<PAGE>
PROSPECTUS
Filed Pursuant
to Rule 424(b)(3)
Registration No.
1,010,391 SHARES 33-56139
COLTEC INDUSTRIES INC
COMMON STOCK
-------------
ALL THE SHARES OF COMMON STOCK (THE "SHARES") OFFERED HEREBY ARE BEING OFFERED
BY THE SELLING STOCKHOLDER. SEE "SELLING STOCKHOLDER". COLTEC INDUSTRIES INC
("COLTEC") WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF THE SHARES BEING
OFFERED HEREBY. THE COMMON STOCK IS TRADED ON THE NEW YORK STOCK EXCHANGE (THE
"NYSE") AND THE PACIFIC STOCK EXCHANGE (THE "PSE") UNDER THE SYMBOL "COT". ON
NOVEMBER 21, 1994, THE LAST REPORTED SALE PRICE OF THE COMMON STOCK ON THE NEW
YORK STOCK EXCHANGE WAS $18.25 PER SHARE.
THE SHARES BEING REGISTERED HEREBY MAY BE SOLD FROM TIME TO TIME BY THE SELLING
STOCKHOLDER, OR BY PLEDGEES, TRANSFEREES OR OTHER SUCCESSORS IN INTEREST, ON THE
NYSE, THE PSE (OR SUCH OTHER EXCHANGE ON WHICH THE SHARES ARE LISTED AT THE TIME
OF SALE) IN THE OVER-THE-COUNTER MARKET OR OTHERWISE, AT PRICES AND AT TERMS
THEN PREVAILING OR AT PRICES RELATED TO THE THEN CURRENT MARKET PRICE, OR IN
PRIVATELY NEGOTIATED TRANSACTIONS.
------------
INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH UNDER
"CERTAIN SIGNIFICANT CONSIDERATIONS".
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY COLTEC OR BY THE SELLING STOCKHOLDER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
No action has been or will be taken in any jurisdiction by Coltec or the
Selling Stockholder that would permit a public offering of the Common Stock or
possession or distribution of this Prospectus in any jurisdiction where action
for that purpose is required, other than in the United States. Persons into
whose possession this Prospectus comes are required by Coltec and the Selling
Stockholder to inform themselves about and to observe any restrictions as to the
offering of the Common Stock and the distribution of this Prospectus.
THE DATE OF THIS PROSPECTUS IS DECEMBER 7, 1994.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE PAGE
---- ----
<S> <C> <C> <C>
INCORPORATION OF CERTAIN . . . . . . . . . . . . . MANAGEMENT'S DISCUSSION AND ANALYSIS
DOCUMENTS BY REFERENCE . . . . . . . . . . . . . 2 OF FINANCIAL CONDITION AND
ADDITIONAL INFORMATION . . . . . . . . . . . . . . 2 RESULTS OF OPERATIONS. . . . . . . . . . . . . . 10
THE COMPANY. . . . . . . . . . . . . . . . . . . . 3 DETERMINATION OF OFFERING PRICE. . . . . . . . . . 26
CERTAIN SIGNIFICANT. . . . . . . . . . . . . . . . PlAN OF DISTRIBUTION . . . . . . . . . . . . . . . 26
CONSIDERATIONS . . . . . . . . . . . . . . . . . 4 SELLING STOCKHOLDER. . . . . . . . . . . . . . . . 28
PRICE RANGE OF COMMON STOCK. . . . . . . . . . . . DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . 28
AND DIVIDEND POLICY. . . . . . . . . . . . . . . 5 DESCRIPTION OF CERTAIN INDEBTEDNESS. . . . . . . . 31
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . 7 LEGAL MATTERS. . . . . . . . . . . . . . . . . . . 36
SELECTED FINANCIAL DATA. . . . . . . . . . . . . . 8 EXPERTS. . . . . . . . . . . . . . . . . . . . . . 36
. . . . . . . . . . . . . . . . . . . . . . . . . INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . F-1
</TABLE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Securities and Exchange Commission
(File No. 1-7568) by Coltec pursuant to the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), are hereby incorporated by reference in this
Prospectus:
(a) Annual Report on Form 10-K for the fiscal year ended December 31,
1993.
(b) Quarterly Report on Form 10-Q for the fiscal quarter ended April
3, 1994.
(c) Quarterly Report on Form 10-Q for the fiscal quarter ended July
3, 1994.
(d) Quarterly Report on Form 10-Q for the fiscal quarter ended
October 2, 1994.
(e) Current Reports on Form 8-K dated April 14, May 24 and June 10,
1994.
In addition, all documents filed by Coltec pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus
and prior to the termination of the offering (the "Offering") shall be deemed to
be incorporated by reference herein and to be a part hereof from the date of
filing of such documents. Any statement contained in a document incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
Copies of all documents which are incorporated by reference (not including
the exhibits to such information, unless such exhibits are specifically
incorporated by reference in such information) will be provided without charge
to each person, including any beneficial owner, to whom this Prospectus is
delivered, upon written or oral request. Requests should be directed to Coltec,
Attention: Secretary, 430 Park Avenue, New York, New York 10022; telephone (212)
940-0400.
ADDITIONAL INFORMATION
Coltec has filed with the Commission a Registration Statement (which term
shall include any amendments thereto) on Form S-3 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities being
registered hereby. This Prospectus does not contain all the information set
forth in the
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Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission and to which reference is hereby
made. Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
Coltec is subject to the informational requirements of the Exchange Act and
in accordance therewith files reports and other information with the Commission.
The Registration Statement and the exhibits thereto, as well as such reports,
proxy statements and other information filed by Coltec with the Commission, may
be inspected and copied at the public reference facilities of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at 7 World Trade Center, 13th floor, New York, New York 10048 and at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. Such reports and other information may also be
inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005
and the PSE, 301 Pine Street, Suite 1104, San Francisco, California 94104.
THE COMPANY
Coltec manufactures and sells a diversified range of highly engineered
aerospace, automotive and industrial products in the United States and, to a
lesser extent, abroad. Through its Aerospace/Government segment, Coltec is a
leading manufacturer of landing gear systems, engine fuel controls, turbine
blades, fuel injectors, nozzles and related components for commercial and
military aircraft, and also produces high-horsepower diesel engines for naval
ships and diesel, gas and dual-fuel engines for electric power plants. Coltec's
Automotive segment manufactures and markets a selected line of high value-added
products, including fuel injection system assemblies and components,
transmission controls, suspension controls, emission control air pumps, oil
pumps and seals for domestic original equipment manufacturers and the
replacement parts market. Coltec's Industrial segment is a leading manufacturer
of industrial seals, gaskets, packing products and self-lubricating bearings and
also produces technologically advanced spray nozzles for agricultural, home
heating and industrial applications and air compressors for manufacturers. Each
of Coltec's three industry segments contributed approximately one-third of total
sales in 1993.
Coltec's strategy is to develop and maintain substantial market positions
and attractive margins for its products through technological innovation, cost
efficiencies, product differentiation and quality. Coltec emphasizes targeted
development of highly engineered, high value-added components and systems
designed to meet specific customer requirements. This emphasis has enabled
Coltec to maintain close, interactive relationships with the major aircraft and
domestic automobile manufacturers and Coltec's principal industrial customers.
Through successful introduction of new products, cost reductions, productivity
improvements and selected divestitures, Coltec has consistently achieved strong
operating margins in its businesses. Coltec's average operating margin for the
period from 1989 to 1993 was 17.3%, or 17.7% excluding the effect of a
restructuring charge taken in the second quarter of 1993 (the "1993
restructuring charge"). Operating margins were 17.8% in 1992 and 15.9% in 1993,
or 17.7% in 1993 excluding the effect of the 1993 restructuring charge.
Coltec's focus on aftermarket sales (representing 42% of total sales from 1989
to 1993) in all of its segments contributes to Coltec's consistently strong
operating margins.
Coltec's Aerospace/Government segment has taken an aggressive approach in
3
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responding to changing economic and market conditions. With reductions in
domestic military spending, Coltec has placed increasing emphasis on sales to
commercial aircraft and aircraft engine manufacturers. Coltec's
Aerospace/Government segment increased commercial sales as a percentage of total
sales from 48% in 1989 to 62% in 1993. In 1993, Aerospace/Government segment
sales declined 13%, primarily reflecting lower demands for new commercial
aircraft resulting from the excess capacity of the world airline fleets. The
Aerospace/Government segment's operating margin was 15.0% in 1993, or 18.9%
excluding the effect of the 1993 restructuring charge, compared to 19.5% in
1992. Coltec's ability to maintain this operating margin for 1993 was
particularly noteworthy in light of weak industry conditions. In addition to
producing landing gear for various aircraft manufacturers, including The Boeing
Company and McDonnell Douglas Corporation, Coltec has been awarded contracts to
supply the main and nose landing gear assemblies for the Boeing 777 aircraft.
In 1993, Coltec delivered on schedule the first three main and nose landing gear
assemblies for Boeing 777 aircraft. Production rates and deliveries of Boeing
777 landing gear shipsets are scheduled to accelerate over the next several
years.
In January 1994, Coltec refinanced its bank credit agreement (the "1992
Credit Agreement", and, as refinanced, the "1994 Credit Agreement") on terms
which offer Coltec greater financial flexibility and lower borrowing costs. If
this refinancing had been in place at the beginning of 1993, earnings before
extraordinary item for 1993 would have increased by $10.1 million, or $0.14 per
common share. Refinancing the 1992 Credit Agreement has also increased Coltec's
operating flexibility and requires no scheduled mandatory debt repayments until
January 1997. From January 1, 1989 to October 2, 1994, Coltec has generated
$714 million in cash provided by operating activities.
CERTAIN SIGNIFICANT CONSIDERATIONS
LEVERAGE AND DEBT SERVICE
As a result of a recapitalization of Coltec completed in 1986 (the "1986
Recapitalization") and the acquisition of Coltec by Coltec Holdings Inc.
("Holdings") in 1988, Coltec is highly leveraged. Although a recapitalization
in 1992 (the "1992 Recapitalization") reduced the deficit in shareholders'
equity and reduced indebtedness and interest expense, Coltec continues to have
substantial indebtedness and negative shareholders' equity. As of October 2,
1994, Coltec's total indebtedness was $986.8 million. At such date, Coltec's
total assets were $857.4 million and its shareholders' equity was a deficit of
$555.1 million. Coltec's negative shareholders' equity is due to the 1986
Recapitalization and the retirement of an intercompany note in the principal
amount of $846.3 million distributed by Coltec to Holdings. For the year ended
December 31, 1993, Coltec's ratio of earnings to fixed charges was 1.9 to 1 and,
for the nine months ended October 2, 1994, the ratio was 2.5 to 1.
Although the 1992 Recapitalization and the refinancing of the 1992 Credit
Agreement in January 1994 have improved Coltec's operating and financing
flexibility, Coltec's remaining substantial indebtedness could limit its
capacity to respond to changing business and economic conditions. Insofar as
changing business and economic conditions may affect the financial condition and
financing requirements of Coltec, they could impose significant risks to the
holders of Common Stock of Coltec. Furthermore, the ability of Coltec to
satisfy its obligations and to service, repay or refinance its debt will be
dependent upon the future performance of Coltec, which will be subject to
prevailing economic conditions and to financial, business and other factors,
including factors beyond the control of Coltec, affecting the business and
operations of Coltec.
4
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The 1994 Credit Agreement imposes significant operating and financial
restrictions on Coltec. Such restrictions affect, and in many respects
significantly limit or prohibit, among other things, the ability of Coltec to
incur additional indebtedness, create liens, sell assets, engage in mergers and
acquisitions, make certain capital expenditures or pay dividends. The
indentures under which Coltec's 9-3/4% Senior Notes Due 1999, 9-3/4% Senior
Notes Due 2000, 11-1/4% Debentures Due 1996-2015 and 10-1/4% Senior Subordinated
Notes Due 2002 were issued contain certain similar restrictive covenants. These
restrictions, in combination with the leveraged nature of Coltec, could limit
the ability of Coltec to effect future financings or otherwise may restrict
corporate activities. See "Description of Certain Indebtedness".
Borrowings under the 1994 Credit Agreement bear interest at fluctuating
rates. Increases in interest rates with respect to such borrowings could
adversely affect Coltec's financial condition.
CYCLICAL BUSINESS AND COMPETITION; LITIGATION
Coltec operates in markets that are cyclical in nature and highly
competitive, and Coltec's results of operations are affected by changes in its
customers' markets, including changes that affect government defense contracts
and commercial aircraft and automobile production. Currently, defense spending
and commercial aircraft production schedules are at reduced levels and have
adversely affected sales in the Aerospace/Government segment. While the
Automotive segment is benefiting from the strength in the automotive industry
and increased applications for components supplied by Coltec, results at the
Industrial segment divisions have been mixed. Many of Coltec's competitors have
substantially greater financial resources than Coltec.
From time to time the business operations of Coltec result in product
liability actions, including asbestos litigation. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
Certain of the contracts under which Coltec is a supplier, including those
with commercial aviation manufacturers and the United States government, contain
provisions allowing for early termination, including termination due to lack of
congressional appropriation or for convenience.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock has traded on the NYSE and PSE since March 25, 1992, the
date of its initial public offering. The following table sets forth the high
and low sales prices (expressed as dollars per common share) of the Common Stock
as reported on the NYSE Composite Tape for the periods indicated.
HIGH LOW
FISCAL 1992
First Quarter (beginning March 25)........ $ 19 $17
Second Quarter............................ 21-3/4 17
Third Quarter............................. 19-1/4 15-3/8
Fourth Quarter............................ 19-1/4 14-1/8
FISCAL 1993
First Quarter............................. 19-1/4 16-1/4
Second Quarter............................ 17-1/2 14-7/8
Third Quarter............................. 18 15-1/4
Fourth Quarter............................ 19-3/8 16
FISCAL 1994
First Quarter............................. 21-7/8 18-3/4
Second Quarter............................ 20-1/2 18-1/4
Third Quarter............................. 19-7/8 18-1/8
Fourth Quarter (through November 21, 1994) 19 17-1/2
5
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At November 18, 1994, there were 519 holders of record of the Common Stock.
Coltec does not currently intend to pay cash dividends on the Common Stock.
Coltec currently intends to retain earnings for support of its working capital,
repayment of indebtedness, capital expenditures and other general corporate
purposes. The 1994 Credit Agreement and certain of the indentures governing
issues of Coltec's long-term debt limit the payment of cash dividends on the
Common Stock. See "Description of Certain Indebtedness". Subject to such
restrictions, any future determination to pay cash dividends will be dependent
upon Coltec's results of operations, financial condition, contractual
restrictions and other factors deemed relevant by the Board of Directors.
6
<PAGE>
USE OF PROCEEDS
Coltec will not receive any proceeds from the sale by the Selling
Stockholder of the Shares offered hereby. The aggregate proceeds to the Selling
Stockholder from the sale of the Shares will be the purchase price of the Shares
sold, less the aggregate agents' commissions and underwriters' discounts, if
any, and any other expenses of issuance and distribution not borne by Coltec.
7
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SELECTED FINANCIAL DATA
The following table sets forth selected financial data of Coltec for the five
years ended December 31, 1993 and nine months ended October 2, 1994 and October
3, 1993. The selected financial data for the five years ended December 31,
1993, with the exception of order backlog and employee data, were derived from
the financial statements of Coltec, certain of which statements have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report included elsewhere herein. The selected financial data for the
nine months ended October 2, 1994 and October 3, 1993, with the exception of
order backlog and employee data, were derived from the unaudited financial
statements of Coltec.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended December 31,
(Dollars in millions, -------------------------- ------------------------------------------------
except per share data) Oct. 2, 1994 Oct. 3, 1993 1993 1992 1991 1990 1989
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<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Sales $986.4 $990.6 $1,334.8 $1,368.7 $1,373.0 $1,487.2 $1,516.7
------ ------ -------- -------- -------- -------- --------
Operating income(a) 173.2 148.8 211.7 243.1 229.0 268.9 272.8
------ ------ -------- -------- -------- -------- --------
Earnings from continuing operations
before interest, income taxes and
extraordinary item(b) 173.2 148.8 211.7 243.1 230.4 278.1 278.6
Interest and debt expense, net 66.8 83.4 110.2 135.8 199.9 203.4 211.8
Provision for income taxes 38.3 23.4 36.3 42.6 28.3 33.8 16.8
------ ------ -------- -------- -------- -------- --------
Earnings from continuing operations
before extraordinary item(a) 68.1 42.0 65.2 64.7 2.2 40.9 50.0
Discontinued operations(c) -- -- -- -- -- 17.7 3.6
Extraordinary item(d) (1.2) (1.0) (17.8) (106.9) .6 (4.5) (6.1)
------ ------ -------- -------- -------- -------- --------
Net earnings (loss) 66.9 41.0 47.4 (42.2) 2.8 54.1 47.5
------ ------ -------- -------- -------- -------- --------
Earnings (loss) per common share:
Continuing operations(a) .98 .60 .94 1.11 .09 1.64 2.00
Discontinued operations -- -- -- -- -- .70 .14
Extraordinary item (.02) (.01) (.26) (1.83) .02 (.18) (.24)
------ ------ -------- -------- -------- -------- --------
Net earnings (loss) .96 .59 .68 (.72) .11 2.16 1.90
------ ------ -------- -------- -------- -------- --------
Ratio of earnings to fixed charges(e) 2.5 1.7 1.9 1.8 1.2 1.4 1.3
------ ------ -------- -------- -------- -------- --------
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital 194.9 149.2 163.1 95.3 168.8 162.9 207.3
Total assets 857.4 831.7 806.4 828.8 834.2 876.8 952.3
Long-term debt (including
current portion) 986.8 1,087.4 1,033.6 1,122.1 1,622.9 1,646.3 1,747.4
Shareholders' equity (555.1) (626.1) (625.5) (666.6) (1,194.5) (1,188.4) (1,241.3)
Other Operating Data:
Operating margin(a) 17.6% 15.0% 15.9% 17.8% 16.7% 18.1% 18.0%
Cash provided by operating activities 70.2 59.3 105.2 119.9 149.2 155.5 1
14.3
Capital expenditures 23.0 22.9 38.6 25.0 26.2 23.2 28.7
Depreciation of property, plant and
equipment 24.5 25.6 33.2 35.3 36.9 36.8 36.7
Order backlog (at end of period) 651.7 609.6 669.7 709.1 808.8 864.2 831.0
Number of employees (at end of period) 9,700 10,000 10,000 10,700 11,400 12,400 13,300
(notes on next page)
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<FN>
(a) Operating income for the nine months ended October 3, 1993 and the year
ended December 31, 1993 includes a $25.2 million restructuring charge to
cover the cost of consolidation and rearrangement of certain manufacturing
facilities and related reductions in work force, primarily in the
Aerospace/Government segment, as well as at Central Moloney Transformer
Division. If the 1993 restructuring charge was excluded, operating
income, earnings from continuing operations before extraordinary items
and the operating margin would have been $174.0 million, $57.3 million
and 17.6%, respectively, for the nine months ended October 3, 1993;
and $236.9 million, $80.5 million and 17.7%, respectively, for the year
ended December 31, 1993. Central Moloney was sold in January 1994.
(b) Earnings from continuing operations before interest, income taxes and
extraordinary item include for 1991, 1990 and 1989, $1.4 million, $9.2
million and $5.8 million, respectively, of dividend income from Coltec's
minority interest in Crucible Materials Corporation. If such item was
excluded, earnings from continuing operations before interest, income taxes
and extraordinary item would have been $229.0 million, $268.9 million and
$272.8 million for the years ended December 31, 1991, 1990 and 1989,
respectively.
(c) On March 22, 1990, Coltec sold substantially all the assets of the Colt
Firearms Division to a company formed by a group of private investors for
total proceeds of $51.6 million and a gain of $17.3 million. Coltec has
accounted for the sales, expenses, assets and liabilities of Colt Firearms
as a discontinued operation.
(d) Coltec recognized extraordinary items in each of the nine months ended
October 2, 1994 and October 3, 1993 and in each of the five years ended
December 31, 1993 in connection with debt refinancings and early retirement
of debt; and, in addition, in the year ended December 31, 1992 in
connection with the recapitalization.
(e) For purposes of calculating the ratio of earnings to fixed charges,
earnings are determined by adding fixed charges (excluding capitalized
interest) and income taxes to earnings from continuing operations. Fixed
charges consist of interest expense, capitalized interest and that portion
of rental expense deemed to be representative of the interest factor.
------------------------------------
</TABLE>
9
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INDUSTRY SEGMENT INFORMATION
The following table shows financial information by industry segment for the five
years ended December 31, 1993 and nine months ended October 2, 1994 and
October 3, 1993.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended December 31,
--------------------------- --------------------------------------------------------------------
(Dollars in millions) Oct. 2, 1994 Oct. 3, 1993 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales:
Aerospace/Government $305.5 $326.5 $ 453.3 $ 523.7 $ 562.8 $ 581.9 $ 570.5
Automotive 381.5 331.1 445.7 402.6 372.6 436.1 479.3
Industrial 300.8 333.9 436.7 443.8 439.3 470.2 468.8
Intersegment elimination(a) (1.4) (.9) (.9) (1.4) (1.7) (1.0) (1.9)
------ ------ -------- -------- -------- -------- --------
Total $986.4 $990.6 $1,334.8 $1,368.7 $1,373.0 $1,487.2 $1,516.7
------ ------ -------- -------- -------- -------- --------
------ ------ -------- -------- -------- -------- --------
Operating income(b):
Aerospace/Government $ 47.6 $ 39.4 $ 67.8 $ 102.1 $ 109.6 $ 107.6 $ 118.7
Automotive 86.3 78.0 102.4 85.1 59.3 93.9 92.6
Industrial 65.7 57.4 75.9 84.4 80.2 96.1 86.7
------ ------ -------- -------- -------- -------- --------
Total segments 199.6 174.8 246.1 271.6 249.1 297.6 298.0
Corporate unallocated(c) (26.4) (26.0) (34.4) (28.5) (20.1) (28.7) (25.2)
------ ------ -------- -------- -------- -------- --------
Operating income $173.2 $148.8 $ 211.7 $ 243.1 $ 229.0 $ 268.9 $ 272.8
------ ------ -------- -------- -------- -------- --------
------ ------ -------- -------- -------- -------- --------
Operating margin(b):
Aerospace/Government 15.6% 12.1% 15.0% 19.5% 19.5% 18.5% 20.8%
Automotive 22.6 23.6 23.0 21.1 15.9 21.5 19.3
Industrial(d) 21.8 17.2 17.4 19.0 18.3 20.4 18.5
------ ------ -------- -------- -------- -------- --------
Total 17.6% 15.0% 15.9% 17.8% 16.7% 18.1% 18.0%
Return on total assets(e):
Aerospace/Government 17.6% 26.3% 26.7% 25.1% 25.6%
Automotive 82.2 71.8 48.1 66.3 57.2
Industrial 42.1 45.2 42.2 49.1 41.5
-------- -------- -------- -------- --------
Total 26.3% 29.3% 27.5% 30.7% 28.9%
Backlog(f):
Aerospace/Government $524.5 $576.9 $697.2 $738.5 $696.4
Automotive 77.6 64.8 47.0 51.5 56.4
Industrial 67.6 67.4 64.6 74.2 78.2
-------- -------- -------- -------- --------
Total $669.7 $709.1 $808.8 $864.2 $831.0
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
<FN>
(a) Reflects elimination of intercompany sales between divisions in different
segments.
