text.

Source and Methodology

Source

Until 2020: The data have been collected from https://zenodo.org/records/5528490.
From 2021 to 2024: The data were collected using the EDGAR-Crawler toolkit, which facilitated the extraction and processing of SEC filings from the EDGAR database.

Methodology

Crawling: The EDGAR-Crawler toolkit was utilized to download the 10-K filings for each specified year.
Extraction and Cleaning: The filings were extracted and cleaned to ensure a structured and clean dataset.
Integration: This dataset is seamlessly integrated with existing datasets from 1993 to 2020, providing a continuous and comprehensive record of SEC annual reports for extensive research and analysis.

Use Cases

This dataset is invaluable for various applications, including but not limited to:

Academic Research: Researchers in economics, finance, and business management can leverage this dataset to conduct detailed and expansive analyses, enhancing the scope and depth of their studies with robust financial data.
Financial Analysis: Professionals in finance can utilize the detailed reports to bolster financial analysis, strategic planning, and decision-making processes, ensuring well-informed and data-driven insights.
NLP Applications: The structured textual data in this dataset supports natural language processing (NLP) research and applications, enabling the development of advanced models and tools for financial document analysis and more.

General Dataset Statistics

Total number of words: 7,245,966,226
Total number of entries: 245,211
Average number of words per entry: 34,324.36
Number of zero-word documents: 4,043

Dataset Citation

If you utilize this dataset in your research, please cite it as follows:

@dataset{SecAnnual,
title={SEC Annual Reports (Form 10-K) 1993-2024},
author={Pleias},
year={2024},
description={Collection of SEC annual reports (Form 10-K) for the years 1993 to 2024}
}

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Size of the auto-converted Parquet files (First 5GB):

2.22 GB

Number of rows (First 5GB):

48,543

Estimated number of rows:

372,808

Collection including PleIAs/SEC

Finance Commons

Collection

A large collection of multimodal financial documents in open data. • 7 items • Updated Jul 17 • 3