(b) The $25.2 million restructuring charge is included in segment operating
income for the nine months ended October 3, 1993 and the year ended
December 31, 1993 as follows: $17.7 million in Aerospace/Government, $3.8
million in Automotive and $3.7 million in Industrial. Excluding the
restructuring charge, operating income and the operating margin for the
nine months ended October 3, 1993 would have been $57.1 million and 17.5%
for Aerospace/Government, $81.8 million and 24.7% for Automotive and
$61.1 million and 18.3% for Industrial; and for the year ended
December 31, 1993, operating income and the operating margin would have
been $85.5 million and 18.9% for Aerospace/ Government, $106.2 million
and 23.8% for Automotive and $79.6 million and 18.2% for Industrial.
(c) Represents corporate selling and administrative expense, including other
income and expense, that is not allocable to individual industry segments.
(d) Excluding Central Moloney Transformer Division which was sold in January
1994, the operating margin for the Industrial segment would have been 21.7%
in 1993, 22.4% in 1992, 21.7% in 1991, 23.2% in 1990 and 20.0% in 1989.
(e) Return on total assets is calculated for each segment by dividing segment
operating income by segment total assets at December 31, and for total
Coltec by dividing total Coltec operating income by total assets at December
31, less assets of discontinued operations.
(f) Of the $669.7 million backlog at December 31, 1993, $255.2 million was
scheduled to be shipped after 1994.
</TABLE>
RESULTS OF OPERATIONS
Nine Months Ended October 2, 1994 Compared with Nine Months Ended October 3,
1993.
Earnings per share before extraordinary items for the nine months ended
October 2, 1994 improved to $.98 from $.60 per share in 1993, or $.82 per share
excluding the 1993 restructuring charge. Sales for the nine months of 1994 were
$986.4 million compared with $990.6 million a year ago. Operating income was
$173.2 million and the operating margin was 17.6% compared with operating income
of $148.8 million and an operating margin of 15.0% for the like period last
year. Excluding the 1993 restructuring charge, operating income was $174.0
million and the operating margin was 17.6% for the nine months of 1993.
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For the nine months ended October 2, 1994, operating income in the
Aerospace/Government segment increased 21% on a 6% decline in sales. Automotive
segment operating income improved 11% on a 15% sales increase and in the
Industrial segment, operating income was up 14% and sales were down 10%.
Excluding the 1993 restructuring charge, operating income in the nine months of
1994 declined 17% in the Aerospace/Government segment and increased 6% in the
Automotive segment. Included in the nine months of 1993 operating income for
the Automotive segment was a recovery of previously incurred engineering
expense. Excluding such recovery and the 1993 restructuring charge, Automotive
segment operating income increased 10% in 1994. Excluding the 1993
restructuring charge and Central Moloney, Industrial segment sales and operating
income increased 3% and 5%, respectively, in the nine months of 1994. For
Coltec, excluding the 1993 restructuring charge and Central Moloney, sales and
operating income were $981.5 million and $173.1 million, respectively, in the
nine months of 1994, compared with $943.5 million and $175.5 million,
respectively, in the like period last year.
Operating results for the Aerospace/Government segment in the nine months of
1994 continued to reflect the general weakness in the aerospace industry and a
gap in the production and sales of engines for U.S. Navy programs as well as
production problems at Walbar. Operating results in the Automotive segment
continue to benefit from a strong automotive industry and increasing application
for segment products. In the Industrial segment, higher earnings were reported
by Quincy Compressor, Garlock Bearings and Delavan Commercial Products, while
Garlock Valves & Industrial Plastics and Garlock Plastomer Products reported
lower results.
Following is a discussion of the results of operations for the nine months ended
October 2, 1994 compared with the nine months ended October 3, 1993.
SALES. In the Aerospace/Government segment, sales were $305.5 million compared
with $326.5 million a year ago. This decline results from the general weakness
in the aerospace industry as reflected in lower sales volume at Chandler Evans
Control Systems, Delavan Gas Turbine and Walbar. Sales were also down at
Fairbanks Morse Engine due to a gap in shipments of engines for U.S. Navy
programs. These declines were partially offset by increased shipments of
landing gear assemblies at Menasco Aerosystems for the foreign military market
and for new commercial programs, including the Boeing 777 jetliner.
Automotive segment sales were $381.5 million for the nine months of 1994
compared with $331.1 million a year ago. The sales improvement was due to
higher new car and truck production and increased applications for segment
components. Contributing to the higher sales at Coltec Automotive was the
acquisition of General Motors' air pump manufacturing operations and this
division becoming the sole source of these components to the automaker's North
American Operations.
Sales for the Industrial segment were $300.8 million compared with $333.9
million in 1993. Excluding Central Moloney, Industrial segment sales were
$295.9 million in the nine months of 1994 compared with $286.7 million last
year. Higher sales were reported by Quincy Compressor on increased shipments of
both reciprocating and rotary screw air compressors and greater demand for
compressor parts and accessories. Sales were higher at Garlock Bearings,
Sterling Die and Haber on increased demand from the automotive market. At
Delavan Commercial Products, sales of fuel spray nozzles were up to the home
heating and industrial markets. Lower sales were reported
11
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in the nine months of 1994 by Garlock Mechanical Packing, Garlock Plastomer
Products and Garlock Valves & Industrial Plastics.
COST OF SALES. Cost of sales declined slightly during the nine months ended
October 2, 1994, however, excluding Central Moloney, cost of sales was 6%
higher. This increase primarily reflects the higher sales volume in the
Automotive segment and production problems at Walbar. Cost of sales as a
percent of sales increased to 67.3% from 66.3%, after excluding Central Moloney.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense,
including other income and expense, increased slightly in the nine months ended
October 2, 1994 and increased 4%, after excluding Central Moloney. This
increase was due to higher state and local income taxes and to the recovery in
1993 of previously incurred engineering expense. The increase in selling and
administrative expense was offset in part by cost savings resulting from
reductions in the sales force at Garlock Mechanical Packing. As a percent of
sales, selling and administrative expense was 15.0% in 1994 compared with 15.4%
in 1993, after excluding Central Moloney and the recovery of engineering
expense.
RESTRUCTURING CHARGE. The $25.2 million restructuring charge recorded in the
second quarter of 1993 covered the cost of consolidation and rearrangement of
certain manufacturing facilities and related reductions in work force by
approximately 570 employees, primarily in the Aerospace/Government segment, as
well as at Central Moloney.
As of October 2, 1994, the objectives of the restructuring program were
completed and the liability for the restructuring charge was fully utilized.
During the nine months of 1994, this liability was reduced primarily by cash
expenditures and there were no revisions in the original estimates.
INTEREST AND DEBT EXPENSE, NET. Interest and debt expense, net declined $16.6
million or 20% in the nine months of 1994 due to lower borrowing costs, under
the 1994 Credit Agreement, and to repayments of long-term debt.
PROVISION FOR INCOME TAXES. The provision for income taxes for the nine months
of 1994 resulted in an effective income tax rate of 36.0% compared with 35.7%
for 1993.
EXTRAORDINARY ITEM. The extraordinary charge in the nine months of 1994
resulted from early retirement of debt and in the nine months of 1993, from
early retirement of debt and a debt refinancing.
LIQUIDITY AND FINANCIAL POSITION
On January 11, 1994, Coltec entered into a $415.0 million reducing revolving
credit facility (the "1994 Credit Agreement"). This facility was used to prepay
borrowings outstanding and replace letters of credit issued under a credit
agreement entered into in 1992 (the "1992 Credit Agreement"). On January 11,
1994, borrowings of $324.0 million were outstanding and letters of credit of
$43.6 million were issued under the 1994 Credit Agreement. The remaining
balance of the 1994 Credit
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Agreement is being used for working capital and general corporate purposes. The
1994 Credit Agreement, which expires June 30, 1999, provides up to $100.0
million for issuance of letters of credit and will be reduced $50.0 million on
January 11, 1997 and 1998. On October 2, 1994, borrowings of $297.0 million
were outstanding and letters of credit of $31.2 million were issued under the
1994 Credit Agreement leaving $86.8 million available for additional borrowings
and issuances of letters of credit.
In the first quarter of 1994, Coltec adopted the requirements of Financial
Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts Related
to Certain Contracts." In accordance with Interpretation No. 39, Coltec has
recorded liabilities for asbestos-related matters that are deemed probable and
can be reasonably estimated (settled actions and actions in advanced stages of
processing), and has separately recorded an asset equal to the amount expected
to be recovered by insurance. As of October 2, 1994, Coltec has recorded a
liability of $42.5 million, of which $23.5 million is included in accrued
expenses, with the balance in other liabilities in the Consolidated Balance
Sheet. In addition, Coltec has recorded a receivable for that portion of
payments previously made for asbestos product liability actions and related
litigation costs that is recoverable from its insurance carriers. At October 2,
1994 and December 31, 1993, the receivable balance was $75.2 million and $59.5
million, respectively, of which $44.0 million and $35.8 million, respectively,
is included in accounts and notes receivable -- net, with the remaining balance
included in other assets.
During the nine months ended October 2, 1994, Coltec generated $70.2 million of
cash from operating activities compared with $59.3 million for the nine months
of 1993. The improvement resulted primarily from the net receipt in 1994 of
$19.9 million from insurance carriers for asbestos-related matters compared with
a $2.5 million net receipt last year. Higher working capital requirements
reduced the overall improvement in cash generated from operating activities.
The $70.2 million of cash generated in 1994 was used to reduce indebtedness by
$44.6 million and invest $23.0 million in capital expenditures. Excluding the
current receivable due from insurance carriers of $44.0 million at October 2,
1994 and $35.8 million at December 31, 1993, receivables increased 12% to $140.4
million compared with $125.7 million at the end of 1993 and receivable days
outstanding were 38 days at October 2, 1994 compared with 36 days at December
31, 1993. Inventories of $190.9 million at October 2, 1994 were 14% higher than
at December 31, 1993.
At October 2, 1994, total debt was $986.8 million compared with $1,033.6 million
at year-end 1993. The negative balance in shareholders' equity of $555.1
million compares with a negative balance of $625.5 million at year-end 1993.
Cash and cash equivalents at October 2, 1994 were $9.5 million compared with
$5.7 million at December 31, 1993. Working capital at October 2, 1994 was
$194.9 million and the current ratio was 1.87 . This compares with working
capital of $163.1 million and a current ratio of 1.83 at December 31, 1993.
13
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993, COMPARED WITH YEAR ENDED DECEMBER 31, 1992
Earnings before extraordinary item for 1993 were $65.2 million, equal to $.94
per common share, or $80.5 million, equal to $1.16 per common share, excluding
the 1993 restructuring charge of $25.2 million recorded by Coltec in the second
quarter of 1993. This compared with earnings before extraordinary item of $64.7
million, or $1.11 per common share, in 1992. In January 1994, Coltec entered
into the 1994 Credit Agreement. Had this facility been entered into at the
beginning of 1993, earnings before extraordinary item for 1993 would have
increased by $10.1 million, or $.14 per common share. Sales were $1,334.8
million in 1993 compared with $1,368.7 million in 1992. Operating income for
1993 was $211.7 million and the operating margin was 15.9%. Excluding the 1993
restructuring charge, operating income was $236.9 million and the operating
margin was 17.7%. For 1992, operating income was $243.1 million and the
operating margin was 17.8%. Although sales and operating income declined
slightly in 1993, Coltec was able to maintain its operating margin, excluding
the 1993 restructuring charge, at about the same level as in 1992. This
performance was achieved despite 1993 being a difficult year for two of the
major markets served by Coltec. The aerospace industry continued to be impacted
by declining orders for new commercial aircraft and cuts in defense spending;
and the nation's manufacturing sector, the primary market for the Industrial
segment, remained weak.
The Aerospace/Government segment reported a 34% decline in operating income in
1993 on a 13% sales decline and an operating margin of 15.0% compared with 19.5%
last year. Excluding the 1993 restructuring charge, operating income declined
16% in 1993 and the segment's operating margin was 18.9%. Operating income for
1993 was $67.8 million, $85.5 million excluding the 1993 restructuring charge,
on sales of $453.3 million, compared with operating income of $102.1 million on
sales of $523.7 million in the prior year. The Automotive segment achieved a
record 23.0% operating margin in 1993, compared with 21.1% in 1992, a 20%
improvement in operating income and an 11% increase in sales. Excluding the
1993 restructuring charge, the Automotive segment's operating margin was 23.8%
and operating income improved 25%. Operating income was $102.4 million, $106.2
million excluding the 1993 restructuring charge, on sales of $445.7 million
compared with operating income of $85.1 million on sales of $402.6 million in
1992. This strong performance reflects higher new car and truck production,
increased applications for segment components and the introduction of new
automotive products. In the Industrial segment, operating income and sales
were down 10% and 2%, respectively, and segment operating margin declined to
17.4% from 19.0% in 1992. Excluding the 1993 restructuring charge, Industrial
segment operating income was down 6% and the operating margin for 1993 was
18.2%. Segment operating income was $75.9 million, $79.6 million excluding the
1993 restructuring charge, and sales were $436.7 million, compared with
operating income of $84.4 million and sales of $443.8 million in 1992. Record
sales and earnings performances were reported by Quincy Compressor and Garlock
Bearings Divisions, while Central Moloney Transformer, Garlock Mechanical
Packing and France Compressor Products Divisions, and FMD Electronics reported
lower results in 1993. Excluding Central Moloney Transformer, which was sold in
January 1994, sales were up 2% to $372.5 million compared with $365.3 million in
1992, operating income was $80.3 million, down 2% from $81.9
14
<PAGE>
million in 1992, and segment operating margin for 1993 was 21.5% compared with
22.4% in 1992.
Excluding the 1993 restructuring charge and Central Moloney, 1993 operating
income was $80.7 million, down slightly from 1992, and the operating margin was
21.7%.
Following is a discussion of the results of operations for the year ended
December 31, 1993, compared with the year ended December 31, 1992.
SALES. Sales of $1,334.8 million in 1993 were 2% lower than the $1,368.7
million in 1992. In the Aerospace/Government segment, sales were $453.3 million
compared with $523.7 million last year. The decline in Aerospace/Government
segment sales reflects lower demand for new commercial aircraft resulting from
the excess capacity of the world airline fleets, as well as continued declines
in defense spending. In spite of the weak economic conditions in the aerospace
industry, Coltec began shipping components for new commercial programs in 1993,
including landing gear systems for the Boeing 777 aircraft and flight controls
for the Fokker Fo-70 aircraft. In 1993, sales to the military and other
branches of the United States Government accounted for $173 million, or 38%, of
total sales for the Aerospace/Government segment, compared with $192 million, or
37%, in 1992 and $223 million, or 40%, in 1991. For Coltec, sales to the
military and other branches of the United States Government were $190 million,
$210 million and $224 million, or 14%, 15% and 16%, in 1993, 1992 and 1991,
respectively. In 1993, Menasco Aerosystems Division reported lower commercial
sales of landing gear systems for both the Boeing 757 and 767 aircraft and lower
military sales, primarily for spare parts. Menasco Aerospace Ltd in Canada
reported lower shipments of landing gear systems for the Boeing 737 and
McDonnell Douglas MD-80 aircraft and flight controls for the Fokker Fo-100
aircraft. Sales of overhaul and repair services declined at Menasco Overhaul
Division due mainly to increased competition and the economic slowdown in
Europe. The decline in sales at Fairbanks Morse Engine Division was due to
completion of certain government programs and lower shipments of engines to the
commercial sector. Late in 1993, Fairbanks Morse Engine was awarded a contract
to provide engines for the U.S. Navy Sealift program. Sales at Chandler Evans
Control Systems Division declined in 1993 on lower demand for fuel pumps from
both the commercial and military markets. Walbar reported higher sales in 1993
on increased demand for repair and coating services for gas turbine engine
components, and on increased shipments of turbine blades and vanes for
commercial aircraft engines.
For 1993, Automotive segment sales increased 11% to $445.7 million, reflecting
the recovery of the domestic automotive industry that began last year and
continued to accelerate in 1993. Also contributing to the sales improvement
were increased applications for segment components and the introduction of new
automotive products. Higher volume, including increased applications for
segment components and new product sales, contributed 7% and 4%, respectively,
to the total sales increase. Sales were higher at Holley Automotive Division on
increased demand for manifold assemblies and transmission solenoids, and on the
introduction of new automotive products. Coltec Automotive Division reported
increased shipments of oil pumps into the European automotive market and
mechanical emission control air pumps for use on light trucks and vans. The
sales improvement at Stemco Truck Products Division was due to the continued
demand for wheel lubrication systems from original equipment manufacturers,
reflecting increased truck and trailer
15
<PAGE>
production, and to increased aftermarket shipments, resulting from gains in
market share. Farnam Sealing Systems reported higher sales on increased demand
from the original equipment market for engine and transmission products. Holley
Replacement Parts reported lower sales in 1993 reflecting the continuing decline
in demand for carburetors in the aftermarket.
Sales for the Industrial segment in 1993 were $436.7 million, or 2% lower than
in 1992. Sales were higher at Quincy Compressor on increased shipments of
rotary screw air compressors, strong demand for compressor parts and
accessories, and new product introductions. Garlock Bearings reported higher
sales on new applications for DU bearings and strong demand from the truck
market for DX bearings. Sales were up at Sterling Die and Haber Tool due
primarily to increased demand from the automotive market, and at Garlock
Plastomer Products on strong acceptance from the aerospace industry for its new
PTFE insulating tape. At Garlock Mechanical Packing Division, sales of KLOZURE
oil seals and industrial seals were higher on increased demand from original
equipment manufacturers; while sales of gasketing and compressed sheet products
declined due to softness in the petrochemical market. Sales were lower in 1993
at Central Moloney Transformer reflecting the low level of demand for
transformers and competitive pricing pressures, and at Garlock Valves &
Industrial Plastics Division due to the slowdown in the European economy.
Delavan Commercial Products Division reported lower sales due to the foreign
exchange translation impact on sales of its U.K. affiliate and to lower demand
for agricultural nozzles and pumps, resulting from the flooding in the Midwest.
COST OF SALES. Cost of sales decreased 4% in 1993 reflecting lower sales volume
for the Aerospace/Government segment and Central Moloney Transformer, improved
manufacturing processes, lower maintenance cost and depreciation expense, and
benefits realized from the restructuring program. As a percent of sales, cost
of sales declined to 67.8% from 69.0% in 1992.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense,
including other income and expense, increased 6% in 1993. This increase results
primarily from a full year of amortization expense on restricted stock awards
granted in 1992 and from the inclusion in 1992 of a nonrecurring reduction in
insurance cost and receipt of a $8.7 million license fee by Menasco Aerosystems.
The increase in 1993 selling and administrative expense was offset in part by
recovery of previously incurred engineering expense by Coltec Automotive. As a
percent of sales, selling and administrative expense increased to 14.4% from
13.2% in 1992.
RESTRUCTURING CHARGE. The 1993 restructuring charge of $25.2 million recorded
in the second quarter of 1993 covers the cost of consolidation and rearrangement
of certain manufacturing facilities and related reductions in work force by
approximately 570 employees, primarily in the Aerospace/Government segment, as
well as at Central Moloney Transformer. These actions are intended to reduce
annual operating costs, primarily salaries, wages and related employee-benefit
costs by approximately $10 million beginning in 1994 and thereby improve
Coltec's competitiveness. Coltec believes that the cost efficiencies gained
from the restructuring will permit Coltec to maintain or improve operating
margins. Key elements of the restructuring program include closing a landing
gear manufacturing facility and consolidation of landing gear production at two
existing Menasco facilities, closing a turbine engine components facility and
consolidating
16
<PAGE>
production of these components at three existing Walbar facilities, and closing
one of two Central Moloney Transformer plants. At Chandler Evans Control
Systems, the manufacturing area was reduced; and at Holley Replacement Parts,
administrative offices and the distribution operation was relocated to one of
the division's manufacturing facilities. During 1993, significant progress was
made toward achieving the objectives of the restructuring program and the
program is expected to be completed in 1994. Substantially all of the 1993
restructuring charge consists of provisions made in anticipation of cash
expenditures to be funded from operations in approximately equal amounts in 1993
and 1994.
In January 1994, Coltec sold Central Moloney at a price approximating book
value. Coltec believes that this divestiture will contribute to improved
results in the Industrial segment. The 1993 operating margin for the Industrial
segment was 17.4%. Excluding the operating results at Central Moloney, the 1993
operating margin for the Industrial segment would have improved to 21.5%, or
21.7% excluding the 1993 restructuring charge.
INTEREST AND DEBT EXPENSE, NET. Net interest expense declined $25.7 million, or
19%, in 1993. Included in 1992 was substantial interest expense that was
reduced significantly by the recapitalization completed by Coltec on April 1,
1992.
PROVISION FOR INCOME TAXES. The effective income tax rate for 1993 was 35.75%
compared with 39.7% in 1992. The lower effective tax rate for 1993 is
principally due to the disaffiliation of Coltec from Holdings as a result of the
recapitalization and the adjustment of reserves, partially offset by the
increase in the U.S. statutory rate from 34% to 35%.
EXTRAORDINARY ITEM. In 1993, Coltec incurred extraordinary charges of $17.8
million in connection with debt refinancings and the early retirement of debt.
This included $14.7 million from a debt refinancing completed in January 1994.
In 1992, Coltec incurred extraordinary charges of $105.3 million, in connection
with the recapitalization, and $1.6 million, from the early retirement of debt.
YEAR ENDED DECEMBER 31, 1992, COMPARED WITH YEAR ENDED DECEMBER 31, 1991
In 1992, earnings before extraordinary item were $64.7 million, equal to $1.11
per common share, compared with $2.2 million, or $.09 per common share, in 1991.
The lower 1991 earnings reflected substantial interest expense, which was
reduced significantly by the recapitalization. Giving pro forma effect to the
recapitalization as if it had occurred on January 1, 1991, Coltec would have
reported earnings before extraordinary item for 1992 of $82.4 million, or $1.19
per common share, compared with earnings of $56.5 million, or $.82 per common
share, in 1991. Operating income for 1992 increased 6% over 1991 on a slight
decline in sales. Operating income was $243.1 million in 1992 on sales of
$1,368.7 million, compared with operating income of $229.0 million on sales of
$1,373.0 million in 1991. Coltec's operating margin improved from 16.7% in 1991
to 17.8% in 1992. The 1992 results were achieved in spite of continued
reductions in defense spending and the slowdown in certain commercial programs
that unfavorably impacted the Aerospace/Government
17
<PAGE>
segment and resulted in a 12% decline in Coltec's order backlog from the level
at year-end 1991. Both sales and operating income in the Aerospace/Government
segment declined 7% in 1992, however the segment maintained its 1991 operating
margin of 19.5%. Operating income for the Aerospace/Government segment in 1992
was $102.1 million on sales of $523.7 million, compared with operating income of
$109.6 million on sales of $562.8 million in 1991. In the Automotive segment,
operating income was up 44% in 1992 on an 8% sales increase and segment
operating margin improved to 21.1% from 15.9% in 1991. Segment operating income
was $85.1 million and sales were $402.6 million compared with operating income
of $59.3 million and sales of $372.6 million in 1991. This strong performance
by the Automotive segment was aided by increased new car and truck production,
the introduction of new automotive products having higher margins and recovering
aftermarket sales. In the Industrial segment, operating income increased 5% on
a slight improvement in sales and segment operating margin improved to 19.0%
from 18.3% in 1991, despite the lack of significant growth during 1992 in many
of the markets served. Operating income and sales for the Industrial segment
were $84.4 million and $443.8 million, respectively, in 1992. This compared
with operating income and sales of $80.2 million and $439.3 million,
respectively, in 1991. The segment's improved results were paced by the strong
performances of Garlock Bearings and Quincy Compressor.
Following is a discussion of the results of operations for the year ended
December 31, 1992, compared with the year ended December 31, 1991.
SALES. For 1992, sales totaled $1,368.7 million, which was slightly lower than
the $1,373.0 million reported in 1991. In the Aerospace/Government segment,
sales declined 7% to $523.7 million compared with $562.8 million in 1991. The
sales decline was due to continued reductions in defense spending and stretch-
out of certain commercial programs. Lower sales at Menasco Aerosystems were due
primarily to a reduction in military spare parts sales and, to a lesser extent,
a reduction in commercial spare parts sales. This sales decline was offset in
part by increased shipments of landing gear systems for the Lockheed F-16 and
Boeing 757 aircraft. Sales were down at Menasco Aerospace reflecting a program
stretch-out on the McDonnell Douglas MD-80 aircraft and lower spare parts sales.
The weak economic condition of the airline industry resulted in lower demand for
landing gear overhaul services at Menasco Overhaul. Walbar reported a decline
in sales on lower shipments of compressor blades and vanes to aircraft engine
manufacturers for military applications. Chandler Evans Control Systems
reported lower sales of spare parts to both the military and commercial markets,
however the division was able to offset this sales decline with sales of new
products. Higher sales at Delavan Gas Turbine Products resulted from increased
overhaul services and at Lewis Engineering from improved pricing.
Sales for the Automotive segment increased 8% to $402.6 million, reflecting
increased new car and truck production, the introduction of new automotive
products having higher margins and recovering aftermarket sales. Contributing
to the higher sales was the initial production of the Chrysler LH car models
which use Holley throttle bodies and other fuel system components. All
divisions within the Automotive segment reported increased sales in 1992.
Higher sales at Holley Automotive were due to strong demand for transmission
solenoids and the introduction of new automotive products. At Coltec
Automotive, shipments of both mechanical air pumps and oil pumps were above 1991
levels. In addition, tooling and prototype sales were higher. In 1992, Coltec
Automotive began initial shipments of oil pumps into the European automotive
market. The sales increase at Holley
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<PAGE>
Replacement Parts was due to improved pricing and higher volume for
remanufactured and performance carburetors resulting from increased market
penetration. The sales improvement at Stemco Truck Products was due to selected
price increases and to an increase in shipments of wheel lubrication systems to
the original equipment market. Farnam Sealing Systems reported higher sales on
the introduction of new engine and transmission products.
Industrial segment sales of $443.8 million were slightly higher in 1992. Sales
were up significantly at Garlock Bearings on increased demand for DU bearings
from the automotive market and new applications for DX bearings. Sales were
higher at Quincy Compressor on increased demand for reciprocating and rotary
screw air compressors and from improved pricing. The Sterling Die and Haber
Tool operations benefited from increased sales to the automotive market. At
Delavan Commercial Products, sales of fuel spray nozzles were up to the home
heating market, reflecting cooler weather in the Northeast and higher sales to
Europe and Japan, and to the industrial market, reflecting increased pollution-
control applications. Sales were down at Central Moloney Transformer due to
lower pricing and reduced volume, attributable to a falloff in demand for
transformers related to a decline in housing starts. Due to weak market
conditions in 1992, Garlock Mechanical Packing reported sales declines in Canada
and Mexico and in its hydraulic components, compression packing and mechanical
seals product lines. These declines were offset in part by increased sales of
industrial sealing and gasketing products, price increases and new product
sales. Lower sales were also reported in 1992 by France Compressor Products.
COST OF SALES. Cost of sales decreased 2% in 1992 reflecting the lower sales
volume in the Aerospace/Government segment, reductions in work force and
benefits realized from manufacturing efficiencies and cost-reduction programs.
As a percent of sales, cost of sales declined to 69.0% from 70.4% in 1991.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense,
including other income and expense, increased 2% in 1992. Selling and
administrative expense for 1992 reflected a $3.5 million reduction in insurance
cost compared with a $6.5 million reduction in 1991. These reductions were
realized from the sale of stock in a company formed in 1986 to provide insurance
coverage then largely unavailable. The increase in 1992 selling and
administrative expense was offset in part by higher license fee receipts
received by Menasco Aerosystems in 1992. As a percent of sales, selling and
administrative expense was 13.2% in 1992 compared to 12.9% in 1991.
INTEREST AND DEBT EXPENSE, NET. Net interest expense declined $64.1 million, or
32%, in 1992. Included in 1991 was substantial interest expense that was
reduced significantly by the recapitalization.
PROVISION FOR INCOME TAXES. The effective income tax rates were 39.7% and 92.8%
for 1992 and 1991, respectively. The lower effective rate for 1992 reflected a
lower tax cost to repatriate non-U.S. earnings and no adverse effect of
unutilized operating losses as a result of higher income for 1992.
EXTRAORDINARY ITEM. In 1992, Coltec incurred extraordinary charges of $105.3
million in connection
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with the recapitalization, primarily for premiums, expenses and write-off of
deferred financing costs from early retirement of debt; and $1.6 million from
the write-off of deferred financing costs from early retirement of debt and from
a debt refinancing. In 1991, Coltec recognized an extraordinary gain of $.6
million resulting from the purchase of its debentures.
DISCONTINUED OPERATIONS
On March 22, 1990, Coltec sold substantially all of the assets of the Colt
Firearms Division to the parent company of Colt's Manufacturing Company, Inc.
(collectively with its parent company, "Colt's Manufacturing"), a company formed
by a group of private investors, for cash and certain securities of Colt's
Manufacturing. At December 31, 1993, Coltec's investment in Colt's
Manufacturing was fully reserved.
On March 18, 1992, Colt's Manufacturing filed a petition for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Code and on January
19, 1993, the Official Committee of Unsecured Creditors of Colt's Manufacturing
Company, Inc. filed a fraudulent conveyance action against Coltec and other
defendants. Coltec believes that it has adequately provided for any liabilities
Coltec may incur with respect to Colt's Manufacturing and accordingly does not
believe that the Chapter 11 filing or the associated financial condition of
Colt's Manufacturing or the fraudulent conveyance action will have a material
effect on Coltec's results of operations and financial condition.
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LIQUIDITY AND FINANCIAL POSITION
On April 1, 1992, Coltec completed a recapitalization which included a public
offering of its common stock, two long-term debt offerings and a new bank
financing arrangement. The recapitalization reduced the aggregate indebtedness
of Coltec and Holdings, refinanced a substantial portion of remaining
indebtedness on more favorable terms and improved Coltec's operating and
financial flexibility. On November 18, 1993, Holdings became a wholly owned
subsidiary of Coltec as a result of a reorganization that resulted in the
exchange by the Holdings shareholders of their shares of common stock of
Holdings for 24,830,000 shares of common stock of Coltec (the "Holdings
Reorganization") constituting 35.5% of the shares of common stock outstanding
after the exchange. Immediately before this exchange, Holdings owned 35.7% or
25,000,000 shares of the common stock of Coltec. The Holdings Reorganization
simplified the equity capital structures of Coltec and Holdings, and enabled the
Holdings stockholders to hold shares of Coltec common stock directly. The $26.7
million of cash acquired by Coltec in the Holdings Reorganization was used
primarily to retire outstanding indebtedness of Coltec.
Funds from operations continue to be the main source of financing for Coltec's
businesses and for repaying its debt. In 1993, cash provided by operating
activities was $105.2 million compared with $119.9 million in 1992 and $149.2
million in 1991. The lower cash from operations in 1993 was due primarily to
increased working capital requirements, resulting from the buildup of inventory
for new programs and to meet increased customer requirements and from payments
relating to the restructuring program. In addition to the $105.2 million of
cash generated in 1993, Coltec received $26.7 million of cash in the Holdings
Reorganization. These funds were used to reduce indebtedness by $92.1 million
and invest $38.6 million in capital expenditures. As a result of an agreement
with one of its insurance carriers, Coltec began collecting in the third quarter
of 1993 its receivable from insurance carriers for asbestos product liability
claims and related litigation costs. Included in current receivables at
December 31, 1993 was $35.8 million due from insurance carriers. Excluding this
amount, receivables increased 2% to $125.7 million at December 31, 1993 and
receivable days outstanding were 36 compared with 35 days at year-end 1992.
Inventories of $167.8 million at December 31, 1993, were slightly higher than at
year-end 1992, and inventory turnover was 4.76 times in 1993 compared with 4.83
times in 1992. Cash and cash equivalents at December 31, 1993, were $5.7
million compared with $7.2 million at December 31, 1992. Working capital at
December 31, 1993, was $163.1 million and the current ratio was 1.83. This
compares with working capital of $95.3 million and a current ratio of 1.39 at
December 31, 1992. The increase in working capital results from the receivable
from insurance carriers and the reduction in current maturities of long-term
debt, reflecting the debt refinancing completed in January, 1994.
At December 31, 1993, total debt was $1,033.6 million compared with $1,122.1
million at December 31, 1992. During 1993, Coltec redeemed $50.0 million of its
11-1/4% debentures and refinanced $15.1 million of its 9-7/8% industrial revenue
bonds with like bonds having interest rates of 6.4% to 6.55%. The 1994 Credit
Agreement has resulted in reducing Coltec's mandatory debt repayments over the
next five years by approximately $120.0 million and will result in lower
interest cost in future years. Coltec's loan agreements contain various
restrictions and conditions, with which Coltec is in compliance. Management
believes that cash generated from operations and borrowings
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available under the 1994 Credit Agreement will be adequate to meet Coltec's
operating needs, planned capital expenditures and debt service requirements for
the next several years.
The negative balance in shareholders' equity of $625.5 million at December 31,
1993 compares with a negative balance of $666.6 million at year-end 1992. The
$41.1 million increase in equity during 1993 reflects $47.4 million of net
earnings, $2.8 million of amortization of unearned compensation related to
restricted shares and $.2 million of proceeds and tax benefits from the exercise
of stock options and the expiration of restrictions on restricted stock, offset
by a $4.2 million minimum pension liability, a $3.6 million reduction in foreign
currency translation adjustments, and $1.5 million of expenses incurred in
connection with the Holdings Reorganization.
Other assets at December 31, 1993, were $87.9 million or $41.7 million less than
the balance at year-end 1992. This reduction results from the write-off of
deferred financing cost as a result of the refinancing of the 1992 Credit
Agreement and from the increase in amounts currently due from insurance
carriers. Other liabilities increased $52.5 million during 1993 to $132.4
million at December 31, 1993. This increase results from recognition of a
minimum pension liability, the assumption of liabilities in connection with the
Holdings Reorganization and a reserve for environmental and product liability
claims, established from proceeds to be received from insurance settlements.
The $46.4 million in liabilities of discontinued operations at December 31,
1993, represented reserves to cover postretirement benefits for the former
employees of the discontinued operations and other future estimated costs of the
disposition of Crucible Materials Corporation in 1985, the steelmaking facility
in Midland, Pennsylvania in 1982, and Colt Firearms in 1990. Payments covering
the liabilities of discontinued operations in 1993, 1992 and 1991 were $4.4
million, $6.2 million and $4.2 million, respectively. Coltec expects future
cash payments will extend over the remaining lives of the former employees at
the discontinued operations.
CAPITAL EXPENDITURES
Capital expenditures were $38.6 million in 1993 compared with $25.0 million in
1992 and $26.2 million in 1991, as Coltec continues to invest in capital
improvements to increase efficiency, reduce costs, pursue new opportunities,
expand production and maintain facilities. The level of capital expenditures
has and will vary from year to year, affected by the timing of capital spending
for new production equipment for new products, periodic plant and facility
expansion as well as cost reduction and labor efficiency programs. Capital
expenditures during 1993 included construction of a manufacturing facility in
Greenwood, South Carolina for Walbar Metals; consolidation of landing gear
production at the Ft. Worth, Texas, facility of Menasco Aerosystems, and
production equipment to manufacture a new oil pump at Coltec Automotive. At
December 31, 1993, Coltec had $14.9 million of planned capital expenditures that
included $4.7 million for a new landing gear overhaul facility in Ontario,
Canada and $1.7 million for consolidation of administrative offices and
distribution operations of Holley Replacement Parts at Bowling Green, Kentucky.
ENVIRONMENTAL
Coltec and its subsidiaries are subject to numerous federal, state and local
environmental laws, many of which are becoming increasingly stringent, giving
rise to increased compliance costs. For example, the Clean Air Amendments will
require abatement of chemical air emissions that were
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previously unregulated and will require certain existing, and many newly
constructed or modified, facilities to obtain air emission permits that were not
previously required. Because many of the regulations under the Clean Air
Amendments have not yet been promulgated, Coltec cannot estimate their impact at
this time. Coltec, however, believes that it will not be at a competitive
disadvantage in complying with the Clean Air Amendments and that any increase in
costs to comply with the Clean Air Amendments will not have a material effect on
its results of operations and financial condition.
Many of the facilities of Coltec and its subsidiaries are subject to the federal
Resource Conservation and Recovery Act of 1976 ("RCRA"), and its analogous state
statutes. Although the costs under RCRA for the treatment, storage and disposal
of hazardous materials generated at Coltec's facilities are increasing, Coltec
does not believe that such costs will have a material effect on Coltec's results
of operations and financial condition.
Coltec has been notified that it is among the Potentially Responsible Parties
("PRPs") under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended ("CERCLA"), or similar state laws, for the
costs of investigating, and in some cases remediating, contamination by
hazardous materials at several sites. CERCLA imposes joint and several
liability for the costs of investigating and remediating properties contaminated
with hazardous materials. Liability for these costs can be imposed on present
and former owners or operators of the properties or on parties who generated the
wastes that contributed to the contamination. The process of investigating and
remediating contaminated properties can be lengthy and expensive. The process
is also subject to the uncertainties occasioned by changing legal requirements,
developing technological applications and liability allocations among PRPs.
Based on the progress to date in the investigation, cleanup and allocation of
responsibility for these sites, Coltec has estimated that its costs in
connection with all except one of these sites approximate $20 million at
December 31, 1993, and has accrued for this amount in the Consolidated Balance
Sheet as of December 31, 1993. Although Coltec is pursuing insurance recovery
in connection with certain of these matters, the accrual has not been reduced
for potential recoveries from insurance companies or other third parties. In
addition, Coltec has not recorded a receivable with respect to any potential
recovery of costs in connection with any environmental matter. While progress
toward the investigation, cleanup and responsibility allocation at the remaining
site has not been sufficient to allow Coltec at this time to determine the
extent of its potential financial responsibility, Coltec does not believe its
costs in connection with such site will have a material effect on Coltec's
results of operations and financial condition.
Coltec's annual expenditures (including capital expenditures) relating to
environmental matters over the three years ended December 31, 1993 ranged from
$4 million to $6 million, and Coltec expects such expenditures to approximate
$11 million in 1994 and $8 million in 1995. Capital expenditures in each of
1994 and 1995 are expected to approximate $2 million, and expenditures for
recurring environmental matters are expected to approximate $2 million in each
of 1994 and 1995. The balance of the anticipated expenditures in each year is
expected to cover expenses for nonrecurring environmental matters. The estimate
of annual environmental expenditures for 1994 and 1995 is based upon the
expected timing of expenditures pursuant to currently identified environmental
sites.
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Because environmental laws are becoming increasingly stringent, Coltec is unable
to estimate future costs to comply with such laws; however, Coltec does not
foresee a continuous upward trend in annual expenditures on environmental
matters.
ASBESTOS LITIGATION
With respect to asbestos product liability and related litigation costs, in 1993
two subsidiaries of Coltec received approximately 27,400 new lawsuits, with a
comparable number of lawsuits received in 1992 and 1991. The subsidiaries made
payments with respect to asbestos liability and related costs aggregating $38.7
million in 1993, $39.8 million in 1992 and $48.4 million in 1991, substantially
all of which were covered by insurance.
As of December 31, 1993, certain actions had been settled on a group basis with
payments to be made to individual plaintiffs over periods of one to four years.
In addition, in accordance with Coltec's internal procedures for the processing
of asbestos product liability actions and due to the proximity to trial or
settlement, certain outstanding actions have progressed to a stage where Coltec
can reasonably estimate the cost to dispose of these actions. Coltec estimates
that the aggregate remaining cost of the disposition of the foregoing settled
actions and actions in advanced stages of processing, including associated legal
costs, is approximately $52.6 million and expects that this cost will be
substantially covered by insurance.
As of December 31, 1993, the two subsidiaries were among a number of defendants
in approximately 68,500 actions, including approximately 6,100 actions in
advanced stages of processing as described above. As of December 31, 1992, the
number of outstanding actions approximated that as of December 31, 1993. The
remaining 62,400 outstanding actions as of December 31, 1993 are in preliminary
procedural stages. Coltec lacks sufficient information upon which judgments can
be made as to the validity or ultimate disposition of such actions, thereby
making it difficult to estimate with reasonable certainty the liability or costs
to Coltec. When asbestos actions are received they are typically forwarded to
local counsel to ensure that the appropriate preliminary procedural response is
taken. The complaints typically do not contain sufficient information to
permit a reasonable evaluation as to their merits at the time of receipt, and in
jurisdictions encompassing a majority of the outstanding actions the practice
has been that little or no discovery or other action is taken until several
months prior to the date set for trial. Accordingly, Coltec generally does not
have the information necessary to analyze the actions in sufficient detail to
estimate the ultimate liability or costs to Coltec, if any, until the actions
appear on a trial calendar. A determination to seek dismissal, to attempt to
settle or to proceed to trial is typically not made prior to the receipt of such
information.
It is also difficult to predict the number of asbestos lawsuits that Coltec's
subsidiaries will receive in the future. Coltec has noted that, with respect to
recently settled actions or actions in advanced stages of processing, the mix of
the injuries alleged and the mix of the occupations of the plaintiffs are
changing from those traditionally associated with Coltec's asbestos-related
actions. Coltec is not able to determine with reasonable certainty whether this
trend will continue. Based upon the foregoing, and due to the unique factors
inherent in each of the actions, including the nature of the disease, the
occupation of the plaintiff, the presence or absence of other possible causes of
a plaintiff's illness, the availability of legal defenses, such as the statute
of limitations or state of the
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art, and whether the lawsuit is an individual one or part of a group, management
is unable to estimate with reasonable certainty the cost of disposing of
outstanding actions in preliminary procedural stages or of actions that may be
filed in the future. However, Coltec believes that it is in a favorable
position compared to many other defendants because, among other things, the
asbestos fibers in its asbestos-containing products were encapsulated.
Considering the foregoing, as well as the experience of Coltec and other
defendants in asbestos litigation, the likely sharing of judgments among
multiple responsible defendants, and the significant amount of insurance
coverage that Coltec expects to be available from its solvent carriers, Coltec
believes that pending and reasonably anticipated future actions are not likely
to have a material effect on Coltec's results of operations and financial
condition. Although the insurance coverage that Coltec has is substantial,
insurance coverage for asbestos claims is not available to cover asbestos
exposures initially occurring on and after July 1, 1984. Coltec's subsidiaries
continue to be named as defendants in new cases.
Effective in the first quarter of 1994, Coltec will adopt the requirements of
Financial Accounting Standards Board Interpretation No. 39, "Offsetting of
Amounts Related to Certain Contracts". In accordance with Interpretation
No. 39, Coltec will record an accrual for its liabilities for asbestos-related
matters that are deemed probable and can be reasonably estimated, and will
separately record an asset equal to the amount of such liabilities that is
expected to be recovered by insurance. Accordingly, the liabilities and assets
to be recorded in 1994 will relate only to settled actions and actions in
advanced stages of processing, which approximated $52.6 million as of
December 31, 1993. Coltec does not expect that the adoption of Interpretation
No. 39 will have a material effect on Coltec's results of operations and
financial condition.
OTHER FINANCIAL INFORMATION
PRO FORMA RESULTS OF OPERATIONS
Giving pro forma effect to the recapitalization as if it had occurred on January
1, 1991, Coltec would have reported earnings before extraordinary item as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
(In millions, except per share data) 1992 1991
- -----------------------------------------------------------------------------
<S> <C> <C>
Earnings before interest, income taxes
and extraordinary item $243.1 $230.4
Interest and debt expense, net 116.7 117.6
Provision for income taxes 44.0 56.3
------ ------
Earnings before extraordinary item $ 82.4 $ 56.5
------ ------
------ ------
Earnings per common share
Before extraordinary item(a) $ 1.19 $ .82
------ ------
------ ------
<FN>
(a) Pro forma earnings per common share before extraordinary item by
quarter would have been $.22, $.33, $.29 and $.35 for the first,
second, third and fourth quarters of 1992, respectively; and $.15,
$.23, $.29 and $.15 for the like quarters of 1991.
</TABLE>
EFFECTS OF INFLATION AND FOREIGN CURRENCY FLUCTUATIONS
Inflation and foreign currency fluctuations have not had a material impact on
the operating results and financial position of Coltec during the past three
years. Coltec generally has been able to offset the effects of inflation with
price increases, cost-reduction programs and operating efficiencies. Coltec's
foreign operations, which are primarily located in Canada, do not operate in
hyperinflationary economies.
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IMPACT OF NEW ACCOUNTING STANDARDS
Coltec adopted Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," and No. 109, "Accounting for
Income Taxes" effective January 1, 1993; and No. 112, "Employers' Accounting for
Postemployment Benefits" effective January 1, 1994. The adoption of these
standards did not have a material effect on Coltec's results of operations and
financial condition.
Based on preliminary analyses, Coltec does not expect the future adoption of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan," and No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," will have a material effect on Coltec's results of operations and
financial condition.
DETERMINATION OF OFFERING PRICE
The Selling Stockholder may, from time to time, sell the Shares offered hereby
on the NYSE or the PSE at prices prevailing at the time of sale, or in privately
negotiated transactions. Such sales may be made directly or indirectly through
agents, brokers, dealers or underwriters.
PLAN OF DISTRIBUTION
All Shares covered by this Prospectus are being offered for the account of the
Selling Stockholder. Consequently, Coltec will not receive any of the proceeds
from the sale of the Shares offered hereby.
The Shares may be sold from time to time by the Selling Stockholder, or by his
pledgees, transferees or other successors in interest, on the NYSE or the PSE
(or such other exchange on which the Shares are listed at the time of sale), in
the over-the-counter market or otherwise, at prices and on terms then prevailing
or at prices related to the then current market price, or in privately
negotiated transactions. The Shares may be sold by various methods, including,
but not limited to, one or more of the following: (a) directly in a privately
negotiated transaction, (b) a block trade in which the broker or dealer so
engaged will attempt to sell Shares as agent but may position and resell a
portion of the block as principal to facilitate the transaction, (c) purchased
by a broker or dealer as principal and resold by the broker or dealer for its
own account pursuant to this Prospectus, (d) a transaction on the NYSE or PSE in
accordance with the rules of such exchanges, and (e) ordinary brokers
transactions and transactions in which the broker solicits the purchasers. In
effecting sales, brokers or dealers engaged by the Selling Stockholder may
arrange for other brokers or dealers to participate. Alternatively, the Selling
Stockholder may from time to time offer the Shares through underwriters, dealers
or agents who may receive compensation in the form of underwriting discounts,
concessions, or commissions from the Selling Stockholder or purchasers of Shares
for whom they act as agents. In addition, any of the Shares that qualify for
sale pursuant to Rule 144 under the Securities Act, or otherwise pursuant to an
applicable exemption under the Securities Act, may be sold other than pursuant
to this Prospectus.
The Selling Stockholder and any such underwriters, dealers or agents that
participate in the
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distribution of Shares may be deemed to be underwriters, and any profit on the
sale of the Shares by them and any discounts, commissions or concessions
received by them may be deemed to be underwriting discounts and commissions
under the Securities Act. The Shares may by sold from time to time in one or
more transactions at a fixed offering price, which may be changed, or at varying
prices determined at the time of sale or at negotiated prices. Such prices will
be determined by the Selling Stockholder or by an agreement between the Selling
Stockholder and underwriters or dealers. Brokers or dealers acting in
connection with the sale of the Shares contemplated by this Prospectus may
receive commissions in connection therewith.
At the time a particular offer of Shares is made, to the extent required, a
supplement to this Prospectus will be distributed that will identify and set
forth the aggregate amount of Shares being offered and the terms of the
offering, including the name or names of any underwriters, dealers or agents,
the purchase price paid by any underwriters for Shares purchased from the
Selling Stockholder, any discounts, commissions and other items constituting
compensation from the Selling Stockholder or Coltec and any discounts,
commissions or concessions allowed or reallowed or paid to dealers, including
the proposed selling price to the public. Such supplement to this Prospectus
and, if necessary, a post-effective amendment to the Registration Statement of
which this Prospectus is a part, will be filed with the Commission to reflect
the disclosure of additional information with respect to the distribution of the
Shares. Coltec will pay all the expenses incident to the registration, and
certain other expenses related to this Offering of the Shares, other than
underwriting commissions and discounts, normal commission expenses and brokerage
fees, applicable transfer taxes and attorneys' fees of Selling Stockholder's
counsel.
The Selling Stockholder has entered into an indemnification agreement with
Coltec pursuant to which Coltec will be indemnified against failure by the
Selling Stockholder to deliver a Prospectus if required, as well as against
certain civil liabilities, including liabilities under the Securities Act or the
Exchange Act incurred in connection with any untrue (or alleged untrue)
statement of a material fact or omission of a material fact in this Registration
Statement to the extent such liability relates to information supplied by the
Selling Stockholder for inclusion in the Registration Statement or Prospectus.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the Shares may not simultaneously engage in market-
making activities with respect to the Shares for a period of nine business days
prior to the commencement of such distribution. In addition and without
limiting the foregoing, the Selling Stockholder and any person participating in
the distribution of the Shares will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including without
limitation, Rules 10b-2, 10b-6 and 10b-7, which provisions may limit the timing
of purchases and sales of the Shares by the Selling Stockholder. All of the
foregoing may affect the marketability of the Shares.
In order to comply with certain states' securities laws, if applicable, the
Shares will be sold in such jurisdictions only through registered or licensed
brokers or dealers. In certain states the Shares may not be sold unless the
Shares have been registered or qualify for sale in such state, or unless an
exemption from registration or qualification is available and complied with.
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There can be no assurance that the Selling Stockholder will sell any or all of
the Shares offered by him hereby.
SELLING STOCKHOLDER
Mr. David I. Margolis, Chairman of the Board and Chief Executive Officer of
Coltec during the past three years and Chairman of the newly created Executive
Committee since October 12, 1994, is the Selling Stockholder referred to herein.
He has advised Coltec that he will retire on February 1, 1995, following his
attaining 65 years of age in January 1995. On October 12, 1994, the Board of
Directors of Coltec elected John W. Guffey, Jr., who has been President and
Chief Operating Officer of Coltec since 1991, to succeed Mr. Margolis as
Chairman of the Board and Chief Executive Officer effective February 1, 1995,
with Mr. Margolis remaining a member of the Board of Directors of Coltec and
Chairman of the Executive Committee.
Mr. Margolis has advised Coltec that (i) as of the date of the Prospectus he
beneficially owns 1,133,472 shares of Coltec common stock, including 120,000
shares that may be acquired from Coltec within 60 days upon the exercise of
options for common stock (an additional 180,000 shares become exercisable at
future dates) and 3,081 shares (as of August 31, 1994) credited to his
individual account in the Retirement Savings Plan for Salaried Employees (the
"Savings Plan") and (ii) he shares voting power of 2,507,421 shares (as of
August 31, 1994) as a trustee of the Savings Plan. The 1,133,472 shares
represent 1.6% of the outstanding shares of Coltec common stock outstanding on
August 31, 1994.
1,010,391 shares are being offered hereby and, assuming all are sold, he will
own 123,081 shares, consisting of the 120,000 shares and 3,081 shares referred
to above. Because the Selling Stockholder may sell all or a part of the Shares
he holds pursuant to this Prospectus and the fact that this Offering is not
being underwritten on a firm commitment basis, no estimate can be given as to
the number of Shares that will be held by the Selling Stockholder upon
termination of this Offering. See "Plan of Distribution". The Common Stock
offered by this Prospectus may be offered from time to time in whole or in part
by the Selling Stockholder or by his transferees, as to whom applicable
information will, to the extent required, be set forth in a prospectus
supplement.
DESCRIPTION OF CAPITAL STOCK
Coltec's authorized capital stock consists of 100 million shares of Common
Stock, par value $.01 per share, and 2.5 million shares of preferred stock, par
value $.01 per share ("Preferred Stock"). The following summary description of
the capital stock of Coltec does not purport to be complete and is qualified in
its entirety by reference to Coltec's Restated Articles of Incorporation, a copy
of which was filed by reference as an exhibit to Coltec's Annual Report on Form
10-K for the fiscal year ended December 31, 1993, which is incorporated by
reference in this Prospectus.
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COMMON STOCK
Subject to the prior rights of any series of Preferred Stock that may from time
to time be authorized and outstanding, holders of Common Stock are entitled to
receive dividends out of funds legally available therefor when, as and if
declared by the Board of Directors and to receive pro rata the net assets of
Coltec legally available for distribution upon liquidation or dissolution.
Holders of Common Stock are entitled to one vote for each share of Common Stock
held on each matter submitted to a vote of shareholders, including the election
of directors. All outstanding shares of Common Stock are fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the Preferred Stock in one or
more classes or series and to fix the voting powers, preferences and relative
participating, optional or other special rights, without any further vote or
action by the shareholders. The ability of the Board of Directors to issue
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the outstanding voting stock of Coltec, Coltec
has no current plans to issue any of the Preferred Stock.
CERTAIN PROVISIONS OF THE RESTATED ARTICLES OF INCORPORATION AND BY-LAWS
The Restated Articles of Incorporation provide that any action required or
permitted to be taken by the shareholders of Coltec may be effected only at an
annual or special meeting of shareholders, and prohibits shareholders' action by
written consent in lieu of a meeting. Coltec's By-laws provide that special
meetings of shareholders may be called only by the chairman or by a majority of
the members of the Board of Directors. Shareholders are not permitted to call a
special meeting or to require that the Board of Directors call a special meeting
of shareholders.
Coltec's By-laws establish an advance notice procedure for the nomination, other
than by or at the direction of the Board of Directors or a committee thereof, of
candidates for election as directors as well as for other shareholder proposals
to be considered at shareholders' meetings. Notice of shareholder proposals and
director nominations must be timely given in writing to the Secretary of Coltec
prior to the meeting at which the matters are to be acted upon or directors are
to be elected. The notice must contain certain information specified in
Coltec's By-laws.
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
The Restated Articles of Incorporation provide for indemnification of officers
and directors of Coltec to the extent permitted by Pennsylvania law, which
generally permits indemnification for actions taken by officers or directors as
representatives of Coltec in good faith and in a manner reasonably believed to
be in or not opposed to Coltec's best interests, subject to certain limitations.
In accordance with Pennsylvania law, the Restated Articles of Incorporation and
Coltec's By-laws contain provisions eliminating the personal liability of
directors to Coltec and its shareholders for
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monetary damages for breaches of their fiduciary duties, except for breach of a
director's duty to act with statutorily defined due care and for a breach which
constitutes self-dealing, willful misconduct or recklessness. The applicable
provisions of Pennsylvania law pertain only to breaches of duty by directors as
directors and not in any other corporate capacity, including as officers. As a
result of the inclusion of such provisions, shareholders may be unable to
recover monetary damages against directors for actions taken by them which
constitute negligence or gross negligence or which are in violation of their
fiduciary duties, although it may be possible to obtain injunctive or other
equitable relief with respect to such actions. If equitable remedies are found
not to be available to shareholders in any particular case, shareholders may not
have any effective remedy against the challenged conduct.
STATUTORY PROVISIONS
On April 27, 1990, the Pennsylvania Business Corporation Law of 1988 (the "BCL")
was amended, among other things, to protect public companies from hostile
takeover attempts. Set forth below is a summary of significant anti-takeover
provisions of the BCL. Such provisions may delay, defer or prevent a takeover
attempt that a shareholder might consider to be in its best interest. As
indicated, and as permitted by the BCL, Coltec has elected not to be governed by
certain anti-takeover provisions.
STATUTORY PROVISIONS APPLICABLE TO COLTEC
BUSINESS COMBINATIONS (SUBCHAPTER 25-F). A public corporation may not engage in
any business combination with a 20% shareholder for five years following the 20%
acquisition unless: (a) the combination or the purchase of the control shares
was approved by the board of directors before the date that the shareholder
became an interested shareholder or (b)(i) the combination is approved by the
holders of a majority of the shares not controlled by the interested shareholder
at a special meeting held not less than three months after the shareholder
acquired an 80% voting stake, and the aggregate amount of the offer meets
certain fair price criteria or (ii) by unanimous vote. If the combination was
not previously approved, the 20% shareholder may effect a combination after the
five-year period only if the shareholder receives approval from a majority of
the shares not owned by the acquiror or the aggregate amount of the offer meets
certain fair price criteria.
FIDUCIARY OBLIGATIONS OF DIRECTORS (SECTIONS 1715 ET AL.). In discharging their
duties, directors may, in considering the best interests of the corporation,
consider (a) the effects of any action upon any or all groups affected by such
action, including shareholders, employees, suppliers, customers and creditors of
the corporation, and communities in which the corporation is located, (b) the
short-term and long-term interests of the corporation, including the possibility
that these interests may be best served by the corporation's continued
independence, (c) the resources, intent and conduct (past, stated and potential)
of any person seeking to acquire control and (d) all other pertinent factors.
Directors need not treat any corporate interest or interests of any particular
group affected by such action (e.g., shareholders) as the dominant or
controlling interest or factor.
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STATUTORY PROVISIONS INAPPLICABLE TO COLTEC
CONTROL TRANSACTIONS (SUBCHAPTER 25-E). Any person who acquires the direct or
indirect power to control the vote of at least 20% of the outstanding voting
interests in a public corporation is required to pay any other shareholder who
exercises his rights under the BCL an amount equal to the fair value of the
voting shares held by such shareholder as of the date of the transaction
pursuant to which control of at least 20% voting interest was obtained.
CONTROL SHARE ACQUISITION (SUBCHAPTER 25-G). Subject to safe harbors for
certain acquiring persons, shareholder approval is required before a person who
acquires (or seeks to acquire) ownership or voting power over "control shares"
of a public corporation may vote the control shares. Control shares are defined
in terms of crossing any one of three specified thresholds of percentage
ownership of voting power (20%, 33-1/3% or 50%). The public corporation has the
right to redeem the control shares (at their market price at the time of
redemption) if the acquiror fails to obtain the approval of the remaining
shareholders or fails to complete the control transaction.
DISGORGEMENT OF PROFITS (SUBCHAPTER 25-H). Subject to safe harbors for certain
acquiring persons, disgorgement to the public corporation is mandated for
profits realized by a person or group that (a) acquires stock from the public
corporation itself or from the shareholders within two years before or 18 months
after the person or group attempts to acquire 20% or more of a public
corporation's voting power, or publicly discloses that it is seeking to acquire
control of the public corporation and (b) then sells that stock within 18 months
after such an attempt or disclosure.
SEVERANCE PAY (SUBCHAPTER 25-I). Severance payments must be made to employees
of public corporations who are terminated within 24 months after a control share
acquisition approved by shareholders.
LABOR CONTRACTS (SUBCHAPTER 25-J). Labor contracts are preserved after a
control share acquisition approved by shareholders.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summary of agreements governing the 1994 Credit Agreement and
certain other outstanding long-term indebtedness of Coltec does not purport to
be complete and is qualified in its entirety by reference to the various
agreements, copies of which have been filed, or incorporated by reference, as
exhibits to Coltec's Annual Report of Form 10-K for the fiscal year ended
December 31, 1993, which is incorporated by reference in this Prospectus.
Capitalized terms used but not defined herein have the meanings assigned to them
in the various agreements described.
1994 CREDIT AGREEMENT
Coltec has entered into the 1994 Credit Agreement among Coltec, the various
financial institutions named therein (the "Lenders"), Credit Lyonnais New York
Branch, the Bank of Montreal, The Industrial Bank of Japan, Limited, New York
Branch and The Bank of Nova Scotia, as Co-Agents
31
<PAGE>
thereunder, and Bankers Trust Company, as Administrative Agent thereunder,
pursuant to which the Lenders have agreed, subject to certain conditions, to
provide up to $415 million of financing to Coltec under a revolving loan
facility (the "Revolving Loan Facility") from time to time until June 30, 1999.
The 1994 Credit Agreement also provides for the issuance of letters of credit in
an aggregate amount of up to $100 million under the Revolving Loan Facility;
provided that at no time shall the aggregate principal amount of loans
outstanding, together with the aggregate face amount of letters of credit
issued, under the Revolving Loan Facility exceed $415 million.
PREPAYMENTS AND COMMITMENT REDUCTIONS
The Revolving Loan Facility is subject to mandatory commitment reductions and
corresponding prepayments of $50 million on each of January 11, 1997 and January
11, 1998. In addition, the 1994 Credit Agreement requires certain other
mandatory commitment reductions and corresponding prepayments from the net
proceeds of certain sales of assets and certain issuances of debt or equity
securities. The 1994 Credit Agreement also permits voluntary prepayments and
commitment reductions of the Revolving Loan Facility from time to time.
INTEREST
Loans under the 1994 Credit Agreement bear interest at an annual rate equal to,
at Coltec's option, (a) the Base Rate (as described below) or (b) the Eurodollar
Rate (as described below) plus 1.00%; PROVIDED that the Eurodollar Rate may be
reduced from time to time based on the achievement of specified ratios of
Coltec's EBIDTA to Interest Expense (as defined in the 1994 Credit Agreement)
and of certain ratings of Coltec's long-term unsecured indebtedness by Standard
& Poor's Rating Group and Moody's Investors Service, Inc. Interest on Base Rate
Loans is payable quarterly and interest on Eurodollar Rate Loans is payable at
the end of the relevant interest period (but not less often than quarterly).
The default rate of interest for all Loans is equal to the higher of (a) the
Base Rate applicable to such Loans plus 2.25% per annum and (b) the Eurodollar
Rate applicable to such Loans plus 2.00% per annum. The "Base Rate" is the
higher of (a) 1/2 of 1% in excess of the Federal Reserve reported certificate of
deposit rate and (b) the rate that Bankers Trust Company announces as its prime
lending rate, as in effect from time to time. The "Eurodollar Rate" is the
average of the quotations for one, two, three or six-month London Interbank
Offered Rate offered to first class banks in the New York interbank Eurodollar
market by Bankers Trust Company, adjusted for statutory reserves at all times.
GUARANTEES
Amounts owed under or in respect of the 1994 Credit Agreement by Coltec are
guaranteed by each of the material domestic subsidiaries of Coltec, whether now
existing or hereafter acquired or organized.
SECURITY
All the obligations of Coltec under the 1994 Credit Agreement and the other loan
documents and
32
<PAGE>
under the interest rate protection agreements of Coltec maintained with a
Lender, and all the obligations of the subsidiaries of Coltec guaranteeing the
obligations of Coltec thereunder, are secured by (a) all the common stock of
each current or future material domestic subsidiary of Coltec and 66% of the
common stock of any current or future foreign subsidiary of Coltec that is owned
by Coltec or any of its domestic subsidiaries; (b) substantially all the
inventory, machinery and equipment, patents, trademarks and other personal
property of Coltec and its material domestic subsidiaries; and (c) certain real
estate and fixtures thereon owned by Coltec and its material domestic
subsidiaries.
COVENANTS
The 1994 Credit Agreement contains certain customary covenants, including
restrictive covenants that, subject to certain exceptions, impose limitations on
the ability of Coltec and its subsidiaries to, among other things: (a) create
or incur additional indebtedness or contingent obligations; (b) create or incur
additional liens; (c) merge with other entities; (d) dispose of a material
portion of their assets or acquire all or substantially all of the business or
assets of other entities; (e) invest in or make loans to other entities; (f)
enter into certain real property leases, operating leases or sale-leaseback
transactions; (g) pay dividends and redeem or repurchase capital stock; (h)
engage in certain transactions with affiliates; (i) pay, prepay, repurchase or
retire outstanding indebtedness; and (j) amend the terms of certain indebtedness
and other material agreements. The 1994 Credit Agreement also restricts the
maximum amount of capital expenditures that may be made by Coltec and its
subsidiaries in any fiscal year as follows: 1994--$50 million; 1995--$55
million; 1996--$60 million; 1997--$65 million and 1998 and thereafter--$70
million; PROVIDED that Coltec and its subsidiaries may use up to $25 million of
any amount permitted to be made and remaining unutilized from any fiscal year in
the immediately succeeding fiscal year. In addition, the 1994 Credit Agreement
includes financial covenants requiring Coltec to maintain (a) a ratio of
Consolidated Current Assets to Consolidated Current Liabilities (in each case,
as defined in the 1994 Credit Agreement) of at least 1.25 to 1 at all times and
(b) an Interest Coverage Ratio (as defined in the 1994 Credit Agreement) for any
four fiscal quarter period ending on or prior to December 31, 1994 of at least
2.25 to 1 and for any four fiscal quarter period ending thereafter of at least
2.50 to 1.
EVENTS OF DEFAULT
The 1994 Credit Agreement contains customary events of default, including but
not limited to: (a) nonpayment of principal, interest, fees or other amounts
when due; (b) violation of covenants; (c) failure of any representation or
warranty to be true in all material respects when made; (d) cross-default and
cross-acceleration; (e) bankruptcy events; (f) material judgments rendered
against Coltec; (g) violation of certain ERISA provisions; (h) change of
control; and (i) invalidity of any loan document or security interest created
thereunder.
9-3/4% SENIOR NOTES DUE 1999 AND 9-3/4% SENIOR NOTES DUE 2000
The 9-3/4% Senior Notes Due 1999 (the "Senior Notes Due 1999") were issued under
an Indenture dated as of October 26, 1992 (the "Senior Notes Due 1999
Indenture"), between Coltec and United States Trust Company of New York, as
Trustee. The Senior Notes Due 1999 are unsecured senior
33
<PAGE>
obligations of Coltec, mature on November 1, 1999, and bear interest at the rate
of 9-3/4% per annum, payable semiannually on May 1 and November 1 of each year.
The 9-3/4% Senior Notes Due 2000 (the "Senior Notes Due 2000") were issued under
an Indenture dated as of April 1, 1992 (the "Senior Notes Due 2000 Indenture"),
between Coltec and United States Trust Company of New York, as Trustee. The
Senior Notes Due 2000 are unsecured senior obligations of Coltec, mature on
April 1, 2000, and bear interest at the rate of 9-3/4% per annum, payable
semiannually on April 1 and October 1 of each year. Neither the Senior Notes
Due 1999 nor the Senior Notes Due 2000 are redeemable prior to maturity.
The Senior Notes Due 1999 Indenture and the Senior Notes Due 2000 Indenture
each contain covenants that (a) limit, under certain circumstances, the ability
of Coltec and certain of its subsidiaries to incur additional indebtedness and
contingent obligations, enter into sale-leaseback transactions or grant liens;
(b) limit the ability of Coltec and certain of its subsidiaries to redeem or
reacquire, prior to any scheduled maturity, repayment or sinking fund payment,
any indebtedness of Coltec that ranks PARI PASSU with or is subordinate in right
of payment to the Senior Notes Due 1999 or Senior Notes Due 2000, as the case
may be, which is scheduled to mature on or after the maturity date of the Senior
Notes Due 1999 or Senior Notes Due 2000, as the case may be, or pay dividends or
make other distributions on account of, or reacquire, any shares of any class of
its capital stock; (c) limit the investments which may be made by Coltec and
certain of its subsidiaries; (d) limit the ability of certain subsidiaries of
Coltec to issue capital stock in certain circumstances; (e) limit the ability of
Coltec and certain of its subsidiaries to engage in transactions with certain of
Coltec's affiliates; (f) limit the ability of Coltec to merge, consolidate or
sell all or substantially all its assets; (g) prohibit, subject to certain
exceptions, Coltec or certain of its subsidiaries from creating or permitting to
exist any consensual encumbrance or restriction on the ability of such
subsidiaries to pay dividends, repay certain indebtedness owed to Coltec or any
such subsidiary thereof or transfer assets to Coltec or certain of its
subsidiaries; and (h) require that the proceeds of certain sales of assets be
used to make an offer to repurchase the Senior Notes Due 1999 or Senior Notes
Due 2000, as the case may be.
11-1/4% DEBENTURES DUE 1996-2015
The 11-1/4% Debentures due 1996-2015 (the "Debentures") were issued under an
Indenture dated as of December 1, 1985 between Coltec and the Bank of New York
(as successor to Mellon Bank, N.A.), as trustee (the "1985 Indenture").
The Debentures are redeemable at Coltec's option, in whole or in part, from time
to time at redemption prices determined by year of redemption. Coltec may not,
however, effect the optional redemption prior to December 1, 1995, directly or
indirectly, from or in anticipation of borrowed funds having an annual interest
cost of less than 11-1/4%.
The 1985 Indenture contains, among others, covenants that restrict the
incurrence of secured debt and sale-leaseback transactions by Coltec and certain
of its subsidiaries. In connection with the consummation of the 1992
Recapitalization, Coltec's obligations under the 1985
34
<PAGE>
Indenture and the Debentures were secured, and any other indebtedness that
Coltec may incur under the 1985 Indenture will be secured, by certain assets of
Coltec and its subsidiaries equally and ratably, as and to the extent required
by the 1985 Indenture, with Coltec's obligations under the 1994 Credit
Agreement.
10-1/4% SENIOR SUBORDINATED NOTES DUE 2002
The 10-1/4% Senior Subordinated Notes Due 2002 (the "Subordinated Notes") were
issued under an Indenture dated as of April 1, 1992 (the "Subordinated Note
Indenture"), between Coltec and Norwest Bank Minnesota, National Association, as
Trustee. The Subordinated Notes are unsecured senior subordinated obligations
of Coltec, mature on April 1, 2002, and bear interest at the rate of 10-1/4% per
annum, payable semiannually on April 1 and October 1 of each year. The
Subordinated Notes are redeemable, in whole or in part, at Coltec's option, at
any time on or after April 1, 1997, at specified redemption prices (expressed in
percentages of principal amount), together with accrued interest to the
redemption date, starting at 105.125% of the principal amount and declining
thereafter.
The Subordinated Note Indenture contains covenants that (a) limit, under certain
circumstances, the ability of Coltec and certain of its subsidiaries to incur
additional indebtedness and contingent obligations or grant liens; (b) limit the
ability of Coltec and certain of its subsidiaries to redeem or reacquire, prior
to any scheduled maturity, repayment of sinking fund payment, any indebtedness
of Coltec that ranks PARI PASSU with or is subordinated in right of payment to
the Subordinated Notes, which is scheduled to mature on or after the maturity
date of the Subordinated Notes, or pay dividends or make other distributions on
account of, or reacquire, any shares of any class of its capital stock; (c)
limit the investments which may be made by Coltec and certain of its
subsidiaries; (d) prohibit the issuance by Coltec of any indebtedness that is by
its terms senior in right of payment to the Subordinated Notes and subordinate
to any "senior indebtedness" (as such term is defined in the Subordinated Note
Indenture) of Coltec; (e) limit the ability of Coltec and certain of its
subsidiaries to engage in transactions with certain of Coltec's affiliates; (f)
limit the ability of Coltec to merge, consolidate or sell all or substantially
all its assets; (g) prohibit, subject to certain exceptions, Coltec or certain
of its subsidiaries from creating or permitting to exist any consensual
encumbrance or restriction on the ability of such subsidiaries to pay dividends,
repay certain indebtedness owed to Coltec or any such subsidiary thereof or
transfer assets to Coltec or certain of its subsidiaries; and (h) require that
the proceeds of certain sales of assets be used to make an offer to repurchase
the Subordinated Notes.
The Subordinated Notes are subordinate in right of payment to all "senior
indebtedness" of Coltec, as such term is defined in the Subordinated Note
Indenture. As defined in the Subordinated Note Indenture, "senior indebtedness"
includes, among other things, indebtedness under the 1994 Credit Agreement, the
Senior Notes Due 1999, the Senior Notes Due 2000 and the Debentures.
35
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the Common Stock being registered
have been passed upon for Coltec by Reed Smith Shaw & McClay, Pittsburgh,
Pennsylvania.
EXPERTS
The financial statements and schedules included and incorporated by
reference in this Prospectus to the extent and for the periods indicated in
their reports have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of said firm
as experts in giving said reports.
36
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
THREE YEARS ENDED DECEMBER 31, 1993*
Consolidated Balance Sheet
at December 31, 1993 and 1992 F-2
Consolidated Statement of Earnings
for the three years ended December 31, 1993 F-4
Consolidated Statement of Cash Flows
for the three years ended December 31, 1993 F-5
Consolidated Statement of Shareholders' Equity
for the three years ended December 31, 1993 F-6
Notes to Financial Statements F-7
Report of Independent Public Accountants F-30
NINE MONTHS ENDED OCTOBER 2, 1994 AND OCTOBER 3, 1993 (Unaudited)
Consolidated Balance Sheet
at October 2, 1994 and December 31, 1993 F-31
Consolidated Statement of Earnings
for the nine months ended October 2, 1994
and October 3, 1993 F-32
Consolidated Statement of Cash Flows
for the nine months ended October 2, 1994
and October 3, 1993 F-33
Notes to Financial Statements F-34
* Note 1 - Summary of Accounting Policies (e.g. Costs In Excess Of Net Assets
Acquired And Impact Of New Accounting Standards); Note 3 - Restructuring
Charge; Note 7 - Financial Instruments; Note 13 - Related Party Transactions;
and Note 15 - Commitments and Contingencies included in the audited financial
statements in this Prospectus revise and supersede the respective notes
included in the audited financial statements incorporated by reference into
Coltec's Form 10-K for the year ended December 31, 1993. The revisions
reflect additional disclosures in response to comments received from the
Securities and Exchange Commission.
F-1
<PAGE>
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-------------------
1993 1992
------ -------
(In thousands)
<S> <C> <C>
A S S E T S
Current assets
Cash and cash equivalents (Notes 1 and 7) $ 5,749 $ 7,155
Accounts and notes receivable (Notes 7 and 15)
Trade 124,640 123,331
Other 41,051 4,959
-------- --------
165,691 128,290
Less allowance for doubtful accounts 4,170 4,614
-------- --------
161,521 123,676
Inventories (Note 1)
Finished goods 39,206 42,044
Work in process and finished parts 103,166 102,787
Raw materials and supplies 25,405 22,075
-------- --------
167,777 166,906
Deferred income taxes (Note 5) 17,036 33,080
Other current assets 8,587 7,710
-------- --------
Total current assets 360,670 338,527
Property, plant and equipment, at cost (Note 1)
Land and improvements 18,202 18,637
Buildings and equipment 130,085 132,013
Machinery and equipment 479,220 462,992
Leasehold improvements 8,445 8,491
Construction in progress 21,285 17,988
-------- --------
657,237 640,121
Less accumulated depreciation and amortization 431,908 413,312
-------- --------
225,329 226,809
Costs in excess of net assets acquired,
net of amortization (Note 1) 132,550 133,883
Other assets (Notes 6, 7 and 15) 87,863 129,557
-------- --------
$806,412 $828,776
-------- --------
-------- --------
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-2
<PAGE>
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
-------------------------
1993 1992
------- ------
(In thousands,
LIABILITIES and SHAREHOLDERS' EQUITY except share data)
<S> <C> <C>
Current liabilities
Current maturities of long-term debt (Notes 6, 7 and 16) $ 1,543 $ 48,645
Accounts payable 64,791 59,287
Accrued expenses
Salaries, wages and employee benefits 40,946 49,661
Taxes 30,103 30,876
Interest 23,887 20,626
Other 32,272 29,100
---------- ----------
127,208 130,263
Current portion of liabilities of discontinued
operations 4,000 5,046
---------- ----------
Total current liabilities 197,542 243,241
Long-term debt (Notes 6, 7 and 16) 1,032,089 1,073,450
Deferred income taxes (Note 5) 27,543 53,116
Other liabilities 132,367 79,854
Liabilities of discontinued operations 42,361 45,759
Commitments and contingencies (Note 15)
Shareholders' equity (Notes 1, 8, 9 and 13)
Preferred stock
$.01 par value, 2,500,000 shares authorized,
shares outstanding - none -- --
Common stock
$.01 par value, 100,000,000 shares authorized,
69,943,341 and 69,853,464 shares issued at
December 31, 1993 and 1992, respectively
(excluding 25,000,000 shares held by a wholly
owned subsidiary at December 31, 1993) 699 699
Capital in excess of par value 636,846 634,088
Retained earnings (deficit) (1,251,465) (1,298,899)
Unearned compensation - restricted stock awards (5,552) (7,221)
Minimum pension liability (4,205) --
Foreign currency translation adjustments 1,077 4,689
---------- ----------
(622,600) (666,644)
Less cost of 179,309 shares of common stock in
treasury at December 31, 1993 (2,890) --
---------- ----------
(625,490) (666,644)
---------- ----------
$ 806,412 $ 828,776
---------- ----------
---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-3
<PAGE>
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1993 1992 1991
------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C>
Net sales $1,334,829 $1,368,703 $1,372,979
---------- ---------- ----------
Costs and expenses
Cost of sales 905,464 944,405 966,791
Selling and administrative 192,437 181,176 177,168
Restructuring charge (Note 3) 25,219 - -
---------- ---------- ----------
Total costs and expenses 1,123,120 1,125,581 1,143,959
---------- ---------- ----------
Operating income 211,709 243,122 229,020
Dividend income -- -- 1,431
---------- ---------- ----------
Earnings before interest, income taxes
and extraordinary item 211,709 243,122 230,451
Interest and debt expense, net 110,190 135,862 199,942
---------- ---------- ----------
Earnings before income taxes and
extraordinary item 101,519 107,260 30,509
Provision for income taxes (Note 5) 36,293 42,577 28,300
---------- ---------- ----------
Earnings before extraordinary item 65,226 64,683 2,209
Extraordinary item (Note 4) (17,792) (106,930) 591
---------- ---------- ----------
Net earnings (loss) $ 47,434 $ (42,247) $ 2,800
---------- ---------- ----------
---------- ---------- ----------
Earnings (loss) per common share (Note 1)
Before extraordinary item $ .94 $ 1.11 $ .09
Extraordinary item (.26) (1.83) .02
---------- ---------- ----------
Net earnings (loss) $ .68 $ (.72) $ .11
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of common
and common equivalent shares 69,591 58,413 25,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-4
<PAGE>
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1993 1992 1991
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ 47,434 $ (42,247) $ 2,800
Adjustments to reconcile net earnings (loss) to cash
Extraordinary item 17,792 106,930 (591)
Restructuring charge 25,219 -- --
Depreciation and amortization 49,092 49,129 44,916
Noncash interest expense, net -- 25,180 92,991
Deferred income taxes (10,766) (17,829) 22,607
Receivable from insurance carriers 3,056 (15,660) (2,816)
Payment of liabilities of discontinued operations (4,444) (6,166) (4,152)
Other operating items (11,809) 2,032 (13,702)
-------- --------- ---------
115,574 101,369 142,053
-------- --------- ---------
Changes in assets and liabilities
Accounts and notes receivable (2,007) (7,896) 13,158
Inventories (2,871) 15,261 25,099
Deferred income taxes 3,501 (216) (6,658)
Other current assets (877) 738 1,235
Accounts payable 4,067 (4,819) (4,587)
Accrued expenses (12,169) 15,450 (21,060)
-------- --------- ---------
Changes in assets and liabilities (10,356) 18,518 7,187
-------- --------- ---------
Cash provided by operating activities 105,218 119,887 149,240
-------- --------- ---------
Cash flows from investing activities
Cash received in Holdings reorganization 26,749 -- --
Proceeds from sale of an investment -- 3,733 12,035
Capital expenditures (38,587) (24,997) (26,239)
Other - net 1,948 (3,503) 1,547
-------- --------- ---------
Cash used in investing activities (9,890) (24,767) (12,657)
-------- --------- ---------
Cash flows from financing activities
Proceeds from issuance of long-term debt 46,069 150,000 5,557
Retirement of long-term debt (138,179) (242,192) (117,659)
Net proceeds from issuance of common stock
in recapitalization -- 625,575 --
Net retirement of long-term debt in recapitalization -- (433,836) --
Payment of premiums, fees and expenses in recapitalization
and debt refinancing -- (153,061) --
Distribution to Holdings pursuant to preferred stock
redemption and tax sharing procedure (4,624) (48,585) (14,000)
-------- --------- ---------
Cash used in financing activities (96,734) (102,099) (126,102)
-------- --------- ---------
Cash and cash equivalents
Increase (decrease) (1,406) (6,979) 10,481
At beginning of period 7,155 14,134 3,653
-------- --------- ---------
At end of period $ 5,749 $ 7,155 $ 14,134
-------- --------- ---------
-------- --------- ---------
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-5
<PAGE>
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Three Years Ended December 31, 1993
-------------------------------------------------------------------------
Unearned
Compensation -
Common Stock Capital in Retained Restricted
------------------------- Excess of Earnings Stock
(In thousands, except share data) Shares Amount Par Value (Deficit) Awards
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1991 25,000,000 $250 $ -- $(1,201,630) $ --
Net earnings 2,800
Distribution to Holdings pursuant to
tax sharing procedure (14,000)
Proceeds from Holdings applied to
purchase of Holdings senior
discount debentures 4,763
Foreign currency translation
adjustments
---------- ---- -------- ----------- -------
Balance, December 31, 1991 25,000,000 250 -- (1,208,067) --
Net loss (42,247)
Issuance of stock in recapitalization 44,275,000 443 625,132
Distribution to Holdings pursuant to
preferred stock redemption and
tax sharing procedure (48,585)
Issuance of restricted stock, net 578,464 6 8,956 (7,221)
Foreign currency translation
adjustments
---------- ---- -------- ----------- -------
Balance, December 31, 1992 69,853,464 699 634,088 (1,298,899) (7,221)
Net earnings 47,434
Issuance of restricted stock, net 89,877 -- 1,389 1,669
Exercise of stock options (4)
Tax benefit from stock option and
incentive plan 133
Stock exchange in the Holdings
reorganization 1,240
Minimum pension liability
Foreign currency translation
adjustments
---------- ---- -------- ----------- -------
Balance, December 31, 1993 69,943,341 $699 $636,846 $(1,251,465) $(5,552)
---------- ---- -------- ----------- -------
---------- ---- -------- ----------- -------
<CAPTION>
Three Years Ended December 31, 1993
------------------------------------------------------------------------
Foreign
Minimum Currency Treasury Stock
Pension Translation ------------------------
(In thousands, except share data) Liability Adjustments Shares Amount Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1991 $ -- $13,019 -- $ -- $(1,188,361)
Net earnings 2,800
Distribution to Holdings pursuant to
tax sharing procedure (14,000)
Proceeds from Holdings applied to
purchase of Holdings senior
discount debentures 4,763
Foreign currency translation
adjustments 271 271
------- ------- -------- ------- -----------
Balance, December 31, 1991 -- 13,290 -- -- (1,194,527)
Net loss (42,247)
Issuance of stock in recapitalization 625,575
Distribution to Holdings pursuant to
preferred stock redemption and
tax sharing procedure (48,585)
Issuance of restricted stock, net 1,741
Foreign currency translation
adjustments (8,601) (8,601)
------- ------- -------- ------- -----------
Balance, December 31, 1992 -- 4,689 -- -- (666,644)
Net earnings 47,434
Issuance of restricted stock, net (14,309) (229) 2,829
Exercise of stock options 5,000 79 75
Tax benefit from stock option and
incentive plan 133
Stock exchange in the Holdings
reorganization (170,000) (2,740) (1,500)
Minimum pension liability (4,205) (4,205)
Foreign currency translation
adjustments (3,612) (3,612)
------- ------- -------- ------- -----------
Balance, December 31, 1993 $(4,205) $ 1,077 (179,309) $(2,890) $ (625,490)
------- ------- -------- ------- -----------
------- ------- -------- ------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-6
<PAGE>
1. Summary of Accounting Policies
PRINCIPLES OF CONSOLIDATION: Investments in which Coltec Industries Inc
("Coltec") has ownership of 50% or more of the voting common stock are
consolidated in the financial statements. Intercompany accounts and
transactions are eliminated.
CONSOLIDATED STATEMENT OF CASH FLOWS: Cash equivalents consist of
short-term, highly liquid investments with original maturities of three
months or less. The effect of changes in foreign exchange rates on cash
balances is not significant.
Interest paid and federal and state income taxes paid and refunded were as
follows:
<TABLE>
<CAPTION>
(In thousands) 1993 1992 1991
------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $105,713 $107,236 $105,377
Income taxes--
Paid 31,873 40,767 30,327
Refunded 3,913 4,417 4,470
</TABLE>
FOREIGN CURRENCY TRANSLATION: The financial statements of foreign
subsidiaries were prepared in their respective local currencies and are
translated into U.S. dollars at year-end rates for assets and liabilities
and at monthly weighted average rates for income and expenses. Translation
adjustments are included in shareholders' equity. Foreign currency
transaction gains and losses are included in net earnings. For 1993, 1992
and 1991, such gains and losses were not significant.
INVENTORIES: Inventories, including inventories under long-term commercial
and government contracts and programs, are valued at the lower of cost or
market, less reserves of $18,086,000 and $16,789,000 at December 31, 1993
and 1992, respectively, for potential losses from excess and slow-moving
inventories. At December 31, 1993 and 1992, $45,150,000 and $64,464,000,
respectively, of contract advances have been offset against inventories
under long-term commercial and government contracts and programs in the
Consolidated Balance Sheet. Losses on commercial and government contracts
and programs are recognized in full when identified. At December 31, 1993
and 1992, an accrual for loss contracts and programs was not required.
Cost elements included in inventory are material, labor and factory
overhead, primarily using standard cost, which approximates actual cost.
Cost on approximately 53% of the domestic inventory at December 31, 1993
was determined on the last-in, first-out basis. Cost on the remainder of
the inventory is generally determined on the first-in, first-out basis.
The excess of current cost over last-in, first-out cost at December 31,
1993 and 1992 was approximately $21,800,000 and $24,500,000, respectively.
F-7
<PAGE>
PROPERTY AND DEPRECIATION: Depreciation and amortization of plant and
equipment are provided generally by using the straight-line method, based
on estimated useful lives of the assets. For U.S. federal income tax
purposes, most assets are depreciated using allowable accelerated methods.
The ranges of estimated useful lives used in computing depreciation and
amortization for financial reporting were as follows:
<TABLE>
<CAPTION>
Years
-------------------------------------------------------
<S> <C>
Land improvements 5 - 40
Buildings and equipment 10 - 45
Machinery and equipment 3 - 20
</TABLE>
For leasehold improvements, the estimated useful life used in computing
amortization is the lesser of the asset life or the lease term.
Interest cost incurred during the period of construction of plant and
installation of equipment is capitalized as part of the cost of such plant
and equipment.
Renewals and betterments are capitalized by additions to the related asset
accounts, while repair and maintenance costs are charged against earnings.
Coltec generally records retirements by removing the cost and accumulated
depreciation from the asset and reserve accounts.
At December 31, 1993 and 1992, Coltec had the following assets recorded
under capital leases:
<TABLE>
<CAPTION>
(In thousands) 1993 1992
------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 285 $ 294
Buildings and equipment 7,867 8,583
Machinery and equipment 11,059 11,023
Leasehold improvements 1,003 1,028
------- -------
20,214 20,928
Less - Accumulated depreciation and
amortization 15,548 15,062
------- -------
$ 4,666 $ 5,866
------- -------
------- -------
</TABLE>
ENVIRONMENTAL EXPENDITURES: Expenditures for environmental activities are
expensed or capitalized in accordance with generally accepted accounting
principles. Expenditures that relate to an existing condition caused by
past operations, and which do not contribute to current or future revenue
generation, are accrued when it is probable that an obligation has been
incurred and the amount can be reasonably estimated. Expenditures incurred
for environmental compliance with respect to pollution prevention and
ongoing monitoring programs are expensed as incurred. Expenditures that
increase the value of the property are capitalized.
F-8
<PAGE>
START-UP COSTS: Start-up costs related to new operations and new product
lines are expensed as incurred.
REVENUE RECOGNITION: Revenue, including revenue under long-term commercial
and government contracts and programs, is recorded at the time deliveries
or customer acceptances are made and Coltec has the contractual right to
bill.
COSTS IN EXCESS OF NET ASSETS ACQUIRED: It is Coltec's policy to amortize
the excess costs arising from acquisitions on a straight-line basis over
periods not to exceed 40 years. Excess costs arising from all completed
acquisitions are being amortized on a straight-line basis over a 40 year
period. At December 31, 1993 and 1992, accumulated amortization was
$52,063,000 and $47,036,000, respectively. In evaluating the value and
future benefits of the excess costs arising from acquisitions, the
recoverability from operating income is measured. Under this approach, the
carrying value would be reduced if it is probable that management's best
estimate of future operating income from related operations before
amortization will be less than the carrying amount of the excess costs
arising from acquisitions over the remaining amortization period.
SHAREHOLDERS' EQUITY AND EARNINGS PER SHARE: In November 1991, Coltec
increased the amount of authorized common stock to 100,000,000 shares and
decreased the par value of the preferred stock and the common stock to $.01
per share. In January 1992, Coltec effected a 250,000 for 1 split of its
common stock. Reference is made to Note 2 for information relating to the
Recapitalization.
In November 1993, all the shareholders of Coltec Holdings Inc.
("Holdings"), the former parent company of Coltec, exchanged their shares
of common stock of Holdings for 35.5% or 24,830,000 shares of common stock
of Coltec. Reference is made to Note 13 for information relating to the
Holdings Reorganization.
Earnings per common share are computed by dividing earnings by the weighted
average number of common and common equivalent shares outstanding during
each period. Common equivalent shares are shares issuable on the exercise
of stock options and shares of restricted stock, net of shares assumed to
have been purchased using the treasury stock method. All applicable share
and per share data has been adjusted for the 250,000 for 1 split.
IMPACT OF NEW ACCOUNTING STANDARDS: Coltec adopted Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions" and No. 109, "Accounting for Income Taxes", effective
January 1, 1993; and No. 112, "Employers' Accounting for Postemployment
Benefits", effective January 1, 1994. The adoption of these standards did
not have a material effect on Coltec's results of operations and financial
condition.
F-9
<PAGE>
Based on preliminary analyses, Coltec does not expect that the future
adoption of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" and No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", will have a material effect on
Coltec's results of operations and financial condition.
2. RECAPITALIZATION
On April 1, 1992, Coltec completed a plan of recapitalization which
included its initial public offering of 44,275,000 shares of Coltec common
stock for net proceeds of $625,575,000 (the "Equity Offering") and the
public offering of $200,000,000 aggregate principal amount of its 9-3/4%
senior notes due 2000 and of $250,000,000 aggregate principal amount of its
10-1/4% senior subordinated notes due 2002 (the "Note Offerings").
Coltec's recapitalization consisted of (i) the Equity Offering, the net
proceeds of which were used to redeem all of the outstanding $355,493,000
aggregate principal amount of 12-1/2% senior subordinated debentures due
1997-2001 at 106.25% of principal amount, together with accrued interest to
the date of redemption (the "12-1/2% Debenture Redemption") and to repay
the outstanding $225,000,000 indebtedness under the Letter of Credit and
Revolving Credit Facility Agreement (the "1989 Credit Agreement"), (ii)
bank borrowings under a Term and Working Capital Facility (the "1992 Credit
Agreement") of which $429,772,000 was initially drawn down, and (iii) the
Note Offerings. Proceeds from the 1992 Credit Agreement and the Note
Offerings were used (a) to retire a dividend note payable from Coltec to
Holdings, the proceeds of which were used by Holdings to effect its tender
offer for the outstanding Holdings 14-3/4% senior discount debentures (the
"Holdings Debentures") ($881,000,000 aggregate principal amount and
$733,115,000 accreted value) (the "Debt Tender Offer"), the related consent
solicitation and the redemption of the Holdings preferred stock (the
"Preferred Stock Redemption"), (b) to repay the remaining indebtedness
outstanding under the 1989 Credit Agreement not repaid from the proceeds of
the Equity Offering and (c) to pay fees and expenses in connection with the
foregoing transactions (the "Recapitalization").
In connection with the Recapitalization, Coltec incurred extraordinary
charges in the second quarter 1992 of $105,347,000, net of a $28,000,000
tax benefit. The extraordinary charges were primarily payment of premiums
and expenses, and write-off of deferred financing costs resulting from
early retirement of debt.
Pursuant to the Recapitalization, the consolidated statement of earnings
for the year ended December 31, 1991 and for the first quarter 1992 reflect
the interest and finance cost related to the outstanding Holdings
Debentures because the net proceeds of the Note Offerings and the 1992
Credit Agreement were used to repay such indebtedness.
F-10
<PAGE>
3. RESTRUCTURING CHARGE
Coltec recorded a restructuring charge of $25,219,000 in the second quarter
1993 to cover the cost of consolidation and rearrangement of certain
manufacturing facilities and related reductions in work force, primarily in
the Aerospace/ Government segment, as well as at Central Moloney
Transformer Division.
4. EXTRAORDINARY ITEM
In 1993, Coltec incurred extraordinary charges of $17,792,000, net of a
$9,581,000 tax benefit, in connection with debt refinancings and the early
retirement of debt, including $14,675,000, net of a $7,902,000 tax benefit,
from a debt refinancing completed in January 1994. Reference is made to
Note 16 for information on the refinancing.
In 1992, Coltec incurred extraordinary charges of $105,347,000, net of a
$28,000,000 tax benefit, in connection with the Recapitalization and
extraordinary charges of $1,583,000, net of a $816,000 tax benefit, in
connection with a debt refinancing and early retirement of debt. Reference
is made to Note 2 for information on the Recapitalization. In 1991, Coltec
recognized an extraordinary gain of $591,000, net of taxes of $305,000, in
connection with the early retirement of debt.
5. INCOME TAXES
Effective January 1, 1993, Coltec adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", which requires that the
deferred tax provision be determined under the liability method. Under
this method, deferred tax assets and liabilities are recognized based on
differences between the financial statement and tax bases of assets and
liabilities using presently enacted tax rates.
F-11
<PAGE>
The significant components of deferred tax assets and liabilities at
December 31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1993 1992
-------------------------------------------------------------------------------------------------
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Excess tax over book depreciation $ -- $(32,049) $ -- $(34,001)
Recognition of income on contracts
reported on different methods for
tax and financial reporting -- (30,068) -- (31,256)
Employee benefit plans 31,057 -- 29,408 --
Administrative and general expenses
period costed for tax purposes -- (8,357) -- (10,454)
Foreign tax credit carryforwards 29,000 -- 19,000 --
Other 28,910 -- 26,267 --
------- -------- ------- --------
88,967 (70,474) 74,675 (75,711)
Less -- Valuation allowance (29,000) -- (19,000) --
------- -------- ------- --------
Total deferred taxes $59,967 $(70,474) $55,675 $(75,711)
------- -------- ------- --------
------- -------- ------- --------
</TABLE>
The valuation allowance is attributable to foreign tax credit carryforwards
which expire in the years 1994 through 1998.
Domestic and foreign components of earnings before income taxes and
extraordinary item were as follows:
<TABLE>
<CAPTION>
(In thousands) 1993 1992 1991
-----------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ 71,126 $ 67,217 $(11,758)
Foreign 30,393 40,043 42,267
-------- -------- --------
Total $101,519 $107,260 $ 30,509
-------- -------- --------
-------- -------- --------
</TABLE>
Provision for income taxes was as follows:
<TABLE>
<CAPTION>
(In thousands) 1993 1992 1991
-----------------------------------------------------------------------
<S> <C> <C> <C>
Current --
Domestic $ 36,254 $ 43,026 $ (5,575)
Foreign 9,568 17,596 17,926
-------- -------- --------
45,822 60,622 12,351
-------- -------- --------
Deferred --
Domestic (11,553) (14,527) 16,187
Foreign 2,024 (3,518) (238)
-------- -------- --------
(9,529) (18,045) 15,949
-------- -------- --------
Total $ 36,293 $ 42,577 $ 28,300
-------- -------- --------
-------- -------- --------
</TABLE>
F-12
<PAGE>
Reconciliation of tax at the U.S. statutory income tax rate, 35% in 1993
and 34% in 1992 and 1991, to the provision for income taxes was as follows:
<TABLE>
<CAPTION>
(In thousands) 1993 1992 1991
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at U.S. statutory rate $35,532 $36,468 $10,373
Tax cost (benefit)--
Repatriation of non-U.S. earnings 3,201 4,600 8,662
Non-U.S. rate differential 954 1,708 3,317
Adjustment of reserves (6,692) (2,636) (1,663)
Unutilized operating losses -- -- 5,245
Other (not individually significant) 3,298 2,437 2,366
------- ------- -------
Provision for income taxes $36,293 $42,577 $28,300
------- ------- -------
------- ------- -------
Effective tax rate 35.75% 39.7% 92.8%
----- ---- ----
----- ---- ----
</TABLE>
The provisions, prior to the disaffiliation noted below, were determined
pursuant to the tax sharing procedure between Coltec and Holdings and would
have been the same if determined by Coltec on a separate group basis.
Holdings subsequent to its disaffiliation from Coltec realized during the
fourth quarter of 1992, the benefit of unutilized operating losses for 1991
by filing a refund claim based on the carryback of such losses.
As a consequence of the Recapitalization, Coltec became disaffiliated from
Holdings. For 1991 and the first quarter of 1992, Coltec and all of its
80% or greater owned U.S. subsidiaries ("Coltec Separate Group") joined
with Holdings in the filing of consolidated U.S. federal income tax returns
with Holdings as the parent company. For the nine month period ended
December 31, 1992, Coltec Separate Group filed a consolidated U.S. federal
income tax return with Coltec as the parent company. During the periods of
affiliation with Holdings, Coltec's portion of the resulting tax liability
for each of the periods was the lesser of (i) Coltec's tax liability
determined on a Coltec Separate Group basis, or (ii) Coltec's ratable share
of Holdings' consolidated tax liability, including, pursuant to the tax
sharing procedure between Coltec and Holdings, part of the determined tax
benefits from Holdings' losses. Upon consummation of the Recapitalization,
the tax sharing procedure was terminated and Coltec and Holdings entered
into a Tax Disaffiliation Agreement. On November 18, 1993, Holdings became
a wholly owned subsidiary of Coltec. Reference is made to Note 13 for
information relating to the Holdings Reorganization.
The excess of Coltec's U.S. federal income tax liability, for each period
of affiliation with Holdings, determined in accordance with the tax sharing
procedure, over its U.S. federal income tax liability if determined on a
separate group basis was paid to Holdings and is included as a distribution
to Holdings in the Consolidated Statement of Shareholders' Equity.
F-13
<PAGE>
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
(In thousands) 1993 1992
----------------------------------------------------------------------
<S> <C> <C>
1992 Credit Agreement - 7.5%* $ 308,618 $ 350,922
9-3/4% senior notes due 1999 150,000 150,000
9-3/4% senior notes due 2000 200,000 200,000
11-1/4% debentures due 1996-2015 91,625 141,625
10-1/4% senior subordinated notes due 2002 250,000 250,000
Other due 1994-2010 33,389 29,548
---------- ----------
1,033,632 1,122,095
Less - Amounts due within one year 1,543 48,645
---------- ----------
$1,032,089 $1,073,450
---------- ----------
---------- ----------
<FN>
---------------
* Indicates average interest rate for 1993.
</TABLE>
a) In connection with the Recapitalization, Coltec entered into the 1992
Credit Agreement with various banks. The 1992 Credit Agreement
consisted of a $404,772,000 term loan facility and a $160,000,000
revolving loan facility. In addition, up to $85,000,000 of letters of
credit could be issued under or outside the facility. At December 31,
1993, $259,618,000 and $49,000,000 of borrowings were outstanding
under the term loan and revolving loan facilities, respectively; and
$43,608,000 of letters of credit had been issued. In January 1994,
Coltec completed a bank refinancing that resulted in the repayment of
the 1992 Credit Agreement. Reference is made to Note 16 for
information on the refinancing.
Interest on borrowings under the 1992 Credit Agreement was computed,
at Coltec's option, at an annual rate equal to (i) the base rate plus
1.5% or (ii) the Eurodollar rate plus 2.75%. The base rate was the
higher of (x) 1/2 of 1% in excess of the Federal Reserve reported
certificate of deposit rate and (y) the prime lending rate, as in
effect from time to time. Letter of credit fees of 3% were payable on
outstanding letters of credit and a commitment fee of 1/2 of 1% was
payable on the unutilized revolving loan facility.
The 1992 Credit Agreement contained various restrictions and
conditions including a fixed charge coverage ratio, current ratio,
leverage ratio and cash flow coverage ratio. In addition, the 1992
Credit Agreement limited or restricted purchases of Coltec's common
stock, payment of dividends, capital expenditures, the incurrence of
additional indebtedness, mergers, asset acquisitions and dispositions,
investments, prepayment of other debt and transactions with
affiliates. At December 31, 1993, Coltec was in compliance with the
above covenants.
b) The 9-3/4% senior notes due 1999 are not redeemable prior to maturity
on November 1, 1999.
F-14
<PAGE>
c) The 9-3/4% senior notes due 2000 were issued in connection with the
Recapitalization and are not redeemable prior to maturity on April 1,
2000.
d) The 10-1/4% senior subordinated notes were issued in connection with
the Recapitalization and are redeemable at the option of Coltec on or
after April 1, 1997 at 105.125% of par, declining to 100% of par on or
after April 1, 1999.
e) Coltec has purchased in the open market and redeemed $58,375,000
principal amount of its 11-1/4% debentures. The remaining 11-1/4%
debentures are redeemable at the option of Coltec at 106.750% of par,
declining to 100% of par on or after December 1, 2005. Mandatory
annual sinking fund payments of $7,125,000 beginning December 1, 1996
are calculated to retire 90% of the debentures prior to maturity.
Coltec, at its option, may redeem up to an additional $14,250,000
annually, beginning December 1, 1996 through 2014.
f) At December 31, 1993 and 1992, $1,550,000 and $9,550,000,
respectively, of defeased notes have been offset against trustee funds
included in other assets in the Consolidated Balance Sheet. The
defeased notes include $1,550,000 at both December 31, 1993 and 1992
of 9-7/8% industrial revenue bonds issued in 1980 and $8,000,000 at
December 31, 1992 of 9-3/4% senior promissory notes issued in 1976.
g) The amounts payable under capital lease obligations as of December 31,
1993 were as follows:
<TABLE>
<CAPTION>
(In thousands)
------------------------------------------------------------
<S> <C>
1994 $ 1,333
1995 1,333
1996 1,333
1997 1,333
1998 1,288
Remainder 28,397
-------
Total minimum lease payments 35,017
Less - Amount representing interest 17,399
-------
Total minimum lease payments at present value,
included in long-term debt $17,618
-------
-------
</TABLE>
h) Minimum payments on long-term debt, after reflecting the bank
refinancing completed in January, 1994, due within five years from
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
(In thousands)
------------------------------------------------------------
<S> <C>
1994 $ 1,543
1995 941
1996 522
1997 50,750
1998 50,814
</TABLE>
F-15
<PAGE>
7. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of Coltec's financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount of cash and cash equivalents
approximates fair value due to the short-term maturity of the investments.
ACCOUNTS AND NOTES RECEIVABLE, OTHER: The carrying amount of accounts and
notes receivable, other approximates fair value due to the short-term
nature of the receivables.
LONG-TERM RECEIVABLES AND INVESTMENTS: The fair value of certain long-term
receivables and investments is based on quoted market prices for similar
publicly traded securities or on the present value of estimated future cash
flows.
LONG-TERM DEBT: The fair value of Coltec's publicly traded long-term debt
is based on the quoted market prices for such debt and for non-publicly
traded long-term debt, on quoted market prices for similar publicly traded
debt. The fair value of interest rate swap agreements is based on quotes
from commercial banks.
The estimated fair value of Coltec's financial instruments at December 31,
1993 and 1992 is as follows:
<TABLE>
<CAPTION>
1993 1992
------------------------- --------------------------
Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 5,749 $ 5,749 $ 7,155 $ 7,155
Accounts and notes receivable, other 41,051 41,051 4,959 4,959
Long-term receivables and
investments --
Practical to estimate fair value 38,041 38,041 17,479 17,466
Not practical to estimate fair value 21,759 -- 63,928 --
Long-term debt 1,033,632 1,082,164 1,122,095 1,153,820
</TABLE>
It was not practicable to obtain independent estimates of the fair value of
Coltec's minority interest, consisting principally of preferred stock, in
Crucible Materials Corporation ("Crucible"), a private corporation in 1993
and 1992, or of the receivable from insurance carriers for asbestos product
liability claims and related litigation costs in 1992 without incurring
excessive costs. The $21,759,000 carrying value of the investment in
Crucible at December 31, 1993 and 1992, and the $42,169,000 receivable from
insurance carriers at December 31, 1992 are included in other assets in the
Consolidated Balance Sheet. Reference is made to Note 15 for information
relating to the receivable from insurance carriers.
F-16
<PAGE>
It is Coltec's policy to enter into forward exchange contracts to hedge
U.S. dollar denominated sales, under long-term contracts, of certain
foreign subsidiaries. Coltec does not engage in speculation. Coltec's
foreign exchange contracts do not subject Coltec to risk due to exchange
rate movements because gains and losses on these contracts offset losses
and gains on the sales and related receivables being hedged. At December
31, 1993 and 1992 Coltec had $251,610,000 and $298,990,000, respectively,
of forward exchange contracts, denominated in Canadian dollars, which had a
fair value of $240,131,000 and $283,240,000, respectively, based on quotes
from commercial banks. The contracts have varying maturities with none
exceeding five years.
As of December 31, 1993, Coltec has outstanding interest rate swap
agreements with major financial institutions having a total notional
principal amount of $150,000,000, an average fixed interest rate of 6.34%
and an average remaining life of 1-1/4 years, the fair values of which are
$4,522,000. Interest rate swap agreements effectively hedge interest rate
exposures and, as such, the differential to be paid or received is accrued
and recognized in interest expense as market interest rates change. Gains
or losses, on the termination of an interest rate swap agreement which has
been an effective hedge, are deferred and amortized over the remaining
original life of the swap when the underlying debt is not extinguished, or
are recognized in the period when the underlying debt is extinguished.
Coltec has an outstanding contingent liability for guaranteed debt and
lease payments of $27,140,000, and letters of credit, other than with
respect to guaranteed debt, of $40,733,000. It was not practical to obtain
independent estimates of the fair values for the contingent liability for
guaranteed debt and lease payments and for letters of credit without
incurring excessive costs. In the opinion of management, nonperformance by
the other parties to the interest rate swap agreements and the contingent
liabilities will not have a material effect on Coltec's results of
operations and financial condition.
8. STOCK OPTION AND INCENTIVE PLAN
On March 19, 1992, Coltec adopted the 1992 Stock Option and Incentive Plan
(the "Option Plan"). The Option Plan provides for the granting of
incentive stock rights, stock options, stock appreciation rights,
restricted stock and dividend equivalents to officers and key employees.
The number of shares that may be issued under the Option Plan may not
exceed 3,000,000 shares of common stock. Stock options outstanding under
the Option Plan were granted at a price equal to 100% of the market price
on the date of grant and are exercisable in annual installments of 20%,
commencing one year from date of grant.
F-17
<PAGE>
Information on stock options for the two years ended December 31, 1993 is
as follows:
<TABLE>
<CAPTION>
Option
Number Price Range
of Shares Per Share
-------------------------------------------------------------
<S> <C> <C>
Outstanding January 1, 1992 -- --
Granted 2,015,000 $15.00-18.25
Exercised -- --
Canceled -- --
-------------------------------------------------------------
Outstanding December 31, 1992 2,015,000 15.00-18.25
Granted 290,000 16.38-18.75
Exercised (5,000) 15.00
Canceled (40,000) 15.00
-------------------------------------------------------------
Outstanding December 31, 1993 2,260,000 15.00-18.75
-------------------------------------------------------------
Exercisable December 31:
1992 -- --
1993 398,000 15.00-18.25
-------------------------------------------------------------
</TABLE>
In addition to the granting of stock options, Coltec has granted shares of
restricted stock under the Option Plan. Restrictions on certain shares
lapse in annual installments of 33-1/3% commencing one and three years from
date of grant. Restrictions on the remaining shares lapse 100% three years
from the date of grant. The unearned compensation resulting from the grant
of restricted shares is reported as a reduction to shareholders' equity in
the Consolidated Balance Sheet and is being charged to earnings over the
period the restricted shares vest.
Information on restricted stock for the two years ended December 31, 1993
is as follows:
<TABLE>
<CAPTION>
Number of Shares
----------------------
1993 1992
----------------------------------------------------------------------
<S> <C> <C>
Outstanding January 1 578,464 --
Granted 89,877 578,464
Restrictions expired (99,772) --
Forfeited (14,309) --
----------------------------------------------------------------------
Outstanding December 31 554,260 578,464
----------------------------------------------------------------------
</TABLE>
Shares available for grant at December 31, 1993 and 1992 under the Option
Plan were 66,659 and 406,536, respectively.
9. PENSION AND RETIREMENT PLANS
Coltec and certain of its subsidiaries have in effect, for substantially
all U.S. employees, pension plans under which funds are deposited with
trustees. The benefits under these plans are based
F-18
<PAGE>
primarily on years of service and either final average salary or fixed
amounts for each year of service. Coltec's funding policy is consistent
with the funding requirements of the Employee Retirement Income Security
Act ("ERISA") of 1974, as amended. Plan assets consist principally of
publicly traded equity and fixed-income securities.
Pension coverage for employees of the non-U.S. subsidiaries is provided, to
the extent deemed appropriate, through separate plans. Obligations under
such plans are systematically provided for by depositing funds with
trustees, or through book reserves.
In a number of the pension plans, the plan assets exceed the accumulated
benefit obligations ("overfunded plans"); and in the remainder of the
plans, the accumulated benefit obligations exceed the plan assets
("underfunded plans").
As of December 31, 1993 and 1992, the status of Coltec's pension plans was
as follows:
<TABLE>
<CAPTION>
1 9 9 3 1 9 9 2 *
-------------------------- --------------------------
OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
(IN THOUSANDS) PLANS PLANS PLANS PLANS
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of projected benefit
obligation, based on employment service
to date and current salary levels:
Vested employees $246,597 $115,724 $229,120 $103,126
Nonvested employees 7,040 6,447 6,718 5,781
-------- -------- -------- --------
Accumulated benefit obligation 253,637 122,171 235,838 108,907
Additional amounts related to
projected salary increases 21,060 436 22,982 3,162
-------- -------- -------- --------
Total projected benefit obligation 274,697 122,607 258,820 112,069
-------- -------- -------- --------
Assets available for benefits:
Funded assets 305,411 82,421 293,921 82,839
Accrued pension expense, per books 1,069 40,614 4,542 27,549
-------- -------- -------- --------
Total assets 306,480 123,035 298,463 110,388
-------- -------- -------- --------
Assets in excess of (less than)
projected benefit obligation $ 31,783 $ 428 $ 39,643 $ (1,681)
-------- -------- -------- --------
-------- -------- -------- --------
Consisting of:
Unamortized net asset existing
at date of adoption of FAS No. 87 $ 2,492 $ 19,098 $ 1,526 $ 10,508
Unrecognized net gain (loss) 34,589 (11,813) 43,613 (6,244)
Unrecognized prior service cost (5,298) (6,857) (5,496) (5,945)
-------- -------- -------- --------
$ 31,783 $ 428 $ 39,643 $ (1,681)
-------- -------- -------- --------
-------- -------- -------- --------
<FN>
---------------
* Restated to reflect funding classification as of December 31, 1993.
</TABLE>
F-19
<PAGE>
For U.S. plans, discount rates of 7.5% and 8.0% were used as of December
31, 1993 and 1992, respectively, for the valuation of the actuarial present
value of benefit obligations.
In accordance with the requirements of Statement of Financial Accounting
Standards No. 87, "Employers' Accounting for Pensions", Coltec recorded a
minimum pension liability for underfunded plans. The minimum liability is
equal to the excess of the accumulated benefit obligation over plan assets.
A corresponding amount is recorded as either an intangible asset or a
reduction of shareholders' equity. As of December 31, 1993, Coltec
recorded a $13,571,000 additional minimum liability, included in other
liabilities in the Consolidated Balance Sheet, a $7,102,000 intangible
asset, included in other assets in the Consolidated Balance Sheet, and a
$4,205,000 charge to shareholders' equity, net of a $2,264,000 tax benefit.
Assumptions as of January 1 used to develop the net periodic pension cost
for U.S. plans were:
1993 1992 1991
-----------------------------------------------------------------
Discount rate for benefit obligations 8.0% 8.0% 8.5%
Expected long-term rate of return on assets 8.5% 8.5% 8.5%
Rate of increase in compensation levels 5.0% 6.0% 6.0%
For non-U.S. plans, which were not material, similar economic assumptions
were used.
The components of net periodic pension cost were as follows:
<TABLE>
<CAPTION>
(In thousands) 1993 1992 1991
------------------------------------------------------------------------------------------------
<S> <C>
Service cost - benefits earned $ 9,423 $ 9,947 $ 9,087
Interest cost on projected benefit obligation 28,496 27,993 26,511
Actual return on assets (7,770) (233) (32,541)
Amortization and deferral, net (30,968) (38,394) (1,282)
-------- -------- --------
Net periodic pension cost (credit) $ (819) $ (687) $ 1,775
-------- -------- --------
-------- -------- --------
</TABLE>
For discontinued operations, Coltec's total projected benefit obligation at
December 31, 1993 and 1992 was $263,751,000 and $263,660,000, respectively,
and is fully funded. Interest accrued for 1993, 1992 and 1991 on the
projected benefit obligation was $20,450,000, $21,555,000, and $24,200,000,
respectively, and was fully offset by return on assets resulting in no net
periodic cost.
10. OTHER POSTRETIREMENT BENEFITS
Coltec provides health care and life insurance benefits to its eligible
retired employees, principally in the United States. Effective January 1,
1993, Coltec adopted Statement of
F-20
<PAGE>
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", ("FAS 106") using the delayed
recognition transition option whereby the transition obligation is being
amortized on a straight-line basis over 20 years. FAS 106 requires that
the cost of postretirement benefits be recognized in the financial
statements during the years the employees provide services. Prior to 1993,
Coltec recognized the cost of postretirement benefits by expensing the
premiums, net of retiree contributions.
Coltec's accumulated postretirement benefit obligation, none of which is
funded, and the postretirement benefit cost liability at December 31, 1993
and January 1, 1993 were as follows:
<TABLE>
<CAPTION>
December 31, January 1,
(In thousands) 1993 1993
----------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of projected accumulated
postretirement benefit obligation
Retirees $ 17,511 $ 16,390
Fully eligible active participants 4,613 3,987
Other active participants 3,441 3,546
-------- --------
Total 25,565 23,923
Unamortized transition obligation (22,727) (23,923)
Unrecognized net loss (1,482) --
Postretirement benefit cost liability -------- --------
$ 1,356 $ --
-------- --------
-------- --------
</TABLE>
The components of postretirement benefit cost for the year ended
December 31, 1993 were as follows:
<TABLE>
<CAPTION>
(In thousands)
---------------------------------------------------------------------
<S> <C>
Service cost - benefits earned $ 249
Interest cost on accumulated postretirement benefit obligation 1,838
Amortization of transition obligation 1,196
Postretirement benefit cost ------
$3,283
------
------
</TABLE>
Discount rates of 7.5% and 8.0% were used in determining the accumulated
postretirement benefit obligation at December 31, 1993 and January 1, 1993,
respectively. The health care cost trend rates used in determining the
accumulated postretirement benefit obligation at December 31, 1993 were
13.1% in 1994 gradually declining to 5.0% in 2005. The effect of a 1%
increase in the health care cost trend rates in each year would be to
increase the total service and interest cost components of the
postretirement benefit cost for 1993 by $234,000 and to increase the
accumulated postretirement benefit obligation at December 31, 1993 by
$1,800,000.
F-21
<PAGE>
11. SEGMENT INFORMATION
Coltec's financial results are reported in three industry segments:
Aerospace/Government, Automotive, and Industrial.
Information on sales and operating income by industry segment for the years
1993, 1992 and 1991 included on page 10 in the Management's Discussion and
Analysis of Financial Condition and Results of Operations is incorporated
herein by reference.
Information on total assets; depreciation of property, plant and equipment;
and capital expenditures by industry segment for the three years ended
December 31, 1993 is as follows:
<TABLE>
<CAPTION>
(In millions) 1993 1992 1991
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total assets:
Aerospace/Government $386.2 $388.7 $410.0
Automotive 124.6 118.6 123.3
Industrial 180.1 186.7 189.8
Corporate unallocated 115.5 134.8 111.1
------ ------ ------
Total $806.4 $828.8 $834.2
------ ------ ------
------ ------ ------
Depreciation of property, plant and equipment:
Aerospace/Government $ 16.1 $ 17.3 $ 18.4
Automotive 7.4 7.9 8.7
Industrial 9.5 9.9 9.6
Corporate unallocated .2 .2 .2
------ ------ ------
Total $ 33.2 $ 35.3 $ 36.9
------ ------ ------
------ ------ ------
Capital expenditures:
Aerospace/Government $ 21.8 $ 13.3 $ 14.2
Automotive 9.6 6.5 5.7
Industrial 7.2 5.2 6.3
------ ------ ------
Total $ 38.6 $ 25.0 $ 26.2
------ ------ ------
------ ------ ------
</TABLE>
F-22
<PAGE>
Information by geographic segment for the three years ended December 31,
1993 is as follows:
<TABLE>
<CAPTION>
Operating Total
(In millions) Sales Income Assets
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1993
Domestic operations $1,155.4 $215.9 $619.4
Foreign operations 206.7 30.2 207.6
Intersegment elimination (27.3) -- (136.1)
-------- ------ ------
Total segments 1,334.8 246.1 690.9
Corporate unallocated -- (34.4) 115.5
-------- ------ ------
Total $1,334.8 $211.7 $806.4
-------- ------ ------
-------- ------ ------
1992
Domestic operations $1,160.8 $228.3 $623.7
Foreign operations 232.8 43.3 217.4
Intersegment elimination (24.9) -- (147.1)
-------- ------ ------
Total segments 1,368.7 271.6 694.0
Corporate unallocated -- (28.5) 134.8
-------- ------ ------
Total $1,368.7 $243.1 $828.8
-------- ------ ------
-------- ------ ------
1991
Domestic operations $1,132.9 $204.3 $632.2
Foreign operations 264.3 44.8 224.0
Intersegment elimination (24.2) -- (133.1)
-------- ------ ------
Total segments 1,373.0 249.1 723.1
Corporate unallocated -- (20.1) 111.1
-------- ------ ------
Total $1,373.0 $229.0 $834.2
-------- ------ ------
-------- ------ ------
</TABLE>
12. SUPPLEMENTARY EARNINGS INFORMATION
The following costs and expenses are included in the Consolidated Statement
of Earnings:
<TABLE>
<CAPTION>
(In thousands) 1993 1992 1991
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maintenance $25,363 $27,444 $28,651
------- ------- -------
Taxes, other than federal income taxes
Payroll 28,700 28,764 28,725
------- ------- -------
Property 4,764 4,793 4,745
------- ------- -------
State and local 4,785 5,195 4,427
------- ------- -------
Rent 12,235 12,849 12,803
------- ------- -------
Research and development costs 22,079 22,947 23,773
------- ------- -------
</TABLE>
F-23
<PAGE>
13. RELATED PARTY TRANSACTIONS
On November 18, 1993, Holdings became a wholly owned subsidiary of Coltec
as a result of the exchange by all of the Holdings shareholders of their
shares of common stock of Holdings for 35.5% or 24,830,000 shares of common
stock of Coltec (the "Holdings Reorganization") in a transaction accounted
for as a purchase. The net assets acquired consisted primarily of
25,000,000 shares of common stock of Coltec and $26,700,000 of cash.
Immediately before this exchange, Holdings owned 35.7% or 25,000,000 shares
of common stock of Coltec. The 25,000,000 shares of common stock of Coltec
which Holdings owned before this exchange and continues to own after the
exchange are reported in the Consolidated Balance Sheet as a reduction of
the total common shares issued. Expenses of $1,500,000 incurred in
connection with this exchange were charged to capital in excess of par
value. As a result of the exchange, Morgan Stanley Group Inc. became a
direct shareholder of Coltec. In connection with an industrial revenue
bond refinancing in 1993, Morgan Stanley & Co. Incorporated ("MS&Co."), a
wholly owned subsidiary of Morgan Stanley Group Inc., received a fee of
$309,000.
During 1992, in connection with the Recapitalization, MS&Co. received a
portion of the total underwriting commission of $36,527,000 in connection
with the Equity Offering, an underwriting commission of $11,250,000 in
connection with the Note Offerings, and fees of $1,049,000 as one of the
dealer managers for the Debt Tender Offer. In addition, MS & Co. received
an underwriting commission of $2,625,000 in connection with the offering of
the 9-3/4% senior notes due 1999.
During the two years ended December 31, 1992, MS&Co. acted as a dealer in
the placement of a portion of Coltec's commercial paper and as one of the
brokers in the purchase of Coltec's debentures.
14. QUARTERLY SALES AND EARNINGS (UNAUDITED)
The following table sets forth quarterly sales, gross profit and earnings
for the three years ended December 31, 1993.
<TABLE>
<CAPTION>
Quarter
------------------------------------------------------
(In thousands, except per share data) 1st 2nd 3rd 4th
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993
Net sales $339,934 $334,591 $316,077 $344,227
-------- -------- -------- --------
Gross profit 107,903 107,729 104,585 109,148
-------- -------- -------- --------
Operating income 54,967 37,040 56,800 62,902
-------- -------- -------- --------
Earnings before extraordinary item 17,490 6,013 18,490 23,233
Extraordinary item (264) (375) (378) (16,775)
-------- -------- -------- --------
Net earnings 17,226 5,638 18,112 6,458
-------- -------- -------- --------
Earnings (loss) per common share
Before extraordinary item .25 .09 .27 .33
Extraordinary item -- (.01) (.01) (.24)
-------- -------- -------- --------
Net earnings .25 .08 .26 .09
-------- -------- -------- --------
F-24
<PAGE>
<CAPTION>
Quarter
------------------------------------------------------
(In thousands, except per share data) 1st 2nd 3rd 4th
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1992
Net sales $337,557 $359,973 $330,640 $340,533
-------- -------- -------- --------
Gross profit 98,867 109,122 106,447 109,862
-------- -------- -------- --------
Operating income 52,293 65,480 59,537 65,812
-------- -------- -------- --------
Earnings (loss) before
extraordinary item (2,713) 23,280 19,905 24,211
Extraordinary item -- (105,347) -- (1,583)
-------- -------- -------- --------
Net earnings (loss) (2,713) (82,067) 19,905 22,628
-------- -------- -------- --------
Earnings (loss) per common share
Before extraordinary item (.11) .33 .29 .35
Extraordinary item -- (1.51) -- (.02)
-------- -------- -------- --------
Net earnings (loss) (.11) (1.18) .29 .33
-------- -------- -------- --------
1991
Net sales $337,087 $357,297 $338,205 $340,390
-------- -------- -------- --------
Gross profit 95,362 107,176 102,951 100,699
-------- -------- -------- --------
Operating income 48,934 58,988 64,098 57,000
-------- -------- -------- --------
Earnings (loss) before
extraordinary item (2,263) 2,554 5,831 (3,913)
Extraordinary item 591 -- -- --
-------- -------- -------- --------
Net earnings (loss) (1,672) 2,554 5,831 (3,913)
-------- -------- -------- --------
Earnings (loss) per common share
Before extraordinary item (.09) .10 .23 (.16)
Extraordinary item .02 -- -- --
-------- -------- -------- --------
Net earnings (loss) (.07) .10 .23 (.16)
-------- -------- -------- --------
<FN>
---------------
Reference is made to Note 3 for restructuring charge, Note 4 for
extraordinary item and Note 1 for earnings per share. Earnings (loss) per
common share for the year ended December 31, 1992 does not equal the sum of
earnings (loss) per common share for each of the four quarters of 1992 due
to the Equity Offering.
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
Coltec and certain of its subsidiaries are liable for lease payments and
are defendants in various lawsuits, including actions involving asbestos-
containing products, certain environmental proceedings and a fraudulent
conveyance action. With respect to asbestos product liability and related
litigation costs, in 1993 two subsidiaries of Coltec received approximately
27,400 new lawsuits, with a comparable number of lawsuits received in 1992
and 1991. The subsidiaries
F-25
<PAGE>
made payments with respect to asbestos liability and related costs
aggregating $38,677,000 in 1993, $39,810,000 in 1992 and $48,442,000 in
1991, substantially all of which were covered by insurance.
In May 1993, in a case in which neither Coltec nor any of its subsidiaries
were parties, the Supreme Court of Pennsylvania confirmed that the
continuous trigger theory of coverage was applicable to relevant insurance
policies governed by Pennsylvania law and held that the insured could
trigger any policy during the applicable policy period in full without
allocating among all policies providing coverage and without allocating to
the insured responsibility for policy periods in which there was
insufficient coverage. Following such decision, agreement was reached by
Coltec with certain of its insurers regarding the balance of Coltec's
primary and most of its first-layer excess coverage and payments are being
made in accordance with the agreement.
Based on the favorable resolution of the primary and most of the first-
layer excess coverage, Coltec anticipates that the continuous trigger
theory of coverage should apply to the balance of Coltec's excess
insurance. Therefore, Coltec believes that it is likely to have coverage
for a substantial portion of foreseeable future asbestos-related actions
and litigation costs, and has reflected payments made for asbestos product
liability actions and related litigation costs, net of recoveries, as a
receivable from its insurance carriers. At December 31, 1993, and 1992,
the receivable balance was $59,535,000 and $42,169,000, respectively, and
is included in other assets in the Consolidated Balance Sheet, except for
the current portion at December 31, 1993, $35,838,000, which is in accounts
and notes receivable, other.
As of December 31, 1993, certain actions had been settled on a group basis
with payments to be made to individual plaintiffs over periods of one to
four years. In addition, in accordance with Coltec's internal procedures
for the processing of asbestos product liability actions and due to the
proximity to trial or settlement, certain outstanding actions have
progressed to a stage where Coltec can reasonably estimate the cost to
dispose of these actions. Coltec estimates that the aggregate remaining
cost of the disposition of the foregoing settled actions and actions in
advanced stages of processing, including associated legal costs, is
approximately $52,600,000 and expects that this cost will be substantially
covered by insurance.
As of December 31, 1993, the two subsidiaries were among a number of
defendants in approximately 68,500 actions, including approximately 6,100
actions in advanced stages of processing as described above. As of
December 31, 1992, the number of outstanding actions approximated that as
of December 31, 1993. The remaining 62,400 outstanding actions as of
December 31, 1993 are in preliminary procedural stages. Coltec lacks
sufficient information upon which judgments can be made as to the validity
or ultimate disposition of such actions, thereby making it difficult to
estimate with reasonable certainty the liability or costs to Coltec. When
asbestos actions are received they are typically forwarded to local counsel
to ensure that the appropriate preliminary procedural response is taken.
The complaints typically do not
F-26
<PAGE>
contain sufficient information to permit a reasonable evaluation as to
their merits at the time of receipt, and in jurisdictions encompassing a
majority of the outstanding actions the practice has been that little or no
discovery or other action is taken until several months prior to the date
set for trial. Accordingly, Coltec generally does not have the information
necessary to analyze the actions in sufficient detail to estimate the
ultimate liability or costs to Coltec, if any, until the actions appear on
a trial calendar. A determination to seek dismissal, to attempt to settle
or to proceed to trial is typically not made prior to the receipt of such
information.
It is also difficult to predict the number of asbestos lawsuits that
Coltec's subsidiaries will receive in the future. Coltec has noted that,
with respect to recently settled actions or actions in advanced stages of
processing, the mix of the injuries alleged and the mix of the occupations
of the plaintiffs are changing from those traditionally associated with
Coltec's asbestos-related actions. Coltec is not able to determine with
reasonable certainty whether this trend will continue. Based upon the
foregoing, and due to the unique factors inherent in each of the actions,
including the nature of the disease, the occupation of the plaintiff, the
presence or absence of other possible causes of a plaintiff's illness, the
availability of legal defenses, such as the statute of limitations or state
of the art, and whether the lawsuit is an individual one or part of a
group, management is unable to estimate with reasonable certainty the cost
of disposing of outstanding actions in preliminary procedural stages or of
actions that may be filed in the future. However, Coltec believes that it
is in a favorable position compared to many other defendants because, among
other things, the asbestos fibers in its asbestos-containing products were
encapsulated. Considering the foregoing, as well as the experience of
Coltec and other defendants in asbestos litigation, the likely sharing of
judgments among multiple responsible defendants, and the significant amount
of insurance coverage that Coltec expects to be available from its solvent
carriers, Coltec believes that pending and reasonably anticipated future
actions are not likely to have a material effect on Coltec's results of
operations and financial condition. Although the insurance coverage that
Coltec has is substantial, insurance coverage for asbestos claims is not
available to cover exposures initially occurring on and after July 1, 1984.
Coltec's subsidiaries continue to be named as defendants in new cases.
Effective in the first quarter of 1994, Coltec will adopt the requirements
of Financial Accounting Standards Board Interpretation No. 39, "Offsetting
of Amounts Related to Certain Contracts." In accordance with
Interpretation No. 39, Coltec will record an accrual for its liabilities
for asbestos-related matters that are deemed probable and can be reasonably
estimated, and will separately record an asset equal to the amount of such
liabilities that is expected to be recovered by insurance. Accordingly,
the liabilities and assets to be recorded in 1994 will relate only to
settled actions and actions in advanced stages of processing, which
approximated $52,600,000 as of December 31, 1993. Coltec does not expect
that the adoption of Interpretation No. 39 will have a material effect on
Coltec's results of operations and financial condition.
F-27
<PAGE>
Coltec has been notified that it is among the Potentially Responsible
Parties ("PRPs") under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), or similar
state laws, for the costs of investigating, and in some cases remediating,
contamination by hazardous materials at several sites. CERCLA imposes
joint and several liability for the costs of investigating and remediating
properties contaminated with hazardous materials. Liability for these
costs can be imposed on present and former owners or operators of the
properties or on parties who generated the wastes that contributed to the
contamination. The process of investigating and remediating contaminated
properties can be lengthy and expensive. The process is also subject to
the uncertainties occasioned by changing legal requirements, developing
technological applications and liability allocations among PRPs. Based on
the progress to date in the investigation, cleanup and allocation of
responsibility for these sites, Coltec has estimated that its costs in
connection with all except one of these sites approximates $20,000,000 at
December 31, 1993, and has accrued for this amount in the Consolidated
Balance Sheet as of December 31, 1993. Although Coltec is pursuing
insurance recovery in connection with certain of these matters, the accrual
has not been reduced for potential recoveries from insurance companies or
other third parties. In addition, Coltec has not recorded a receivable
with respect to any potential recovery of costs in connection with any
environmental matter. While progress toward the investigation, cleanup and
responsibility allocation at the remaining site has not been sufficient to
allow Coltec at this time to determine the extent of its potential
financial responsibility, Coltec does not believe its costs in connection
with such site will have a material effect on Coltec's results of
operations and financial condition.
On March 22, 1990, Coltec sold substantially all of the assets of Colt
Firearms to the parent company of Colt's Manufacturing Company, Inc.
(collectively with its parent company, "Colt's Manufacturing"), a company
formed by a group of private investors, for cash and certain securities of
Colt's Manufacturing. At December 31, 1993, Coltec's investment in Colt's
Manufacturing was fully reserved.
On March 18, 1992, Colt's Manufacturing filed a petition for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Code, and on
January 19, 1993, the Official Committee of Unsecured Creditors of Colt's
Manufacturing Company, Inc. filed a fraudulent conveyance action against
Coltec and other defendants. Coltec believes that it has adequately
provided for any liabilities Coltec may incur with respect to Colt's
Manufacturing and accordingly does not believe that the Chapter 11 filing,
the associated financial condition of Colt's Manufacturing or the
fraudulent conveyance action will have a material effect on Coltec's
results of operations and financial condition.
Under operating lease commitments, expiring on various dates after
December 31, 1994, Coltec and certain of its subsidiaries are obligated as
of December 31, 1993 to pay rentals totaling $28,283,000 as follows:
$6,104,000 in 1994, $5,021,000 in 1995, $4,085,000 in 1996, $3,042,000 in
1997, $2,796,000 in 1998, and $7,235,000 in later years. These rent
payments
F-28
<PAGE>
are before reduction for related sublease rental income of $1,375.000.
16. SUBSEQUENT EVENT
On January 11, 1994, Coltec entered into a $415,000,000 reducing revolving
credit facility (the "1994 Credit Agreement"), with a syndicate of banks,
which expires June 30, 1999. The facility also provides up to $100,000,000
for the issuance of letters of credit and will be reduced $50,000,000 on
both January 11, 1997 and 1998. Obligations under the facility are secured
by substantially all of Coltec's assets. Borrowings under the facility
bear interest, at Coltec's option, at an annual rate equal to (i) the base
rate or (ii) the Eurodollar rate plus 1%. The base rate is the higher of
(x) 1/2 of 1% in excess of the Federal Reserve reported certificate of
deposit rate and (y) the prime lending rate, as in effect from time to
time. Letter of credit fees of 1% are payable on outstanding letters of
credit and a commitment fee of 3/8 of 1% is payable on the unutilized
facility.
The facility contains various restrictions and conditions. The most
restrictive of these require that the fixed charge coverage ratio be at
least 2.25 to 1 for any period of four consecutive quarters to and
including the fourth quarter of 1994 and thereafter 2.5 to 1. The ratio of
current assets to current liabilities must be at least 1.25 to 1. In
addition, the facility limits or restricts purchases of Coltec's common
stock, payment of dividends, capital expenditures, indebtedness, liens,
mergers, asset acquisitions and dispositions, investments, prepayment of
certain debt and transactions with affiliates.
Upon completion of the refinancing on January 11, 1994, borrowings of
$324,000,000 were outstanding and letters of credit of $43,608,000 were
issued under the 1994 Credit Agreement. The 1994 Credit Agreement was used
to prepay indebtedness outstanding and replace letters of credit issued
under the 1992 Credit Agreement. The remaining balance of the facility
will be used for working capital and general corporate purposes. In
December, 1993, Coltec recorded an extraordinary charge of $14,675,000, net
of a $7,902,000 tax benefit, in connection with the early retirement of
the 1992 Credit Agreement.
F-29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Coltec Industries Inc:
We have audited the accompanying consolidated balance sheet of Coltec Industries
Inc (a Pennsylvania corporation) and subsidiaries as of December 31, 1993 and
1992, and the related consolidated statements of earnings, shareholders' 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 Coltec Industries 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 LLP
New York, N.Y.
January 24, 1994
F-30
<PAGE>
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
October 2, December 31,
1994 1993
----------- ------------
(Unaudited)
(In thousands, except share data)
<S> <C> <C>
A S S E T S
Current assets -
Cash and cash equivalents $ 9,500 $ 5,749
Accounts and notes receivable - net 184,357 161,521
Inventories -
Finished goods 42,555 39,206
Work in process and finished parts 123,755 103,166
Raw materials and supplies 24,602 25,405
----------- ----------
190,912 167,777
Deferred income taxes 23,140 17,036
Other current assets 11,469 8,587
----------- ----------
Total current assets 419,378 360,670
Property, plant and equipment 646,312 657,237
Less accumulated depreciation and amortization 430,577 431,908
----------- ----------
215,735 225,329
Costs in excess of net assets acquired, net of amortization 131,205 132,550
Other assets 91,102 87,863
----------- ----------
$ 857,420 $ 806,412
----------- ----------
----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities -
Current maturities of long-term debt $ 533 $ 1,543
Accounts payable 69,467 64,791
Accrued expenses 150,465 127,208
Current portion of liabilities of discontinued operations 4,000 4,000
----------- --------
Total current liabilities 224,465 197,542
Long-term debt 986,280 1,032,089
Deferred income taxes 31,039 27,543
Other liabilities 142,243 132,367
Liabilities of discontinued operations 28,445 42,361
Shareholders' equity -
Preferred stock, $.01 par value, 2,500,000 shares
authorized, shares outstanding - none -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
70,016,384 and 69,943,341 shares issued at October 2, 1994
and December 31, 1993, respectively (excluding 25,000,000
shares held by a wholly owned subsidiary) 700 699
Capital in excess of par value 638,393 636,846
Retained earnings (deficit) (1,184,594) (1,251,465)
Unearned compensation -- restricted stock awards (4,392) (5,552)
Minimum pension liability (4,205) (4,205)
Foreign currency translation adjustments 1,181 1,077
----------- ----------
(552,917) (622,600)
Less: Cost of 131,949 and 179,309 shares of common stock
in treasury at October 2, 1994 and December 31, 1993,
respectively (2,135) (2,890)
----------- ----------
(555,052) (625,490)
----------- ----------
$ 857,420 $ 806,412
----------- ----------
----------- ----------
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-31
<PAGE>
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------
October 2, October 3,
1994 1993
---------- ----------
(In thousands,
except per share data)
<S> <C> <C>
Net sales $986,375 $990,602
-------- --------
Costs and expenses -
Cost of sales 665,712 670,385
Selling and administrative 147,462 146,191
Restructuring charge -- 25,219
-------- --------
Total costs and expenses 813,174 841,795
-------- --------
Operating income 173,201 148,807
Interest and debt expense, net 66,853 83,449
-------- --------
Earnings before income taxes and
extraordinary item 106,348 65,358
Provision for income taxes 38,285 23,365
-------- --------
Earnings before extraordinary item 68,063 41,993
Extraordinary item (1,192) (1,017)
-------- --------
Net earnings $ 66,871 $ 40,976
-------- --------
-------- --------
Earnings per common share -
Before extraordinary item $ .98 $ .60
Extraordinary item (.02) (.01)
-------- --------
Net earnings $ .96 $ .59
-------- --------
-------- --------
Weighted average number of common
and common equivalent shares 69,809 69,580
-------- --------
-------- --------
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-32
<PAGE>
COLTEC INDUSTRIES INC AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
October 2, October 3,
1994 1993
---------- ----------
(In thousands)
<S> <C> <C>
Cash flows from operating activities -
Net earnings $ 66,871 $ 40,976
Adjustments to reconcile net earnings to cash -
Extraordinary item 1,192 1,017
Restructuring charge -- 25,219
Depreciation and amortization 32,695 37,583
Deferred income taxes 3,496 (10,438)
Receivable from insurance carriers 19,946 2,540
Payment of liabilities of discontinued operations (3,337) (3,525)
Other operating items (2,679) (8,771)
-------- --------
118,184 84,601
-------- --------
Changes in assets and liabilities -
Accounts and notes receivable (22,223) (16,123)
Inventories (26,220) (15,606)
Deferred income taxes (6,104) 2,521
Other current assets (3,161) (2,631)
Accounts payable 7,181 4,882
Accrued expenses 2,518 1,653
-------- --------
Changes in assets and liabilities (48,009) (25,304)
-------- --------
Cash provided by operating activities 70,175 59,297
-------- --------
Cash flows from investing activities -
Capital expenditures (22,973) (22,894)
Other - net 1,123 6,501
-------- --------
Cash used in investing activities (21,850) (16,393)
-------- --------
Cash flows from financing activities -
Issuance of long-term debt 331,000 43,952
Payments of long-term debt (375,574) (79,388)
Distribution to Holdings pursuant to tax sharing procedure -- (4,624)
-------- --------
Cash used in financing activities (44,574) (40,060)
-------- --------
Cash and cash equivalents -
Increase 3,751 2,844
At beginning of period 5,749 7,155
-------- --------
At end of period $ 9,500 $ 9,999
-------- --------
-------- --------
</TABLE>
The accompanying notes to financial statements are an integral part of this
statement.
F-33
<PAGE>
1. The unaudited financial statements, included herein, reflect in the opinion
of Coltec Industries Inc ("Coltec") all normal recurring adjustments
necessary to present fairly the financial position and results of
operations, for the periods indicated. The unaudited financial statements
have been prepared in accordance with the instructions to Form 10-Q and do
not include all of the information required by generally accepted
accounting principles for complete financial statements. The consolidated
balance sheet as of December 31, 1993 has been derived from the audited
financial statements as of that date. For further information, refer to
the financial statements and footnotes included in Coltec's annual report
to shareholders for the year ended December 31, 1993.
2. In the first quarter of 1994, Coltec adopted the requirements of Financial
Accounting Standards Board Interpretation No. 39, "Offsetting of Amounts
Related to Certain Contracts." In accordance with Interpretation No. 39,
Coltec recorded its liabilities for asbestos-related matters that are
deemed probable and can be reasonably estimated (settled actions and
actions in advanced stages of processing), and separately recorded an asset
equal to the amount expected to be recovered by insurance. In addition,
Coltec has recorded a receivable for that portion of payments previously
made for asbestos product liability actions and related litigation costs
that is recoverable from its insurance carriers. Liabilities for asbestos
related matters and the receivable from insurance carriers included in the
Consolidated Balance Sheet are as follows:
<TABLE>
<CAPTION>
October 2, December 31,
1994 1993
---------- ------------
(In thousands)
<S> <C> <C>
Accounts and notes receivable -- net $43,972 $35,838
Other assets 31,198 23,697
Accrued expenses 23,530 --
Other liabilities 18,953 --
</TABLE>
3. Coltec recorded a restructuring charge of $25,219,000 in the second quarter
1993 to cover the cost of consolidation and rearrangement of certain
manufacturing facilities and related reductions in work force by
approximately 570 employees, primarily in the Aerospace/Government segment,
as well as at Central Moloney.
As of October 2, 1994, the objectives of the restructuring program were
completed and the liability for the restructuring charge was fully
utilized. During the nine months of 1994, the liability was reduced
primarily by cash expenditures and there were no revisions in the original
estimates.
F-34
<PAGE>
4. Interest paid and federal and state income taxes paid and refunded were as
follows:
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------
October 2, October 3,
1994 1993
---------- ----------
(In thousands)
<S> <C> <C>
Interest paid $53,173 $83,424
Income taxes:
Paid 38,743 25,409
Refunded 1,706 2,547
</TABLE>
5. During the nine months 1994, Coltec incurred extraordinary charges of
$1,192,000, net of a $642,000 tax benefit, in connection with the early
retirement of debt.
During the nine months 1993, Coltec incurred extraordinary charges of
$1,017,000, net of a $548,000 tax benefit, in connection with a debt
refinancing and the early retirement of debt.
6. On January 11, 1994, Coltec entered into a $415,000,000 reducing revolving
credit facility (the "1994 Credit Agreement"), with a syndicate of banks,
which expires June 30, 1999. The facility also provides up to $100,000,000
for the issuance of letters of credit and will be reduced $50,000,000 on
both January 11, 1997 and 1998. Obligations under the facility are secured
by substantially all of Coltec's assets. Borrowings under the facility
bear interest, at Coltec's option, at an annual rate equal to (i) the base
rate or (ii) the Eurodollar rate plus 1%. The base rate is the higher of
(x) 1/2 of 1% in excess of the Federal Reserve reported certificate of
deposit rate, and (y) the prime lending rate, as in effect from time to
time. Letter of credit fees of 1% are payable on outstanding letters of
credit and a commitment fee of 3/8 of 1% is payable on the unutilized
facility.
The facility contains various restrictions and conditions. The most
restrictive of these require that the fixed charge coverage ratio be at
least 2.25 to 1 for any period of four consecutive quarters to and
including the fourth quarter of 1994 and thereafter 2.5 to 1. The ratio of
current assets to current liabilities must be at least 1.25 to 1. In
addition, the facility limits or restricts purchases of Coltec's common
stock, payment of dividends, capital expenditures, indebtedness, liens,
mergers, asset acquisitions and dispositions, investments, prepayment of
certain debt and transactions with affiliates.
F-35
<PAGE>
Minimum payments on long-term debt, after reflecting the bank refinancing
completed in January, 1994, due within five years from December 31, 1993,
are as follows:
<TABLE>
<CAPTION>
(In thousands)
----------------------------------------
<S> <C>
1994 $ 1,543
1995 941
1996 522
1997 50,750
1998 50,814
----------------------------------------
</TABLE>
7. Coltec and certain of its subsidiaries are defendants in various lawsuits,
including actions involving asbestos-containing products and certain
environmental proceedings. With respect to asbestos product liability and
related litigation costs, as of October 2, 1994, two subsidiaries of Coltec
were among a number of defendants (typically 15 to 40) in approximately
67,400 actions (including approximately 3,000 actions in advanced stages
of processing) filed in various states by plaintiffs alleging injury or
death as a result of exposure to asbestos fibers. Through October 2, 1994,
approximately 107,200 of the approximately 174,600 total actions brought
have been settled or otherwise disposed of.
The damages claimed for personal injury or death vary from case to case and
in many cases plaintiffs seek $1 million or more in compensatory damages
and $2 million or more in punitive damages. Although the law in each state
differs to some extent, it appears, based on advice of counsel, that
liability for compensatory damages would be shared among all responsible
defendants, thus limiting the potential monetary impact of such judgments
on any individual defendant.
Following a decision of the Pennsylvania Supreme Court, in a case in which
neither Coltec nor any of its subsidiaries were parties, that held
insurance carriers are obligated to cover asbestos-related bodily injury
actions if any injury or disease process, from first exposure through
manifestation, occurred during a covered policy period (the "continuous
trigger theory of coverage"), Coltec settled litigation with its primary
and most of its first-level excess insurance carriers, substantially on the
basis of the Court's ruling. Coltec is currently negotiating with its
remaining excess carriers to determine, on behalf of its subsidiaries, how
payments will be made with respect to such insurance coverage for asbestos
claims. Coltec is currently receiving payments pursuant to an interim
agreement with certain of its excess carriers. Coltec believes that a
final agreement can be achieved without litigation, and on substantially
the same basis that it has resolved the issues with its primary and first-
level excess carriers. Coltec believes it will have available to it a
significant amount of coverage from its solvent carriers for asbestos
claims.
F-36
<PAGE>
Settlements are generally made on a group basis with payments made to
individual claimants over periods of one to four years. In the first nine
months of 1994, two subsidiaries of Coltec received approximately 14,500
new actions. Payments were made with respect to asbestos liability and
related costs aggregating $26,592,000 in the first nine months of 1994,
substantially all of which were covered by insurance. In accordance with
Coltec's internal procedures for the processing of asbestos product
liability actions and due to the proximity to trial or settlement, certain
outstanding actions have progressed to a stage where Coltec can reasonably
estimate the cost to dispose of these actions. As of October 2, 1994,
Coltec estimates that the aggregate remaining cost of the disposition of
the settled actions for which payments remain to be made and actions in
advanced stages of processing, including associated legal costs, is
approximately $42,483,000 and Coltec expects that this cost will be
substantially covered by insurance.
With respect to the 64,400 outstanding actions as of October 2, 1994 which
are in preliminary procedural stages, Coltec lacks sufficient information
upon which judgments can be made as to the validity or ultimate disposition
of such actions, thereby making it difficult to estimate with reasonable
certainty the liability or costs to Coltec. When asbestos actions are
received they are typically forwarded to local counsel to ensure that the
appropriate preliminary procedural response is taken. The complaints
typically do not contain sufficient information to permit a reasonable
evaluation as to their merits at the time of receipt, and in jurisdictions
encompassing a majority of the outstanding actions, the practice has been
that little or no discovery or other action is taken until several months
prior to the date set for trial. Accordingly, Coltec generally does not
have the information necessary to analyze the actions in sufficient detail
to estimate the ultimate liability or costs to Coltec, if any, until the
actions appear on a trial calendar. A determination to seek dismissal, to
attempt to settle or to proceed to trial is typically not made prior to the
receipt of such information.
It is also difficult to predict the number of asbestos lawsuits that
Coltec's subsidiaries will receive in the future. Coltec has noted that,
with respect to recently settled actions or actions in advanced stages of
processing, the mix of the injuries alleged and the mix of the occupations
of the plaintiffs have been changing from those traditionally associated
with Coltec's asbestos-related actions. Coltec is not able to determine
with reasonable certainty whether this trend will continue. Based upon the
foregoing, and due to the unique factors inherent in each of the actions,
including the nature of the disease, the occupation of the plaintiff, the
presence or absence of other possible causes of a plaintiff's illness, the
availability of legal defenses, such as the statute of limitations or state
of the art, and whether the lawsuit is an individual one or part of a
group, management is unable to estimate with reasonable certainty the cost
of disposing of outstanding actions in preliminary procedural stages or of
actions that may be filed in the future. However, Coltec believes that its
subsidiaries are in a favorable position compared to many other defendants
because, among other things, the asbestos fibers in its asbestos-containing
products were encapsulated. Considering the foregoing, as well as the
experience of Coltec's subsidiaries and other defendants in asbestos
litigation, the likely sharing of judgments among multiple
F-37
<PAGE>
responsible defendants, and the significant amount of insurance coverage
that Coltec expects to be available from its solvent carriers, Coltec
believes that pending and reasonably anticipated future claims are not
likely to have a material effect on Coltec's results of operations and
financial condition.
Although the insurance coverage which Coltec has is substantial, it should
be noted that insurance coverage for asbestos claims is not available to
cover exposures initially occurring on and after July 1, 1984. Coltec's
subsidiaries continue to be named as defendants in new cases.
In addition to claims for personal injury, the subsidiaries were among 40
or more defendants in 34 cases involving property damage claims based upon
asbestos-containing materials found in schools, public facilities and
private commercial buildings. The subsidiaries have been dismissed without
payment in 31 of these cases. One school case was settled for an amount
that is not material and two cases remain unresolved as against one
subsidiary only. However, based upon the proceedings to date in these
cases, it appears that the subsidiary has no liability in those two cases.
With respect to environmental proceedings, Coltec has been notified that it
is among the Potentially Responsible Parties ("PRPs") under the federal
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), or similar state laws, for the costs of
investigating, and in some cases remediating, contamination by hazardous
materials at several sites. CERCLA imposes joint and several liability for
the costs of investigating and remediating properties contaminated with
hazardous materials. Liability for these costs can be imposed on present
and former owners or operators of the properties or on parties who
generated the wastes that contributed to the contamination. The process of
investigating and remediating contaminated properties can be lengthy and
expensive. The process is also subject to the uncertainties occasioned by
changing legal requirements, developing technological applications and
liability allocations among PRPs. Coltec has estimated that its costs in
connection with all except one of these sites approximates $20,000,000 at
October 2, 1994, and has accrued for this amount in the Consolidated
Balance Sheet as of October 2, 1994. Although Coltec is pursuing insurance
recovery in connection with certain of these matters, the accrual has not
been reduced for potential recoveries from insurance companies or other
third parties. In addition, Coltec has not recorded a receivable with
respect to any potential recovery of costs in connection with any
environmental matter. While progress toward the investigation, cleanup and
responsibility allocation at the remaining site has not been sufficient to
allow Coltec at this time to determine the extent of its potential
financial responsibility, Coltec does not believe its costs in connection
with such site will have a material effect on Coltec's results of
operations and financial condition.
On March 22, 1990, Coltec sold substantially all of the assets of Colt
Firearms to the parent company of Colt's Manufacturing Company, Inc.
(collectively with its parent company, "Colt's
F-38
<PAGE>
Manufacturing"), a company formed by a group of private investors, for cash
and certain securities of Colt's Manufacturing. On March 18, 1992, Colt's
Manufacturing filed a petition for bankruptcy protection under Chapter 11
of the United States Bankruptcy Code, and on January 19, 1993, the Official
Committee of Unsecured Creditors of Colt's Manufacturing Company, Inc.
filed a fraudulent conveyance action against Coltec and other defendants.
On September 30, 1994, Colt's Manufacturing's plan of reorganization was
approved by the United States Bankruptcy Court. Pursuant to this approval,
Coltec and Colt's Manufacturing entered into a settlement agreement which
included the dismissal of the fraudulent conveyance action against Coltec.
All liabilities assumed by Coltec in this settlement agreement were fully
reserved.
F-39
